UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
000-50463
Callidus Software
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0438629
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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160 West Santa Clara Street, Suite 1500
San Jose, CA 95113
(Address of principal executive
offices, including zip code)
(408) 808-6400
(Registrants Telephone
Number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 par value per share
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The NASDAQ Stock Market LLC
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Preferred Stock Purchase Rights
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark whether the Registrant is not required to
file reports pursuant to Section 13 or Section 15(d)
of the
Act. Yes o No þ
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 requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of the
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act (Check one):
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Accelerated
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Non-accelerated
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act. Yes o No þ
The aggregate market value of the voting and non-voting stock
held by non-affiliates of the Registrant, based on the closing
sale price of the Registrants common stock on
June 30, 2009, as reported on the NASDAQ Global Market, was
approximately $85.4 million. Shares of common stock held by
each executive officer and director and by each person who may
be deemed to be an affiliate of the Registrant have been
excluded from this computation. The determination of affiliate
status for this purpose is not necessarily a conclusive
determination for other purposes. As of March 1, 2010, the
Registrant had 31,153,488 shares of its common stock,
$0.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant is incorporating by reference into Part III
of this Annual Report on
Form 10-K
portions of its Proxy Statement for its 2010 Annual Meeting of
Stockholders to be held on June 1, 2010.
CALLIDUS
SOFTWARE INC.
ANNUAL REPORT ON
FORM 10-K
For the Fiscal Year Ended December 31, 2009
TABLE OF
CONTENTS
©
1998-2010
Callidus Software Inc. All rights reserved. Callidus Software,
the Callidus Software logo, and TrueComp Manager are trademarks,
servicemarks, or registered trademarks of Callidus Software Inc.
in the United States and other countries. All other brand,
service or product names are trademarks or registered trademarks
of their respective companies or owners.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on
Form 10-K,
including the Managements Discussion and Analysis of
Financial Condition and Results of Operations section in
Item 6 of this report, and other materials accompanying
this Annual Report on
Form 10-K
contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These
statements relate to our future plans, objectives, expectations,
intentions and financial performance and the assumptions that
underlie these statements. Generally, the words
believe, expect, intend,
estimate, anticipate,
project, will, and similar expressions
and the negatives thereof identify forward-looking statements,
which generally are not historical in nature. These
forward-looking statements include, but are not limited to,
statements concerning the following: changes in and expectations
with respect to license revenues and gross margins, future
operating expense levels, the impact of quarterly fluctuations
of revenue and operating results, levels of recurring revenues,
staffing and expense levels, the impact of foreign exchange rate
fluctuations and the adequacy of our capital resources to fund
operations and growth. As and when made, management believes
that these forward-looking statements are reasonable. However,
caution should be taken not to place undue reliance on any such
forward-looking statements because such statements speak only as
of the date when made and may be based on assumptions that do
not prove to be accurate. Our Company undertakes no obligation
to publicly update or revise any forward-looking statements,
whether as a result of new information, future events, or
otherwise, occurring after the date of this Annual Report on
Form 10-K.
In addition, forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to
differ materially from our Companys historical experience
and our present expectations or projections. For a detailed
discussion of these risks and uncertainties, see the
Business and Risk Factors sections in
Items 1 and 1A of this Annual Report on
Form 10-K.
PART I
Callidus
Software Inc.
Incorporated in Delaware in 1996, Callidus Software Inc. is a
market and technology leader in Sales Performance Management
(SPM) solutions globally, to companies of every size.
Organizations use SPM systems to optimize their investment in
sales planning and performance, specifically in the areas of
sales and channel pay for performance and incentive management.
SPM solutions also provide the capability to continually monitor
and analyze these business processes in order to understand what
is working well, and which programs might need to be revised.
Sales performance programs are key vehicles in aligning employee
and channel partner goals with corporate objectives.
We recently introduced our next generation Sales Performance
Management suite, the Monaco release, a multi-tenant
Software-as-a-Service (SaaS) solution that delivers a
comprehensive suite of sales lifecycle management solutions.
These solutions provide value to customers by helping them
optimize sales effectiveness from sales and channel on-boarding,
to deployment, to pay for performance, to talent development.
The Monaco release also offers a new focus on delivering more
rapid time-to-value and ease of use for our customers.
Enhancements include a new user interface, and a new
self-service platform to deliver increased value to end users.
In addition, we have built and delivered a library of
industry-standard plans and reports, that comes pre-packaged as
part of the product. These plans and reports allow customers to
get up and running with a proven set of best practice resources
quickly.
By facilitating effective management of sales selection and
on-boarding, sales deployment and readiness management,
incentive and bonus programs, and performance improvements, our
products allow our customers to optimize cost efficiencies and
drive sales effectiveness. While we offer our customers a range
of purchasing and deployment options, from on-demand
subscription SaaS to on-premise licensing, our business and
revenue model is focused on recurring revenue. Our software
suite is based on our proprietary technology and extensive
expertise in sales performance management, and provides the
flexibility and scalability required to meet the dynamic SPM
requirements of global companies of every size across multiple
industries.
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Our software consulting services offers customers a full range
of SPM solution implementations, system upgrades, compensation
plan enhancements, migration assistance, reporting and
integration consulting and solution architecture services.
As of December 31, 2009 over 2 million salespeople,
brokers and channel representatives have their sales performance
managed by our products.
Products
The Callidus product suite provides an end-to-end solution for
all aspects of the SPM process. With our products, organizations
gain insight into sales operations and financial performance
including sales capacity and coverage, sales goal attainment and
financial performance, and incentive effectiveness. Our products
combine a complete web-based solution with flexible rules-based
architecture, grid-based computing, reporting, analytics, and
workflow functionality. While our horizontal solution is
applicable to every industry, Callidus additionally provides
value-added industry-specific solutions, particularly in
financial services and insurance, telecommunications, life
sciences, and technology. Callidus solutions are cross-platform
and standards-based, enabling them to be integrated with a wide
range of IT systems and processes. Callidus also provides
packaged, certified integration with salesforce.com, enabling an
organizations sales team to seamlessly access Callidus
applications from its Sales Force Automation/Customer
Relationship Management system.
We offer our customers various options to purchase and deploy
our products, primarily through on-demand, SaaS subscription and
on-premise time-based term licenses. The Callidus On-Demand
service delivers all the advantages of SPM. By using Callidus
On-Demand, organizations gain the benefit of SPM with a rapid
deployment that provides flexibility, efficiency, cost savings,
security, and reliability. Callidus On-Demand can be configured
with a selection of service levels and options that suit an
organizations business objectives, requirements, and
resources. Callidus On-Demand customers rely on our Technical
Operations services to provide the infrastructure,
infrastructure operations, and software application operations
layers required for SPM. In addition to Technical Operations, we
make available to all customers Sales Operations services. Sales
Operations provides plan and reporting administration services,
which includes compensation plan maintenance, report design and
maintenance, customer service, issue resolution, production
support, and incentive change management. Companies selecting
this service do not need to hire and train a compensation
analyst or compensation administration team to design and run
the system.
Customers that prefer to have our products operating on their
own premises can purchase either time-based term licenses or
perpetual licenses. Our time-based term license offering gives
our customers the right to use our products for a period of
time, typically 12 to 24 months. Fees under the time-based
term licenses are generally billed annually. Thus, the up-front
cost to purchase a time-based term license is significantly
lower than that of a perpetual license. We started offering
time-based term licenses on several of our products in the third
quarter of 2009.
Our products and the deployment options currently offered are
listed below.
TrueComp
Manager Application
Our TrueComp Manager application automates the modeling, design,
administration, reporting, and analysis of pay-for-performance
programs for organizations ranging from hundreds to hundreds of
thousands of sales people. Our customers use the TrueComp
Manager application to design, test, and implement sales
compensation plans that reward employees based on profitability
of sales or customer value, team-selling, and new product
introduction or geographic expansion, or other sales activities
that customers wish to encourage. The TrueComp Manager
application enables our customers to define flexible market
goals and territories for its sales force and channels,
accurately collect sales performance data, apply it to each
payees profile and goals, and process and pay their sales
force for achievement on target. The TrueComp Manager
application provides a flexible, user-maintainable system that
can be easily modified to align direct or indirect sales
compensation with corporate goals and shareholder value. It also
provides sophisticated modeling functionality to enable the
finance organization to accurately forecast compensation spend,
or to perform incentive and coverage modeling to understand the
different incentive
and/or
market scenarios. This combined modeling functionality enables
organizations to substantially reduce their exposure to
unexpected compensation overspend.
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The TrueComp Manager application serves as the business
user-facing application to
set-up
compensation plans and incentives, territories, and goals, and
to manage day-to-day operations of sales collections and
payments. The solution collects and integrates multiple data
feeds used to measure and process sales performance. The
TrueComp grid component provides high-performance processing of
compensation data and results and, together with our parallel
processing functionality, enables organizations to manage global
compensation. The applications modular, date-effective
approach to defining compensation plans avoids the maintenance
and change problems associated with homegrown solutions. The
TrueComp Manager application was initially shipped in the first
quarter of 1999 and is now being offered to our customers
through an on-demand SaaS solution, or under a time-based term
or perpetual license.
Callidus
Reporting
Callidus Reporting delivers real-time production reports for
detailed and summarized sales goal information. It delivers
compensation statements, and order to payment tracking, enabling
transparency and confidence in the sales incentive process
across stakeholders, including the sales force, dealer networks,
brokers and channel partners. With integrated reporting
capabilities as part of the Callidus Software suite, businesses
can quickly and efficiently deploy sales incentives, knowing
that sales and channel partners receive up-to-date, transparent
details on their performance and payments. The reports deliver
at-a-glance
summary snapshots for sales, and enable quick and easy
navigation to the orders and events that drive their
compensation. Callidus Reporting software was initially shipped
in the first quarter of 2006 and is now being offered to our
customers through an on-demand SaaS solution, or under a
time-based term or perpetual license.
Callidus
Analytics
Callidus Analytics solution enables businesses to quickly deploy
performance dashboards across the sales force and selling
channels to monitor and indentify trends affecting sales team,
product, and customer performance. The solution provides
out-of-the-box dashboards for sales, finance, and sales
operations roles to interactively assess and identify trends
affecting selling performance across customers, products,
channels, sales teams, and territories, and provides ad-hoc
query capabilities for deeper analysis of root causes of
performance trends.
Callidus Analytics is integrated with the TrueComp Manager
solution, and is shipped with pre-packaged dashboards by role
for rapid time to value. Callidus Analytics also allows
integration with salesforce.com via AppExchange. Callidus
Analytics software was initially shipped in the first quarter of
2006 and is now being offered to our customers through an
on-demand SaaS solution, or under a time-based term or perpetual
license.
Callidus
Producer Management
Callidus Producer Management is designed for insurance carriers
with large independent distribution channels, or a large numbers
of captive agents. Callidus Producer Management streamlines
producer administration by helping onboard, deploy, and pay
producers, while providing visibility into channel operations
and financial performance. Producer management helps businesses
not only realize significant hard dollar savings with better
control and flexibility of incentive plans and payments to
producers, but also to rapidly onboard new producers, grow
producer revenue and mindshare, and ensure long-term producer
loyalty. Callidus Producer Management was initially shipped in
the second quarter of 2007 and is now being offered to our
customers through an on-demand SaaS solution, or under a
time-based term or perpetual license.
Callidus
Channel Management
Callidus Channel Management is designed for telecommunications
companies with large independent channels that need one central
location to view and update dealer information. Channel
management provides businesses a comprehensive view of dealer
information, essential for providing the maximum service level
to dealers. It helps businesses not only realize significant
savings with better control and flexibility of incentive plans
and payments to dealers, but also to manage sophisticated types
of hierarchies required for independent dealers. Callidus
Channel Management was initially shipped in the second quarter
of 2007 and is now being offered to our customers through an
on-demand SaaS solution, or under a time-based term or perpetual
license.
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Callidus
Objective Management
Callidus Objective Management enables organizations to design
and deploy pay-for-performance initiatives to every employee to
consistently and reliably deliver and optimize results. The
self-service applications empower administrators and managers to
set, review, and reward objectives, and analyze objective
performance, to achieve maximum impact on their key initiatives.
Objective Management delivers insight to key stakeholders to
understand the alignment of objectives across departments and
teams. This enables businesses to spend less time juggling
different systems and spreadsheets and more time to focus on
execution and impact of corporate objectives. Callidus Objective
Management was initially available in the fourth quarter of 2008
and is now being offered to our customers through an on-demand
SaaS solution.
Callidus
Quota Management
Callidus Quota Management is designed to provide sales and
finance teams with a solution that ensures sales quotas are
allocated fairly, in a timely manner, and are aligned with
corporate revenue goals and market opportunity. Quota Management
identifies opportunities to allocate and change quotas to
maximize revenue based on historical performance. It helps
allocate quotas effectively and quickly using sophisticated
business rules, and manages the rollout and approval process
across sales teams and regions in a coordinated and timely
manner, enabling everyone to be brought into the process.
Callidus Quota Management was initially available in the fourth
quarter of 2008 and is now being offered to our customers
through an on-demand SaaS solution.
Callidus
Communicator
Callidus Communicator is designed to help accelerate and
streamline communications with a business sales force and
channels to help align sales behavior with corporate objectives
for more consistent results. The solution can dramatically
accelerate the process of rolling out compensation plans,
special incentives, and strategic objective plans to the field,
and helps track these documents through the inquiry, sign-off,
and approval processes. The software helps expedite go-to-market
for new products and services and accelerates sales readiness
for new fiscal periods. Callidus Communicator was initially
available in the third quarter of 2009 and is now being offered
to our customers through an on-demand SaaS solution.
Callidus
Business Process Management
Callidus Business Process Management (BPM) solutions provide a
configurable, template-based platform to define, model, build,
deploy and optimize workflows for critical sales and operational
processes, such as agent onboarding and offboarding, and third
party data validation and management. Callidus BPM replaces
manually documented and ad-hoc processes that are challenging to
implement, track, audit, and modify. Callidus BPM was initially
available in the third quarter of 2009 and is now being offered
to our customers through an on-demand SaaS solution, or under a
time-based term or perpetual license.
Callidus
Commissions Manager
Callidus Commissions Manager is a 100% native solution on the
Force.com platform (developed by Salesforce.com) that delivers
an easy-to-use application that can be rapidly deployed to help
companies drive adoption of Salesforce CRM. With Callidus
Commissions Manager, sales professionals can track their
projected commissions, initiate claims for credit and payment on
closed deals, file disputes on payments, and track the status
and amounts of paid and pending commissions, all as part of
their day-to-day opportunity management in Salesforce.com. In
addition, role-based dashboards across stakeholders provide
insight into sales performance and help provide transparency to
sales and finance on earnings to-date as well as earnings
potentials. Commissions Manager was initially available in the
third quarter of 2009 and is now being offered to our customers
through an on-demand SaaS solution.
Callidus
Plan Communicator
Callidus Plan Communicator is a 100% native solution on the
Force.com platform (developed by Salesforce.com) that
accelerates the process of rolling out and communicating
incentive plans across the sales force, and
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obtaining acknowledgement from each sales person. With this
solution, organizations can transform the sales plan deployment
and approval process, accelerating new go-to-markets and fiscal
period rollouts, and rolling out changes to sales strategy
throughout the year. Plan Communicator was initially available
in the third quarter of 2008 and is now being offered to our
customers through an on-demand SaaS solution.
Services
We provide a full range of services to our customers, including
professional services, maintenance and technical support
services, and professional development services.
Professional Services. We provide integration
and configuration services to our customers and partners. Our
on-demand customers benefit from a quicker time to value than
our traditional on-premise customers because our software is
already up and running in our hosting facility. For these
customers, professional services typically include the
identification and sourcing of legacy data, configuration of
application rules to create compensation plans, set up of
pre-defined reports and custom reports, and the ability to
interface our hosted application with other applications used by
our customers. For those customers who purchase our on-premise
solution, our services include the installation of our software,
identification and sourcing of legacy data, configuration of the
TrueComp application rules necessary to create compensation
plans, creation of custom reports and integration of our
software with other products, and other general testing and
tuning services. Installation, configuration and other
professional services related to our software can be performed
by our customers, or at their discretion, by us or third-party
implementation providers. We also provide services to our
implementation partners to aid them in certain projects and
training programs. In addition, we provide Callidus Strategic
and Expert Services to help customers optimize incentive
compensation business processes and management capability. The
professional services we perform are generally performed on a
time and materials basis.
Business Process Solutions. We provide a suite
of value-added Business Process Solutions around ours and
client-designed solutions. Specific solutions are available for
the Callidus TrueComp Manager application, Callidus Producer
Management, and Callidus Reporting & Analytics
products. Each solution includes clearly defined engagement
plans, rapid deployment methods, and a proven track record of
delivering value to customers.
Maintenance and Technical Support Services. We
have maintenance and technical support centers in the United
States and India. We currently offer two levels of support,
standard and premium, which are generally provided on a yearly
basis. Under both levels of support, our customers are provided
with online access to our customer support database, telephone,
web and
e-mail
support, and all product enhancements and new releases. In
addition, online chat is offered for clients as an alternative
option. In the case of premium support, our customers are
provided with access to a support engineer 24 hours a day,
7 days a week. In addition, our customers who subscribe to
standard or premium support can be provided access to a remote
technical account manager to assist with management and
resolution of support requests.
Education and Professional Development
Services. We offer a comprehensive set of over 20
performance-oriented, role-based training courses for our
customers, partners, and employees. Our educational services
include self-service web-based training, classroom training,
remote (virtual training with off-site instructor),
on-site
training, and custom training. Our professional certification is
available to promote standards for SPM professionals who
demonstrate the ability to implement our suite of products.
Technology
Our products are written in Java. The TrueComp Manager
application is based on our proprietary rules engine, which is
implemented on our scalable TrueComp Grid computing
architecture. This technology offers our customers high degrees
of functionality and flexibility, coupled with the scalability
and reliability that enables them to maximize the return on
investment in their SPM systems.
Customers
While our products and services can serve the Sales Performance
Management needs of all companies, we have driven particular
penetration with our solutions and expertise in the
telecommunications, insurance, banking,
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technology, life sciences/pharmaceuticals, and retail and
distribution markets. In 2009, 2008 and 2007, no customer
accounted for more than 10% of our total revenues.
Americas revenues represented 87%, 86% and 80% of our
total revenues in 2009, 2008 and 2007, respectively. The
remaining amounts of revenue in each of the past three years
have been generated in Europe and the Asia Pacific region.
Now at over 200 customers, with $50 billion of incentives
and compensation paid, for over 2 million payees in over
140 countries, we believe that we are the unequivocal leader in
the sales performance management space.
Sales and
Marketing
We sell and market our software through a direct sales force and
in conjunction with our partners. In the United States, we have
sales and service offices in Austin, Birmingham (Alabama), New
York, San Jose (HQ), and Scottsdale. Outside the United
States, we have sales and service offices in the United Kingdom
and Singapore.
Sales. Our direct sales force, consisting of
account development, account executives, technical pre-sales
engineers and field management, is responsible for the sale of
our products to global enterprises across multiple industries,
and is organized into geographic and industry territories. Our
account development team is responsible for generating new
qualified opportunities and following up on marketing campaigns.
Marketing. Our marketing activities include
product, service, field, customer, and industry marketing
functions as well as marketing communications. Product marketing
is responsible for defining new product requirements, managing
product life cycles, and generating content for sales collateral
and marketing programs. Marketing communications is focused on
both primary demand generation efforts to help increase
awareness of SPM, and secondary demand generation efforts to
drive sales leads for our products and services. This is done
through multiple channels, including advertising, webcasts,
industry events, email marketing, web marketing, and
telemarketing. In addition, our relaunched website is optimized
to drive prospects to our solutions and generate additional
sales opportunities.
Alliances
and Partnerships
We actively promote and maintain strategic relationships with
systems integrators, consulting organizations, independent
software vendors, value-added resellers, and technology
providers. These relationships provide both customer referrals
and co-marketing opportunities, which have helped in expanding
our customer base. On a national and global basis, we have
established alliances with partners such as Accenture and
salesforce.com.
In 2007, we forged a partnership with salesforce.com,
specifically focused on the promotion and marketing of our
On-Demand offering as an AppExchange certified partner, and in
2008 we developed our first native Force.com application,
Callidus Plan Communicator. In 2009, we also launched our new
native Force.com suite, featuring our new claims-based
commission management solution, which enables sales
professionals to manage commissions as part of Salesforce CRM.
We showcased the solutions at Dreamforce 09.
Also in 2009, we significantly expanded our global reseller
network in specific geographic markets. In addition to CIS in
Latin America and ICM Advisory in Poland, we added Seven Seas
Technologies to resell our products in Africa, Advantech to
resell our products in Israel, Ultima to resell our products in
Turkey, Cognity to resell our products in Greece, Hyperintel to
resell our products in Indonesia, HAND Enterprise Solutions to
resell our products in China and Excel Technologies to resell
our products in Asia.
Research
and Development
Our research and development organization consists of
experienced software engineers, software quality engineers, and
technical writers. We organize the development staff along
product lines, with an engineering services group providing
centralized support for quality assurance, technical
documentation, and advanced support. In 2009, 2008, and 2007, we
recorded research and development expenses of
$13.9 million, $14.6 million and $15.6 million,
respectively. These expenses include stock-based compensation.
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Competition
Our principal competition comes from Oracle Corporation and
internally developed software solutions. We also compete with
other software and consulting companies that generally focus on
specific industries or sectors, including Centive (now Xactly),
DSPA Software, Merced Systems, Synygy, Trilogy-Versata,
Varicent, and ZS Associates. We believe that the principal
competitive factors affecting our market are:
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industry-specific domain expertise;
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scalability and flexibility of solutions;
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excellent customer service;
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functionality of solutions; and
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total cost of ownership.
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We believe that we compete effectively with the established
enterprise software companies due to our focus, established
market leadership, domain expertise, comprehensive suite and
roadmap of solutions outside of core commission management, and
highly scalable architecture. We believe we have more fully
developed the domain expertise necessary to meet the dynamic
requirements of todays complex sales performance and
incentive compensation programs.
Our On-Demand offering competes favorably in terms of speed of
implementation, reliability, security, scalability, and
portability to an on-premise solution. The addition of our
lifecycle solutions enhanced our ability to provide a
comprehensive sales management solution delivered from a single
vendor. The addition of our salesforce.com solutions has also
enhanced our ability to compete in the mid-market sector. While
our competitors offer viable market alternatives, we believe
that we have developed superior breadth and depth of
functionality demanded by specific vertical markets, while
providing increased operational flexibility to support more
rapid deployment capability. Additionally, we have created
substantial product differentiation by adding features into our
products that are specific to each of our target markets, and
that scale to growing business needs.
We believe that our products offer a more cost-effective and
complete alternative to internally developed solutions.
Internally-developed solutions are generally expensive,
inflexible, and difficult to maintain for companies with
increasingly complex sales performance and incentive
compensation programs, thereby increasing total cost of
ownership and limiting the ability to implement programs that
effectively address targeted business objectives.
Although we believe that our products and services currently
compete effectively with those of our competitors, the market
for SPM products is rapidly evolving. Our larger competitors
have significantly greater financial, technical, marketing,
service, and other resources. Many of these companies also have
a larger installed base of users, longer operating histories,
and greater name recognition. Our competitors may also be able
to respond more quickly to changes in customer requirements, or
may announce new products, services, or enhancements that better
meet the needs of customers or changing industry standards. In
addition, if one or more of our competitors were to merge or
partner with another of our competitors, the change in the
competitive landscape could adversely affect our ability to
compete effectively. Increased competition may cause price
reductions, reduced gross margins, and loss of market share.
Intellectual
Property
Our success and ability to compete is dependent, in part, on our
ability to develop and maintain the proprietary aspects of our
technology and operate without infringing upon the proprietary
rights of others. We rely primarily on a combination of
copyrights, trade secrets, confidentiality procedures,
contractual provisions and other similar measures to protect our
proprietary information. We also have a patent registration
program within the United States and have an ongoing trademark
registration program pursuant to which we register some of our
product names, slogans and logos in the United States and in
some foreign countries. However, due to the rapidly changing
nature of applicable technologies, we believe that the
improvement of existing products, reliance upon trade secrets
and
7
unpatented proprietary know-how and development of new products
are generally more advantageous than patent and trademark
protection.
Our agreements with customers include restrictions intended to
protect and defend our intellectual property. We also require
our employees, contractors and many of those with whom we have
business relationships to sign non-disclosure and
confidentiality agreements.
Some of our products include third-party software that we use
based on rights granted under license agreements. While
third-party software comprises important elements of our product
offerings, it is commercially available and we believe there are
other commercially available substitutes that can be integrated
with our products on reasonable terms. In certain cases we also
believe we could develop substitute technology to replace these
products if these third-party licenses were no longer available
on reasonable terms.
Employees
As of December 31, 2009, we had a total of
284 employees. Of those employees, 46 were in sales and
marketing, 72 were in research and development and technical
support, 84 were in professional services and training, 36 were
in on-demand operations, and 46 were in general and
administration. We consider our relationship with our employees
to be good and have not experienced interruptions of operations
due to labor disagreements.
Executive
Officers of the Company
The following table sets forth certain information with respect
to our executive officers as of March 1, 2010:
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Executive
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Officer
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Name
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Age
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Position
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Since
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Leslie J. Stretch
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48
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President; Chief Executive Officer
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2005
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Ronald J. Fior
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52
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Senior Vice President, Finance and Operations; Chief Financial
Officer
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2002
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V. Holly Albert
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51
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Senior Vice President, General Counsel and Corporate Secretary
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2006
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Merritt Alberti
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44
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Senior Vice President, Worldwide Client Services
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2009
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Jimmy C. Duan
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47
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Senior Vice President, Asia Pacific and Latin America
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2008
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Michael L. Graves
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40
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Senior Vice President, Engineering
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2007
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Lorna Heynike
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39
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Senior Vice President, Marketing
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2009
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Jeffrey Saling
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48
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Senior Vice President, North America and EMEA
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2008
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Leslie J. Stretch has served as our President and CEO
since December 2007. Previously, Mr. Stretch was our Senior
Vice President, Global Sales, Marketing and On-Demand Business
from July 2007 to November 2007, Senior Vice President,
Worldwide Sales from April 2006 to July 2007, and Vice
President, Worldwide Sales from November 2005 to April 2006.
Prior to joining Callidus, Mr. Stretch served as interim
CEO for The Hamsard Group, plc. in the United Kingdom from April
2005 to September 2005. Previously, Mr. Stretch served in a
variety of roles at Sun Microsystems, most recently as Senior
Vice President of Global Channel Sales from January 2005 to
April 2005, UK Vice President and Managing Director from
February 2003 to January 2005, and UK Sales Director from May
1996 to February 2003. Prior to joining Sun Microsystems,
Mr. Stretch served in a variety of roles at Oracle
Corporation, U.K. including Director of Retail and Commercial
Business UK from June 1995 to June 1996, Branch Manager Western
Canada from 1994 to 1995, and Branch Manager Scotland from 1989
to 1994. Mr. Stretch holds a B.A. in Economics and Economic
History from the University of Strathclyde and a Postgraduate
Diploma in Computer Systems Engineering from the University of
Edinburgh.
Ronald J. Fior has served as our Senior Vice President,
Finance and Operations and Chief Financial Officer since April
2006. Since joining us, Mr. Fior has also served as our
Vice President, Finance and Chief Financial Officer from
September 2002 to April 2006. From December 2001 to July 2002,
Mr. Fior served as Vice President of Finance and Chief
Financial Officer for Ingenuity Systems, a bioinformatics
software development company. From July 1998 until October 2001,
Mr. Fior served as Chief Financial Officer and Vice
President of Finance and
8
Operations of Remedy Corporation, an enterprise software
applications company. Prior to this, Mr. Fior served for
13 years as Chief Financial Officer of numerous divisions
and companies within the publishing operations of The Thomson
Corporation, including the ITP Education Group and the
International Thomson Publishing Group. Mr. Fior holds a
Bachelor of Commerce degree from the University of Saskatchewan
and is a Chartered Accountant.
V. Holly Albert has served as our Senior Vice
President, General Counsel and Secretary since August 2006.
Previously, Ms. Albert was in private legal practice from
April 2004 until August 2006. Prior to that, Ms. Albert was
the Vice President, General Counsel and Corporate Secretary at
Docent Inc., (now SumTotal Systems, Inc.) a provider of
integrated software applications, services, and content from
December 2002 to April 2004. Prior to Docent, Ms. Albert
served as Vice President, General Counsel and COO at Tradenable,
Inc., an Internet financial services company. Prior to
Tradenable, she was the Vice President and General Counsel at
infoUSA.com. Prior to infoUSA, she served in a variety of roles
at Honeywell Inc. from 1983 to 2000, with her last position
being the General Counsel for Honeywell-Measurex Corporation.
Ms. Albert is a member of both the California and New
Mexico State bars and received her J.D. from the University of
Pittsburgh School Of Law. Ms. Albert also holds an M.A.
from John F. Kennedy University in Psychology and a B.A. in
Economics from Washington and Jefferson College.
Merritt Alberti has served as our Senior Vice President,
Worldwide Client Services since April 2009. Previously, he
served as our Vice President, North America Client Services from
January 2008 to March 2009. From 2004 to 2008, Mr. Alberti
was Vice President at Compensation Technologies, a consulting
services organization specializing in the design, implementation
and support of incentive compensation management programs. Prior
to Compensation Technologies, he was director of technology
services at The Alexander Group, Inc, a consulting organization
that specializes in sales force effectiveness. Mr. Alberti
holds a B.S. from the United States Military Academy at West
Point, an M.S. in information systems from Tarleton State
University, and an MBA from the University of Texas at Austin.
Jimmy C. Duan became our Senior Vice President, Asia
Pacific and Latin America in February 2010. Previously, he
served as our Senior Vice President, Mid-Market Business since
October 2008. Mr. Duan also served as our Vice President,
Strategic Services from October 2005 to April 2006, Managing
Director, Expert Services from April 2004 to September 2005, and
Managing Director, Western Area Consulting from March 2001 to
March 2004. From May 2006 to October 2008, Mr. Duan was
employed by Xactly Corporation, an on-demand sales compensation
solution provider, in various positions, most recently as its
Vice President, Products and Professional Services,
Mr. Duan also served as Director of Business Intelligence
and Data Warehousing at Quovera, a business consulting and
technology integration provider, from May 1999 March 2001
and as Solutions Manager at Talus Solutions, a pricing and
revenue management software solution provider, from October 1996
to May 1999. Mr. Duan holds a B.S. in Engineering from
Central-South University in China and a Ph.D. in Industrial and
Systems Engineering from Virginia Tech.
Michael L. Graves has served as our Senior Vice
President, Engineering since February 2007. Previously,
Mr. Graves served in a variety of roles at Oracle
Corporation, an enterprise application software company, from
October 1997 to February 2007, most recently as Vice President
of Engineering, Oracle Applications from January 2006 to
February 2007, and Senior Director of Engineering from October
1997 to January 2006. Mr. Graves holds a B.S.
Finance-Economics from the University of California, Berkeley.
Lorna Heynike has served as our Senior Vice President,
Marketing, since July 2009. Prior to that, Mrs. Heynike was
our Vice President, Product Management from January 2009 to July
2009, and our Senior Director, Product Management from April
2007 to January 2009. Previously, Mrs. Heynike worked in a
variety of product management related positions with Oracle
Corporation, from April 2001 to March 2007, most recently as
Director, Product Management. Mrs. Heynike holds an MBA
from Heriot-Watt University in Edinburgh, Scotland; an M.Sc.
from the University of Edinburgh, Scotland; and a B.A. degree
with Honors from the University of California at Berkeley.
Jeffrey Saling has served as our Senior Vice President,
North America and EMEA, since July 2009. Mr. Saling has
also served as our Senior Vice President, Callidus On-Demand,
from April 2008 to July 2009, Vice President, Managed Services,
from May 2006 to April 2008, Managing Director, On-Demand
Services, from December 2005 to May 2006, and Managing Director,
Client Services from January 2004 to November 2005. Prior to
joining
9
Callidus, Mr. Saling worked in a variety of roles at
Chordiant Software, an enterprise application software company
focused on front office solutions, including Americas Vice
President of Field Operations from July 2001 to January 2004,
and Consultancy Services Director/Manager from January 1998 to
July 2001. Prior to Chordiant, Mr. Saling served as General
Manager (Senior Manager) for Accentures (Andersen
Consultings) outsourced business for Ford Motor Company
from June 1997 to December 1998. Mr. Saling holds a
Bachelor of Science degree in Business Administration,
Production & Operations Management, from California
State University, Hayward.
Available
Information
We make available, free of charge, on our website
(www.callidussoftware.com) our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and other periodic reports as soon as reasonably practicable
after we have electronically filed or furnished such materials
to the Securities and Exchange Commission.
Factors
That Could Affect Future Results
We operate in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties that could cause
actual results to differ materially from the results
contemplated by the forward-looking statements contained in this
Annual Report on
Form 10-K.
Because of the following factors, as well as other variables
affecting our operating results, past financial performance
should not be considered a reliable indicator of future
performance, and investors should not use historical trends to
anticipate results or trends in future periods.
RISKS
RELATED TO OUR BUSINESS
We
have a history of losses, and we cannot assure you that we will
achieve and sustain profitability.
We incurred net losses of $18.0 million, $13.8 million
and $13.1 million in 2009, 2008 and 2007, respectively. Our
transition to a recurring revenue model has resulted in a
decline in perpetual license revenues, and we do not expect the
perpetual license revenues to return to historical levels. At
the same time, the decline in growth rate of our cumulative Net
Annual Contract Value (ACV) for on-demand services in several
previous quarters, and the absolute decline in Net ACV in the
second quarter of 2009, will adversely affect our on-demand
revenues in subsequent periods. As a result of the transition to
a recurring revenue model and in the face of challenging
macro-economic conditions, our revenue declined by 24% from 2008
to 2009. In addition, because our recurring revenue provides
lower gross margin than our historical perpetual license
revenues, our overall gross margin declined from 43% to 39% from
2008 to 2009. To achieve profitability, we must increase our
total revenues, principally by growing our cumulative Net ACV by
entering into more or larger recurring revenue transactions and
maintaining or reducing the rate of existing customer
cancellations. If we cannot increase our cumulative Net ACV, our
future results of operations and financial condition will be
adversely affected and we may be unable to achieve profitability.
To achieve profitability, we must also ensure that our cost
structure is aligned to the revenue and gross margin levels of
our new model. To reduce our expenses, we took a number of cost
reduction steps in 2007, 2008, and 2009. These cost reductions
efforts include headcount reductions, the latest of which
commenced in the first quarter of 2010. In connection with the
restructurings, we incurred expenses of $3.0 million in 2009,
$1.6 million in 2008, and $1.5 million in 2007. We do
not expect to realize the full benefits of the latest measures
until the second or third quarter of 2010. We are continuing to
monitor our expenses in an effort to further optimize our
performance for the long-term. However, there is no assurance
that these steps to manage our expenses will be adequate.
Consequently, we may be required to incur additional
restructuring expenses in the future and, even with these or any
future actions, we cannot be sure that we will achieve or
sustain profitability on a quarterly or annual basis in the
future. If we cannot increase our total revenues, improve our
gross margins, and control our costs, our future results of
operations and financial condition will be negatively affected.
10
Disruptions
in the financial and insurance industries or the global economic
crisis may materially and adversely affect our revenues,
operating results and financial condition.
Historically, a substantial portion of our revenues have been
derived from sales of our products and services to customers in
the financial and insurance industries. The substantial
disruptions in these industries in 2008 and 2009 have resulted,
and may in the future result, in these customers deferring or
cancelling future planned expenditures on our products and
services. Further, consolidations and business failures in these
industries could result in substantially reduced demand for our
products and services. In addition, the disruptions in these
industries and the concurrent global financial crisis may cause
other potential customers to defer or cancel future purchases of
our products and services as they seek to conserve resources in
the face of economic turmoil and the drastically reduced
availability of capital in the equity and debt markets. Any of
these developments, or the combination of these developments,
may materially and adversely affect our revenues, operating
results and financial condition in future periods.
If we
are unable to consistently offer our on-demand offering on a
profitable basis, our operating results could be adversely
affected.
We have invested, and expect to continue to invest, substantial
resources to expand, market, and implement our on-demand
offering. We achieved positive gross margins on our on-demand
offering for the first time in the first quarter of 2008. As we
continue to promote our on-demand service, there is a risk of
confusion in the market over the alternative ways to purchase
our software, which could result in delayed sales. In addition,
with our increased focus on the on-demand service, customers
that might have otherwise purchased a perpetual license may opt
for our on-demand service which may adversely affect our revenue
and operating results in the short-term as revenues for
on-demand services are recognized over the life of the agreement
with each of our customers rather than upfront as they generally
were recognized with perpetual licenses. In addition, the
professional services associated with on-demand implementations
are generally much less than those associated with perpetual
licenses. This business model shift to on-demand may also have a
longer term adverse effect on operating results, as our
on-demand offering is expected to continue to generate much
lower margins than our perpetual license sales.
Our on-demand contracts provide for payment by the customer
either after the customer goes into production, as of the
effective date of the contract, or when we meet the
customer-specific requirements. To the extent those contracts,
for which we will not recognize revenue until the customer has
commenced production, become predominant, our revenue
recognition will be delayed and our operating results will be
adversely affected.
We
cannot accurately predict customer subscription and maintenance
renewal rates and the impact these renewal rates will have on
our future revenues or operating results.
Our customers have no obligation to renew their subscriptions
for our on-demand service or maintenance support for term or
perpetual license transactions after the expiration of their
initial subscription or maintenance period, which is typically
12 to 24 months, and some customers have elected not to
renew. In addition, our customers may renew for fewer payees or
renew for shorter contract lengths. We cannot accurately predict
customer renewal rates. Our customers renewal rates may
decline or fluctuate as a result of a number of factors,
including their reduced spending levels, their decision to do
more of the work themselves internally, or dissatisfaction with
our service. If our customers do not renew their subscriptions
for our on-demand services or maintenance support, our revenue
will decline and our business will suffer.
Because
we recognize revenue from subscriptions for our on-demand
service and maintenance support over the terms of the
subscription and maintenance support agreements, downturns or
upturns in sales may not be immediately reflected in our
operating results.
We generally recognize on-demand and maintenance revenues from
customers ratably over the terms of their subscription and
maintenance support agreements, which are typically 12 to
24 months, although terms can range from one to
60 months. As a result, most of the recurring revenues we
report in each quarter result from the recognition of deferred
revenue relating to subscription and maintenance agreements
entered into during previous quarters. Consequently, a decline
in new or renewed subscriptions and maintenance in any one
quarter will not
11
necessarily be fully reflected in the revenue in that quarter
but will negatively affect our revenue in future quarters. In
addition, we may be unable to adjust our cost structure to
reflect the changes in revenues. Accordingly, the effect of
significant downturns in sales and market acceptance of our
on-demand service may not be fully reflected in our results of
operations until future periods. Our subscription model also
makes it difficult for us to rapidly increase our revenue
through additional sales in any period, as revenue from new
customers must be recognized over the applicable subscription
term.
Our
success depends upon our ability to develop new products and
enhance our existing products rapidly and cost-effectively.
Failure to successfully introduce new or enhanced products may
adversely affect our operating results.
The sales performance management software market is
characterized by:
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Rapid technological advances in hardware and software
development;
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evolving standards in computer hardware, software technology and
communications infrastructure;
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changing customer needs; and
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frequent new product introductions and enhancements.
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To keep pace with technological developments, satisfy
increasingly sophisticated customer requirements, achieve market
acceptance and effectively respond to competitive product
introductions, we must quickly identify emerging trends and
requirements, accurately define and design enhancements and
improvements for existing products and introduce new products
and services. Accelerated product introductions and short
product life cycles require high levels of expenditures for
research and development that could adversely affect our
operating results. Further, any new products we develop may not
be introduced in a timely manner or available in a distribution
model acceptable to our target markets and may therefore not
achieve the broad market acceptance necessary to generate
significant revenues. For example, we recently introduced
several new products that are only available through our
on-demand services offering or through our relationship with
salesforce.com. If one or both of these distribution options are
not accepted by customers in our target markets, these new
products may not succeed and our future revenues may be
adversely affected. Additionally, shifting more of our new
product development efforts to offshore resources will require
detailed technical and logistical coordination to ensure that
international resources are aware of and understand development
specifications and that they can meet development timelines or,
if they are not met, that any delays are not significant. If we
are unable to quickly and successfully develop and distribute
new products cost-effectively or enhance existing products or if
we fail to position and price our products to meet market
demand, our business and operating results will be adversely
affected.
Our
use of third-party international product development and support
services may prove difficult to manage or of inadequate quality
to allow us to realize our cost reduction goals and produce new
products to drive growth.
We use an India-based firm to provide certain software
engineering services and support and we expect to expand our use
of offshore third-party technical services and support in the
future. We have limited experience in managing development and
support of our products by offshore contractors, and may not be
able to maintain acceptable standards of quality in support or
product development. If we are unable to successfully maintain
product development and support quality through our efforts with
international third-party service providers, our attempts to
reduce costs and drive growth through new products may be
negatively impacted which would adversely affect our results of
operations. Additionally, if we transition too much of our
development and support efforts offshore and we are not able to
effectively manage these out-sourced providers, our ability to
quickly respond to changing market demands and support our
customers may be severely compromised which could adversely
affect our business and results of operations. In addition,
outsourcing development and support operation to offshore
providers may expose us to misappropriation of our intellectual
property, or make it more difficult to defend our rights in our
technology.
12
The
market for sales performance management software is still new
and rapidly evolving and may not develop as we
expect.
Our business is in the market for sales performance management
software, which is an evolving market. We believe one of our key
challenges is to convince prospective customers of their need
for our products and services and to persuade them that they
should make purchases of our products and services a higher
priority relative to other projects. Our future financial
performance will depend in large part on continued growth in the
number of organizations adopting sales performance management
software as a solution to address the problems related to sales
performance management. We have only recently begun to focus our
business on this market opportunity. The market for sales
performance management software may not develop as we expect, or
at all. Even if a market does develop, our competitors may be
more successful than we are in capturing the market. In either
case, our business and operating results will be adversely
affected.
Our
failure to effectively implement and manage the offering of our
on-premise product on a time-based term license basis or the
restructuring of our organizations in connection with our
transition to a recurring revenue business model may harm our
business and financial results.
In the third quarter of 2009, we began offering our on-premise
products on a time-based term license basis. We had initial
sales of our products on this basis in the third quarter of
2009, but there is no assurance when or if this new offering
will achieve market acceptance. If our new on-premise time-based
term license offering fails to achieve market acceptance, our
business and operating results may be materially and adversely
affected. In connection with our transition to a recurring
revenue business model, in July 2009, we reorganized our sales
organization and marketing department to more effectively focus
on market opportunities and concurrently took other significant
action to reduce costs. There are no guarantees that it will be
successful. If these steps prove insufficient or ineffective or
result in unanticipated disruption to our business, our ability
to achieve or sustain profitability may be materially impaired.
Our
quarterly revenues and operating results are unpredictable and
are likely to continue to fluctuate substantially, which may
harm our results of operations.
Although our revenue is primarily focused on recurring revenues,
we anticipate doing some perpetual license revenue business
which is difficult to forecast and which is likely to fluctuate
significantly from quarter to quarter due to a number of
factors, many of which are wholly or partially beyond our
control. We expect that our ongoing focus on our on-demand
business will result in lower revenues from perpetual licenses
and decreased customer expenditures on professional services
over historical levels.
Accordingly, we believe that period-to-period comparisons of our
results of operations should not be relied upon as definitive
indicators of future performance.
Factors that may cause our quarterly revenue and operating
results to fluctuate include:
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Disruption in the financial and insurance industries and the
global financial crisis, which may result in the deferral or
cancellation of future purchases of our products and services;
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the discretionary nature of our customers purchase and
budget cycles and changes in their budgets for software and
related purchases;
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the priority our customers place on the purchase of our products
as compared to other information technology and capital
acquisitions;
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competitive conditions in our industry, including new product
introductions, product announcements and discounted pricing or
special payment terms offered by our competitors;
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varying size, timing and contractual terms of orders for our
products, which may delay the recognition of revenues;
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indeterminate and often lengthy sales cycles;
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13
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changes in the mix of revenues attributable to higher-margin
product license or recurring revenues as opposed to
substantially lower-margin on-demand and professional services
and other revenues;
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strategic actions by us or our competitors, such as
acquisitions, divestitures, spin-offs, joint ventures, strategic
investments or changes in business strategy;
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merger and acquisition activities among our customers, which may
alter their buying patterns, or failure of potential customers,
which may reduce demand for our products and services;
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the extent to which our customers needs for professional
services are reduced as a result of product improvements as well
as implementation efficiencies in our on-demand offering over
traditional on-premise implementations;
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the utilization rate of our professional services personnel and
the degree to which we use third-party consulting services;
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changes in the average selling prices of our products;
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the rates the market will bear for our professional services and
our ability to efficiently and profitably perform such services
based on those market rates; and
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increased operating expenses associated with channel sales and
increased product development efforts.
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Our
professional services revenues declined materially in recent
periods as a result of changes to our business model, and we do
not expect them to recover to previous historical
levels.
Historically, a significant portion of our revenues were derived
from the performance of professional services, primarily
implementation, configuration, training and other consulting
services in connection with perpetual licenses and ongoing
projects. However, given the shift in our business model to
on-demand and other factors, services revenue has declined
materially, and we expect services revenues to be a much smaller
portion of our revenues going forward. Characteristics of our
on-demand offering contributing to the decline in our service
revenue include:
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The initial implementation time for our on-demand solution is
substantially less than our traditional on-premise enterprise
software model resulting in a decreased need for our
professional services.
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Historically, our on-premise enterprise software license
transactions require post-implementation professional services,
typically in the form of upgrade, updates and configuration
support. Under our on-demand solution model, upgrades and
updates are included in our on-demand technical operations
thereby further reducing customers professional services
needs.
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The number of third party professional services providers
capable of implementing, configuring and performing other
consulting services related to our on-demand solutions,
including our partners, continues to expand. To the extent
customers use third party professional services providers, our
professional services revenues may be reduced.
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In addition, certain customers may experience budget constraints
causing them to delay or cancel projects, including projects in
which we would have performed professional services related to
our software applications. To the extent these budget
constraints continue or our customers become impacted by them,
our professional services revenues may be reduced. For these and
other reasons, our professional service revenues may decline
further in the future.
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We
might not be able to manage our operations efficiently or
profitably.
We experienced significant growth in our overall operations in
2007 and in our on-demand operations in 2008. Since 2008,
however, we have significantly reduced the size of our internal
organization as we have transitioned to a recurring revenue
model, expanded our offshore and third party professional
services partnerships and in reaction to slowing economic
activity. As we continue to optimize our operations in relation
to our recurring revenue model, we expect additional adjustments
in our organizational structure will continue. The actions we
have taken and may take
14
in the future may cause disruptions in or add complexity to our
operations. In addition, if we return to a period of growth in
our operations, we will likely need to expand the size of our
staff, grow and manage our related operations and third party
partnerships and strengthen our financial and accounting
controls. Any expansion may increase our expenses, and there is
no assurance that our infrastructure would be sufficiently
scalable to efficiently manage the growth that we may
experience. If we expand our operations, our systems, procedures
or controls might not be adequate to support expansion. Further,
to the extent we invest in additional resources and growth in
our revenues does not ensue, our operating results would be
adversely affected. If we are unable to further leverage our
operating cost investments as a percentage of revenues our
ability to generate profits will be adversely impacted.
Our
service revenues produce substantially lower gross margins than
our license and recurring revenues, and periodic variations in
the proportional relationship between services revenues and
higher margin license and recurring revenues have harmed, and
may continue to harm, our overall gross margins.
Our services revenues, which include fees for consulting,
implementation and training, were 37%, 46% and 49% of our
revenues for 2009, 2008 and 2007, respectively. Our services
revenues have substantially lower gross margins than our license
and recurring revenues.
Historically, services revenues as a percentage of total
revenues have varied significantly from period to period due to
a number of circumstances including fluctuations in licensing
and recurring revenues, changes in the average selling prices
for our products and services and the effectiveness and appeal
of competitive service providers. In addition, the volume and
profitability of services can depend in large part upon:
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Competitive pricing pressure on the rates that we can charge for
our professional services;
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increases or decreases in the number of services projects being
performed on a fixed bid or acceptance basis that may defer
recognition of revenue;
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the timing and amount of any remediation services related to
professional services warranty claims;
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the complexity of the customers information technology
environments;
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the priority and resources customers place on their
implementation projects; and
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the extent to which outside consulting organizations provide
services directly to customers.
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As an example of competitive pressure on our services offerings,
many of our potential customers are outsourcing technology
projects offshore to take advantage of lower labor costs.
Additionally, market rates for the types of professional
services we offer may be greater or less than the rates we
charge domestically depending on the geographic regions where
the services are performed. Moreover, as we expand our
international services operations, revenues may be impacted by
fluctuations in currency exchange rates. Consequently, as we
extend our customer base internationally, we expect greater
variation in the proportion of services revenues compared to our
other higher margin license and recurring revenues, which may
increase or erode margins for our service revenues and our
overall gross margins.
The
loss of key personnel, higher than normal employee attrition in
key departments, or the inability of replacements to quickly and
successfully perform in their new roles could adversely affect
our business.
Our success depends to a significant extent on the abilities and
effectiveness of our personnel, and in particular our president
and chief executive officer and our other executive officers.
All of our existing personnel, including our executive officers,
are employed on an at-will basis. If we lose or
terminate the services of one or more of our current executives
or key employees or if one or more of our current or former
executives or key employees joins a competitor or otherwise
competes with us, it could impair our business and our ability
to successfully implement our business plan. Likewise, if a
number of employees from specific departments were to depart,
our short-term ability to maintain business operations and
implement our business plan may be impaired. For example, our
announcement that we intend to move our corporate headquarters
from San Jose, California to a smaller, lower cost facility
in or around Pleasanton, California in the third quarter of
2010 may cause a greater than expected number of employees
from departments within our corporate headquarters to depart in
the coming quarters. Additionally, if we are unable to quickly
hire qualified replacements for our executive, other key
positions or employees within specific
15
departments, our ability to execute our business plan could be
harmed. Even if we can quickly hire qualified replacements, we
would expect to experience operational disruptions and
inefficiencies during any transition.
Our
products have long sales cycles, which makes it difficult to
plan our expenses and forecast our results.
The sales cycles for our on-demand solutions are still evolving,
and as we continue to broaden our on-demand offerings it is
difficult to determine with any certainty how long our sales
cycles for our on-demand solutions will be in the future. The
sales cycles for perpetual licenses of our products have
historically been between six and twelve months, and longer in
some cases, to complete. Consequently, it remains difficult to
predict the quarter in which a particular sale will close and to
plan expenditures accordingly. Moreover, because sales are often
completed in the final two weeks of a quarter, this difficulty
may be compounded. Global economic uncertainty and corporate
cost-cutting are likely to continue throughout 2010, thereby
prolonging the difficulty of predicting license and on-demand
sales into the foreseeable future. The period between our
initial contact with a potential customer and its purchase of
our products and services is relatively long due to several
factors, including:
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The complex nature of our products;
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the need to educate potential customers about the uses and
benefits of our products and services;
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budget cycles of our potential customers that affect the timing
of purchases;
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customer requirements for competitive evaluation and internal
approval before purchasing our products and services;
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potential delays of purchases due to announcements or planned
introductions of new products and services by us or our
competitors; and
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the lengthy approval processes of our potential customers, many
of which are large organizations.
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The failure to complete sales of our on-demand solution in a
particular quarter will defer revenues into subsequent quarters
as revenue from our on-demand services are recognized ratably
over the term of the agreement.
Professional
services revenues comprise a substantial portion of our revenues
and, to the extent our customers choose to use other services
providers, our revenues and operating results may
decline.
A substantial portion of our revenues are derived from the
performance of professional services, primarily implementation,
configuration, training and other consulting services in
connection with new product licenses and other ongoing projects.
However, there are a number of third-party service providers
available that offer these professional services, and we do not
require that our customers use our professional services. To the
extent our customers choose to use third-party service providers
instead of us or perform these professional services themselves,
our revenues and operating income may decline significantly.
Deployment
of our products frequently requires substantial technical
implementation and support by us or third-party service
providers. Failure to meet these requirements could cause a
decline or delay in recognition of our revenues and an increase
in our expenses.
Deployments of our products frequently require a substantial
degree of technical and logistical expertise for both on-demand
and on-premise implementations. Moreover, whether for our
on-demand or on-premise implementations, our customers can
require large, enterprise-wide deployments of our products. It
may be difficult for us to manage these deployments, including
the timely allocation of personnel and resources by us and our
customers. Failure to successfully manage the process could harm
our reputation both generally and with specific customers and
may cause us to lose existing customers, face potential customer
disputes or limit the number of new customers that purchase our
products, each of which could adversely affect our revenues and
increase our technical support and litigation costs.
Our software license customers have the option to receive
implementation, maintenance, training and consulting services
from our internal professional services organization or from
outside consulting organizations.
16
We may increase our use of third-party service providers to help
meet our implementation and service obligations. If we use a
greater number of third-party service providers than we do
currently, we will be required to negotiate additional
arrangements, which may result in lower gross margins for
maintenance or service revenues. Moreover, third-party service
providers may not be as skilled in implementing or maintaining
our products as our internal professional staff.
If implementation services are not provided successfully and in
a timely manner, our customers may experience increased costs
and errors, which may result in customer dissatisfaction and
costly remediation and litigation, any of which could adversely
impact our reputation, operating results and financial
condition. We make estimates of sales return reserves related to
potential future requirements to provide remediation services in
connection with current period service revenues, which are
accounted for in the consolidated financial statements. If
actual remediation services exceed our estimates we could be
required to take additional charges, which could be material.
Acquisitions
and investments present many risks, and we may not realize the
anticipated financial and strategic goals for any such
transactions.
We may in the future acquire or make investments in other
complementary companies, products, services and technologies. In
January 2010, we completed the acquisition of Actek, a leading
provider of commissions and compliance software for complex
selling environments for the insurance and financial services
industries. In January 2008 we acquired Compensation
Technologies LLC to expand our services offerings and improve
our services related operations. We may not realize the expected
benefits of acquisitions or investments we made or may make in
the future. For example, after acquiring Compensation
Technologies to strengthen our professional service operation,
demand for our professional services declined substantially, in
the face of challenging macro-economic condition, as well as our
transition to a recurring revenue model, which is less service
intensive. In addition, acquisitions and investments involve a
number of risks, including the following:
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We may have difficulty integrating the operations and personnel
of the acquired business, and may have difficulty retaining the
key personnel of the acquired business;
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we may find that the acquired business or assets do not further
our business strategy, or that we overpaid for the business or
assets, or that economic conditions change, all of which may
generate a future impairment charge;
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we may have difficulty integrating the acquired technologies or
products with our existing product lines;
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there may be customer confusion where our products overlap with
those of the acquired business;
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we may become exposed to liabilities associated with the sale of
the acquired business products and services;
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our ongoing business and managements attention may be
disrupted or diverted by transition or integration issues or the
complexity of managing geographically and culturally diverse
locations;
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we may have difficulty maintaining uniform standards, controls,
procedures and policies across locations;
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acquisitions may result in litigation from terminated employees
or third-parties; and
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we may experience significant problems or liabilities associated
with product quality, technology and legal contingencies.
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These factors could have a material adverse effect on our
business, results of operations and financial condition or cash
flows, particularly in the case of a larger acquisition or
multiple acquisitions in a short period of time. From time to
time, we may enter into negotiations for acquisitions or
investments that are not ultimately consummated. Such
negotiations could result in significant diversion of management
time, as well as out-of-pocket expenses.
The consideration paid in connection with an investment or
acquisition also affects our financial condition and operating
results. If we were to proceed with one or more significant
acquisitions in which the consideration included cash, we could
be required to use a substantial portion of our available cash
or incur substantial debt to
17
consummate such acquisitions. If we incur substantial debt, it
could result in material limitations on the conduct of our
business. To the extent we issue shares of stock or other rights
to purchase stock, including options, existing stockholders may
be diluted. In addition, acquisitions may result in the
incurrence of debt, large one-time write-offs (such as acquired
in-process research and development) and restructuring charges.
They may also result in the acquisition of goodwill and other
intangible assets that are subject to impairment tests, which
could result in future impairment charges.
If we
are unable to hire or subcontract for and retain qualified
employees, including sales, professional services, and
engineering personnel, our growth may be impaired.
To expand our business successfully and maintain a high level of
quality, we need to continually recruit, retain and motivate
highly skilled employees and subcontractors in all areas of our
business, including sales, professional services and
engineering. In particular, if we are unable to hire or
subcontract for and retain talented professional services
personnel with the skills, and in the locations, we require, we
might need to redeploy existing personnel or further increase
our reliance on subcontractors to fill certain of our labor
needs. As our customer base increases and as we continue to
evaluate and modify our organizational structure to increase
efficiency, we are likely to experience staffing constraints in
connection with the deployment of trained and experienced
professional services resources capable of implementing,
configuring and maintaining our software for existing customers
looking to migrate to more current versions of our products as
well as new customers requiring installation support. Moreover,
as a company focused on the development of complex products, we
are often in need of additional software developers and
engineers.
Our
latest product features and functionality may require existing
customers to migrate to more recent versions of our software.
Moreover, we may choose to or be compelled to discontinue
maintenance support for older versions of our software products,
forcing customers to upgrade their software in order to continue
receiving maintenance support. If existing customers fail to
migrate or delay migration to newer versions of our software,
our revenues may be harmed.
We plan to pursue sales of new product modules to existing
perpetual license customers of our TrueComp software. To take
advantage of new features and functionality in our latest
modules, many of our perpetual license customers will need to
migrate to a more current version of our products. We also
expect to periodically terminate maintenance support on older
versions of our products for various reasons including, without
limitation, termination of support by third-party software
vendors whose products complement ours or upon which we are
dependent. Termination of maintenance may force our perpetual
license customers to migrate to more current versions of our
software. Regardless of the reason, upgrading to more current
versions of our products is likely to involve additional cost,
which our customers may delay or decline to incur. If a
sufficient number of our customers do not migrate to newer
versions of our software, our continued maintenance support
opportunities and our ability to sell additional products to
these customers, and as a result, our revenues and operating
income, may possibly be harmed significantly.
If we
do not compete effectively, our revenues may not grow and could
decline.
We have experienced, and expect to continue to experience,
intense competition from a number of software companies. We
compete principally with vendors of Sales Performance Management
(SPM) software, Enterprise Incentive Management (EIM) software,
enterprise resource planning software, and customer relationship
management software. Our competitors may announce new products,
services or enhancements that better meet the needs of customers
or changing industry standards. Increased competition may cause
price reductions, reduced gross margins and loss of market
share, any of which could have a material adverse effect on our
business, results of operations and financial condition.
Many of our enterprise resource planning competitors and other
potential competitors have significantly greater financial,
technical, marketing, service and other resources. Many also
have a larger installed base of users, longer operating
histories or greater name recognition. Some of our
competitors products may also be more effective at
performing particular SPM or EIM system functions or may be more
customized for particular customer needs in a given market. Even
if our competitors provide products with less SPM or EIM system
functionality than
18
our products, these products may incorporate other capabilities,
such as recording and accounting for transactions, customer
orders or inventory management data. A product that performs
these functions, as well as some of the functions of our
software solutions, may be appealing to some customers because
it would reduce the number of software applications used to run
their business.
Our products must be integrated with software provided by a
number of our existing or potential competitors. These
competitors could alter their products in ways that inhibit
integration with our products, or they could deny or delay our
access to advance software releases, which would restrict our
ability to adapt our products for integration with their new
releases and could result in the loss of both sales
opportunities and renewals of on-demand services and maintenance.
A
substantial majority of our product revenues are derived from
our
TrueComp®
software application and related products and services, and a
decline in sales of these products and services could adversely
affect our operating results and financial
condition.
We derive, and expect to continue to derive, a substantial
majority of our product revenues from our TrueComp application
and related products and services through both our on-demand and
on-premise solutions. Our on-demand solution still consists
substantially of our TrueComp application. In addition, our
installed base of perpetual license customers has predominantly
purchased our TrueComp application, and our ability to generate
maintenance revenue from these customers depends on their
continued use of our TrueComp application. As a result of these
factors, maintenance revenue from these customers depends on the
customer use of our TrueComp application, we are particularly
vulnerable to fluctuations in demand for our TrueComp
application. Accordingly, if demand for our TrueComp application
and related products and services decline significantly, our
business and operating results will be adversely affected.
If we
reduce prices, alter our payment terms or modify our products or
services in order to compete successfully, our margins and
operating results may be adversely affected.
The intensely competitive market in which we do business may
require us to reduce our prices
and/or
modify our pricing strategies in ways that may adversely affect
our operating results. If our competitors offer deep discounts
on competitive products or services, we may be required to lower
prices or offer other terms more favorable to our customers in
order to compete successfully. Some of our competitors may
bundle their software products that compete with ours with their
other products and services for promotional purposes or as a
long-term pricing strategy or provide guarantees of prices and
product implementations. These practices could, over time, limit
the prices that we can charge for our products or cause us to
modify our existing market strategies for our products and
services. If we cannot offset price reductions and other terms
more favorable to our customers with a corresponding increase in
the number of sales or decreased spending, then the reduced
revenues resulting from lower prices or revenue recognition
delays would adversely affect our margins and operating results.
Our
products depend on the technology of third parties licensed to
us that are necessary for our applications to operate and the
loss or inability to maintain these licenses, errors in such
software, or discontinuation or updates to such software could
result in increased costs or delayed sales of our
products.
We license technology from several software providers for our
rules engine, analytics, web viewer and quota management
application, and we anticipate that we will continue to do so
for these features and from these or other providers in
connection with future products. We also rely on generally
available third-party software to run our applications. Any of
these software applications may not continue to be available on
commercially reasonable terms, if at all, or new versions may be
released that are incompatible with our prior or existing
software releases. Some of the products could be difficult to
replace, and developing or integrating new software with our
products could require months or years of design and engineering
work. The loss or modification of any of these technologies
could result in delays in the license of our products until
equivalent technology is developed or, if available, is
identified, licensed and integrated. Acquisitions of our
third-party technology licenses by our competitors or otherwise
may have a material adverse impact on us if the acquirer seeks
to cancel or change the terms of our license.
19
In addition, our products depend upon the successful operation
of third-party products in conjunction with our products and,
therefore, any undetected errors in these products could prevent
the implementation or impair the functionality of our products,
delay new product introductions
and/or
injure our reputation. Our use of additional or alternative
third-party software that requires us to enter into license
agreements with third parties could result in new or higher
royalty payments.
Errors
in our products could be costly to correct, adversely affect our
reputation and impair our ability to sell our
products.
Our products are complex and, accordingly, they may contain
errors, or bugs, that could be detected at any point
in their product life cycle. While we continually test our
products for errors and work with customers to identify and
correct bugs, errors in our products are likely to be found in
the future. Any errors could be extremely costly to correct,
materially and adversely affect our reputation and impair our
ability to sell our products. Further, our efforts to reduce
costs by employing more subcontracting personnel to perform
product development and support tasks may make it more difficult
for us to timely respond to product errors. Moreover, customers
relying on our products to calculate and pay incentive
compensation may have a greater sensitivity to product errors
and security vulnerabilities than customers for software
products in general. If we incur substantial costs to correct
any product errors, our operating margins would be adversely
affected.
Because our customers depend on our software for their critical
business functions, any interruptions could result in:
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Lost or delayed market acceptance and sales of our products;
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product liability suits against us;
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diversion of development resources; and
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substantially greater service and warranty costs.
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Our
revenues might be harmed by resistance to adoption of our
software by information technology departments.
Some potential customers have already made a substantial
investment in third-party or internally developed software
designed to model, administer, analyze and report on
pay-for-performance programs. These companies may be reluctant
to abandon these investments in favor of our software. In
addition, information technology departments of potential
customers may resist purchasing our software solutions for a
variety of other reasons, particularly the potential
displacement of their historical role in creating and running
software and concerns that packaged software products are not
sufficiently customizable for their enterprises.
We may
lose sales opportunities and our business may be harmed if we do
not successfully develop and maintain strategic relationships to
implement and sell our products.
We have relationships with third-party consulting firms, systems
integrators and software vendors. These third parties may
provide us with customer referrals, cooperate with us in the
design, sales
and/or
marketing of our products, provide valuable insights into market
demands and provide our customers with systems implementation
services or overall program management. However, we do not have
formal agreements governing our ongoing relationship with
certain of these third-party providers and the agreements we do
have generally do not include obligations with respect to
generating sales opportunities or cooperating on future business.
We also have and are considering strategic relationships that
are new or unusual for us and which can pose additional risks.
While reseller arrangements offer the advantage of leveraging
larger sales organizations than our own to sell our products,
they also require considerable time and effort on our part to
train and support our strategic partners personnel, and
require our strategic partners to properly motivate and
incentivize their sales force. Also, if the reseller agreement
is an exclusive arrangement, there is risk that the exclusivity
prevents us from pursuing the applicable markets ourselves,
which if the reseller is not being successful there on our
behalf, may adversely affect our results of operations.
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Should any of these third parties go out of business or choose
not to work with us; we may be forced to develop new
capabilities internally, which may cause significant delays and
expense, thereby adversely affecting our operating results. Any
of our third-party providers may offer products of other
companies, including products that compete with our products. If
we do not successfully and efficiently establish, maintain, and
expand our industry relationships with influential market
participants, we could lose sales and service opportunities,
which would adversely affect our results of operations.
Breaches
of security or failure to safeguard customer data could create
the perception that our services are not secure, causing
customers to discontinue or reject the use of our services and
potentially subject us to significant liability. Implementing,
monitoring and maintaining adequate security safeguards may be
costly.
Our on-demand service allows our customers to access our
software and transmit confidential data, including personally
identifiable individual data of their employees, agents, and
customers over the Internet. We also store data provided to us
by our customers on servers in a third-party data warehouse. In
addition, we may have access to confidential and private
individual data as part of our professional services
organization activities, including implementation, maintenance
and support of our software for perpetual license customers. If
we do not adequately safeguard the confidential information
imported into our software or otherwise provided to us by our
customers, or if third parties penetrate our systems or security
and misappropriate our customers confidential information,
our reputation may be damaged and we may be sued and incur
substantial damages in connection with such disclosures or
misappropriations. Even if it is determined that our security
measures were adequate, the damage to our reputation may cause
customers and potential customers to reconsider the use of our
software and services, which may have a material adverse effect
on our results of operations.
Moreover, many of our customers are subject to heightened
security obligations regarding the personally identifiable
information of their customers. In the United States, these
heightened obligations particularly affect the financial
services and insurance sectors, which are subject to stringent
controls over personal information under the Gramm-Leach-Bliley
Act, Health Insurance Portability and Accountability Act, Health
Information Technology for Economic and Clinical Health Act and
other similar state and federal laws and regulations. In
addition, the European Union Directive on Data Protection
creates international obligations on the protection of personal
data that typically exceed security requirements mandated in the
United States. The security measures we have implemented and may
need to implement, monitor and maintain in the future to satisfy
the requirements of our customers, many of which are in the
financial services and insurance sectors, may be substantial and
involve significant time and effort, which are typically not
chargeable to our customers.
If we
fail to adequately protect our proprietary rights and
intellectual property, we may lose valuable assets, experience
reduced revenues and incur costly litigation to protect our
rights.
Our success and ability to compete is significantly dependent on
the proprietary technology embedded in our products. We rely on
a combination of copyrights, patents, trademarks, service marks,
trade secret laws and contractual restrictions to establish and
protect our proprietary rights. We cannot protect our
intellectual property if we are unable to enforce our rights or
if we do not detect its unauthorized use. Despite our
precautions, it may be possible for unauthorized third parties
to copy
and/or
reverse engineer our products and use information that we regard
as proprietary to create products and services that compete with
ours. Some license provisions protecting against unauthorized
use, copying, transfer and disclosure of our licensed programs
may be unenforceable under the laws of certain jurisdictions and
foreign countries. Further, the laws of some countries do not
protect proprietary rights to the same extent as the laws of the
United States. To the extent that we engage in international
activities, our exposure to unauthorized copying and use of our
products and proprietary information increases.
We enter into confidentiality or license agreements with our
employees and consultants and with the customers and
corporations with whom we have strategic relationships. No
assurance can be given that these agreements will be effective
in controlling access to and distribution of our products and
proprietary information. Further, these agreements do not
prevent our competitors from independently developing
technologies that are substantially equivalent or superior to
our products. Litigation may be necessary in the future to
enforce our intellectual property
21
rights and to protect our trade secrets. Litigation, whether
successful or unsuccessful, could result in substantial costs
and diversion of management resources, either of which could
seriously harm our business.
Our
results of operations may be adversely affected if we are
subject to a protracted infringement claim or one that results
in a significant damage award.
From time to time, we receive claims that our products or
business infringe or misappropriate the intellectual property
rights of third parties and our competitors or other third
parties may challenge the validity or scope of our intellectual
property rights. We believe that claims of infringement are
likely to increase as the functionality of our products expands
and as new products are introduced. A claim may also be made
relating to technology that we acquire or license from third
parties. If we were subject to a claim of infringement,
regardless of the merit of the claim or our defenses, the claim
could:
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Require costly litigation to resolve;
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absorb significant management time;
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cause us to enter into unfavorable royalty or license agreements;
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require us to discontinue the sale of all or a portion of our
products;
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require us to indemnify our customers or third-party systems
integrators; or
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require us to expend additional development resources to
redesign our products.
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Our
inclusion of open source software in our products may expose us
to liability or require release of our source
code.
We use a limited amount of open source software in our products
and may use more in the future. From time to time there have
been claims challenging the ownership of open source software
against companies that incorporate open source software into
their products. As a result, we could be subject to suits by
parties claiming ownership of what we believe to be open source
software. In addition, some open source software is provided
under licenses that require that proprietary software, when
combined in specific ways with open source software, become
subject to the open source license and thus freely available.
While we take steps to minimize the risk that our software, when
combined with open source software, would become subject to open
source licenses, few courts have interpreted open source
licenses. As a result, the manner in which these licenses will
be enforced is unclear. If our software were to become subject
to open source licenses, our ability to commercialize our
products and our operating results would be materially and
adversely affected.
Uncertain
economic conditions may adversely impact our
business.
Our business may be adversely affected by the ongoing credit
crises and adverse worldwide economic conditions. Further
weakening in the global economy, or a further decline in
confidence in the economy, could adversely impact our business
in a number of important respects. These include
(i) reduced bookings and revenues, as a result of longer
sales cycles, reduced, deferred or cancelled customer purchases
and lower average selling prices; (ii) increased operating
losses and reduced cash flows from operations;
(iii) greater than anticipated uncollectible accounts
receivable and increased allowances for doubtful accounts
receivable; and (iv) impairment in the value of our
financial and non-financial assets resulting in non-cash
impairment charges.
We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make
required payments. This allowance consists of amounts identified
for specific customers. If the financial condition of our
customers were to deteriorate, resulting in an impairment in
their ability to make payments, additional allowances may be
required, and we may be required to defer revenue recognition on
sales to affected customers, any of which could adversely affect
our operating results. In the future, we may have to record
additional reserves or write-offs
and/or defer
revenue on certain sales transactions which could negatively
impact our financial results.
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If we
do not adequately manage and evolve our financial reporting and
managerial systems and processes, our ability to manage and grow
our business may be harmed.
Our ability to successfully implement our business plan and
comply with regulations, including the Sarbanes-Oxley Act,
requires an effective planning and management process. We expect
that we will need to continue to improve existing, and implement
new, operational and financial systems, procedures and controls
to manage our business effectively in the future. Any delay in
the implementation of, or disruption in the transition to, new
or enhanced systems, procedures or controls, could impair our
ability to accurately forecast sales demand, manage our system
integrators and other third-party service vendors and record and
report financial and management information on a timely and
accurate basis.
We
expect to continue expanding our international operations but we
do not have substantial experience in international markets, and
may not achieve the expected results.
We have been expanding our international operations since 2006
and expect to continue expanding these operations in 2010.
International expansion may require substantial financial
resources and a significant amount of attention from our
management. International operations involve a variety of risks,
particularly:
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Unexpected changes in regulatory requirements, taxes, trade laws
and tariffs;
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differing abilities to protect our intellectual property rights;
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use of international resellers and compliance with the foreign
corrupt practices act;
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differing labor regulations;
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greater difficulty in supporting and localizing our products;
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greater difficulty in establishing, staffing and managing
foreign operations;
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possible political and economic instability; and
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|
|
fluctuating exchange rates.
|
We have limited experience in marketing, selling and supporting
our products and services abroad. If we invest substantial time
and resources to grow our international operations and fail to
do so successfully and on a timely basis, our business and
operating results could be seriously harmed.
RISKS
RELATED TO OUR STOCK
Our
stock price is likely to remain volatile.
The trading price of our common stock has in the past and may in
the future be subject to wide fluctuations in response to a
number of factors, including those described in this section. We
receive only limited attention by securities analysts, and there
frequently occurs an imbalance between supply and demand in the
public trading market for our common stock due to limited
trading volumes. Our stock repurchase program may increase this
imbalance. Investors should consider an investment in our common
stock as risky and should purchase our common stock only if they
can withstand significant losses. Other factors that affect the
volatility of our stock include:
|
|
|
|
|
Our operating performance and the performance of other similar
companies;
|
|
|
|
significant sales or distributions by existing investors coupled
with a lack of trading volume for our stock;
|
|
|
|
announcements by us or our competitors of significant contracts,
results of operations, projections, new technologies,
acquisitions, commercial relationships, joint ventures or
capital commitments;
|
|
|
|
changes in our management team;
|
|
|
|
publication of research reports about us or our industry by
securities analysts; and
|
|
|
|
developments with respect to intellectual property rights.
|
23
Additionally, some companies with volatile market prices for
their securities have been subject to securities class action
lawsuits filed against them. For example, in 2004 we were sued
in connection with the decline in our stock price following the
announcements of disappointing operating results and changes in
senior management. Any future suits such as these could have a
material adverse effect on our business, results of operations,
financial condition and the price of our common stock.
Future
sales of substantial amounts of our common stock by us or our
existing stockholders could cause our stock price to
fall.
Additional equity financings or other share issuances by us
could adversely affect the market price of our common stock.
Sales by existing stockholders of a large number of shares of
our common stock in the public trading market (or in private
transactions) including sales by our executive officers,
directors or venture capital funds, or the perception that such
additional sales could occur, could cause the market price of
our common stock to drop.
Provisions
in our charter documents, our stockholder rights plan and
Delaware law may delay or prevent an acquisition of our
company.
Our certificate of incorporation and bylaws contain provisions
that could make it harder for a third party to acquire us
without the consent of our board of directors. For example, if a
potential acquirer were to make a hostile bid for us, the
acquirer would not be able to call a special meeting of
stockholders to remove our board of directors or act by written
consent without a meeting. In addition, our board of directors
has staggered terms, which means that replacing a majority of
our directors would require at least two annual meetings. The
acquirer would also be required to provide advance notice of its
proposal to replace directors at any annual meeting, and would
not be able to cumulate votes at a meeting, which would require
the acquirer to hold more shares to gain representation on the
board of directors than if cumulative voting were permitted. In
addition, we are a party to a stockholder rights agreement,
which effectively prohibits a person from acquiring more than
15% (subject to certain exceptions) of our common stock without
the approval of our board of directors. Furthermore,
Section 203 of the Delaware General Corporation Law limits
business combination transactions with 15% stockholders that
have not been approved by the board of directors. All of these
factors make it more difficult for a third party to acquire us
without negotiation. These provisions may apply even if the
offer may be considered beneficial by some stockholders. Our
board of directors could choose not to negotiate with an
acquirer that it does not believe is in our strategic interests.
If an acquirer is discouraged from offering to acquire us or
prevented from successfully completing a hostile acquisition by
these or other measures, you could lose the opportunity to sell
your shares at a favorable price.
We lease our headquarters in San Jose, California which
consists of approximately 53,000 square feet of office
space. The lease on our San Jose headquarters expires in
2010. We are in the process of negotiating a new lease and
expect to enter into the lease and relocate our headquarters to
Pleasanton, California in 2010. We also lease facilities in
Austin, Birmingham (Alabama), London, New York, and Scottsdale.
We believe that our properties are in good operating condition
and adequately serve our current business operations. We also
anticipate that suitable additional or alternative space,
including those under lease options, will be available at
commercially reasonable terms for future expansion. See
Note 7 to the Consolidated Financial Statements for
information regarding our lease obligations.
|
|
Item 3.
|
Legal
Proceedings
|
We are from time to time a party to various litigation matters
and customer disputes incidental to the conduct of our business,
none of which, at the present time, is likely to have a material
adverse effect on our future financial results.
In accordance with accounting for contingencies, we record a
liability when it is both probable that a liability has been
incurred and the amount of the loss can be reasonably estimated.
We review the need for any such liability on a quarterly basis
and record any necessary adjustments to reflect the effect of
ongoing negotiations, contract disputes, settlements, rulings,
advice of legal counsel, and other information and events
pertaining to a particular
24
case in the period they become known. At December 31, 2009,
we have not recorded any such liabilities in accordance with
accounting for contingencies. We believe that we have valid
defenses with respect to the contract disputes and other legal
matters pending against us and that the probability of a loss
under such matters is not probable.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock has been traded on the NASDAQ Global Market
under the symbol CALD since our initial
public offering in November 2003. The following table sets
forth, for the periods indicated, the high and low closing sales
prices reported on the NASDAQ Global Market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2009
|
|
Fiscal Year Ended December 31, 2008
|
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
Fourth
|
|
Third
|
|
Second
|
|
First
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
High
|
|
$
|
3.40
|
|
|
$
|
3.05
|
|
|
$
|
3.57
|
|
|
$
|
3.26
|
|
|
$
|
4.26
|
|
|
$
|
5.74
|
|
|
$
|
6.49
|
|
|
$
|
5.54
|
|
Low
|
|
$
|
2.65
|
|
|
$
|
2.49
|
|
|
$
|
2.69
|
|
|
$
|
2.13
|
|
|
$
|
1.95
|
|
|
$
|
3.91
|
|
|
$
|
4.75
|
|
|
$
|
3.75
|
|
As of March 1, 2010, we had 31,153,488 shares of our
common stock outstanding. There were 46 stockholders of record
of our common stock, and we believe a greater number of
beneficial owners.
We have never declared or paid cash dividends on our capital
stock. We currently expect to retain future earnings, if any,
for use in the operation and expansion of our business and do
not anticipate paying any cash dividends in the foreseeable
future.
Performance
Graph
The following performance graph shall not be deemed to be
incorporated by reference by means of any general statement
incorporating by reference this
Form 10-K
into any filing under the Securities Act of 1933, as amended or
the Securities Exchange Act of 1934, except to the extent that
the Company specifically incorporates such information by
reference, and shall not otherwise be deemed filed under such
acts.
The graph compares the cumulative total return of our common
stock from December 31, 2004 through December 31, 2009
with the NASDAQ Composite Index and the NASDAQ
Computer & Data Processing Index.
The graph assumes (i) that $100 was invested in our common
stock at the closing price of our common stock on
December 31, 2003, (ii) that $100 was invested in each
of the NASDAQ Composite Index and the NASDAQ
Computer & Data Processing Index at the closing price
of the respective index on such date and (iii) that all
dividends received were reinvested. To date, no cash dividends
have been declared or paid on our common stock.
25
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Callidus Software Inc., The NASDAQ Composite Index
And The NASDAQ Computer & Data Processing Index
|
|
|
* |
|
$100 invested on 12/31/04 in stock or index, including
reinvestment of dividends. Fiscal year ending December 31. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2004
|
|
|
12/31/2005
|
|
|
12/31/2006
|
|
|
12/31/2007
|
|
|
12/31/2008
|
|
|
12/31/2009
|
Callidus Software Inc.
|
|
|
|
100.00
|
|
|
|
|
71.31
|
|
|
|
|
106.96
|
|
|
|
|
87.78
|
|
|
|
|
50.76
|
|
|
|
|
51.27
|
|
NASDAQ Composite
|
|
|
|
100.00
|
|
|
|
|
101.33
|
|
|
|
|
114.01
|
|
|
|
|
123.71
|
|
|
|
|
73.11
|
|
|
|
|
105.61
|
|
NASDAQ Computer & Data Processing
|
|
|
|
100.00
|
|
|
|
|
102.45
|
|
|
|
|
115.69
|
|
|
|
|
138.09
|
|
|
|
|
78.91
|
|
|
|
|
126.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The Company has not changed comparable indices from 2008. The
NASDAQ National Market Composite Index changed its name to the
NASDAQ Composite Index in June 2006. |
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data should be
read in conjunction with the Managements Discussion and
Analysis of Financial Condition and Results of Operations
section and the Consolidated Financial Statements and Notes
thereto included elsewhere in this annual report. The selected
consolidated statements of operations data for each of the years
in the three-year period ended December 31, 2009, and as of
December 31, 2009 and 2008, are derived from our audited
consolidated financial statements that have been included in
this annual report. The selected consolidated statement of
operations data for each of the years in the two year period
ended December 31, 2006 and the selected consolidated
balance sheet data as of December 31, 2007, 2006 and 2005
are derived from our audited consolidated financial statements
that have not been included in this annual report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
46,322
|
|
|
$
|
40,546
|
|
|
$
|
23,907
|
|
|
$
|
18,006
|
|
|
$
|
14,919
|
|
Services
|
|
|
29,702
|
|
|
|
49,535
|
|
|
|
49,125
|
|
|
|
30,329
|
|
|
|
28,691
|
|
License
|
|
|
5,034
|
|
|
|
17,100
|
|
|
|
28,025
|
|
|
|
27,773
|
|
|
|
17,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
81,058
|
|
|
|
107,181
|
|
|
|
101,057
|
|
|
|
76,108
|
|
|
|
61,453
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring(1)
|
|
|
22,468
|
|
|
|
16,111
|
|
|
|
11,043
|
|
|
|
6,253
|
|
|
|
4,576
|
|
Services(1)
|
|
|
26,195
|
|
|
|
44,613
|
|
|
|
43,555
|
|
|
|
28,541
|
|
|
|
25,708
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
License
|
|
|
754
|
|
|
|
897
|
|
|
|
884
|
|
|
|
546
|
|
|
|
377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
49,417
|
|
|
|
61,621
|
|
|
|
55,482
|
|
|
|
35,340
|
|
|
|
30,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
31,641
|
|
|
|
45,560
|
|
|
|
45,575
|
|
|
|
40,768
|
|
|
|
30,792
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing(1)
|
|
|
20,369
|
|
|
|
29,456
|
|
|
|
30,806
|
|
|
|
25,463
|
|
|
|
18,552
|
|
Research and development(1)
|
|
|
13,853
|
|
|
|
14,597
|
|
|
|
15,563
|
|
|
|
14,558
|
|
|
|
12,606
|
|
General and administrative(1)
|
|
|
12,310
|
|
|
|
14,237
|
|
|
|
13,991
|
|
|
|
12,367
|
|
|
|
9,744
|
|
Restructuring
|
|
|
2,993
|
|
|
|
1,641
|
|
|
|
1,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
49,525
|
|
|
|
59,931
|
|
|
|
61,818
|
|
|
|
52,388
|
|
|
|
40,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(17,884
|
)
|
|
|
(14,371
|
)
|
|
|
(16,243
|
)
|
|
|
(11,620
|
)
|
|
|
(10,110
|
)
|
Interest and other income, net
|
|
|
308
|
|
|
|
702
|
|
|
|
2,772
|
|
|
|
2,709
|
|
|
|
1,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision for income taxes and cumulative effect of
change in accounting principle
|
|
|
(17,576
|
)
|
|
|
(13,669
|
)
|
|
|
(13,471
|
)
|
|
|
(8,911
|
)
|
|
|
(8,619
|
)
|
Provision for (benefit from) income taxes
|
|
|
377
|
|
|
|
161
|
|
|
|
(330
|
)
|
|
|
(62
|
)
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of change in accounting principle
|
|
|
(17,953
|
)
|
|
|
(13,830
|
)
|
|
|
(13,141
|
)
|
|
|
(8,849
|
)
|
|
|
(8,605
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,953
|
)
|
|
$
|
(13,830
|
)
|
|
$
|
(13,141
|
)
|
|
$
|
(8,721
|
)
|
|
$
|
(8,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.60
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
30,050
|
|
|
|
29,913
|
|
|
|
29,068
|
|
|
|
27,690
|
|
|
|
26,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
33,550
|
|
|
$
|
36,845
|
|
|
$
|
50,637
|
|
|
$
|
52,939
|
|
|
$
|
63,705
|
|
Total assets
|
|
|
66,259
|
|
|
|
83,879
|
|
|
|
87,447
|
|
|
|
85,194
|
|
|
|
80,644
|
|
Working capital
|
|
|
17,083
|
|
|
|
26,720
|
|
|
|
48,390
|
|
|
|
54,949
|
|
|
|
54,962
|
|
Total liabilities
|
|
|
35,028
|
|
|
|
39,913
|
|
|
|
33,698
|
|
|
|
27,814
|
|
|
|
22,493
|
|
Total stockholders equity
|
|
|
31,231
|
|
|
|
43,966
|
|
|
|
53,749
|
|
|
|
57,380
|
|
|
|
58,151
|
|
|
|
|
(1) |
|
Effective January 1, 2006, the Company adopted the
provisions of accounting for share-based payment under the
modified prospective method. Accordingly, for the years ended
December 31, 2009, 2008, 2007 and 2006, stock-based
compensation was accounted for under accounting for share-based
payment, while for the years prior to January 1, 2006,
stock-based compensation was accounted for under accounting for
stock issued to employees. The amounts above include stock-based
compensation as follows: |
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cost of recurring revenues
|
|
$
|
471
|
|
|
$
|
692
|
|
|
$
|
250
|
|
|
$
|
193
|
|
|
$
|
9
|
|
Cost of services revenues
|
|
|
574
|
|
|
|
1,263
|
|
|
|
838
|
|
|
|
832
|
|
|
|
100
|
|
Sales and marketing
|
|
|
1,019
|
|
|
|
1,861
|
|
|
|
1,162
|
|
|
|
1,045
|
|
|
|
(226
|
)
|
Research and development
|
|
|
736
|
|
|
|
1,169
|
|
|
|
995
|
|
|
|
917
|
|
|
|
226
|
|
General and administrative
|
|
|
1,524
|
|
|
|
2,711
|
|
|
|
1,709
|
|
|
|
1,766
|
|
|
|
435
|
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
of 2009 Results
We are a market and technology leader in Sales Performance
Management (SPM) software solutions designed to align internal
sales resources and distribution channels with corporate
strategy. Our software enhances core processes in sales
management, such as the structuring of sales territories, the
management of sales force talent, the establishment of sales
targets and the creation and execution of sales incentive plans.
Using our SPM software solutions, companies can tailor these
core processes to further their strategic objectives, including
coordinating sales efforts with long-range strategies regarding
sales and margin targets, growth initiatives, sales force talent
development, territory expansion and market penetration. Our
customers can also use our SPM solutions to address more
tactical objectives, such as successful new product launches and
effective cross-selling strategies. Leading companies worldwide
in the financial services, insurance, communications,
high-technology, life sciences and retail industries rely on our
solutions for their sales performance management and incentive
compensation needs. Our SPM solutions can be purchased and
delivered as either an on-demand service or an on-premise
software solution. Our on-demand service allows customers to use
our software products through a web interface rather than
purchase computer equipment and install our software at their
locations, and we believe the benefits of this deployment method
will make our on-demand offering our most popular product choice.
We sell our products and services both directly through our
sales force and in conjunction with our strategic partners. We
also offer professional services, including configuration,
integration and training, generally on a
time-and-materials
basis. We generate recurring subscription and support revenues
from our on-demand service, support and maintenance agreements
associated with our product licenses and, beginning in the third
quarter of 2009, we introduced on-premise licenses of our
software as a time-based term license arrangement, all of which
is recognized ratably over the term of the related agreement.
Transition
to Recurring Revenue Model Completed
In 2009, we effectively completed the transition to our
recurring revenue business model from a perpetual license
business model. Our financial results for 2009 reflected our
progress in the transition during the past year. Recurring
revenues for 2009 were $46.3 million, up 14% over 2008. As
a percentage of total revenues, recurring revenues accounted for
57%, up from 38% for 2008. Our progress in the transition to a
recurring revenue business model is better illustrated in the
comparison between the fourth quarters of 2009 and 2008.
Recurring revenues accounted for 76% of total revenues in the
fourth quarter of 2009, an increase from 41% in the fourth
quarter of 2008. We expect recurring revenues to run at
approximately 70% of total revenues through 2010.
A key metric in our recurring revenue business model is
additions to Net Annual Contract Value (ACV) generated from the
sale of our on-demand and time-based term license offerings. Our
Net ACV increased by $6.4 million or 25% during 2009 to
$32.4 million in cumulative net ACV at the end of 2009.
Because of the move to a recurring revenue model, the full
impact of the ACV bookings during 2009 will generally be
recognized ratably over the next year. As a result of the
contractual terms in some of our customer agreements, revenue
related to new ACV bookings may be deferred until a customer
goes live.
Total revenues for the year were $81.1 million, down
$26.1 million or 24% from the prior year. This decrease was
the result of the anticipated decrease in license and services
revenues related to our business model change, combined with a
very challenging economic environment. Total license revenue for
the year was $5.0 million, a decrease of $12.1 million
from 2008. Services revenue decreased by 40% from
$49.5 million in 2008 to
28
$29.7 million in 2009. The shift in revenue mix from
perpetual license revenue to more predictable recurring revenue
has also resulted in reduced services revenue as expected, as
the average implementation time for a recurring revenue
arrangement is significantly less than under the perpetual
license model.
Alignment
of Cost Base with Recurring Revenue Model
During the past year of our transition to a recurring revenue
business model, we aggressively reduced our operating expenses
to better align our cost base with our recurring revenue
streams. Our operating expenses decreased by $10.4 million,
or 17%, to $49.5 million in 2009 from $59.9 million in
2008. The significant decrease in operating expenses was
primarily the result of cost saving actions including reduction
in staff taken throughout 2009. As a result of reductions in
workforce, we recorded charges of approximately
$3.0 million in 2009 compared to $1.6 million in 2008.
We expect to realize additional savings in 2010 related to these
and further actions. With our plans to transfer more of our
development efforts to offshore resources and relocate our
headquarters in 2010, we will make further progress toward
aligning our cost base with our recurring revenue streams and
achieving profitability.
Immaterial
Adjustments to Previously Released Financial
Results
Subsequent to the filing of our Form 8K on January 28,
2010, which included our press release containing our
December 31, 2009 unaudited financial statements, we made
immaterial adjustments to our fiscal 2009 financial statements
which had the effect of increasing net loss by approximately
$320,000. These adjustments are not material to either the
annual or fourth quarter financial statements for the period
ended December 31, 2009.
Other
Business Highlights
On January 1, 2010, we completed the acquisition of Actek.
Under the terms of the agreement, we paid Acteks owner
$2.1 million in a combination of cash and stock and assumed
debt of $0.9 million. In addition, we may pay up to
approximately $1 million in the form of cash, restricted
stock units and stock options, depending on the achievement of
specified operational milestones on January 1, 2011.
Because this consideration is contingent on the achievement of
the milestones, we are required to revalue the consideration at
each subsequent reporting date until January 1, 2011 under
the acquisition accounting guidance. Actek is a leading provider
of commissions and compliance software for complex selling
environments for the insurance and financial services industries.
Challenges
and Risks
In response to market demand, we shifted our primary business
focus from the sale of perpetual licenses for our products to
the provision of our software as a service through our on-demand
offering. Our SaaS model also provides more predictable
quarterly revenues for us. In 2009, as our on-demand business
has begun to mature and we faced challenging macro economic
conditions, the growth rate of our new on-demand ACV bookings
has slowed and we have begun to experience some attrition. As a
result, the overall net ACV growth rate in 2009 was lower than
in prior years. As a further step in our transition to a
recurring revenue business model, in the third quarter of 2009
we began offering our on-premise products as a time-based term
license arrangement. We believe this offering will better
address the needs of our customers that prefer our on-premise
solution, and provide us with more predictable revenue streams
than perpetual on-premise licenses. While we have sold
on-premise time-based term licenses during the second half of
2009, there is no assurance that this new offering will achieve
market acceptance. If we are unable to significantly grow our
recurring revenue business or continue to provide our on-demand
services on a consistently profitable basis in the future, our
business and operating results may be materially and adversely
affected.
Costs associated with supporting our on-demand offering are
generally higher than the cost of maintenance related to our
on-premise customers. In addition to providing customer support
that is included in our maintenance offering, we are responsible
for the full operation of the software that the customer has
contracted for in our hosting facility. Additionally, some of
our on-demand customers subscribe to additional services
available through our business operations offering that result
in additional costs.
29
Our transition to a recurring revenue model has accelerated the
anticipated decline in services revenues, as implementations of
our on-demand offering generally are faster and require lower
customer investment than our on-premise business. We do not
expect our services revenues and margins to return to historical
levels, and have taken steps to better align our costs to
anticipated revenues. However, there is no assurance that the
steps we have taken, or may take in the future, will be
adequate. If they are not, our overall gross margins and our
ability to achieve or sustain profitability will be adversely
affected.
In July 2009 in connection with our transition to a recurring
revenue business model, we reorganized our sales organization
and marketing department to more effectively focus on our market
opportunity and at the same time took other significant actions
to reduce costs. If these steps prove insufficient or
ineffective or result in unanticipated disruption to our
business, our ability to achieve or sustain profitability may be
materially impaired.
From a business perspective, we have a number of sales
opportunities in process and additional opportunities coming
from our sales pipeline; however, we continue to experience wide
variances in the timing and size of our transactions and the
timing of revenue recognition resulting from greater flexibility
in contract terms. We believe one of our major remaining
challenges is increasing prospective customers
prioritization of purchasing our products and services over
competing IT projects. To address this challenge, we have set
goals that include expanding our sales efforts, promoting our
on-demand services, and continuing to develop new products and
enhancements to our suite of products.
Historically, a substantial portion of our revenues has been
derived from sales of our products and services to customers in
the financial and insurance industries. The recent substantial
disruptions in these industries have resulted and may in the
future result in these customers deferring or cancelling future
planned expenditures on our products and services. Further,
consolidations and business failures in these industries could
result in substantially reduced demand for our products and
services. In addition, the disruptions in these industries and
the concurrent international financial crisis may cause other
potential customers to defer or cancel future purchases of our
products and services as they seek to conserve resources in the
face of economic turmoil and the drastically reduced
availability of capital in the equity and debt markets. Any of
these developments, or the combination of these developments,
may materially and adversely affect our revenues, operating
results and financial condition in future periods.
If we are unable to grow our revenues, we may be unable to
achieve and sustain profitability. In addition to these risks,
our future operating performance is subject to the risks and
uncertainties described in Risk Factors in
Section 1A of this annual report on
Form 10-K.
Application
of Critical Accounting Policies and Use of Estimates
The discussion and analysis of our financial condition and
results of operations which follows is based upon our
consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America (GAAP). The application of GAAP requires our management
to make assumptions, judgments and estimates that affect our
reported amounts of assets, liabilities, revenues and expenses,
and the related disclosure regarding these items. We base our
assumptions, judgments and estimates on historical experience
and on various other factors that we believe to be reasonable
under the circumstances. Actual results could differ
significantly from these estimates under different assumptions
or conditions. To the extent that there are material differences
between these estimates and actual results, our future financial
statement presentation of our financial condition or results of
operations will be affected. On a regular basis, we evaluate our
assumptions, judgments and estimates. We also discuss our
critical accounting policies and estimates with our Audit
Committee of the Board of Directors.
We believe that the assumptions, judgments and estimates
involved in the accounting for revenue recognition, allowance
for doubtful accounts and service remediation reserve,
stock-based compensation, goodwill impairment, long-lived asset
impairment and income taxes have the greatest potential impact
on our consolidated financial statements. These areas are key
components of our results of operations and are based on complex
rules which require us to make judgments and estimates, so we
consider these to be our critical accounting policies.
Historically, our assumptions, judgments and estimates relative
to our critical accounting policies have not differed materially
30
from actual results. For a more detailed discussion of these
accounting policies and our use of estimates, please refer to
Note 1 to our Consolidated Financial Statements included in
this report.
Revenue
Recognition
We recognize revenue when all four revenue recognition criteria
have been met: persuasive evidence of an arrangement exists, we
have delivered the product or performed the service, the fee is
fixed or determinable and collection is deemed probable.
Determining whether and when some of these criteria have been
satisfied often involves assumptions and judgments that can have
a significant impact on the timing and amount of revenue we
report. Changes in assumptions or judgments or changes to the
elements in a software arrangement could cause a material
increase or decrease in the amount of revenue that we report in
a particular period.
Allowance
for Doubtful Accounts and Service Remediation Reserve
We must make estimates of the uncollectability of accounts
receivable. We record an increase in the allowance for doubtful
accounts when the prospect of collecting a specific account
receivable becomes doubtful. Management specifically analyzes
accounts receivable and historical bad debt experience, customer
creditworthiness, current economic trends, international
situations (such as currency devaluation) and changes in our
customer payment history when evaluating the adequacy of the
allowance for doubtful accounts. Should any of these factors
change, the estimates made by management will also change, which
could affect the level of our future provision for doubtful
accounts. Specifically, if the financial condition of our
customers were to deteriorate, affecting their ability to make
payments, an additional provision for doubtful accounts may be
required and such provision may be material.
We generally warrant that our services will be performed in
accordance with the criteria agreed upon in a statement of work,
which we generally execute with each applicable customer prior
to commencing work. Should these services not be performed in
accordance with the agreed upon criteria, we typically provide
remediation services until such time as the criteria are met.
Management must use judgments and make estimates of service
remediation reserves related to potential future requirements to
provide remediation services in connection with current period
service revenues. When providing for service remediation
reserves, we analyze historical experience of actual remediation
service claims as well as current information on remediation
service requests as they are the primary indicators for
estimating future service claims. Material differences may
result in the amount and timing of our revenues if, for any
period, actual remediation claims differ from managements
judgments or estimates.
Stock-based
Compensation
Stock-based compensation expense is measured at the grant date
based on the fair value of the award and is recognized on a
straight-line basis over the requisite service period, which is
generally the vesting period. We currently use the
Black-Scholes-Merton option pricing model to determine the fair
value of stock options and employee stock purchase plan shares.
The determination of the fair value of stock-based awards on the
date of grant using an option pricing model is affected by our
stock price as well as assumptions regarding a number of complex
and subjective variables. These variables include: the expected
term of the options, taking into account projected exercises;
our expected stock price volatility over the expected term of
the awards; the risk-free interest rate; estimated forfeitures
and expected dividends, which we determine as follows:
|
|
|
|
|
Expected term is determined based on historical experience,
giving consideration to the contractual terms of the stock-based
awards, vesting schedules and expectations of future employee
behavior as influenced by changes to the terms of its
stock-based awards.
|
|
|
|
Expected volatility is based on the historical volatility over
the expected term.
|
|
|
|
Risk-free interest rate is based on the implied yield currently
available on U.S. Treasury zero-coupon issues with a
remaining term equivalent to the expected term.
|
31
|
|
|
|
|
Estimated forfeitures are based on voluntary termination
behavior as well as analysis of actual option forfeitures.
|
|
|
|
Expected dividends are estimated at zero based on our history
and intentions of not declaring and paying dividends.
|
Changes in these variables could materially affect the estimate
of fair value of stock-based compensation and thus could
materially affect our operating results.
Goodwill
Impairment
We complete our goodwill impairment test on an annual basis,
during the fourth quarter of our fiscal year, or more
frequently, if changes in facts and circumstances indicate that
an impairment in the value of goodwill recorded on our balance
sheet may exist. In order to estimate the fair value of
goodwill, we typically estimate future revenue, consider market
factors and estimate our future cash flows. Based on these key
assumptions, judgments and estimates, we determine whether we
need to record an impairment charge to reduce the value of the
asset carried on our balance sheet to its estimated fair value.
Assumptions, judgments and estimates about future values are
complex and often subjective. They can be affected by a variety
of external and internal factors, including industry and
economic trends and changes in our business strategy or our
internal forecasts. Although we believe the assumptions,
judgments and estimates we have made in the past have been
reasonable and appropriate, different assumptions, judgments and
estimates could materially affect our reported financial results.
We completed our annual impairment test in the fourth quarter of
fiscal 2009 and determined there was no impairment. We currently
believe that there is no significant risk of future material
goodwill impairment.
Long-Lived
Asset Impairment
We evaluate impairment of our long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of
an asset group may not be recoverable. We assess the
recoverability of the assets to be held and used based on the
undiscounted future cash flows expected to be generated by the
asset group. If the carrying amount of an asset group exceeds
its estimated future cash flows, an impairment charge is
recognized equal to the amount by which the carrying amount of
the asset group exceeds the fair value of the asset group. Upon
classification of long lived assets as held for
sale, such assets are measured at the lower of their
carrying amount or fair value less cost to sell and we cease
further depreciation or amortization.
Accounting
for Income Taxes
Income tax expense is recognized for the amount of taxes payable
or refundable for the current year. In addition, deferred tax
assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the financial
reporting and tax bases of assets and liabilities, and for
operating losses and tax credit carryforwards. Management must
make assumptions, judgments and estimates to determine our
current provision for income taxes and also our deferred tax
assets and liabilities and any valuation allowance to be
recorded against a deferred tax asset.
Our assumptions, judgments and estimates relative to the current
provision for income taxes take into account current tax laws,
our interpretation of current tax laws and possible outcomes of
current and future audits conducted by foreign and domestic tax
authorities. We have established reserves for income taxes to
address potential exposures involving tax positions that could
be challenged by tax authorities. Although we believe our
assumptions, judgments and estimates are reasonable, changes in
tax laws or our interpretation of tax laws and the resolution of
potential tax audits could significantly impact the amounts
provided for income taxes in our consolidated financial
statements.
Our assumptions, judgments and estimates relative to the value
of a deferred tax asset take into account predictions of the
amount and category of future taxable income, such as income
from operations or capital gains income. Actual operating
results and the underlying amount and category of income in
future years could render our current assumptions, judgments and
estimates of recoverable net deferred taxes inaccurate. Any of
the assumptions,
32
judgments and estimates mentioned above could cause our actual
income tax obligations to differ from our estimates, thus
materially impacting our financial position and results of
operations.
Recent
Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board
(FASB) issued new revenue recognition standards for
arrangements with multiple deliverables, where certain of those
deliverables are non-software related. The new standards permit
entities to initially use managements best estimate of
selling price to value individual deliverables when those
deliverables do not have VSOE of fair value or when third-party
evidence is not available. Additionally, these new standards
modify the manner in which the transaction consideration is
allocated across the separately identified deliverables by no
longer permitting the residual method of allocating arrangement
consideration. These new standards are effective for annual
periods ending after June 15, 2010, however early adoption
is permitted. The Company is currently evaluating the impact of
adopting these new standards on our consolidated financial
position, results of operations and cash flows, including
possible early adoption.
See Note 1 of our Notes to Consolidated Financial
Statements for information regarding the effect of newly adopted
accounting pronouncements on our financial statements.
Results
of Operations
Comparison
of the Years Ended December 31, 2009 and 2008
Revenues,
Cost of Revenues and Gross Profit
The table below sets forth the changes in revenue, cost of
revenue and gross profit from 2009 to 2008 (in thousands, except
percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Ended
|
|
|
Percentage
|
|
|
Ended
|
|
|
Percentage
|
|
|
Year to Year
|
|
|
Change
|
|
|
|
December 31,
|
|
|
of Total
|
|
|
December 31,
|
|
|
of Total
|
|
|
Increase
|
|
|
Year over
|
|
|
|
2009
|
|
|
Revenues
|
|
|
2008
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
Year
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
46,322
|
|
|
|
57
|
%
|
|
$
|
40,546
|
|
|
|
38
|
%
|
|
$
|
5,776
|
|
|
|
14
|
%
|
Services
|
|
|
29,702
|
|
|
|
37
|
%
|
|
|
49,535
|
|
|
|
46
|
%
|
|
|
(19,833
|
)
|
|
|
(40
|
)%
|
License
|
|
|
5,034
|
|
|
|
6
|
%
|
|
|
17,100
|
|
|
|
16
|
%
|
|
|
(12,066
|
)
|
|
|
(71
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
81,058
|
|
|
|
100
|
%
|
|
$
|
107,181
|
|
|
|
100
|
%
|
|
$
|
(26,123
|
)
|
|
|
(24
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Ended
|
|
|
Percentage
|
|
|
Ended
|
|
|
Percentage
|
|
|
Year to Year
|
|
|
Change
|
|
|
|
December 31,
|
|
|
of Related
|
|
|
December 31,
|
|
|
of Related
|
|
|
Increase
|
|
|
Year over
|
|
|
|
2009
|
|
|
Revenues
|
|
|
2008
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
Year
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
22,468
|
|
|
|
49
|
%
|
|
$
|
16,111
|
|
|
|
40
|
%
|
|
$
|
6,357
|
|
|
|
39
|
%
|
Services
|
|
|
26,195
|
|
|
|
88
|
%
|
|
|
44,613
|
|
|
|
90
|
%
|
|
|
(18,418
|
)
|
|
|
(41
|
)%
|
License
|
|
|
754
|
|
|
|
15
|
%
|
|
|
897
|
|
|
|
5
|
%
|
|
|
(143
|
)
|
|
|
(16
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
49,417
|
|
|
|
|
|
|
$
|
61,621
|
|
|
|
|
|
|
$
|
(12,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
23,854
|
|
|
|
51
|
%
|
|
$
|
24,435
|
|
|
|
60
|
%
|
|
$
|
(581
|
)
|
|
|
(2
|
)%
|
Services
|
|
|
3,507
|
|
|
|
12
|
%
|
|
|
4,922
|
|
|
|
10
|
%
|
|
|
(1,415
|
)
|
|
|
(29
|
)%
|
License
|
|
|
4,280
|
|
|
|
85
|
%
|
|
|
16,203
|
|
|
|
95
|
%
|
|
|
(11,923
|
)
|
|
|
(74
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
31,641
|
|
|
|
39
|
%
|
|
$
|
45,560
|
|
|
|
43
|
%
|
|
$
|
(13,919
|
)
|
|
|
(31
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
Revenues
Recurring Revenues. Recurring revenues,
consisting of on-demand arrangements, time-based on-premise
arrangements and maintenance revenues, increased by
$5.8 million, or 14%, in 2009 compared to 2008. The
increase was primarily the result of an increase of
$6.7 million in subscription revenues related to on-demand
and business operations services in 2009. This increase was
attributable to the increase in the number of existing on-demand
customers for which we recognized revenue as all elements of the
related customer contracts began to be performed during 2009
compared to 2008. We introduced our time-based term license
offering in the third quarter of 2009. Total revenue generated
from this new offering was $0.2 million during 2009.
Support revenues for maintenance services decreased by
$1.1 million in 2009 compared to 2008, which was primarily
a result of a number of on-premise customers converting to our
on-demand service and decreased perpetual license sales to new
customers.
Services Revenues. Services revenues decreased
by $19.8 million or 40% in 2009 compared to 2008. The
decrease was primarily a result of combined effect of shorter
on-demand implementation time, the challenging economic
environment and reduced on-premise license sales. Services
revenue for 2008 benefitted from a one-time fee of approximately
$1.2 million paid to us by two of our customers that were
acquired and subsequently terminated our services.
License Revenues. Perpetual license revenues
decreased $12.1 million, or 71%, in 2009 compared to 2008.
The decrease was primarily attributable to our transition from a
perpetual license business to a recurring revenue SaaS-oriented
company. As a result, our license business diminished in
importance in the past year and we do not expect perpetual
license revenue to return to historical levels.
Cost
of Revenues and Gross Margin
Cost of Recurring Revenues. Cost of recurring
revenues increased by $6.4 million or 39% in 2009 compared
to 2008. The increase was primarily due to increased cost of
fulfilling higher level of customer orders resulting from the
increase in on-demand subscription revenue, increased
amortization of intangible assets resulting from higher cost of
third-party technology used in our products, the allocation of a
relatively greater portion of such amortization expense to the
cost of recurring revenues as such revenues compose a greater
portion of total revenues and, in certain periods, increased
labor and infrastructure costs associated with customers going
live with our on-demand offering. The costs associated with
supporting our on-demand offering are generally higher than the
cost of maintenance related to our on-premise customers, as we
are responsible for the full operation of the software that the
customer has contracted for in our hosting facility.
Cost of Services Revenues. Cost of services
revenues decreased by $18.4 million or 41% in 2009 compared
to 2008. The decrease was attributable to the decrease in
related services revenues as discussed above and decreases in
personnel and subcontractor costs.
Cost of License Revenues. Cost of license
revenues decreased by $0.1 million or 16% in 2009 compared
to 2008. The decrease was primarily the result of our transition
to a recurring revenue business. As a result of the transition,
we have allocated to the cost of license revenues a lower
portion of the amortization expense for intangible assets
comprised of third-party technology used in our products.
Gross Margin. Our overall gross margin
decreased to 39% in 2009 from 43% in 2008. This was primarily a
result of our business model shifting to on-demand from
perpetual license sales, which historically has had a higher
margin.
Our recurring revenue gross margin declined from 60% in 2008 to
51% in 2009. The decrease was primarily due to the increase in
higher cost on-demand revenue and additional costs, including
the amortization expense for intangible assets comprised of
third party technology used in our products and costs associated
with customers going live, as discussed above. We expect our
overall recurring revenue margin to fluctuate, but trend upwards
in future periods as we realize the full quarter benefit of our
recent cost cutting actions as well as anticipated efficiencies
over the longer term.
34
Services gross margin increased from 10% in 2008 to 12% in 2009.
The increase was primarily due to the progress we made during
the first half of the year to improve utilization. Services
gross margin was adversely impacted during the fourth quarter of
2009 as a result of lower-than-planned utilization and a
decrease in our average billing rate. While we expect
improvement in our services margin in 2010, we do not expect it
to return to the levels it was under our perpetual license model.
License gross margin decreased from 95% in 2008 to 85% in 2009.
The decrease in license gross margin reflects the lower license
revenue offset against the fixed cost of license generated by
the amount of intangible assets amortization allocated to
license sales.
Operating
Expenses
The table below sets forth the changes in operating expenses
from 2009 to 2008 (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Ended
|
|
|
Percentage
|
|
|
Ended
|
|
|
Percentage
|
|
|
Year to Year
|
|
|
Change
|
|
|
|
December 31,
|
|
|
of Total
|
|
|
December 31,
|
|
|
of Total
|
|
|
Increase
|
|
|
Year over
|
|
|
|
2009
|
|
|
Revenues
|
|
|
2008
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
Year
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
20,369
|
|
|
|
25
|
%
|
|
$
|
29,456
|
|
|
|
27
|
%
|
|
$
|
(9,087
|
)
|
|
|
(31
|
)%
|
Research and development
|
|
|
13,853
|
|
|
|
17
|
%
|
|
|
14,597
|
|
|
|
14
|
%
|
|
|
(744
|
)
|
|
|
(5
|
)%
|
General and administrative
|
|
|
12,310
|
|
|
|
15
|
%
|
|
|
14,236
|
|
|
|
13
|
%
|
|
|
(1,926
|
)
|
|
|
(14
|
)%
|
Restructuring
|
|
|
2,993
|
|
|
|
4
|
%
|
|
|
1,641
|
|
|
|
2
|
%
|
|
|
1,352
|
|
|
|
82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
49,525
|
|
|
|
61
|
%
|
|
$
|
59,930
|
|
|
|
56
|
%
|
|
$
|
(10,405
|
)
|
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing. Sales and marketing
expenses decreased $9.1 million, or 31%, in 2009 compared
to 2008. The decrease was primarily attributable to decreases in
personnel costs of $4.9 million due to reductions in
headcount and a decrease in commission payments of
$0.7 million resulting from decreased perpetual license
sales. The decrease was also driven by a decrease in partner
selling fees of $1.1 million, a decrease in travel costs of
$1.2 million, and a decrease in stock-based compensation as
discussed below. The reductions in commission expenses are, in
part, reflective of the shift of our business focus to our
on-demand offering and away from the license model. For
financial reporting purposes, commission expenses associated
with on-demand arrangements are deferred and then amortized over
the non-cancelable term of the contract as the related revenue
is recognized; whereas commission expenses related to perpetual
license sales are incurred in the period the transaction occurs.
Commission expenses associated with the new time-based licenses
will have the same treatment as commission expenses associated
with on-demand arrangements.
Research and Development. Research and
development expenses decreased $0.7 million, or 5%, in 2009
compared to 2008. The decrease was primarily due to a decrease
in personnel costs of $0.7 million due to the reductions in
headcount and a decrease in stock-based compensation as
discussed below, partially offset by an increase in professional
fees of $0.3 million for costs related to our offshore
resource center.
General and Administrative. General and
administrative expenses decreased $1.9 million, or 14%, in
2009 compared to 2008. The decrease in 2009 was primarily due to
a decrease in bad debt expenses, which included
$0.5 million in 2008 resulting from one customer that filed
for bankruptcy, a decrease in professional fees of
$0.3 million, and a decrease in stock-based compensation as
discussed below.
Restructuring. Restructuring charges were
$3.0 million in 2009 compared to $1.6 million in 2008,
in connection with severance and termination-related costs, most
of which were severance-related cash expenditures. As of
December 31, 2009, accrued restructuring charges were
$0.1 million.
35
Stock-Based
Compensation
The following table sets forth a summary of our stock-based
compensation expenses for 2009 and 2008 (in thousands, except
percentage data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
Percentage
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year to Year
|
|
|
Change
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Increase
|
|
|
Year over
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Year
|
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of recurring revenues
|
|
$
|
471
|
|
|
$
|
692
|
|
|
$
|
(221
|
)
|
|
|
(32
|
)%
|
Cost of services revenues
|
|
|
574
|
|
|
|
1,263
|
|
|
|
(689
|
)
|
|
|
(55
|
)%
|
Sales and marketing
|
|
|
1,019
|
|
|
|
1,861
|
|
|
|
(842
|
)
|
|
|
(45
|
)%
|
Research and development
|
|
|
736
|
|
|
|
1,169
|
|
|
|
(433
|
)
|
|
|
(37
|
)%
|
General and administrative
|
|
|
1,524
|
|
|
|
2,711
|
|
|
|
(1,187
|
)
|
|
|
(44
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
4,324
|
|
|
$
|
7,696
|
|
|
$
|
(3,372
|
)
|
|
|
(44
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expenses decreased
$3.4 million or 44% in 2009 compared to 2008. The overall
decreases were primarily attributable to the decrease in our
stock price over the past two years and to employees with
unvested options and awards leaving the Company due to
reductions in workforce. See Note 8 Stock-based
Compensation for additional discussion.
Other
Items
The table below sets forth the changes in other items from 2009
to 2008 (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
Percentage
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year to Year
|
|
|
Change
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Increase
|
|
|
Year over
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Year
|
|
|
Interest and other income, net
|
|
$
|
308
|
|
|
$
|
702
|
|
|
$
|
(394
|
)
|
|
|
(56
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
377
|
|
|
$
|
161
|
|
|
$
|
216
|
|
|
|
134
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and Other Income, Net
Interest and other income, net decreased $0.4 million or
56% in 2009 compared to 2008. The decrease was primarily
attributable to the $0.9 million decrease in interest
income generated on our investments as a result of a lower
average investments balance and lower interest rates in 2009
compared to 2008. The decrease was partially offset by
$0.5 million related to changes in fair value of our
auction rate securities.
Provision
for Income Taxes
Provision for income taxes was $0.4 million for 2009 and
$0.2 million for 2008. The increase was primarily
attributable a change in the deferred tax assets of one of the
Companys foreign subsidiaries in 2009.
36
Comparison
of the Years Ended December 31, 2008 and 2007
Revenues,
Cost of Revenues and Gross Profit
The table below sets forth the changes in revenue, cost of
revenue and gross profit from 2008 to 2007 (in thousands, except
percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Ended
|
|
|
Percentage
|
|
|
Ended
|
|
|
Percentage
|
|
|
Year to Year
|
|
|
Change
|
|
|
|
December 31,
|
|
|
of Total
|
|
|
December 31,
|
|
|
of Total
|
|
|
Increase
|
|
|
Year over
|
|
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
Year
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
40,546
|
|
|
|
38
|
%
|
|
$
|
23,907
|
|
|
|
24
|
%
|
|
$
|
16,639
|
|
|
|
70
|
%
|
Services
|
|
|
49,535
|
|
|
|
46
|
%
|
|
|
49,125
|
|
|
|
49
|
%
|
|
|
410
|
|
|
|
1
|
%
|
License
|
|
|
17,100
|
|
|
|
16
|
%
|
|
|
28,025
|
|
|
|
28
|
%
|
|
|
(10,925
|
)
|
|
|
(39
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
107,181
|
|
|
|
100
|
%
|
|
$
|
101,057
|
|
|
|
100
|
%
|
|
$
|
6,124
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Ended
|
|
|
Percentage
|
|
|
Ended
|
|
|
Percentage
|
|
|
Year to Year
|
|
|
Change
|
|
|
|
December 31,
|
|
|
of Related
|
|
|
December 31,
|
|
|
of Related
|
|
|
Increase
|
|
|
Year over
|
|
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
Year
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
16,111
|
|
|
|
40
|
%
|
|
$
|
11,043
|
|
|
|
46
|
%
|
|
$
|
5,068
|
|
|
|
46
|
%
|
Services
|
|
|
44,613
|
|
|
|
90
|
%
|
|
|
43,555
|
|
|
|
89
|
%
|
|
|
1,058
|
|
|
|
2
|
%
|
License
|
|
|
897
|
|
|
|
5
|
%
|
|
|
884
|
|
|
|
3
|
%
|
|
|
13
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
$
|
61,621
|
|
|
|
|
|
|
$
|
55,482
|
|
|
|
|
|
|
$
|
6,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
24,435
|
|
|
|
60
|
%
|
|
$
|
12,864
|
|
|
|
54
|
%
|
|
$
|
11,571
|
|
|
|
90
|
%
|
Services
|
|
|
4,922
|
|
|
|
10
|
%
|
|
|
5,570
|
|
|
|
11
|
%
|
|
|
(648
|
)
|
|
|
(12
|
)%
|
License
|
|
|
16,203
|
|
|
|
95
|
%
|
|
|
27,141
|
|
|
|
97
|
%
|
|
|
(10,938
|
)
|
|
|
(40
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
45,560
|
|
|
|
43
|
%
|
|
$
|
45,575
|
|
|
|
45
|
%
|
|
$
|
(15
|
)
|
|
|
|
*%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
Recurring Revenues. Recurring revenues
increased by $16.6 million, or 70%, in 2008 compared to
2007. The increase is primarily the result of an increase of
$14.9 million in on-demand subscription revenues in 2008.
This increase is attributable to the increase in the number of
on-demand customers for which we recognized revenue in 2008
compared to 2007. Support revenues for maintenance services
increased by $1.7 million in 2008 compared to 2007, which
was a result of license sales to new customers and continued
renewal of maintenance support by our existing customers.
Services Revenues. Services revenues remained
essentially flat in 2008 as compared to 2007, increasing by
$0.4 million or 1%. Included in services revenues for 2008
were one-time fees aggregating approximately $1.2 million
paid to us by two of our customers. These customers were
acquired by another company, and as a result stated their
intentions to terminate our services. Excluding these one-time
fees, services revenues decreased in 2008 as compared to 2007.
The decrease was due to a number of factors, including deferrals
of services and other revenues as a result of project delays and
the completion of a number of projects during 2008 that were not
immediately replaced.
License Revenues. License revenues decreased
$10.9 million, or 39%, in 2008 compared to 2007. The
decrease was attributable to the shift of our primary business
focus from the sale of perpetual licenses for our products to
the provision of our software as a service through our on-demand
offering. Our average license revenue
37
per transaction for 2008 was $0.6 million compared to
$0.7 million in 2007. We had three transactions in 2008
with a license value over $1.0 million compared to eight
such transactions in 2007.
Cost
of Revenues and Gross Margin
Cost of Recurring Revenues. Cost of recurring
revenues increased by $5.1 million or 46% in 2008 compared
to 2007. The increase was due to the investment we made to grow
our on-demand business as well as the increase in related
recurring revenues discussed above. As a percentage of related
revenues, cost of recurring revenues improved to 40% in 2008
compared to 46% in 2007. This improvement is primarily
attributable to economies of scale achieved as a result of the
increase in the number of on-demand customers for which we
recognized revenue during 2008 as discussed above.
Cost of Services Revenues. Cost of services
revenues increased by $1.1 million or 2% in 2008 compared
to 2007. The increase was attributable to a loss on a contract
of $1.6 million related to a customer dispute and
acquisition-related amortization costs of $1.4 million,
partially offset by a decrease in subcontractor costs.
Cost of License Revenues. Cost of license
revenues increased by $13,000 or 1% in 2008 compared to 2007.
The increase was primarily the result of amortization expense
for additional purchases of intangible assets comprised of
third-party software licenses used in our products.
Gross Margin. Our overall gross margin
decreased to 43% in 2008 from 45% in 2007. The decrease in our
gross margin is primarily attributable to the shift in revenue
mix away from higher margin license revenues, which represented
16% of our total revenues in 2008 compared to 28% in 2007. The
effect of the revenue mix shift was partially offset by the
improvement in our gross margin for recurring revenues.
Recurring gross margin improved from 54% in 2007 to 60% in 2008
as we continued to achieve operational scale in our on-demand
business. Services gross margin decreased from 11% in 2007 to
10% in 2008 as a result of the loss related to a customer
dispute, acquisition-related amortization costs and the increase
in stock-based compensation. License gross margin decreased from
97% in 2007 to 95% in 2008 due to increased amortization expense
from additional purchases of intangible assets.
Operating
Expenses
The table below sets forth the changes in operating expenses
from 2008 to 2007 (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
Year
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
Ended
|
|
|
Percentage
|
|
|
Ended
|
|
|
Percentage
|
|
|
Year to Year
|
|
|
Change
|
|
|
|
December 31,
|
|
|
of Total
|
|
|
December 31,
|
|
|
of Total
|
|
|
Increase
|
|
|
Year over
|
|
|
|
2008
|
|
|
Revenues
|
|
|
2007
|
|
|
Revenues
|
|
|
(Decrease)
|
|
|
Year
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
$
|
29,456
|
|
|
|
27
|
%
|
|
$
|
30,806
|
|
|
|
30
|
%
|
|
$
|
(1,350
|
)
|
|
|
(4
|
)%
|
Research and development
|
|
|
14,597
|
|
|
|
14
|
%
|
|
|
15,563
|
|
|
|
15
|
%
|
|
|
(966
|
)
|
|
|
(6
|
)%
|
General and administrative
|
|
|
14,237
|
|
|
|
13
|
%
|
|
|
13,991
|
|
|
|
14
|
%
|
|
|
246
|
|
|
|
2
|
%
|
Restructuring
|
|
|
1,641
|
|
|
|
2
|
%
|
|
|
1,458
|
|
|
|
1
|
%
|
|
|
183
|
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
59,931
|
|
|
|
56
|
%
|
|
$
|
61,818
|
|
|
|
61
|
%
|
|
$
|
(1,887
|
)
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and Marketing. Sales and marketing
expenses decreased $1.3 million, or 4%, for 2008 compared
to 2007. The decrease was primarily attributable to decreases in
personnel costs of $1.7 million due to reductions in
headcount and a decrease in commission payments resulting from
decreased license sales. The decrease was also driven by a
decrease in advertising expenses of $0.1 million. The
decrease was partially offset by an increase in
acquisition-related amortization costs of $0.5 million and
an increase in stock-based compensation as discussed below. The
reduction in commission expense is, in part, reflective of the
shift in our business focus to our on-demand offering and away
from the perpetual license model. Commission expenses associated
with on-demand arrangements are deferred and then amortized over
the non-cancelable term of the contract as the related revenue
is recognized; whereas commission expenses related to license
sales are incurred in the period the transaction occurs.
38
Research and Development. Research and
development expenses decreased $1.0 million, or 6%, for
2008 compared to 2007. The decrease was primarily due to
decreases in personnel costs of $1.7 million resulting from
headcount reductions, partially offset by an increase in
professional fees of $0.7 million for costs related to our
new offshore resource center. The offshore resource center has
helped us reduce overall engineering costs, and the cost to
headcount ratio for an onshore engineer versus an offshore
engineer is 3 to 1. As such, we have been able to maintain the
same level of engineering support and development while
controlling our costs. The decrease was also partially offset by
an increase in stock-based compensation as discussed below.
General and Administrative. General and
administrative expenses increased $0.2 million, or 2%, for
2008 compared to 2007. The increase was primarily due to an
increase in bad debt expense related to one of our customers
that recently filed for bankruptcy. The increase also included
an increase in stock-based compensation as discussed below.
Restructuring. Restructuring charges increased
$0.2 million, or 13%, for 2008 compared to 2007. We
recorded restructuring charges of $1.2 million in the
fourth quarter of 2008 and $0.4 million in the first
quarter of 2008 in connection with severance and
termination-related costs, most of which were severance-related
cash expenditures. This 2008 cost savings program was
substantially completed in the fourth quarter of 2008 and will
be fully completed in the early part of 2009. As of
December 31, 2008, accrued restructuring charges were
$0.8 million.
Stock-Based
Compensation
The following table sets forth a summary of our stock-based
compensation expenses for 2008 and 2007 (in thousands, except
percentage data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
Percentage
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Change
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Year to Year
|
|
|
Year over
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase
|
|
|
Year
|
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of recurring revenues
|
|
$
|
692
|
|
|
$
|
250
|
|
|
$
|
442
|
|
|
|
177
|
%
|
Cost of services revenues
|
|
|
1,263
|
|
|
|
838
|
|
|
|
425
|
|
|
|
51
|
%
|
Sales and marketing
|
|
|
1,861
|
|
|
|
1,162
|
|
|
|
699
|
|
|
|
60
|
%
|
Research and development
|
|
|
1,169
|
|
|
|
995
|
|
|
|
174
|
|
|
|
17
|
%
|
General and administrative
|
|
|
2,711
|
|
|
|
1,709
|
|
|
|
1,002
|
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
7,696
|
|
|
$
|
4,954
|
|
|
$
|
2,742
|
|
|
|
55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expenses increased
$2.7 million or 55% for 2008 compared to 2007. The overall
increase was primarily attributable to restricted stock units
vesting for the full 2008 year versus one quarter in 2007
and newly granted stock options and restricted stock units for
current employees and employees acquired as part of the
Compensation Technologies acquisition. See
Note 8 Stock-based Compensation for additional
discussion.
Other
Items
The table below sets forth the changes in other items from 2008
to 2007 (in thousands, except percentage data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
Percentage
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year to Year
|
|
|
Change
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Increase
|
|
|
Year over
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Year
|
|
|
Interest and other income, net
|
|
$
|
702
|
|
|
$
|
2,772
|
|
|
$
|
(2,070
|
)
|
|
|
(75
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
161
|
|
|
$
|
(330
|
)
|
|
$
|
491
|
|
|
|
(149
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Interest
and Other Income, Net
Interest and other income, net decreased $2.1 million or
75% for 2008 compared to 2007. The decrease was primarily
attributable to the $1.5 million decrease in interest
income generated on our investments as a result of a lower
average investments balance in 2008 compared to 2007 and lower
interest rates in 2008 compared to 2007. The decrease also
included the other than temporary impairment of
$0.8 million recorded on our auction rate securities
partially offset by the corresponding put option gain of
$0.5 million and a $0.3 million increase in loss on
foreign currency transactions as a result of a stronger US
dollar.
Provision
(Benefit) for Income Taxes
Provision for income taxes was $0.2 million for 2008, while
we had a benefit from income taxes of $0.3 million for
2007. The provision in 2008 was primarily the result of
$0.4 million in foreign withholding taxes partially offset
by a $0.2 million refund of research and development and
alternative minimum tax credits, which we elected to accelerate
in lieu of bonus depreciation, in accordance with the Housing
and Economic Recovery Act of 2008. Under this act, corporations
eligible for 50% bonus depreciation on property placed in
service during the period April 1 through December 31,
2008 may elect to claim a special refundable credit amount
in lieu of bonus depreciation. In making the election, we will
receive a cash benefit from the current utilization of carry
forward credits, in exchange for deferring deductions until
future years otherwise generated by bonus depreciation. See
Note 10 Income Taxes for further discussion.
Liquidity
and Capital Resources
As of December 31, 2009, our principal sources of liquidity
were cash, cash equivalents and short-term investments totaling
$33.6 million and accounts receivable of $12.7 million.
The following table summarizes, for the periods indicated,
selected items in our condensed consolidated statements of cash
flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(3,861
|
)
|
|
$
|
6,150
|
|
|
$
|
(3,127
|
)
|
Investing activities
|
|
|
(20,643
|
)
|
|
|
10,663
|
|
|
|
8,238
|
|
Financing activities
|
|
|
611
|
|
|
|
(3,322
|
)
|
|
|
4,658
|
|
Net Cash Used in / Provided by Operating
Activities. The $10 million adverse change
in 2009 operating cash flow compared to 2008 was primarily due
to an $18.4 million decrease in cash collections resulting
from the decrease in revenue, partially offset by a
$9.7 million decrease in payroll related costs as a result
of workforce reduction programs in 2009. The $9.3 million
improvement in operating cash flow in 2008 compared to 2007 was
due to a $4.5 million decrease in professional services
expense due to the decreased use of outside contractors in our
professional services organization, a $4.3 million increase
in cash collections resulting from the increase in revenue and
the timing of accounts receivable collections, and a
$4.4 million decrease in employee expense reports and other
costs, partially offset by a $2.9 million increase in
payroll related costs due to an increase in headcount and a
$1.0 million increase in restructuring payments
Net Cash Used in / Provided by Investing
Activities. Net cash used in investing activities
during 2009 was primarily related to purchases of investments of
$29 million, purchases of property and equipment of
$2.0 million and purchases of intangible assets of
$1.6 million, partially offset by maturity and sales of
investments of $11.7 million. Net cash provided by
investing activities during 2008 was primarily due to proceeds
from the maturities and sale of investments of
$36.8 million, partially offset by purchases of investments
of $13.9 million, payments for the Compensation
Technologies acquisition of $9.4 million, purchases of
property and equipment of $2.4 million and purchases of
intangible assets of $0.4 million. Net cash provided by
investing activities during 2007 was primarily due to proceeds
from the maturities and sale of investments of
$59.4 million and change in restricted cash of
$0.1 million, partially offset by purchases of investments
of $46.7 million, purchases of property and equipment of
$2.7 million and purchases of intangible assets of
$1.9 million.
40
Net Cash Used in / Provided by Financing
Activities. In 2009, net cash provided by
financing activities was primarily related to net cash received
from the exercise of stock options and shares purchased under
our employee stock purchase plan of $1.8 million, partially
offset by repurchases of stock of $0.7 million and cash
used to repurchase common stock from employees for payment of
taxes of $0.4 million on vesting of restricted stock units.
In 2008, net cash received from the exercise of stock options
and shares purchased under our employee stock purchase plan was
$4.8 million. In 2007, net cash received from the exercise
of stock options and shares purchased under our employee stock
purchase plan was $4.7 million.
Auction
Rate Securities
See Note 5 Investments of our Notes to
Consolidated Financial Statements for information regarding our
auction rate securities.
Contractual
Obligations and Commitments
The following table summarizes our contractual cash obligations
(in thousands) at December 31, 2009. Contractual cash
obligations that are cancelable upon notice and without
significant penalties are not included in the table. In
addition, to the extent that payments for unconditional purchase
commitments for goods and services are based, in part, on volume
or type of services required by us, we included only the minimum
volume or purchase commitment in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
Contractual Obligations
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
and beyond
|
|
|
Operating lease commitments
|
|
$
|
3,994
|
|
|
$
|
2,112
|
|
|
$
|
985
|
|
|
$
|
316
|
|
|
$
|
201
|
|
|
$
|
166
|
|
|
$
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconditional purchase commitments(1)
|
|
$
|
2,572
|
|
|
$
|
1,803
|
|
|
$
|
667
|
|
|
$
|
102
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in the unconditional purchase commitments is
approximately $211,000 of unrecognized tax benefits. |
For our New York, New York and San Jose, California
offices, we have two certificates of deposit totaling
approximately $232,000 and $434,000, as of December 31,
2009 and 2008, respectively, pledged as collateral to secure
letters of credit required by our landlords for security
deposits.
Our future capital requirements will depend on many factors,
including revenues we generate, the timing and extent of
spending to support product development efforts, the expansion
of sales and marketing activities, the timing of introductions
of new products and enhancements to existing products, market
acceptance of our on-demand service offering, our ability to
offer on-demand service on a consistently profitable basis and
the continuing market acceptance of our other products. However,
based on our current business plan and revenue projections, we
believe our existing cash and investment balances will be
sufficient to meet our anticipated cash requirements as well as
the contractual obligations listed above for the next twelve
months.
Off-Balance
Sheet Arrangements
With the exception of the above contractual cash obligations, we
have no material off-balance sheet arrangements that have not
been recorded in our consolidated financial statements.
Related
Party Transactions
For information regarding related party transactions, see
Note 14 of Notes to Consolidated Financial Statements and
Part III, Item 12, Certain Relationships and Related
Transactions, and Director Independence included in this Annual
Report on
Form 10-K
and incorporated by reference here.
41
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market Risk. Market risk represents the risk
of loss that may impact our financial position due to adverse
changes in financial market prices and rates. Our market risk
exposure is also a result of fluctuations in interest rates and
foreign exchange rates. See Note 5 Investments
of our Notes to Consolidated Financial Statements for
information regarding our auction rate securities.
We do not hold or issue financial instruments for trading
purposes except for certain auction rate securities, and we
invest in investment grade securities. We limit our exposure to
interest rate and credit risk by establishing and monitoring
clear policies and guidelines for our investment portfolios,
which is approved by our board of directors. The guidelines also
establish credit quality standards, limits on exposure to any
one security issue, limits on exposure to any one issuer and
limits on exposure to the type of instrument.
Financial instruments that potentially subject us to market risk
are short-term investments, long-term investments and trade
receivables denominated in foreign currencies. We mitigate
market risk by monitoring ratings, credit spreads and potential
downgrades for all bank counterparties on at least a quarterly
basis. Based on our on-going assessment of counterparty risk, we
will adjust our exposure to various counterparties.
Interest Rate Risk. We invest our cash in a
variety of financial instruments, consisting primarily of
investments in money market accounts, certificates of deposit,
high quality corporate debt obligations, United States
government obligations, auction rate securities and the related
put option asset.
Investments in both fixed-rate and floating-rate interest
earning instruments carry a degree of interest rate risk. The
fair market value of fixed-rate securities may be adversely
affected by a rise in interest rates, while floating rate
securities, which typically have a shorter duration, may produce
less income than expected if interest rates fall. Due in part to
these factors, our investment income may decrease in the future
due to changes in interest rates. At December 31, 2009, the
average maturity of our investments was approximately
9 months, and all investment securities other than auction
rate securities had maturities of less than 24 months. The
following table presents certain information about our financial
instruments except for auction rate securities at
December 31, 2009 that are sensitive to changes in interest
rates (in thousands, except for interest rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity
|
|
Total
|
|
Total
|
|
|
1 Year
|
|
More Than
|
|
Principal
|
|
Fair
|
|
|
or Less
|
|
1 Year
|
|
Amount
|
|
Value
|
|
Available-for-sale securities
|
|
$
|
8,634
|
|
|
$
|
9,832
|
|
|
$
|
18,466
|
|
|
$
|
18,420
|
|
Weighted average interest rate
|
|
|
0.59
|
%
|
|
|
1.38
|
%
|
|
|
|
|
|
|
|
|
Our exposure to interest rate risk also relates to the increase
or decrease in the amount of interest expense we must pay on our
outstanding debt instruments. As of December 31, 2009, we
had no outstanding indebtedness for borrowed money. Therefore,
we currently have no exposure to interest rate risk related to
debt instruments. To the extent we enter into or issue debt
instruments in the future, we will have interest rate risk.
Foreign Currency Exchange Risk. Our revenues
and our expenses, except those related to our
non-United
States operations, are generally denominated in United States
dollars. For our operations outside the United States, we
transact business generally in various other currencies. For
2009, approximately 12% of our total revenue was denominated in
foreign currency. At December 31, 2009, approximately 12%
of our total accounts receivable was denominated in foreign
currency. Our exchange risks and foreign exchange losses have
been minimal to date. The overall decrease in revenue for 2009
as compared to 2008 reflects a $1.6 million adverse effect
due to currency exchange rate fluctuations. We expect to
continue to transact a majority of our business in
U.S. dollars.
Occasionally, we may enter into forward exchange contracts to
reduce our exposure to currency fluctuations on our foreign
currency transactions. The objective of these contracts is to
minimize the impact of foreign currency exchange rate movements
on our operating results. We do not use these contracts for
speculative or trading purposes.
As of December 31, 2009, we had an aggregate of
$0.5 million (notional amount) of outstanding short-term
foreign currency forward exchange contracts related to customer
payments denominated in Mexican Pesos (MXN).
42
We had $0.2 million of losses related to forward exchange
contracts for 2009. We do not anticipate any material adverse
effect on our consolidated financial condition, results of
operations or cash flows resulting from the use of these
instruments in the immediate future. However, we cannot provide
any assurance that our foreign exchange rate contract investment
strategies will be effective or that transaction losses can be
minimized or forecasted accurately. In particular, generally, we
hedge only a portion of our foreign currency exchange exposure.
We cannot assure you that our hedging activities will eliminate
foreign exchange rate exposure. Failure to do so could have an
adverse effect on our business, financial condition, and results
of operations or cash flows.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The response to this item is submitted as a separate section of
this Annual Report on
Form 10-K
beginning on
page F-1.
43
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
N/A.
|
|
Item 9A.
|
Controls
and Procedures
|
|
|
(a)
|
Disclosure
Controls and Procedures
|
Our Chief Executive Officer and our Chief Financial Officer,
after evaluating the effectiveness of our disclosure
controls and procedures (as defined in the Securities
Exchange Act of 1934 (Exchange Act)
Rules 13a-15(e)
or
15d-15(e))
as of the end of the period covered by this annual report, have
concluded that our disclosure controls and procedures are
effective based on their evaluation of these controls and
procedures required by paragraph (b) of Exchange Act
Rules 13a-15
or 15d-15.
Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls
and procedures or our internal controls will prevent all errors
and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls
must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our company have been
detected.
|
|
(b)
|
Managements
Annual Report on Internal Control Over Financial
Reporting
|
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended). Our
management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2009. In making
this assessment, our management used the criteria set forth by
the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated
Framework. Our management has concluded that, as of
December 31, 2009, our internal control over financial
reporting is effective based on these criteria.
|
|
(c)
|
Changes
in Internal Control Over Financial Reporting
|
There were no changes in our internal control over financial
reporting during the fourth quarter of 2009 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
Certain information required by Part III of
Form 10-K
is omitted from this Annual Report on
Form 10-K
because we will file a definitive proxy statement within
120 days after the end of our fiscal year pursuant to
Regulation 14A for our annual meeting of stockholders,
currently scheduled for June 1, 2010, and the information
included in the proxy statement shall be incorporated herein by
reference when it is filed with the Securities and Exchange
Commission.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
|
|
(a)
|
Consolidated
financial statements, consolidated financial statements schedule
and exhibits
|
1. Consolidated financial statements. The
consolidated financial statements as listed in the accompanying
Index to Consolidated Financial Information are
filed as part of this Annual Report on
Form 10-K.
44
2. All schedules not listed in the accompanying index have
been omitted as they are either not required or not applicable,
or the required information is included in the consolidated
financial statements or the notes thereto.
3. Exhibits. The exhibits listed in the
accompanying Index to Exhibits are filed or
incorporated by reference as part of this Annual Report on
Form 10-K.
45
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger dated as of January 14, 2008
by and among Compensation Technologies LLC, Callidus Software,
Inc., CMS Merger Sub LLC, Robert Conti, Gary Tubridy and David
Cichelli and Robert Conti, as Member Representative
(incorporated by reference to Exhibit 2.1 to the
Companys
Form 8-K
filed with the Commission on January 14, 2008)
|
|
2
|
.2
|
|
Agreement and Plan of Merger dated as of January 14, 2008
by and among Compensation Management Services LLC, Callidus
Software, Inc., CMS Merger Sub LLC, Robert Conti, Gary Tubridy
and David Cichelli and Robert Conti, as Member Representative
(incorporated by reference to Exhibit 2.2 to the
Companys
Form 8-K
filed with the Commission on January 14, 2008)
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 to the Companys
Registration Statement on
Form S-1
(File
No. 333-109059)
filed with the Commission on September 23, 2003, and
declared effective on November 19, 2003)
|
|
3
|
.2
|
|
Amended and Restated By-Laws (incorporated by reference to
Exhibit 3.2 to the Companys
Form 10-K
filed with the Commission on March 27, 2006)
|
|
4
|
.1
|
|
Certificate of Designations (incorporated by reference from
Exhibit A to Exhibit 10.27 to the Companys
Form 8-K
filed with the Commission on September 3, 2004)
|
|
4
|
.2
|
|
Specimen Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Companys Registration Statement on
Form S-1
(File
No. 333-109059)
filed with the Commission on September 23, 2003, and
declared effective on November 19, 2003)
|
|
4
|
.3
|
|
Stockholders Rights Agreement dated September 2, 2004
(incorporated by reference herein from Exhibit 10.27 to the
Companys
Form 8-K
filed with the Commission on September 3, 2004)
|
|
4
|
.4
|
|
Amendment to Stockholders Rights Agreement dated
September 28, 2004 (incorporated by reference herein from
Exhibit 10.27.1 to the Companys
Form 10-Q
filed with the Commission on November 15, 2004)
|
|
10
|
.1
|
|
Lease Agreement between W9/PHC II San Jose, L.L.C. and
Callidus Software Inc. (incorporated by reference to
Exhibit 10.5 to the Companys Registration Statement
on
Form S-1
(File
No. 333-109059)
filed with the Commission on September 23, 2003, and
declared effective on November 19, 2003)
|
|
10
|
.2
|
|
1997 Stock Option Plan (incorporated by reference to
Exhibit 10.6 to the Companys Registration Statement
on
Form S-1
(File
No. 333-109059)
filed with the Commission on September 23, 2003, and
declared effective on November 19, 2003)
|
|
10
|
.3
|
|
Amended and Restated 2003 Stock Incentive Plan (incorporated by
reference to Exhibit 10.18 to the Companys
Form 10-Q
filed with the Commission on May 15, 2006)
|
|
10
|
.4
|
|
Form of Stock Option Agreement (incorporated by reference herein
from Exhibit 10.7.1 to the Companys
Form 10-Q
filed with the Commission on November 15, 2004)
|
|
10
|
.5
|
|
Amended and Restated Employee Stock Purchase Plan (incorporated
by reference to Exhibit 10.4 to the Companys
Form 10-K
filed with the Commission on March 27, 2006)
|
|
10
|
.6
|
|
Form of Restricted Stock Unit Agreement (incorporated by
reference to Exhibit 10.1 to the Companys
Form 10-Q
filed with the Commission on May 8, 2009)
|
|
10
|
.7
|
|
Form of Executive Change of Control Agreement (incorporated by
reference to Exhibit 10.1 to the Companys
Form 10-Q
filed with the Commission on May 8, 2009)
|
|
10
|
.8
|
|
Form of Director Change of Control Agreement Full
Single-Trigger (incorporated by reference to Exhibit 10.19
to the Companys
Form 10-Q
filed with the Commission on August 14, 2006)
|
|
10
|
.9
|
|
Form of Indemnification Agreement (incorporated by reference to
Exhibit 10.11 to the Companys Registration Statement
on
Form S-1
(File
No. 333-109059)
filed with the Commission on September 23, 2003, and
declared effective on November 19, 2003)
|
|
10
|
.10
|
|
Employment Agreement with Ronald J. Fior dated August 30,
2002 (incorporated by reference to Exhibit 10.14 to the
Companys Registration Statement on
Form S-1
(File
No. 333-109059)
filed with the Commission on September 23, 2003, and
declared effective on November 19, 2003)
|
46
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.11
|
|
Form of Performance-Based Stock Option Agreement for stock
options granted to Mr. Ronald J. Fior on September 1,
2004 (incorporated by reference herein from Exhibit 10.28
to the Companys
Form 8-K
filed with the Commission on September 3, 2004)
|
|
10
|
.12
|
|
Form of Executive Incentive Plan (incorporated by reference to
Exhibit 10.25 to the Companys
Form 8-K
filed with the Commission on January 29, 2008)
|
|
10
|
.13
|
|
Resignation Letter Between Callidus Software Inc. and Robert H.
Youngjohns (incorporated by reference to Exhibit 10.25 to
the Companys
Form 8-K
filed with the Commission on November 20, 2007)
|
|
10
|
.14
|
|
Non-Qualified Stock Option Agreement with Robert H. Youngjohns
(incorporated by reference to Exhibit 10.35 to the
Companys
Form 10-Q
filed with the Commission on August 11, 2005)
|
|
10
|
.15
|
|
Restricted Stock Agreement with Michael L. Graves (incorporated
by reference to Exhibit 10.24 to the Companys
Form 10-Q
filed with the Commission on August 1, 2007)
|
|
10
|
.16
|
|
Amendment dated November 30, 2007 to Offer Letter Between
Callidus Software Inc. and Leslie J. Stretch (incorporated by
reference to Exhibit 10.26 to the Companys
Form 8-K
filed with the Commission on November 20, 2007)
|
|
10
|
.17
|
|
Offer Letter with V. Holly Albert dated August 8, 2006
(incorporated by reference to Exhibit 10.1 to the
Companys
Form 10-Q
filed with the Commission on August 7, 2009)
|
|
10
|
.18
|
|
Employment Agreement with Merritt Alberti dated January 16,
2008 (incorporated by reference to Exhibit 10.2 to the
Companys
Form 10-Q
filed with the Commission on August 7, 2009)
|
|
10
|
.19
|
|
Relocation Expense Allowance agreement with Merritt Alberti
dated June 18, 2009 (incorporated by reference to
Exhibit 10.3 to the Companys
Form 10-Q
filed with the Commission on August 7, 2009)
|
|
10
|
.20
|
|
Offer Letter with Jimmy Duan dated September 24, 2008
(incorporated by reference to Exhibit 10.4 to the
Companys
Form 10-Q
filed with the Commission on August 7, 2009)
|
|
10
|
.21
|
|
Offer Letter with Michael Graves dated February 6, 2007
(incorporated by reference to Exhibit 10.5 to the
Companys
Form 10-Q
filed with the Commission on August 7, 2009)
|
|
10
|
.22
|
|
Offer Letter with Jeffrey Saling dated January 8, 2004
(incorporated by reference to Exhibit 10.6 to the
Companys
Form 10-Q
filed with the Commission on August 7, 2009)
|
|
10
|
.23
|
|
Letter agreement with Jeffrey Saling dated April 8, 2008
(incorporated by reference to Exhibit 10.7 to the
Companys
Form 10-Q
filed with the Commission on August 7, 2009)
|
|
10
|
.24
|
|
Offer Letter with Lorna Heynike dated July 24, 2009
(incorporated by reference to Exhibit 10.1 to the
Companys
Form 10-Q
filed with the Commission on November 6, 2009)
|
|
21
|
.1
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
31
|
.1
|
|
302 Certifications
|
|
32
|
.1
|
|
906 Certifications
|
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized on March 9, 2010.
CALLIDUS SOFTWARE INC.
Ronald J. Fior,
Chief Financial Officer,
Senior Vice President, Finance and Operations
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated below.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ LESLIE
J. STRETCH
Leslie
J. Stretch
|
|
Chief Executive Officer, President and Director (Principal
Executive Officer)
|
|
March 9, 2010
|
|
|
|
|
|
/s/ RONALD
J. FIOR
Ronald
J. Fior
|
|
Chief Financial Officer and Senior Vice President, Finance and
Operations (Principal Accounting Officer)
|
|
March 9, 2010
|
|
|
|
|
|
/s/ CHARLES
M. BOESENBERG
Charles
M. Boesenberg
|
|
Chairman
|
|
March 9, 2010
|
|
|
|
|
|
/s/ WILLIAM
B. BINCH
William
B. Binch
|
|
Lead Independent Director
|
|
March 9, 2010
|
|
|
|
|
|
/s/ GEORGE
B. JAMES
George
B. James
|
|
Director
|
|
March 9, 2010
|
|
|
|
|
|
/s/ DAVID
B. PRATT
David
B. Pratt
|
|
Director
|
|
March 9, 2010
|
|
|
|
|
|
/s/ MICHELE
VION
Michele
Vion
|
|
Director
|
|
March 9, 2010
|
|
|
|
|
|
/s/ ROBERT
H. YOUNGJOHNS
Robert
H. Youngjohns
|
|
Director
|
|
March 9, 2010
|
48
CALLIDUS
SOFTWARE INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Callidus Software Inc.
We have audited the accompanying consolidated balance sheets of
Callidus Software Inc. (the Company) and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders equity and
comprehensive loss, and cash flows for each of the years in the
three-year period ended December 31, 2009. We also have
audited the Companys internal control over financial
reporting as of December 31, 2009, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these consolidated
financial statements, for maintaining effective internal control
over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying managements report on
internal control over financial reporting appearing under
Item 9A(b). Our responsibility is to express an opinion on
these consolidated financial statements and an opinion on the
Companys internal control over financial reporting based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements
included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Callidus Software Inc. as of December 31, 2009
and 2008, and the results of its operations and its cash flows
for each of the years in the three-year period ended
December 31, 2009, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, Callidus
Software Inc. maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by COSO.
As discussed in note 5 to the consolidated financial
statements, the Company changed its method of accounting for
other than temporary impairments of available for sale
investments during the year ended December 31, 2009
included in Financial Accounting Standards Board Accounting
Standards Codification (FASB ASC) Topic 320,
Investments Debt and Equity Securities. Also,
as discussed in note 10 to the consolidated financial
statements, the Company changed its method of accounting for
uncertainty in income taxes during the year ended
December 31, 2007, due to the adoption of new accounting
principles included in FASB ASC Topic 740, Income Taxes.
Mountain View, California
March 9, 2010
F-2
CALLIDUS
SOFTWARE INC.
CONSOLIDATED BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share amount)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,565
|
|
|
$
|
35,390
|
|
Short-term investments
|
|
|
21,985
|
|
|
|
1,455
|
|
Accounts receivable, net of allowances of $563 in 2009 and $949
in 2008
|
|
|
12,715
|
|
|
|
22,710
|
|
Deferred income taxes
|
|
|
170
|
|
|
|
360
|
|
Prepaid and other current assets
|
|
|
3,872
|
|
|
|
4,104
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
50,307
|
|
|
|
64,019
|
|
Long-term investments
|
|
|
1,142
|
|
|
|
3,828
|
|
Property and equipment, net
|
|
|
4,355
|
|
|
|
4,890
|
|
Goodwill
|
|
|
5,528
|
|
|
|
5,655
|
|
Intangible assets, net
|
|
|
2,993
|
|
|
|
3,208
|
|
Deferred income taxes, noncurrent
|
|
|
1,255
|
|
|
|
811
|
|
Deposits and other assets
|
|
|
679
|
|
|
|
1,468
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
66,259
|
|
|
$
|
83,879
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,407
|
|
|
$
|
2,447
|
|
Accrued payroll and related expenses
|
|
|
3,929
|
|
|
|
7,128
|
|
Accrued expenses
|
|
|
3,219
|
|
|
|
5,027
|
|
Deferred income taxes
|
|
|
1,229
|
|
|
|
816
|
|
Deferred revenue
|
|
|
21,440
|
|
|
|
21,881
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
33,224
|
|
|
|
37,299
|
|
Long-term deferred revenue
|
|
|
668
|
|
|
|
1,202
|
|
Other liabilities
|
|
|
1,136
|
|
|
|
1,412
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
35,028
|
|
|
|
39,913
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred Stock, $0.001 par value; 5,000 shares
authorized; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 100,000 shares
authorized; 30,561 and 29,240 shares issued and outstanding
at December 31, 2009 and December 31, 2008,
respectively
|
|
|
30
|
|
|
|
29
|
|
Additional paid-in capital
|
|
|
212,435
|
|
|
|
207,493
|
|
Accumulated other comprehensive income
|
|
|
244
|
|
|
|
121
|
|
Accumulated deficit
|
|
|
(181,478
|
)
|
|
|
(163,677
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
31,231
|
|
|
|
43,966
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
66,259
|
|
|
$
|
83,879
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-3
CALLIDUS
SOFTWARE INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
$
|
46,322
|
|
|
$
|
40,546
|
|
|
$
|
23,907
|
|
Services
|
|
|
29,702
|
|
|
|
49,535
|
|
|
|
49,125
|
|
License
|
|
|
5,034
|
|
|
|
17,100
|
|
|
|
28,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
81,058
|
|
|
|
107,181
|
|
|
|
101,057
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
22,468
|
|
|
|
16,111
|
|
|
|
11,043
|
|
Services
|
|
|
26,195
|
|
|
|
44,613
|
|
|
|
43,555
|
|
License
|
|
|
754
|
|
|
|
897
|
|
|
|
884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
49,417
|
|
|
|
61,621
|
|
|
|
55,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
31,641
|
|
|
|
45,560
|
|
|
|
45,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
20,369
|
|
|
|
29,456
|
|
|
|
30,806
|
|
Research and development
|
|
|
13,853
|
|
|
|
14,597
|
|
|
|
15,563
|
|
General and administrative
|
|
|
12,310
|
|
|
|
14,237
|
|
|
|
13,991
|
|
Restructuring
|
|
|
2,993
|
|
|
|
1,641
|
|
|
|
1,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
49,525
|
|
|
|
59,931
|
|
|
|
61,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(17,884
|
)
|
|
|
(14,371
|
)
|
|
|
(16,243
|
)
|
Interest and other income, net
|
|
|
308
|
|
|
|
702
|
|
|
|
2,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before provision (benefit) for income taxes
|
|
|
(17,576
|
)
|
|
|
(13,669
|
)
|
|
|
(13,471
|
)
|
Provision (benefit) for income taxes
|
|
|
377
|
|
|
|
161
|
|
|
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,953
|
)
|
|
$
|
(13,830
|
)
|
|
$
|
(13,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.60
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in basic and diluted per share computation
|
|
|
30,050
|
|
|
|
29,913
|
|
|
|
29,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-4
CALLIDUS
SOFTWARE INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE LOSS
Years Ended December 31, 2009, 2008 and
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
Comprehensive
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Deficit
|
|
|
Equity
|
|
|
Loss
|
|
|
|
(In thousands, except per share data)
|
|
|
Balance as of December 31, 2006
|
|
|
28,354
|
|
|
$
|
28
|
|
|
$
|
193,499
|
|
|
$
|
408
|
|
|
$
|
(136,555
|
)
|
|
$
|
57,380
|
|
|
|
|
|
Exercise of stock options under stock incentive plans
|
|
|
797
|
|
|
|
1
|
|
|
|
2,404
|
|
|
|
|
|
|
|
|
|
|
|
2,405
|
|
|
|
|
|
Issuance of common stock under stock purchase plans
|
|
|
506
|
|
|
|
1
|
|
|
|
2,253
|
|
|
|
|
|
|
|
|
|
|
|
2,254
|
|
|
|
|
|
Issuance of common stock under restricted stock plans
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
4,954
|
|
|
|
|
|
|
|
|
|
|
|
4,954
|
|
|
|
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
80
|
|
|
$
|
80
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32
|
)
|
|
|
|
|
|
|
(32
|
)
|
|
|
(32
|
)
|
Cumulative effect of adoption of an accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151
|
)
|
|
|
(151
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,141
|
)
|
|
|
(13,141
|
)
|
|
|
(13,141
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
29,704
|
|
|
$
|
30
|
|
|
$
|
203,110
|
|
|
$
|
456
|
|
|
$
|
(149,847
|
)
|
|
$
|
53,749
|
|
|
$
|
(13,093
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options under stock incentive plans
|
|
|
755
|
|
|
|
1
|
|
|
|
2,484
|
|
|
|
|
|
|
|
|
|
|
|
2,485
|
|
|
|
|
|
Issuance of common stock under stock purchase plans
|
|
|
532
|
|
|
|
|
|
|
|
2,320
|
|
|
|
|
|
|
|
|
|
|
|
2,320
|
|
|
|
|
|
Issuance of common stock under restricted stock plans, net of
shares withheld for employee taxes
|
|
|
243
|
|
|
|
|
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
(207
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
7,704
|
|
|
|
|
|
|
|
|
|
|
|
7,704
|
|
|
|
|
|
Unrealized gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
(31
|
)
|
|
$
|
(31
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(304
|
)
|
|
|
|
|
|
|
(304
|
)
|
|
|
(304
|
)
|
Stock repurchases
|
|
|
(1,994
|
)
|
|
|
(2
|
)
|
|
|
(7,918
|
)
|
|
|
|
|
|
|
|
|
|
|
(7,920
|
)
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,830
|
)
|
|
|
(13,830
|
)
|
|
|
(13,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
29,240
|
|
|
$
|
29
|
|
|
$
|
207,493
|
|
|
$
|
121
|
|
|
$
|
(163,677
|
)
|
|
$
|
43,966
|
|
|
$
|
(14,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options under stock incentive plans
|
|
|
104
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
101
|
|
|
|
|
|
Issuance of common stock under stock purchase plans
|
|
|
788
|
|
|
|
1
|
|
|
|
1,687
|
|
|
|
|
|
|
|
|
|
|
|
1,688
|
|
|
|
|
|
Issuance of common stock under restricted stock plans, net of
shares withheld for employee taxes
|
|
|
677
|
|
|
|
|
|
|
|
(437
|
)
|
|
|
|
|
|
|
|
|
|
|
(437
|
)
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
4,332
|
|
|
|
|
|
|
|
|
|
|
|
4,332
|
|
|
|
|
|
Stock repurchases
|
|
|
(248
|
)
|
|
|
|
|
|
|
(741
|
)
|
|
|
|
|
|
|
|
|
|
|
(741
|
)
|
|
|
|
|
Cumulative effect of adoption of an accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(152
|
)
|
|
|
152
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
|
|
|
|
|
|
|
|
129
|
|
|
$
|
129
|
|
Cumulative translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146
|
|
|
|
|
|
|
|
146
|
|
|
|
146
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,953
|
)
|
|
|
(17,953
|
)
|
|
|
(17,953
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
30,561
|
|
|
$
|
30
|
|
|
$
|
212,435
|
|
|
$
|
244
|
|
|
$
|
(181,478
|
)
|
|
$
|
31,231
|
|
|
$
|
(17,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-5
CALLIDUS
SOFTWARE INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(17,953
|
)
|
|
$
|
(13,830
|
)
|
|
$
|
(13,141
|
)
|
Adjustments to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
2,748
|
|
|
|
2,511
|
|
|
|
1,915
|
|
Amortization of intangible assets
|
|
|
2,058
|
|
|
|
2,886
|
|
|
|
485
|
|
Provision for doubtful accounts and service remediation reserves
|
|
|
(108
|
)
|
|
|
819
|
|
|
|
114
|
|
Stock-based compensation
|
|
|
4,324
|
|
|
|
7,696
|
|
|
|
4,954
|
|
(Gain) Loss on disposal of property
|
|
|
(1
|
)
|
|
|
25
|
|
|
|
2
|
|
Deferred income taxes
|
|
|
200
|
|
|
|
(4
|
)
|
|
|
(513
|
)
|
Net (accretion) amortization on investments
|
|
|
58
|
|
|
|
(162
|
)
|
|
|
(596
|
)
|
Put option (gain) loss
|
|
|
390
|
|
|
|
(492
|
)
|
|
|
|
|
(Gain) loss on investments classified as trading securities
|
|
|
(484
|
)
|
|
|
771
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
10,234
|
|
|
|
3,259
|
|
|
|
(573
|
)
|
Prepaid and other current assets
|
|
|
218
|
|
|
|
35
|
|
|
|
254
|
|
Other assets
|
|
|
226
|
|
|
|
1,052
|
|
|
|
82
|
|
Accounts payable
|
|
|
822
|
|
|
|
(687
|
)
|
|
|
666
|
|
Accrued expenses
|
|
|
(2,336
|
)
|
|
|
(2,413
|
)
|
|
|
(283
|
)
|
Accrued payroll and related expenses
|
|
|
(2,591
|
)
|
|
|
60
|
|
|
|
(292
|
)
|
Accrued restructuring
|
|
|
(668
|
)
|
|
|
(159
|
)
|
|
|
973
|
|
Deferred revenue
|
|
|
(998
|
)
|
|
|
4,783
|
|
|
|
2,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(3,861
|
)
|
|
|
6,150
|
|
|
|
(3,127
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investments
|
|
|
(28,957
|
)
|
|
|
(13,919
|
)
|
|
|
(46,730
|
)
|
Proceeds from maturities and sale of investments
|
|
|
11,670
|
|
|
|
36,820
|
|
|
|
59,438
|
|
Purchases of property and equipment
|
|
|
(1,943
|
)
|
|
|
(2,491
|
)
|
|
|
(2,664
|
)
|
Purchases of intangible assets
|
|
|
(1,601
|
)
|
|
|
(361
|
)
|
|
|
(1,942
|
)
|
Acquisition, net of cash acquired
|
|
|
(14
|
)
|
|
|
(9,386
|
)
|
|
|
|
|
Change in restricted cash
|
|
|
202
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(20,643
|
)
|
|
|
10,663
|
|
|
|
8,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of common stock and warrants
|
|
|
1,789
|
|
|
|
4,805
|
|
|
|
4,658
|
|
Repurchases of stock
|
|
|
(742
|
)
|
|
|
(7,920
|
)
|
|
|
|
|
Repurchase of common stock from employees for payment of taxes
on vesting of restricted stock units
|
|
|
(436
|
)
|
|
|
(207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
611
|
|
|
|
(3,322
|
)
|
|
|
4,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
|
68
|
|
|
|
86
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(23,825
|
)
|
|
|
13,577
|
|
|
|
9,731
|
|
Cash and cash equivalents at beginning of year
|
|
|
35,390
|
|
|
|
21,813
|
|
|
|
12,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
11,565
|
|
|
$
|
35,390
|
|
|
$
|
21,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
8
|
|
|
$
|
14
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment not paid as of year-end
|
|
$
|
1,316
|
|
|
$
|
405
|
|
|
$
|
454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of intangible assets not paid as of year-end
|
|
$
|
657
|
|
|
$
|
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition costs not paid as of year-end
|
|
$
|
|
|
|
$
|
14
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred direct stock-based compensation costs
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-6
CALLIDUS
SOFTWARE INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1
|
The
Company and Significant Accounting Policies
|
Description
of Business
The Company is a provider of Sales Performance Management (SPM)
software and services to global companies. Enterprises use SPM
systems to optimize their investment in sales planning and
performance, specifically in the areas of incentive
compensation, quota and goal management, and territory
alignment. SPM solutions also provide the capability to
continually monitor and analyze these business processes in
order to understand what is working well and which programs
might need to be revised. Sales performance and incentive
compensation management programs are key vehicles in aligning
employee and channel partner goals with corporate objectives.
The Companys suite of products enables companies to access
applicable transaction data, allocate compensation credit to
appropriate employees and business partners, determine relevant
compensation measurements, payment amounts and timing, and
accurately report on compensation results. By facilitating
effective management of complex incentive and sales performance
programs, the Companys products allow its customers to
align sales and incentive strategies with corporate objectives
to increase sales revenue, make better use of their sales and
incentive budgets, and drive productivity improvements. The
Companys software suite is based on its proprietary
technology and extensive expertise in sales performance
programs, and provides the flexibility and scalability required
to meet the dynamic SPM requirements of small, medium, and large
businesses across multiple industries. The Companys
products drive sales strategies toward desired business outcomes.
Principles
of Consolidation
The consolidated financial statements include the accounts of
Callidus Software Inc. and its wholly owned subsidiaries
(collectively, the Company), which include wholly-owned
subsidiaries in Australia, Canada, Germany, Hong Kong, Singapore
and the United Kingdom. All intercompany transactions and
balances have been eliminated in the consolidation.
Certain
Risks and Uncertainties
The Companys products and services are concentrated in the
software industry, which is characterized by rapid technological
advances and changes in customer requirements. A critical
success factor is managements ability to anticipate or to
respond quickly and adequately to technological developments in
its industry and changes in customer requirements. Any
significant delays in the development or introduction of
products or services could have a material adverse effect on the
Companys business and operating results.
Historically, a substantial portion of the Companys
revenues have been derived from sales of its products and
services to customers in the financial and insurance industries.
The substantial disruptions in these industries under the
current economy may result in these customers deferring or
cancelling future planned expenditures on the Companys
products and services. The Company is also subject to
fluctuations in sales for the TrueComp product, and its revenues
are typically dependent on a small volume of transactions.
Continued macroeconomic weakness may keep potential customers
from purchasing the Companys products.
Use of
Estimates
Preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America and the rules and regulations of the
Securities and Exchange Commission (SEC) requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the consolidated financial
statements, the reported amounts of revenues and expenses during
the reporting period and the accompanying notes. Estimates are
used for, but not limited to, the allocation of the value of
purchase consideration for business acquisitions, uncertain tax
liabilities, valuation of certain investments, allowances for
doubtful accounts and service remediation reserves, the useful
lives of fixed assets and intangible assets, goodwill and
intangible asset impairment charges, accrued
F-7
liabilities and other contingencies. These estimates and
assumptions are based on managements best estimates and
judgment. Management evaluates such estimates and assumptions on
an ongoing basis using historical experience and considers other
factors, including the current economic environment, for
continued reasonableness. Appropriate adjustments, if any, to
the estimates used are made prospectively based upon such
evaluation. Illiquid credit markets, volatile equity and foreign
currency markets and declines in IT spending by companies have
combined to increase the uncertainty inherent in such estimates
and assumptions. As future events and their effects cannot be
determined with precision, actual results could differ
materially from those estimates. Changes in those estimates, if
any, resulting from continuing changes in the economic
environment, will be reflected in the financial statements in
future periods.
Foreign
Currency Translation
The functional currencies of the Companys foreign
subsidiaries are their respective local currencies. Accordingly,
the foreign currencies are translated into U.S. dollars
using exchange rates in effect at period end for assets and
liabilities and average rates during each reporting period for
the results of operations. Adjustments resulting from the
translation of the financial statements of the foreign
subsidiaries are reported as a separate component of accumulated
other comprehensive income (loss). Foreign currency transaction
gains and losses are included in interest and other income, net
in the accompanying consolidated statements of operations.
Cash
and Cash Equivalents and Investments
The Company considers all highly liquid instruments with an
original maturity on the date of purchase of three months or
less to be cash equivalents. Cash equivalents as of
December 31, 2009 and 2008 consisted of money market funds.
The Company determines the appropriate classification of
investment securities at the time of purchase and re-evaluates
such designation as of each balance sheet date. As of
December 31, 2009 and 2008, all investment securities,
except for certain auction rate securities that are classified
as trading, are designated as available for sale.
The Company considers all investments that are available for
sale, except for certain auction rate securities, that have a
maturity date longer than three months to be short-term
investments, including those investments with a maturity date of
longer than one year that are highly liquid and for which the
Company does not have a positive intent to hold to maturity.
These securities are carried at estimated fair value based on
quoted market prices or other readily available market
information, with the unrealized gains (losses) reported as a
separate component of stockholders equity. Gains are
recognized when realized in our Consolidated Statements of
Operations. Losses are recognized as realized. When the Company
has determined that an
other-than-temporary
decline in fair value has occurred, the amount of the decline
that is related to a credit loss is recognized in earnings.
Gains and losses are determined using the specific
identification method.
All of the auction rate securities carry AAA credit ratings from
one or more of the major credit rating agencies. These
investments are education municipal securities substantially
collateralized by the U.S. Department of Education Federal
Family Education Loan program guarantee. None of the auction
rate securities held by the Company are mortgage-backed debt
obligations. Liquidity for these securities is typically
provided by an auction process that resets the applicable
interest rate at pre-determined intervals, usually every
28 days. However, as a result of liquidity issues in the
global credit and capital markets, the auctions for all of the
Companys ARS failed beginning in February 2008, when sell
orders exceeded buy orders. The failures of these auctions do
not affect the value of the collateral underlying the ARS, and
the Company continues to earn and receive interest on the
Companys ARS at contractually set rates. As of
December 31, 2009, there continues to be no auction market
for the Companys ARS. In the absence of a liquid market to
value these securities, the Company has used a discounted cash
flow model to estimate the fair value of its investments in ARS
as of December 31, 2009.
In connection with certain of the auction rate securities, in
October 2008, one financial institution where the Company holds
auction rate securities issued certain put option rights to the
Company, which entitles the Company to sell its auction rate
securities to the financial institution for a price equal to the
par value plus any accrued and unpaid interest. These rights to
sell the securities are exercisable at any time during the
period from June 30, 2010 to July 2, 2012, after which
the rights will expire. See Note 5 Investments
for additional discussion.
F-8
Fair
Value of Financial Instruments and Concentrations of Credit
Risk
The fair value of the Companys financial instruments,
including cash and cash equivalents, accounts receivable and
accounts payable, approximate their respective carrying value
due to their short maturity. See Note 5
Investments for discussion regarding the valuation of the
Companys investments. Financial instruments that
potentially subject the Company to concentrations of credit risk
are short-term investments, long-term investments and trade
receivables. The Company mitigates concentration of risk by
monitoring ratings, credit spreads and potential downgrades for
all bank counterparties on at least a quarterly basis. Based on
the Companys on-going assessment of counterparty risk, the
Company will adjust its exposure to various counterparties.
The Companys customer base consists of businesses
throughout the Americas, Europe Middle East Africa and
Asia-Pacific. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral on
accounts receivable. As of December 31, 2009 and
December 31, 2008, the Company had no customers comprising
greater than 10% of net accounts receivable. See Note 13
for information regarding revenues from significant customers.
Reserve
Accounts
Trade accounts receivable are recorded at the invoiced amount
and do not bear interest. The Company reduces gross trade
accounts receivable with its allowance for doubtful accounts and
service remediation reserve. The allowance for doubtful accounts
is the Companys best estimate of the amount of probable
credit losses in the Companys existing accounts
receivable. The Company reviews its allowance for doubtful
accounts monthly. Past due balances over 90 days are
reviewed individually for collectability. Account balances are
charged against the allowance after reasonable means of
collection have been exhausted and the potential for recovery is
considered remote.
The Company must make estimates of the uncollectability of
accounts receivable. The Company records an increase in the
allowance for doubtful accounts when the prospect of collecting
a specific account receivable becomes doubtful. Management
specifically analyzes accounts receivable and historical bad
debt experience, customer creditworthiness, current economic
trends, international situations (such as currency devaluation)
and changes in customer payment history when evaluating the
adequacy of the allowance for doubtful accounts. Should any of
these factors change, the estimates made by management will also
change, which could affect the level of the Companys
future provision for doubtful accounts. Specifically, if the
financial condition of customers were to deteriorate, affecting
their ability to make payments, an additional provision for
doubtful accounts may be required and such provision may be
material. The allowance for doubtful accounts, which is netted
against accounts receivable on the consolidated balance sheets,
totaled approximately $307,000 and $550,000 at December 31,
2009 and December 31, 2008, respectively.
The service remediation reserve is the Companys best
estimate of the probable amount of remediation services it will
have to provide for ongoing professional service arrangements.
Provisions to the allowance for doubtful accounts are recorded
in general and administrative expenses, while provisions for
service remediation reduce services revenues.
The Company generally warrants that its services will be
performed in accordance with the criteria agreed upon in a
statement of work, which the Company generally executes with
each applicable customer prior to commencing work. Should these
services not be performed in accordance with the agreed upon
criteria, the Company typically provides remediation services
until such time as the criteria are met. Management must use
judgments and make estimates of service remediation reserves
related to potential future requirements to provide remediation
services in connection with current period service revenues.
When providing for service remediation reserves, the Company
analyzes historical experience of actual remediation service
claims as well as current information on remediation service
requests as they are the primary indicators for estimating
future service claims. Material differences may result in the
amount and timing of revenues if, for any period, actual
remediation claims differ from managements judgments or
estimates. The service remediation reserve balance, which is
netted against accounts receivable on the consolidated balance
sheets, was approximately $256,000 and $399,000 at
December 31, 2009 and December 31, 2008, respectively.
F-9
Below is a summary of the changes in the Companys reserve
accounts for 2009, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Provision,
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Net of
|
|
|
|
|
|
End of
|
|
|
|
of Period
|
|
|
Recoveries
|
|
|
Write-Offs
|
|
|
Period
|
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009
|
|
$
|
550
|
|
|
$
|
178
|
|
|
$
|
(421
|
)
|
|
$
|
307
|
|
Year ended December 31, 2008
|
|
|
154
|
|
|
|
645
|
|
|
|
(249
|
)
|
|
|
550
|
|
Year ended December 31, 2007
|
|
|
463
|
|
|
|
130
|
|
|
|
(439
|
)
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Remediation
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
|
|
|
Service
|
|
|
End of
|
|
|
|
of Period
|
|
|
Provision
|
|
|
Claims
|
|
|
Period
|
|
|
Service remediation reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009
|
|
$
|
399
|
|
|
$
|
818
|
|
|
$
|
(961
|
)
|
|
$
|
256
|
|
Year ended December 31, 2008
|
|
|
225
|
|
|
|
1,770
|
|
|
|
(1,596
|
)
|
|
|
399
|
|
Year ended December 31, 2007
|
|
|
241
|
|
|
|
1,200
|
|
|
|
(1,216
|
)
|
|
|
225
|
|
The decrease in allowance for doubtful accounts and service
remediation reserve from 2008 to 2009 was primarily attributable
to the decrease of revenue in 2009 and the transition of our
business model from on-premise to on-demand services. The
increase in allowance for doubtful accounts from 2007 to 2008
was primarily attributable to one customer that filed for
bankruptcy, which resulted in approximately $223,000 of bad debt
expense. The remaining increase was comprised of smaller amounts
reserved in the normal course of our analysis of uncollectible
amounts.
Property
and Equipment
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line
method over the estimated useful lives of the respective assets,
generally three to five years. Leasehold improvements are
amortized over the lesser of the assets estimated useful
lives or the related lease terms. Expenditures for maintenance
and repairs are charged to expense as incurred. Cost and
accumulated depreciation of assets sold or retired are removed
from the respective property accounts and the gain or loss is
reflected in the consolidated statements of operations.
Restricted
Cash
Included in prepaid and other current assets and deposits and
other assets in the consolidated balance sheets at
December 31, 2009 and 2008 is restricted cash totaling
$232,000 and $434,000, respectively, related to security
deposits on leased facilities for our New York, New York and
San Jose, California offices. The restricted cash
represents investments in certificates of deposit required by
landlords to meet security deposit requirements for the leased
facilities. Restricted cash is included in prepaid and other
current assets and deposits and other assets based on the
contractual term for the release of the restriction.
Goodwill
and Acquired Intangible Assets
The Company reviews its goodwill for impairment in November
annually, or more frequently, if facts and circumstances warrant
a review. In order to estimate the fair value of goodwill, the
Company estimates future revenue, considers market factors and
estimates its future cash flows. The Company has one reporting
unit and evaluates goodwill for impairment by comparing the
carrying amount of the reporting unit, including the associated
goodwill, to its estimated undiscounted future cash flows.
Intangible assets with finite lives are amortized over their
estimated useful lives of one to five years. Generally,
amortization is based on the pattern in which the economic
benefits of the intangible asset will be consumed.
As of December 31, 2009, the Company noted no indications
of impairment of its goodwill or acquired intangible assets.
F-10
Impairment
of Long-Lived Assets
The Company assesses impairment of its long-lived assets in
accordance with the provisions of accounting for the impairment
or disposal of long-lived assets. Long-lived assets, such as
property and equipment and purchased intangibles subject to
amortization are required to be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset group may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset group to estimated undiscounted
future cash flows expected to be generated by the asset group.
If the carrying amount of an asset group exceeds its estimated
future cash flows, an impairment charge is recognized equal to
the amount by which the carrying amount of the asset group
exceeds the fair value of the asset group.
Research
and Development Costs
Software development costs associated with new products and
enhancements to existing products are expensed as incurred until
technological feasibility, in the form of a working model, is
established, at which time any additional development costs
would be capitalized in accordance with accounting guidance for
computer software to be sold, leased, or otherwise marketed.
Costs eligible for capitalization were not material to our
consolidated financial statements.
Stock-Based
Compensation
The Company measures and recognizes compensation expense for all
stock-based awards made to employees and directors including
employee stock options, restricted stock units
(RSUs), and employee stock purchases under the
Companys Employee Stock Purchase Plan based on estimated
fair values on the date of grant using the Black-Scholes-Merton
option pricing model. The value of the portion of the award that
is ultimately expected to vest is recognized as expense on a
straight-line basis over the requisite service periods in the
Companys Consolidated Statements of Operations.
Foreign
Currency
The Company transacts business in foreign countries in
U.S. dollars and in various foreign currencies.
Occasionally, the Company may enter into forward exchange
contracts to reduce its exposure to currency fluctuations on its
foreign currency exposures. The objective of these contracts is
to minimize the impact of foreign currency exchange rate
movements on the Companys operating results. These
contracts are carried at fair value with changes recorded in
interest and other income. The Company does not use these
contracts for speculative or trading purposes.
Income
Taxes
The Company is subject to income taxes in both the United States
and foreign jurisdictions and the Company uses estimates in
determining its provision for income taxes. This process
involves estimating actual current tax assets and liabilities
together with assessing temporary differences resulting from
differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities,
which are recorded on the consolidated balance sheets. Net
deferred tax assets are recorded to the extent the Company
believes that these assets will more likely than not be
realized. In making such determination, all available positive
and negative evidence is considered, including scheduled
reversals of deferred tax liabilities, projected future taxable
income, tax planning strategies and recent financial operations.
With the exception of the net deferred tax assets of one of the
Companys foreign subsidiaries, the Company maintained a
full valuation allowance against its net deferred tax assets at
December 31, 2009 because the Company believes that it is
not more-likely-than-not that the gross deferred tax assets will
be realized. While the Company has considered future taxable
income and ongoing prudent and feasible tax planning strategies
in assessing the need for a valuation allowance, in the event
the Company were to determine that it would be able to realize
our deferred tax assets in the future, an adjustment to the
deferred tax assets would increase net income in the period such
determination was made.
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between
financial statement carrying amounts of existing assets and
liabilities and their respective tax basis, as well
F-11
as operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to be applied to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
In July 2006, the FASB issued guidance on accounting for
uncertainty in income taxes, which clarifies the accounting for
uncertainty in income taxes recognized in the financial
statements in accordance with accounting for income taxes. A tax
benefit from an uncertain tax position may be recognized when it
is more likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or
litigation processes, based on the technical merits. The Company
adopted the provisions of accounting for uncertainty in income
taxes on January 1, 2007. As a result of applying the
provisions of the accounting guidance, the Company recognized
approximately $0.1 million in the liability for
unrecognized tax benefits as well as incremental penalties and
interest net of deductions of $41,000, the sum of which was
accounted for as an increase to the January 1, 2007
beginning balance of accumulated deficit. The Companys
unrecognized tax benefits at December 31, 2007 related to
various foreign jurisdictions.
Income tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized
upon the adoption of accounting for uncertainty in income taxes
and in subsequent periods. This interpretation also provides
guidance on measurement, derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and
transition.
The Company recognizes interest and penalties related to
unrecognized tax benefits within the income tax expense line in
the accompanying consolidated statement of operations. Accrued
interest and penalties are included within the related tax
liability line in the consolidated balance sheet.
Revenue
Recognition
The Company generates revenues by providing its software
application as a service through its on-demand subscription and
time-based term license offering and providing related
professional services to its customers, as well as by licensing
software on a perpetual basis and providing related software
support. The Company presents revenue net of sales taxes and any
similar assessments.
The Company recognizes revenues in accordance with accounting
standards for software and service companies. The Company will
not recognize revenue until persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or
determinable and collection is deemed probable. The Company
evaluates each of these criteria as follows:
Evidence of an Arrangement. The Company
considers a non-cancelable agreement signed by it and the
customer to be evidence of an arrangement.
Delivery. In on-demand arrangements, the
Company considers delivery to have occurred as the service is
provided to the customer, and they have access to the hosting
environment. In both perpetual and time-based term licensing
arrangements, the Company considers delivery to have occurred
when media containing the licensed programs is provided to a
common carrier, or in the case of electronic delivery, the
customer is given access to the licensed programs. The
Companys typical end-user license agreement does not
include customer acceptance provisions.
Fixed or Determinable Fee. The Company
considers the fee to be fixed or determinable unless the fee is
subject to refund or adjustment or is not payable within its
standard payment terms. The Company considers payment terms
greater than 90 days to be beyond its customary payment
terms. If the fee is not fixed or determinable, the Company
recognizes the revenue as amounts become due and payable.
In perpetual licensing arrangements where the customer is
obligated to pay at least 90% of the license amount within
normal payment terms and the remaining 10% is to be paid within
a year from the contract effective date, the Company will
recognize the license revenue for the entire arrangement upon
delivery assuming all other revenue recognition criteria have
been met. This policy is effective as long as the Company
F-12
continues to maintain a history of providing similar terms to
customers and collecting from those customers without providing
any contractual concessions.
Collection is Deemed Probable. The Company
conducts a credit review for all significant transactions at the
time of the arrangement to determine the creditworthiness of the
customer. Collection is deemed probable if the Company expects
that the customer will be able to pay amounts under the
arrangement as payments become due. If the Company determines
that collection is not probable, the Company defers the
recognition of revenue until cash collection.
Recurring
Revenue
Recurring revenues include on-demand revenues, time-based term
license revenues and maintenance revenues. On-demand revenues
are principally derived from technical operation fees earned
through the Companys services offering of the on-demand
TrueComp suite, as well as revenues generated from business
operations services. Time based term license revenues are
derived from fees earned through the licensing of our software
bundled with maintenance for a specified period of time.
Maintenance revenues are derived from maintaining, supporting
and providing periodic updates for the Companys licensed
software. Customers that own perpetual licenses can receive the
benefits of upgrades, updates, and support from either
subscribing to the Companys on-demand services or
maintenance services.
On-Demand Revenue. In arrangements where the
Company provides its software applications as a service, the
Company has considered accounting guidance for arrangements that
include the right to use software stored on another
entitys hardware and non-software deliverables in an
arrangement containing
more-than-incidental
software, and has concluded that these transactions are
considered service arrangements and fall outside of the scope of
software revenue recognition guidance. Accordingly, the Company
follows the provisions of SEC Staff Accounting
Bulletin No. 104, Revenue Recognition, and
accounting guidance for revenue arrangements with multiple
deliverables. Customers will typically prepay for the
Companys on-demand services, which amounts the Company
defers and recognizes ratably over the non-cancelable term of
the customer contract. In addition to the on-demand services,
these arrangements may also include implementation and
configuration services, which are billed on a
time-and-materials
basis and recognized as revenues as the services are performed.
In determining whether the consulting services can be accounted
for separately from on-demand revenues, the Company considers
the following factors for each consulting agreement:
availability of the consulting services from other vendors;
whether objective and reliable evidence of fair value exists for
the undelivered elements; the nature of the consulting services;
the timing of when the consulting contract is signed in
comparison to the on-demand service contract and the contractual
dependence of the consulting work on the on-demand service.
For all of the arrangements where the elements qualify for
separate units of accounting, the on-demand revenues are
recognized ratably over the non-cancelable contract term, which
is typically 12 to 24 months, beginning on the date the
on-demand services begin to be performed. Implementation and
configuration services, when sold with the on-demand offering,
are recognized as the services are rendered for
time-and-materials
contracts. The majority of our implementation and configuration
services for on-demand arrangements are accounted for in this
manner. If implementation and configuration services associated
with an on-demand arrangement do not qualify as a separate unit
of accounting, the Company will recognize the revenue from
implementation and configuration services ratably over the
remaining non-cancelable term of the subscription contract once
the implementation is complete. For arrangements with multiple
deliverables, the Company allocates the total contractual
arrangement to the separate units of accounting based on their
relative fair values, as determined by the fair value of the
undelivered and delivered items.
In addition, the Company will defer the direct costs of the
implementation and configuration services and amortize those
costs over the same time period as the related revenue is
recognized. The deferred costs on the Companys
consolidated balance sheets for these consulting arrangements
totaled $1.8 million and $2.6 million at
December 31, 2009 and 2008, respectively. As of
December 31, 2009 and 2008, $1.4 million and
$2.0 million, respectively, of the deferred costs are
included in prepaid and other current assets, with the remaining
amount included in deposits and other assets in the consolidated
balance sheets.
F-13
Included in the deferred costs for on-demand arrangements is the
deferral of commission payments to the Companys direct
sales force, which the Company amortizes over the non-cancelable
term of the contract as the related revenue is recognized. The
commission payments are a direct and incremental cost of the
revenue arrangements. The deferral of commission expenditures
related to the Companys on-demand offering was
$1.0 million and $0.8 million at December 31,
2009 and 2008, respectively.
Time-Based Term License. The Company
introduced on-premise licenses of our software as a time-based
term license arrangement in the third quarter of 2009. Such
arrangements typically include an initial fee, which covers the
time-based term license for a specified period and the
maintenance and support for the first year of the arrangement.
If a customer wishes to receive maintenance after the first
year, then the customer must pay the maintenance fee for each
year they wish to receive maintenance.
For a Single-Year Time-based Term License that is sold with
multiple elements the entire arrangement fee is recognized
ratably. In these arrangements, both the time-based term
licenses and the maintenance agreements have duration of one
year; therefore the fair value of the bundled maintenance
services is not reliably measured by reference to a maintenance
renewal rate. As a result, revenue cannot be allocated to the
various elements of the arrangement and it will be recognized
ratably over the longer of the maintenance term or over the
period during which the services are expected to be performed.
Multi-Year Time-based Term License arrangements often include
multiple elements (e.g., software technology, maintenance,
training, consulting and other services). The Company allocates
revenue to each element of the arrangement based on
vendor-specific objective evidence of each elements fair
value when the Company can demonstrate that sufficient evidence
exists of the fair value for the undelivered elements. The fair
value of each element in multiple element arrangements is
determined based on either (i) in the case of maintenance,
providing the customer with the ability during the term of the
arrangement to renew maintenance at a substantive renewal rate
or (ii) selling the element on a stand-alone basis.
In Multi-Year Time-based Term License arrangements that include
multiple elements and for which fair value of VSOE cannot be
established for the undelivered elements the entire arrangement
fee is recognized ratably upon delivery. All of our multi-year
time-based term license arrangements are accounted for in this
manner.
Similar to certain on-demand arrangements as described above,
the Company will defer the direct costs, and amortize those
costs over the same time period as the related revenue is
recognized. The deferred costs on the Companys
consolidated balance sheets for these arrangements totaled
$0.1 million and are included in prepaid and other current
assets at December 31, 2009.
Maintenance Revenue. Under perpetual software
license arrangements, a customer typically pre-pays maintenance
for the first twelve months, and the related revenues are
deferred and recognized ratably over the term of the initial
maintenance contract. Maintenance is renewable by the customer
on an annual basis thereafter. Rates for maintenance, including
subsequent renewal rates, are typically established based upon a
specified percentage of net license fees as set forth in the
arrangement.
Services
Revenue
Professional Service Revenue. Professional
service revenues primarily consist of integration services
related to the installation and configuration of the
Companys products as well as training. The Companys
installation and configuration services do not involve
customization to, or development of, the underlying software
code. Generally, the Companys professional services
arrangements are on a
time-and-materials
basis. Reimbursements, including those related to travel and
out-of-pocket
expenses, are included in services revenues, and an equivalent
amount of reimbursable expenses is included in cost of services
revenues. For professional service arrangements with a fixed
fee, the Company recognizes revenue utilizing the proportional
performance method of accounting. The Company estimates the
proportional performance on fixed-fee contracts on a monthly
basis, if possible, utilizing hours incurred to date as a
percentage of total estimated hours to complete the project. If
the Company does not have a sufficient basis to measure progress
toward completion, revenue is recognized upon completion of
performance. To the extent the Company enters into a fixed-fee
services contract, a loss will be recognized any time the total
estimated project cost exceeds project revenues.
F-14
In certain arrangements, the Company has provided for unique
acceptance criteria associated with the delivery of consulting
services. In these instances, the Company has recognized revenue
in accordance with the provisions of SAB 104. To the extent
there is contingent revenue in these arrangements, the Company
will defer the revenue until the contingency has lapsed.
Perpetual
License Revenue
The Companys perpetual software license arrangements
typically include: (i) an end-user license fee paid in
exchange for the use of its products, generally based on a
specified number of payees, and (ii) a maintenance
arrangement that provides for technical support and product
updates, generally over renewable twelve month periods. If the
Company is selected to provide integration and configuration
services, then the software arrangement will also include
professional services, generally priced on a
time-and-materials
basis. Depending upon the elements in the arrangement and the
terms of the related agreement, the Company recognizes license
revenues under either the residual or the contract accounting
method.
Certain arrangements result in the payment of customer referral
fees to third parties that resell the Companys software
products. In these arrangements, license revenues are recorded,
net of such referral fees, at the time the software license has
been delivered to a third-party reseller and an end-user
customer has been identified.
Residual Method. Perpetual license fees are
recognized upon delivery whether licenses are sold separately
from or together with integration and configuration services,
provided that (i) the criteria described above have been
met, (ii) payment of the license fees is not dependent upon
performance of the integration and configuration services, and
(iii) the services are not otherwise essential to the
functionality of the software. The Company recognizes these
license revenues using the residual method pursuant to the
requirements of accounting guidance for software revenue
recognition. Under the residual method, revenues are recognized
when vendor-specific objective evidence of fair value exists for
all of the undelivered elements in the arrangement (i.e.,
professional services and maintenance), but does not exist for
one or more of the delivered elements in the arrangement (i.e.,
the software product). Each license arrangement requires careful
analysis to ensure that all of the individual elements in the
license transaction have been identified, along with the fair
value of each undelivered element.
The Company allocates revenue to each undelivered element based
on its fair value, with the fair value determined by the price
charged when that element is sold separately. For a certain
class of transactions, the fair value of the maintenance portion
of the Companys arrangements is based on substantive
stated renewal rates rather than stand-alone sales. The fair
value of the professional services portion of the arrangement is
based on the hourly rates that the Company charges for these
services when sold independently from a software license. If
evidence of fair value cannot be established for the undelivered
elements of a license agreement, the entire amount of revenue
from the arrangement is deferred until evidence of fair value
can be established, or until the items for which evidence of
fair value cannot be established are delivered. If the only
undelivered element is maintenance, then the entire amount of
revenue is recognized over the maintenance delivery period.
Contract Accounting Method. For arrangements
where services are considered essential to the functionality of
the software, such as where the payment of the license fees is
dependent upon performance of the services, both the license and
services revenues are recognized in accordance with the
provisions of accounting for performance of construction-type
and certain production-type contracts. The Company generally
uses the
percentage-of-completion
method because the Company is able to make reasonably dependable
estimates relative to contract costs and the extent of progress
toward completion. However, if the Company cannot make
reasonably dependable estimates, the Company uses the
completed-contract method. If total cost estimates exceed
revenues, the Company accrues for the estimated loss on the
arrangement at the time such determination is made.
In certain arrangements, the Company has provided for unique
acceptance criteria associated with the delivery of consulting
services. In these instances, the Company has recognized revenue
in accordance with the provisions of accounting for performance
of construction-type and certain production-type contracts. To
the extent there is contingent revenue in these arrangements,
the Company measures the level of profit that is expected based
on the non-contingent revenue and the total expected project
costs. If the Company is assured of a certain level of profit
excluding the contingent revenue, the Company recognizes the
non-contingent revenue on a
percentage-of-completion
basis and recognizes the contingent revenue upon final
acceptance.
F-15
Cost
of Revenues
Cost of recurring revenues consists primarily of salaries,
benefits, allocated overhead costs related to on-demand
operations and technical support personnel, as well as allocated
amortization of purchased technology. Cost of license revenues
consists primarily of amortization of purchased technology. Cost
of services revenues consists primarily of salaries, benefits,
travel and allocated overhead costs related to consulting,
training and other professional services personnel, including
cost of services provided by third-party consultants engaged by
the Company.
Advertising
Costs
The Company expenses advertising costs in the period incurred.
Advertising expense was $29,000, $53,000, and $117,000 for 2009,
2008 and 2007, respectively.
Net
Loss Per Share
Basic net loss per share is calculated by dividing net loss for
the period by the weighted average common shares outstanding
during the period, less shares subject to repurchase. Diluted
net loss per share is calculated by dividing the net loss for
the period by the weighted average common shares outstanding,
adjusted for all dilutive potential common shares, which
includes shares issuable upon the exercise of outstanding common
stock options, the release of restricted stock, and purchases of
employee stock purchase plan (ESPP) shares to the extent these
shares are dilutive. For 2009, 2008 and 2007, the diluted net
loss per share calculation was the same as the basic net loss
per share calculation as all potential common shares were
anti-dilutive.
Diluted net loss per share does not include the effect of the
following potential weighted average common shares because to do
so would be anti-dilutive for the periods presented (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Restricted stock
|
|
|
957
|
|
|
|
1,101
|
|
|
|
115
|
|
Stock options
|
|
|
6,639
|
|
|
|
6,710
|
|
|
|
8,109
|
|
ESPP
|
|
|
359
|
|
|
|
297
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
|
7,955
|
|
|
|
8,108
|
|
|
|
8,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average exercise price of stock options excluded
for 2009, 2008 and 2007 was $4.70, $5.13 and $4.99, respectively.
Comprehensive
Income
Comprehensive income is the total of net income, unrealized
gains and losses on investments and foreign currency translation
adjustments. Unrealized gains and losses on investments and
foreign currency translation adjustment amounts are excluded
from net loss and are reported in accumulated other
comprehensive income in the accompanying consolidated financial
statements.
The following table sets forth the components of accumulated
other comprehensive income as of December 31, 2009 and 2008
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Unrealized gain on
available-for-sale
securities
|
|
|
141
|
|
|
|
12
|
|
Cumulative foreign currency translation gains
|
|
|
255
|
|
|
|
109
|
|
Unrealized loss on adoption of new accounting standards (see
NOTE 5)
|
|
|
(152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
244
|
|
|
$
|
121
|
|
|
|
|
|
|
|
|
|
|
F-16
Recent
Accounting Pronouncements
In June 2009, the FASB issued the FASB Accounting Standards
Codification (the Codification) for financial
statements issued for interim and annual periods ending after
September 15, 2009, which was effective for us beginning in
the third quarter of fiscal 2009. The Codification became the
single authoritative source for GAAP. Accordingly, previous
references to GAAP accounting standards are no longer used in
our disclosures, including these Notes to the Consolidated
Financial Statements. The Codification does not affect our
consolidated financial position, cash flows, or results of
operations.
In May 2009, the FASB issued new standards for subsequent
events, which establishes general standards of accounting for
and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to
be issued. The new standards are effective for interim and
annual reporting periods ending after June 15, 2009. The
Company adopted the new standards during the second quarter of
fiscal 2009 and, as the pronouncement only requires additional
disclosures, the adoption did not have an impact on our
consolidated financial position, results of operations or cash
flows.
In April 2009, the FASB issued new standards for the recognition
and measurement of
other-than-temporary
impairments for debt securities which replaced the pre-existing
intent and ability indicator. These new standards
specify that if the fair value of a debt security is less than
its amortized cost basis, an
other-than-temporary
impairment is triggered in circumstances where (1) an
entity has an intent to sell the security, (2) it is more
likely than not that the entity will be required to sell the
security before recovery of its amortized cost basis, or
(3) the entity does not expect to recover the entire
amortized cost basis of the security (that is, a credit loss
exists).
Other-than-temporary
impairments are separated into amounts representing credit
losses which are recognized in earnings and amounts related to
all other factors which are recognized in other comprehensive
income (loss). The Company adopted these standards in the second
quarter of fiscal 2009. See Note 5 Investments
for additional discussion.
In April 2009, the FASB issued new standards to enhance
consistency in financial reporting by increasing the frequency
of fair value disclosures. These new standards relate to fair
value disclosures for any financial instruments that are not
currently reflected on the balance sheet of companies at fair
value. Prior to issuing these standards, fair values of these
assets and liabilities were only disclosed once a year. These
new standards now require these disclosures on a quarterly
basis, providing qualitative and quantitative information about
fair value estimates for all those financial instruments not
measured on the balance sheet at fair value. The Company adopted
these standards in the second quarter of 2009 and the adoption
did not have an impact on our condensed consolidated financial
statements.
In April 2009, the FASB issued new standards which provide
guidance on how to determine the fair value of assets and
liabilities when the volume and level of activity for the asset
or liability has significantly decreased. These new standards
also provide guidance on identifying circumstances that indicate
a transaction is not orderly. In addition, the Company is
required to disclose in interim as well as annual reporting
periods the inputs and valuation techniques used to measure fair
value and discussion of changes in valuation techniques. The
Company adopted these standards in the second quarter of fiscal
2009 and they did not have a material effect on our consolidated
financial position, results of operations or cash flows.
On November 27, 2007, the Companys Board of Directors
approved a cost savings program to reduce the Companys
workforce by approximately 8%. The Company recorded
restructuring charges of approximately $1.5 million in the
fourth quarter of 2007 and $0.4 million in the first
quarter of 2008, which were the total amounts incurred in
connection with severance and termination-related costs, most of
which were severance-related cash expenditures. The cost savings
program was completed in the first quarter of 2008.
During 2008, management approved and initiated plans to
restructure certain operations by reducing the Companys
workforce to eliminate redundant costs resulting from the
acquisition made at the beginning of the year (see Note 3
below) and improve efficiencies in operations. The Company
incurred restructuring charges of $1.6 million in 2008 and
$0.2 million in the first quarter of 2009 in connection
with severance and termination-
F-17
related costs, most of which are severance-related cash
expenditures. These cost savings program was substantially
completed during 2008 and was fully completed in the first half
of 2009.
In 2009, management approved additional cost savings programs to
further reduce the Companys workforce. The Company
incurred restructuring charges of $3.0 million in 2009 in
connection with severance and termination related costs, most of
which are severance related cash expenditures. The 2009 cost
saving programs were substantially completed during 2009.
Total costs for all programs approved to date of
$6.1 million include restructuring charges of
$1.5 million in 2007, $1.6 million in 2008, and
$3.0 million in 2009.
The following table sets forth a summary of accrued
restructuring charges for 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Cash
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Payments
|
|
|
Additions
|
|
|
Adjustments
|
|
|
2009
|
|
|
Severance and termination-related costs
|
|
$
|
810
|
|
|
$
|
(3,657
|
)
|
|
$
|
3,047
|
|
|
$
|
(54
|
)
|
|
$
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued restructuring charges
|
|
$
|
810
|
|
|
$
|
(3,657
|
)
|
|
$
|
3,047
|
|
|
$
|
(54
|
)
|
|
$
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
Non-Acquisition
|
|
|
|
|
|
|
December 31,
|
|
|
Cash
|
|
|
Related
|
|
|
Related
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Payments
|
|
|
Additions
|
|
|
Additions
|
|
|
2008
|
|
|
Severance and termination related costs
|
|
$
|
972
|
|
|
$
|
(1,498
|
)
|
|
$
|
58
|
|
|
$
|
1,278
|
|
|
$
|
810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued restructuring charges
|
|
$
|
972
|
|
|
$
|
(1,498
|
)
|
|
$
|
58
|
|
|
$
|
1,278
|
|
|
$
|
810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company did not have any acquisitions in the year ended
December 31, 2009.
In 2008, the Company acquired Compensation Technologies LLC
(CT) and Compensation Management Services LLC
(CMS). CT provides business process redesign
support, business analytics solutions, business case development
and compensation administration management while CMS provides
software-as-a-service to a number of customers. The acquisition
of CT and CMS provided the Company with additional customers,
experienced management and employee resources and augmented the
Companys portfolio of service offerings.
The acquisition has been accounted for under the purchase method
of accounting. Assets acquired and liabilities assumed were
recorded at their estimated fair values as of January 14,
2008. The results of operations of CT and CMS since
January 14, 2008 were included in the Companys
consolidated statement of operations. The acquisition was not
material to the Companys consolidated balance sheet and
results of operations.
F-18
The total purchase price for CT and CMS, which was an all cash
transaction and includes the $1.9 million contingent
payment discussed below, was approximately $10.4 million
and is comprised of the following (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
971
|
|
Accounts receivable
|
|
|
4,035
|
|
Prepaid expenses and other current assets
|
|
|
221
|
|
Fixed assets
|
|
|
329
|
|
Other assets
|
|
|
15
|
|
Accounts payable and other accrued liabilities
|
|
|
(2,883
|
)
|
Deferred revenue
|
|
|
(206
|
)
|
Lease liability
|
|
|
(540
|
)
|
Accrued restructuring
|
|
|
(58
|
)
|
Notes payable
|
|
|
(668
|
)
|
Goodwill
|
|
|
5,655
|
|
Intangible assets (see Note 4)
|
|
|
3,500
|
|
|
|
|
|
|
Total Purchase Price
|
|
$
|
10,371
|
|
|
|
|
|
|
The initial purchase price was allocated to the assets and
liabilities acquired, including identifiable intangible assets,
based on their respective estimated fair values at the
acquisition date and resulted in excess purchase consideration
over the net tangible assets and identifiable intangible assets
acquired of $3.7 million.
The acquisition included contingent payments of up to
$4.8 million that were not accounted for in the initial
purchase price as of the acquisition date. The contingent
payments include $1.9 million that was paid on
December 31, 2008 to all of the former shareholders of CT
and CMS in proportion to their ownership based on achievement of
a retention objective. Based on the Companys evaluation of
accounting for contingent consideration paid to the shareholders
of an acquired enterprise in a purchase business combination,
the contingent payment of $1.9 million was accounted for in
the total purchase price of $10.4 million. The contingent
consideration led to an increase in goodwill when the
contingency was resolved on December 31, 2008.
Goodwill of $5.7 million, representing the excess of the
purchase price over the estimated fair value of tangible and
identifiable intangible assets acquired in the acquisition, will
not be amortized, but is instead tested for impairment at least
annually, consistent with the accounting guidance for goodwill
and other intangible assets. The $5.7 million of goodwill
is expected to be deductible for tax purposes. In addition, a
portion of the purchase price was allocated to the following
identifiable intangible assets (in thousands, except years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Useful Lives
|
|
|
|
Purchase Price
|
|
|
in Years
|
|
|
Customer Backlog
|
|
$
|
1,500
|
|
|
|
1.00
|
|
Customer Relationships
|
|
|
2,000
|
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,500
|
|
|
|
2.71
|
|
|
|
|
|
|
|
|
|
|
Customer backlog and relationships represent the underlying
customer support contracts and related relationships with CT and
CMSs existing customers.
|
|
Note 4
|
Goodwill
and Intangible Assets
|
Goodwill as of December 31, 2009 and 2008 was
$5.5 million and $5.7 million, respectively. The
change is due to an adjustment to the previous estimates for the
lease liability valuation associated with the CT acquisition as
a result of actual operating costs.
F-19
Intangible assets consisted of the following as of
December 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Period
|
|
|
|
2008
|
|
|
2008
|
|
|
|
|
|
Amortization
|
|
|
2009
|
|
|
Remaining
|
|
|
|
Cost
|
|
|
Net
|
|
|
Additions
|
|
|
Expense
|
|
|
Net
|
|
|
(Years)
|
|
|
Purchased technology
|
|
$
|
3,579
|
|
|
$
|
1,624
|
|
|
$
|
1,843
|
|
|
$
|
(1,495
|
)
|
|
$
|
1,972
|
|
|
|
1.62
|
|
Customer backlog
|
|
|
1,500
|
|
|
|
63
|
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
0.00
|
|
Customer relationships
|
|
|
2,000
|
|
|
|
1,521
|
|
|
|
|
|
|
|
(500
|
)
|
|
|
1,021
|
|
|
|
2.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
7,079
|
|
|
$
|
3,208
|
|
|
$
|
1,843
|
|
|
$
|
(2,058
|
)
|
|
$
|
2,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
Amortization
|
|
|
2008
|
|
|
|
Cost
|
|
|
Net
|
|
|
Additions
|
|
|
Expense
|
|
|
Net
|
|
|
Purchased technology
|
|
$
|
3,318
|
|
|
$
|
2,333
|
|
|
$
|
261
|
|
|
$
|
(970
|
)
|
|
$
|
1,624
|
|
Customer backlog
|
|
|
|
|
|
|
|
|
|
|
1,500
|
|
|
|
(1,437
|
)
|
|
|
63
|
|
Customer relationships
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
(479
|
)
|
|
|
1,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
$
|
3,318
|
|
|
$
|
2,333
|
|
|
$
|
3,761
|
|
|
$
|
(2,886
|
)
|
|
$
|
3,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets include third-party software licenses used in
our products and acquired assets related to the CT acquisition.
Costs incurred to renew or extend the term of a recognized
intangible asset are expensed in the period incurred. The
$1.8 million added in 2009 is for purchases of third-party
software licenses used in our products. Amortization expense
related to intangible assets was $2.1 million,
$2.9 million and $0.5 million in 2009, 2008 and 2007,
respectively, and was charged to cost of revenues for purchased
technology and customer backlog and sales and marketing expense
for customer relationships. The Companys intangible assets
are amortized over their estimated useful lives of one to five
years. Total future expected amortization is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
Customer
|
|
|
|
Technology
|
|
|
Relationships
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
1,241
|
|
|
$
|
500
|
|
2011
|
|
|
525
|
|
|
|
500
|
|
2012
|
|
|
206
|
|
|
|
21
|
|
2013
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
2015 and beyond
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expected amortization expense
|
|
$
|
1,972
|
|
|
$
|
1,021
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 5
|
Financial Instruments
|
The Company classifies debt and marketable equity securities
based on the liquidity of the investment and managements
intention on the date of purchase and re-evaluates such
designation as of each balance sheet date. Except for certain
auction rate securities that are classified as trading, debt and
marketable equity securities are classified as available for
sale and carried at estimated fair value, which is determined
based on the inputs discussed below. Those securities that are
classified as trading are designated as short-term investments
due to a contractual agreement that allows the Company to sell
the securities at par value beginning June 30, 2010. The
total estimated fair value of such trading securities at
December 31, 2009 was $3.6 million, which includes
losses on investments of $0.1 million as compared to par
value.
The Company considers all highly liquid instruments with an
original maturity on the date of purchase of three months or
less to be cash equivalents. The Company considers all
investments that are available for sale that have a
F-20
maturity date of longer than three months to be short-term
investments, including those investments with a maturity date of
longer than one year that are highly liquid and for which the
Company does not have a positive intent to hold to maturity. The
auction rate security classified as available for sale is
designated as a long-term investment due to the maturity date
being longer than one year and the security not being liquid in
the current market.
Interest is included in interest and other income, net, in the
accompanying consolidated financial statements. Realized gains
and losses are calculated using the specific identification
method. The components of the Companys debt and marketable
equity securities classified as
available-for-sale
were as follows for December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Than Temporary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment
|
|
|
Gain (Loss) on
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unrealized
|
|
|
Recorded in
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses in Other
|
|
|
Other
|
|
|
Recorded in the
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Comprehensive
|
|
|
Comprehensive
|
|
|
Statement of
|
|
|
Estimated
|
|
December 31, 2009
|
|
Cost
|
|
|
Gains
|
|
|
Income (Loss)
|
|
|
Income (Loss)
|
|
|
Operations
|
|
|
Fair Value
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposits
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
720
|
|
Corporate notes and obligations
|
|
|
5,957
|
|
|
|
11
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
5,962
|
|
U.S. government and agency obligations
|
|
|
11,747
|
|
|
|
8
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
11,738
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities classified as available for sale
|
|
|
900
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in debt and equity securities
|
|
$
|
19,324
|
|
|
$
|
19
|
|
|
$
|
(31
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For investments in securities classified as
available-for-sale,
market value and the amortized cost of debt securities have been
classified in accordance with the following maturity groupings
based on the contractual maturities of those securities as of
December 31, 2009 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
Contratual maturity
|
|
Amortized Cost
|
|
|
Value
|
|
|
Less than 1 year
|
|
|
8,614
|
|
|
|
8,610
|
|
1-2 years
|
|
|
9,810
|
|
|
|
9,810
|
|
More than 2 years
|
|
|
900
|
|
|
|
892
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,324
|
|
|
|
19,312
|
|
|
|
|
|
|
|
|
|
|
The components of the Companys debt and marketable equity
securities classified as
available-for-sale
were as follows for December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recorded in the
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Statement of
|
|
|
Estimated
|
|
December 31, 2008
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Operations
|
|
|
Fair Value
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes and obligations
|
|
|
1,445
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
1,455
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate securities classified as available for sale
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
(153
|
)
|
|
|
747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in debt and equity securities
|
|
$
|
2,345
|
|
|
$
|
10
|
|
|
$
|
|
|
|
$
|
(153
|
)
|
|
$
|
2,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
For investments in securities classified as
available-for-sale,
market value and the amortized cost of debt securities have been
classified in accordance with the following maturity groupings
based on the contractual maturities of those securities as of
December 31, 2008 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair
|
|
Contratual maturity
|
|
Amortized Cost
|
|
|
Value
|
|
|
Less than 1 year
|
|
|
1,445
|
|
|
|
1,455
|
|
1-2 years
|
|
|
|
|
|
|
|
|
More than 2 years
|
|
|
900
|
|
|
|
747
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,345
|
|
|
|
2,202
|
|
|
|
|
|
|
|
|
|
|
The Company had no realized gains or losses on the sales of
investments in 2009. The Company had no realized gains and
realized losses on sales of investments of $22,000 in 2008.
There were no realized gains or losses on the sales of
investments in 2007. The Company had proceeds of
$11.7 million from maturities and sales of investments for
2009. All proceeds from sales and maturities of investments were
equal to the par value of the securities.
The Company measures financial assets at fair value on a
recurring basis. The estimated fair value of the Companys
financial assets was determined using the following inputs at
December 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Other Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
December 31, 2009
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Money market funds(1)
|
|
$
|
6,644
|
|
|
$
|
6,644
|
|
|
$
|
|
|
|
$
|
|
|
U.S. treasury bills(2)
|
|
|
5,043
|
|
|
|
5,043
|
|
|
|
|
|
|
|
|
|
Certificate of deposits(2)
|
|
|
720
|
|
|
|
|
|
|
|
720
|
|
|
|
|
|
Corporate notes and obligations(2)
|
|
|
5,962
|
|
|
|
|
|
|
|
5,962
|
|
|
|
|
|
U.S. government agency obligations(2)
|
|
|
6,695
|
|
|
|
|
|
|
|
6,695
|
|
|
|
|
|
Auction-rate securities(2),(3)
|
|
|
4,458
|
|
|
|
|
|
|
|
|
|
|
|
4,458
|
|
Asset associated with put option(4)
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
Warrants(5)
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
Publicly traded securities(5)
|
|
|
225
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,874
|
|
|
$
|
11,912
|
|
|
$
|
13,377
|
|
|
$
|
4,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in cash and cash equivalents on the consolidated
balance sheet. |
|
(2) |
|
Except as indicated in (3), included in short-term investments
on the consolidated balance sheet. |
|
(3) |
|
$892K included in long-term investments on the consolidated
balance sheet. |
|
(4) |
|
Included in prepaid and other current assets on the consolidated
balance sheet. |
|
(5) |
|
Included in long-term investments on the consolidated balance
sheet. |
F-22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Other Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
December 31, 2008
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Money market funds(1)
|
|
$
|
27,202
|
|
|
$
|
27,202
|
|
|
$
|
|
|
|
$
|
|
|
Auction rate securities(2)
|
|
|
3,828
|
|
|
|
|
|
|
|
|
|
|
|
3,828
|
|
Corporate notes and obligations(3)
|
|
|
1,455
|
|
|
|
|
|
|
|
1,455
|
|
|
|
|
|
Asset associated with put option(4)
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
|
492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,977
|
|
|
$
|
27,202
|
|
|
$
|
1,455
|
|
|
$
|
4,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in cash and cash equivalents on the consolidated
balance sheet. |
|
(2) |
|
Included in long-term investments on the consolidated balance
sheet. |
|
(3) |
|
Included in short-term investments on the consolidated balance
sheet. |
|
(4) |
|
Included in deposits and other assets on the consolidated
balance sheet. |
The table below presents the changes during the period related
to balances measured using significant unobservable inputs
(Level 3) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss)
|
|
|
|
|
|
Adjustment
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Recorded in
|
|
|
|
|
|
as a Result
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
|
|
|
Statement of
|
|
|
Unrealized
|
|
|
of Adopting
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Addition
|
|
|
Operations
|
|
|
Gain (Loss)
|
|
|
ASC 320-10-65-1
|
|
|
2009
|
|
|
Auction rate securities classified as trading
|
|
$
|
3,081
|
|
|
$
|
|
|
|
$
|
485
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,566
|
|
Auction rate securities classified as available for sale
|
|
|
747
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
153
|
|
|
|
892
|
|
Asset associated with put option
|
|
|
492
|
|
|
|
|
|
|
|
(390
|
)
|
|
|
|
|
|
|
|
|
|
|
102
|
|
Warrants
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,320
|
|
|
$
|
25
|
|
|
$
|
95
|
|
|
$
|
(8
|
)
|
|
$
|
153
|
|
|
$
|
4,585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation of Investments, Put Option and Warrants
Level 1
and Level 2
The Companys
available-for-sale
securities include certificate of deposits, corporate notes and
obligations, and U.S. government and agency obligations at
December 31, 2009 and corporate notes and obligations at
December 31, 2008. The Company values these securities
using a pricing matrix from a reputable pricing service, who may
use quoted prices in active markets for identical assets
(Level 1 inputs) or inputs other than quoted prices that
observable either directly or indirectly (Level 2 inputs).
However, the Company classifies all its
available-for-sale
securities, except for certain auction rated securities, as
having Level 2 inputs. The Company validates the estimated
fair value received from the reputable pricing service on a
quarterly basis.
In December 2009, the Company executed a Subscription
Agreement for Units (the Agreement) with
ForceLogix Technologies, Inc. (ForceLogix).
ForceLogix is a Canada-based public company that delivers
on-demand sales management process optimization solutions for
sales organizations. Pursuant to the Agreement, the Company
purchased 2,639,000 units of ForceLogix for an aggregate of
$250,000. Each unit consists of one common share and three
quarters (3/4) of one common share purchase warrant of
ForceLogix. The Company owns approximately 5% of the outstanding
common shares of ForceLogix as of December 31, 2009 and
does not have the ability to exercise significant influence. The
Company valued the investment in the common stock using
observable inputs (Level 1 inputs) and the related warrants
using unobservable inputs (Level 3 inputs).
F-23
Level 3
The Company valued its auction rate securities using
unobservable inputs (Level 3). The Company utilized the
income approach applying assumptions for interest rates using
current market trends and an estimated term based on
expectations from brokers for liquidity in the market and
redemption periods agreed to by other broker-dealers. The
Company also applied an adjustment for the lack of liquidity to
the value determined by the income approach utilizing a put
option model. As a result of the valuation assessment, the
Company recorded a gain on auction rate securities classified as
trading securities of $484,000 for 2009 and an unrealized gain
on auction rate securities classified as available for sale of
$144,000 for 2009. As a result of the adoption of recognition
and presentation of
other-than-temporary
impairments accounting guidance, the Company recorded a
cumulative effect adjustment of $0.2 million to increase
the second quarter 2009 beginning unrealized loss on auction
rate securities classified as available for sale and to decrease
the second quarter 2009 beginning accumulated deficit. See
further discussion below.
In connection with certain of the auction rate securities, in
October 2008, one financial institution where the Company holds
auction rate securities issued certain put option rights to the
Company, which entitles the Company to sell its auction rate
securities to the financial institution for a price equal to the
par value plus any accrued and unpaid interest. These rights to
sell the securities are exercisable at any time during the
period from June 30, 2010 to July 2, 2012, after which
the rights will expire. As a result of the valuation assessment,
the Company recorded a loss on the put option of
$0.4 million 2009. The auction rate securities to which the
put option applies were recorded as short-term investments and
the asset associated with the put option was recorded as prepaid
and other current assets as of December 31, 2009, as the
put may be exercised beginning June 30, 2010. These auction
rate securities were recorded as long-term investments and the
asset associated with the put option was recorded as deposits
and other assets on the consolidated balance sheets as of
December 31, 2008.
The Company valued the ForceLogix warrants using the
Black-Scholes-Merton option pricing model. At December 31,
2009, the fair value of the warrants is insignificant.
Adoption
of Recognition and Presentation of
Other-Than-Temporary
Impairments Guidance
In the second quarter of 2009, the Company reclassified a
cumulative effect adjustment of $0.2 million to increase
the second quarter 2009 beginning unrealized loss on investments
and decrease the second quarter 2009 beginning accumulated
deficit. This adjustment to beginning accumulated other
comprehensive loss reclassifies the impairment previously
recognized in 2008 as the Company does not intend to sell its
auction rate security and it is not more-likely-than-not that
the Company will be required to sell that security before
recovery. The cumulative effect adjustment relates to the
Companys one auction rate security classified as available
for sale with an estimated fair value of $0.9 million, and
was measured based on the discounted cash flows as of
April 1, 2009.
Changes in value of the Companys auction rate securities
since June 30, 2009 were allocated between credit loss
factors and other factors. The Company considered the following
factors when determining credit loss:
|
|
|
|
|
Adverse conditions specifically related to the security,
industry, or geographic area (i.e., financial condition of the
issuer, financial condition of the underlying assets, changes to
the underlying business, and changes in the quality of the
underlying assets);
|
|
|
|
the historical and implied volatility of the security;
|
|
|
|
the payment structure of the debt security (i.e., the
increased/decreased probability of repayment);
|
|
|
|
failure of the issuer to make payments or default on obligations;
|
|
|
|
changes to the rating of the security; and
|
|
|
|
declines in value of the underlying assets.
|
As the Company concluded that there was no
other-than-temporary-impairment
as of December 31, 2008 when using the modified definitions
in the recognition and presentation of
other-than-temporary
impairments guidance, the Company recorded the full impairment
as an adjustment to opening accumulated deficit. In addition,
the Company evaluated the credit loss and determined it was
immaterial.
F-24
|
|
Note 6
|
Property
and Equipment, Net
|
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Equipment
|
|
$
|
10,428
|
|
|
$
|
10,003
|
|
Purchased software
|
|
|
7,790
|
|
|
|
6,317
|
|
Furniture and fixtures
|
|
|
1,916
|
|
|
|
1,912
|
|
Leasehold improvements
|
|
|
1,714
|
|
|
|
1,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,848
|
|
|
|
19,998
|
|
Less accumulated depreciation and amortization
|
|
|
17,493
|
|
|
|
15,108
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
4,355
|
|
|
$
|
4,890
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for 2009, 2008 and 2007
was $2.8 million, $2.5 million and $1.9 million,
respectively. Included in depreciation and amortization expense
was amortization of purchased software, which totaled
$1.2 million, $0.9 million, and $0.7 million for
2009, 2008 and 2007, respectively.
|
|
Note 7
|
Commitments
and Contingencies
|
Contingencies
The Company is from time to time a party to various litigation
matters and customer disputes incidental to the conduct of its
business. At the present time, the Company believes that none of
these matters is likely to have a material adverse effect on the
Companys future financial results.
The Company records a liability when it is both probable that a
liability has been incurred and the amount of the loss can be
reasonably estimated. The Company reviews the need for any such
liability on a quarterly basis and records any necessary
adjustments to reflect the effect of ongoing negotiations,
contract disputes, settlements, rulings, advice of legal
counsel, and other information and events pertaining to a
particular case in the period they become known. At
December 31, 2009, the Company has not recorded any such
liabilities in accordance with accounting for contingencies. The
Company believes that it has valid defenses with respect to the
legal matters pending against the Company and that the
probability of a loss under such matters is not probable.
Other
Contingencies
The Company generally warrants that its products shall perform
to its standard documentation. Under the Companys standard
warranty, should a product not perform as specified in the
documentation within the warranty period, the Company will
repair or replace the product or refund the license fee paid.
Such warranties are accounted for in accordance with accounting
for contingencies. To date, the Company has not incurred any
costs related to warranty obligations for its software product.
The Companys product license and on-demand agreements
typically include a limited indemnification provision for claims
by third parties relating to the Companys intellectual
property. Such indemnification provisions are accounted for in
accordance with guarantors accounting and disclosure
requirements for guarantees, including indirect guarantees of
indebtedness of others. To date, the Company has not incurred
and therefore has not accrued for any costs related to such
indemnification provisions.
Commitments
The Company leases its facilities under several non-cancelable
operating lease agreements that expire at various dates through
2016. For leases with escalating rent payments, rent expense is
amortized on a straight-line basis over the life of the lease.
The Company had deferred rent related to leases with such
escalating payments of $351,000 and $482,000 as of
December 31, 2009 and 2008, respectively. Rent expense for
2009, 2008 and 2007 was $2.9 million, $3.0 million and
$2.8 million, respectively. In addition, the Company, in
the normal course of business, enters into unconditional
purchase commitments for supplies and services.
F-25
For each of the next five years and beyond, noncancelable
long-term operating lease obligations and unconditional purchase
commitments are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Operating Lease
|
|
|
Unconditional
|
|
|
|
Commitments
|
|
|
Purchase Commitments
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
2,112
|
|
|
$
|
1,803
|
|
2011
|
|
|
985
|
|
|
|
667
|
|
2012
|
|
|
316
|
|
|
|
102
|
|
2013
|
|
|
201
|
|
|
|
|
|
2014
|
|
|
166
|
|
|
|
|
|
2015 and beyond
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future minimum payments
|
|
$
|
3,994
|
|
|
$
|
2,572
|
|
|
|
|
|
|
|
|
|
|
Included in prepaid and other current assets and deposits and
other assets in the consolidated balance sheets at
December 31, 2009 and 2008 is restricted cash of $232,000
and $434,000, respectively, related to security deposits on
leased facilities for our New York, New York and San Jose,
California offices. The restricted cash represents investments
in certificates of deposit and secured letters of credit
required by landlords to meet security deposit requirements for
the leased facilities. Restricted cash is included in either
prepaid and other current assets or deposits and other assets
based on the remaining contractual term for the release of the
restriction.
|
|
Note 8
|
Stock-Based
Compensation
|
Expense
Summary
Stock-based compensation expense of $4.3 million was
recorded for 2009 in the consolidated statement of operations.
Of the total stock-based compensation expense, approximately
$1.6 million was related to stock options,
$0.8 million was related to purchases of common stock under
the ESPP, and $1.9 million was related to restricted stock
units. For 2008, $7.7 million of stock-based compensation
expense was recorded. Of the total stock-based compensation
expense, approximately $2.4 million was related to stock
options, $1.0 million was related to purchases of common
stock under the ESPP, and $4.3 million was related to
restricted stock units. For 2007, $5.0 million of
stock-based compensation expense was recorded. Of the total
stock-based compensation expense, approximately
$3.8 million was related to stock options,
$0.8 million was related to purchases of common stock under
the ESPP, and $0.4 million was related to restricted stock
units.
As of December 31, 2009, there was $4.1 million,
$3.3 million and $0.1 million of total unrecognized
compensation expense related to stock options, restricted stock
units and the ESPP, respectively. This expense related to stock
options, restricted stock units and the ESPP is expected to be
recognized over a weighted average period of 2.64 years,
1.86 years and 0.30 years, respectively.
The table below sets forth the functional classification of
stock-based compensation expense for 2009, 2008 and 2007 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of recurring revenues
|
|
$
|
471
|
|
|
$
|
692
|
|
|
$
|
250
|
|
Cost of services revenues
|
|
|
574
|
|
|
|
1,263
|
|
|
|
838
|
|
Sales and marketing
|
|
|
1,019
|
|
|
|
1,861
|
|
|
|
1,162
|
|
Research and development
|
|
|
736
|
|
|
|
1,169
|
|
|
|
995
|
|
General and administrative
|
|
|
1,524
|
|
|
|
2,711
|
|
|
|
1,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
4,324
|
|
|
$
|
7,696
|
|
|
$
|
4,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
Determination
of Fair Value
The fair value of each restricted stock unit is estimated based
on the market value of the Companys stock on the date of
grant. The fair value of each option award is estimated on the
date of grant and the fair value of the ESPP is estimated on the
beginning date of the offering period using the
Black-Scholes-Merton valuation model and the assumptions noted
in the following table.
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Stock Option Plans
|
|
|
|
|
|
|
Expected life (in years)
|
|
0.50 to 3.50
|
|
2.50 to 3.50
|
|
2.50 to 3.50
|
Risk-free interest rate
|
|
1.02% to 1.84%
|
|
1.27% to 2.58%
|
|
3.40% to 5.00%
|
Volatility
|
|
63% to 106.13%
|
|
42% to 61%
|
|
39% to 54%
|
Dividend Yield
|
|
|
|
|
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
|
Expected life (in years)
|
|
0.50 to 1.00
|
|
0.50 to 1.00
|
|
0.49 to 1.00
|
Risk-free interest rate
|
|
0.27% to 0.62%
|
|
1.97% to 2.18%
|
|
4.47% to 5.16%
|
Volatility
|
|
68% to 126%
|
|
48% to 61%
|
|
30% to 37%
|
Dividend Yield
|
|
|
|
|
|
|
Stockholder-Approved
Stock Option and Incentive Plans
The Company has two stock option and incentive plans approved by
stockholders, the 1997 Stock Option Plan and the 2003 Stock
Incentive Plan.
The incentive and nonstatutory options to purchase the
Companys common stock granted to employees under the 1997
Stock Option Plan generally vest over 4 years with a
contractual term of 10 years. The vesting period generally
equals the requisite service period of the individual grantees.
Since the Companys initial public offering, no options to
purchase shares under the 1997 Stock Option Plan have been
granted and all shares that remained available for future grant
under this plan became available for issuance under the 2003
Stock Incentive Plan, as described below.
The 2003 Stock Incentive Plan became effective upon the
completion of the Companys initial public offering in
November 2003. As of December 31, 2009, the Company was
authorized to issue approximately 10,050,161 shares of
common stock under the plan. Under the plan, the Companys
Board of Directors (or an authorized subcommittee) may grant
stock options or other types of stock-based awards, such as
restricted stock, restricted stock units, stock bonus awards or
stock appreciation rights. Incentive stock options may be
granted only to the Companys employees. Nonstatutory stock
options and other stock-based awards may be granted to
employees, consultants or non-employee directors. These options
vest as determined by the Board of Directors (or an authorized
subcommittee), generally over 4 years. Formerly, the
Companys Board of Directors had approved a contractual
term of 10 years, but effective April 24, 2006, the
Board of Directors approved a reduction of the contractual term
to 5 years for all future grants. The restricted stock
units also vest as determined by the Board, generally over
3 years. The vesting period generally equals the requisite
service period of the individual grantees. On July 1 of each
year, the aggregate number of shares reserved for issuance under
this plan increases automatically by a number of shares equal to
the lesser of (i) 5% of the Companys outstanding
shares, (ii) 2,800,000 shares, or (iii) a lesser
number of shares approved by the Board of Directors.
F-27
A summary of the Companys shares available for grant and
the status of options and awards under the 1997 Stock Option
Plan and the 2003 Stock Incentive Plan are as follows:
Shares Available
for Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Number of shares)
|
|
Beginning Available
|
|
|
2,744,965
|
|
|
|
2,280,248
|
|
|
|
2,398,987
|
|
Authorized
|
|
|
1,498,515
|
|
|
|
1,501,687
|
|
|
|
1,448,546
|
|
Granted
|
|
|
(1,729,600
|
)
|
|
|
(2,071,174
|
)
|
|
|
(2,469,150
|
)
|
Forfeited
|
|
|
422,663
|
|
|
|
719,950
|
|
|
|
868,466
|
|
Expired
|
|
|
572,533
|
|
|
|
314,254
|
|
|
|
33,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Available
|
|
|
3,509,076
|
|
|
|
2,744,965
|
|
|
|
2,280,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding as of December 31, 2006
|
|
|
6,452,905
|
|
|
$
|
4.47
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,055,150
|
|
|
|
7.36
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(797,424
|
)
|
|
|
3.02
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(868,466
|
)
|
|
|
5.51
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(33,399
|
)
|
|
|
9.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2007
|
|
|
6,808,766
|
|
|
$
|
5.36
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
872,624
|
|
|
|
4.58
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(755,132
|
)
|
|
|
3.29
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(719,950
|
)
|
|
|
5.72
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(314,254
|
)
|
|
|
10.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2008
|
|
|
5,892,054
|
|
|
$
|
5.18
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,068,998
|
|
|
|
2.81
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(103,537
|
)
|
|
|
1.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(422,663
|
)
|
|
|
4.80
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(572,533
|
)
|
|
|
5.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009
|
|
|
5,862,319
|
|
|
$
|
4.83
|
|
|
|
3.27
|
|
|
$
|
774,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest as of December 31, 2009
|
|
|
4,897,381
|
|
|
$
|
5.00
|
|
|
|
3.17
|
|
|
$
|
675,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2009
|
|
|
4,285,644
|
|
|
$
|
5.04
|
|
|
|
3.16
|
|
|
$
|
632,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-28
Restricted
Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Term (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Unreleased as of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
414,000
|
|
|
|
|
|
|
|
|
|
Released
|
|
|
(33,500
|
)
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(28,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unreleased as of December 31, 2007
|
|
|
352,092
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,198,550
|
|
|
|
|
|
|
|
|
|
Released
|
|
|
(287,680
|
)
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(121,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unreleased as of December 31, 2008
|
|
|
1,141,919
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
660,602
|
|
|
|
|
|
|
|
|
|
Released
|
|
|
(836,673
|
)
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(287,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unreleased as of December 31, 2009
|
|
|
678,766
|
|
|
|
0.98
|
|
|
$
|
2,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest as of December 31, 2009
|
|
|
598,804
|
|
|
|
0.91
|
|
|
$
|
1,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units are not considered outstanding at the
time of grant, as the holders of these units are not entitled to
dividends and voting rights. Unvested restricted stock units are
not considered outstanding in the computation of basic net loss
per share.
As of December 31, 2009, the range of exercise prices and
weighted average remaining contractual life of outstanding
options under the 1997 Stock Option Plan and the 2003 Stock
Incentive Plan are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of
|
|
Number of
|
|
|
Contractual Life
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Exercise Prices
|
|
Shares
|
|
|
(Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$0.84 - $2.62
|
|
|
690,849
|
|
|
|
3.45
|
|
|
$
|
1.93
|
|
|
|
372,444
|
|
|
$
|
1.36
|
|
$2.83 - $3.38
|
|
|
756,537
|
|
|
|
4.25
|
|
|
|
3.09
|
|
|
|
177,981
|
|
|
|
3.07
|
|
$3.45 - $3.80
|
|
|
643,991
|
|
|
|
3.89
|
|
|
|
3.68
|
|
|
|
643,991
|
|
|
|
3.68
|
|
$3.90 - $4.38
|
|
|
758,359
|
|
|
|
5.13
|
|
|
|
4.19
|
|
|
|
756,190
|
|
|
|
4.19
|
|
$4.44 - $4.69
|
|
|
790,409
|
|
|
|
2.53
|
|
|
|
4.64
|
|
|
|
703,877
|
|
|
|
4.63
|
|
$4.84 - $5.17
|
|
|
595,642
|
|
|
|
2.41
|
|
|
|
4.97
|
|
|
|
385,961
|
|
|
|
4.99
|
|
$5.28 - $6.26
|
|
|
601,207
|
|
|
|
2.53
|
|
|
|
6.15
|
|
|
|
398,628
|
|
|
|
6.11
|
|
$6.30 - $7.53
|
|
|
694,050
|
|
|
|
2.25
|
|
|
|
7.46
|
|
|
|
533,553
|
|
|
|
7.46
|
|
$7.73 - $15.36
|
|
|
331,125
|
|
|
|
1.93
|
|
|
|
10.75
|
|
|
|
312,869
|
|
|
|
10.87
|
|
$16.03 - $16.03
|
|
|
150
|
|
|
|
4.16
|
|
|
|
16.03
|
|
|
|
150
|
|
|
|
16.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.84 - $16.03
|
|
|
5,862,319
|
|
|
|
3.27
|
|
|
$
|
4.83
|
|
|
|
4,285,644
|
|
|
$
|
5.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair value of stock options and restricted
stock units granted during 2009 was $1.31 and $2.66 per share,
respectively. For 2008, the weighted-average fair value of stock
options and restricted stock units granted was $1.61 and $4.99
per share, respectively. For 2007, the weighted-average fair
value of stock options and restricted stock units granted was
$3.00 and $7.80 per share, respectively. The total intrinsic
value of stock options exercised was $0.2 million,
$1.4 million and $3.9 million for 2009, 2008 and 2007,
respectively. The total cash
F-29
received from employees as a result of stock option exercises
was $0.1 million, $2.5 million and $2.4 million
for 2009, 2008 and 2007, respectively.
Employee
Stock Purchase Plan
In August 2003, the Board of Directors adopted the Employee
Stock Purchase Plan (ESPP), which became effective upon the
completion of the Companys initial public offering and is
intended to qualify as an employee stock purchase
plan under Section 423 of the Internal Revenue Code.
The ESPP is designed to enable eligible employees to purchase
shares of the Companys common stock at a discount on a
periodic basis through payroll deductions. Each offering period
under the ESPP will be for 12 months and will consist of
two consecutive six-month purchase periods. The purchase price
for shares of common stock purchased under the ESPP will be 85%
of the lesser of the fair market value of the Companys
common stock on the first day of the applicable offering period
and the fair market value of the Companys common stock on
the last day of each purchase period. The Company issued
approximately 788,000 shares during 2009 under the ESPP.
The weighted-average fair value of stock purchase rights granted
under the ESPP during 2009 was $1.24 per share. During 2008, the
Company issued approximately 532,000 shares under the ESPP.
The weighted-average fair value of stock purchase rights granted
under the ESPP in 2008 was $1.74 per share. During 2007, the
weighted-average fair value of stock purchase rights granted
under the ESPP was $2.23 per share.
Other
Plan Awards
On May 31, 2005, the Company granted its former chief
executive officer, Robert H. Youngjohns, an option to purchase
1,000,000 shares of its common stock with an exercise price
of $3.45 per share, which was the fair market value of the
Companys common stock on the date of grant. The option had
a contractual term of 10 years and vested over four years,
with 25% of the shares subject to the option vesting on the
first anniversary of the grant date and 1/48th vesting
each month thereafter. The vesting period equals the requisite
service period of the grant. A summary of the status of this
option for 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term (Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding as of December 31, 2006
|
|
|
1,000,000
|
|
|
$
|
3.45
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(375,000
|
)
|
|
|
3.45
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2007
|
|
|
625,000
|
|
|
$
|
3.45
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2008
|
|
|
625,000
|
|
|
$
|
3.45
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009
|
|
|
625,000
|
|
|
$
|
3.45
|
|
|
|
5.41
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and Expected to Vest as of December 31, 2009
|
|
|
625,000
|
|
|
$
|
3.45
|
|
|
|
5.41
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of December 31, 2009
|
|
|
625,000
|
|
|
$
|
3.45
|
|
|
|
5.41
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
The agreements granting both the 28,000 shares of
restricted stock and the option to purchase
1,000,000 shares were approved by the Companys
Compensation Committee, which is made up entirely of independent
directors. Upon his resignation as chief executive officer on
November 30, 2007, Mr. Youngjohns unvested
shares terminated. As a continuing member of the Companys
Board of Directors, his vested shares did not terminate.
|
|
Note 9
|
Stockholders Equity
|
Convertible
Preferred Stock
Upon completion of the Companys initial public offering,
the Company amended its certificate of incorporation and
authorized 5,000,000 shares of undesignated preferred stock
with a par value of $0.001. None of these shares were
outstanding as of December 31, 2009 or 2008.
Repurchase
Program
On November 27, 2007, the Companys Board of Directors
authorized a one-year program for the repurchase of up to
$10 million of the Companys outstanding common stock.
On October 21, 2008, the Companys Board of Directors
re-authorized the program for the repurchase of up to
$5 million of its outstanding common stock, which
represented the unused balance of the program initially approved
in 2007. During 2008 under these repurchase programs the Company
executed the repurchase of 1,994,000 shares for a total
cost of approximately $8.0 million. During 2009 under these
repurchase programs the Company executed the repurchase of
248,000 shares for a total cost of approximately
$0.7 million. The repurchased shares have been
constructively retired for accounting purposes. The
Companys Board of Directors suspended the repurchase
program in the first quarter of 2009.
The following is a geographical breakdown of consolidated loss
before income taxes by income tax jurisdiction (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
United States
|
|
$
|
(17,815
|
)
|
|
$
|
(14,003
|
)
|
|
$
|
(14,317
|
)
|
Foreign
|
|
|
239
|
|
|
|
334
|
|
|
|
846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(17,576
|
)
|
|
$
|
(13,669
|
)
|
|
$
|
(13,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision (benefit) for income taxes for 2009, 2008 and 2007
consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(195
|
)
|
|
$
|
(198
|
)
|
|
$
|
(50
|
)
|
State
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Foreign
|
|
|
373
|
|
|
|
363
|
|
|
|
210
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
130
|
|
|
|
98
|
|
|
|
|
|
State
|
|
|
18
|
|
|
|
15
|
|
|
|
|
|
Foreign
|
|
|
51
|
|
|
|
(117
|
)
|
|
|
(513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
$
|
377
|
|
|
$
|
161
|
|
|
$
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
The provision (benefit) for income taxes differs from the
expected tax benefit computed by applying the statutory federal
income tax rates to consolidated loss before income taxes as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Federal tax at statutory rate
|
|
$
|
(5,976
|
)
|
|
$
|
(4,648
|
)
|
|
$
|
(4,346
|
)
|
State taxes, net of federal benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-deductible expenses
|
|
|
1,244
|
|
|
|
603
|
|
|
|
(72
|
)
|
Foreign taxes
|
|
|
378
|
|
|
|
177
|
|
|
|
(303
|
)
|
Current year net operating losses and other deferred tax
|
|
|
|
|
|
|
|
|
|
|
|
|
assets for which no benefit has been recognized
|
|
|
5,037
|
|
|
|
4,424
|
|
|
|
4,418
|
|
Refundable R&D credit in lieu of bonus depreciation
|
|
|
(196
|
)
|
|
|
(198
|
)
|
|
|
|
|
Other
|
|
|
(110
|
)
|
|
|
(197
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes
|
|
$
|
377
|
|
|
$
|
161
|
|
|
$
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amount used
for income tax purposes. Net deferred tax assets consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards and deferred
start-up
costs
|
|
$
|
27,574
|
|
|
$
|
22,178
|
|
Property and equipment
|
|
|
1,423
|
|
|
|
599
|
|
Accrued expenses and 481(a)
|
|
|
10
|
|
|
|
1,432
|
|
Purchased technology
|
|
|
372
|
|
|
|
426
|
|
Unrealized gain/loss on investments
|
|
|
781
|
|
|
|
581
|
|
Research and experimentation credit carryforwards
|
|
|
8,639
|
|
|
|
8,278
|
|
Capitalized research and experimentation costs
|
|
|
21,478
|
|
|
|
20,578
|
|
Deferred stock compensation
|
|
|
3,616
|
|
|
|
4,249
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
63,893
|
|
|
|
58,321
|
|
Less valuation allowance
|
|
|
(63,435
|
)
|
|
|
(57,853
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
458
|
|
|
|
468
|
|
Deferred tax liability
|
|
|
(262
|
)
|
|
|
(113
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
196
|
|
|
$
|
355
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Based on
the level of historical taxable income and projections for
future taxable income over the period in which the temporary
differences are deductible, the Company has recorded a valuation
allowance against the deferred tax assets for which it believes
it is not more likely than not to be realized. As of
December 31, 2009, a valuation allowance has been recorded
on all deferred tax assets, except the deferred tax assets
related to one of its foreign subsidiaries, based on the
analysis of profitability for that subsidiary.
The net changes for valuation allowance for years ended
December 31, 2009 and 2008 was an increase of
$5.6 million and $2 million, respectively.
As of December 31, 2009, the Company had net operating loss
carryforwards for federal and California income tax purposes of
approximately $76 million and $25 million,
respectively, available to reduce future income
F-32
subject to income taxes. The federal net operating loss
carryforwards, if not utilized, will expire over 20 years
beginning in 2019. The California net operating loss
carryforward, if not utilized, will expire beginning in 2010.
The Company also has research credit carryforwards for federal
and California income tax purposes of approximately
$5.7 million and $5.9 million, respectively, available
to reduce future income taxes. The federal research credit
carryforward, if not utilized, will expire over 20 years
beginning in 2017. The California research credit carries
forward indefinitely.
Federal and California tax laws impose restrictions on the
utilization of net operating loss and tax credit carryforwards
in the event of an ownership change, as defined in
Section 382 of the Internal Revenue Code. The
Companys ability to utilize its net operating loss and tax
credit carryforwards are subject to limitations under these
provisions.
Not included in the deferred income tax asset balance at
December 31, 2009 is approximately $1.5 million, which
pertains to certain net operating loss carryforwards resulting
from the exercise of employee stock options. When recognized,
the tax benefit of these losses will be accounted for as a
credit to additional paid-in capital rather than a reduction of
the income tax provision.
In fiscal 2009, the Company recognized approximately
$0.1 million in the liability for unrecognized tax benefits
as well as incremental penalties and interest net of deductions
of $41,000. The Companys unrecognized tax benefits at
December 31, 2009 relate to various foreign jurisdictions.
The activity related to the Companys unrecognized tax
benefits is set forth below (in thousands):
|
|
|
|
|
|
|
Total
|
|
|
Balance at January 1, 2009
|
|
$
|
1,827
|
|
Increases related to prior year tax positions
|
|
|
276
|
|
Increases related to current year tax positions
|
|
|
127
|
|
Reductions to unrecognized tax benefits as a result of a lapse
of applicable statue of limitations
|
|
|
(29
|
)
|
Balance at December 31, 2009(1)
|
|
$
|
2,201
|
|
|
|
|
|
|
|
|
|
(1) |
|
$2.0 million is included as a reserve against deferred
tax assets and $0.2 million is included in accrued expenses
on the consolidated balance sheet. |
If recognized, the unrecognized tax benefits at
December 31, 2009 would reduce the Companys annual
effective tax rate. The Company also accrued potential penalties
and interest of $8,000 related to these unrecognized tax
benefits during 2009, and in total, as of December 31,
2009, the Company has recorded a liability for potential
penalties and interest of $86,000. The Company recognizes
interest and penalties related to unrecognized tax benefits
within the income tax expense line in the accompanying
consolidated statement of operations. Accrued interest and
penalties are included within the related tax liability line in
the consolidated balance sheet. The Company has classified the
unrecognized tax benefits as long term, as it does not expect
them to be realized over the next 12 months. The Company
also does not expect its unrecognized tax benefits to change
significantly over the next 12 months.
The Company files U.S., state, and foreign income tax returns in
jurisdictions with varying statutes of limitations. All tax
years generally remain subject to examination by federal and
most state tax authorities. In foreign jurisdictions, the 2001
through 2008 tax years generally remain subject to examination
by their respective tax authorities.
|
|
Note 11
|
Stockholders Rights Plan
|
On August 31, 2004, the Companys Board of Directors
approved the adoption of a Stockholder Rights Plan (the
Rights Plan) and reserved 100,000 shares of
participating, non-redeemable preferred stock for issuance upon
exercise of the rights. The number of shares of preferred stock
reserved for issuance may be increased by resolution of the
Board of Directors without shareholder approval. The Rights Plan
was amended on September 28, 2004.
F-33
Under the Rights Plan each common stockholder at the close of
business on September 10, 2004 received a dividend of one
preferred stock purchase right (a Right or
Rights) for each share of common stock held. Each
Right entitles the holder to purchase from the Company one
one-thousandth of a share of a new series of participating
preferred stock at an initial purchase price of $23.00. The
Rights will become exercisable and will detach from the common
stock a specified period of time after any person (the
Acquiring Person) has become the beneficial owner of
15% or more of the Companys common stock or commences a
tender or exchange offer which, if consummated, would result in
any person becoming the beneficial owner of 15% or more of the
common stock. The Rights held by an Acquiring Person would
become null and void upon the occurrence of such an event.
Further, if an Acquiring Person becomes the beneficial owner of
15% or more of the Companys common stock, upon the
exercise of each Right, the holder will be entitled to receive,
in lieu of preferred stock, common stock having a market value
equal to two times the purchase price of the right. However, if
the number of shares of common stock which are authorized by the
Companys certificate of incorporation are not sufficient
to issue such common shares, then the Company shall issue such
number of one one-thousandths of a share of preferred stock as
are then equivalent in value to the common shares. In addition,
if, following an acquisition of 15% or more of the
Companys common stock, the Company is involved in certain
mergers or other business combinations, each Right will entitle
the holder to purchase a number of shares of common stock of the
other party to such transaction equal in value to two times the
purchase price of the Right.
The Company may exchange all or part of the Rights for shares of
common stock at an exchange ratio of one share of common stock
per Right any time after a person has acquired 15% or more (but
before any person has acquired more than 50%) of the
Companys common stock.
The Company may redeem the Rights at a price of $0.001 per Right
at any time prior to a specified period of time after a person
has become the beneficial owner of 15% or more of its common
stock. The Rights will expire on September 2, 2014, unless
earlier exchanged or redeemed.
|
|
Note 12
|
Employee
Benefit Plan
|
In 1999, the Company established a 401(k) tax-deferred savings
plan, whereby eligible employees may contribute a percentage of
their eligible compensation up to the maximum allowed under IRS
rules. Company contributions are discretionary. No such Company
contributions have been made since the inception of this plan.
|
|
Note 13
|
Segment,
Geographic and Customer Information
|
The accounting principles guiding disclosures about segments of
an enterprise and related information establishes standards for
the reporting by business enterprises of information about
operating segments, products and services, geographic areas, and
major customers. The method of determining which information is
reported is based on the way that management organizes the
operating segments within the Company for making operational
decisions and assessments of financial performance. The
Companys chief operating decision maker is considered to
be the Companys chief executive officer (CEO). The CEO
reviews financial information presented on a consolidated basis
for purposes of making operating decisions and assessing
financial performance. By this definition, the Company operates
in one business segment, which is the development, marketing and
sale of enterprise software and related services. The
Companys TrueComp Suite is its only product line, which
includes all of its software application products.
The following table summarizes revenues for 2009, 2008 and 2007
by geographic areas (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Americas
|
|
$
|
70,463
|
|
|
$
|
91,973
|
|
|
$
|
80,743
|
|
EMEA
|
|
|
9,595
|
|
|
|
14,014
|
|
|
|
18,824
|
|
Asia Pacific
|
|
|
1,000
|
|
|
|
1,194
|
|
|
|
1,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,058
|
|
|
$
|
107,181
|
|
|
$
|
101,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
Substantially all of the Companys long-lived assets are
located in the United States. Long-lived assets located outside
the United States are not significant.
In 2009, 2008 and 2007, no customer accounted for more than 10%
of our total revenues.
|
|
Note 14
|
Related
Party Transactions
|
In 2005, the Company entered into a service agreement with Saama
Technologies, Inc. for software consulting services. William
Binch, who was appointed to the Companys Board of
Directors in April 2005, is also currently a member of
Saamas board of directors. The Company incurred expenses
of $0, approximately $227,000 and $831,000 for services rendered
by Saama for 2009, 2008 and 2007, respectively.
In 2007, CT entered into an operating lease agreement with CCT
Properties LLC for its office space. Robert Conti, who was
appointed as Senior Vice President, Client Services, in January
2008 in connection with the acquisition of CT, is also a part
owner of CCT Properties LLC. The Company incurred rent expense
for the office space owned by CCT Properties of approximately
$153,000 and $202,000 for 2009 and 2008, respectively.
Mr. Conti resigned from his position with the Company
effective March 31, 2009.
Subsequent to the acquisition of CT in 2008, the Company
continued its service agreement with The Alexander Group, Inc.
for software consulting services. Robert Conti, who was
appointed as Senior Vice President, Client Services, in January
2008 in connection with the acquisition of CT, is also a part
owner of The Alexander Group and continues to serve as its
Senior Vice President and CFO. The Company incurred expenses of
approximately $147,000 and $553,000 for services rendered by The
Alexander Group for 2009 and 2008, respectively.
Subsequent to the acquisition of CT in 2008, the Company
continued to purchase hosting services from Level 3
Communications, Inc. Michele Vion, who was appointed to the
Companys Board of Directors in September 2005, was the
Senior Vice President, Human Resources, at Level 3
Communications through January 2010. The Company incurred
expenses of approximately $95,000 and $86,000 for hosting
services rendered by Level 3 Communications for 2009 and
2008, respectively.
The Company believes all of these agreements represent
arms length transactions.
|
|
Note 15
|
Subsequent Events
|
Subsequent to year-end, the Company completed the acquisition of
Actek, a leading provider of commissions and compliance software
for complex selling environments for the insurance and financial
services industries. Under the terms of the agreement, the
Company paid Acteks owner $2.1 million in a
combination of cash and stock and assumed debt of
$0.9 million. In addition, the Company may pay up to
approximately $1 million in the form of cash, restricted
stock units and stock options, depending on the achievement of
specified operational milestones on January 1, 2011.
Because this consideration is contingent on the achievement of
the milestones, the Company is required to revalue the
consideration at each subsequent reporting date until
January 1, 2011 under the acquisition accounting guidance.
In February 2010, management approved a cost savings program to
reduce the Companys workforce. The Company expects to
incur restructuring charges of $0.7 million in the first
quarter of 2010 in connection with severance and
termination-related costs, most of which are severance-related
cash expenditures. The February 2010 cost savings program will
be fully completed in the first quarter of 2010.
F-35
|
|
Note 16
|
Quarterly Financial Data (Unaudited) (in thousands, except for
per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Total
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
25,900
|
|
|
$
|
22,370
|
|
|
$
|
17,391
|
|
|
$
|
15,397
|
|
|
$
|
81,058
|
|
Gross profit
|
|
|
10,615
|
|
|
|
9,032
|
|
|
|
6,412
|
|
|
|
5,581
|
|
|
|
31,640
|
|
Net loss
|
|
|
(2,810
|
)
|
|
|
(3,334
|
)
|
|
|
(6,740
|
)
|
|
|
(5,069
|
)
|
|
|
(17,953
|
)
|
Basic and diluted net income (loss) per share
|
|
$
|
(0.10
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.60
|
)
|
Weighted average common shares (basic and diluted)
|
|
|
29,549
|
|
|
|
29,942
|
|
|
|
30,205
|
|
|
|
30,493
|
|
|
|
30,050
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
28,123
|
|
|
$
|
23,462
|
|
|
$
|
28,253
|
|
|
$
|
27,343
|
|
|
$
|
107,181
|
|
Gross profit
|
|
|
11,810
|
|
|
|
8,603
|
|
|
|
13,534
|
|
|
|
11,613
|
|
|
|
45,560
|
|
Net loss
|
|
|
(2,628
|
)
|
|
|
(5,131
|
)
|
|
|
(1,387
|
)
|
|
|
(4,684
|
)
|
|
|
(13,830
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.09
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.46
|
)
|
Weighted average common shares (basic and diluted)
|
|
|
29,756
|
|
|
|
29,989
|
|
|
|
30,063
|
|
|
|
29,841
|
|
|
|
29,913
|
|
F-36