Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 000-29357
----------------
CHORDIANT SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-1051328
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
20400 Stevens Creek Blvd., Suite #400
Cupertino, CA 95014
(Address, including zip code, of principal executive offices)
Registrant's telephone number, includes area code: (408) 517-6100
----------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
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 such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The approximate aggregate market value of the common stock held by non-
affiliates of the registrant, based upon the closing price of the registrant's
common stock on the Nasdaq National Market on February 15, 2001 of $3.188, was:
$43,174,555.
As of February 15, 2001, shares of the registrant's common stock
outstanding: 38,106,262.
Documents incorporated by reference
Certain portions of the registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than April 30, 2001, in connection with the registrant's 2001 Annual
Meeting of stockholders, are incorporated herein by reference into Part III of
this Annual Report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CHORDIANT SOFTWARE, INC.
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS...................................................... 3
ITEM 2. PROPERTIES.................................................... 23
ITEM 3. LEGAL PROCEEDINGS............................................. 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS....................................................... 24
ITEM 6. SELECTED FINANCIAL DATA....................................... 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................... 59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 59
ITEM 11. EXECUTIVE COMPENSATION........................................ 59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K...................................................... 60
2
PART I
FORWARD-LOOKING INFORMATION
Except for the historical information contained herein, this Annual Report
contains certain information that is forward-looking in nature. Examples of
forward-looking statements include statements regarding Chordiant's future
financial results, operating results, product successes, business strategies,
projected costs, future products, competitive positions and plans and
objectives of management for future operations. In some cases, you can identify
forward-looking statements by terminology, such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue' or the negative of such terms and other comparable
terminology. In addition, statements that refer to expectations or other
characterizations of future events or circumstances are forward-looking
statements. These statements involve known and unknown risks and uncertainties
that may cause Chordiant's or its industry's results, levels of activity,
performance or achievements to be materially different from those expressed or
implied by the forward-looking statements. Factors that may cause or contribute
to such differences include, among others, those discussed under the captions
"Business," "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." These and many other factors
could affect the future financial and operating results of Chordiant. Chordiant
undertakes no obligation to update any forward-looking statement to reflect
events after the date of this Annual Report.
ITEM 1. BUSINESS
Overview
Chordiant provides a customer relationship management (CRM) software
infrastructure solution for customer relationship marketing, service, sales,
knowledge management and real-time transactions across multiple communication
channels. Chordiant believes its solution enables companies, who depend upon
and value their customer relationships, to bolster customer retention and build
long-term, profitable relationships with customers. Chordiant's primary target
markets includes companies with demanding customer relationships involving a
large number of individual customers with complex customer relationships that
require high levels of personalized services. Chordiant's customers include
global companies in the financial services, telecommunications, retail and
integrated travel services industries. The Chordiant solution seeks to fulfill
the requirements these companies have for an enterprise-wide CRM software
infrastructure solution capable of servicing millions of individual customers
across multiple communication channels in real-time.
Industry Background
The CRM market is large, pervasive and rapidly growing. Today, Chordiant
believes customers are placing increasing value on convenient access to
information, products and services. To be successful in building long term and
profitable relationships with customers, Chordiant believes companies must take
a strategic approach to attract and retain valuable customers. To attract
customers, companies must focus on developing and executing a new set of
strategies that provide users with personalized experiences when they first
contact a company. Companies must be more responsive to customer needs and must
focus on delivering superior customer service and satisfaction to differentiate
themselves from their competitors. Companies must work to retain their
customers by providing relevant and targeted information and experiences each
time an interaction between a business and individual takes place. Moreover,
companies must recognize that every customer interaction provides an
opportunity to sell additional, and more valuable, products and services and
increase customer loyalty through personalized customer interaction.
While the Internet has emerged as a significant channel to initiate and
maintain customer relationships, Chordiant believes that existing and
established customer communication channels have not become less significant.
Specifically, to remain competitive, Chordiant believes that companies must
provide consistent high quality customer service across all communication
channels including self service systems such as the Internet,
3
e-mail and automated telephony and assisted contact points such as call
centers, branches and retail outlets. Companies that use organization and
enterprise-wide customer information to provide consistent customer services
through interactions across multiple channels and contact points will be able
to compete more successfully in the rapidly changing Internet economy.
There are many challenges to implementing an enterprise approach that is
focused on individual customers. These challenges include providing customers
access to information and functionality that traditionally resides within
complex back end systems, integrating and managing disparate systems and
generating relevant processes in real time. Successful integration of these
systems and the creation of a comprehensive single view of the customer allows
companies to control routing and prompting of appropriate responses to the
customer in an automated and dynamic process.
Many existing product technologies do not meet the new requirements of an
enterprise view of customer relationships. Client/server technologies for sales
force automation, call centers and field service management were originally
designed for departmental functions and use by employees rather than customers.
The growth of the Internet has given rise to a wide range of new products
focused on a specific channel of customer contact such as Web self-service, e-
mail response and marketing automation. These single function Web-based
products are not likely to completely replace existing means of handling
customer service and commerce. For instance, many companies continue to rely
heavily on telephone-based customer service representatives and are struggling
to integrate Web and e-mail products with the telephone. Companies have
responded to the lack of integration among existing products by attempting to
design and build their own e-business software applications. The cost and time
to custom build these new systems can be prohibitive, and the expertise
required to design and integrate the systems are often beyond the capabilities
of most companies. Additionally, most commercially-available and custom-built
systems do not have the flexibility to integrate existing and anticipated
technologies or to allow customization to keep up with a constantly changing
Internet economy.
Chordiant believes that companies need a flexible, integrated software
solution that supports all channels of customer contact with a comprehensive
single view of the customer and consistent business services. Today, customer
data must be accessed from multiple sources, applications and transaction
systems to respond to customer inquiries following company specific business
rules. Unlike traditional customer profiles, a comprehensive single view of the
customer must be updated in real time for each customer contact and reflect the
customer's contact history and other relevant information. A completely
customer focused software solution improves the ability to attract, engage and
retain customers on a personalized basis and understand their needs and
preferences to provide consistent interactions with customers through any
communication channel.
The Chordiant Solution
Chordiant provides CRM infrastructure software and applications that
Chordiant believes enables companies to offer their customers personalized
marketing, sales programs, e-business services and customer support across
multiple communication channels. Chordiant has designed its products to
integrate customer information from different data sources, generate business
processes based on a customer's specific profile and request, and provide
uniform service and data to customers across multiple communications channels.
Chordiant's products are designed to enable companies to deliver appropriate
offers and information to a targeted customer at the time of customer need.
Chordiant believes that companies that use its products can increase the value
derived from their customers through improved retention rates and linked
selling opportunities that result from a personalized customer interaction.
Chordiant's product suite, Chordiant Unified CRM Solution, includes the
Unified CRM Infrastructure, Unified Interfaces, common business services and
relationship marketing, service, self-serve and knowledge management
applications. The Chordiant Unified Infrastructure provides for intelligent
customer interaction management across a client's entire business by unifying
communication channels and business processes from different corporate data
sources containing customer information. The Chordiant Unified Interfaces
contain
4
interface products including: Chordiant Unified Knowledge, Chordiant Unified
Touch-Points, Chordiant Unified Response Center, Chordiant Unified Rules and
Workflow. Chordiant's Unified Interface products are designed to unify the
customer information, business processing and application services to provide
consistent service to customers across communications channels including the
Internet, telephone, e-mail and branch offices.
Chordiant's product suite is designed to enable companies to increase the
return from their customers by facilitating individual interactions between
customers and companies that Chordiant believes will help retain customers,
grow revenues and increase profits. Chordiant's customers include multinational
market leading business-to-consumer companies such as: Bank One International,
Barclays Mercantile, British Sky Broadcasting, Canadian Tire Acceptance
Limited, Direct Line Group Services Limited, First USA Bank, OnStar, a division
of General Motors, Lloyds TSB Bank, Metropolitan Life Insurance Company and
Thomas Cook Global Services.
Key benefits of the Chordiant solution include the following:
Comprehensive single view of the customer. Companies that have a
comprehensive single view of their customers and that distribute information
throughout their enterprise to the points of customer contact can provide a
more consistent and personalized consumer experience. Chordiant's data
management technology helps companies develop a single view of the customer by
integrating, consolidating and managing data derived from external and internal
sources. Chordiant's product suite uses multiple data sources, existing
applications and transaction systems to build a comprehensive single view of
the customer and generate the appropriate response at time of contact. A bank,
for example, might use Chordiant's products to integrate information about a
customer contained in internal databases such as credit card, mortgage and
savings account historical transaction systems, Web logs and e-mail management
systems, as well as external databases such as national credit check services.
By integrating this information, the bank has a more comprehensive
understanding of the customer's ability to repay a loan and the value of that
customer's relationship with the bank.
Automated, sophisticated decision making processes. Workflow and rules
driven business processes help companies to make automated, yet informed,
decisions about customer inquiries. Chordiant's workflow processing system
supports customizable business processes allowing companies to develop business
rules that will be implemented consistently. Chordiant's workflow editor is a
graphical user interface application that allows business analysts to customize
and automate their company's unique business rules. Chordiant's sophisticated
routing engine is designed to allow companies to instantly determine how to
respond to specific customer inquiries and generate offers appropriate for
particular customers. A bank, for example, could specify that at the time of
contact, only customers with a solid credit card history, an existing home
loan, a savings account with a minimum balance and a clean credit history
should receive an attractive auto loan rate and free online bill payment
services.
Consistent customer experience across multiple channels. Chordiant believes
that companies providing customers with a consistent experience across multiple
communication channels enjoy greater customer satisfaction because customers
are able to receive the same reliable service and information regardless of how
they choose to contact the company. There are a large and increasing number of
customer communications channels, including: Web, e-mail, fax, self-service
systems, mobile devices, call centers and retail outlets. Chordiant's product
suite implements a common set of business rules uniformly across systems
already existing in different customer communications channels. A bank, for
example, could ensure that a particular customer receives the same attractive
auto loan rate and online bill payment service promotion, regardless of whether
the customer contacts the bank through the Web, e-mail, a customer service call
center or in person at a local branch.
Standard and customizable business services. Chordiant believes that
companies that implement their unique business services will realize greater
levels of efficiency, consistency and customer satisfaction. Chordiant's
products provide a broad set of standard business objects, or fundamental
business functions, that are common across industries. These standard business
objects can be modified to accommodate specific
5
customer and business processes, policies and transactions of individual
companies. A bank, for example, could customize Chordiant's business objects by
activating specific financial services objects related to specific
transactions, such as processing auto loans, and alter Chordiant's standard
loan business processes to bypass an external credit check if the customer has
a clean credit and mortgage history.
Strategy
Chordiant's objective is to continue to provide innovative CRM
infrastructure software that enables companies to provide superior relationship
marketing, personalized service and customer support to their individual
customers across multiple communication channels.
Key elements of Chordiant's strategy include the following:
Continue technology leadership. The increasing demands for multi-channel
interactive CRM solutions require products that are adaptable, extensible and
interoperable. To meet these requirements, Chordiant intends to continue to
devote substantial resources to the development of new and innovative product
capabilities. Because Chordiant has designed its products to utilize the
capabilities of the Internet, Chordiant believes that its products are more
easily adapted to a constantly changing e-business environment. For example,
Chordiant's product suite is designed to accommodate additional contact points
such as personal digital assistants, cellular telephones and digital
television.
Extend technology and integration alliances. Chordiant has sought, secured
and continued to seek, strategic alliances to assist in developing, marketing
and selling its product. This approach is intended to leverage the technology
and resources available to perform application design and development services
for Chordiant's customers and provide additional marketing and technical
expertise in industry segments. To help ensure that Chordiant delivers
comprehensive products to its customers, Chordiant has established strategic
relationships with organizations in three general categories:
. computing and network platform vendors;
. software platform vendors; and
. systems integrators.
Target leading global business-to-consumer companies. Chordiant intends to
continue targeting the global leaders in the primary business-to-consumer
markets by providing solutions to the financial services, telecommunications,
travel and retail industries. These industries are characterized by commodity-
like products and large numbers of dispersed customers, partners, vendors and
suppliers. Chordiant believes that companies in these industries will be early
users, and early beneficiaries, of an integrated system that can deliver
personalized, real-time processes utilizing a comprehensive single view of the
customer.
Expand worldwide infrastructure. Chordiant intends to continue to grow its
global presence by expanding worldwide field sales, marketing and services
organizations. Chordiant plans to continue expanding its international presence
by adding direct sales personnel and increasing Chordiant's indirect sales
channels. In particular, Chordiant plans to further expand its European
operations from Chordiant's existing international headquarters in London,
England. Chordiant has established regional offices in both Germany and the
Netherlands.
Growth through customer references. Chordiant plans to achieve additional
market success as Chordiant's customers become successful in using their e-
business initiatives to increase customer retention and revenues. Chordiant's
most successful customers become valuable references for Chordiant's future
sales opportunities. To ensure that all Chordiant customers become Chordiant
references, Chordiant intends to:
. deliver superior customer service to Chordiant's customers, to help
ensure their long-term satisfaction and success with Chordiant's
products;
6
. work with experienced and knowledgeable systems integrators to help
enable Chordiant's customers to implement large scale deployments
successfully;
. deliver high quality customer education and training on Chordiant's
products to assist Chordiant's customers to meet and exceed their e-
business expectations; and
. hire and retain expert consultants to assist Chordiant's customers in
implementation of Chordiant's products.
Products
Chordiant's products are designed to address complex and extreme customer
information demands placed on global companies who desire to treat millions of
their customers in an individual, personalized way. Chordiant's Unified CRM
Solution provides companies with e-business infrastructure software that is
typically licensed as an integrated set of applications and functionality.
Chordiant's Unified CRM Solution suite is designed using a three-tiered
technology architecture. This layered architecture insulates software
components from one another which allows enhancements and customization to the
software to be made in a plug-and-play, modular manner. This three-tiered
product architecture is summarized below:
The Chordiant Unified Infrastructure. The Chordiant Unified Infrastructure
brings together data from across the customer's enterprise to create the
customer data model. This customer data model provides a single point of
contact for customer transactions, affording efficient access to all customer
account information. Chordiant's Unified Infrastructure integrates and
communicates with telephony equipment, legacy systems and transactional
applications. The Chordiant Unified Infrastructure enables workflow-driven
interfaces and support for electronic communications, telephony systems and
switches, SQL relational databases, back- office business applications and
legacy data warehouses. As part of the Unified Infrastructure, Chordiant has
developed a unique set of technologies that incorporate separate object-
oriented communications managers for Internet, e-mail, CTI and fax customer
communications. Each communications manager is responsible for representing the
customer's request to the Chordiant workflow engine.
The Chordiant Unified Infrastructure also hosts persistent data connectors
and data routers, which manage communications between the Chordiant workflow
engine and a company's legacy applications, mainframe databases, relational
databases and data warehouses. The Chordiant Unified Infrastructure provides
integration capabilities with these legacy database systems and relational
databases, whether they reside locally or are dispersed across the corporate
enterprise network. Through the persistent data manager and data router,
Chordiant's Unified CRM Infrastructure opens, calls, encapsulates, updates and
manages data resources from one or more databases, providing the complete set
of data and information needed when interacting with a customer.
Customers may also license Chordiant's Unified Rules and Unified Workflow
with Chordiant's Unified Infrastructure. Chordiant Unified Rules and Chordiant
Unified Workflow applications address functionality required by a customer
business analyst who incorporates their company's business processes into the
Chordiant Unified CRM Solution. The Unified Rules and Workflow allow for the
creation of new business processes or the modification of existing ones. By
using Unified Rules, processes can be strung together to provide a fully guided
sequence for complex business process, or a large number of dissimilar
transactions or services.
Chordiant's Unified Touch-points. Chordiant's Unified Touch-points provide a
dynamic interface for creating unique, personalized interactions between the
business and individual. Individuals may contact companies through this layer
by browser-based HTML/XML, e-mail, fax, telephony and mobile devices. Internal
customer service representatives respond to each customer contact based upon
the business process, the company's policies for that process and the
customer's unique profile.
7
Chordiant's Unified Response center. Chordiant's Unified Response center
includes three applications: Live Response, Assisted Response and Automated
Response. Live Response is the application used by customer service agents. The
Live Response application uses guided transactions to ensure that the customer
interaction is both personalized and consistent across all touch-points. Live
Response provides a customer interaction environment that empowers a customer
service agent to provide individualized, high-quality sales, support and
service. Application functionality includes:
. Customer Management (create, retrieve, update and delete customer
information)
. Account Management (view, add, delete, update)
. Inquiries (directions, assistance)
. Service Work (view queues, add activities, transfer work, defer work,
view activities in process)
. Local Administration (change password, modify screen layout)
Chordiant's Assisted Response E-mail application routes incoming e-mail to a
queue for assisted response dependent upon on the e-mail content, the customer
profile, or the final results from the query to the Chordiant knowledge base
application. This approach provides a highly flexible way to manage the routing
of incoming messages dependent upon customer case history and profile.
Chordiant's Automated Response E-mail application includes automated e-mail
routing and e-mail response capabilities. This application will receive
incoming e-mail and compare the e-mail to templates to determine if they should
be automatically responded to, or if the e-mail should be immediately forwarded
to a customer service agent for assisted response. When the automated response
feature is enabled, the application will attempt to locate an answer from the
knowledge base application. If an appropriate answer is found, a return answer
to the customer (via e-mail) will be made and the event will be logged into the
customer's case history.
Customers
Chordiant targets multinational market leaders in business-to-consumer
industries, particularly companies in the financial services,
telecommunications, travel and leisure and automotive industries. In the
future, Chordiant plans to expand into the retail and utilities industries.
Below is a list of Chordiant's customers as of December 31, 2000, each of which
during the past two years has purchased $500,000 or more of products from
Chordiant.
. Bank One International
. British Sky Broadcasting (BskyB)
. Barclays Mercantile
. Direct Line Group Services Limited
. First USA Bank
. OnStar, a division of General Motors, Inc.
. Lloyds TSB Bank
. Metropolitan Life Insurance Company
. The Royal Bank of Scotland plc
A small number of customers account for a significant portion of Chordiant's
total revenues. As a result, the loss or delay of individual orders or delays
in the product implementations for a customer can have a large impact on
Chordiant's revenues. In 1998, revenues from KLM Royal Dutch Airlines, Thomas
Cook Global Services, Canadian Tire Acceptance Limited and Chase Manhattan
Mortgage Corporation accounted for 36%,
8
19%, 14% and 12% of Chordiant's total net revenues. In 1999, revenues from
Chase Manhattan Mortgage Corporation, First USA, and Electronic Data Systems
Corporation (EDS) accounted for 30%, 19% and 15% of Chordiant's total net
revenues. For the year ended December 31, 2000, revenues from EDS, Lloyds TSB
and Direct Line Group Services Limited accounted for approximately 30%, 19% and
14%, respectively, of Chordiant's total net revenues. Chordiant expects that
revenues from a small number of customers will continue to account for a
majority of Chordiant's total net revenues in the future as historical
implementations are completed and replaced with new projects from new and
existing customers.
Technology
Chordiant designs and builds products to provide customer relationship
management solutions for large enterprises. Chordiant's Unified CRM solution
product suite consists of three layers. These layers are: e-business software
infrastructure, e-business software application code and a software framework,
including several software engines.
The first software-layer, the e-business infrastructure, utilizes a four-
tier architecture: (1) delivering functionality to desktop computers, (2)
multiple consumer touch points (Web, e-mail, fax, etc.), (3) corporate
computing centers, and (4) in the data centers and networks of the company. The
first-tier is used by internal customer service representatives, marketing
professionals, sales and service employees, supervisors, management and other
staff of a company involved with customer contact. The second-tier is for the
consumers who desire to interact with the company using telephones, Web
browsers or wireless personal digital assistants and mobile devices. Telephone
calls, e-mails, Web-collaboration and other interactions are managed by
Chordiant's technology in this second-tier. The third-tier of the architecture
configures and operates the multiple software servers in customer computing
centers. This third-tier queues, routes, responds, initiates and computes the
business processes and applications, based on distributed information and
processing of business logic. All customer data comes from the fourth-tier,
where existing corporate company information systems are accessed and data is
integrated with connector architecture including caching and transactions
capabilities. Underlying this architecture is a persistent data management
system that integrates multiple real time data sources, utilizing object-
computing models.
The second software-layer, the Chordiant e-business application code,
implements a wide variety of common functions often used by retail, financial,
insurance, travel and telecommunications industries for customer relationship
management functions. A flexible object model consisting of common business
fundamentals is contained in this technology layer. For example, common objects
include establishing the initial customer relationship, taking customer orders,
opening accounts, accessing the customer's case history, fulfilling orders and
case tracking.
The third software-layer contains Chordiant's enterprise software framework.
The framework itself implements workload balancing, fail over systems, data
management systems and security systems. The framework also includes several
software engines used by the first and second software-layers. These engines
include a workflow system, a business rules system and a knowledge management
system.
Applications running in the context of this multi-layer, multi-tier
environment, along with the data management system, object model and the
software engines, assist in delivering distributed customer data throughout the
company to form a single and unified view of a customer.
Certain Chordiant products use technology modules from third party
technology providers including Sun Microsystems, IBM and Ilog, Inc. Chordiant
products are based on open system standards and are designed to be scalable and
integrate with a company's various information technology systems, networks and
telephony systems. Chordiant's products are based on industry standards
including Java, CORBA, IIOP, RMI and XML. Chordiant's server software runs on
both UNIX server platforms and Windows NT servers and can be configured for
multiple servers.
9
Sales and Marketing
Chordiant licenses its products and sells services primarily through a
direct sales organization which is complemented by the selling and support
efforts of systems integrators and technology vendors. Chordiant's market focus
is in the business-to-consumer segment of the economy with a targeted effort on
leading consumer focused companies and companies using multiple channels as the
means of conducting business and serving customers. Chordiant targets its sales
and marketing efforts, together with its product design efforts, on industries
such as retail banking, consumer financial services, telecommunications, travel
and leisure, automotive and retailers.
The sales process generally ranges from three to twenty-four months
depending on the level of education that prospective customers need about the
use and benefits of Chordiant's products and the involvement of systems
integrators. During the sales process, Chordiant typically approaches senior
executive management teams including the senior marketing officer, chief
information officer and chief executive officer of the potential customer.
Chordiant utilizes sales teams consisting of sales and technical professionals
who work with Chordiant's strategic partners to create organization-specific
proposals, presentations and demonstrations that address the specific needs of
each potential customer.
Chordiant has sales offices in the greater metropolitan areas of Dallas,
Chicago and New York, and in Cupertino, California, London, England, Munich,
Germany and Amsterdam, the Netherlands. Technical sales consultants provide
pre-sales support to potential customers on product information and deployment
capabilities and complement the direct sales professionals. Chordiant plans to
significantly expand the size of its direct sales organization and to establish
additional sales offices domestically and internationally.
Chordiant focuses its marketing efforts on educating potential customers,
generating new sales opportunities and creating awareness of Chordiant's
products. Chordiant conducts a variety of marketing programs to educate its
target market, including seminars, trade shows, press relations and industry
analyst programs.
Chordiant's marketing organization serves an integral role in acquiring,
organizing and prioritizing customer and industry feedback to help provide
product direction to its development organization. Chordiant also has a
detailed product management process that surveys customers and identifies
market needs to help predict and prioritize future customer requirements.
Professional Services, Customer Support and Education Services
Chordiant offers a broad range of customer services including professional
consulting services and product support and training services. Chordiant
believes that providing a high level of customer service is critical to
achieving rapid product implementation, customer success and continued revenues
growth.
Professional Services
Chordiant's professional services consulting teams assist their customers
and systems integrator partners in the design and implementation of products.
Chordiant's professional services organization deploys consultants as part of
the project team alongside systems integration partners and members of the
customer's internal team to provide technical knowledge, business engineering,
project guidance and quality assessments during the project. In the design
stage, Chordiant provides a variety of professional services that help
determine a customer's business objectives and the technical requirements of
the application implementation. In the implementation stage, Chordiant uses a
delivery methodology to assist customers and integration partners in planning
and managing the implementation. Systems integrators, supported by Chordiant's
consultants, manage the overall project and implement the product with a
customer's existing communications, applications, databases and transaction
systems. In the final phases of an implementation, the systems integrators
provide education and training to enable a customer's internal team to deploy
the new system, train internal users and assume control over ongoing support.
10
Chordiant's methodology includes:
. user requirements and needs analysis;
. business engineering consultation;
. architectural analysis and performance planning;
. project management support services;
. engineering support for development and deployment; and
. technical support for software integration and communications
integration.
Net services revenues provided by Chordiant in the fiscal year ended
December 31, 2000 accounted for approximately 50% of Chordiant's total net
revenues.
Customer Support
Chordiant's customers have a choice of support and maintenance options
depending on the level of service desired. Chordiant's technical support is
available to clients by telephone, over the Web and by e-mail. The company
maintains a technical support hotline staffed by engineers from 8:00 a.m. to
9:00 p.m., Eastern time, Monday through Friday, from its corporate
headquarters in Cupertino, California and local support during business hours
for European customers from London, England. An optional premium service is
available providing technical support 24 hours a day, seven days a week.
Additionally, Chordiant provides product enhancement releases to all customers
as part of their support and maintenance contract. Chordiant uses a customer
service automation system to track each customer inquiry until it is resolved.
Chordiant also makes use of its Website and a secured customer forum to
provide product information and technical support information worldwide 24
hours a day, seven days a week.
Educational Services
Chordiant provides educational services to train and enable its systems
integrators and customers to use Chordiant's products. Chordiant offers a
comprehensive series of training modules to provide the knowledge and skills
to successfully deploy, use and maintain the company's products. These
training courses focus on the technical aspects of Chordiant's products as
well as business issues and processes. A complete set of modules covering
business engineering, project management and development engineering are
available. Training courses can be provided on-site for a custom session at a
fee and are regularly scheduled through classroom and lab instruction at the
company's Cupertino, California corporate headquarters, and at its London,
England offices for European systems integrators and customers.
Product Development
Chordiant has made substantial investments in research and development
through internal development and technology licensing. Chordiant's product
development efforts are focused on extending Chordiant's software
infrastructure, CRM business services and application functionality, self-
service and Web-based collaboration functionality, and continued integration
of key industry-specific transaction systems and services.
Chordiant's product development resources are organized into a number of
development teams including:
. system services and workflow development;
. business services and application functionality and design;
. tools and Internet development;
. enterprise integration;
11
. documentation; and
. quality assurances.
Chordiant's software and Internet applications teams have extensive
experience in object oriented development, data management, workflow
engineering, Java programming and Internet technologies. Chordiant's research
and development expenditures before the effect of non-cash compensation expense
and purchased in-process research and development were $5.9 million in fiscal
year 1998, $6.5 million in fiscal year 1999, and $14.4 million for the year
ended December 31, 2000.
Strategic Relationships
To enhance the productivity of Chordiant's sales and service organizations,
Chordiant has established relationships with systems integrators, complementary
technology providers and alternative service providers.
Systems integrators
Chordiant has established relationships and trained professionals at a
number of systems integrators including: Accenture (formerly known as Andersen
Consulting); Computer Sciences Corporation; Electronic Data Systems Corporation
and Logica plc. Chordiant plans to expand these relationships to increase its
capacity to sell and implement its products. Chordiant has trained a
significant number of consultants in these organizations for the implementation
and support of its products. Chordiant believes that expanding its
relationships with systems integrators and independent consulting firms will
enable the company to gain a greater share of emerging markets more rapidly.
Complementary technology providers
Chordiant designs products to be based on industry standards and
technologies, and to support a number of key software platforms. Chordiant has
relationships with:
. IBM Software for IBM Visual Age and MQ series development tools and
interface software and support;
. Sun Microsystems for Java and Forte developments tools in support of
Chordiant's enterprise data and transaction management services;
. Oracle Corporation and Sybase, Inc., providers of industry-standard
relational databases;
. Cisco Systems, Inc., Genesys Telecommunications Laboratories, Inc. and
Lucent Technologies, Inc., providers of telephony equipment and software
interfaces; and
. Ilog, Inc. a software provider of resource optimization and business
rules technology.
Competition
The market for Chordiant's products is new and rapidly evolving, and is
highly competitive. The competitive landscape is rapidly evolving to address
the convergence of e-business services and customer interaction applications.
To realize the potential of this convergence, companies must be able to offer
personalized marketing and sales and extend e-business services to all points
of customer contact. This must be done through an integrated system and
customer data model tailored by each company to meet its specific customer
requirements.
Chordiant faces three main sources of competition:
. custom-built solutions;
. vendors with help desk, field service, call center or sales force
automation products; and
12
. vendors of enterprise resource planning products.
There is no one competitor, nor is there a small number of competitors, that
are dominant in Chordiant's market.
Custom-Built Solutions
Existing enterprise systems supporting branch and call centers have
historically been custom built by professional services organizations or
internally developed. Custom development has the inherent limitation of being a
high cost alternative because it relies on building the entire solution from
scratch and the resulting configuration is difficult to upgrade to take
advantage of new requirements and channels of communication such as the
Internet. Chordiant expects that internal development will continue to be a
significant source of competition.
Stand-Alone Solution Vendors
Chordiant competes with providers of stand-alone solutions for Web based
customer relationship management, such as E.piphany, Inc. and Kana
Communications, Inc. Chordiant also competes against traditional client/server-
based, call center service customer and salesforce automation solutions, such
as Siebel Systems, Inc., Nortel Networks Corporation (including Clarify Inc.)
and Pegasystems Inc. Most point application providers started with a single
application focus, such as service, salesforce automation or help desks, and
then added additional software modules addressing other needs, such as e-mail,
field service or quality tracking. Although these vendors have started to
pursue the enterprise-wide opportunity of providing enterprise-wide solutions
and services to all points of customer contact, their lack of multi-channel
integration, real time data models for integration of multiple data sources and
lack of personalization capability and their client/server architecture are
limitations.
Enterprise Application Vendors
Chordiant anticipates competitive offerings and consolidation from several
major enterprise software developers, such as Oracle, PeopleSoft Inc., IBM and
SAP. Chordiant expects enterprise resource planning software vendors to acquire
and integrate point solutions as they approach different segments of the e-
business and customer relationship management markets.
Other Potential Competitors
The telephony market for equipment and software is in the midst of a major
transition from proprietary systems to open software applications running on
commodity hardware. Software acquisitions by traditional telephony vendors,
such as Lucent Technologies' purchase of Mosaix, Inc. and Nortel Networks'
purchase of Clarify are examples of the desire to move from hardware platforms
into software applications. Examples of companies providing middleware in
support of computer and telephony integration are Genesys Telecommunications
Laboratories and Geotel Communications Corporation, purchased by Cisco Systems.
Providers of client/server and mainframe call center systems include
Pegasystems for financial services and IMA and Quintus for outsourcers and call
centers. These companies have not historically provided enterprise level
software infrastructure and customer management applications but may in the
future.
Chordiant believes that the principal competitive factors in the company's
market include:
. the breadth and depth of solutions;
. product quality and performance;
. relationships with systems integrators;
. the ability to implement solutions;
13
. establishment of a significant base of reference customers;
. the ability of products to operate with multiple software applications;
. customer service; and
. product price.
Although Chordiant believes that its product competes favorably with these
factors, Chordiant's market is relatively new and is evolving rapidly.
Chordiant may not be able to maintain its competitive position against current
and potential competitors, especially those with significantly greater
financial and personnel resources.
Intellectual Property and Propriety Rights
Chordiant's success is dependent upon its ability to develop and protect
proprietary technology and intellectual proprietary rights. Chordiant relies
primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets, and copyright and trademark laws to accomplish these
goals.
Chordiant licenses its product through non-exclusive license agreements that
impose restrictions on customers' ability to utilize the software. In addition,
Chordiant seeks to avoid disclosure of its trade secrets, including requiring
employees, customers and others with access to Chordiant's proprietary
information to execute confidentiality agreements with Chordiant and
restricting access to Chordiant's source code. Chordiant also seeks to protect
its rights in its products, documentation and other written materials under
trade secret and copyright laws. Due to rapid technological change, Chordiant
believes that factors such as the technological and creative skills of its
personnel, new product developments and enhancements to its existing products
are more important than the various legal protections of its technology to
establishing and maintaining a technology leadership position.
Chordiant integrates third party software into its products. This third
party software may not continue to be available on commercially reasonable
terms or at all. In particular, Chordiant licenses Forte Tool and related Forte
products from Forte Software. If Chordiant cannot maintain licenses to the
Forte products or other key third party software, shipments of Chordiant's
products could be delayed until equivalent software is developed or licensed
and integrated into Chordiant's products. Moreover, although Chordiant is
generally indemnified against claims if technology licensed from third parties
infringes the intellectual property and proprietary rights of others, this
indemnification is not always available for all types of intellectual property
and proprietary rights and in some cases the scope of this indemnification is
limited. There can be no assurance that infringement or invalidity claims
arising from the incorporation of third-party technology or claims for
indemnification from Chordiant's customers resulting from these claims will not
be asserted or prosecuted against Chordiant. These claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources, in addition to potential product redevelopment costs and
delays.
Despite Chordiant's efforts to protect its proprietary rights, existing laws
afford only limited protection. Attempts may be made to copy or reverse
engineer aspects of Chordiant's products or to obtain and use information that
Chordiant regards as proprietary. There can be no assurance that Chordiant will
be able to protect Chordiant's proprietary rights against unauthorized third
party copying or use. Use by others of Chordiant's proprietary rights could
materially harm Chordiant's business. Furthermore, policing the unauthorized
use of Chordiant's products is difficult and expensive litigation may be
necessary in the future to enforce Chordiant's intellectual property rights.
It is also possible that third parties will claim that Chordiant has
infringed their current or future products. Chordiant expects that software
developers will increasingly be subject to infringement claims as the number of
products in different industry segments overlap. Any claims, with or without
merit, could be time-consuming, result in costly litigation, prevent product
shipment, cause delays, or require Chordiant to enter into royalty or licensing
agreements, any of which could harm its business. Patent litigation in
particular has complex
14
technical issues and inherent uncertainties. If an infringement claim against
the company was successful and it could not obtain a license on acceptable
terms, license a substitute technology or redesign to avoid infringement,
Chordiant's business would be harmed.
Employees
As of December 31, 2000, Chordiant employed 250 full time employees. Of that
total, 84 were primarily engaged in product development, engineering or systems
engineering, 57 were engaged in sales and marketing, 78 were engaged in
professional services and 31 were engaged in operational, financial and
administrative functions.
None of Chordiant's employees are represented by a labor union and Chordiant
has never experienced a work stoppage. Chordiant believes that its relations
with its employees are good.
15
BUSINESS RISKS
Because Chordiant's short operating history makes it difficult to evaluate its
prospects, Chordiant's future financial performance may disappoint investors
and result in a decline in Chordiant's stock price.
You must consider Chordiant's prospects given the risks, expenses and
challenges Chordiant might encounter because the company is at an early stage
of development and growth in a new and rapidly evolving market. Until September
1997, Chordiant was engaged primarily in the research and development of its
software products. Chordiant licensed its first product in September 1997 and
Chordiant's sales and service organizations are relatively new and still
growing. Due to Chordiant's short operating history, Chordiant's future
financial performance is not predictable and may disappoint investors and
result in a substantial decline in Chordiant's stock price. The revenue and
income potential of Chordiant's products are unproven.
Chordiant expects to continue to incur losses and may not achieve or maintain
profitability, which may cause Chordiant's stock price to decline.
Chordiant incurred net losses of $35.4 million for the year ended December
31, 2000. As of December 31, 2000, Chordiant had an accumulated deficit of
$97.9 million. Chordiant expects to continue to incur losses on both a
quarterly and annual basis at least through the first half of 2001. Moreover,
Chordiant expects to continue to incur significant sales and marketing and
research and development expenses and expenses to establish additional sales
offices domestically and internationally, and, as a result, Chordiant will need
to generate significant revenues to achieve and maintain profitability.
Chordiant cannot be certain that Chordiant can sustain this growth or that it
will generate sufficient revenues to achieve profitability.
Chordiant's operating results fluctuate significantly and an unanticipated
decline in revenues may disappoint investors and result in a decline in
Chordiant's stock price.
Chordiant's quarterly revenues will depend primarily upon product
implementation by its customers. Chordiant has historically recognized most of
the company's license and services revenue using the percentage-of-completion
method using labor hours incurred as the measure of progress towards completion
of implementation of Chordiant's products and Chordiant expects this practice
to continue. Thus, delays in implementation by Chordiant customers and system
integration partners will reduce Chordiant's quarterly revenue. Historically, a
substantial portion of new customer orders have been booked in the third month
of the calendar quarter, with a concentration of these bookings in the last two
weeks of the third month. Chordiant expects this trend to continue and,
therefore, any failure or delay in bookings would decrease Chordiant's
quarterly deferred revenue. If Chordiant's revenues or operating margins are
below the expectations of any securities analysts that may analyze Chordiant,
or investors, Chordiant's stock price is likely to decline.
Chordiant has limited experience with large-scale deployments and if
Chordiant's products do not successfully operate in a company-wide environment,
Chordiant may lose sales and suffer decreased revenues.
If existing customers have difficulty deploying Chordiant's products or
choose not to fully deploy the products, particularly in large-scale
deployments, it could damage Chordiant's reputation and reduce revenues.
Chordiant's success requires that the company's products be highly scalable, or
able to accommodate substantial increases in the number of users. To date, no
large-scale deployment has been operating at any customer site and Chordiant's
products are currently being used by only a limited number of users.
Chordiant's products are expected to be deployed on a variety of computer
hardware platforms and to be used in connection with a number of third-party
software applications by personnel who may not have previously used application
software systems or Chordiant's products. These deployments present very
significant technical challenges, which are difficult or impossible to predict.
16
Failure to successfully customize or implement Chordiant's products for a
customer could prevent recognition of revenues, collection of amounts due or
cause legal claims by the customer.
If a customer is not able to customize or deploy Chordiant's products
successfully, the customer may not complete expected product deployment, which
would prevent recognition of revenues and collection of amounts due, and could
result in claims against Chordiant. Chordiant has, in the past, had disputes
with customers concerning product performance. One dispute, from a 1995
consulting agreement, resulted in a settlement following contractually-
required mediation. One, from a 1997 product license, resulted in a settlement
following litigation. One, from a product license and related service
agreements, was resolved in February, 2000 when the company entered into a new
agreement with the client, Chase Manhattan Mortgage Corporation. For further
details regarding the Chase dispute, see "Chordiant Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
in this Annual Report.
Chordiant's primary products have a long sales and implementation cycle, which
makes it difficult to predict Chordiant's quarterly results and may cause
operating results to vary significantly.
The period between initial contact with a prospective customer and the
implementation of Chordiant's products is unpredictable and often lengthy,
ranging to date from three to twenty-four months. Thus, deferred revenue could
vary significantly from quarter to quarter. Any delays in the implementation of
Chordiant's products could cause reductions in Chordiant's revenues. The
licensing of Chordiant's products is often an enterprise-wide decision that
generally requires Chordiant to provide a significant level of education to
prospective customers about the use and benefits of Chordiant's products. The
implementation of Chordiant's products involves significant commitment of
technical and financial resources and is commonly associated with substantial
implementation efforts that may be performed by Chordiant, by the customer or
by third-party system integrators. Customers generally consider a wide range of
issues before committing to purchase Chordiant's products, including product
benefits, ability to operate with existing and future computer systems, ability
to accommodate increased transaction volume and product reliability.
Because a small number of customers account for a substantial portion of
Chordiant's software license revenues, Chordiant's revenues could decline if
Chordiant loses a major customer.
Chordiant derives a significant portion of its software license revenues in
each quarter from a limited number of customers. Loss of a major customer in a
particular quarter could cause a decrease in revenue, deferred revenues and net
income. For the year ended December 31, 2000, revenues from Electronic Data
Systems Corporation (EDS), Lloyds TSB and Direct Line Group Services Limited
accounted for approximately 30%, 19% and 14% of Chordiant's total net revenues.
For the fiscal year ended December 31, 1999, revenues from Chase Manhattan
Mortgage Corporation, First USA and EDS accounted for 30%, 19%, and 15% of
Chordiant's total net revenues. Chordiant expects that a limited number of
customers will continue to account for a substantial portion of the company's
revenues. As a result, if Chordiant loses a major customer, if a contract is
delayed or cancelled, Chordiant's revenues would be adversely affected. In
addition, customers that have accounted for significant revenues in the past
may not generate revenues in any future period causing Chordiant's failure to
obtain new significant customers or additional orders from existing customers
to materially affect Chordiant's operating results.
Defects in Chordiant's products could diminish demand for Chordiant's products
and result in decreased revenues, decreased market acceptance and injury to
Chordiant's reputation.
Errors may be found from time to time in Chordiant's new or enhanced
products after commencement of commercial shipments resulting in decreased
revenues, decreased sales, injury to Chordiant's reputation and/or increased
warranty and repair costs. Although Chordiant conducts extensive product
testing during product development, Chordiant has in the past discovered
software errors in Chordiant's products as well as in third party products, and
as a result has experienced delays in the shipment of its new products. The
latest version of Chordiant's primary product suite was introduced in June
2000.
17
Chordiant's failure to maintain strong relationships with system integrators
would harm Chordiant's ability to market and implement Chordiant's products and
reduce future revenues.
Failure to establish or maintain relationships with systems integrators
would significantly harm Chordiant's ability to license Chordiant's software
products. System integrators install and deploy Chordiant's products, in
addition to those of Chordiant's competitors, and perform custom integration of
systems and applications. Some system integrators also engage in joint
marketing and sales efforts with Chordiant. If these relationships fail,
Chordiant will have to devote substantially more resources to the sales and
marketing, implementation and support of Chordiant's products than it would
have to otherwise. Chordiant's efforts may also not be as effective as those of
the system integrators, which could reduce revenues. In many cases, these
parties have extensive relationships with Chordiant's existing and potential
customers and influence the decisions of these customers. A number of
Chordiant's competitors have stronger relationships with these system
integrators and, as a result, these system integrators may be more likely to
recommend competitors' products and services.
In particular, Chordiant has established a non-exclusive relationship with
Electronic Data Systems Corporation, or EDS, a large system integrator and one
of Chordiant's principal stockholders. For the fiscal year ended December 31,
2000 and the fiscal year ended December 31, 1999, approximately 30% and 15%,
respectively, of Chordiant's revenues were derived from customers for whom
Electronic Data Systems has been engaged to provide software and system
integration services. Deterioration of Chordiant's relationship with Electronic
Data Systems could have a material adverse effect on sales of Chordiant's
products.
To date, Chordiant's sales have been concentrated in the financial services,
travel and leisure, automotive and telecommunications markets and if Chordiant
is unable to continue sales in these markets or successfully penetrate new
markets, Chordiant's revenues may decline.
Sales of Chordiant's products and services in four markets -- financial
services, travel and leisure, automotive and telecommunications -- accounted
for 94% of total net revenues for the year ended December 31, 2000 and 87% of
total net revenues for the fiscal year ended December 31, 1999. Chordiant
expects that revenues from these four markets will continue to account for a
substantial portion of Chordiant's total net revenues in 2001. If Chordiant is
unable to successfully increase penetration of Chordiant's existing markets or
achieve sales in additional markets, or if the overall economic climate of
Chordiant's target markets deteriorates, Chordiant's revenues may decline.
Continued negative gross margin in services revenues could adversely impact
Chordiant's overall gross margin and income.
Chordiant's gross margin in services revenues has historically been
negative. Service revenues have also had lower gross margins than Chordiant's
license revenues. As a result, an increase in the percentage of total net
revenues represented by services revenues, or an unexpected decrease in license
revenues, could have a detrimental impact on Chordiant's overall gross margins.
Chordiant anticipates that service revenues will continue to represent over 40%
of total net revenues. To increase services revenues, Chordiant must expand
Chordiant's services organization, successfully recruit and train a sufficient
number of qualified services personnel, and obtain renewals of current
maintenance contracts by Chordiant's customers. This expansion could further
reduce gross margins in Chordiant's service revenues.
Because competition for qualified personnel is intense, Chordiant may not be
able to retain or recruit personnel, which could impact the development and
sales of Chordiant's products.
If Chordiant is unable to hire or retain qualified personnel, or if newly
hired personnel fails to develop the necessary skills or fails to reach
expected levels of productivity, Chordiant's ability to develop and market
Chordiant's products will be weakened. Chordiant's success depends largely on
the continued contributions of Chordiant's key management, engineering, sales
and marketing and professional services personnel, including Samuel T.
Spadafora, Chordiant's chairman of the board of directors and chief executive
officer and
18
Stephen Kelly, Chordiant's president and chief operating officer. Except for
Chordiant's chief executive officer and president and chief operating officer,
Chordiant does not have employment agreements with any of Chordiant's key
personnel. Chordiant has experienced turnover in Chordiant's key personnel in
the recent past.
In particular, Chordiant's ability to increase Chordiant's sales will depend
on Chordiant's ability to recruit, train and retain top quality sales people
who are able to target prospective customers' senior management, and who can
productively generate and service large accounts. There is a shortage of
qualified sales personnel and competition for such personnel is intense,
particularly in the Silicon Valley, where Chordiant's principal offices are
located, and in the markets in which Chordiant competes.
Chordiant depends on technology licensed to Chordiant by third parties, and the
loss or inability to maintain these licenses could prevent or delay sales of
Chordiant's products.
Chordiant licenses technology from several software providers that is
incorporated in Chordiant's products. In particular, Chordiant licenses Forte
Tool and related Forte products from Forte Software, Inc., a Sun Microsystems,
Inc. company. Chordiant's license agreement with Forte expires in September
2001, and can be extended upon agreement of the parties. Chordiant anticipates
that Chordiant will continue to license technology from Forte and other third
parties in the future. This software may not continue to be available on
commercially reasonable terms, if at all. The loss of the Forte technology or
other technology licenses could result in delays in the license of Chordiant's
products until equivalent technology, if available, is developed or identified,
licensed and integrated into Chordiant's products. Even if substitute
technologies are available, there can be no guarantee that Chordiant will be
able to license these technologies on commercially reasonable terms, if at all.
Defects in third party products associated with Chordiant's products could
impair Chordiant's products' functionality and injure Chordiant's reputation.
The effective implementation of Chordiant's products depends upon the
successful operation of third party products in conjunction with Chordiant's
products. Any undetected errors in these products could prevent the
implementation or impair the functionality of Chordiant's products, delay new
product introductions or injure Chordiant's reputation. In the past, while
Chordiant's business has not been materially harmed, product releases have been
delayed as a result of errors in third-party software and Chordiant has
incurred significant expenses fixing and investigating the cause of these
errors.
Chordiant's customers and system integration partners have the ability to alter
Chordiant's source code and inappropriate alterations could adversely affect
the performance of Chordiant's products, cause injury to Chordiant's reputation
and increase operating expenses.
Customers and system integration partners have access to Chordiant's
computer source code when they license Chordiant's products and may alter the
source code. Alteration may lead to implementation, operation, technical
support and upgrade problems for Chordiant's customers. This could adversely
affect the market acceptance of Chordiant's products, and any necessary
investigative work and repairs could cause Chordiant to incur significant
expenses and delays in implementation.
If Chordiant fails to introduce new versions and releases of Chordiant's
products in a timely manner, customers may license competing products and
Chordiant's revenues may decline.
If Chordiant is unable to ship or implement enhancements to Chordiant's
products when planned, or fails to achieve timely market acceptance of these
enhancements, Chordiant may suffer lost sales and could fail to achieve
anticipated revenues. A majority of Chordiant's total revenues has been, and is
expected to be, derived from the license of Chordiant's primary product suite.
Chordiant's future operating results will depend on the demand for these
products by future customers, including new and enhanced releases that are
19
subsequently introduced. If Chordiant's competitors release new products that
are superior to Chordiant's products in performance or price, or if Chordiant
fails to enhance Chordiant's products and introduce new features and
functionality in a timely manner, demand for Chordiant's products may decline.
Chordiant has in the past experienced delays in the planned release dates of
new versions of Chordiant's software products and upgrades. New versions or
Chordiant's products may not be released on schedule or may contain defects
when released.
If Chordiant's products do not operate with the hardware and software platforms
used by Chordiant's customers, customers may license competing products and
Chordiant's revenues will decline.
If Chordiant's products fail to satisfy advancing technological
requirements, the market acceptance of these products could be reduced.
Chordiant currently serves a customer base with a wide variety of constantly
changing hardware, software applications and networking platforms. Customer
acceptance of Chordiant's products depends on many factors such as:
. Chordiant's ability to integrate Chordiant's products with multiple
platforms and existing or legacy systems;
. Chordiant's ability to anticipate and support new standards, especially
Internet and enterprise Java standards; and
. the integration of additional software modules and third party software
applications with Chordiant's existing products.
Chordiant's reliance on international operations may cause increased operating
expenses and cause Chordiant's net income to decline.
During the fiscal year ended December 31, 2000, international revenues were
$25.8 million or approximately 77% of Chordiant's total net revenues. During
the fiscal year ended December 31, 1999, international revenues were $6.6
million or approximately 38% of Chordiant's total net revenues. Chordiant
expects international revenues will continue to represent a significant portion
of Chordiant's total net revenues in future periods.
Chordiant has faced, and will continue to face, risks associated with:
. difficulties in managing Chordiant's widespread operations;
. difficulties in hiring qualified local personnel;
. seasonal fluctuations in customer orders;
. longer accounts receivable collection cycles;
. expenses associated with products used in foreign markets;
. currency fluctuation and hedging activities; and
. economic downturns in international economies.
Any of these factors could have a significant impact on Chordiant's ability
to license products on a competitive and timely basis and adversely affect
Chordiant's operating expenses and net income.
Chordiant's international sales are both U.S. dollar and local currency
denominated. As a result, an increase in the value of the U.S. dollar relative
to foreign currencies could make Chordiant's products less competitive in
international markets and could negatively affect Chordiant's operating results
and cash flows.
20
International expansion could be difficult and Chordiant may not achieve sales
growth.
If Chordiant is unable to expand Chordiant's international operations and
sales, and build relationships with third parties outside the United States on
a timely basis, Chordiant may not achieve anticipated sales growth. Chordiant
has expanded, and intends to continue expanding, its international operations
and enter additional international markets. In October 1997, Chordiant opened
an office in London, England, and during 1999 and 2000, Chordiant opened
offices in the Netherlands and Germany, respectively. To increase Chordiant's
international sales opportunities, Chordiant will need to further develop
Chordiant's international sales, professional services and support
organizations, and Chordiant will need to form additional relationships with
system integration partners worldwide.
Chordiant's failure to integrate successfully Chordiant's acquired companies
could prevent Chordiant from operating efficiently.
On July 19, 2000, Chordiant completed its acquisition of White Spider
Software, Inc., an early stage software company that had completed development
of a beta version of a knowledge management software product. Upon the closing
date, White Spider became a wholly-owned subsidiary of Chordiant.
On January 8, 2001, Chordiant entered into an agreement and plan of merger
and reorganization with Prime Response Inc., a Delaware corporation, whose
common stock is listed on the Nasdaq National Market under the symbol "PRME",
pursuant to which Chordiant exchanged 0.60 shares of its common stock for each
outstanding share of Prime Response common stock. On March 27, 2001, the
stockholders of Prime Response approved the merger agreement and the
stockholders of Chordiant approved the issuance of shares of Chordiant common
stock to the stockholders of Prime Response. As of March 27, 2001, Prime
Response is a wholly-owned subsidiary of Chordiant. Prime Response is a
provider of integrated relationship marketing software solutions.
Chordiant's business strategy includes pursuing opportunities to grow
Chordiant's business, both internally and through selective acquisitions and
various types of business combinations. To implement this strategy, Chordiant
may in the future be involved in additional merger and acquisition
transactions. Acquisition transactions are motivated by many factors, including
Chordiant's desire to acquire skilled personnel, Chordiant's desire to obtain
new technologies and Chordiant's desire to expand and enhance Chordiant's
product offerings. Growth through acquisitions has several identifiable risks
including difficulties associated with successfully integrating the previously
distinct businesses into Chordiant's organization, the substantial management
time devoted to integrating the companies, the possibility that Chordiant might
not be successful in retaining the employees of the acquired companies,
undisclosed liabilities, the failure to realize anticipated benefits (such as
cost savings and synergies) and issues related to integrating acquired
technology or content into Chordiant's products and media properties (such as
unanticipated expenses). Realization of any of these risks in connection with
any mergers or acquisitions Chordiant has entered into, or may enter into,
could have a material adverse effect on Chordiant's business, operating results
and financial condition.
Competition in Chordiant's markets is intense and could reduce Chordiant's
sales and prevent Chordiant from achieving profitability.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any one of which could reduce Chordiant's
future revenues. The market for Chordiant's products is intensely competitive,
evolving and subject to rapid technological change. The intensity of
competition is expected to increase in the future. Chordiant's current
competitors include:
. Internal information technology departments: In-house information
technology departments of potential customers have developed or may
develop systems that provide some or all of the functionality of
21
Chordiant's products. Chordiant expects that internally developed
application integration and process automation efforts will continue to be
a significant source of competition.
. Point application vendors: Chordiant competes with providers of stand-
alone point solutions for Web-based customer relationship management and
traditional client/server-based, call-center service customer and
salesforce automation solution providers.
Many of Chordiant's competitors have greater resources and broader customer
relationships than Chordiant does. In addition, many of these competitors have
extensive knowledge of Chordiant's industry. Current and potential competitors
have established, or may establish, cooperative relationships among themselves
or with third parties to offer a single solution and increase the ability of
their products to address customer needs.
If Chordiant is unable to protect Chordiant's intellectual property, Chordiant
may lose a valuable asset or incur costly litigation to protect Chordiant's
rights.
Chordiant's success and ability to compete depends upon Chordiant's
proprietary technology. Chordiant relies on trademark, trade secret and
copyright laws to protect Chordiant's intellectual property. Chordiant has no
patents or patent applications. Chordiant ships source code to Chordiant's
customers, and third party system integrators and partners are given access to
it. Despite Chordiant's efforts to protect Chordiant's intellectual property, a
third party could copy or obtain the source code to Chordiant's software or
other proprietary information without authorization and/or could develop
software competitive to the company's. Chordiant's means of protecting
Chordiant's proprietary rights may not be adequate and Chordiant's competitors
may independently develop similar technology or duplicate Chordiant's products.
Chordiant may have to litigate to enforce Chordiant's intellectual property
rights, to protect Chordiant's trade secrets or know-how or to determine their
scope, validity or enforceability. Enforcing or defending Chordiant's
proprietary technology is expensive, could cause the diversion of Chordiant's
resources and may not prove successful. Chordiant's protective measures may
prove inadequate to protect Chordiant's proprietary rights. If Chordiant is
unable to protect Chordiant's intellectual property, Chordiant may lose a
valuable asset or incur costly litigation to protect Chordiant's rights.
If Chordiant becomes subject to intellectual property infringement claims,
these claims could be costly and time-consuming to defend, divert management's
attention and cause product delays, and have an adverse effect on Chordiant's
revenues and net income.
Chordiant expects that software product developers and providers of software
in markets similar to Chordiant's target markets will increasingly be subject
to infringement claims as the number of products and competitors in Chordiant's
industry grows and the functionality of products overlaps. Any claims, with or
without merit, could be costly and time-consuming to defend, divert Chordiant's
management's attention, or cause product delays. Chordiant has no patents or
patent applications that Chordiant could use defensively against any company
bringing such a claim. If any of Chordiant's products were found to infringe a
third party's proprietary rights, Chordiant could be required to enter into
royalty or licensing agreements to be able to sell Chordiant's products.
Royalty and licensing agreements, if required, may not be available on terms
acceptable to Chordiant or at all.
Chordiant's stock price is subject to significant fluctuations.
Since Chordiant's initial public offering in February 2000, the price of
Chordiant's common stock has fluctuated widely. Chordiant believes that factors
such as the risks described herein or other factors could cause the price of
its common stock to fluctuate, perhaps substantially. In addition, recently,
the stock market, in general, and the market for high technology stocks in
particular, has experienced extreme price fluctuations, which have often been
unrelated to the operating performance of the affected companies. Such
fluctuations could adversely affect the market price of Chordiant's common
stock.
22
ITEM 2. FACILITIES
Chordiant's headquarters are located in offices that are approximately
31,000 square feet in Cupertino, California pursuant to an office lease
expiring in July 2004. Chordiant also leases office space in New York, New
York, Mahwah, New Jersey; Irving, Texas; Chicago, Illinois; Manchester, New
Hampshire; London, England; Neu-Isenberg, Germany; Munich, Germany and
Amsterdam, the Netherlands.
ITEM 3. LEGAL PROCEEDINGS
Chordiant is not a party to any material legal proceedings. Chordiant may be
subject to various claims and legal actions arising in the ordinary course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of Chordiant during
the fourth quarter of the fiscal year ended December 31, 2000.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"CHRD." Public trading of our common stock commenced on February 14, 2000. The
following table shows, for the periods indicated, the high and low per share
prices of our common stock, as reported by the Nasdaq National Market.
Quarter Ended Low High
------------- ------ ------
First Quarter.................................................. $16.25 $39.44
Second Quarter................................................. $ 5.44 $16.63
Third Quarter.................................................. $ 7.38 $17.98
Fourth Quarter................................................. $ 1.88 $ 8.00
As of February 15, 2001, there were approximately 205 stockholders of record
of our common stock. We have never paid or declared any cash dividends. We
currently expect to retain earnings for use in the operation and expansion of
our business and therefore do not anticipate paying any cash dividends.
Recent Sales of Unregistered Securities
We have sold and issued the following unregistered securities during the
period covered by this Annual Report:
(1) In July, 2000, Chordiant issued an aggregate of 476,515 shares of
common stock in exchange for all outstanding shares of White Spider
Software, Inc. and assumed employee stock options granted by White Spider
and exercisable into shares of Chordiant common stock over a term of ten
years from the date of grant of such options, the latest possible date of
exercise being June 23, 2010. Each share of White Spider was exchanged for
approximately .074ths of a share of Chordiant common stock. As of the
closing date of the acquisition, White Spider Software is a wholly owned
subsidiary of Chordiant.
(2) From January 1, 2000 through April 11, 2000, Chordiant issued,
pursuant to the exercise of stock options granted to certain employees,
consultants and directors under our 1999 Equity Incentive Plan, 1,977,823
shares of common stock. All common stock issuable pursuant to then
outstanding options and common stock available for grant under the 1999
Equity Incentive Plan was registered pursuant to a Form S-8 Registration
Statement filed on April 11, 2000.
The sales and issuances of securities described in paragraph (1) above were
deemed to be exempt from registration under the Securities Act by virtue of
Rule 506 of Regulation D of the Securities Act of 1933. Appropriate legends are
affixed to the stock certificates issued in the aforementioned transactions.
The sales and issuances of securities described in paragraph (2) were deemed
to be exempt from registration under the Securities Act by virtue of Rule 701
of the Securities Act of 1933 in that they were offered and sold either
pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation, as provided by Rule 701.
Use of Proceeds from Sales of Registered Securities
We commenced our initial public offering on February 14, 2000 pursuant to a
Registration Statement on Form S-1 (File No. 333-92187) (the "Registration
Statement"), which was declared effective on February 14, 2000. The offering
terminated following the sale of all securities registered. The managing
underwriters of the public offering were Robertson Stephens, Dain Rauscher
Wessels and Thomas Weisel Partners LLC (the "Underwriters"). Pursuant to the
Registration Statement, the Company sold 4,500,000 shares of common stock
24
at $18.00 per share resulting in gross proceeds of $81.0 million, $5.7 million
of which was applied toward the underwriting discount and commissions. Other
expenses related to the offering are estimated to have been $2.0 million and
have been paid or are payable to unaffiliated parties. On February 25, 2000,
the Underwriters exercised their over-allotment options and purchased 675,000
additional shares of common stock at the issuance price of $18.00 per share, of
which 425,000 shares were sold by the Company and 250,000 were sold by two of
our stockholders. In conjunction with its sale of the 425,000 shares, the
Company received $7,114,500, net of commissions and costs. The total net
proceeds to the Company from the initial public offering were approximately
$80.4 million. The Company used a portion of the net proceeds to make a payment
of $1,490,155 representing principal and accrued interest to the holder of our
accounts receivable line of credit. We currently expect to use the remaining
net proceeds primarily for working capital and general corporate purposes,
including increased research and development expenditures, increased sales and
marketing expenditures, and capital expenditures made in the ordinary course of
business. In addition, we may use a portion of the net proceeds to fund
acquisitions or investments in complementary businesses, technologies or
products. Pending such uses, we will invest the net proceeds in short-term,
investment grade, and interest bearing securities.
25
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
the consolidated financial statements and related notes of Chordiant and
"Chordiant Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Annual Report. The
consolidated statement of operations data for the years ended December 31,
1998, 1999 and 2000 and the consolidated balance sheet data as of December 31,
1999 and 2000 are derived from the audited consolidated financial statements
included in this Annual Report. The consolidated statement of operations data
for the years ended December 31, 1996 and 1997 and the balance sheet data as of
December 31, 1996, 1997 and 1998 are derived from audited consolidated
financial statements not included in this Annual Report. The diluted net loss
per share computation excludes potential shares of common stock (preferred
stock, options and warrants to purchase common stock and common stock subject
to repurchase rights that Chordiant holds), since their effect would be
antidilutive. See the notes to Chordiant's consolidated financial statements
for a detailed explanation of the determination of the shares used to compute
basic and diluted net loss per share. Chordiant's historical results are not
necessarily indicative of results to be expected for future periods.
Year-Ended December 31,
-----------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Net revenues:
License...................... $ -- $ 1,142 $ 4,360 $ 8,007 $ 16,896
Service...................... 2,312 1,766 8,105 9,581 16,793
------- -------- -------- -------- --------
Total net revenues........... 2,312 2,908 12,465 17,588 33,689
------- -------- -------- -------- --------
Cost of net revenues:
License...................... -- 73 425 397 912
Service...................... 2,353 1,462 8,947 14,352 17,510
Non-cash compensation
expense..................... -- 129 127 692 2,040
------- -------- -------- -------- --------
Total cost of net revenues... 2,353 1,664 9,449 15,441 20,462
------- -------- -------- -------- --------
Gross profit (loss)........... (41) 1,244 2,966 2,147 13,227
------- -------- -------- -------- --------
Operating expenses:
Sales and marketing:
Non-cash compensation
expense..................... -- 125 122 739 1,488
Other sales and marketing.... 1,140 5,142 12,580 13,368 22,422
Research and development:
Non-cash compensation
expense..................... -- 158 155 846 2,039
Other research and
development................. 4,598 6,240 5,858 6,494 14,437
Purchased in-process research
and development............. -- -- -- -- 4,234
General and administrative:
Non-cash compensation
expense..................... 3 86 85 383 689
Other general and
administrative.............. 1,860 1,416 2,046 2,668 5,493
Amortization of intangible
assets...................... -- -- -- -- 802
------- -------- -------- -------- --------
Total operating expenses..... 7,601 13,167 20,846 24,498 51,604
------- -------- -------- -------- --------
Loss form operations.......... (7,642) (11,923) (17,880) (22,351) (38,377)
Interest expense.............. (55) (112) (121) (1,067) (269)
Interest income and other
income, net.................. 135 442 561 281 3,290
------- -------- -------- -------- --------
Net loss...................... $(7,562) $(11,593) $(17,440) $(23,137) $(35,356)
======= ======== ======== ======== ========
Net loss per share:
Basic and diluted............ $ (1.51) $ (2.31) $ (3.44) $ (4.34) $ (1.05)
======= ======== ======== ======== ========
Weighted average shares used
in computing basic and
diluted net loss per share.. 5,002 5,009 5,075 5,327 33,690
======= ======== ======== ======== ========
As of December 31,
-----------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
(in thousands, except per share data)
Consolidated Balance Sheet
Data:
Cash and cash equivialents.... $ 2,678 $ 18,916 $ 1,713 $ 6,719 $ 41,465
Working capital (deficit)..... (1,368) 7,767 (10,162) 1,833 60,529
Total assets.................. 7,282 21,360 11,521 22,086 107,448
Short-term and long-term
borrowings................... 1,045 1,268 1,687 13,225 595
Short-term and long-term
deferred revenue............. 4,179 10,487 5,719 10,196 30,045
Mandatorily redeemable
convertible preferred stock.. 9,047 28,949 28,949 51,609 --
Stockholders' equity
(deficit).................... (9,586) (20,682) (37,604) (57,782) 63,320
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Chordiant provides software that is designed for global consumer businesses
serving the needs of one-to-one relationships in industries such as banking,
financial services, insurance, telecommunications, travel and leisure, and
other markets with diverse sets of customers and products. Chordiant's products
are a suite of applications that enables companies to quickly access the right
information and apply a common set of business rules across multiple contact
channels to maximize customer retention and satisfaction. It applies
personalized business processes to business transactions in a consistent
manner, no matter where the interaction occurs. It allows companies to
implement a solution across a wide range of devices such as Internet Websites,
in-car concierge systems, wireless application protocol enabled devices that
support mobile Internet phones and personal digital appliance devices,
traditional call centers and retail sites.
Chordiant was incorporated in California in March 1991 and was
reincorporated in Delaware in October 1997. Before 1997, Chordiant was
primarily engaged in custom consulting services. Chordiant released the first
version of its product suite in September 1997. With the release of this
product suite, Chordiant accelerated the development of its sales and marketing
organizations.
Chordiant derives revenues primarily from licenses of its software and from
related services, which include implementation, consulting, customization and
integration, post-contract customer support and training. Its products are
typically licensed directly to customers for a perpetual term, with pricing
based on the number of servers and the number of users.
On contracts involving significant implementation or customization essential
to the functionality of its products, Chordiant recognizes license and service
revenues under the percentage-of-completion method of accounting using labor
hours worked as the measure of progress towards completion. Chordiant
classifies revenues from these arrangements as license and service revenues
based upon the estimated fair value of each element. Provisions for estimated
contract losses are recognized in the period in which the loss becomes probable
and can be reasonably estimated. When Chordiant sells existing customers
additional seats, revenue for the license of the additional seats is recognized
at either the go-live date or the delivery date, whichever is later.
On contracts not involving significant implementation or customization
essential to the functionality of its products, Chordiant recognizes license
revenues when there is persuasive evidence of an arrangement, the fee is fixed
and determinable, there is probability of collection and delivery has occurred.
For arrangements with multiple elements, Chordiant recognizes revenues for the
delivered elements based upon the residual contract value as prescribed by
Statement of Position No. 98-9, "Modification of SOP No. 97-2 with Respect to
Certain Transactions."
In situations in which Chordiant is not responsible for implementation
services but is obligated to provide unspecified additional software products
in the future, Chordiant recognizes revenue as a subscription ratably over the
term of the commitment period.
Chordiant recognizes service revenues from consulting and training services
as these services are performed. It recognizes service revenues from post-
contract customer support ratably over the contractual support term, generally
one year.
In the future, Chordiant expects to derive revenues from contracts that
provide for implementation services at a fixed hourly rate. On other contracts,
Chordiant expects to derive revenues from the licensing of the installed
product on a per transaction basis. In connection with these types of
arrangements, Chordiant will recognize the fair value of the implementation
services as the services are delivered and will recognize license fees on a
monthly basis at the contractual rate.
27
Chordiant bills customers according to contract terms. Chordiant records as
deferred revenues amounts billed to customers in excess of revenues recognized.
Service revenues as a percentage of total revenues were 65%, 54% and 50% for
the fiscal years ended December 31, 1998, 1999, and 2000, respectively. To help
ensure the success of early product deployments by customers, in early 1998
Chordiant began establishing a significant service organization. The
organization assists customers, and third parties, such as system integrators,
in the design and implementation of Chordiant's products. Since service
revenues have a lower gross margin than license revenues, this service activity
resulted in reduced overall gross margins. Since the fourth quarter of 1998,
Chordiant engaged third parties to provide services to customers, who then
billed Chordiant for their services. As a result of using third party
resources, revenues from these contracts generated small gross margins. As a
result of expansion of its service organization and use of system integrators
that bill its customers directly for services, Chordiant believes that its use
of third party service providers will decline substantially in future periods.
Chordiant expects that service revenue will continue to represent over 40% of
total revenues.
Chordiant sells its products through its direct sales force, and augments
its sales efforts through relationships with system integrators, application
service providers and technology vendors.
For the fiscal years ended December 31, 1998, 1999 and 2000, revenues were
derived from customer accounts in the United States, United Kingdom, South
Africa, Germany, Canada and the Netherlands. For the fiscal years ended
December 31, 1998, 1999 and 2000, international revenues were $9.7 million,
$6.6 million and $25.8 million or approximately 78%, 38%, and 77% of
Chordiant's total net revenues, respectively. Chordiant believes international
revenues will continue to represent a significant portion of its total revenues
in future periods.
A small number of customers account for a significant portion of Chordiant's
total net revenues. As a result, the loss or delay of individual orders or
delays in the product implementations for a customer can have a material impact
on its revenues. For the year ended December 31, 2000, revenues from EDS,
Lloyds TSB and Direct Line Group Services Limited accounted for approximately
30%, 19% and 14% of its total net revenues, respectively. For the year ended
December 31, 1999, revenues from Chase Manhattan Mortgage Corporation, First
USA and EDS accounted for 30%, 19% and 15% of its total net revenues,
respectively. Chordiant expects that revenues from a small number of customers
will continue to account for a majority of its total net revenues in the future
as historical implementations are completed and replaced with new projects from
new and existing customers.
Since its inception, Chordiant has incurred substantial research and
development costs and has invested heavily in the expansion of its product
development, sales, marketing and professional services organizations in order
to build an infrastructure to support its long-term growth strategy. The number
of Chordiant's fulltime employees increased from 118 at December 31, 1998, to
144 at December 31, 1999, to 250 at December 31, 2000, representing increases
of approximately 22% and 74%, respectively. Chordiant anticipates that its
operating expenses will continue to increase as it expands its product
development, sales and marketing and professional services organization.
Chordiant expects to incur net losses in the future.
Chordiant believes that period-to-period comparisons of its operating
results are not meaningful and should not be relied upon as indicative of
future performance. Chordiant's prospects must be considered given the risks,
expenses and difficulties frequently encountered by companies in early stages
of development, particularly companies in new and rapidly evolving businesses.
There can be no assurance Chordiant will be successful in addressing these
risks and difficulties. In addition, although Chordiant has experienced revenue
growth recently, this trend may not continue. In addition, Chordiant may not
achieve or maintain profitability in the future.
28
Results of Operations
The following table provides the percentage of Chordiant's total net
revenues represented by each for the fiscal years ended December 31, 1998, 1999
and 2000. This information has been derived from the consolidated financial
statements included elsewhere in this Annual Report. The following table sets
forth, as a percentage of total net revenues, consolidated statements of
operations data for the periods indicated:
Year ended December 31,
---------------------------
1998 1999 2000
------- ------- -------
As a Percentage of Total Net Revenues:
Net revenues License-third parties............. 35 % 34 % 32 %
License-related parties........................ 0 12 18
Service-third parties.......................... 64 51 12
Service-related parties........................ 1 3 38
------- ------- -------
Total net revenues........................... 100 100 100
------- ------- -------
Cost of net revenues:
License-third parties.......................... 3 1 3
License-related parties........................ 0 1 0
Service-third parties.......................... 71 80 47
Service-related parties........................ 1 2 5
Non-cash compensation expense.................. 1 4 6
------- ------- -------
Total costs of net revenues.................. 76 88 61
------- ------- -------
Gross profit..................................... 24 12 39
------- ------- -------
Operating expenses:
Sales and marketing;
Non-cash compensation expense.................. 1 4 4
Other sales and marketing........................ 101 76 67
Research and development:
Non-cash compensation expense.................. 1 5 6
Other research and development................. 47 37 43
Purchased in-process research and development.. 0 0 13
General and administrative Non-cash compensation
expense........................................ 1 2 2
Other general and administrative............... 16 15 16
Amortization of intangibles.................... 0 0 2
------- ------- -------
Total operating expenses..................... 167 139 153
------- ------- -------
Loss from operations............................. (143) (127) (114)
Interest expense................................. (1) (6) (1)
Interest income and other income, net............ 4 1 10
------- ------- -------
Net loss......................................... (140)% (132)% (105)%
======= ======= =======
Comparison of Fiscal Years Ended December 31, 1999 and 2000
Net Revenues
License. License revenues consist of licenses of Chordiant's e-business
infrastructure software. License revenues increased from $8.0 million for the
year ended December 31, 1999 to $16.9 million, or approximately 111%, for the
year ended December 31, 2000. The revenue increase was primarily due to the
growth in the number of product implementations by new and existing customers
and higher average transaction size. Chordiant's average transaction size has
increased due to an increased number of users per deployment.
29
Service. Service revenues consist of consulting assistance and
implementation, customization and integration and post-contract customer
support and training. Service revenues increased from $9.6 million for the year
ended December 31,1999 to $16.8 million, or approximately 75%, for the year
ended December 31, 2000. The revenue increase was primarily due to a
continuation in large customer implementations as well as maintenance, support
and consulting revenues associated with license agreements signed in earlier
periods.
Cost of Net Revenues
License. Cost of net license revenues consists primarily of royalty payments
to third parties, primarily Forte Software, for technology incorporated into
Chordiant's products. Chordiant expects the relationship with Forte Software to
continue for at least the next twelve months. Cost of net license revenues
increased from $397,000 for the year ended December 31, 1999 to $912,000, or
approximately 130%, for the year ended December 31, 2000. The cost of net
license revenues increase was primarily due to the growth in the number of
product implementations by new and existing customers and higher average
transaction size.
Service. Cost of service revenues consist primarily of salaries, facility
costs and payments to third-party consultants incurred in providing customer
support, training and implementation services. Cost of net service revenues,
before the effect of non-cash compensation expense, increased from $14.4
million for the year ended December 31, 1999 to $17.5 million, or approximately
22%, for the year ended December 31, 2000. The increase in absolute dollars was
primarily due to increased staff to support a higher number of product-related
engagements. Chordiant expects that the cost of net service revenues will
continue to increase in dollar amounts as it continues to expand its
professional services organization to meet anticipated customer demand.
Operating Expenses
Sales and marketing. Sales and marketing expenses consist of salaries,
commissions, field office expenses, travel and entertainment, promotional
expenses and allocated facility costs. Sales and marketing expenses, before the
effect of non-cash compensation expense, increased from $13.4 million for the
year ended December 31, 1999 to $22.4 million, or approximately 67%, for the
year ended December 31, 2000. The increase in these expenses were mainly
attributable to increases of $6.3 million in personnel expenses, $700,000 in
allocated depreciation and overhead costs and $2.0 million in marketing and
advertising costs. Chordiant expects that sales and marketing expenses will
continue to increase in dollar amounts as it continues to expand its sales and
marketing efforts through the establishment of additional domestic and
international sales offices and increased promotional activities.
Research and development. Research and development expenses include costs
associated with the development and enhancement of Chordiant's products,
quality assurance activities and allocated facility costs. These costs consist
primarily of employee salaries, benefits and the cost of consulting resources
that supplement its internal development team. Due to the relatively short time
between the date Chordiant's products achieve technological feasibility and the
date its products become generally available to customers, costs subject to
capitalization under SFAS No. 86 have been immaterial and have been expensed as
incurred. Research and development expenses before the effect of non-cash
compensation expense and purchased in-process research development increased
from $6.5 million for the year ended December 31, 1999 to $14.4 million, or
approximately 122%, for the year ended December 31, 2000. The increase was
mainly due to an increase of $6.6 million in personnel related expenses and
$1.3 million in allocated depreciation and overhead costs. Chordiant
anticipates that it will continue to devote substantial resources to research
and development and that these expenses will continue to increase in dollar
amounts.
Purchased in-process research and development. In-process research and
development expense represents technology acquired which, on the date of
acquisition, had not achieved technological feasibility and had no alternative
future use based on the state of development. The product under development may
not achieve commercial viability. Accordingly, the amount of acquired in-
process research and development of $4.2 million was immediately expensed, of
which $700,000 was attributable to the
30
acquisition of White Spider. The nature of the efforts required to develop the
purchased in-process research and development into a commercially viable
product principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to
establish that the product can be produced to meet its designed specifications,
including functions, features and technical performance requirements.
In 1998, Chordiant entered into a license for its products and related
service agreements with Chase Manhattan Mortgage Corporation (Chase). In 2000,
Chase alleged a breach of the agreements between the parties. At December 31,
1999, Chordiant's outstanding receivable balance from Chase was $1.7 million.
On March 1, 2000, Chordiant agreed with Chase to terminate the existing
agreements between them, and Chase agreed to pay Chordiant the $1.7 million
receivable balance under the agreements as of December 31, 1999. The parties
also entered into a separate agreement whereby Chase transferred to Chordiant
ownership of certain technology and intellectual property developed by the
parties under their prior agreements. Chordiant intends to use this technology
to add additional functionality to its core products as well as develop and
market a credit and collections application for the financial services
industry. Chordiant agreed to pay Chase $3.5 million for the intellectual
property rights to the technology. Chase retains an option to purchase a
license to the credit and collections application when it is made commercially
available by Chordiant. Chase has also agreed to assist Chordiant by providing
certain consulting services in designing the application. This acquired
technology was still in development on March 1, 2000 so the entire $3.5 million
paid by Chordiant to Chase was expensed by Chordiant as in-process research and
development. Development work on the acquired technology was completed during
the fourth quarter in 2000. Revenues in connection with the developed
technology also began during the fourth quarter of 2000.
The value of the purchase in-process research and development was determined
by estimating the projected net cash flows related to the product, determined
based upon Chordiant's estimates of costs to complete the development of the
technology and the future revenue to be earned upon commercialization of the
products. The estimated stage of completion (expressed as a percentage of
completion) for each project was calculated and then was applied to the net
cash flows for the product. The cash flows were then discounted back to their
net present value.
General and administrative. General and administrative expenses consist of
salaries for administrative, executive and finance personnel, recruiting costs,
information systems costs, professional service fees and allocated facility
costs. These expenses, before the effect of non-cash compensation expense,
increased from $2.7 million for the year ended December 31, 1999 to $5.5
million, or 104%, for the year ended December 31, 2000. The increase in these
expenses was mainly attributable to increases of $1.8 million in personnel
related expenses and $1.0 million in professional service fees due to an
increase in outside contractor expenses associated with increased recruiting
efforts and expanded human resources programs. Chordiant believes that its
general and administrative expenses will continue to increase in dollar amounts
as a result of its growing operations.
Non-cash compensation expense. Amortization of stock-based compensation is
allocated as non-cash compensation expense to the respective amounts in cost of
net revenues, sales and marketing, research and development and general and
administrative expense and includes the amortization of unearned employee
stock-based compensation and expenses for stock granted to consultants in
exchange for services. Employee stock-based compensation expense is amortized
over a four year vesting schedule using the multiple option approach. In
connection with the grant of some employee stock options, Chordiant recorded
aggregate unearned stock-based compensation expenses of $11.3 million for the
year ended December 31, 1999 and $4.1 million for the year ended December 31,
2000. The amount recorded in fiscal year 2000 included $2.0 million associated
with the acquisition of White Spider. Stock-based compensation included in
operating expenses totaled $2.7 million for the year ended December 31, 1999
and $6.3 million for the year ended December 31, 2000.
Amortization of intangibles. Amortization of intangibles for the year ended
December 31, 2000 was $802,000. Chordiant recorded intangibles in the amount of
$5.4 million ,of which $5.2 million was attributed to goodwill, during the year
ended December 31, 2000 due to the July 2000 purchase of White Spider.
Intangible assets for the White Spider acquisition are being amortized over a
period of three years.
31
Interest and other Income, net, and Interest Expense
Interest and other income, net, and interest expense consists primarily of
interest income generated from Chordiant's cash, cash equivalents and short-
term investments, interest expense incurred in connection with outstanding
borrowings, foreign currency gains and losses and other non-operating income
and expenses. Interest expense decreased from $1.1 million for the year ended
December 31, 1999 to $269,000 for the year ended December 31, 2000. The
decrease is due primarily to decreased borrowings. Interest and other income,
net increased from $281,000 for the year ended December 31, 1999 to $3.3
million for the year ended December 31, 2000. The increase is primarily
attributable to increased interest income earned on Chordiant's cash, cash
equivalents and short-term investments, which grew significantly following the
completion of its initial public offering in February 2000. Additionally,
within the net increase of $3.3 million for other income for the year ended
December 31, 2000 is a loss of approximately $460,000 attributable to foreign
exchange transaction losses.
Comparison of the Fiscal Years Ended December 31, 1998 and 1999
Net Revenues
License. License revenues increased from $4.4 million for the fiscal year
ended December 31, 1998 to $8.0 million or approximately 82% for the fiscal
year ended December 31, 1999, due to the growth in the number of product
implementations by new customers and higher average transaction size.
Chordiant's average transaction size has increased due to deployments by its
customers to larger numbers of users.
Service. Service revenues increased from $8.1 million for the fiscal year
ended December 31, 1998 to $9.6 million for the fiscal year ended December 31,
1999. The service revenue increase in 1999 was primarily due to a continuation
in large customer implementations as well as maintenance, support and
consulting revenues associated with license agreements signed in earlier
periods.
Cost of Net Revenues
License. Cost of license revenues consist primarily of royalty payments to
third parties for technology incorporated into Chordiant's products. Chordiant
began paying royalties for the fiscal year ended December 31, 1997.
Service. Cost of service revenue was $8.9 million for the fiscal year ended
December 31, 1998 and $14.4 million for the fiscal year ended December 31,
1999. During the fiscal years ended December 31, 1998 and 1999, Chordiant hired
a number of additional service personnel in anticipation of supporting a larger
customer base in future periods. These increased investment efforts to meet
anticipated customer demand resulted in negative gross margins from service
revenues for the fiscal years ended December 31, 1998 and 1999.
Operating Expenses
Sales and marketing. Sales and marketing expenses, before the effect of non-
cash compensation expense, increased from $12.6 million for the fiscal year
ended December 31, 1998 to $13.4 million for the fiscal year ended December 31,
1999. The increase of $788,000 in these expenses for the fiscal year ended
December 31, 1999, as compared to the fiscal year ended December 31, 1998, was
attributable to a $1.4 million increase in personnel expenses, offset by a
decrease in $612,000 of advertising cost.
Research and development. Research and development expenses, before the
effect of non-cash compensation expense, increased from $5.9 million for the
fiscal year ended December 31, 1998 to $6.5 million for the fiscal year ended
December 31, 1999. The increase of $600,000 in these expenses for the fiscal
year ended December 31, 1999, as compared to the fiscal year ended December 31,
1998, was attributable to an increase of $350,000 in personnel expenses and an
increase of $250,000 in overhead costs.
32
General and administrative. General and administrative expenses, before the
effect of non-cash compensation expense, increased from $2.0 million for the
fiscal year ended December 31, 1998 to $2.7 million for the fiscal year ended
December 31, 1999. The increase of $700,000 in these expenses for the fiscal
year ended December 31, 1999, as compared to the fiscal year ended December 31,
1998, was attributable to increases in personnel related expenses in connection
with additional finance, executive and information services and an increase in
outside contractor expenses associated with increased recruiting efforts and
expanded human resources programs.
In connection with the grant of some employee stock options, Chordiant
recorded an aggregate unearned stock-based compensation expense of $11.3
million for the fiscal year ended December 31, 1999. Stock-based compensation
totalling $489,000 for the fiscal year ended December 31, 1998 and $2.7 million
for the fiscal year ended December 31, 1999 was allocated to the respective
amounts in cost of net revenues, sales and marketing, research and development
and general and administrative.
Interest and other Income, net, and Interest Expense
Interest and other income, net decreased from $561,000 for the fiscal year
ended December 31, 1998 to $281,000 for the fiscal year and December 31, 1999.
Interest expense increased from $121,000 for the fiscal year ended December 31,
1999 to $1,067,000 for the fiscal year ended December 31, 2000. The increase in
interest expense was attributable to an increase in borrowings.
Provision for Income Taxes
Chordiant has not generated taxable income since inception and, as a result,
no provision for income taxes was recorded during the periods presented. Its
deferred tax assets primarily consist of net operating loss carryforwards,
nondeductible allowances and research and development tax credits. Chordiant
has recorded a valuation allowance for the full amount of its net deferred tax
assets, as the future realization of the tax benefit is not considered by
management to be more-likely-than-not.
Liquidity and Capital Resources
Since inception, Chordiant has financed its operations primarily through
private sales of common and preferred stock, with net proceeds totaling $51.6
million, through the sale of $10.0 million in convertible debentures, and
through the issuance of 4,925,000 shares of Chordiant common stock to the
public from which Chordiant raised approximately $80.4 million in net proceeds.
Net cash used in operating activities was $14.6 million for the fiscal year
ended December 31, 1998, $27.6 million for the fiscal year ended December 31,
1999 and $17.1 million for the fiscal year ended December 31, 2000.
Net cash used in investing activities was $3.1 million for the fiscal year
ended December 31, 1998, $1.9 million for the fiscal year ended December 31,
1999 and $28.1 million for the fiscal year ended December 31, 2000. Investing
activities consist primarily of purchases of property and equipment and net
proceeds from transactions involving Chordiant's short-term investments.
Net cash generated from financing activities was $448,000 for the fiscal
year ended December 31, 1998, $34.5 million for the fiscal year ended December
31, 1999 and $80.1 million for the fiscal year ended December 31, 2000. Net
cash generated from financing activities consisted primarily of net proceeds
from the issuance of preferred stock and proceeds from the issuance of common
stock through an initial public offering and borrowings.
On August 2, 2000, Chordiant committed to new terms and conditions for a new
line of credit composed of two elements, an accounts receivable line and an
equipment line.
33
Under the new terms and conditions of the accounts receivable line, the
total amount of the line of credit is $11.5 million. At Chordiant's option,
borrowings under the accounts receivable line of credit will bear interest
either at the lending bank's prime rate or the LIBOR Option (1,2,3 or 6 month
maturity) plus 2.50 basis points. The accounts receivable line is limited to
80% of eligible accounts receivable. There was no borrowing outstanding at
December 31, 2000 under the line of credit.
Borrowings under Chordiant's $3.4 million equipment line bear interest at
the lending bank's prime rate. Borrowings outstanding under the equipment line
were $595,000 at December 31, 2000.
Chordiant's assets secure borrowings under both lines of credit. The lines
of credit require Chordiant to maintain a minimum quick ratio of 2.50 to 1.00,
a tangible net worth of at least $25.0 million plus 60% of the proceeds of any
public stock offerings and subordinated debt issuance, and certain other
covenants.
Chordiant expects to continue to experience growth in its operating
expenses. Chordiant anticipates that operating expenses and planned capital
expenditures will continue to be a material use of its cash resources. In
addition, Chordiant may utilize cash resources to fund acquisitions or
investments in other businesses, technologies or product lines. Chordiant
believes that available cash and cash equivalents and the net proceeds from the
sale of equity securities this year will be sufficient to meet its working
capital and operating expense requirements for at least the next 12 months.
After that period, Chordiant may require additional funds to support its
working capital and operating expense requirements or for other purposes and
may seek to raise these additional funds through public or private debt or
equity financings. There can be no assurance that this additional financing
will be available, or if available, will be on reasonable terms.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities
and supercedes and amends a number of existing accounting standards. SFAS No.
133 requires that all derivatives be recognized in the balance sheet at their
fair market value and the corresponding derivative gains or losses be either
reported in the statement of operations or as a deferred item depending on the
type of hedge relationship that exists with respect to any derivatives. In July
1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting
for Derivatives Instruments and Hedging Activities--Deferral of Effective Date
of FASB Statement No. 133." SFAS No. 137 deferred the effective date until
fiscal years commencing after June 15, 2000. Chordiant will adopt SFAS No. 133
in its quarter ending March 31, 2001. Chordiant does not believe that the
pronouncement will have a material impact on its financial condition or results
of operations as currently conducted.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In June 2000, the SEC issued SAB 101B to defer the
effective date of implementation of SAB 101 until the fourth quarter of fiscal
2000. The adoption of SAB 101 did not have a material effect on Chordiant's
financial position or results of operations.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT CHORDIANT'S MARKET RISK
Chordiant is exposed to the impact of interest rate changes, foreign
currency fluctuations, and change in the market values of its investments.
Interest Rate and Foreign Exchange Rate Risk. Chordiant's exposure to market
rate risk due to changes in interest rates relates primarily to the company's
investment portfolio. Chordiant has not used derivative financial instruments
in Chordiant's investment portfolio. Chordiant invests Chordiant's excess cash
in debt instruments of the U.S. government and its agencies, and in high-
quality corporate issuers and, by policy, limits the amount of credit exposure
to any one issuer. Chordiant protects and preserves Chordiant's invested funds
by limiting default, market and reinvestment risk. Chordiant's interest income
is sensitive to changes in the general level of U.S. interest rates,
particularly since the majority of Chordiant's investments are in short-term
instruments. Due to the short-term nature of Chordiant's investments, Chordiant
believes that there is no material risk exposure. Therefore, no quantitative
tabular disclosures have been provided.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected if
interest rates fall. Due in part to these factors, Chordiant's future
investment income may fall short of expectations due to changes in interest
rates or Chordiant may suffer losses in principal if forced to sell securities
which have declined in market value due to changes in interest rates.
Chordiant utilizes foreign exchange contracts to hedge foreign currency
exposures of underlying assets and liabilities, primarily certain receivables
that are denominated in British Pounds, thereby limiting Chordiant's risk.
Gains and losses on foreign exchange contracts are reflected in the income
statement. Chordiant has entered into foreign exchange contracts, all with
maturities of less than nine months, to sell approximately (Pounds)8.5 million.
Fair value represents the difference in value of the contracts at the spot
rate and the forward rate. The counterparty to these contracts is a substantial
and creditworthy multinational commercial bank. The risks of counterparty
nonperformance associated with these contracts are considered to be not
material. Notwithstanding Chordiant's efforts to manage foreign exchange risks,
there can be no assurances that Chordiant's hedging activities will adequately
protect Chordiant against the risks associated with foreign currency
fluctuations.
The table below provides information about Chordiant's foreign currency
forward exchange contracts at December 31, 2000. The information is provided in
U.S. dollar equivalents and presents the notional amount (forward amount), the
weighted average contractual foreign currency exchange rates and fair value.
Contract Weighted Contract
amount in Average Amount in Fair
British Pounds Contract Rate U.S. Dollars Value
-------------- ------------- ------------- -----
(in thousands) (in thousands) (in thousands)
Foreign currency to be
sold under contract:
British Pounds.......... (Pounds) 8,500 1.4623 $12,429 $(280)
While the contract amounts provide one measurement of the volume of these
transactions, they do not represent the amount of Chordiant's exposure to
credit risk. The amounts (arising from the possible inabilities of the
counterparty to meet the terms of its contracts) are generally limited to the
amounts, if any, by which the counterparty's obligations exceed Chordiant's
obligations as these contracts can be settled on a net basis at Chordiant's
option. Chordiant controls credit risk through limits and monitoring
procedures.
Chordiant's international business is subject to risks typical of an
international business, including, but not limited to differing economic
conditions, changes in political climate, differing tax structures, other
regulations and restrictions, and foreign exchange rate volatility.
Accordingly, Chordiant's future results could be materially adversely impacted
by changes in these or other factors.
35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Chordiant Software, Inc. and Subsidiaries: Financial Statements for the Fiscal
Years Ended December 31, 1998, 1999 and 2000.
Page
----
Report of Independent Accountants.......................................... 37
Consolidated Balance Sheets................................................ 38
Consolidated Statements of Operations...................................... 39
Consolidated Statements of Stockholders' Equity (Deficit).................. 40
Consolidated Statements of Cash Flows...................................... 41
Notes to Consolidated Financial Statements................................. 42
36
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Chordiant Software, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Chordiant Software, Inc. ("Chordiant") and its subsidiaries at December 31,
1999 and 2000, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of Chordiant's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes 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. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 1, 2001
37
CHORDIANT SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31
------------------
1999 2000
-------- --------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 6,719 $ 41,465
Short-term investments................................... 2,000 26,203
Accounts receivable--third parties, net.................. 7,233 19,423
Accounts receivable--related parties..................... 1,211 1,057
Other current assets..................................... 1,775 7,149
-------- --------
Total current assets................................... 18,938 95,297
Property and equipment, net................................ 2,580 5,050
Intangible assets, net..................................... -- 4,585
Other assets............................................... 568 2,516
-------- --------
Total assets........................................... $ 22,086 $107,448
======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings............................................... $ 2,608 $ 595
Accounts payable......................................... 2,101 5,081
Accrued expenses......................................... 2,493 8,163
Deferred revenue--third parties.......................... 6,031 17,441
Deferred revenue--related parties........................ 3,872 3,488
-------- --------
Total current liabilities.............................. 17,105 34,768
Borrowings, long-term...................................... 10,617 --
Deferred revenue--third parties............................ 293 8,013
Deferred revenue--related parties.......................... -- 1,103
Other liabilities.......................................... 244 244
-------- --------
Total liabilities...................................... 28,259 44,128
-------- --------
Mandatorily redeemable convertible preferred stock, $0.001
par value; 25,028 shares authorized; 22,412 and no shares
issued and outstanding.................................... 51,609 --
-------- --------
Commitments and contingencies (Note 10)
Stockholders' equity (deficit):
Common Stock, $0.001 par value; 300,000 shares
authorized; 5,906 and 38,206 shares issued and
outstanding............................................. 6 41
Additional paid-in capital............................... 14,652 170,386
Notes receivable from stockholders....................... (406) (1,799)
Unearned compensation.................................... (9,470) (7,290)
Accumulated deficit...................................... (62,564) (97,920)
Accumulated other comprehensive loss..................... -- (98)
-------- --------
Total stockholders' equity (deficit)................... (57,782) 63,320
-------- --------
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' equity (deficit).. $ 22,086 $107,448
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
38
CHORDIANT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
Net revenues:
License-third parties.......................... $ 4,360 $ 5,938 $ 10,728
License-related parties........................ -- 2,069 6,168
Service-third parties.......................... 8,013 9,007 3,980
Service-related parties........................ 92 574 12,813
-------- -------- --------
Total net revenues........................... 12,465 17,588 33,689
Cost of net revenues:
License-third parties.......................... 425 263 873
License-related parties........................ -- 134 39
Service-third parties.......................... 8,846 13,999 15,878
Service-related parties........................ 101 353 1,632
Non-cash compensation expense.................. 127 692 2,040
-------- -------- --------
Total costs of net revenues.................. 9,499 15,441 20,462
-------- -------- --------
Gross profit..................................... 2,966 2,147 13,227
-------- -------- --------
Operating expenses:
Sales and marketing:
Non-cash compensation expense................ 122 739 1,488
Other sales and marketing.................... 12,580 13,368 22,422
Research and development:
Non-cash compensation expense................ 155 846 2,039
Other research and development............... 5,858 6,494 14,437
Purchased in-process research and
development................................. -- -- 4,234
General and administrative:
Non-cash compensation expense................ 85 383 689
Other general and administrative............. 2,046 2,668 5,493
Amortization of intangible assets.............. -- -- 802
-------- -------- --------
Total operating expenses..................... 20,846 24,498 51,604
-------- -------- --------
Loss from operations............................. (17,880) (22,351) (38,377)
Interest expense................................. (121) (1,067) (269)
Interest income and other income, net............ 561 281 3,290
-------- -------- --------
Net loss......................................... $(17,440) $(23,137) $(35,356)
======== ======== ========
Net loss per share:
Basic and diluted.............................. $ (3.44) $ (4.34) $ (1.05)
======== ======== ========
Weighted average shares used in computing basic
and diluted net loss per share................ 5,075 5,327 33,690
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
39
CHORDIANT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
Note Accumulated Total
Common Stock Additional Receivable Other Stockholders'
-------------- Paid-in from Unearned Accumulated Comprehensive Equity Comprehensive
Shares Amount Capital Stockholder Compensation Deficit Loss (Deficit) Loss
------ ------ ---------- ----------- ------------ ----------- ------------- ------------- -------------
Balance at
December 31,
1997........... 5,013 $ 5 $ 1,300 $ -- $ -- $(21,987) $ -- $(20,682)
Exercise of
stock options.. 236 -- 56 -- -- -- -- 56
Repurchase of
Common Stock... (30) -- (27) -- -- -- -- (27)
Unearned
compensation... -- -- 1,500 -- (1,500) -- -- --
Amortization of
unearned
compensation... -- -- -- -- 489 -- -- 489
Stock option
cancellations.. -- -- (9) -- 9 -- -- --
Comprehensive
loss:
Net loss........ -- -- -- -- -- (17,440) -- (17,440) $(17,440)
Comprehensive
loss........... -- -- -- -- -- -- -- -- $(17,440)
------ --- -------- ------- ------- -------- ---- -------- --------
Balance at
December 31,
1998........... 5,219 5 2,820 -- (1,002) (39,427) -- (37,604)
Exercise of
stock options.. 713 1 745 (406) -- -- -- 340
Repurchase of
Common Stock... (26) -- (41) -- -- -- -- (41)
Unearned
compensation... -- -- 11,274 -- (11,274) -- -- --
Amortization of
unearned
compensation... -- -- -- -- 2,660 -- -- 2,660
Stock option
cancellations.. -- -- (146) -- 146 -- -- --
Comprehensive
loss:
Net loss........ -- -- -- -- -- (23,137) -- (23,137) $(23,137)
Comprehensive
loss........... -- -- -- -- -- -- -- -- $(23,137)
------ --- -------- ------- ------- -------- ---- -------- --------
Balance at
December 31,
1999........... 5,906 6 14,652 (406) (9,470) (62,564) -- (57,782)
Exercise of
stock options.. 2,581 2 2,798 (1,456) -- -- -- 1,344
Repurchase of
Common Stock... (86) -- (77) 63 -- -- -- (14)
Conversion of
Preferred Stock
into Common
Stock.......... 22,412 22 51,587 -- -- -- -- 51,609
Conversion of
debt into
Common Stock... 2,000 2 9,998 -- -- -- -- 10,000
Issuance of
Common Stock in
initial public
offering....... 4,925 5 80,406 -- -- -- -- 80,411
Unearned
compensation... -- -- 2,043 -- (2,043) -- -- --
Amortization of
unearned
compensation... -- -- -- -- 6,256 -- -- 6,256
Common Stock
issued in
connection with
White Spider
acquisition.... 350 4 8,022 -- (2,033) -- -- 5,993
Issuance of
Common Stock
for Employee
Stock Purchase
Plan........... 118 -- 957 -- -- -- -- 957
Comprehensive
loss:
Net loss........ -- -- -- -- -- (35,356) -- (35,356) $(35,356)
Foreign currency
translation.... -- -- -- -- -- -- (98) (98) (98)
Comprehensive
loss........... -- -- -- -- -- -- -- -- $(35,454)
------ --- -------- ------- ------- -------- ---- -------- --------
Balance at
December 31,
2000........... 38,206 $41 $170,386 $(1,799) $(7,290) $(97,920) $(98) $ 63,320
====== === ======== ======= ======= ======== ==== ========
The accompanying notes are an integral part of these consolidated financial
statements.
40
CHORDIANT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
Cash flows from operating activities:
Net loss........................................ $(17,440) $(23,137) $(35,356)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 521 1,276 1,502
Purchased in-process research and development.. -- -- 734
Amortization of intangibles.................... -- -- 802
Stock-based compensation expense............... 489 2,660 6,256
Provision for doubtful accounts................ 17 470 (529)
Changes in assets and liabilities:
Accounts receivable-third parties............. (4,963) (2,416) (11,639)
Accounts receivable-related parties........... 15 (1,109) 154
Other current assets.......................... 311 (1,501) (5,374)
Other assets.................................. (181) (340) (1,912)
Accounts payable.............................. 3,936 (2,451) 2,774
Accrued expenses.............................. 1,308 378 5,637
Deferred revenue--third parties............... 1,317 605 19,130
Deferred revenue--related parties............. -- (2,128) 719
Other liabilities............................. 103 141 --
-------- -------- --------
Net cash used in operating activities........ (14,567) (27,552) (17,102)
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment............. (2,033) (990) (3,948)
Cash acquired in the acquisition of White
Spider, net of cash used....................... -- -- 29
Purchases of short-term investments............. (9,558) (2,800) (24,203)
Proceeds from sales and maturities of short-term
investments.................................... 8,507 1,851 --
-------- -------- --------
Net cash used in investing activities........ (3,084) (1,939) (28,122)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of mandatorily redeemable
convertible preferred stock, net............... -- 22,660 --
Proceeds from common stock issuance in initial
public offering, net........................... -- -- 80,411
Exercise of stock options....................... 56 340 1,344
Proceeds from issuance of common stock for
Employee Stock Purchase Plan................... -- -- 957
Repurchase of common stock...................... (27) (41) (14)
Proceeds from borrowings........................ 781 14,627 --
Repayment of borrowings......................... (362) (3,089) (2,630)
-------- -------- --------
Net cash provided by financing activities.... 448 34,497 80,068
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents..................................... -- -- (98)
Net increase (decrease) in cash and cash
equivalents..................................... (17,203) 5,006 34,746
Cash and cash equivalents at beginning of
period.......................................... 18,916 1,713 6,719
-------- -------- --------
Cash and cash equivalents at end of period....... $ 1,713 $ 6,719 $ 41,465
======== ======== ========
Supplemental cash flow information:
Cash paid for interest.......................... $ 112 $ 1,062 $ 270
======== ======== ========
Cash paid for taxes............................. $ -- $ -- $ 53
======== ======== ========
Supplemental non-cash activities:
Issuance of Common Stock upon conversion of
Preferred Stock................................ $ -- $ -- $ 51,609
======== ======== ========
Issuance of Common Stock in connection with the
White Spider acquisition....................... $ -- $ -- $ 8,026
======== ======== ========
Issuance of Common Stock upon conversion of
debt........................................... $ -- $ -- $ 10,000
======== ======== ========
Common Stock issued for stockholder notes....... $ 112 $ 406 $ 1,456
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
41
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 1--THE COMPANY:
Chordiant Software, Inc. ("Chordiant") was incorporated in California in
March 1991 and reincorporated in Delaware in October 1997.
In February 2000, Chordiant completed its initial public offering in which
Chordiant sold 4,500 shares of its Common Stock resulting in net proceeds to
Chordiant of $73,291, net of issuance cost. In February 2000, Chordiant's
underwriters exercised their over-allotment option, which resulted in the sale
of an additional 425 shares of Chordiant's stock, which generated additional
proceeds of $7,115. Upon closing of the initial public offering, each
outstanding share of Chordiant's Convertible Preferred Stock was automatically
converted into one share of Common Stock of Chordiant, resulting in the
issuance of 22,412 shares of Common Stock.
Chordiant provides e-business infrastructure software for customer
interaction applications. Chordiant's product helps enable companies to offer
their customers personalized marketing, sales programs, e-business services and
customer support across multiple channels of communications.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Reclassifications
The statement of operations reflects reclassifications to allocate the non-
cash compensation expense related to the issuance of stock options from a
single-line presentation within operating expenses to the respective amounts in
cost of net revenues, sales and marketing, research and development and general
and administrative expense.
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
Chordiant and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Such estimates include the allowance
for doubtful accounts, valuation of deferred tax assets and the estimates
associated with the percentage-of-completion method of accounting for certain
of Chordiant's revenue contracts.
Cash, cash equivalents and short-term investments
All highly liquid investments with a maturity of three months or less from
their date of purchase are considered to be cash equivalents.
Chordiant's short-term investments consist of debt securities with
maturities greater than three months at the date of purchase. The Company
classifies all short-term investments as available-for-sale in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Accordingly, Chordiant's
investments are carried at fair value as of the balance sheet
42
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
date. Unrealized gains and losses are reported net of related taxes as a
separate component of stockholder's equity (deficit). Additionally, the cost
of securities sold is based upon the specific identification method. At
December 31, 1999 and 2000, amortized cost approximated fair value and
unrealized gains and losses were insignificant.
The portfolio of short-term investments (including cash and cash
equivalents) consisted of the following:
December 31,
--------------
1999 2000
------ -------
Cash....................................................... $ 631 $15,671
Money market and money funds............................... 24 222
Commercial paper........................................... 6,064 22,975
U.S. Corporate bonds....................................... -- 637
U.S. Corporate notes....................................... 2,000 3,249
Municipal bonds............................................ -- 22,093
U.S. Government bonds and notes............................ -- 2,821
------ -------
$8,719 $67,668
====== =======
Fair value of financial instruments
Chordiant's financial instruments, including cash and cash equivalents,
short-term investments, accounts receivable and accounts payable are carried
at cost, which approximates fair value because of the short-term nature of
those instruments. The reported amounts of borrowings approximate fair value
due to the market value interest rates which these debts bear.
Chordiant enters into foreign currency forward exchange contracts to hedge
against exposure to changes in foreign currency exchange rates of underlying
assets and liabilities, primarily certain receivables that are denominated in
British pounds. The estimated fair value of foreign currency forward exchange
contracts represents the difference in value of the contracts at the spot rate
and the forward rate and is based primarily on quoted market prices for the
same or similar instruments, adjusted where necessary for maturity
differences. The table below provides information about Chordiant's foreign
currency forward exchange contracts and corresponding fair value at December
31, 2000.
Weighted Contract
Contract Average Amount
Amount in Contract in U.S. Fair
British Pounds Rate Dollars Value
-------------- -------- -------- -----
Foreign currency to be sold
under contract:
British pounds................ (Pounds) 8,500 1.4623 $12,429 $(280)
Property and equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method based upon the estimated useful lives of assets which
range from three to seven years. Amortization of leasehold improvements is
calculated using the straight-line method over the shorter of the economic
life of the asset or the lease term. Purchased internal-use software consists
primarily of amounts paid for perpetual licenses to third party software
applications which are amortized over their estimated useful life, generally
three years.
43
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
Intangible assets
Intangible assets resulting from the acquisition of White Spider Software,
Inc. ("White Spider") were determined by management to be primarily associated
with goodwill and workforce in place. Goodwill and workforce in place are
amortized on a straight-line basis over their estimated period of benefit,
which is three years (see Note 3).
Long-lived assets
Chordiant accounts for long-lived assets under SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of," which requires the Company to review for impairment of long-lived assets,
whenever events or changes in circumstances indicate that the carrying amount
of an asset might not be recoverable. When such an event occurs, the Company
estimates the future cash flows expected to result from the use of the asset
and its eventual disposition. If the undiscounted expected future cash flows is
less than the carrying amount of the asset, an impairment loss is recognized.
To date, no impairment loss has been recognized.
Revenue recognition
Chordiant derives revenues from licenses of its software and related
services, which include assistance in implementation, customization and
integration, post-contract customer support, training and consulting.
On contracts involving significant implementation or customization essential
to the functionality of Chordiant's product, license and service revenues are
recognized under the percentage-of-completion method using labor hours incurred
as the measure of progress towards completion as prescribed by Statement of
Position ("SOP") No. 81-1, "Accounting for Performance of Construction-Type and
Certain Product-Type Contracts." Chordiant considers that a project is
completed at the go-live date. Provisions for estimated contract losses are
recognized in the period in which the loss becomes probable and can be
reasonably estimated. When Chordiant sells additional licenses, revenue from
additional seats is recognized at the go-live date if the seats have been
delivered. Chordiant classifies revenues from these arrangements as license and
services revenues based upon the estimated fair value of each element.
On contracts that do not involve significant implementation or customization
essential to the functionality of Chordiant's product, license fees are
recognized when there is persuasive evidence of an arrangement for a fixed and
determinable fee that is probable of collection and when delivery has occurred
as prescribed by SOP No. 97-2, "Software Revenue Recognition." For arrangements
with multiple elements, Chordiant recognizes revenue for services and post-
contract customer support based upon vendor specific objective evidence
("VSOE") of fair value of the respective elements. VSOE of fair value for the
services element is based upon the standard hourly rates Chordiant charges for
services when such services are sold separately. VSOE of fair value for annual
post-contract customer support is established with the optional stated future
renewal rates included in the contracts. When contracts contain multiple
elements, and VSOE of fair value exists for all undelivered elements, Chordiant
accounts for the delivered elements, principally the license portion, based
upon the "residual method" as prescribed by SOP No. 98-9, "Modification of SOP
No. 97-2 with Respect to Certain Transactions."
In situations in which Chordiant is not responsible for implementation
services but is obligated to provide unspecified additional software products
in the future, Chordiant recognizes revenue as a subscription ratably over the
term of the commitment period.
44
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
Revenues from reseller arrangements are recognized on the "sell-through"
method, when the reseller reports to Chordiant the sale of Chordiant's software
products to end users. Chordiant's agreements with its customers and resellers
do not contain product return rights.
Other service revenues from consulting and training services are recognized
as such services are performed. Service revenues from post-contract customer
support are recognized ratably over the support period, generally one year.
In future periods, Chordiant expects to derive revenues from contracts that
provide for implementation services at a fixed hourly rate. On other contracts,
the Company expects to derive revenues from the licensing of the installed
product on a per transaction basis. In connection with such arrangements,
Chordiant will recognize the fair value of the implementation services as such
services are delivered and will recognize license fees on a monthly basis at
the contractual rate per transaction.
Chordiant bills customers in accordance with contract terms. Amounts billed
to customers in excess of revenues recognized are recorded as deferred
revenues.
Concentrations of credit risk
Financial instruments that potentially subject Chordiant to concentrations
of credit risk consist of cash, cash equivalents, short-term investments and
accounts receivable. To date, Chordiant has invested excess funds in money
market accounts, commercial paper, municipal bonds and term notes. Chordiant
deposits cash, cash equivalents and short-term investments with financial
institutions that management believes are credit worthy. Chordiant's accounts
receivable are derived from revenues earned from customers located in the
United States, United Kingdom, Canada, Netherlands and South Africa. Chordiant
performs ongoing credit evaluations of its customers' financial condition and,
generally, requires no collateral from its customers. Chordiant maintains
reserves for potential credit losses on customer accounts when deemed
necessary. To date, such losses have not been material.
The following table summarizes the revenues from customers, of which Company
H is a related party, in excess of 10% of total net revenues:
Year Ended
December 31,
----------------
1998 1999 2000
---- ---- ----
Company A................................................... 12% 30% --
Company B................................................... -- 19% --
Company C................................................... 14% -- --
Company D................................................... 36% -- --
Company E................................................... 19% -- --
Company F................................................... -- -- 14%
Company G................................................... -- -- 19%
Company H................................................... -- 15% 30%
At December 31, 1999, Company A accounted for 24% of accounts receivable. At
December 31, 2000, Company G accounted for 64% of accounts receivable.
45
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
Software development costs
Costs incurred in the research and development of new products and
enhancements to existing products are charged to expense as incurred until the
technological feasibility of the product or enhancement has been established
through the development of a working model. After establishing technological
feasibility, additional development costs incurred through the date the product
is available for general release to customers would be capitalized and
amortized over the estimated product life. To date, the period between
achieving technological feasibility and general release has been short and
software development costs qualifying for capitalization have been
insignificant. Accordingly, Chordiant has not capitalized any software
development costs.
Advertising costs
Advertising costs are charged to sales and marketing expense as incurred.
Advertising costs for the years ended December 31, 1998, 1999 and 2000 totaled
$1,955, $1,340 and $838, respectively.
Stock-based employee compensation
Chordiant accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees," the provisions of Financial
Accounting Standards Board Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans," ("FIN 28")
and complies with the disclosure provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation." Under APB No. 25, compensation expense is based on
the difference, if any, on the date of the grant, between the fair value of the
Company's stock and the exercise price of the stock option being granted.
Stock-based compensation is amortized in accordance with FIN 28 using the
multiple option approach. SFAS No. 123 defines a "fair value" based method of
accounting for an employee stock option or similar equity instrument. The pro
forma disclosures of the difference between compensation expense included in
net loss and the cost measured by the fair value method are presented in Note
12.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling Goods or
Services."
Foreign currency translation
The functional currency of Chordiant's sales offices located in Europe is
their respective local currency. Foreign currency assets and liabilities are
translated at the current exchange rates at each balance sheet date. Revenues
and expenses are translated at weighted average exchange rates in effect during
the year. The related gains and losses from foreign currency translation are
recorded in accumulated other comprehensive income as a separate component of
stockholders' equity (deficit).
All foreign-currency-denominated assets and liabilities are remeasured at
the current exchange rates (spot rates) with any resulting transaction gains
and losses recognized in current earnings. Chordiant also records gains and
losses on foreign currency forward exchange contracts in current earnings based
on the difference between the spot rate at the balance sheet date and the spot
rate at the date of inception of the foreign currency forward exchange
contract. To date, gains and losses on hedged foreign-currency denominated
assets and liabilities have been offset by the gains and losses on the foreign
currency forward exchange contracts. Other foreign currency transaction gains
and losses were not significant during the periods presented.
46
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
Income taxes
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in Chordiant's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
Reverse stock split
In November 1999, Chordiant's Board of Directors approved a 1-for-2 reverse
stock split of Chordiant's outstanding shares. The reverse stock split became
effective on February 2000. All share and per share information included in
these consolidated financial statements have been adjusted to reflect this
reverse stock split.
Net loss per share
Basic and diluted net loss per share is computed by dividing the net loss
for the period by weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net loss per share includes
potential common stock unless their effect is antidilutive. Potential common
stock consist of the incremental number of common shares issuable upon
conversion of Mandatorily Redeemable Convertible Preferred Stock (using the if-
converted method), common shares issuable upon the exercise of stock options
(using the treasury stock method) and common shares issuable upon the assumed
conversion of convertible debt (using the if-converted method) and common
shares subject to repurchase by Chordiant.
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated:
Years Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
Net loss................................... $(17,440) $(23,137) $(35,356)
-------- -------- --------
Weighted average common shares............. 5,075 5,391 33,897
Weighted average unvested Common shares
subject to repurchase..................... -- (64) (207)
-------- -------- --------
Denominator for basic and diluted
calculation............................... 5,075 5,327 33,690
-------- -------- --------
Net loss per share--basic and diluted...... $ (3.44) $ (4.34) $ (1.05)
======== ======== ========
47
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
The following table sets forth the weighted average potential common shares
that are excluded from the calculation of diluted net loss per share as their
effect is anti-dilutive:
Year Ended December 31,
-----------------------
1998 1999 2000
------- ------- -------
Weighted average effect of antidilutive
securities:
Mandatorily Redeemable Convertible Preferred
Stock......................................... 16,449 17,999 2,702
Convertible debt............................... -- 1,479 241
Employee stock options......................... 1,909 6,202 4,219
Common shares subject to repurchase............ -- 64 207
------- ------- -------
18,358 25,744 7,369
======= ======= =======
Segment information
Effective January 1, 1998, Chordiant adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for the way companies report information about
operating segments in financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. In accordance with the provisions of SFAS No. 131, Chordiant has
determined that it operates in only one operating segment.
Foreign revenues are based on the country in which the customer is located.
The following is a summary of total net revenues by geographic area:
Year Ended December 31,
-----------------------
1998 1999 2000
------- ------- -------
United Kingdom................................... $ 3,441 $ 3,973 $21,903
United States.................................... 2,729 10,974 7,912
South Africa..................................... -- -- 1,739
Germany.......................................... -- -- 1,647
Canada........................................... 1,724 642 364
Netherlands...................................... 4,500 1,653 123
Other............................................ 71 346 1
------- ------- -------
$12,465 $17,588 $33,689
======= ======= =======
Property and equipment information is based on the physical location of the
assets. The following is a summary of property and equipment by geographic
area:
December 31,
-------------
1999 2000
------ ------
United States................................................ $2,350 $4,427
United Kingdom............................................... 230 591
Other........................................................ -- 32
------ ------
$2,580 $5,050
====== ======
48
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
Comprehensive income
Chordiant adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income," effective January 1, 1998. This statement requires companies to
classify items of comprehensive income (loss) by their nature in the financial
statements and display the accumulated balance of comprehensive income (loss)
separately in the stockholders' equity (deficit) section of the balance sheet.
For the three years ended December 31, 2000, foreign currency translation
adjustments included in comprehensive income (loss) were insignificant. There
were no other items of comprehensive income (loss).
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes a new model for accounting for derivatives and hedging activities
and supercedes and amends a number of existing accounting standards. SFAS No.
133 requires that all derivatives be recognized in the balance sheet at their
fair market value and the corresponding derivative gains or losses be either
reported in the statement of operations or as a deferred item depending on the
type of hedge relationship that exists with respect to any derivatives. In July
1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting
for Derivatives Instruments and Hedging Activities--Deferral of Effective Date
of FASB Statement No. 133." SFAS No. 137 deferred the effective date until
fiscal years commencing after June 15, 2000. Chordiant will adopt SFAS No. 133
in its quarter ending March 31, 2001. Chordiant does not believe that the
pronouncement will have a material impact on its financial condition or results
of operations as currently conducted.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In June 2000, the SEC issued SAB No. 101B to defer the
effective date of implementation of SAB 101 until the fourth quarter of fiscal
2000. The adoption of SAB 101 did not have a material effect on Chordiant's
financial position or results of operations.
NOTE 3--ACQUISITION:
On July 19, 2000, Chordiant and White Spider entered into a stock purchase
agreement (the "Agreement"). Under the terms of the Agreement, Chordiant issued
350 shares of Common Stock in exchange for the 4,728 shares of White Spider's
Common Stock outstanding as of the date of the acquisition. In addition,
employee options to purchase approximately 1,710 of White Spider's Common Stock
were assumed by Chordiant and became options to purchase 127 shares of
Chordiant's Common Stock. This transaction was accounted for as a purchase
business combination in accordance with APB No. 16, "Business Combinations."
Total consideration for the transaction, including direct acquisition cost, was
estimated as follows:
Shares of Chordiant Common Stock................................ $ 5,904
Options to purchase Chordiant Common Stock...................... 2,122
Less: Intrinsic value of unvested option allocated to deferred
stock-based compensation....................................... (2,033)
Direct acquisition cost......................................... 200
-------
$ 6,193
=======
The value of the options included in the purchase price was determined using
the Black-Scholes option pricing model. In accordance with FIN 44, "Accounting
for Certain Transactions Involving Stock
49
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
Compensation--an interpretation of APB No. 25," stock options granted by
Chordiant in exchange for options held by White Spider were considered part of
the purchase price paid by Chordiant. However, to the extent that service was
required subsequent to the date of the acquisition in order to vest in the
replacement unvested options, the intrinsic value of the unvested options was
deducted from the fair value of the options issued and allocated to unearned
compensation. The amount allocated to unearned compensation will be recognized
as compensation expense over the remaining vesting period.
In accordance with APB No. 16, the total consideration paid has been
allocated to assets acquired, including tangible and intangible assets, and
liabilities assumed based on their respective estimated fair values at the
acquisition date. Fair values were based on management estimates and an
independent appraisal of certain intangible assets. The total consideration was
allocated as follows:
Fair value of net tangible assets acquired and liabilities
assumed......................................................... $ 92
In-process research and development.............................. 734
Workforce-in-place............................................... 198
Goodwill......................................................... 5,169
------
$6,193
======
Tangible assets acquired principally include cash and cash equivalents,
accounts receivable, fixed assets and other assets. Liabilities assumed
principally include borrowing, accounts payable and accrued expenses.
The value of the purchased in-process research and development was
determined by estimating the projected net cash flows related to the product
under development, determined based upon Chordiant's estimates of costs to
complete the development of the technology and the future revenue to be earned
upon commercialization of the products. The estimated stage of completion
(expressed as a percentage of completion) was calculated and then was applied
to the net cash flow for the product. A discount rate of 25% was applied to the
projected cash flows of the in-process research and development to determine
their net present value. As of the date of the acquisition, White Spider's in-
process research and development efforts consisted of one project for which the
estimated state of completion was 67%.
The value attributed to in-process research and development was charged to
expense in the period the acquisition was consummated. The write-off was
necessary because the acquired in-process technology has not yet reached
technological feasibility and has no future alternatives uses. The product
under development may not achieve commercial viability. The nature of the
efforts required to develop the purchased in-process research and development
into a commercially viable product principally relate to the completion of all
planning, designing, prototyping, verification and testing activities that are
necessary to establish that the product can be produced to meet its designed
specifications, including functions, features and technical performance
requirements.
The value allocated to the assembled workforce is attributable to the
workforce in place after the acquisition which eliminates the need to hire new
replacement employees. The value was determined by estimating the cost involved
in assembling a new workforce including costs of salaries, benefits, training
and recruiting. Workforce in place is amortized on a straight-line basis over
the estimated period of benefit, which is three years.
The excess of purchase price over tangible and identifiable intangible
assets acquired and liabilities assumed was recorded as goodwill. Goodwill is
amortized on a straight-line basis over the estimated period of benefit, which
is three years.
50
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
NOTE 4--PURCHASE OF IN-PROCESS RESEARCH AND DEVELOPMENT:
Chordiant entered into a license and related service agreements with a
customer who alleged a breach of the agreements between the parties. At
December 31, 1999, the outstanding receivable balance from this customer was
$1,700. On March 1, 2000, the parties agreed to terminate the existing
agreements and the customer agreed to pay the outstanding receivable of $1,700.
The parties also entered into a separate technology agreement whereby the
customer transferred to Chordiant ownership of certain in process technology
and intellectual property developed by the parties under the existing
agreements. Chordiant intends to use this technology to add additional
functionality to its core product as well as develop and market a credit and
collections application for the financial services industry. Chordiant agreed
to pay the customer $3,500 for the intellectual property rights to the
technology. The customer retains an option to purchase a license to the credit
and collections application when it is made commercially available by
Chordiant. The customer has also agreed to assist Chordiant by providing
certain consulting services in designing the application. The consideration
paid to acquire the in-process technology of $3,500 was charged to expense as
in-process research and development in the period the Company entered into the
technology agreement. The write off was necessary because the in-process
technology had not reached technological feasibility and had no alternative
uses.
NOTE 5--BALANCE SHEET COMPONENTS:
December 31,
----------------
1999 2000
------- -------
Accounts receivable--third parties, net:
Accounts receivable.................................... $ 7,957 $19,618
Allowance for doubtful accounts........................ (724) (195)
------- -------
$ 7,233 $19,423
======= =======
Property and equipment, net:
Computer hardware...................................... $ 3,907 $ 4,919
Purchased internal-use software........................ 1,082 1,537
Furniture and equipment................................ 1,036 745
Leasehold improvements................................. 533 1,347
------- -------
6,558 8,548
Accumulated depreciation and amortization................ (3,978) (3,498)
------- -------
$ 2,580 $ 5,050
======= =======
Accrued expenses:
Accrued payroll and related expenses................... $ 1,753 $ 5,753
Other accrued liabilities.............................. 740 2,410
------- -------
$ 2,493 $ 8,163
======= =======
NOTE 6--SOFTWARE DEVELOPMENT AND LICENSE AGREEMENTS:
During 1996, Chordiant entered into a Value-Added Reseller License and
Services Agreement with Forte Software, Inc. ("Forte"). The Value-Added
Reseller License and Services Agreement was subsequently updated in 1998 and
amended in 1999 and 2000. Under this agreement, Chordiant may acquire full-use
product licenses for assignment to one or more third-party end-users and pay
Forte Software, Inc. the license fees due upon delivery of the product
licenses. The amounts payable to Forte total 75% of the license fees charged to
the end-user by Chordiant and are recognized as a cost of net revenues. Total
expenses recorded for each of the three years ended December 31, 2000
represented $425, $263 and $873, respectively.
51
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
NOTE 7--RELATED PARTY TRANSACTIONS:
Chordiant previously entered into agreements with some holders of
Chordiant's mandatorily redeemable convertible preferred stock. These
agreements consist primarily of product licenses and related services. Revenues
and related costs of revenues, together with deferred revenues and accounts
receivable from these related parties, are separately disclosed in the
financial statements.
NOTE 8--BORROWINGS:
Revolving line of credit
In January 1999, Chordiant entered into an accounts receivable line of
credit (the "1999 Line") for borrowings of up to $4,000. Chordiant's borrowings
under the 1999 Line were limited to 80% of eligible accounts receivable,
accrued interest at bank's prime rate plus 0.25% (8.5% at December 31, 1999)
and matured in January 2002. Borrowings outstanding under the 1999 Line at
December 31, 1999 were $2,376.
In August 2000, Chordiant renegotiated the 1999 Line and entered into a new
revolving line of credit (the "2000 Line") under which Chordiant could borrow
up to $11,500 with interest at the bank's prime rate or LIBOR (1, 2, 3 or 6
months maturity) plus 0.25% (9.75% at December 31, 2000). Borrowings are
payable on August 2001, and are secured by all assets of Chordiant. At December
31, 2000, there were no borrowings outstanding under the 2000 Line.
Under the terms of the 1999 Line and the 2000 Line, Chordiant is required to
comply with certain restrictive covenants, which include maintaining minimum
amounts of solvency and liquidity. At December 31, 1999 and 2000, Chordiant was
in compliance with these covenants.
Equipment loans
At December 31, 1999, Chordiant maintained a credit facility with a bank
consisting of four equipment loans (the "1999 Loans") in the aggregate amounts
of $3,351. As of December 31, 1999, Chordiant had borrowed $910 under the 1999
Loans. The 1999 Loans accrued interest at the bank's prime rate plus 0.25%
(8.5% at December 31, 1999). The 1999 Loans matured in June 2000, March 2000
and December 2000.
During 2000, Chordiant extended two of the four equipment loans and entered
into one additional equipment loan (the "2000 Loans") in the aggregate amounts
of $3,343. As of December 31, 2000, Chordiant had borrowed $595 under the 2000
Loans. The 2000 Loans accrue interest at rates ranging from the bank's prime
rate to the bank's prime rate plus 0.25% (9.5% to 9.75% at December 31, 2000).
Under the term of the 1999 Loans and 2000 Loans, Chordiant is required to
comply with certain restrictive covenants, which include maintaining minimum
amounts of solvency and liquidity. At December 31, 1999 and 2000, Chordiant was
in compliance with those covenants.
Convertible debt
In April 1999, Chordiant raised $10,000 through a convertible debt financing
arrangement (the "Arrangement"). In accordance with the terms of the
Arrangement, the outstanding debt of $10,000 was converted into 2,000 shares of
Chordiant's common stock upon consummation of Chordiant's initial public
offering.
52
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
NOTE 9--INCOME TAXES:
The components of loss before taxes are as follows:
December 31,
----------------------------
1998 1999 2000
-------- -------- --------
United States................................ $(17,307) $(15,150) $(18,464)
Foreign...................................... (133) (7,987) (16,892)
-------- -------- --------
Total...................................... $(17,440) $(23,137) $(35,356)
======== ======== ========
No provision for income taxes has been recorded for any period presented as
Chordiant has incurred net operating losses for tax purposes. In addition, no
benefit for income taxes has been recorded due to the uncertainty of the
realization of any deferred tax assets.
Deferred tax assets and liabilities consist of the following:
December 31,
------------------
1999 2000
-------- --------
Net operating loss carryforwards....................... $ 17,700 $ 18,952
Accrued expenses and provisions........................ 3,700 1,107
Tax credit carryforwards............................... 1,100 1,055
Deferred revenue....................................... -- 9,686
Depreciation and amortization.......................... -- (19)
Gross deferred tax assets.............................. 22,500 30,781
Deferred tax valuation allowance....................... (22,500) (30,781)
-------- --------
Net deferred tax assets.............................. $ -- $ --
======== ========
Chordiant provides a valuation allowance for deferred tax assets when it is
more likely than not that some portion or all of the net deferred tax assets
will not be realized. Based on a number of factors, including the lack of a
history of profits and the fact that the market in which Chordiant competes is
intensely competitive and characterized by rapidly changing technology,
management believes that there is sufficient uncertainty regarding the
realization of deferred tax assets such that a full valuation allowance has
been provided.
At December 31, 2000, the Company had approximately $51,922 and $22,242 of
net operating loss carryforwards for federal and state purposes, respectively.
These carryforwards are available to offset future taxable income and expire
beginning in 2020 and 2006, respectively. At December 31, 2000, there is $635
of federal credits that fully expire in 2020. The state credits of $420 do not
expire.
Under the Tax Reform Act of 1986, the amounts of and the benefit from net
operating losses that can be carried forward may be impaired or limited in
certain circumstances. Events which may cause limitations in the utilization of
net operating losses include a cumulative stock ownership change of more than
50 over a three year period and other events. Chordiant has not yet determined
whether or not operating loss benefits are impaired or limited.
53
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
NOTE 10--COMMITMENTS AND CONTINGENCIES:
Chordiant leases its facilities and some equipment under noncancelable
operating leases which expire on various dates through 2004. Rent expense is
recognized ratably over the lease term. Future minimum lease payments as of
December 31, 2000 are as follows:
Year Ending December 31,
2001............................................................. $ 2,630
2002............................................................. 2,243
2003............................................................. 2,296
2004............................................................. 1,681
2005............................................................. 818
Thereafter....................................................... 4,013
-------
$13,681
=======
Rent expense for the years ended December 31, 1998, 1999 and 2000 totaled
$1,036, $1,438 and $1,774, respectively.
NOTE 11--COMMON STOCK:
During 1998, 1999 and 2000, Chordiant repurchased 30, 26 and 86,
respectively, shares of Common Stock at original issuance prices for a total
repurchase price of $27, $41 and $77, respectively. The shares were retired
upon repurchase.
NOTE 12--STOCK OPTION PLANS:
In November 1999, the 1999 equity incentive plan (the "1999 Plan") was
adopted by the Board of Directors and amends Chordiant's 1997 equity plan. The
1999 Plan provides for the grant to employees of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986 and for grants
to employees, directors and consultants of nonstatutory stock options and stock
purchase rights. Unless terminated sooner, the 1999 Plan will terminate
automatically in 2009. A total of 13,107 shares of Common Stock have been
reserved for issuance under the 1999 Plan. The number of shares reserved under
the plan will automatically increase at the end of each year by the greater of
(1) 5% of outstanding shares on that date and (2) the number of shares of
common stock subject to stock awards made under the 1999 Plan during the prior
twelve month period. However, the automatic increase is subject to reduction by
the Board of Directors. The 1999 Plan is administered by the Board of Directors
or a committee that this board delegated this power and provides generally that
the option price shall not be less than the fair market value of the shares on
the date of grant and that no portion may be exercised beyond ten years from
that date. Under the 1999 Plan, stock options vest over a period that is
limited to five years, but are typically granted with a four year vesting
period. Each option outstanding under the 1999 Plan may be exercised in whole
or in part at any time. Exercised but unvested shares are subject to repurchase
by Chordiant at the initial exercise price. At December 31, 1999 and 2000, 161
and 158 shares were subject to repurchase, respectively.
During 1997, the Company implemented the Bonus and Salary Conversion Plan
(the "Bonus Plan"). The Bonus Plan provides a means by which selected employees
may elect to forego cash bonuses in exchange for fully vested options to
purchase shares of Chordiant's Common Stock. During the year ended December 31,
1998, 189 options were granted under the Bonus Plan with exercise prices
ranging from $0.14 to $0.40 per
54
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
share. No options were granted under the Bonus Plan in subsequent years. The
shares subject to the Bonus Plan shall not exceed 750.
The following table summarizes option activity under the Company's stock
option plans:
Year Ended December 31,
--------------------------------------------------
1998 1999 2000
---------------- ---------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
Outstanding at beginning of
period....................... 2,218 $0.21 5,981 $0.60 7,774 $ 1.82
Granted....................... 4,436 0.74 3,393 3.66 4,360 8.35
Cancelled..................... (437) 0.32 (887) 1.06 (826) 11.85
Exercised..................... (236) 0.26 (713) 1.28 (2,581) 1.08
Outstanding at end of period.. 5,981 0.60 7,774 1.82 8,727 5.00
Options exercisable at end of
period....................... 1,284 2,672 2,687
Weighted average minimum
value/fair value of options
granted during the period.... $0.16 $0.79 $ 6.90
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2000:
Options Outstanding at December Options Exercisable
31, 2000 at December 31, 2000
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
------------ ----------- ----------- -------- ----------- --------
$0.07-0.10 56 4.1 $ 0.08 56 $ 0.08
$0.14 306 7.4 0.14 204 0.14
$0.30-0.40 130 6.7 0.30 75 0.30
$0.64-0.90 1,768 7.5 0.66 1,289 0.66
$1.20-1.50 357 7.8 1.29 171 1.29
$2.72-4.03 2,180 8.7 3.72 634 3.73
$5.13-7.10 2,679 9.7 6.29 182 6.29
$7.69-11.31 480 9.4 8.93 65 8.82
$11.88-16.63 223 9.6 12.60 7 13.04
$18.00 548 9.1 18.00 4 18.00
----- -----
8,727 2,687
===== =====
During the years ended December 31, 1998, 1999 and 2000, Chordiant recorded
unearned compensation expense of approximately $1,500, $11,274 and $4,076,
respectively, related to the issuance of stock options. The amount recorded in
the year ended December 31, 2000 included $2,033 associated with Chordiant's
acquisition of White Spider described in Note 3. These expenses are being
amortized over a period of four years from the date of issuance using the
"multiple option" approach prescribed by FIN 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Reward Plans."
Amortization of unearned compensation expense related to these options of
approximately $489, $2,660 and $6,256 was allocated among cost of net revenues,
sales and marketing, research and development and general and administrative
for all periods presented.
55
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
Had compensation cost for Chordiant's stock-based compensation awards been
determined based on the minimum value at the grant dates as prescribed by SFAS
No. 123, the Company's net loss would have been as follows:
Year Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
Net loss:
As reported............................... $(17,440) $(23,137) $(35,356)
Pro forma................................. $(17,746) $(23,944) $(45,041)
Basic and diluted net loss per share:
As reported............................... $ (3.44) $ (4.34) $ (1.05)
Pro forma................................. $ (3.50) $ (4.49) $ (1.34)
Under SFAS No. 123, the minimum value of each option grant is estimated on
the grant date using the following weighted average assumptions:
Year Ended
December 31,
-----------------
1998 1999 2000
---- ---- -----
Expected lives in years:
Stock options......................................... 4.6 4.6 5.0
Employee stock purchase plan.......................... 0.5 0.5 0.5
Risk free interest rates:
Stock options......................................... 6.2% 5.5% 6.1%
Employee stock purchase plan.......................... 0.0% 0.0% 5.8%
Volatility:
Stock options......................................... 0.0% 0.0% 115.0%
Employee stock purchase plan.......................... 0.0% 0.0% 65.0%
Dividend yield........................................ 0.0% 0.0% 0.0%
Because the determination of the fair value of all options granted after
Chordiant became a public entity includes an expected volatility factor in
addition to the other factors described in the table above and because
additional option grants are expected to be made each year, the above pro forma
disclosures are not representative of the pro forma effects of option grants on
reported results for future years.
NOTE 13--EMPLOYEE BENEFIT PLANS:
401(k) Savings Plan
Chordiant sponsors a 401(k) Savings Plan. Under the 401(k) Plan, employees
may elect to contribute up to 15% of their pre-tax compensation. Chordiant's
contributions to the 401(k) Plan totaled $99, $155 and $143 for the years ended
December 31, 1998, 1999 and 2000, respectively.
Defined contribution plan
Chordiant also sponsors a defined contribution pension plan for the
employees of Chordiant's sales office in the United Kingdom. Under the pension
plan, each employee of the United Kingdom sales office may elect to contribute
5% of their pre-tax compensation. Chordiant's contributions to the pension plan
totaled $62, $123 and $312 for the years ended December 31, 1998, 1999 and
2000, respectively.
56
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
1999 Employee stock purchase plan
In November 1999, the 1999 employee stock purchase plan (the "ESPP") was
adopted by the Board of Directors and became effective on February 14, 2000,
the date of Chordiant's initial public offering. Eligible employees can have up
to 15% of their earnings withheld, to be used to purchase shares of the
Company's Common Stock on every February 15th and August 15th, for a total 24-
month term. A new ESPP scheme commences each 6-month anniversary. An employee
may participate in one ESPP scheme at any one time. The price of the Common
Stock purchased under the Purchase Plan will be equal to 85% of the lower of
the fair market value of the Common Stock on the commencement date of each six
month offering period or the specified purchase date. The amount that may be
offered pursuant to this plan is 2,118 shares. In 2000, 118 shares were
purchased under the ESPP at a weighted average price of $8.13.
1999 Non-employee director option plan
In November 1999, the 1999 non-employee director option plan was adopted by
the Board of Directors and became effective on the date of the initial public
offering. The non-employee director plan provides for the automatic grant of a
nonstatutory option to purchase 25 shares of Common Stock to each new non-
employee director who becomes a director after the date of Chordiant's initial
public offering on the date that such person becomes a director. Each current
and future non-employee director will automatically be granted an additional
nonstatutory option to purchase 8 shares on the day after each of Chordiant's
annual meetings of the stockholders. Each director who is a member of a board
committee will automatically be granted an additional nonstatutory option to
purchase 5 shares on the day after each of Chordiant's annual meetings of the
stockholders. A total of 700 shares of Common Stock have been reserved for
issuance under the director plan. The amount reserved under the plan will
automatically increase each year by the greater of (1) 0.5% outstanding shares
on such date and (2) the number of shares subject to stock awards made under
the director plan during the prior twelve month period. However, the automatic
increase is subject to reduction by the Board of Directors.
NOTE 14--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following is a summary of the unaudited quarterly results of operations
for the periods shown:
Year Ended December 31,
----------------------------------------------------------------------
1999 2000
---------------------------------- ----------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Net revenues............ $4,471 $3,721 $4,055 $5,341 $ 5,014 $7,396 $9,700 $11,579
Gross profit............ 1,081 557 425 84 802 2,617 3,852 5,956
Net loss................ 4,337 5,588 5,511 7,701 13,195 7,852 8,043 6,266
Net loss per share:
basic and diluted...... $(0.88) $(1.06) $(1.02) $(1.38) $ (0.60) $(0.21) $(0.22) $ (0.17)
57
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share data)
NOTE 15--SUBSEQUENT EVENTS:
On January 8, 2001, Chordiant entered into a merger agreement (the
"Agreement") and Plan of Merger and Reorganization (the "Agreement") with Prime
Response, Inc. ("Prime"). Pursuant to the Agreement, all issued and outstanding
shares of Prime will be exchanged for 12,289 shares of Chordiant's common stock
with a value of approximately $34,800. In addition, based on an exchange ratio
of 0.60 shares of Chordiant common stock for every share of Prime, all of
Prime's outstanding options and warrants will be converted into 1,367 and 1,307
shares of Chordiant's common stock, respectively. The fair value of the options
and warrants of approximately $3,200 and $3,500, respectively, was determined
using the Black-Scholes option pricing model and will be included as a
component of the purchase price. The transaction will be accounted for as a
purchase. The transaction has been approved by the Board of Directors of both
Chordiant and Prime. The closing is subject to approval by Chordiant and Prime
stockholders and certain other customary closing conditions.
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item, insofar as it relates to directors and
officers of Chordiant, will be contained under the captions "Directors and
Executive Officers of the Registrant" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934" in Chordiant's definitive proxy statement with
respect to our 2001 Annual Meeting of Stockholders (the "Proxy Statement"), and
is hereby incorporated by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION
The Information required by this item will be contained in the Proxy
Statement under the caption "Executive Compensation," and is hereby
incorporated by reference thereto.
ITEM 12. SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS OF AND MANAGEMENT
The Information required by this item will be contained in the Proxy
Statement under the caption "Security Ownership by Certain Beneficial Owners
and Management," and is hereby incorporated by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS OF CHORDIANT
The Information required by this item will be contained in the Proxy
Statement under the caption "Certain Relationships and Related Party
Transactions," and is hereby incorporated by reference thereto.
59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. Index to Financial Statements
Please see the accompanying Index to Financial Statements which appears
on page 36 of this report. The Report of Independent Accountants, Financial
Statements and Notes to Financial Statements which are listed in the Index
to Financial Statements and which appear beginning on page 37 of this
report are included in Item 8 above.
2. Financial Statement Schedules
Schedules not listed have been omitted because the information required
to be set forth therein is not applicable or is included in the Financial
Statement or notes thereto.
3. Exhibits
The exhibits listed in the accompanying index to exhibits are filed or
incorporated by reference as a part of this annual report.
(b) Reports on Form 8-K
(i) Chordiant filed a Current Report on March 10, 2000 reporting the
resolution of a dispute between Chordiant and a client, Chase
Manhattan Mortgage Corporation. Chase alleged a breach of the
agreements between Chase and Chordiant. To resolve this dispute,
the parties agreed to terminate the existing agreements between
the parties and Chase agreed to pay Chordiant the $1.7 million
receivables balance as of December 31, 1999 due under the
agreements. The parties agreed to enter into a separate agreement
whereby Chase transferred to Chordiant certain technology and
intellectual property developed by the parties under the prior
agreements. Chordiant agreed to pay Chase $3.5 million for the
intellectual property rights to the technology.
(ii) Chordiant filed a Current Report on Form 8-K on July 19, 2000
reporting the acquisition by Chordiant of White Spider Software,
Inc., whereby Chordiant issued 476,515 shares of common stock in
exchange for all outstanding shares of White Spider Software,
Inc. and assumed stock options, for a total consideration paid
by Chordiant of $6,000,000. As of the closing of the
acquisition, White Spider Software became a wholly owned
subsidiary of Chordiant.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cupertino, State of California, on March 27, 2001.
Chordiant Software, Inc.
/s/ Samuel T. Spadafora
By: _________________________________
Samuel T. Spadafora
Chairman and Chief Executive
Officer
Know All Persons by these Presents, that each person whose signature appears
below constitutes and appoints Samuel T. Spadafora and Steven G. Vogel, and
each or any one of them, his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their or his substitutes or substitute, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report on Form 10-K has been signed by the following persons on
behalf of the Registrant and of the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Samuel T. Spadafora Chairman of the Board and March 27, 2001
____________________________________ Chief Executive Officer
Samuel T. Spadafora (Principal Executive
Officer)
/s/ Steven G. Vogel Chief Financial Officer, March 27, 2001
____________________________________ Chief Accounting Officer and
Steven G. Vogel Secretary (Principal
Financial and Accounting
Officer)
Director March , 2001
____________________________________
Oliver D. Curme
Director March , 2001
____________________________________
Kathryn C. Gould
/s/ Mitchell Kertzman Director March 27, 2001
____________________________________
Mitchell Kertzman
61
Signature Title Date
--------- ----- ----
/s/ Robert S. McKinney Director March 27, 2001
____________________________________
Robert S. McKinney
Director March , 2001
____________________________________
William Raduchel
/s/ Carol L. Realini Director March 27, 2001
____________________________________
Carol L. Realini
/s/ David Springett Director March 27, 2001
____________________________________
David Springett
/s/ Joseph F. Tumminaro Director March 27, 2001
____________________________________
Joseph F. Tumminaro
/s/ Steven Kelly Director March 27, 2001
____________________________________
Steven Kelly
62
Index to Exhibits
Exhibit
Number Description
------- -----------
2.1 Stock Purchase Agreement, dated July 19, 2000, between Chordiant
Software, Inc., White Spider Software, Inc. and the Sellers (filed as
Exhibit 99.1 with Chordiant's Current Report on Form 8-K (No. 000-
29357) filed on August 3, 2000 and which Exhibit 99.1 is incorporated
herein by reference).
2.2 Agreement and Plan of Merger and Reorganization, dated as of January
8, 2001, by and among Chordiant Software, Inc., Puccini Acquisition
Corp. and Prime Response, Inc. (included as Annex A to the joint proxy
statement/prospectus filed with Amendment No. 1 to Chordiant's
Registration Statement on Form S-4 (No. 333-54856) filed on February
26, 2001 and which Annex A is incorporated herein by reference).
3.1 Amended and Restated Certificate of Incorporation of Chordiant
Software, Inc. (filed as Exhibit 3.3 with Chordiant's Registration
Statement on Form S-1 (No. 333-92187) filed on December 6, 1999 and
which Exhibit 3.3 is incorporated herein by reference).
3.2 Certificate of Amendment of the Amended and Restated Certificate of
Incorporation of Chordiant Software, Inc. (filed as Exhibit 3.4 with
Amendment No. 2 to Chordiant's Registration Statement on Form S-1 (No.
333-92187) filed on February 7, 2000 and which Exhibit 3.4 is
incorporated herein by reference).
3.3 Amended and Restated Bylaws of Chordiant Software, Inc. (filed as
Exhibit 3.2 with Chordiant's Registration Statement on Form S-1 (No.
333-92187) filed on December 6, 1999 and which Exhibit 3.2 is
incorporated herein by reference).
4.1 Specimen Common Stock Certificate (filed as Exhibit 4.2 with Amendment
No. 2 to Chordiant's Registration Statement on Form S-1 (No. 333-
92187) filed on February 7, 2000 and which Exhibit 4.2 is incorporated
herein by reference).
4.2 Amended and Restated Registration Rights Agreement, dated as of
September 28, 1999 (filed as Exhibit 4.3 with Chordiant's Registration
Statement on Form S-1 (No. 333-92187) filed on December 6, 1999 and
which Exhibit 4.3 is incorporated herein by reference).
4.3 Subordinated Registration Rights Agreement, dated July 19, 2000, by
and among Chordiant Software, Inc. and the Sellers of capital stock of
White Spider Software, Inc. (filed as Exhibit 4.3 with Chordiant's
Registration Statement on Form S-4 (No. 333-54856) filed on February
2, 2001 and which Exhibit 4.3 is incorporated herein by reference).
10.1* 1999 Equity Incentive Plan and Form of Stock Option Agreement (filed
as Exhibit 10.2 with Chordiant's Registration Statement on Form S-1
(No. 333-92187) filed on December 6, 1999 and which Exhibit 10.2 is
incorporated herein by reference).
10.2* 1999 Employee Stock Purchase Plan (filed as Exhibit 10.3 with
Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed
on December 6, 1999 and which Exhibit 10.3 is incorporated herein by
reference).
10.3* 1999 Non-Employee Directors' Plan and Form of Stock Option Agreement
(filed as Exhibit 10.4 with Amendment No. 1 to Chordiant's
Registration Statement on Form S-1 (No. 333-92187) filed on January
19, 2000 and which Exhibit 10.4 is incorporated herein by reference).
10.4* 2000 Nonstatutory Equity Incentive Plan (filed as Exhibit 99.2 with
Chordiant's S-8 Registration Statement (No. 333-42844) filed on August
2, 2000 and which Exhibit 99.2 is incorporated herein by reference).
10.5* White Spider Software, Inc. 2000 Stock Incentive Plan (filed as
Exhibit 99.1 with Chordiant's Current Report on Form S-8 (No. 333-
49032) filed on October 31, 2000 and which Exhibit 99.1 is
incorporated herein by reference).
63
Exhibit
Number Description
------- -----------
10.6* Form of Notice of the White Spider Software, Inc. 2000 Stock Incentive
Plan (filed as Exhibit 99.2 with Chordiant's Current Report on Form S-
8 (No. 333-49032) filed on October 31, 2000 and which Exhibit 99.2 is
incorporated herein by reference).
10.7 Cupertino City Center Net Office Lease by and between Cupertino City
Center Buildings, as Lessor, and Chordiant Software, Inc., as Lessee,
dated June 19, 1998 (filed as Exhibit 10.5 with Amendment No. 1 to
Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed
on January 19, 2000 and which Exhibit 10.5 is incorporated herein by
reference).
10.8+ Forte Software, Inc. Value-Added Reseller (VAR) License and Services
Agreement, dated October 30, 1998 (filed as Exhibit 10.6 with
Amendment No. 4 to Chordiant's Registration Statement on Form S-1 (No.
333-92187) filed on February 14, 2000 and incorporated herein by
reference).
10.9 Software License Agreement, dated July 11, 1998, between Electronic
Data Systems Corporation and Chordiant Software, Inc. (filed as
Exhibit 10.7 with Amendment No. 4 to Chordiant's Registration
Statement on Form S-1 (No. 333-92187) filed on February 14, 2000 and
which Exhibit 10.7 is incorporated herein by reference).
10.10* Employment Letter Agreement of Samuel T. Spadafora, dated April 24,
1998, by Chordiant Software, Inc. and agreed to and accepted by Samuel
T. Spadafora (filed as Exhibit 10.8 with Amendment No. 1 to
Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed
on January 19, 2000 and which Exhibit 10.8 is incorporated herein by
reference).
10.11* Employment Letter Agreement of Stephen Kelly, effective as of January
5, 2001, by Chordiant Software, Inc. and agreed to and accepted by
Stephen Kelly (filed as Exhibit 10.11 with Chordiant's Registration
Statement on Form S-4 (No. 333-54856) filed on February 2, 2001 and
which Exhibit 10.11 incorporated herein by reference).
10.12* Form of Promissory Note executed by each of Samuel T. Spadafora,
Steven Springsteel and Donald J. Morrison in favor of Chordiant
Software, Inc. (filed as Exhibit 10.11 with Amendment No. 1 to
Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed
on January 19, 2000 and which Exhibit 10.11 is incorporated herein by
reference).
10.13* Form of Stock Pledge Agreement between Chordiant Software, Inc. and
each of Samuel T. Spadafora, Steven Springsteel and Donald J. Morrison
(filed as Exhibit 10.12 with Amendment No. 1 to Chordiant's
Registration Statement on Form S-1 (No. 333-92187) filed on January
19, 2000 and which Exhibit 10.12 is incorporated herein by reference).
21.1 Subsidiaries of Chordiant.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (set forth on signature page).
- --------
* Management contract or compensatory plan or arrangement.
+ Confidential treatment has been requested as to certain portions of this
exhibit. The omitted portions have been separately filed with the Securities
and Exchange Commission.
64