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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2001
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: 0-29357
Chordiant Software, Inc.
(Exact name of registrant as specified in its charter)
Delaware 93-1051328
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
20400 Stevens Creek Blvd., Suite 400 95014
Cupertino, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including 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, $.01 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 for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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 aggregate market value of the voting stock held by non-affiliates of the
issuer as of December 31, 2001 was approximately $420,205,116.
The number of shares outstanding of the issuer's common stock as of December 31,
2001 was 53,190,521.
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, 2002, in connection with the registrant's 2002 Annual Meeting of
stockholders, are incorporated herein by reference into Part III of this Annual
Report.
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 our future financial
results, trends, 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," "goals," "anticipates," "believes," "estimates," "predicts,"
"potential," "projects" 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 our or our 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 herein as set forth under the
captions "Business," "Business Risks" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations." These and many other factors
could affect our future financial and operating results. Actual results may
differ substantially from those projected, expressly or impliedly, in such
forward-looking statements. We do not undertake an obligation to update
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements. We caution that our
business and financial performance are subject to substantial risks and
uncertainties.
ITEM 1. BUSINESS
Overview
We provide customer relationship management (CRM) software solutions for global
business-to-consumer enterprise companies. We believe our solutions enable these
companies, who depend upon and value their customer relationships, to improve
customer retention and build long-term, profitable relationships with customers.
Our target customers are companies with a multitude of highly complex and
demanding customer relationships that require high levels of personalized
services. Our customers include global companies in the financial services,
telecommunications, retail and travel services industries. Our solutions seek to
fulfill the requirements of these companies for enterprise-wide CRM software
infrastructure solutions capable of servicing millions of individual customers
across multiple communication channels in real-time. Our solutions enable
organizations to market, sell, and serve their customers across multiple
channels, including call centers, branch representatives and self-serve channels
such as automated telephony, the web and e-mail.
Industry Background
The enterprise market opportunity is large, pervasive and continually growing.
We believe customers today place increasing value on real-time access to
information, products and services. To be successful in building long-term,
profitable relationships with customers, we believe companies must take a
strategic approach to attract and retain valuable customers. Companies need to
develop and execute 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 deliver superior customer service and satisfaction to
differentiate themselves from their competitors. Companies must provide relevant
and targeted information and experiences each time an individual customer
interacts with the business to retain their customers. Moreover, companies must
recognize that every customer interaction provides an opportunity to sell
additional, and more valuable, products and services and to increase customer
loyalty through personalized customer interaction. Many business to consumer
companies are seeking to improve their ability to interact with individual
customers in real-time and to deliver the appropriate service offering at every
point of customer contact. This requires implementation of the company's
business processes from multiple lines of
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business to consistently market, sell and deliver service to their customers
throughout the enterprise. Addressing customer retention, maximizing lifetime
profitability of existing customer relationships in an increasingly competitive
environment, and effectively attracting new customers are a primary business
drivers today for global consumer companies.
To improve the business results with existing customers, companies seek to
improve their capability to interact with their customers on an individual basis
by integrating the company's customer information, lines of business, multiple
data sources, business channels, points of customer interaction and by
monitoring real-time customer events. By combining the total view of customer
information in real-time with real-time processes and policies, companies are
enabled to interact with customers across multiple dimensions of their
businesses and to serve proactively individual customers' inquiries and
interactions. Companies enabled to address multiple dimensions of their
customers in real-time can proactively follow-through on marketing offers and
service inquiries to market and serve effectively each customer's individual
needs.
We believe that companies need a flexible, integrated software solution that
supports all channels of customer contact with a comprehensive single view of
the customer combined with 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 must 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 to understand their needs and
preferences, which enables companies to provide consistent interactions with
customers through any communication channel.
The business channels and communication touch points between companies and their
employees, partners and customers have grown to include not only traditional
channels such as direct mail, the telephone, retail stores and direct sales
forces, but also newer channels such as e-mail, web commerce sites and web
self-service sites. As a result, valuable customer data is stored in numerous,
disparate back-office systems, numerous enterprise software applications as well
as data stores that are commonly transactional systems, fulfillment systems and
a variety of customer data sources. Because most companies lack an integrated
customer service information infrastructure and maintain customer data in these
various disparate systems, consolidating data in real-time and addressing the
multiple dimensions of the business interactions with various customers to
create a single customer view is a difficult task. We believe companies need to
implement an integrated enterprise information platform to integrate marketing,
selling and service interactions to serve and market effectively to meet their
customer's individual needs.
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 and 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 allow companies to control
routing and prompting of appropriate responses to the customer in an automated
and dynamic process.
Many existing CRM product offerings do not meet the new requirements of an
enterprise view of customer relationships. Traditional applications 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 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 telephone services. 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 involved in custom
building these new systems can be prohibitive, and the expertise required to
design and integrate the systems are often beyond the capabilities of many
companies. Additionally, most commercially available and custom-built
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systems lack the flexibility to integrate existing and anticipated technologies
or to allow customization to keep up with a constantly changing Internet
economy.
The Chordiant 5 Solution
Until now, the complexities of multi-dimensional customer interactions have
forced enterprises to settle for prepackaged CRM applications that require
predetermined, inflexible, vendor-defined customer data models, processes and
solutions. Custom-built solutions sometimes yielded better results, but have
been slow to build, costly to deliver and expensive to maintain.
A complex business environment and customer needs are in a constant state of
change. Yet, to date, the complexities of marketing, selling and servicing
multiple product lines to multitudes of customers have confounded the efforts of
prepackaged CRM application vendors, delivering only static vs. dynamic CRM
solutions. We believe that a CRM solution with real-time capabilities and
multi-dimensional customer interactions that are delivered across the enterprise
and are powered by business rules and processes address this complex business
environment and constantly changing customer needs.
Our CRM solution, Chordiant 5, is an enterprise CRM solution designed for global
enterprises seeking to optimize marketing, selling and servicing efforts. We
have designed our solution to integrate customer information from different data
sources, generate business processes based on a customer's specific profile and
requests, and provide uniform service and data to customers across multiple
communications channels. Our solution is designed to enable companies to deliver
appropriate offers and information to a targeted customer at the time of
customer need. We believe that companies that use our products can increase the
value derived from their customers through improved retention rates and linked
selling opportunities that result from a personalized customer interaction.
The Chordiant 5 solution includes the Chordiant 5 Enterprise Platform, Chordiant
5 Marketing and Chordiant 5 Selling & Servicing products. This integrated suite
of applications is built upon our JX architecture and is designed to leverage
existing business data and information technology systems. Our products offer
companies a way to facilitate dynamic customer interactions across their
enterprises thereby allowing companies to differentiate their service to
customers and seek competitive advantages over their competitors.
Key benefits of our solution include the following:
Comprehensive single view of the customer in real-time. Companies that have a
comprehensive profile of each customer and that distribute information
throughout their enterprise to the points of customer contact can provide a more
consistent and personalized consumer experience. Our data management technology
helps companies develop a real-time profile of the customer by integrating,
consolidating and managing data derived from external and internal sources. Our
solution uses multiple data sources, existing applications and transaction
systems to build a comprehensive profile of the customer and generate the
appropriate response at the time of customer contact.
Automated, sophisticated decision-making processes. Workflow and rules-driven
business processes help companies to make automated, yet informed, decisions
about customer inquiries. Our workflow processing system supports customizable
business processes allowing companies to develop business rules that will be
implemented consistently. Our workflow editor is a graphical user interface
application that allows companies to customize and automate their unique
business rules. Business rules, policies, and processes can be changed and
reused quickly in a number of customer-facing applications. Our 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.
Consistent customer experience across multiple channels. We believe 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
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choose to contact the company. There is a large and increasing number of
customer communications channels, including web, e-mail, fax, self-service
systems, mobile devices, call centers and retail outlets. Our solution
implements a common set of business rules uniformly across systems already
existing in different customer communications channels.
Standard and customizable business services. We believe that companies that
implement their unique business services will realize greater levels of
efficiency, consistency and customer satisfaction. Our solution provides 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 customer and business processes, policies and transactions
of individual companies. Our solution adapts to many existing company
transaction systems and legacy data warehouses thereby leveraging these existing
investments companies have previously made. We believe our solution allows
companies an increased return on their existing information systems as measured
by increased retention rates, increased revenue per customer and increased
profitability.
Strategy
Our goal is to continue to provide innovative CRM solution 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 our strategy include the following:
Target leading global business-to-consumer companies. We continue to focus on
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 complex transaction-oriented
product offerings and large numbers of dispersed customers, partners, providers
and suppliers. We intend to leverage our experience and continue to target sales
and marketing activities through our direct sales force and integration partners
to expand worldwide market share in our target markets. We believe that
companies in these industries can realize significant business benefits and
obtain a competitive advantage by implementing our solutions.
Expand worldwide infrastructure. We intend to continue to grow our global
presence by expanding our worldwide field sales, marketing and services
organizations. We plan to continue expanding our international presence by
adding direct sales personnel and increasing our presence with our systems
integrators.
Extend technology leadership and position. We intend to continue to devote
resources to the design and development of new and innovative product
capabilities. We have designed our latest version of our solution, Chordiant 5
Enterprise Platform, on the latest industry standards, including J2EE (Java 2
Enterprise Edition), XML (Extensible Mark-up Language) and SOAP (Simple Object
Access Protocol). We believe that the Chordiant 5 solution, based on these
industry standards, meets the latest corporate standards in enterprise CRM
software computing.
Extend technology and integration alliances. We have developed existing
technology and integration alliance partnerships with which we expect to
continue to partner in our efforts to expand our presence in our target markets
and meet the needs of customers and prospects. We will continue to seek
strategic alliances to further assist in developing, marketing and selling our
solutions. This approach is intended to leverage the technology and resources
available to perform application design and development services for our
customers and provides additional marketing and technical expertise in industry
segments. To help ensure that we deliver comprehensive solutions to our
customers, we have established strategic relationships with organizations in
three general categories:
o technology platform vendors;
o software platform vendors; and
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o systems integrators.
Growth through vertical concentration and customer references. We plan to
achieve additional market success by referencing customers who are successful in
using our solution. Our most successful customers become valuable references for
our future sales opportunities. To ensure that all our customers become our
references, we intend to:
o deliver superior customer service to our customers, to ensure their
long-term satisfaction and success with our solutions;
o work with experienced and knowledgeable systems integrators to enable our
customers to implement successfully large-scale deployments of our
solutions;
o deliver high quality customer education and training on our products to
assist our customers to meet and exceed their business expectations; and
o hire and retain expert consultants to assist our customers in
implementation of our solutions.
Product Solutions
Our solutions are designed to address the enterprise requirements of global
consumer companies serving millions of individual customers across multiple
business channels integrating multiple lines of business. Our solutions are
designed to enable global business-to-consumer enterprises to optimize
marketing, selling and servicing efforts. The Chordiant 5 solution suite, our
newest product release, is typically licensed as an integrated set of
applications and functionalities, and is based on our JX architecture which
provides an open systems based environment capable of deployment throughout a
customer's information technology infrastructure. This integrated suite includes
the following products:
Chordiant 5 Marketing. Chordiant 5 Marketing automates the ongoing, complex
- ---------------------
marketing processes required to plan, define, execute and optimize marketing
campaigns of business-to-consumer enterprises. The Chordiant 5 Marketing
solution is an integrated set of applications designed to support a full range
of marketing relationship management processes. Chordiant 5 Marketing is
comprised of the following applications:
o Chordiant 5 Marketing Director powers complex relationship marketing
campaigns across all traditional media channels: direct mail, telesales,
and print and broadcast advertising.
o Chordiant 5 Online Marketing provides the execution server for web and
e-mail based marketing campaigns.
o Chordiant 5 Mobile Marketing provides the execution server for mobile
devices such as cellular phones.
o Chordiant 5 OneReporting provides real-time access to detailed marketing
and customer information for creating reports, analysis and intelligent
marketing decision-making.
Chordiant 5 Selling and Servicing. Chordiant 5 Selling & Servicing provides
- ---------------------------------
role-based application interfaces that optimize real-time, process-centric
interactions between a company and its customers. The solution provides a
company's employees who interact with customers and business partners a series
of role-based interfaces for matching a company's unique business policies and
processes to individual customers to optimize selling and servicing
interactions. The application automates a company's business policies and
processes accelerate customer sales cycles, improve customer interactions and
gain consistent customer interactions. By using Chordiant 5 Selling & Services
applications, companies are able to increase
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the effectiveness of sales or service offerings by matching customer profiles
and contact histories with appropriate offers to increase cross-sell
effectiveness and opportunities.
The Chordiant 5 Selling & Servicing application suite is comprised of the
following products:
o Chordiant 5 Advisor is a web browser-based application that allows customer
information and application functionality to be broadly shared within and
outside a company. Chordiant 5 Advisor helps a company's employees and
partners optimize customer selling and servicing interactions through a
company's branch, back-office and partner/retail operations.
o Chordiant 5 Call Center Advisor is a desktop-based application designed to
provide a full set of servicing and selling business processes for high
volume transactional call centers. The desktop environment provides for
computer telephony integration for call handling and customer-facing roles
in high-volume transaction environments where guided selling and servicing
processes are critical to meet significant performance and time-dependency
requirements.
The Chordiant 5 Enterprise Platform. The Chordiant 5 Enterprise Platform
- -----------------------------------
solution offers flexible servers for managing a company's business to consumer
policies, processes, profiles and connections. The Chordiant 5 Enterprise
Platform includes the Chordiant 5 Foundation Server, a set of Chordiant 5
application connectors, and four optional Chordiant 5 application server
products.
o Chordiant 5 Foundation Server provides the software infrastructure to allow
companies to access multiple data resources residing with a company's
transaction systems and fulfillment systems while integrating with many
existing enterprise back-office applications. Chordiant 5 Foundation Server
integrates and communicates with telephony equipment, legacy systems and
transactional applications. The Foundation Server enables workflow-driven
interfaces and support for electronic communications, telephony systems and
switches, relational databases, back-office business applications and
legacy data warehouses. The Foundation Server includes a business process
server, an integration server and an integrated set of application
components.
o Chordiant 5 Collaboration Server is a Web-based interaction server that
includes functionality for online chat, Web page pushing, synchronized
co-browsing, and provides support for advanced Web applications.
o Chordiant 5 Rules Server is a configurable business policies server that
allows companies to implement policies specific to their customer profiles,
offers and business processes.
o Chordiant 5 Knowledge Server is a knowledge based server designed to
provide intelligent responses to customer requests that are based on
customer profiles, offerings of interest and an optimized set of similar
inquiries.
o Chordiant 5 Connectors are connectivity applications that allow a business
to access information and communications systems for maintaining
persistent, real-time connections between information technology systems.
o Chordiant 5 Interaction Server is an interaction server for delivering
complicated interactions to a web browser at the user interface such as
smart forms, answer checking, and guided interactions.
Customers
We target global market leaders in business-to-consumer industries, particularly
companies in the financial services, telecommunications, travel and leisure
industries. Our customers, include: USAA, Chase Insurance, Metropolitan Life
Insurance Company, CIBC Bank, Hutchinson 3G, Lloyds TSB Bank, Thompson Travel,
British Sky Broadcasting (BskyB), Barclays Mercantile, Direct Line, Canadian
Tire Acceptance Ltd., Halifax plc, Wachovia and The Royal Bank of Scotland plc.
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As of December 31, 2001 we have licensed our software products and provided
services to more than 150 customers. Our customers represent companies of all
sizes, but our sales efforts are targeted on large global institutions from
industries such as retailing, financial services, communications, and travel and
leisure. For the years ended December 31, 2001 and 2000, no customer accounted
for more than 18% and 30% of our revenues, respectively.
A small number of customers account for a significant portion of our 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 large impact on our revenues.
For the year ended December 31, 2001 revenues from Companies F, G, D and C
accounted for approximately 18%, 13%, 10% and 10%, respectively, of our total
net revenues. In 2000, revenues from Companies G, F, and E accounted for
approximately 30%, 19% and 14%, respectively, of our total net revenues. We
expect that revenues from a small number of customers will continue to account
for a majority of our total net revenues in the future as historical
implementations are completed and replaced with new projects from new and
existing customers.
Technology
We design and build products to provide CRM solutions for large enterprises. Our
JX architecture is an open standards based enterprise platform based on industry
standard J2EE and XML technology. Our JX architecture delivers XML connectivity
and a J2EE standard object environment. Our JX architecture and in particular
the Chordiant Enterprise Platform are J2EE compliant. This industry standard set
of development specifications leverages the strengths of the Java programming
language to enable software applications that are easier to develop, configure
and integrate with legacy and third-party information technology systems.
Our JX technology architecture has the following characteristics:
Reliability
Our JX architecture addresses three major problems that typically cause
reliability problems with enterprise software products: software components not
being available, transaction failures and inconsistent software versions
deployed across distributed systems.
o Software Failover: Our JX architecture uses J2EE's failover capabilities
for automatic software component failover. Therefore, if a component is not
available on one system, a second system can respond without discernable
impact from the end user's perspective.
o Enterprise Java Bean (EJB) Containers: Our JX architecture makes use of
J2EE's EJB container function to account for transaction failures. If an
object is written as an EJB, and an associated operation aborts, the object
is restored to its original state. This ensures that a customer's data is
not lost during a transactional operation.
o Java Archive: Our JX architecture also uses J2EE's Java Archive (JAR)
capabilities to control version consistency of components. This ensures
that system administrators do not install inconsistent versions of software
across multiple machines, and end users do not run inconsistent
applications that might cause a system crash or data loss.
Performance & Scalability
Excessive network traffic, serialized program execution, lack of load balancing
or interpretive execution can cause performance and scalability problems in a
corporate computing environment. Our JX architecture undergoes rigorous testing
to ensure that it is suitable for deployment in scalable, high performance
production systems. Our JX architecture features:
o Application Partitioning and Deployment: JX components can be separated and
automatically distributed across available nodes in the network by using
J2EE's Java Bean technology.
o Automated Load Balancing: Our JX architecture leverages J2EE's automated
load balancing capability. As the number of requests or transactions on a
system increases, JX automatically balances the load across multiple CPUs
or systems.
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o Compiling Extensions: Java programming can be used to extend or customize
any component within our JX architecture. This allows for software code
optimization and system performance improvements.
Middleware Interoperability:
The Chordiant 5 Foundation Server is based completely on our JX architecture and
is typically deployed in enterprise environments that require interoperability
with a company's existing or newly developed information technology systems. The
architecture enables:
o Legacy Interoperability: Enterprise systems need connectivity with
back-office legacy systems. Our JX architecture supports connectivity
components compatible with the JCA 1.0 (Java Connector Architecture)
specification.
o Middleware Interoperability: Enterprise applications inherently need to
inter-operate with traditional middleware services and our architecture
supports: MQ Series, Corba, RMI, IIOP, RPCs, Encina and Tuxedo.
Certain of our products use technology modules from third party technology
providers including Sun Microsystems, IBM, BEA and Ilog, Inc. Our 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. Our enterprise platform solutions are based on industry standards and
support industry standard J2EE application servers including IBM Websphere. Our
Server software runs on UNIX server platforms from Sun Microsystems and IBM.
Sales and Marketing
We license our solutions and sell services primarily through a direct sales
organization that is complemented by the selling and support efforts of systems
integrators and technology vendors. Our market focus is in the
business-to-consumer segment of the economy with a targeted effort on leading
consumer focused industries and companies using multiple channels as the means
of conducting business and serving customers. We target our sales and marketing
efforts, together with our product design efforts, on industries such as retail
banking, insurance, consumer financial services, telecommunications, travel and
leisure and retailers.
The sales process generally ranges from three to twelve months depending on the
level of knowledge that prospective customers need about the use and benefits of
our solutions and the involvement of systems integrators. During the sales
process, we typically approach the senior management teams of the business and
information technology departments of a prospective customer's organization. We
utilize sales teams consisting of sales and technical professionals who work
with our systems integration partners to create company specific proposals,
presentations and demonstrations that address the needs of the business and
technology requirements.
Our ability to achieve significant revenue growth in the future will depend in
large part on how successfully we recruit, train and retain sufficient direct
sales, technical and global services personnel, and how well we continue to
establish and maintain relationships with our strategic partners. We believe
that the complexity of our products and the large-scale deployments anticipated
by our customers will require a number of highly trained global services
personnel.
In the United States we have sales offices in the greater metropolitan areas of
Boston, Chicago, Dallas, and New York, and corporate offices located in
Cupertino, California. Outside the United States, we have offices in London,
Paris, Amsterdam, Frankfurt, Munich, Madrid, Johannesburg, Sydney and Melbourne.
We focus our marketing efforts on educating potential customers, generating new
sales opportunities and creating awareness of our solutions. We conduct a
variety of marketing programs to educate our target market, including direct
marketing campaigns, seminars, trade shows, press relations and industry analyst
programs.
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Our marketing organization is integral in acquiring, organizing and prioritizing
customer and industry feedback to help provide product direction to our
development organization. We also have a detailed product management process
that surveys customers and identifies market needs to help predict and
prioritize future customer requirements.
Our Services
We offer a comprehensive set of customer services including professional
consulting services and product support and training services. We believe that
providing high quality customer service is critical to achieving rapid product
implementation, customer success and continued revenue growth.
Professional Services
We provide implementation consulting, education and customer support services to
licensed customers through our worldwide professional services organization. Our
professional services consulting teams assist customers and systems integrator
partners in the design and implementation of our software solutions.
Our professional services organization deploys consultants as part of the
project team alongside systems integration partners and members of the
customer's internal team to provide technical knowledge, business engineering,
project guidance and quality assessments during project implementation. In the
design stage, we provide a variety of professional services that help determine
a customer's business processes and the technical requirements of the solutions
implementation. In the implementation stage, we use a delivery methodology to
assist customers and integration partners in planning and managing the
implementation. Typically, systems integrators, supported by our consultants,
manage the overall project and implement the products with a customer's existing
communications, applications, databases and transaction systems. In the final
phases of an implementation, the systems integrators provide deployment services
to enable a customer's internal team to implement the system, train internal
users and provide first-level end-user support to the enterprise users.
Our methodology includes:
o user requirements and needs analysis;
o business process engineering consultation;
o technical architectural analysis and performance planning;
o project management support services;
o technical support for customer specific development and deployment; and
o technical support for software integration and communications integration.
Although our primary strategy is to leverage our strategic systems integration
partners for implementations, our internal professional services organization is
integral in implementing our software solutions for our customers. We believe
that our consulting services enhance the use and administration of our software
solutions, facilitate the implementation of our solutions and result in sharing
best business practices with client and systems integrator project teams. In
addition to implementing our software, our professional services organization
works closely with our internal research and development organization to enhance
existing, and design our new software solutions. Experience and knowledge gained
by our professional services organization through repeated implementation of our
products is routinely shared with our research and development staff.
We provide our customers with support and maintenance services including
telephone support, web-based support and updates to our products and
documentation. We believe that providing a high level of technical
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support is critical to customer satisfaction. We also offer extensive training
programs to our customers and other companies with which we have relationships
to accelerate the implementation and adoption of our solutions by the users
within a company. Fees for our training services are typically charged
separately from our software license, maintenance and consulting fees.
Services revenues provided by us in the year ended December 31, 2001 accounted
for approximately 48% of our total net revenues.
Customer Support
Our customers have a choice of support and maintenance options depending on the
level of service desired. Our technical support is available to clients by
telephone, over the web and by e-mail. We maintain a technical support hotline
staffed by engineers from 8:00 a.m. to 9:00 p.m., Eastern time, Monday through
Friday, from our corporate headquarters in Cupertino, California, and local
support during business hours for European customers from London, England. An
optional premium service is also available providing technical support 24 hours
a day, seven days a week. Additionally, we provide product enhancement releases
to all customers as part of our support and maintenance contracts. We use a
customer service automation system to track each customer inquiry until it is
resolved. We also make use of our website and a secured customer forum to
provide product information and technical support information worldwide 24 hours
a day, seven days a week.
Educational Services
We provide educational services to train and enable our systems integrators and
customers to use our products. We offer a comprehensive series of training
modules to provide the knowledge and skills to successfully deploy, use and
maintain our products. These training courses focus on the technical aspects of
our products as well as business issues and processes. 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 for
a fee and are regularly scheduled through classroom and lab instruction at our
Cupertino, California corporate headquarters, and at our London, England offices
for European systems integrators and customers.
We have entered into a two-year agreement, beginning March 19, 2002, with Merit
International pursuant to which Merit will provide exclusive training and
certain consulting services for negotiated fees. Upon the effective date of this
agreement, we transferred to Merit our training operations including selected
employees.
Product Development
We have made substantial investments in research and development through
internal development, acquisitions and technology licensing. Our product
development efforts are focused on extending our enterprise software solutions,
CRM application components and business application functionality, self service
and web-based collaboration functionality, and continued integration of key
industry-specific transaction systems and services. Our product development
organization is responsible for new software
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products, product architecture, core technologies, product testing, quality
assurance and ensuring the compatibility of our products with third-party
hardware and software platforms.
During 2001 we completed five acquisitions adding to the company's product
development organization and product offerings. The acquisition of companies or
technology assets included: Prime Response, for marketing automation solutions;
AoNet, for J2EE workflow server technology, certain technology assets from
ActionPoint Corporation, for web configuration and customer interaction server
technology; certain assets from Pyxis, Inc., for insurance industry specific
application components; and certain XML interface technology from EDS, Inc.
Our product development resources are organized into a number of development
teams including:
o Enterprise Platform development;
o Marketing applications;
o Selling and Servicing Applications;
o Documentation; and
o Product Release Management.
Our product development teams have extensive experience in distributed
computing, J2EE and object oriented development, data management, workflow
engineering, transaction system interfaces and Internet technologies. Our
research and development expenditures before the effect of non-cash compensation
expense and purchased in-process research and development were $6.5 million,
$14.4 million and $20.5 million for the years ended December 31, 1999, 2000 and
2001, respectively. For the year ended December 31, 2001, we recorded charges of
$3.0 million for acquired in-process research and development costs in
connection with our 2001 acquisitions.
Strategic Partnerships
Establishing partnerships and alliances with third parties that provide
additional services and resources for implementing our solutions to enhance our
sales and service organizations' productivity is an important element of our
strategy. These relationships and alliances fall into the following categories:
Consulting and system integration relationships. To enhance the productivity of
our sales and service organizations, we have established relationships with
systems integrators, complementary technology providers and alternative service
providers. We have established relationships and trained professionals at a
number of systems integrators including: Accenture, Computer Sciences
Corporation, Electronic Data Systems Corporation, IBM Global Services, Logica
plc, and Ecsoft. We plan to expand these relationships to increase our capacity
to sell and implement our products. We have trained a significant number of
consultants in these organizations for the implementation and support of our
solutions. We believe that expanding our relationships with systems integrators
and independent consulting firms will enable the company to gain a greater share
of the CRM market.
Technology Partnerships. We make extensive use of industry platforms and embrace
a number of core technologies in our solution offerings. We have formed
partnerships with vendors of software and hardware technology platforms. We
currently maintain technology relationships with vendors such as
Alcatel/Genesys, BEA Systems, Cisco Systems, IBM, Ilog, Inc., Oracle and Sun
Microsystems. Many of these companies voluntarily provide us with early releases
of new technology platforms, education related to those platforms and limited
access to their technical resources to facilitate adoption of their technology.
We believe that these relationships allow us to focus on our core competencies,
accelerate our application development efforts around J2EE and XML standards by
making use of industry J2EE application servers.
Competition
The market for our products is highly competitive, rapidly evolving, and can be
affected by new product introductions and other market activities of industry
participants. The competitive landscape is quickly
12
evolving to address the convergence of customer interaction applications,
back-office systems and e-business services. 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.
We believe that most large-scale CRM deployments have been the result of large
internal development projects, custom solutions from systems integrators or the
application of personal and departmental productivity tools. We also face
competition from customers' internal development efforts, custom system
integration, as well as other software providers that offer integration and
development platforms. We believe that the market for enterprise customer
relationship management has historically not been well-served by the application
software industry.
Internal Development
Many of our customers and potential customers have in the past attempted to
develop customer service, call center and customer relationship management
systems in-house, either alone or with the help of systems integrators. Internal
information technology departments have staffed projects to build their own
systems utilizing a variety of tools. In some cases, such internal development
projects have been successful in satisfying the needs of an organization. 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
new channels of communication. We expect that internal development will continue
to be a significant source of competition. The competitive factors in this area
require that we produce solutions that integrate effectively with the customer's
existing information systems, scale to meet the needs of the customer's
enterprise, and cost less than the result of an internal development effort. We
cannot assure that we will be able to compete effectively against such internal
development efforts.
Custom System Integration Projects
A second source of competition results from systems integrators engaged to build
a custom development application. The introduction of a systems integrator
typically increases the likelihood of success for the customer. The competitive
factors in this area require that we demonstrate to the customer the cost
savings and advantages of a configurable, upgradeable and commercially supported
product developed by a dedicated professional software organization.
We frequently rely on system consulting and systems integration firms for
implementation and other global services, as well as recommendations of our
products during the evaluation stage of the purchase process. Many of these
third parties have similar and often more established relationships with our
competitors. We cannot assure that these third parties, many of whom have
significantly greater resources than us, will not market software products in
competition with us.
Application Software Competitors
Our primary software competitors include providers of traditional customer
relationship management, enterprise resources planning, call center and
marketing automation software. Although these vendors have started to pursue the
enterprise-wide opportunity of providing enterprise-wide solutions and services
to all points of customer contact, we believe they are limited by their lack of
multi-channel integration, real-time data models for integration of multiple
data sources and lack of business process application generation and their
database application architecture. Our competitors include; among others,
companies such as: Oracle Corporation, PeopleSoft, Inc., SAP and Siebel Systems,
Inc.
These competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, significantly greater name
recognition and a larger installed base of customers than we do. In addition,
some competitors have well-established relationships with our current and
potential customers. As a result, these competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements, or
to devote greater resources to the development, promotion and sale of their
products than we can.
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There is no one competitor, nor are there a small number of competitors that are
dominant in our market. There are many factors that may increase competition in
the enterprise customer relationship management market, including (i) entry of
new competitors, (ii) alliances among existing competitors, (iii) consolidation
in the software industry and (iv) technological changes or changes in the use of
the Internet. Increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which could materially and
adversely affect our business, operating results and financial condition. We
cannot assure that we will be able to compete successfully against current and
future competitors or that competitive pressures faced by us will not materially
and adversely affect our business, operating results and financial condition.
We believe that the principal competitive factors affecting our market include
product features such as adaptability, scalability, ability to integrate with
other products and technologies, functionality and ease-of-use, the timely
development and introduction of new products and product enhancements, as well
as product reputation, quality, performance, price, customer service and
support, and the vendor's reputation. Although we believe that our solutions
currently compete well with regard to such factors, there can be no assurance
that we can maintain our competitive position against current and potential
competitors.
We believe that the principal competitive factors in our target markets include:
o the breadth and depth of solutions;
o product quality and performance;
o relationships with systems integrators;
o the ability to implement solutions;
o establishment of a significant base of reference customers;
o the ability of products to operate with multiple software applications;
o customer service; and
o product price.
Although we believe that our product competes favorably with these factors, our
market is relatively new and is evolving rapidly. We may not be able to maintain
our competitive position against current and potential competitors, especially
those with significantly greater financial and personnel resources.
Intellectual Property and Propriety Rights
Our success is dependent upon our ability to develop and protect proprietary
technology and intellectual proprietary rights. We rely primarily on a
combination of contractual provisions, confidentiality procedures, trade
secrets, and copyright and trademark laws to protect our intellectual property
and proprietary rights.
We license our products through non-exclusive license agreements that impose
restrictions on customers' ability to utilize the software. In addition, we seek
to avoid disclosure of our trade secrets, including requiring employees,
customers and others with access to our proprietary information to execute
confidentiality agreements with us and restricting access to our source code. We
also seek to protect our rights in our products, documentation and other written
materials under trade secret and copyright laws. Due to rapid technological
change, we believe factors such as the technological and creative skills of our
personnel, new product developments and enhancements to our existing products
are more important than the various legal protections of our technology to
establishing and maintaining a technology leadership position.
We integrate third party software into our products. This third party software
may not continue to be available on commercially reasonable terms or at all. For
example, we license Forte Tool and related Forte products from Sun Microsystems,
iPlanet division, for prior versions of our Foundation Server product. Chordiant
5 Enterprise Platform does not require the use of the Forte Tool, however, some
of our existing customers on prior versions of our products require Forte Tool
development licenses and support. If we cannot maintain licenses to key third
party software, shipments of our products could be delayed until equivalent
software is developed or licensed and integrated into our products. Moreover,
although we are generally indemnified against claims if technology licensed from
third parties infringes the intellectual property and proprietary rights of
others, this indemnification is not always available for all types of
14
intellectual property and proprietary rights and in some cases the scope of this
indemnification is limited. There can be no assurance that infringement or
invalidity claims arising from the incorporation of third-party technology or
claims for indemnification from our customers resulting from these claims will
not be asserted or prosecuted against us. These claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources, in addition to potential product redevelopment costs and delays.
Despite our efforts to protect our proprietary rights, existing laws afford only
limited protection. Attempts may be made to copy or reverse engineer aspects of
our products or to obtain and use information that we regard as proprietary.
There can be no assurance that we will be able to protect our proprietary rights
against unauthorized third party copying or use. Use by others of our
proprietary rights could materially harm our business. Furthermore, policing the
unauthorized use of our products is difficult and expensive litigation may be
necessary in the future to enforce our intellectual property rights.
It is also possible that third parties will claim that we have infringed their
current or future products. We expect that software developers will increasingly
be subject to infringement claims as the number of products in different
industry segments overlap. Any claims, with or without merit, could be
time-consuming, result in costly litigation, prevent product shipment, cause
delays, or require us to enter into royalty or licensing agreements, any of
which could harm our business. Patent litigation in particular has complex
technical issues and inherent uncertainties. If an infringement claim against us
was successful and we could not obtain a license on acceptable terms, license a
substitute technology or redesign to avoid infringement, our business would be
harmed.
Employees
As of December 31, 2001, we employed 436 full time employees. Of that total, 121
were primarily engaged in product development, engineering or systems
engineering, 114 were engaged in sales and marketing, 137 were engaged in
professional services and 64 were engaged in operational, financial and
administrative functions.
As of February 28, 2002, we employed 397 full time employees. Of that total, 110
were primarily engaged in product development, engineering or systems
engineering, 111 were engaged in sales and marketing, 129 were engaged in
professional services and 47 were engaged in operational, financial and
administrative functions.
None of our employees are represented by a labor union and we have never
experienced a work stoppage. We believe that our relations with our employees
are good. We believe our future success will depend in part on our continued
ability to recruit and retain highly skilled technical, management and marketing
personnel.
BUSINESS RISKS
We expect to continue to incur losses and may not achieve or maintain
profitability, which may cause our stock price to decline.
We incurred net losses of $42.3 million for the year ended December 31, 2001. As
of December 31, 2001, we had an accumulated deficit of $140.2 million. We expect
to continue to incur losses into the first two quarters of the current fiscal
year. Moreover, we expect to continue to incur significant sales and marketing
and research and development expenses and expenses to establish additional sales
offices domestically and internationally. As a result, we will need to generate
significant revenues to achieve and maintain profitability. We cannot be certain
that we can sustain this growth, or maintain our past growth rates or that we
will generate sufficient revenues to achieve profitability.
15
Competition in our markets is intense and could reduce our sales and prevent us
from achieving profitability.
Increased competition could result in price reductions, reduced gross margins
and loss of market share, any one of which could reduce our future revenues. The
market for our products is intensely competitive, evolving and subject to rapid
technological change. The intensity of competition is expected to increase in
the future. Our current competitors include:
o Internal information technology departments: In-house information
technology departments of potential customers have developed or may develop
systems that provide some or all of the functionality of our products. We
expect that internally developed application integration and process
automation efforts will continue to be a significant source of competition.
o Point application vendors: we compete with providers of stand-alone point
solutions for web-based customer relationship management and traditional
client/server-based, call-center service customer and sales-force
automation solution providers.
Many of our competitors have greater resources and broader customer
relationships than we do. In addition, many of these competitors have extensive
knowledge of our industry. Current and potential competitors have established,
or may establish, cooperative relationships among themselves or with third
parties to offer a single solution and increase the ability of their products to
address customer needs.
Because a small number of customers account for a substantial portion of our
software license revenues, our revenues could decline if we lose a major
customer.
We derive a significant portion of our 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, 2001 revenues from companies F, G, C and D accounted
for 18%, 13%, 10% and 10% of total net revenues, respectively. For the year
ended December 31, 2000 revenues from companies G, F and E accounted for 30%,
19% and 14% of total net revenues, respectively. While our size has increased
and customer concentration has reduced, we still expect that a limited number of
customers will continue to account for a substantial portion of our revenues. As
a result, if we lose a major customer, or if a contract is delayed or cancelled,
our 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 our failure to obtain new significant customers or
additional orders from existing customers to materially affect our operating
results.
We may experience a shortfall in revenue or earnings or otherwise fail to meet
public market expectations, which could materially and adversely affect our
business and the market price of our common stock.
Our revenues and operating results may fluctuate significantly because of a
number of factors, many of which are outside of our control. Some of these
factors include:
o Product and price competition;
o Size and timing of individual license transactions;
o Delay or deferral of customer implementations of our products;
o Length of our sales cycle;
o Success in expanding our global services organization, direct sales force
and indirect distribution channels;
o Timing of new product introductions and product enhancements;
o Appropriate mix of products licensed and services sold;
o Levels of international transactions;
o Activities of and acquisitions by competitors;
o Further deterioration and changes in domestic and foreign markets and
economies; and
o Our ability to develop and market new products and control costs.
16
One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our revenues and
operating results to fluctuate significantly. Based upon the preceding factors,
we may experience a shortfall in revenues or earnings or otherwise fail to meet
public market expectations, which could materially and adversely affect our
business, financial condition, results of operations and the market price of our
common stock.
Our operating results fluctuate significantly and an unanticipated decline in
revenues may disappoint investors and result in a decline in our stock price.
Our quarterly revenues will depend primarily upon product implementation by our
customers. We have historically recognized most of our license and services
revenue using the percentage-of-completion method using labor hours incurred as
the measure of progress towards completion of implementation of our products and
we expect this practice to continue. Thus, delays in implementation by our
customers and systems integration partners would reduce our quarterly revenue.
Historically, a significant portion of new customer orders have been booked in
the third month of the calendar quarter, with many of these bookings occurring
in the last two weeks of the third month. We expect this trend to continue and,
therefore, any failure or delay in bookings would decrease our quarterly
deferred revenue. If our revenues or operating margins are below the
expectations of the investment community, our stock price is likely to decline.
Our failure to maintain and grow our relationships with systems integrators
would harm our ability to market and implement our products and reduce future
revenues.
Failure to establish or maintain relationships with systems integrators would
significantly harm our ability to license our software products. Systems
integrators install and deploy our products, in addition to those of our
competitors, and perform custom integration of systems and applications. Some
systems integrators also engage in joint marketing and sales efforts with us. If
these relationships fail, we will have to devote substantially more resources to
the sales and marketing, implementation and support of our products than we
would have to otherwise. Our efforts may also not be as effective as those of
the systems integrators, which could reduce revenues. In many cases, these
parties have extensive relationships with our existing and potential customers
and influence the decisions of these customers. A number of our competitors have
stronger relationships with these systems integrators and, as a result, these
systems integrators may be more likely to recommend competitors' products and
services.
Failure to successfully customize or implement our 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 our 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 us. We have, in the past, had disputes with customers concerning
product performance. One dispute, 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. For details regarding Chase
Manhattan Mortgage Corporation, please see "Management's Discussion and Analysis
of Financial Condition and Results of Operations" contained in this Annual
Report.
Our primary products have a long sales and implementation cycle, which makes it
difficult to predict our quarterly results and may cause operating results to
vary significantly.
The period between initial contact with a prospective customer and the
implementation of our products is unpredictable and often lengthy, ranging to
date from three to twenty-four months. Thus, deferred revenue could vary
significantly from quarter to quarter. Any delays in the implementation of our
products could cause reductions in our revenues. The licensing of our products
is often an enterprise-wide decision that generally requires us to provide a
significant level of education to prospective customers about the use and
benefits of our products. The implementation of our products involves
significant commitment of technical and financial resources and is commonly
associated with substantial implementation efforts that may be performed by us,
by the customer or by third-party systems integrators. Customers generally
consider a wide range of issues before committing to purchase our products,
including product benefits, ability to
17
operate with existing and future computer systems, vendor financial stability
and longevity, ability to accommodate increased transaction volume and product
reliability.
Our stock price is subject to significant fluctuations.
Since our initial public offering in February 2000, the price of our common
stock has fluctuated widely. We believe that factors such as the risks described
herein or other factors could cause the price of our 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 our common stock.
We are the target of a securities class action complaint and are at risk of
securities class action litigation, which may result in substantial costs and
divert management attention and resources.
Beginning in July 2001, we and certain of our officers and directors, as well as
certain of the underwriters from the our initial public offering, were named as
defendants in several class action shareholder complaints filed in the United
States District Court for the Southern District of New York and consolidated
under the caption, Weiss v. Chordiant Software, Inc., et al., Case No.
01-CV-6222. In the complaint, the plaintiffs allege that we, certain of our
officers and directors and our initial public offering underwriters violated the
federal securities laws because our registration statement and prospectus for
our initial public offering contained untrue statements of material fact or
omitted material facts regarding the compensation to be received by, and the
stock allocation practices of, the underwriters. The plaintiffs seek unspecified
monetary damages and other relief. Similar complaints were filed in the same
court against numerous public companies that conducted initial public offerings
of their common stock since the mid-1990s. This action may divert the efforts
and attention of our management and, if determined adversely to us, could have a
material impact on our business.
Our products need to successfully operate in a company-wide environment; if they
do not we may lose sales and suffer decreased revenues.
If existing customers have difficulty deploying our products or choose not to
fully deploy the products, it could damage our reputation and reduce revenues.
Our success requires that our products be highly scalable, and able to
accommodate substantial increases in the number of users. Our products are
expected to be deployed on a variety of computer hardware platforms and to be
used in connection with a number of third-party software applications by
personnel who may not have previously used application software systems or our
products. These deployments present very significant technical challenges, which
are difficult or impossible to predict. If these deployments do not succeed we
may lose future sales opportunities and suffer decreased revenues.
Defects in our products could diminish demand for our products and result in
decreased revenues, decreased market acceptance and injury to our reputation.
Errors may be found from time to time in our new, acquired or enhanced products,
including the recently announced products within the J2EE architecture. Any
significant software errors in our products may result in decreased revenues,
decreased sales, and injury to our reputation and/or increased warranty and
repair costs. Although we conduct extensive product testing during product
development, we have in the past discovered software errors in our products as
well as in third party products, and as a result have experienced delays in the
shipment of our new products. The latest version of our primary product suite
was introduced in January 2002.
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To date, our sales have been concentrated in the financial services, travel and
leisure and telecommunications markets, and if we are unable to continue sales
in these markets or successfully penetrate new markets, our revenues may
decline.
Sales of our products and services in three large markets -- financial services,
travel and leisure and telecommunications -- accounted for 96% of our total net
revenues for the year ended December 31, 2001 and 94% of total net revenues for
the year ended December 31, 2000. We expect that revenues from these three
markets will continue to account for a substantial portion of our total net
revenues in 2002. If we are unable to successfully increase penetration of our
existing markets or achieve sales in additional markets, or if the overall
economic climate of our target markets deteriorates, our revenues may decline.
In addition, we cannot predict what effect the political terrorist attacks of
September 11, 2001 and the related military conflict will have on our existing
and prospective customers' decision-making process with respect to licensing or
implementing enterprise-level products such as ours. If these or other outside
factors cause existing or prospective customers to cancel or delay deployment of
products such as ours, our operating results would be adversely affected.
Low gross margin in services revenues could adversely impact our overall gross
margin and income.
Our services revenues have had lower gross margins than our license revenues. 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 our overall gross margins. We anticipate that services
revenues will continue to represent over 40% of total net revenues. To increase
services revenues, we must expand our services organization, successfully
recruit and train a sufficient number of qualified services personnel, and
obtain renewals of current maintenance contracts by our customers. This
expansion could further reduce gross margins in our services revenues.
Because competition for qualified personnel could again become intense, we may
not be able to retain or recruit personnel, which could impact the development
and sales of our products.
If we are unable to hire or retain qualified personnel, or if newly hired
personnel fails to develop the necessary skills or fails to reach expected
levels of productivity, our ability to develop and market our products will be
weakened. Our success depends largely on the continued contributions of our key
management, engineering, sales and marketing and professional services
personnel, including Samuel T. Spadafora, our chairman of the board of directors
and Stephen Kelly, our president and chief executive officer. As part of a long
planned management succession strategy, we announced the promotion of Stephen
Kelly to chief executive officer effective January 1, 2002. Samuel T. Spadafora
will continue in his role as chairman of the board of directors.
If we fail to introduce new versions and releases of functional and scalable
products in a timely manner, customers may license competing products and our
revenues may decline.
If we are unable to ship or implement enhancements to our products when planned,
or fail to achieve timely market acceptance of these enhancements, we may suffer
lost sales and could fail to achieve anticipated revenues. A majority of our
total net revenues have been, and are expected to be, derived from the license
of our primary product suite. Our future operating results will depend on the
demand for the product suite by future customers, including new and enhanced
releases that are subsequently introduced. If our competitors release new
products that are superior to our products in performance or price, or if we
fail to enhance our products or introduce new features and functionality in a
timely manner, demand for our products may decline. We have in the past
experienced delays in the planned release dates of new versions of our software
products and upgrades. New versions of our products may not be released on
schedule or may contain defects when released.
We depend on technology licensed to us by third parties, and the loss or
inability to maintain these licenses could prevent or delay sales of our
products.
We license from several software providers technologies that are incorporated
into our products. For example, we license Forte 4GL Runtime and related iPlanet
products from iPlanet, a Sun Microsystems company. In addition, we license
JRules software products from Ilog, Inc. and other products from other
19
vendors. Our license agreement with Sun Microsystems was renewed in October
2001. We anticipate that we will continue to license technology from iPlanet,
Ilog, Inc. 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
iPlanet or Ilog, Inc. technology or other technology licenses could result in
delays in the license of our products until equivalent technology, if available,
is developed or identified, licensed and integrated into our products. Even if
substitute technologies are available, there can be no guarantee that we will be
able to license these technologies on commercially reasonable terms, if at all.
Defects in third party products associated with our products could impair our
products' functionality and injure our reputation.
The effective implementation of our products depends upon the successful
operation of third-party products in conjunction with our products. Any
undetected errors in these third-party products could prevent the implementation
or impair the functionality of our products, delay new product introductions or
injure our reputation. In the past, while our business has not been materially
harmed, product releases have been delayed as a result of errors in third-party
software and we have incurred significant expenses fixing and investigating the
cause of these errors.
Our customers and system integration partners have the ability to alter our
source code and resulting inappropriate alterations could adversely affect the
performance of our products, cause injury to our reputation and increase
operating expenses.
Customers and system integration partners have access to the computer source
code for certain of our products and may alter the source code. Alteration of
our source code may lead to implementation, operation, technical support and
upgrade problems for our customers. This could adversely affect the market
acceptance of our products, and any necessary investigative work and repairs
could cause us to incur significant expenses and delays in implementation.
If our products do not operate with the hardware and software platforms used by
our customers, customers may license competing products and our revenues will
decline.
If our products fail to satisfy advancing technological requirements of our
customers and potential customers, the market acceptance of these products could
be reduced. We currently serve a customer base with a wide variety of constantly
changing hardware, software applications and networking platforms. Customer
acceptance of our products depends on many factors such as:
o our ability to integrate our products with multiple platforms and existing
or legacy systems;
o our ability to anticipate and support new standards, especially Internet
and enterprise Java standards; and
o the integration of additional software modules and third party software
applications with our existing products.
Our reliance on international operations may cause reduced revenues and
increased operating expenses.
During the year ended December 31, 2001, international revenues were $64.4
million or approximately 85% of our total net revenues. During the year ended
December 31, 2000, international revenues were $25.8 million or approximately
77% of our total net revenues. We expect international revenues will continue to
represent a significant portion of our total net revenues in future periods. We
have faced, and will continue to face, risks associated with:
o difficulties in managing our widespread operations;
o difficulties in hiring qualified local personnel;
o seasonal fluctuations in customer orders;
o longer accounts receivable collection cycles;
20
o expenses associated with products used in foreign markets;
o currency fluctuation and hedging activities; and
o economic downturns in international economies.
Any of these factors could have a significant impact on our ability to license
products on a competitive and timely basis and adversely affect our operating
expenses and net income. Our international sales are denominated in both the
U.S. dollar and local currencies. As a result, increases in the value of the
U.S. dollar relative to foreign currencies could make our products less
competitive in international markets and could negatively affect our operating
results and cash flows.
Our failure to successfully integrate acquired companies and technologies into
our operations and technologies could prevent us from operating efficiently.
Our business strategy includes pursuing opportunities to grow our business, both
internally and through selective acquisitions and technology and other asset
purchases. To implement this strategy, we expect to be involved in additional
technology and asset purchase transactions. Acquisition transactions are
motivated by many factors, including, among others, our desire to acquire
skilled personnel, obtain new technologies and expand and enhance our product
offerings. Growth through acquisitions has several identifiable risks, including
difficulties associated with successfully integrating the previously distinct
businesses into our organization, the substantial management time devoted to
integrating personnel, technology and entire companies, the possibility that we
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 our products (such as unanticipated expenses).
Realization of any of these risks in connection with any technology acquisition
and/or asset purchase we have entered into, or may enter into, could have a
material adverse effect on our business, operating results and financial
condition.
If we become subject to intellectual property infringement claims, these claims
could be costly and time-consuming to defend, divert management's attention,
cause product delays and have an adverse effect on our revenues and net income.
We expect that software product developers and providers of software in markets
similar to our target markets will increasingly be subject to infringement
claims as the number of products and competitors in our industry grows and the
functionality of products overlaps. Any claims, with or without merit, could be
costly and time-consuming to defend, divert our management's attention, or cause
product delays. We have no patents or patent applications that we could use
defensively against any company bringing such a claim. If any of our products
were found to infringe a third party's proprietary rights, we could be required
to enter into royalty or licensing agreements to be able to sell our products.
Royalty and licensing agreements, if required, may not be available on terms
acceptable to us or at all.
Power system shortages and outages in California may result in harm to our
operations due to a disruption of our development and administrative activities.
Over the past several years, California has experienced an energy crisis
resulting in significant power shortages and outages. A sustained failure or
frequent power failures could disrupt our operations and the operations of our
third party service providers, which would limit our ability to provide our
products and services to our customers, harming our customer relationships, and
having an adverse effect on our operating results.
ITEM 2. FACILITIES
Our headquarters are located in offices that are approximately 31,000 square
feet in Cupertino, California pursuant to an office lease expiring in July 2004.
We also lease office space in Boston, Chicago, New York City, London, Paris,
Amsterdam, Frankfurt, Munich, Madrid, Johannesburg, Sydney and Melbourne. We
believe our existing facilities meet our current needs and that we will be able
to obtain additional commercial space as needed.
21
ITEM 3. LEGAL PROCEEDINGS
Beginning in July 2001, we and certain of our officers and directors were named
as defendants in several class action shareholder complaints filed in the United
States District Court for the Southern District of New York and consolidated
under the caption, Weiss v. Chordiant Software, Inc., et al., Case No.
01-CV-6222. Similar complaints were filed in the same Court against hundreds of
other public companies that conducted initial public offerings ("IPOs") of their
common stock in the late 1990s (the "IPO Lawsuits"). In each of these
complaints, the plaintiffs allege that we, certain of our officers and directors
and our IPO underwriters violated the federal securities laws because our IPO
registration statement and prospectus contained untrue statements of material
fact or omitted material facts regarding the compensation to be received by, and
the stock allocation practices of, the IPO underwriters. The plaintiffs seek
unspecified monetary damages and other relief.
On August 8, 2001, the IPO Lawsuits were consolidated for pretrial purposes
before United States Judge Shira Scheindlin of the Southern District of New
York. Judge Scheindlin held an initial case management conference on September
7, 2001, at which time she ordered, among other things, that the time for all
defendants in the IPO Lawsuits to respond to any complaint be postponed until
further order of the Court. Thus, we have not been required to answer any of the
complaints, and no discovery has been served on us.
At a further status conference on March 11, 2002, Judge Scheindlin stated that
she would appoint lead plaintiffs counsel in the IPO Lawsuits in mid-March 2002,
and would require the appointed lead plaintiffs counsel to file amended,
consolidated complaints in the IPO Lawsuits by April 17, 2002. Judge Scheindlin
further stated that she did not expect the defendants to file motions to dismiss
the amended, consolidated complaints until summer 2002. We, with the assistance
of our legal counsel, intend to defend our position in this matter vigorously.
In addition to these lawsuits, we are 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 our security holders during the fourth
quarter of the year ended December 31, 2001.
22
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." The following table shows, for the periods indicated, the high and low
per share sales prices of our common stock, as reported by the Nasdaq National
Market. The prices appearing in the tables below reflect over-the-counter market
quotations, which reflect inter-dealer prices, without retail mark-up, markdown
or commission and may not necessarily represent actual transactions.
- ---------------------------------------------------------------------------
Year Ended December 31, 2001 High Low
- ---------------------------------------------------------------------------
First Quarter $4.94 $2.63
- ---------------------------------------------------------------------------
Second Quarter $3.51 $2.75
- ---------------------------------------------------------------------------
Third Quarter $3.10 $1.87
- ---------------------------------------------------------------------------
Fourth Quarter $8.00 $1.80
- ---------------------------------------------------------------------------
Year Ended December 31, 2000
- ---------------------------------------------------------------------------
First Quarter $39.44 $16.25
- ---------------------------------------------------------------------------
Second Quarter $16.63 $5.44
- ---------------------------------------------------------------------------
Third Quarter $17.98 $7.38
- ---------------------------------------------------------------------------
Fourth Quarter $8.00 $1.88
- ---------------------------------------------------------------------------
As of December 31, 2001, there were approximately 305 holders of record of our
common stock. Because many of such shares are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of stockholders represented by these record holders. 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.
In response to the SEC's adoption of Rule 10b5-1 under the Securities Exchange
Act of 1934, we approved amendments to our insider trading policy on July 20,
2001 to permit our directors, executive officers and certain key employees to
enter into trading plans or arrangements for systematic trading in our
securities. We have been advised that certain of our directors and officers have
entered into trading plans for selling shares in our securities. As of December
31, 2001, the directors and officers who have entered into trading plans include
Stephen Kelly and Sam Spadafora. Since December 31, 2001, Joseph Tumminaro
entered into a trading plan, and we anticipate that, as permitted by the Rule
10b5-1 and our insider trading policy, some or all of our directors, executive
officers and key employees may establish trading plans at some date in the
future.
Recent Sales of Unregistered Securities
We have sold and issued the following unregistered securities during the
period covered by this Annual Report:
(1) In May 29, 2001, we issued an aggregate of 165,000 shares of common stock
for the acquisition of certain intellectual property assets and technology of
the AoNet J2EE Workflow Server from ASP Outfitter, Inc.
(2) On May 17, 2001, we issued an aggregate of 1,733,547 shares of common stock
for the acquisition of certain assets associated with the Dialog Server product
suite from Actionpoint, Inc., as a result of which certain members of the Dialog
Server development, support, sales and marketing team from Actionpoint, Inc.
became our employees.
The sales and issuances of securities described in paragraphs (1) and (2) 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.
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, we sold 4,500,000 shares of common stock 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 us and 250,000 were sold by two of our stockholders. In
conjunction with our sale of the 425,000 shares, we received $7,114,500, net of
commissions and costs. The total net proceeds to us from the initial public
offering were approximately $80.4 million. We 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
23
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.
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with our
consolidated financial statements and related notes and "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, 1999, 2000 and 2001 and the consolidated
balance sheet data as of December 31, 2000 and 2001 are derived from the audited
consolidated financial statements included in this Annual Report. The
consolidated statement of operations data for the year ended December 31, 1997
and 1998 and the balance sheet data as of December 31, 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 we hold), since their effect
would be antidilutive. See the notes to our consolidated financial statements
for a detailed explanation of the determination of the shares used to compute
basic and diluted net loss per share. Our historical results are not necessarily
indicative of results to be expected for future periods.
Year Ended December 31,
--------------------------------------------------------------------
1997 1998 1999 2000 2001
--------------------------------------------------------------------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenue $ 2,908 $12,465 $17,588 $33,689 $75,971
-------- ------- ------- ------- -------
Net loss (11,593) (17,440) (23,137) (35,356) (42,262)
======== ======= ======= ======= =======
Net loss per share basic and diluted $ (2.31) $ (3.44) $ (4.34) $ (1.05) $ (0.86)
======== ======= ======= ======= =======
Weighted average shares used in
computing basic and diluted net loss
per share 5,009 5,075 5,327 33,690 49,252
======== ======= ======= ======= =======
As of December 31,
-----------------------------------------------------------------
1997 1998 1999 2000 2001
-----------------------------------------------------------------
(in thousands except per share data)
Consolidated Balance Sheet Data:
Cash and cash equivalents $18,916 $ 1,713 $ 6,719 $ 41,465 $ 27,068
Working capital (deficit) 7,767 (10,162) 1,833 60,529 39,731
Total assets 21,360 11,521 22,086 107,448 114,865
Short-term and long-term borrowings 1,268 1,687 13,225 595 75
Short-term and long-term deferred revenue 10,487 5,719 10,196 30,045 26,863
Mandatorily redeemable convertible preferred
stock 28,949 28,949 51,609 - -
Stockholders' equity (deficit) (20,682) (37,604) (57,782) 63,320 71,300
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR
In addition to historical information, the following discussion and analysis of
management contains forward-looking statements. These forward-looking statements
involve risks, uncertainties and assumptions. The actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including but not limited to, those discussed below and
in the sections in this Annual Report on Form 10-K entitled "Competition,"
"Proprietary Rights" and "Risk Factors." Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. We undertake no obligation to revise or
publicly release the results of any revision to these forward-looking
statements. Readers should carefully review the risk factors described in this
document as well as in other documents we file from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q
to be filed by the Company in 2002.
Overview
We provide customer relationship management (CRM) software solutions for global
business-to-consumer enterprise companies. Our primary target markets include
companies with demanding customer relationships involving a large number of
individual customers with complex customer relationships that require high
levels of personalized services. We began marketing our enterprise applications
software in 1997. Through our acquisitions including Prime Response and certain
technology from ActionPoint, we recently added to our product offerings. Our
customers include global companies in the financial services,
telecommunications, retail and travel services industries. Our solutions seek to
fulfill the requirements these companies have for enterprise-wide CRM software
infrastructure solutions capable of servicing millions of individual customers
across multiple communication channels in real-time. Our solutions enable
organizations to market, sell, and serve their customers across multiple
channels, including call centers, branch representatives and self-serve channels
such as automated telephony the web and e-mail.
The quarter ended December 31, 2001 was the third full quarter with consolidated
revenues and expenses from the Prime Response acquisition. Additionally,
approximately half of the quarter ended June 30, 2001 and all of the subsequent
quarters through December 31, 2001 included consolidated revenues and expenses
associated with the asset acquisitions from ActionPoint and ASP Outfitter. As a
result of these acquisitions, comparison of prior period net revenues and
expenses may not be meaningful.
Service revenues as a percentage of total net revenues were 54%, 50% and 48% for
the years ended December 31, 1999, 2000, and 2001, respectively. We expect that
service revenue will continue to represent over 40% of total net revenues.
We sell our products through our direct sales force, and we augment our sales
efforts through relationships with systems integrators, application service
providers and technology vendors.
For the years ended December 31, 1999, 2000 and 2001, revenues were derived from
customer accounts in the Americas, Europe (principally The United Kingdom) and
the rest of the world (ROW). For the years
25
ended December 31, 1999, 2000 and 2001, international revenues were $6.6
million, $25.8 million, and $64.4 million or approximately 38%, 77% and 85% of
our total net revenues, respectively. We believe international revenues will
continue to represent a significant portion of our total net revenues in future
periods.
A small number of customers account for a significant portion of our 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 our
revenues. We expect that revenues from a small number of customers will continue
to account for a majority of our total net revenues in the future as historical
implementations are completed and replaced with new projects from new and
existing customers. Customer concentration has reduced and we expect that trend
to continue.
Pricing pressure during the past year has intensified particularly with
application products. Several of our competitors continue to aggressively price
their products with large discounts in comparison to our prices. During a recent
competitive sales cycle one competitor offered its product at a fraction of
the cost of our software. While we won this transaction we cannot be sure that
competitors won't offer their products at prices substantially under our prices.
We believe this competitive pricing pressure will continue. Our strategy is to
continue to offer products with functionality different and superior to our
competitors.
Over the past two years our international revenue growth rate has rapidly
outpaced our United States revenue growth rate. We feel this has occurred for
several reasons. First, the U.S. economy has been weak compared to areas where
we have an international presence. Second, our leadership has been very strong
internationally as Stephen Kelly was personally responsible for promoting our
strong growth in International Operations. Third, up until recently, the
competition for sales personnel was very strong in the United States. And
fourth, our acquisition of Prime Response had a very strong international
presence. Assuming the United States economy begins to recover and given our
focus which includes Stephen Kelly as our Chief Executive Officer and with
Jeremy Coote, our new Americas' President, hired in December of 2001, we believe
we will be able to increase our growth rate for our U.S. revenues more rapidly
than our international revenues.
The following table summarizes the revenues from customers in excess of 10% of
total net revenues:
Year Ended December 31,
-----------------------------------
1999 2000 2001
-----------------------------------
Company A 30%
Company B 19%
Company C 10%
Company D 10%
Company E 14%
Company F 19% 18%
Company G 15% 30% 13%
Since our inception, we have incurred substantial research and development costs
and have invested heavily in the expansion of our product development, sales,
marketing and professional services organizations in order to build an
infrastructure to support our long-term growth strategy. The number of our
fulltime employees increased from 250 at December 31, 2000 to 436 at December
31, 2001, representing an increase of approximately 74%. The major increase was
due to the retention of certain employees from the Prime Response and
ActionPoint Dialog Server asset acquisitions. We anticipate that our operating
expenses will continue to increase over the very long term as we expand our
product development, sales and marketing and professional services organization.
As of February 28, 2002, we employed 397 full time employees. Of that total, 110
were primarily engaged in product development, engineering or systems
engineering, 111 were engaged in sales and marketing, 129 were engaged in
professional services and 47 were engaged in operational, financial and
administrative functions.
We believe that period-to-period comparisons of our operating results should not
be relied upon as indicative of future performance. Our prospects must be
considered given the risks, expenses and difficulties frequently encountered by
companies in early stages of development, particularly companies in new and
rapidly evolving businesses. There can be no assurance we will be successful in
addressing these risks and difficulties. In addition, although we have
experienced revenue growth recently, this trend may not continue. In addition,
we may not achieve or maintain profitability in the future.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to estimates
of percentage of completion on our service contracts, uncollectible
receivables, investment values, intangible assets, income taxes, restructuring
costs and contingencies. We base our estimates on historical experience and on
various other
26
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements:
o revenue recognition, including estimating the total estimated days to
complete sales arrangements involving significant implementation or
customization essential to the functionality of our product;
o estimating valuation allowances and accrued liabilities, specifically the
allowance for doubtful accounts, and assessment of the probability of the
outcome of our current litigation;
o accounting for income taxes;
o valuation of long-lived and intangible assets and goodwill; and
o determining functional currencies for the purposes of consolidating our
international operations.
Revenue recognition. We derive revenues from licenses of our software and
related services, which include assistance in implementation, customization and
integration, post-contract customer support, training and consulting. In
addition to determining our results of operations for a given period, our
revenue recognition determines the timing of certain expenses, such as sales
commissions and royalties. Revenue recognition rules for software companies are
very complex and certain judgements affect the application of our revenue
policy. The amount and timing of our revenue is difficult to predict and any
shortfall in revenue or delay in recognizing revenue could cause our operating
results to vary significantly from quarter to quarter and could result in future
operating losses.
At the time of entering into a transaction, we assess whether any services
included within the arrangement require us to perform significant implementation
or customization essential to the functionality of our product so that the
software performs as the customer requests. For contracts involving significant
implementation or customization of the software, we recognize the license and
service fees using the percentage-of-completion method using labor hours
incurred as the measure of progress towards completion. Approximately 58%, 65%
and 73% of total net revenue was recognized under the percentage-of-completion
method of accounting during 1999, 2000 and 2001, respectively. We consider that
a project is completed at the go-live date. We follow this method since
reasonably dependable estimates of time to complete the project can be made.
Estimates are subject to revisions as the contract progresses to completion.
Provisions for estimated contract losses are recognized in the period in which
the loss becomes probable and can be reasonably estimated. When we sell
additional seat licenses, revenue from additional seats is recognized after the
go-live date if the seats have been delivered and no remaining obligations
exist.
On contracts not involving significant implementation or customization essential
to the functionality of our products, we recognize license revenues when there
is persuasive evidence of an arrangement, the fee is fixed or determinable,
there is probability of collection and delivery has occurred.
27
We assess collection based on a number of factors, including past transaction
history with the customer and the credit-worthiness of the customer. We do not
request collateral from our customers. If we determine that collection of a fee
is not probable, we defer the fee and recognize revenue at the time collection
becomes probable, which is generally upon receipt of cash.
For arrangements with multiple elements, we recognize 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." We allocate revenue to each component of the arrangement using
the residual value method based on the fair value of the undelivered elements,
which is specific to us. This means that we defer revenue from the arrangement
fee equivalent to the fair value of the undelivered elements. Fair values for
the ongoing maintenance and support obligations for our perpetual licenses are
based upon separate sales of renewals to other customers or upon optional
substantive renewal rates quoted in the contracts. Fair value of services, such
as training or consulting, is based upon separate sales by us of these services
to other customers.
In situations in which we are not responsible for implementation services but
are obligated to provide unspecified additional software products in the future,
we recognize revenue as a subscription ratably over the term of the commitment
period.
For all sales we use either a binding purchase order or signed license agreement
as evidence of an arrangement. Sales through our third party systems integrators
are evidenced by a master agreement governing the relationship together with
binding purchase orders on a transaction-by-transaction basis. Revenues from
reseller arrangements are recognized on the "sell-through" method, when the
reseller reports to us the sale of our software products to end-users. Our
agreements with customers and resellers do not contain product return rights.
We recognize revenue for post-contract customer support ratably over the support
period, generally one year. Our training and consulting services are billed
based on hourly rates, and we generally recognize revenue as these services are
performed.
We bill customers according to contract terms. We record as deferred revenues
amounts billed to customers in excess of revenues recognized.
28
Allowance for doubtful accounts and accruals for litigation. We must make
estimates of the uncollectability of our accounts receivables. We specifically
analyze accounts receivable and analyze historical bad debts, customer
concentrations, customer credit-worthiness and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts. Generally, we
require no collateral from our customers. Our accounts receivable balance was
$21.6 million, net of allowance for doubtful accounts of $0.2 million as of
December 31, 2001. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Our current estimated range of liability related to some of the pending
litigation is based on claims for which we can estimate the amount
and range of loss. We have recorded the minimum estimated liability related to
those claims, when there is a range of loss.
Accounting for income taxes. As part of the process of preparing our
consolidated financial statements we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included within our consolidated balance
sheet. We must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must
include an expense within the tax provision in the statement of operations.
We have recorded a valuation allowance of $57.9 million as of December 31, 2001,
due to uncertainties related to our ability to utilize our deferred tax assets,
primarily consisting of certain net operating losses carried forward and foreign
tax credits. In the event that actual results differ from these estimates or we
adjust these estimates in future periods we may need to establish an additional
valuation allowance which could materially impact our financial position and
results of operations.
Valuation of long-lived and intangible assets and goodwill. We assess the
impairment of identifiable intangibles, long-lived assets and goodwill whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important which could trigger an impairment
review include the following:
o significant underperformance relative to expected historical or projected
future operating results;
o significant changes in the manner of our use of the acquired assets or the
strategy for our overall business;
o significant negative industry or economic trends;
o significant decline in our stock price for a sustained period; and
o our market capitalization relative to net book value.
When we determine that the carrying value of intangibles, long-lived assets and
goodwill may not be recoverable based upon the existence of one or more of the
above
29
indicators of impairment, we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by our management
to be commensurate with the risk inherent in our current business model. Net
intangible assets, long-lived assets, and net goodwill amounted to $45.5 million
as of December 31, 2001.
Determining functional currencies for the purpose of consolidation. We have
several foreign subsidiaries which together account for approximately 85% of our
net revenues, 30% of our assets and 57% of our total liabilities as of December
31, 2001.
In preparing our consolidated financial statements, we are required to translate
the financial statements of the foreign subsidiaries from the currency in which
they keep their accounting records, generally the local currency, into United
States dollars. This process results in exchange gains and losses which, under
the relevant accounting guidance are either included within the statement of
operations or as a separate part of our net equity under the caption "cumulative
translation adjustment."
Under the relevant accounting guidance the treatment of these translation gains
or losses is dependent upon our management's determination of the functional
currency of each subsidiary. The functional currency is determined based on
management judgment and involves consideration of all relevant economic facts
and circumstances affecting the subsidiary. Generally, the currency in which the
subsidiary transacts a majority of its transactions, including billings,
financing, payroll and other expenditures would be considered the functional
currency but any dependency upon the parent and the nature of the subsidiary's
operations must also be considered.
If any subsidiary's functional currency is deemed to be the local currency, then
any gain or loss associated with the translation of that subsidiary's financial
statements is included in cumulative translation adjustments. However, if the
functional currency were deemed to be the United States dollar then any gain or
loss associated with the translation of these financial statements would be
included within our statement of operations. If we dispose of any of our
subsidiaries, any cumulative translation gains or losses would be realized into
our statement of operations. If we determine that there has been a change in the
functional currency of a subsidiary to the United States dollar, any translation
gains or losses arising after the date of change would be included within our
statement of operations.
Based on our assessment of the factors discussed above, we consider the relevant
subsidiary's local currency to be the functional currency for each of our
international subsidiaries. Accordingly, we had cumulative translation losses of
approximately $0.6 million and $0.1 million, which were included as part of
accumulated other comprehensive loss within our balance sheet at December 31,
2001 and 2000, respectively. During 2001, 2000 and 1999, translation adjustments
of $0, $0.1 million and $0.5 million, respectively, were included under
accumulated other comprehensive loss. Had we determined that the functional
currency of our subsidiaries was the United States dollar, these losses would
have increased our loss for each of the years presented.
The magnitude of these gains or losses is dependent upon movements in the
exchange rates of the foreign currencies in which we transact business against
the United States dollar. These currencies include the
30
United Kingdom Pound Sterling, the German Mark, the French Franc, the Dutch
Guilder and Australian and Canadian Dollars. Any future translation gains or
losses could be significantly higher than those noted in each of these years. In
addition, if determine that a change in the functional currency of one of our
subsidiaries has occurred at any point in time we would be required to include
any translation gains or losses from the date of change in our statement of
operations.
We Disclose Pro Forma Financial Information
We prepare and release quarterly unaudited financial statements prepared in
accordance with generally accepted accounting principles ("GAAP"). We also
disclose and discuss certain pro forma financial information in the related
earnings release and investor conference call. Our pro forma financial
information does not include unusual or non-recurring events or transactions,
amortization of goodwill and purchased intangibles, non-cash compensation
expense or restructuring expense. We believe the disclosure of the pro forma
financial information helps investors more meaningfully evaluate the results of
our ongoing operations. However, we urge investors to carefully review the GAAP
financial information included as part of our Quarterly Reports on Form 10-Q,
our Annual Reports on Form 10-K, and our quarterly earnings releases and compare
that GAAP financial information with the pro forma financial results disclosed
in our quarterly earnings releases and investor calls.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations"
which supercedes Accounting Principles Board Opinion No. 16, "Business
Combinations." SFAS No. 141 requires the purchase method of accounting for
business combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. In addition, SFAS No. 141 establishes specific
criteria for the recognition of intangible assets separately from goodwill and
requires unamortized negative goodwill to be written off immediately as an
extraordinary gain, instead of being deferred and amortized. The provisions of
SFAS No. 141 have been adopted as of July 1, 2001. The adoption of SFAS No. 141,
has not changed the method of accounting used in previous business combinations
initiated prior to July 1, 2001.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. Upon
adoption of SFAS No. 142, we will cease to amortize approximately $17,922 of
goodwill, we had recorded approximately $6,635 of amortization on these amounts
during 2001. We will be required to perform an impairment review of our goodwill
balance upon the initial adoption of SFAS No. 142.
We expect to complete the initial review during the second quarter of 2002. We
do not expect to record an impairment charge upon completion of the initial
review, however, there can be no assurance that at the time the review is
completed a material impairment charge will not be recorded.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets."
31
SFAS No. 144 requires that long-lived assets to be disposed of by sale,
including discontinued operations, be measured at the lower of carrying amount
or fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS No. 144 also broadens the reporting requirements
of discontinued operations to include all components of an entity that have
operations and cash flows that can be clearly distinguished, operationally and
for financial reporting purposes, from the rest of the entity. The provisions of
SFAS 144 are effective for fiscal years beginning after December 15, 2001. We
are evaluating the effect of this statement on our results of operations and
financial position.
In November 2001, the Emerging Issues Task Force (EITF) reached consensus on
EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products. EITF No. 01-9 addresses the accounting for
consideration given by a vendor to a customer and is a codification of EITF No.
00-14, Accounting for Certain Sales Incentives, EITF No. 00-22 Accounting for
`Points' and Certain Other Time-Based or Volume-Based Sales Incentives Offers
and Offers for Free Products or Services to be Delivered in the Future and EITF
No. 00-25, Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products. We do not believe that upon adoption it will
have a significant impact on our financial statements.
In November 2001, the FASB reached consensus on Topic No. D-103, "Income
Statement Characterization of Reimbursements Received for Out of Pocket Expenses
Incurred." The FASB concluded that reimbursements received for out of pocket
expenses incurred should be characterized as revenue in the income statement.
Historically, we have recorded reimbursements as a reduction of services cost of
revenue. This will be applied in financial reporting periods beginning after
December 15, 2001, and comparative financial statements for prior periods will
be reclassified to comply with the guidance in this announcement. We believe the
adoption of this pronouncement will not result in a material increase in our
services revenue and cost of services revenue.
Results of Operations
The following table provides the percentage of our total net revenues
represented by each for the years ended December 31, 1999, 2000 and 2001. 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
---------------------------------------
1999 2000 2001
---------------------------------------
As a Percentage of Total Net Revenues:
Net Revenues:
License--non-related parties 34 % 32 % 52 %
License--related parties 12 18 0
Service--non-related parties 51 12 48
Service--related parties 3 38 0
----------- ----------- -----------
Total net revenues 100 100 100
----------- ----------- -----------
Cost of net revenues:
License--non-related parties 1 3 3
License--related parties 1 0 0
Service--non-related parties 80 47 40
Service--related parties 2 5 0
Non-cash compensation expense 4 6 1
----------- ----------- -----------
Total cost of net revenues 88 61 44
----------- ----------- -----------
Gross profit 12 39 56
----------- ----------- -----------
Operating expenses:
Sales and marketing
Non-cash compensation expense 4 4 1
Other sales and marketing 76 67 55
Research and development
Non-cash compensation expense 5 6 1
Other research and development 37 43 27
Purchased In-process research and development 0 13 4
General and administrative
Non-cash compensation expense 2 2 1
Other general and administrative 15 16 13
Amortization of goodwill - 2 9
Amortization of intangible assets - - 4
Restructuring expense - - 2
----------- ----------- -----------
Total operating expenses 139 153 117
----------- ----------- -----------
Loss from operations (127) (114) (61)
Interest expense (6) (1) -
Other income (expense), net 2 10 5
----------- ----------- -----------
Net loss before income taxes (131) (105) (56)
Provision for income taxes - - -
----------- ----------- -----------
Net loss (131)% (105)% (56)%
=========== =========== ===========
32
Comparison of Years Ended December 31, 2001 and 2000
Net Revenues
License. Total license revenues increased to approximately $39.7 million for the
year ended December 31, 2001 from $16.9 million, or approximately 135%, for the
year ended December 31, 2000. License revenues for enterprise solutions
increased to approximately $26.9 million for the year ended December 31, 2001
from $16.9 million, or approximately 59%, for the year ended December 31, 2000.
License revenues for application products represented approximately $12.7
million in 2001. No revenue for application products was recognized prior to the
acquisition of Prime Response and our asset acquisition from Actionpoint. The
revenue increase was primarily due to the growth in the number of product
implementations by new and existing customers, a higher average transaction size
and the expansion of our product offerings through the acquisitions of Prime
Response and ActionPoint.
Service. Total service revenues increased to approximately $36.3 million for the
year ended December 31, 2001 from $16.8 million, or approximately 116%, for the
year ended December 31, 2000. Service revenues for enterprise solutions
increased to approximately $27.3 million for the year ended December 31, 2001
from $16.8 million, or approximately 63%, for the year ended December 31, 2000.
Service revenues for application products increased to approximately $9.0
million for the year ended December 31, 2001 from zero, 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.
Cost of Net Revenues
License. Cost of net license revenues increased to $2.0 million for the year
ended December 31, 2001 from $1.0 million, or approximately 119%, for the year
ended December 31, 2000. These costs resulted in license gross margins of 95%
and 87% for the years ended December 31, 2001 and 2000, respectively. The cost
of net license revenues increase was primarily due to transaction growth in the
number of product implementations by new and existing customers and a higher
average transaction size.
Service. Cost of net service revenues, before the effect of non-cash
compensation expense, increased to $30.6 million for the year ended December 31,
2001 from $17.5 million, or approximately 75%, for the year ended December 31,
2000. These costs resulted in service gross margins of 16% and -4% for the years
ended December 31, 2001 and 2000, respectively. The increase primarily due to
increased staff to support a
33
higher number of product-related engagements and additional service personnel
expenses from the Prime Response acquisition.
Operating Expenses
Sales and marketing. Sales and marketing expenses, before the effect of non-cash
compensation expense, increased to $41.7 million for the year ended December 31,
2001 from $22.4 million, or approximately 86%, for the year ended December 31,
2000. The increase in these expenses were mainly attributable to increases of
$14.2 million in personnel related expenses, $3.3 million in allocated
depreciation and overhead costs and $1.8 million in marketing and advertising
costs.
Research and development. Research and development expenses before the effect of
non-cash compensation expense and purchased in-process research development
increased to $20.5 million for the year ended December 31, 2001 from $14.4
million, or approximately 42%, for the year ended December 31, 2000. The
increase was mainly due to an increase of $5.0 million in personnel related
expenses and $1.1 million in allocated depreciation and overhead costs.
Purchased in-process research and development. In-process research and
development expense represents technology acquired that on the date of
acquisition, the technology had not achieved technological feasibility and there
was no alternative future use based on the state of development. Because the
product under development may not achieve commercial viability, the amount of
acquired in-process research and development was immediately expensed. The
nature of the efforts required to develop the purchased in-process research and
development into a commercially viable product principally relate to the
completion of all planning, designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its designed specifications, including functions, features and technical
performance requirements.
During 2001, we expensed a total of $3.0 million related to acquired in-process
technology of which $1.5 million is attributable to the acquisition of Prime
Response, $0.4 million is attributable to the acquisition of certain assets of
ActionPoint, Inc., $0.8 million is attributable to certain assets acquired from
ASP Outfitter, Inc. and $0.3 million is attributable to certain assets acquired
from Pyxis, Inc. During 2000, we expensed a total of $4.2 million of which $0.7
million relates to the acquisition of White Spider, Inc. and $3.5 million
relates to the transaction with Chase Manhattan Mortgage Corporation ("Chase").
In 2000, Chase alleged a breach of the license and service agreements entered
between the parties in 1998. On March 1, 2000, we agreed with Chase to terminate
the existing agreements between us, and Chase agreed to pay us 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 us ownership
of certain technology and intellectual property developed by the parties under
their prior agreements. We 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 us. Chase has also agreed to assist us 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 us to Chase was
expensed as in-process research and development. Development work on the
acquired technology was completed during the fourth quarter of 2000.
The value of the purchased in-process research and development was determined by
estimating the projected net cash flows related to the product, determined based
upon our 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, before the
effect of non-cash compensation expense, increased to $9.6 million for the year
ended December 31, 2001 from $5.5 million, or 75%, for the year ended December
31, 2000. The increase in these expenses was mainly attributable to increases of
$2.4 million in personnel related expenses and $1.7 million in professional
services.
34
Non-cash compensation expense. In connection with the grant of certain employee
stock options, we recorded aggregate unearned stock-based compensation expenses
of $14.8 million. The balance represents the total difference between the
exercise price of the option and the deemed fair market value of the underlying
common stock at the date of issuance in relation to options granted prior to our
initial public offering. In addition, we recorded in 2000 unearned stock-based
compensation balances of $2.0 million in connection with the acquisition of
White Spider, Inc. These amounts are included as a component of stockholders'
equity and are being amortized over the vesting period of the options,
consistent with the method described in FASB Interpretation No. 28. We recorded
in 2001 amortization of stock-based compensation expense of $2.7 million
compared to $6.3 million in 2000. At December 31, 2001, approximately $4.0
million of stock-based compensation remained to be amortized.
During 2001, we also recorded stock-based compensation expense of $0.5 million
in conjunction with the settlement of a note receivable with one of our
executives.
The total stock-based compensation expense by operating expense is described as
follows (in thousands):
Year Ended December 31,
--------------------------
2000 2001
--------------------------
Cost of net revenues $ 2,040 $ 698
Sales and marketing 1,488 1,040
Research and development 2,039 1,076
General and administrative 689 406
--------------------------
Total $ 6,256 $ 3,220
==========================
In September 2001, we issued warrants to Accenture plc to purchase up to 600,000
shares of our Common Stock. The warrants are based on Accenture achieving
certain revenue goals. The warrants will be valued based on the fair market
value of our Common Stock upon Accenture achieving the revenue targets. The
measured value of the warrant will be recorded as sales and marketing expenses.
The warrants expire in September 2006.
Amortization of intangibles. In connection with the acquisition of certain
assets from ActionPoint, Inc., we recorded intangibles in the amount of $6.9
million of which $3.2 million was attributed to goodwill. Intangible assets for
the asset acquisition from ActionPoint such as developed technology,
workforce-in-place, core technology, and goodwill are being amortized over
periods of one and one half years, two years, and three years, respectively.
In connection with the acquisition of certain assets from ASP Outfitter, Inc.,
we recorded intangibles in the amount of $0.2 million million of which $0.1
million was attributed to goodwill. Intangible assets for ASP Outfitter such as
workforce-in-place and goodwill are being amortized over a period of two years
and three years, respectively.
Amortization of intangibles for the year ended December 31, 2001 was $9.7
million of which $6.3 million is attributable to the acquisition of Prime
Response in March 2001, $1.8 million is attributable to our acquisition of White
Spider during 2000. The remaining balance of $1.6 million is related to the
acquisitions of certain assets from ActionPoint, Inc. and ASP Outfitter, Inc. in
May 2001.
Restructuring Costs
On March 27, 2001 we completed the acquisition of Prime Response, Inc. In
connection with the acquisition, we restructured several areas to prioritize our
initiatives around high-growth areas of our business, reduce expenses, and
improve efficiency due to macro-economic conditions. This restructuring program
includes a worldwide workforce reduction, consolidation of excess facilities,
and restructuring of certain business functions.
35
Workforce reduction
The restructuring program resulted in the reduction of eleven regular employees,
seven in the general and administrative function in the U.S. and four in the
sales and marketing function based outside the U.S. The workforce reductions
were completed in the second quarter of fiscal year 2001. We recorded a
workforce reduction charge of approximately $0.7 million relating primarily to
severance and benefits.
Consolidation of excess facilities
We accrued for lease costs of $0.8 million in the first quarter of 2001
pertaining to the estimated future gross obligations for non-cancelable lease
payments for excess facilities that were vacated due to reductions in workforce.
During the quarter ended June 30, 2001, we entered into a favorable sublease
transaction, which led to a $0.2 million reduction in the corresponding
facilities charge.
A summary of the restructuring cost and other special charges is outlined as
follows (in thousands):
- ----------------------------------------------------------------------------------------------------------------------------
Facilities Severance and Asset Other Total
Benefits Write-offs
- ----------------------------------------------------------------------------------------------------------------------------
Restructuring reserve:
- ----------------------------------------------------------------------------------------------------------------------------
Total charge $ 774 $ 689 $ 46 $ 401 $ 1,910
- ----------------------------------------------------------------------------------------------------------------------------
Cash paid (257) (689) -- (401) (1,347)
- ----------------------------------------------------------------------------------------------------------------------------
Provision adjustment (210) -- -- -- (210)
- ----------------------------------------------------------------------------------------------------------------------------
Non-cash -- -- (46) -- (46)
- ----------------------------------------------------------------------------------------------------------------------------
Reserve balance at December 31, 2001 $ 307 $ -- $ -- $ -- $ 307
- ---------------------------------------------===============================================================================
Amounts related to the net lease expense due to the consolidation of facilities
will be paid over the lease term through fiscal year 2011. For the year ended
December 31, 2001, we have recorded $1.7 million in restructuring reserve. These
charges primarily relate to the termination and/or sublease of our excess
facilities and to severance and other benefits for impacted employees.
Interest and other Income, net, and Interest Expense
Interest and other income, net, and interest expense consist primarily of
interest income generated from our 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 to $0.1 million for the year ended December
31, 2001 from $0.3 million for the year ended December 31, 2000. The decrease is
due primarily to decreased borrowings. Interest and other income (expense), net
increased to approximately $4.0 million for the year ended December 31, 2001
from $3.3 million for the year ended December 31, 2000. The increase in interest
and other income is primarily attributable to an early termination of a contract
by a customer.
Provision for Income Taxes
Our provision for income taxes was $0.2 million for the year ended December 31,
2001. The increase in provision was attributable to taxes on earnings from our
foreign subsidiaries.
Our deferred tax assets primarily consist of net operating loss carryforwards,
nondeductible allowances and research and development tax credits. We have
recorded a valuation allowance for the full amount of our net deferred tax
assets, as the future realization of the tax benefit is not considered by
management to be more-likely-than-not.
36
Comparison of Years Ended December 31, 2000 and 1999
Net Revenues
License. License revenues for enterprise solutions increased to $16.9 million
for the year ended December 31, 2000, from $8.0 million, or approximately 111%,
for the year ended December 31, 1999. 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.
Services. Services revenues for enterprise solutions increased to $16.8 million
for the year ended December 31, 2000, from $9.6 million, or approximately 75%,
for the year ended December 31,1999. 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 increased to $1.0 million for the year
ended December 31, 2000, from $0.4 million, or approximately 130%, for the year
ended December 31, 1999. These costs resulted in license gross margins of 95%
and 95% for the years ended December 31, 2000 and 1999, respectively. 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 a higher average
transaction size.
Services. Cost of net services revenues, before the effect of non-cash
compensation expense, increased to $17.5 million for the year ended December 31,
2000, from $14.4 million, or approximately 22%, for the year ended December 31,
1999. These costs resulted in license gross margins of -16% and -57% for the
years ended December 31, 2000 and 1999, respectively. The increase in absolute
dollars was primarily due to increased staff to support a higher number of
product-related engagements.
Operating Expenses
Sales and marketing. Sales and marketing expenses, before the effect of non-cash
compensation expense, increased to $22.4 million for the year ended December 31,
2000, from $13.4 million, or approximately 67%, for the year ended December 31,
1999. Increases in these expenses were mainly attributable to increases of $6.3
million in personnel related expenses, $0.7 million in allocated depreciation
and overhead costs and $2.0 million in marketing and advertising costs.
Research and development. Research and development expenses before the effect of
non-cash compensation expense and purchased in-process research development
increased to $14.4 million for the year ended December 31, 2000, from $6.5
million, or approximately 122%, for the year ended December 31, 1999. 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.
Purchased in-process research and development. In-process research and
development expense represents technology acquired that 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 $0.7
million was attributable to the 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, we entered into a license for our 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,
our outstanding receivable balance from Chase was $1.7 million. On March 1,
2000, we agreed with Chase to terminate the existing agreements between us, and
Chase agreed to pay us the $1.7 million receivable balance under the agreements
as of December 31, 1999. The parties also entered
37
into a separate agreement whereby Chase transferred to us ownership of certain
technology and intellectual property developed by the parties under their prior
agreements. We 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 us.
Chase has also agreed to assist us 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 us to Chase was expensed 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 purchased in-process research and development was determined by
estimating the projected net cash flows related to the product, determined based
upon our 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 before the
effect of non-cash compensation expense, increased to $5.5 million for the year
ended December 31, 2000, from $2.7 million, or approximately 104%, for the year
ended December 31, 1999. 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.
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, we recorded aggregate
unearned stock-based compensation expenses of $4.1 million for the year ended
December 31, 2000 and $11.3 million for the year ended December 31, 1999. The
amount recorded in year 2000 included $2.0 million associated with the
acquisition of White Spider. Stock-based compensation included in operating
expenses totaled $6.3 million for the year ended December 31, 2000 and $2.7
million for the year ended December 31, 1999.
Amortization of intangibles. Amortization of intangibles for the year ended
December 31, 2000 was $802,000. We 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.
Interest and other Income, net, and Interest Expense
Interest and other income, net, and interest expense consist primarily of
interest income generated from our 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 to $0.3 million for the year ended December
31, 2000, from $1.1 million for the year ended December 31, 1999. The decrease
is due primarily to decreased borrowings. Interest and other income, net
increased to $3.3 million for the year ended December 31, 2000, from $0.3
million for the year ended December 31, 1999. The increase is primarily
attributable to increased interest income earned on our cash, cash equivalents
and short-term investments, which grew significantly following the completion of
our 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 $0.5 million attributable to foreign exchange
transaction losses.
38
Liquidity and Capital Resources
Our cash, cash equivalents, and short-term investments consist principally of
money market funds, municipal bonds, and marketable equity securities, which
totaled $51.1 million at December 31, 2001. All of our short-term investments
are classified as available-for-sale under the provisions of SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
securities are carried at fair market value. Realized gains and losses are
recognized when realized on the consolidated statements of income.
During the year ended December 31, 2001, net cash used to fund operating
activities was $27.1 million. Net cash provided by investing activities was
$11.8 million, primarily related to the acquisition of Prime Response. Our cash
and cash equivalents, short-term investments and restricted cash value on
December 31, 2001, was $51.1 million, representing a decrease of approximately
$16.5 million since December 31, 2000.
On October 15, 2001, we renewed terms and conditions for a line of credit
composed of two elements, an accounts receivable line and an equipment line.
Under the renewed terms and conditions of the accounts receivable line, the
total amount of the line of credit is $11.5 million. At our option, borrowings
under the accounts receivable line of credit will bear interest either at the
lending bank's prime rate plus 1.5% or the LIBOR Option (1,2,3 or 6 month
maturity) plus 500 basis points. The accounts receivable line is limited to 80%
of eligible accounts receivable. There were no borrowings outstanding at
December 31, 2001 under the line of credit.
Borrowings under our $2.0 million equipment line bear interest at the lending
bank's prime rate plus 2.0%. Borrowings outstanding under a previous term
facility were $75,000 at December 31, 2001.
Our assets collateralize borrowings under both lines of credit. The lines of
credit require us to maintain a minimum quick ratio of 2.00 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. As of
December 31, 2001 we were in compliance with all covenants of the agreement.
We have no material commitments for capital expenditures or strategic
commitments and we anticipate a low rate of capital expenditures. We may use
cash to acquire or license technology, products or businesses related to our
current business. In addition, we anticipate that we will experience low or no
growth or a decline in our operating expenses for the foreseeable future and
that our operating expenses will be a material use of our cash resources.
Future payments due under debt and lease obligations as of December 31, 2001 are
as follows (in thousands):
Borrowings Operating Total
Leases
------------------------------------------
2002 $ 75 $ 3,649 $ 3,724
2003 0 3,493 3,493
2004 0 2,744 2,744
2005 0 1,711 1,711
2006 0 1,900 1,900
Thereafter 0 6,412 6,412
------------------------------------------
Total $ 75 $ 19,909 $ 19,984
==========================================
We have entered into a two-year agreement, beginning March 19, 2002, with Merit
International pursuant to which Merit will provide exclusive training and
certain consulting services for negotiated fees. Upon the effective date of this
agreement, we transferred to Merit our training operations including selected
employees. In addition, Merit will provide to our customers resource development
services in exchange for an agreed-upon fee negotiated on a transaction-by-
transaction basis. We feel this agreement will provide us with high
39
quality training and consulting services. We will pay Merit minimum revenue
targets as follows: January 1, 2002 to June 30, 2002: (pound)0.5 million; July
1, 2002 to December 31, 2002: (pound)0.9 million; January 1, 2003 to June 30,
2002: (pound)0.9 million; July 1, 2003 to December 31, 2003: (pound)1.0 million;
and January 1, 2004 to June 30, 2004: (pound)0.5 million, for a total of
(pound)3.8 million. The minimum revenue targets above can be reduced for Merit's
non-compliance with the terms of the agreement. If we exceed the minimum revenue
target, Merit will raise a credit note to be applied against future minimums.
After one year from the effective date, we may, at our option, terminate the
agreement and pay an early termination fee that reduces from (pound)0.6 million
to (pound)0 over time. Payment of the early termination fee will release our
obligation related to the minimum revenue target.
Our existing cash, cash equivalents and investment balances may decline further
during fiscal 2002, although we believe that our existing balances together with
our anticipated cash flows from operations will be sufficient to meet our
working capital and operating resource expenditure requirements for the next 12
months. If the global economy weakens further, the decline in cash, cash
equivalents and investments balances may be greater than presently anticipated.
We expect to continue to experience growth in our operating expenses. We
anticipate that operating expenses will continue to be a material use of our
cash resources. Our restructuring costs associated with the Prime Response
acquisition were financed through existing cash resources and did not have a
significant impact on our financial position and results of operations. In
addition, we may continue to utilize cash resources to fund acquisitions or
investments in other businesses, technologies or product lines. We may require
additional funds to support our 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT CHORDIANT'S MARKET RISK
We are exposed to the impact of interest rate changes, foreign currency
fluctuations, and change in the market values of our investments.
The following table presents the amounts of cash equivalents and short-term
investments that are subject to interest rate risk by year of expected maturity
and average interest rates as of December 31, 2001:
2001 Fair Value
---------- -----------
Cash equivalents and short-term investments $ 24,072 $ 24,072
Average interest rates 2.47%
The following table presents the amounts of cash equivalents and short-term
investments that are subject to interest rate risk by year of expected maturity
and average interest rates as of December 31, 2000:
2000 Fair Value
------------ ------------
Cash equivalents and short-term investments $ 26,203 $ 26,203
Average interest rates 6.72%
40
Interest Rate Risk. Our exposure to market rate risk for changes in interest
rates relates primarily to our investment portfolio. We have not used derivative
financial instruments to hedge our investment portfolio. We invest excess cash
in debt instruments of the U.S. Government and its agencies, and in high-quality
corporate issuers and, by policy, limit the amount of credit exposure to any one
issuer. We protect and preserve invested funds by limiting default, market and
reinvestment risk. Investments in both fixed rate and floating rate interest
earning instruments carries 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, our future
investment income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if forced to sell securities, which
have declined in market value due to changes in interest rates.
Foreign Currency Risk. International revenues from our foreign subsidiaries
accounted for approximately 85% of total net revenues during 2001. International
sales are made mostly from our foreign sales subsidiaries in their respective
countries and are typically denominated in the local currency of each country.
These subsidiaries also incur most of their expenses in the local currency.
Accordingly, all foreign subsidiaries use the local currency as their functional
currency.
Our international business is subject to risks, including, but not limited to
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility when compared to the United States. Accordingly, our future results
could be materially adversely impacted by changes in these or other factors.
Our exposure to foreign exchange rate fluctuations arises in part from
intercompany accounts in which costs incurred in the United States are charged
to our foreign sales subsidiaries. These intercompany accounts are typically
denominated in the functional currency of the foreign subsidiary. We are also
exposed to foreign exchange rate fluctuations as the financial statements of
foreign subsidiaries are translated into U.S. dollars in consolidation. As
exchange rates vary, these results, when translated, may vary from expectations
and adversely impact overall expected profitability. The effect of foreign
exchange rate fluctuations for 2001 was not material.
During the year ended December 31, 2001 we utilized foreign exchange contracts
to hedge foreign currency exposures of underlying assets and liabilities,
primarily receivables that were denominated in British Pounds, thereby limiting
our risk. Gains and losses on foreign exchange contracts are reflected in the
income statement. As of December 31, 2001 we did not have any foreign exchange
contracts.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Statements
Chordiant Software, Inc. and Subsidiaries: Financial Statements for the
Years Ended December 31, 1999, 2000 and 2001.
Consolidated Financial Statements:
Report of Independent Accountants 42
Consolidated Balance Sheets at December 31, 2000 and 2001 43
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2001 44
Consolidated Statements of Stockholders' Equity for each of
the three years in the period ended December 31, 2001 45
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2001 46
Notes to Consolidated Financial Statements 47
Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes
thereto.
Supplementary Financial Data:
Quarterly Financial Data (unaudited) for the two years ended
December 31,
41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Chordiant Software, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Chordiant Software, Inc. and its subsidiaries at December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule 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 our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 1, 2002, except for Note 20
which is as of March 28, 2002
42
CHORDIANT SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31,
---------------------------
2000 2001
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 41,465 $ 27,068
Short-term investments and restricted cash 26,203 24,072
Accounts receivable -- non-related parties, net 19,423 21,573
Accounts receivable -- related parties 1,057 -
Other current assets 7,149 5,267
------------ ------------
Total current assets 95,297 77,980
Property and equipment, net 5,050 7,083
Goodwill, net 4,415 17,922
Intangible assets, net 170 9,870
Other assets 2,516 2,010
------------ ------------
Total assets $ 107,448 $ 114,865
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Borrowings $ 595 $ 75
Accounts payable 5,081 5,575
Accrued expenses 8,163 10,142
Deferred revenue -- non-related parties [1] 17,441 22,457
Deferred revenue -- related parties [1] 3,488 -
------------ ------------
Total current liabilities 34,768 38,249
Deferred revenue -- non-related parties, long-term [1] 8,013 4,406
Deferred revenue -- related parties, long-term [1] 1,103 -
Other liabilities 244 910
------------ ------------
44,128 43,565
------------ ------------
Commitments and contingencies (Note 14)
Stockholders' Equity:
Common Stock, $0.001 par value; 300,000 shares authorized;
38,206 and 53,190 shares issued and outstanding 41 55
Treasury stock 0 (332)
Additional paid-in capital 170,386 217,395
Notes receivable from stockholders (1,799) (961)
Deferred stock-based compensation (7,290) (4,045)
Accumulated deficit (97,920) (140,182)
Accumulated other comprehensive loss (98) (630)
------------ ------------
Total stockholders' equity 63,320 71,300
------------ ------------
Total liabilities and stockholders' equity $ 107,448 $ 114,865
============ ============
[1] Total deferred revenue as of December 31, 2000 and 2001 is $30,045 and
$26,863, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
43
CHORDIANT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Year Ended December 31,
-----------------------------------------------
1999 2000 2001
------------- ------------- -------------
Net Revenues:
License -- non-related parties $ 5,938 $ 10,728 $ 39,664
License -- related parties 2,069 6,168 -
Service -- non-related parties 9,007 3,980 36,307
Service -- related parties 574 12,813 -
------------ ------------ ------------
Total net revenues 17,588 33,689 75,971
------------ ------------ ------------
Cost of net revenues:
License -- non-related parties 263 873 1,982
License -- related parties 134 39 -
Service -- non-related parties 13,999 15,878 30,607
Service -- related parties 353 1,632 -
Non-cash compensation expense 692 2,040 698
------------ ------------ ------------
Total cost of net revenues 15,441 20,462 33,287
------------ ------------ ------------
Gross profit 2,147 13,227 42,684
------------ ------------ ------------
Operating expenses:
Sales and marketing
Non-cash compensation expense 739 1,488 1,040
Other sales and marketing 13,368 22,422 41,651
Research and development
Non-cash compensation expense 846 2,039 1,076
Other research and development 6,494 14,437 20,457
Purchased In-process research and development 4,234 3,025
General and administrative
Non-cash compensation expense 383 689 406
Other general and administrative 2,668 5,493 9,604
Amortization of goodwill - 773 6,635
Amortization of intangible assets - 29 3,064
Restructuring expense - - 1,669
------------ ------------ ------------
Total operating expenses 24,498 51,604 88,627
------------ ------------ ------------
Loss from operations (22,351) (38,377) (45,943)
Interest expense (1,067) (269) (79)
Other income (expense), net 281 3,290 3,960
------------ ------------ ------------
Net loss before income taxes (23,137) (35,356) (42,062)
Provision for income taxes - - 200
------------ ------------ ------------
Net loss $(23,137) $(35,356) $(42,262)
============ ============ ============
Net loss per share basic and diluted $ (4.34) $ (1.05) $ (0.86)
============ ============ ============
Weighted average shares used in computing basic and diluted
net loss per share 5,327 33,690 49,252
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
44
CHORDIANT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)
Common Stock Additional
----------------------------- Treasury Paid in
Shares Amount Stock Capital
----------------------------- -------------- -------------
Balance at December 31, 1998 5,219 $ 5 $ -- $ 2,820
Exercise of stock options 713 1 -- 745
Repurchase of Common Stock (26) -- -- (41)
Unearned Compensation -- -- -- 11,274
Amortization of unearned compensation -- -- -- --
Stock option cancellations -- -- -- (146)
Comprehensive loss:
Net loss -- -- -- --
Comprehensive loss -- -- -- --
------------- ------------- -------------- -------------
Balance at December 31, 1999 5,906 6 -- 14,652
Exercise of stock options 2,581 2 -- 2,798
Repurchase of Common Stock (86) -- -- (77)
Conversion of Preferred Stock into Common Stock 22,412 22 -- 51,587
Conversion of debt into Common Stock 2,000 2 -- 9,998
Issuance of Common Stock in initial public offering 4,925 5 -- 80,406
Unearned compensation -- -- -- 2,043
Amortization of unearned compensation -- -- -- --
Common Stock issued in connection with White Spider
Acquisition 350 4 -- 8,022
Issuance of Common Stock for Employee Stock Purchase Plan 118 -- -- 957
Comprehensive loss:
Net loss -- -- -- --
Foreign currency translation -- -- -- --
Comprehensive loss -- -- -- --
------------- ------------- -------------- -------------
Balance at December 31, 2000 38,206 41 -- 170,386
Exercise of stock options 738 -- 667
Repurchase of Common Stock and cancellation of note receivable (117) -- (332) --
Stock option cancellations -- -- -- (565)
Issuance of Common Stock for Employee Stock Purchase Plan 555 -- -- 1,307
Repurchase of Common Stock (10) -- -- (26)
Accumulated comprehensive loss
Amortization of unearned compensation -- -- -- --
Net loss -- -- -- --
Common Stock issued in connection with Prime Response
Acquisition 11,919 12 -- 33,733
Warrants and options assumed in connection with Prime Response -- -- -- 6,060
Common Stock issued in connection with ActionPoint Asset
Acquisition 1,734 2 -- 5,303
Common Stock issued in connection with AoNet Asset Acquisition 165 -- -- 530
Comprehensive loss -- -- -- --
Repayment of note receivable -- -- -- --
------------- ------------- -------------- -------------
Balance at December 31, 2001 53,190 $ 55 $ (332) $ 217,395
============= ============= ============== =============
Note Accumulated
Receivable Other
from Unearned Accumulated Comprehensive
Stockholder Compensation Deficit Loss
------------- ------------- ----------- -------------
Balance at December 31, 1998 -- $ (1,002) $ (39,427) $ --
Exercise of stock options (406) -- -- --
Repurchase of Common Stock -- -- -- --
Unearned Compensation -- (11,274) -- --
Amortization of unearned compensation -- 2,660 -- --
Stock option cancellations -- 146 -- --
Comprehensive loss:
Net loss -- -- (23,137) --
Comprehensive loss -- -- -- --
--------------- -------------- ------------- ---------------
Balance at December 31, 1999 (406) (9,470) (62,564) --
Exercise of stock options (1,456) -- -- --
Repurchase of Common Stock 63 -- -- --
Conversion of Preferred Stock into Common Stock -- -- -- --
Conversion of debt into Common Stock -- -- -- --
Issuance of Common Stock in initial public offering -- -- -- --
Unearned compensation -- (2,043) -- --
Amortization of unearned compensation -- 6,256 -- --
Common Stock issued in connection with White Spider
Acquisition -- (2,033) -- --
Issuance of Common Stock for Employee Stock Purchase Plan -- -- -- --
Comprehensive loss:
Net loss -- -- (35,356) --
Foreign currency translation -- -- -- (98)
Comprehensive loss -- -- -- --
--------------- -------------- ------------- ---------------
Balance at December 31, 2000 (1,799) (7,290) (97,920) (98)
Exercise of stock options (96) -- -- --
Repurchase of Common Stock and cancellation of note receivable 800 -- -- --
Stock option cancellations -- 565 -- --
Issuance of Common Stock for Employee Stock Purchase Plan -- -- -- --
Repurchase of Common Stock -- -- -- --
Accumulated comprehensive loss -- -- -- (532)
Amortization of unearned compensation -- 2,680 -- --
Net loss -- -- (42,262) --
Common Stock issued in connection with Prime Response
Acquisition -- -- -- --
Warrants and options assumed in connection with Prime Response -- -- -- --
Common Stock issued in connection with ActionPoint Asset -- -- -- --
Acquisition -- -- -- --
Common Stock issued in connection with AoNet Asset Acquisition -- -- -- --
Comprehensive loss -- -- -- --
Repayment of note receivable 134 -- -- --
--------------- -------------- ------------- ---------------
Balance at December 31, 2001 $ (961) $ (4,045) $ (140,182) $ (630)
=============== ============== ============= ===============
Total
Stockholders'
Equity
(Deficit)
-------------
Balance at December 31, 1998 $(37,604)
Exercise of stock options 340
Repurchase of Common Stock (41)
Unearned Compensation --
Amortization of unearned compensation 2,660
Stock option cancellations --
Comprehensive loss:
Net loss (23,137)
Comprehensive loss --
-----------
Balance at December 31, 1999 (57,782)
Exercise of stock options 1,344
Repurchase of Common Stock (14)
Conversion of Preferred Stock into Common Stock 51,609
Conversion of debt into Common Stock 10,000
Issuance of Common Stock in initial public offering 80,411
Unearned compensation --
Amortization of unearned compensation 6,256
Common Stock issued in connection with White Spider
Acquisition 5,993
Issuance of Common Stock for Employee Stock Purchase Plan 957
Comprehensive loss:
Net loss (35,356)
Foreign currency translation (98)
Comprehensive loss --
-----------
Balance at December 31, 2000 63,320
Exercise of stock options 571
Repurchase of Common Stock and cancellation of note receivable 468
Stock option cancellations --
Issuance of Common Stock for Employee Stock Purchase Plan 1,307
Repurchase of Common Stock (26)
Accumulated comprehensive loss (532)
Amortization of unearned compensation 2,680
Net loss (42,262)
Common Stock issued in connection with Prime Response
Acquisition 33,745
Warrants and options assumed in connection with Prime Response 6,060
Common Stock issued in connection with ActionPoint Asset
Acquisition 5,305
Common Stock issued in connection with AoNet Asset Acquisition 530
Comprehensive loss --
Repayment of note receivable 134
-----------
Balance at December 31, 2001 $ 71,300
===========
The accompanying notes are an integral part of these consolidated financial
statements.
45
CHORDIANT SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
--------------------------------------
1999 2000 2001
- -----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $(23,137) $(35,356) $(42,262)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,276 1,502 3,793
Purchased in-process Research and Development -- 734 3,025
Amortization of intangibles -- 802 9,699
Stock based compensation expense 2,660 6,256 3,222
Provision for doubtful accounts 470 (529) 13
Loss on disposal of assets -- -- 185
Changes in assets and liabilities:
Accounts receivable -- non-related parties (2,416) (11,639) 5,751
Accounts receivable -- related parties (1,109) 154 --
Prepaid expenses and other current assets (1,501) (5,374) 4,118
Other assets (340) (1,912) 1,765
Issuance of restricted cash -- -- (1,000)
Accounts payable (2,451) 2,774 (4,171)
Accrued expenses and other liabilities 378 5,637 (5,585)
Deferred revenue -- non-related parties 605 19,130 (6,296)
Deferred revenue -- related parties (2,128) 719 --
Other liabilities 141 -- 666
-------------------------- -----------
Net cash used in operating activities (27,552) (17,102) (27,077)
-------------------------- -----------
Cash flows from investing activities:
Property and equipment purchases (990) (3,948) (2,121)
Cash acquired from acquisitions, net of cash used -- 29 7,686
Purchases of short-term investments (2,800) (24,203) --
Proceeds from sales and maturities of short-term investments 1,851 -- 4,969
Proceeds from disposal of MSP business -- -- 1,281
-------------------------- -----------
Net cash provided by (used in) investing activities (1,939) (28,122) 11,815
-------------------------- -----------
Cash flows from financing activities:
Proceeds from issuance of mandatorily redeemable convertible preferred stock 22,660 -- --
Proceeds from common stock issuance in initial public offering, net -- 80,411 --
Exercise of stock options 340 1,344 571
Proceeds from issuance of common stock for Employee Stock Purchase Plan -- 957 1,307
Repurchase of common stock (41) (14) (26)
Repayment of note receivable -- -- 134
Proceeds from borrowings 14,627 -- --
Repayment of borrowings (3,089) (2,630) (589)
-------------------------- -----------
Net cash provided by financing activities 34,497 80,068 1,397
-------------------------- -----------
Effect of exchange rate changes on cash and cash equivalents: -- (98) (532)
Net increase/(decrease) in cash & cash equivalents 5,006 34,746 (14,397)
Cash & cash equivalents at beginning of year 1,713 6,719 41,465
-------------------------- -----------
-------------------------- -----------
Cash & cash equivalents at end of year $ 6,719 $ 41,465 $ 27,068
============= ============ ===========
Supplemental cash flow information:
-------------------------- -----------
Cash paid for interest $ 1,062 $ 270 $ 79
============= ============ ===========
-------------------------- -----------
Cash paid for taxes $ -- $ 53 $ 243
============= ============ ===========
Supplemental non-cash activities:
-------------------------- -----------
Issuance of Common Stock upon conversion of Preferred Stock $ -- $ 51,609 $ --
============= ============ ===========
-------------------------- -----------
Issuance of Common Stock in connection with acquisitions $ -- $ 8,026 $ 39,580
============= ============ ===========
-------------------------- -----------
Issuance of Common Stock upon conversion of debt $ -- $ 10,000 $ --
============= ============ ===========
-------------------------- -----------
Common Stock issued for stockholder notes $ 406 $ 1,456 $ 96
============= ============ ===========
-------------------------- -----------
Cancellation of note receivable $ -- $ -- $ 332
============= ============ ===========
-------------------------- -----------
Warrants and options assumed in connection with the Prime Response acquisition $ -- $ -- $ 6,060
============= ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
46
CHORDIANT SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
NOTE 1--THE COMPANY:
We were incorporated in California in March 1991 and reincorporated in Delaware
in October 1997. We provide customer relationship management (CRM) software
solutions for global business-to-consumer enterprise companies. We believe our
solutions enable these companies, who depend upon and value their customer
relationships, to build long-term, profitable relationships with customers. Our
target customers are companies with a multitude of highly complex and demanding
customer relationships that require high levels of personalized services. Our
customers include global companies in the financial services,
telecommunications, retail and integrated travel services industries. Our
solutions seek to fulfill the requirements of these companies for
enterprise-wide CRM software infrastructure solutions capable of servicing
millions of individual customers across multiple communication channels in
real-time. Our solutions enable organizations to market, sell, and serve their
customers across multiple channels, including call centers, branch
representatives and self-serve channels such as automated telephony, the web and
e-mail. During 2001, we expanded our product offering through the acquisitions
of Prime Response, Inc., certain assets of ASP Outfitters, Inc., ActionPoint,
Inc., Pyxis, Inc., and EDS.
NOTE 2--LIQUIDITY AND CAPITAL RESOURCES:
We have incurred losses and negative cash flows since inception. For the year
ended December 31, 2001, we incurred a net loss of approximately $42,300 and
negative cash flows from operations of approximately $27,100. Our cash balances
may decline further although we believe that the effects of our strategic
actions implemented to improve revenue as well as control costs will be adequate
to generate sufficient cash resources to fund our operations. Failure to
generate sufficient revenues or control spending could adversely affect our
ability to achieve our business objectives.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Reclassifications
Certain reclassifications have been made to prior year balances to conform to
current year presentation.
Principles of consolidation
The accompanying consolidated financial statements include our accounts and
those of our wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities 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 our 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.
Our short-term investments consist of debt securities with maturities greater
than three months at the date of purchase. We classify all short-term
investments as available-for-sale. Accordingly, our investments are carried at
fair value as of the balance sheet 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, 2000 and 2001, amortized cost
approximated fair value and unrealized gains and losses were insignificant.
47
The portfolio of short-term investments (including cash and cash equivalents)
consisted of the following:
December 31,
----------------------------
2000 2001
----------------------------
Cash $ 15,671 $ 14,340
Money market and money funds 222 3,793
Commercial paper 22,975 16,704
U.S. Corporate bonds 637 495
U.S. Corporate notes 3,249 4,307
Municipal bonds 22,093 9,200
U.S. Government bonds and notes 2,821 2,301
----------------------------
$ 67,668 $ 51,140
============================
Restricted cash
At December 31, 2001, we had a balance of $1.0 million in the form of short-term
investments, which were restricted from withdrawal. The balance serves as a
security deposit in a revenue transaction.
Fair value of financial instruments
Our financial instruments, including cash and cash equivalents, short-term
investments, accounts receivable, accounts payable, accrued expenses and
borrowings 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 that these debts
bear.
During the year ended December 31, 2001, we entered 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. For the years ended December
31, 2001 and 2000, the gains and losses were insignificant. As of December 31,
2001, we had no outstanding foreign currency forward exchange contracts.
Intangible assets
Intangible assets, including goodwill, purchased technology and other intangible
assets, are carried at cost less accumulated amortization. We amortize goodwill
and other identifiable intangibles on year straight-line basis over their
estimated useful lives which range from one-half year to three years. (see Note
4 in these Notes to Consolidated Financial Statements).
We are required to adopt Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002,
which will result in us no longer amortizing our existing goodwill. At December
31, 2001, net goodwill was $17,922 and goodwill amortization expense was $6,635
for the year ended December 31, 2001. We will be required to measure goodwill
for impairment effective January 1, 2002 as part of the transition period. Any
impairment resulting from the transition provisions will be recorded as of
January 1, 2002 and will be recognized as the effect of a change in accounting
principle. We will not be able to determine if an impairment will be required
until completion of such impairment evaluation.
Revenue recognition
We derive revenues from licenses of our software and related services, which
include assistance in implementation, customization and integration,
post-contract customer support, training and consulting.
On contracts involving significant implementation or customization essential to
the functionality of our 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." We
48
consider a project 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 we sell additional licenses, revenue is
recognized after the go-live date if the products or seats have been delivered
and no remaining obligations exist. We classify 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 our product, license fees are recognized when
there is persuasive evidence of an arrangement for a fixed or 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, we recognize revenue for services and post-contract customer support
based upon vendor specific objective evidence ("VSOE") of fair value of the
respective elements. VSOE of fair value for the services element is based upon
the standard hourly rates we charge for 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, we account 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 we are not responsible for implementation services but
are obligated to provide unspecified additional software products in the future,
we recognize revenue as a subscription ratably over the term of the commitment
period.
Revenues from reseller arrangements are recognized on the "sell-through" method,
when the reseller reports to us the sale of our software products to end-users.
Our agreements with customers and resellers do not contain product return
rights.
Other services 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.
Concentrations of credit risk
Financial instruments that potentially subject us to concentrations of credit
risk consist of cash, cash equivalents, short-term investments and accounts
receivable. To date, we have invested excess funds in money market accounts,
commercial paper, municipal bonds and term notes. We deposit cash, cash
equivalents and short-term investments with financial institutions that
management believes are credit worthy. Our accounts receivable are derived from
revenues earned from customers located in the Americas, Europe, and the Rest of
the World ("ROW"). We perform ongoing credit evaluations of our customers'
financial condition and, generally, require no collateral from our customers. We
maintain reserves for potential credit losses on customer accounts when deemed
necessary.
The following table summarizes the revenues from customers in excess of 10% of
total net revenues:
Year Ended December 31,
-----------------------------------
1999 2000 2001
-----------------------------------
Company A 30%
Company B 19%
Company C 10%
Company D 10%
Company E 14%
Company F 19% 18%
Company G 15% 30% 13%
49
At December 31, 2001, Companies D and G accounted for 17% and 10%, respectively,
of our accounts receivable. At December 31, 2000, Company F accounted for 64% of
accounts receivable.
Research and Development
Costs incurred in the research and development of new products and enhancements
to existing products are charged to expense as incurred until the technological
feasibility of the product or enhancement has been established 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, we have not
capitalized any software development costs.
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.
Long-lived assets
We review for impairment our 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, we estimate the future cash flows
expected to result from the use of the asset and its eventual disposition. If
the undiscounted expected future cash flows are less than the carrying amount of
the asset, an impairment loss is recognized. To date, no impairment loss has
been recognized.
Advertising costs
Advertising costs are charged to sales and marketing expense as incurred.
Advertising costs for the years ended December 31, 1999, 2000 and 2001 totaled
$1,340, $838 and $1,671, respectively.
Internal Use Software
Software development costs, including costs incurred to purchase third party
software, are capitalized beginning when we have determined factors are present,
including among others, that technology exists to achieve the performance
requirements, buy versus internal development decisions have been made and our
management has authorized the funding for the project. Capitalization of
software costs ceases when the software is substantially complete and is ready
for its intended use and is amortized over its estimated useful life of three
years using the straight-line method.
Stock-based employee compensation
We account for stock-based employee compensation arrangements in accordance with
provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting
for Stock Issued to Employees" and related interpretations and comply 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 our
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 16.
We account 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."
50
Foreign currency translation
The functional currency of our foreign entities 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).
Net gains and losses resulting from foreign exchange transactions are included
in other income (expense), net and were not significant during the periods
presented.
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 our 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, our Board of Directors approved a 1-for-2 reverse stock split
of our outstanding shares of capital stock. 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 the 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 us.
The following table sets forth the computation of basic and diluted net loss per
share for the periods indicated:
Year Ended December 31,
--------------------------------------------
1999 2000 2001
----------- ----------- -----------
Net loss available to common stockholders $ (23,137) $ (35,356) $(42,262)
=========== =========== ===========
Weighted average common stock outstanding 5,391 33,897 49,266
Weighted average common stock subject to repurchase 64 207 14
----------- ----------- -----------
Denominator for basic and diluted calculation 5,327 33,690 49,252
=========== =========== ===========
Net loss per share - basic and diluted $ (4.34) $ (1.05) $ (0.86)
=========== =========== ===========
51
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,
--------------------------------
1999 2000 2001
--------------------------------
Warrants outstanding 0 0 1,650
Mandatorily Redeemable Convertible
Preferred Stock 17,999 2,702 0
Convertible Debt 1,479 241 0
Employee stock options 6,202 4,219 6,181
Common shares subject to repurchase 64 207 14
--------------------------------
25,744 7,369 7,845
================================
Segment information
Our chief operating decision maker reviews financial information presented on a
consolidated basis, accompanied by desegregated information about revenues by
geographic regions for purposes of making operating decisions and assessing
financial performance. Accordingly, we consider ourselves to be in a single
industry segment, specifically the license, implementation and support of our
software products.
License revenues for enterprise solutions amounted to $8,007, $16,896 and
$26,935 for the years ended December 31, 1999, 2000 and 2001, respectively.
Software license revenues for application products was approximately $12,729 for
the year ended December 31, 2001.
Services revenues consist of consulting assistance and implementation,
customization and integration and post-contract customer support and training.
Services revenues for enterprise solutions was approximately $9,581, 16,793 and
$27,305 for the years ended December 31, 1999, 2000 and 2001, respectively.
Services revenues for application products was approximately $9,002 for the year
ended December 31, 2001.
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 (in thousands):
Year Ended December 31,
---------------------------------------
1999 2000 2001
---------------------------------------
United Kingdom $ 3,973 $ 21,903 $ 47,569
United States 10,974 7,912 11,568
Germany 0 1,647 5,117
Ireland 0 0 3,641
France 0 0 2,742
Benelux 1,653 123 1,868
Canada 642 364 618
South Africa 0 1,739 0
Other 346 1 2,848
---------------------------------------
$ 17,588 $ 33,689 $ 75,971
=======================================
52
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,
-----------------
2000 2001
------ ------
Americas................................ $4,427 $4,341
Europe (Principally U.K.)............... 591 2,718
ROW..................................... 32 24
------ ------
$5,050 $7,083
====== ======
Comprehensive income
For the three years ended December 31, 2001, foreign currency translation
adjustments included in comprehensive income (loss) were insignificant. There
were no other items of comprehensive income (loss) other than our net loss.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations" which supercedes Accounting Principles Board
Opinion No. 16, "Business Combinations." SFAS No. 141 requires the purchase
method of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. In addition, SFAS No. 141
establishes specific criteria for the recognition of intangible assets
separately from goodwill and requires unamortized negative goodwill to be
written off immediately as an extraordinary gain, instead of being deferred and
amortized. The provisions of SFAS No.141 have been adopted as of July 1, 2001.
The adoption of SFAS No. 141 has not changed the method of accounting used in
previous business combinations initiated prior to July 1, 2001.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after December 15, 2001.
SFAS No. 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. Upon
adoption of SFAS No. 142, we will cease to amortize approximately $17,922 of
goodwill, we had recorded approximately $6,635 of amortization on these amounts
during 2001. We will be required to perform an impairment review of our goodwill
balance upon the initial adoption of SFAS No. 142.
We expect to complete the initial review during the second quarter of 2002. We
do not expect to record an impairment charge upon completion of the initial
review, however, there can be no assurance that at the time the review is
completed a material impairment charge will not be recorded.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 requires that long-lived assets to
be disposed of by sale, including discontinued operations, be measured at the
lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS No. 144 also broadens
the reporting requirements of discontinued operations to include all components
of an entity that have operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest
of the entity. The provisions of SFAS No. 144 are effective for fiscal years
beginning after December 15, 2001. We are evaluating the effect of this
statement on our results of operations and financial position.
In November 2001, the Emerging Issues Task Force (EITF) reached consensus on
EITF No. 01-9, Accounting for Consideration Given by a Vendor to a Customer or a
Reseller of the Vendor's Products. EITF No. 01-9 addresses the accounting for
consideration given by a vendor to a customer and is a codification of EITF No.
00-14, Accounting for Certain Sales Incentives, EITF No. 00-22 Accounting for
`Points' and Certain Other Time-Based or Volume-Based Sales Incentives Offers
and Offers for Free Products or Services to be Delivered in the Future and EITF
No. 00-25, Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products. We do not believe that upon adoption it will
have a significant impact on our financial statements.
In November 2001, the FASB reached consensus on Topic No. D-103, "Income
Statement Characterization of Reimbursements Received for Out of Pocket Expenses
Incurred". The FASB concluded that reimbursements received for out of pocket
expenses incurred should be characterized as revenue in the income statement.
Historically, we have recorded reimbursements as a reduction of services
53
cost of revenue. This pronouncement will be applied in financial reporting
periods beginning after December 15, 2001, and comparative financial statements
for prior periods will be reclassified to comply with the guidance in this
pronouncement. We believe the adoption of this pronouncement will not result in
a material increase in our services revenue and services cost of revenue.
NOTE 4--ACQUISITIONS:
During 2000 and 2001, we completed the following acquisitions that were
accounted for using the purchase method of accounting (in thousands):
- - On May 29, 2001, we acquired certain intellectual property assets and
technology of the AoNet J2EE Workflow Server from ASP Outfitter, Inc.
- - On May 17, 2001, we acquired certain assets associated with the Dialog
Server product suite from ActionPoint, Inc., as a result of which certain
members of the Dialog Server development, support, sales and marketing team
from Actionpoint, Inc. became our employees.
- - On March 27, 2001, we acquired Prime Response, an integrated marketing
software solutions company headquartered in Boston, MA.
- - On July 19, 2000, we acquired White Spider, a provider of software
consulting services and a developer of a knowledge management software
product headquartered in Manchester, NH.
The results of each of these acquisitions have been included in our operating
results from the date of acquisition.
(In thousands) ActionPoint
ASP Outfitter (Dialog Server
(AoNet Assets) Assets) Prime Response White Spider
-------------- -------------- -------------- -------------
Acquisition Date May 29, 2001 May 17, 2001 March 27, 2001 July 19, 2000
Shares issued 165 1,734 11,919 350
Options issued -- -- 1,367 127
Warrants issued -- -- 1,050 --
Purchase Price
Value of shares issued $ 530 $ 5,304 $ 33,745 $ 5,904
Value of warrants issued -- -- 2,819 --
Value of options issued -- -- 3,241 2,122
Less: Intrinsic value of unvested options allocated to
deferred stock based compensation (1) -- -- -- (2,033)
Cash 500 1,954 -- --
Direct acquisition costs 32 134 6,502 200
-------------------------------------------------------------------
Total purchase price $ 1,062 $ 7,392 $ 46,307 $ 6,193
===================================================================
The value of the shares issued was determined based on our market price for a
reasonable period before and after the date the terms of the acquisition are
agreed upon and announced.
54
The value of the options included in the purchase price was determined using the
Black-Scholes option-pricing model. To the extent that services were 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 future vesting period.
The total purchase price is subject to adjustments based upon our finalization
of integration plans, which may include elimination of duplicate facilities and
fixed assets as well as employee severance. The total purchase price for each
acquisition has been allocated as follows (in thousands):
Acquired Company or Assets (as applicable) ActionPoint
ASP Outfitter (Dialog Server
(AoNet Assets) Assets) Prime Response White Spider
-------------- ------------ -------------- ------------
Fair value of assets acquired and liabilities
assumed (net) $ 10 $ 95 $19,895 $ 92
In-process research and development 814 392 1,486 734
Developed technology -- 3,021 4,515 --
Workforce in place 105 675 2,740 198
Tradenames -- -- 982 --
Goodwill 133 3,209 16,689 5,169
---------------------------------------------------------------
Total purchase price $1,062 $7,392 $46,307 $6,193
===============================================================
Tangible assets acquired principally include cash and cash equivalents, accounts
receivable, fixed assets and other assets. Liabilities assumed principally
include 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 our 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 applied to the net cash
flow for the product. Discount rates of 40%, 25%, 35% and 25% were applied to
the projected cash flows of the in-process research and development to determine
their net present value for the ASP Outfitter (AoNet), ActionPoint (Dialog
Server), Prime Response and White Spider products under development,
respectively. In-process research and development efforts associated with the
acquisition from ASP Outfitter, Inc., consisted of one project for which the
estimated state of completion was approximately 50%. In-process research and
development efforts associated with the Dialog Server assets acquired from
ActionPoint, Inc. consisted of one project for which the estimated state of
completion was approximately 75%. Prime Response's in-process research and
development efforts consisted of three projects for which the estimated states
of completion were approximately 47%, 21% and 79%. White Spider's in-process
research and development efforts consisted of one project for which the
estimated state of completion was approximately 67%.
The value attributed to in-process research and development was charged to
expense in the period the acquisitions were consummated. The write-offs were
necessary because the acquired in-process technologies had not yet reached
technological feasibility, and in our opinion, have no future alternative 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 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 between two
and three years.
55
The excess of purchase price over tangible and identifiable intangible assets
acquired and liabilities assumed was recorded as goodwill and was being
amortized over a three year period on a straight-line basis. Beginning on
January 1, 2002, our unamortized balance of goodwill will no longer be
amortized, but will continue to be subject to a periodic impairment assessment.
The following unaudited pro forma consolidated financial information reflects
the results of operations for the year ended December 31, 2001 and December 31,
2000, as if the acquisitions of Prime Response, White Spider, assets associated
with Dialog Server from ActionPoint and assets associated with AoNet from ASP
Outfitter had occurred at the beginning of each period presented, after giving
effect to purchase accounting adjustments. These pro forma results have been
prepared for comparative purposes only, do not purport to be indicative of what
operating results would have been had the acquisitions actually taken place at
the beginning of each period, and may not be indicative of future operating
results (in thousands, except per share data):
Year Ended December 31,
---------------- ----------------
2000 2001
---------------- ----------------
Net revenues $ 63,326 $ 80,087
Net loss $ 74,902 $ 59,335
Net loss per share
Basic and diluted $ (1.48) $(1.13)
Weighted average shares 50,478 52,710
Note 5 - ACQUIRED TECHNOLOGY
During 2000, we acquired certain technology and intellectual property from a
customer for $3,500. The acquired technology was still in development a the time
of the acquistion and has no alternative use. As a result, the entire amount of
$3,500 was expensed as in-process research and development.
In October 2001, we acquired certain intellectual property assets and technology
of the iApply technology from Pyxis, Inc. At the time of the acquisition, the
technology consisted of one project that had not reached technological
feasibility and had no alternative use. As a result, the total consideration of
$302 was expensed as in-process research and development.
In December 31, 2001, we acquired from EDS certain XML interface technology from
$731.
NOTE 6 - DISPOSITION OF MARKETING SERVICE PROVIDER BUSINESS
On September 24, 2001, we sold our Marketing Service Provider Business (the
"Business") for cash proceeds of $1,600 to HNC Software International, Inc. The
Business was acquired from Prime Response, Inc. The results of operations of the
Business from the date of the acquisition of Prime Response to the date of the
sale of the Business are included in our results of operations. No gain or loss
was recorded on the sale of the Business.
NOTE 7 - RESTRUCTURING
On March 27, 2001 we completed the acquisition of Prime Response, Inc.
Associated with the acquisition, several areas of the company were restructured
to prioritize our initiatives around high-growth areas of our business, reduce
expenses, and improve efficiency due to macro-economic conditions. This
restructuring program includes a worldwide workforce reduction, consolidation of
excess facilities, and restructuring of certain business functions.
56
Workforce reduction
The restructuring program resulted in the reduction of eleven regular employees,
seven in the general and administrative function in the United States and four
in the sales and marketing function based outside the United States. The
workforce reductions were completed in the second quarter of fiscal 2001. We
recorded a workforce reduction charge of approximately $689 relating primarily
to severance and benefits.
Consolidation of excess facilities
We accrued for lease costs of $774 in the first quarter of 2001 pertaining to
the estimated future gross obligations for non-cancelable lease payments for
excess facilities that were vacated due to reductions in workforce. During the
quarter ended June 30, 2001, we entered into a favorable sublease transaction,
which led to a $210 reduction in the restructuring reserve.
A summary of the restructuring cost and other special charges is outlined as
follows (in thousands):
Severance and Asset
Facilities Benefits Write-offs Other Total
-------------- -------------- ---------- --------- --------
Total Charge $ 774 $ 689 $ 46 $ 401 $ 1,910
Cash paid (257) (689) -- (401) (1,347)
Provision adjustment (210) -- -- -- (210)
Non-cash -- -- (46) -- (46)
------------------------------------------------------------------------------
Reserve balance at December 31, 2001 $ 307 $ -- $ -- $ -- $ 307
==============================================================================
Amounts related to the net lease expense due to the consolidation of facilities
will be paid over the lease term through fiscal 2011. We expect to substantially
complete our restructuring program during the next three months.
NOTE 8 - LITIGATION
Beginning in July 2001, we and certain of our officers and directors, as well as
certain of the underwriters from the our initial public offering, were named as
defendants in several class action shareholder complaints filed in the United
States District Court for the Southern District of New York and consolidated
under the caption, Weiss v. Chordiant Software, Inc., et al., Case No.
01-CV-6222. In the complaint, the plaintiffs allege that we, certain of our
officers and directors and our initial public offering underwriters violated the
federal securities laws because our registration statement and prospectus for
our initial public offering contained untrue statements of material fact or
omitted material facts regarding the compensation to be received by, and the
stock allocation practices of, the underwriters. The plaintiffs seek unspecified
monetary damages and other relief. Similar complaints were filed in the same
court against numerous public companies that conducted initial public offerings
of their common stock since the mid-1990s. This action may divert the efforts
and attention of our management and, if determined adversely to us, could have a
material impact on our business.
NOTE 9--BALANCE SHEET COMPONENTS:
Year Ended December 31,
-----------------------------------------
2000 2001
--------------- ----------------
Accounts receivable non-
related parties, net:
Accounts receivable $ 19,618 $ 19,858
Unbilled receivable 0 1,923
Allowance for doubtful accounts (195) (208)
--------------- ----------------
$ 19,423 $ 21,573
=============== ================
57
The allowance for doubtful accounts increased (decreased) by $470, $0 and $13 in
the years ended December 31, 1999, 2000 and 2001, respectively. Bad debt
write-offs against the allowance for doubtful accounts were $0, ($529) and $0 in
the years ended December 31, 1999, 2000 and 2001, respectively.
December 31,
----------------------------------
2000 2001
------------ -------------
Property and equipment, net:
Computer hardware $ 4,919 $ 11,242
Purchased internal-use software 1,537 2,321
Furniture and equipment 745 1,449
Leasehold improvements 1,347 2,674
------------ -------------
8,548 17,686
Accumulated depreciation and amortization (3,498) (10,603)
------------ -------------
$ 5,050 $ 7,083
============ =============
Accrued expenses:
Accrued payroll and related expenses $ 5,753 $ 6,724
Other accrued liabilities 2,410 3,418
------------ -------------
$ 8,163 $ 10,142
============ =============
NOTE 10--SOFTWARE DEVELOPMENT AND LICENSE AGREEMENTS:
We have certain royalty commitments associated with the shipment and licensing
of certain products. Royalty expense is generally based on a percentage of the
underlying revenue. Royalty expense was approximately $263, $873, and $1,982 in
fiscal 1999, 2000, and 2001, respectively.
During 1996, we entered into a Value-Added Reseller License and Services
Agreement ("the Agreement") with Forte, Inc. Under the Agreement, as amended, we
may acquire full-use product licenses for assignment to one or more third-party
end-users and pay Sun Microsystems the license fees due upon delivery of the
product licenses. The amounts payable to Sun Microsystems are charged to the
end-user by us and are recognized as a cost of net revenues. Total expenses
recorded were approximately $263, $853 and $1,311 in fiscal 1999, 2000 and 2001,
respectively.
NOTE 11--RELATED PARTY TRANSACTIONS:
We previously entered into agreements with EDS, which was a holder of our
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 EDS
have been separately disclosed in the financial statements until they ceased to
be a related party. During 2001, EDS sold its ownership in us and as a result
ceased to be a related party. Revenues, accounts receivable and deferred revenue
balances are no longer presented as related parties.
During 2000, we issued to one of our executives 200 shares of common stock
subject to a right of repurchase in exchange for a note receivable (the "Note")
of $800. The Note was collateralized by the underlying stock and bore interest
at a rate of 5.88%. In 2001, we repurchased a total of 117 unvested shares at
the original exercise price and forgave the remaining balance of the Note. A
compensation expense of $540 was recorded as of December 31, 2001.
58
NOTE 12--BORROWINGS:
Revolving line of credit
We have a line of credit composed of two elements, an accounts receivable line
and an equipment line.
The total amount available under the accounts receivable line of credit is
$11,500. Borrowings under the accounts receivable line of credit will bear
interest either at the lending bank's prime rate plus 1.5% or the LIBOR Option
(1,2,3 or 6 month maturity) plus 500 basis points. The accounts receivable line
is limited to 80% of eligible accounts receivable. There were no borrowings
outstanding at December 31, 2001 under the accounts receivable line of credit.
Borrowings under our $2,000 equipment line bear interest at the lending bank's
prime rate plus 2.0%. Borrowings outstanding under a previous term facility were
$75 at December 31, 2001.
Our assets collateralize borrowings under both lines of credit. The lines of
credit require us to maintain a minimum quick ratio of 2.00 to 1.00, a tangible
net worth of at least $25,000 plus 60% of the proceeds of any public stock
offerings and subordinated debt issuance, and certain other covenants. At
December 31, 2001, we were in compliance with all convenants.
NOTE 13--INCOME TAXES:
Our provision for income taxes was $200 for the year ended December 31, 2001.
The increase in provision was attributable to taxes on earnings from our foreign
subsidiaries. There was no provision for income taxes in 1999 and 2000 due to
our losses.
Deferred tax assets and liabilities consist of the following:
Year Ended December 31,
------------------------------------------
2000 2001
------------------- -------------------
Net operating loss carryforwards $ 18,952 $ 46,673
Accrued expenses and provisions 1,107 1,580
Tax credit carryforwards 1,055 3,938
Deferred Revenue 9,686 2,438
Depreciation and amortization (19) 3,308
Gross deferred tax assets 30,781 57,937
Deferred tax valuation allowance (30,781) (57,937)
------------------- -------------------
Net deferred tax assets $ 0 $ 0
=================== ===================
The valuation allowance increased by $8,565, $8,281 and $27,156 for the years
ended December 31, 1999, 2000 and 2001, respectively.
We provide a valuation allowance for deferred tax assets when it is more likely
than not that the net deferred tax assets will not be realized. Based on a
number of factors, including the lack of a
59
history of profits, future projected taxable income and the fact that the market
in which we compete is intensely competitive and characterized by rapidly
changing technology, we believe that there is sufficient uncertainty regarding
the realization of deferred tax assets such that a full valuation allowance has
been provided. At December 31, 2001, we had approximately $131,200 and $35,200
of net operating loss carryforwards for federal and state purposes,
respectively. These carryforwards are available to offset future taxable income
and expire beginning in 2012 and 2002, respectively. At December 31, 2001, there
are approximately $1,800 of federal credits that begin to expire in 2011. The
California state credits of approximately $1,800 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 that 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. We have not yet determined
whether or not operating loss benefits are impaired or limited.
NOTE 14--COMMITMENTS AND CONTINGENCIES:
We lease our facilities and some equipment under noncancelable operating leases
that expire on various dates through 2011. Rent expense is recognized ratably
over the lease term. Future minimum lease payments as of December 31, 2001 are
as follows:
Year Ending December 31,
2002 ..................................... $ 3,649
2003 ..................................... 3,493
2004 ..................................... 2,744
2005 ..................................... 1,711
2006 ..................................... 1,900
Thereafter................................ 6,412
-------
$19,909
=======
Rent expense for the years ended December 31, 1999, 2000 and 2001 totaled
$1,438, $1,774 and $3,442, respectively.
NOTE 15--COMMON STOCK:
During 1999, 2000 and 2001, we repurchased 26, 86 and 127 respectively, shares
of Common Stock at original issuance prices for a total repurchase price of $41,
$77 and $26, respectively.
NOTE 16--STOCK OPTION PLANS:
On May 4, 2001, we announced a voluntary stock option exchange program for our
employees. Under the program, employees were given the opportunity to elect to
cancel outstanding stock options held by them in exchange for an equal number of
new options to be granted six months and a day after the exchange took place at
the then current fair market value. These elections needed to be made by June 6,
2001 and were required to include all options granted during the prior six-month
period. A total of 61 employees elected to participate in the exchange program.
Those 61 employees tendered a total of 801 options to purchase our common stock
in return for our promise to grant new options on the grant date of December 10,
2001. A total of 801 options were granted at the fair market value of $6.45 per
share on December 10, 2001 to those employees who had been continuously employed
by us from the date they tendered their original options through December 10,
2001. The exchange program was also available to our executive officers and
directors.
Our 1999 Equity Incentive 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
60
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 17,242 shares of Common Stock have been
reserved for issuance under the 1999 Plan. The number of shares reserved under
the plan automatically increases on October 1st 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, and provided further that the automatic increase ceases when
20,000 shares are reserved for issuance pursuant to the 1999 Plan. As of
December 31, 2001, there were 20,000 shares reserved for issuance pursuant to
the 1999 Plan. The 1999 Plan is administered by the Board of Directors, or a
committee of the Board of Directors to which it has 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 us at the initial exercise price. At December 31, 2000 and 2001,
158 and 14 shares were subject to repurchase, respectively.
1999 Non-Employee Director Option Plan
In November 1999, the 1999 Non-Employee Director Stock Option Plan was adopted
by the Board of Directors and became effective on the date of the initial public
offering. The Non-Employee Director Stock Option 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 our 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 our 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 our annual meetings of the stockholders. A total
of 765 shares of Common Stock have been reserved for issuance under the director
plan. The amount reserved under the 1999 Non-Employee Stock Option Plan
automatically increases on October 1st of 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.
Our Bonus and Salary Conversion 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 our 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 share. No options were granted under the
Bonus Plan in 1999, 2000 or 2001. The shares subject to the Bonus Plan shall not
exceed 750.
The following table summarizes option activity under our stock option plans:
Year Ended December 31,
------------------------------------------------------------------------------
1999 2000 2001
------------------------------------------------------------------------------
Shares Weighted Shares Weighted Shares Weighted
average average average
exercise exercise exercise
price price price
------------------------------------------------------------------------------
Outstanding at beginning of period 5,981 $ 0.60 7,774 $ 1.82 8,727 $ 5.00
Granted 3,393 3.66 4,360 8.35 10,479 4.37
Cancelled (887) 1.06 (825) 11.85 (3,201) 8.25
Exercised (713) 1.28 (2,582) 1.08 (738) 1.11
----------- ---------- ----------
Outstanding at end of period 7,774 1.82 8,727 5.00 15,267 4.10
----------- ---------- ----------
Options exercisable at end of period 2,672 2,687 9,100
Weighted average minimum value/fair value
of options granted during the period $ 0.79 $ 6.90 $ 1.80
61
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------------- -----------------------------------
Range of Weighted Average
Exercise Number Remaining Contractual Weighted Average Number Weighted Average
Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
-------- ----------- --------------------- ---------------- ----------- ----------------
$0.08 - 0.40 233 6.1 $ 0.19 41 $ 0.21
$0.64 - 1.80 3,303 8.1 1.27 1,759 0.81
$2.33 - 3.00 2,087 9.0 2.74 946 2.83
$3.01 - 3.90 4,098 9.2 3.29 1,650 3.36
$4.00 - 4.84 1,265 8.1 4.05 1,066 4.02
$5.25 - 6.67 3,250 8.5 6.25 2,731 6.24
$7.00 - 10.63 369 8.2 8.31 335 8.27
$11.11 - 48.44 662 4.5 16.17 572 16.31
--------- ----------
15,267 9,100
========= ==========
During the years ended December 31, 1999, 2000 and 2001, we recorded unearned
compensation expense of approximately $11,274, $4,076 and $0, respectively,
related to the issuance of stock options. The amount recorded in the year ended
December 31, 2000 included $2,033 associated with our acquisition of White
Spider described in Note 4. 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 $2,660, $6,256 and $3,220 was
allocated among cost of net revenues, sales and marketing, research and
development and general and administrative for all periods presented.
Had compensation cost for our stock-based compensation awards been determined
based on the minimum value at the grant dates as prescribed by SFAS No. 123, our
net loss would have been as follows:
Year Ended December 31,
--------------------------------
1999 2000 2001
-------- -------- --------
Net loss:
As reported .......................... $(23,137) $(35,356) $(42,262)
Pro forma ............................ $(23,944) $(45,041) $(50,463)
Basic and diluted net loss per share:
As reported .......................... $ (4.34) $ (1.05) $ (0.86)
Pro forma ............................ $ (4.49) $ (1.34) $ (1.02)
62
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,
---------------------
1999 2000 2001
---- ---- ----
Expected lives in years:
Stock options ............................... 4.6 5.0 5.0
Employee stock purchase plan ................ 0.5 0.5 0.5
Risk free interest rates:
Stock options ............................... 5.5% 6.1% 3.9%
Employee stock purchase plan ................ 0.0% 5.8% 3.9%
Volatility:
Stock options ............................... 0.0% 115.0% 105.0%
Employee stock purchase plan ................ 0.0% 65.0% 105.0%
Dividend yield .............................. 0.0% 0.0% 0.0%
The weighted average fair value of these options granted in 1999, 2000 and 2001
was $0.79, $6.90 and $1.80, respectively.
Because the determination of the fair value of all options granted after we
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 17--WARRANTS:
We issued warrants to Accenture plc to purchase up to 600 shares of common
stock. The warrant will vest based on achieving designated sales targets. As of
December 31, 2001, no warrants had vested. The exercise price is set at $7.05
per warrant. The warrants expire on September 4, 2006. The warrants will be
valued based on the fair market value of our common stock upon Accenture
achieving the revenue targets and the measured amount will be recorded as sales
and marketing.
In conjunction with the Prime Response, Inc. acquisition, we assumed 1,050
warrants issued to Accenture plc and General Atlantic Partners. The warrants
were included as part of the purchase price of Prime Response, Inc. at the date
of the acquisition.
NOTE 18--EMPLOYEE BENEFIT PLANS:
401(k) Savings Plan
We sponsor 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 $155, $143, and $358 for the years ended December 31,
1999, 2000 and 2001, respectively.
Defined contribution plan
We also sponsor a defined contribution pension plan for the employees of our
United Kingdom sales office. Under the pension plan, employees of the United
Kingdom sales office may elect to contribute 5% of their pre-tax compensation.
Our contributions to the pension plan totaled $123, $312 and $599 for the years
ended December 31, 1999, 2000 and 2001, respectively.
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
our initial public offering. Eligible employees can have up to 15% of their
earnings withheld, to be used to purchase shares of our 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
2,673 shares. In 2001, 555 shares were purchased under the ESPP at a weighted
average price of $2.35. 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 ESPP during
the prior twelve-month period. However, the automatic increase is subject to
reduction by the Board of Directors.
63
NOTE 19--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
The following is a summary of the unaudited quarterly results of operations for
the periods shown:
- ---------------------------------------------------------------------------------------------------------------------
2000 2001
- ---------------------------------------------------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------
Net revenues $ 5,014 $7,396 $9,700 $11,579 $13,047 $18,541 $20,541 $23,842
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 802 2,617 3,852 5,956 7,419 10,032 10,572 14,661
- ---------------------------------------------------------------------------------------------------------------------
Net loss 13,195 7,852 8,043 6,266 9,693 12,700 10,519 9,350
- ---------------------------------------------------------------------------------------------------------------------
Net loss per share:
basic and diluted $ 0.60 $ 0.21 $ 0.22 $ 0.17 $ 0.25 $ 0.25 $ 0.20 $ 0.17
- ---------------------------------------------------------------------------------------------------------------------
NOTE 20--SUBSEQUENT EVENTS:
We have entered into a two-year agreement, beginning March 19, 2002, with Merit
International pursuant to which Merit will provide exclusive training and
certain consulting services for a fixed fee. Upon the effective date of this
agreement, we transferred to Merit our training operations including selected
employees. In addition, Merit will provide to our customers resource development
services in exchange for an agreed-upon fee negotiated on a
transaction-by-transaction basis. We feel this agreement will provide us with
high quality training and consulting services. We will pay Merit minimum revenue
targets as follows: January 1, 2002 to June 30, 2002: (pound)500; July 1, 2002
to December 31, 2002: (pound)900; January 1, 2003 to June 30, 2002: (pound)900
July 1, 2003 to December 31, 2003: (pound)1,000; and January 1, 2004 to June 30,
2004: (pound)500. For a total of (pound)3,800. The minimum revenue target above
can be reduced for Merit's non-compliance with the terms of the agreement. If we
exceed the minimum revenue target, Merit will raise a credit note to be applied
against future minimums. After one year from the effective date, we may, at our
option, terminate the agreement and pay an early termination fee that reduces
from (pound)555 to (pound)0 over time. Payment of the early termination fee will
release our obligation related to the minimum revenue target.
On March 28, 2002, we signed an Agreement and Plan of Merger to acquire
OnDemand, Inc., a Delaware corporation. The closing, which is subject to
contingencies, is anticipated to occur on or about April 1, 2002. In connection
with the merger, the stockholders of OnDemand will receive approximately $12,000
in the aggregate in cash, in exchange for their shares of OnDemand, subject to
certain indemnities and escrow provisions. OnDemand provides relationship
management software and services that enable businesses to increase sales and
reduce costs by maximizing relationships.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
64
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item, insofar as it relates to our directors and
officers, 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 our definitive proxy statement with respect to our 2002 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.
65
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
XX 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 XX 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) On January 17, 2001, we filed a Current Report on Form 8-K,
which contained the text of a joint press release announcing
the intended acquisition of Prime Response, Inc. (a company
acquired by us on March 27, 2001) and the Agreement and Plan
of Merger and Reorganization, dated January 8, 2001, between
Prime Response, Inc. and us.
(ii) On April 10, 2001, we filed a Current Report on Form 8-K
announcing the completion of our acquisition of Prime
Response, Inc. The consolidated financial statements of Prime
Response, Inc., the unaudited pro forma condensed combined
financial information for Prime Response, Inc. and us and the
joint press release announcing the completion of our
acquisition of Prime Response, Inc.
(iii) On June 5, 2001, we filed a Current Report on Form 8-K, which
incorporated by reference a press release (filed as Exhibit
99.1 thereto) relating to the purchase of certain assets from
ActionPoint, Inc., which was issued May 17, 2001.
(iv) On June 5, 2001, we filed a Current Report on Form 8-K, which
incorporated by reference a press release (filed as Exhibit
99.1 thereto) relating to the purchase of certain assets from
ASP Outfitter, Inc, which was issued May 29, 2001.
(v) On September 28, 2001, we filed a current report on Form 8-K
announcing the appointment of George Reyes to our board of
directors.
66
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 our behalf by the undersigned, thereunto duly authorized, in the
City of Cupertino, State of California, on March __, 2002.
Chordiant Software, Inc.
By: /s/ Stephen Kelly
----------------------------------
Stephen Kelly
Chief Executive Officer and
President
Know All Persons by these Presents, that each person whose signature appears
below constitutes and appoints Stephen Kelly and Steve 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/ Stephen Kelly Chief Executive Officer March __, 2002
- ------------------------------------ (Principal Executive
Stephen Kelly Officer)
/s/ Steve G. Vogel Chief Financial Officer March __, 2002
- ------------------------------------ Chief Accounting Officer
Steve G. Vogel Secretary (Principal Financial
and Accounting Officer)
/s/ Samuel T. Spadafora Chairman of the Board March __, 2002
- ------------------------------------
Samuel T. Spadafora
/s/ Joseph F. Tumminaro Director March __, 2002
- ------------------------------------
Joseph F. Tumminaro
/s/ Kathryn C. Gould Director March __, 2002
- ------------------------------------
Kathryn C. Gould
/s/ David Springett Director March __, 2002
- ------------------------------------
David Springett
/s/ William Ford Director March __, 2002
- ------------------------------------
William Ford
/s/ George Reyes Director March __, 2002
- ------------------------------------
George Reyes
67
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).
68
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).
4.4 Registration Rights Agreement, dated as May 17, 2001, by and between
Chordiant Software, Inc. and ActionPoint, Inc.
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).
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).
69
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.
70