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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number: 000-29357
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CHORDIANT SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 93-1051328
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
20400 Stevens Creek Blvd., Suite #400
Cupertino, CA 95014
(Address, including zip code, of principal executive offices)
Registrant's telephone number, includes area code: (408) 517-6100
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001
par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]
The approximate aggregate market value of the common stock held by non-
affiliates of the registrant, based upon the closing price of the registrant's
common stock on the Nasdaq National Market on February 15, 2001 of $3.188, was:
$43,174,555.
As of February 15, 2001, shares of the registrant's common stock
outstanding: 38,106,262.
Documents incorporated by reference
Certain portions of the registrant's definitive proxy statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A, not
later than April 30, 2001, in connection with the registrant's 2001 Annual
Meeting of stockholders, are incorporated herein by reference into Part III of
this Annual Report.
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CHORDIANT SOFTWARE, INC.
TABLE OF CONTENTS
Page
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PART I
ITEM 1. BUSINESS...................................................... 3
ITEM 2. PROPERTIES.................................................... 23
ITEM 3. LEGAL PROCEEDINGS............................................. 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........... 23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS....................................................... 24
ITEM 6. SELECTED FINANCIAL DATA....................................... 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................... 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.... 35
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE...................................... 59
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 59
ITEM 11. EXECUTIVE COMPENSATION........................................ 59
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................... 59
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................ 59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K...................................................... 60
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PART I
FORWARD-LOOKING INFORMATION
Except for the historical information contained herein, this Annual Report
contains certain information that is forward-looking in nature. Examples of
forward-looking statements include statements regarding Chordiant's future
financial results, operating results, product successes, business strategies,
projected costs, future products, competitive positions and plans and
objectives of management for future operations. In some cases, you can identify
forward-looking statements by terminology, such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue' or the negative of such terms and other comparable
terminology. In addition, statements that refer to expectations or other
characterizations of future events or circumstances are forward-looking
statements. These statements involve known and unknown risks and uncertainties
that may cause Chordiant's or its industry's results, levels of activity,
performance or achievements to be materially different from those expressed or
implied by the forward-looking statements. Factors that may cause or contribute
to such differences include, among others, those discussed under the captions
"Business," "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." These and many other factors
could affect the future financial and operating results of Chordiant. Chordiant
undertakes no obligation to update any forward-looking statement to reflect
events after the date of this Annual Report.
ITEM 1. BUSINESS
Overview
Chordiant provides a customer relationship management (CRM) software
infrastructure solution for customer relationship marketing, service, sales,
knowledge management and real-time transactions across multiple communication
channels. Chordiant believes its solution enables companies, who depend upon
and value their customer relationships, to bolster customer retention and build
long-term, profitable relationships with customers. Chordiant's primary target
markets includes companies with demanding customer relationships involving a
large number of individual customers with complex customer relationships that
require high levels of personalized services. Chordiant's customers include
global companies in the financial services, telecommunications, retail and
integrated travel services industries. The Chordiant solution seeks to fulfill
the requirements these companies have for an enterprise-wide CRM software
infrastructure solution capable of servicing millions of individual customers
across multiple communication channels in real-time.
Industry Background
The CRM market is large, pervasive and rapidly growing. Today, Chordiant
believes customers are placing increasing value on convenient access to
information, products and services. To be successful in building long term and
profitable relationships with customers, Chordiant believes companies must take
a strategic approach to attract and retain valuable customers. To attract
customers, companies must focus on developing and executing a new set of
strategies that provide users with personalized experiences when they first
contact a company. Companies must be more responsive to customer needs and must
focus on delivering superior customer service and satisfaction to differentiate
themselves from their competitors. Companies must work to retain their
customers by providing relevant and targeted information and experiences each
time an interaction between a business and individual takes place. Moreover,
companies must recognize that every customer interaction provides an
opportunity to sell additional, and more valuable, products and services and
increase customer loyalty through personalized customer interaction.
While the Internet has emerged as a significant channel to initiate and
maintain customer relationships, Chordiant believes that existing and
established customer communication channels have not become less significant.
Specifically, to remain competitive, Chordiant believes that companies must
provide consistent high quality customer service across all communication
channels including self service systems such as the Internet,
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e-mail and automated telephony and assisted contact points such as call
centers, branches and retail outlets. Companies that use organization and
enterprise-wide customer information to provide consistent customer services
through interactions across multiple channels and contact points will be able
to compete more successfully in the rapidly changing Internet economy.
There are many challenges to implementing an enterprise approach that is
focused on individual customers. These challenges include providing customers
access to information and functionality that traditionally resides within
complex back end systems, integrating and managing disparate systems and
generating relevant processes in real time. Successful integration of these
systems and the creation of a comprehensive single view of the customer allows
companies to control routing and prompting of appropriate responses to the
customer in an automated and dynamic process.
Many existing product technologies do not meet the new requirements of an
enterprise view of customer relationships. Client/server technologies for sales
force automation, call centers and field service management were originally
designed for departmental functions and use by employees rather than customers.
The growth of the Internet has given rise to a wide range of new products
focused on a specific channel of customer contact such as Web self-service, e-
mail response and marketing automation. These single function Web-based
products are not likely to completely replace existing means of handling
customer service and commerce. For instance, many companies continue to rely
heavily on telephone-based customer service representatives and are struggling
to integrate Web and e-mail products with the telephone. Companies have
responded to the lack of integration among existing products by attempting to
design and build their own e-business software applications. The cost and time
to custom build these new systems can be prohibitive, and the expertise
required to design and integrate the systems are often beyond the capabilities
of most companies. Additionally, most commercially-available and custom-built
systems do not have the flexibility to integrate existing and anticipated
technologies or to allow customization to keep up with a constantly changing
Internet economy.
Chordiant believes that companies need a flexible, integrated software
solution that supports all channels of customer contact with a comprehensive
single view of the customer and consistent business services. Today, customer
data must be accessed from multiple sources, applications and transaction
systems to respond to customer inquiries following company specific business
rules. Unlike traditional customer profiles, a comprehensive single view of the
customer must be updated in real time for each customer contact and reflect the
customer's contact history and other relevant information. A completely
customer focused software solution improves the ability to attract, engage and
retain customers on a personalized basis and understand their needs and
preferences to provide consistent interactions with customers through any
communication channel.
The Chordiant Solution
Chordiant provides CRM infrastructure software and applications that
Chordiant believes enables companies to offer their customers personalized
marketing, sales programs, e-business services and customer support across
multiple communication channels. Chordiant has designed its products to
integrate customer information from different data sources, generate business
processes based on a customer's specific profile and request, and provide
uniform service and data to customers across multiple communications channels.
Chordiant's products are designed to enable companies to deliver appropriate
offers and information to a targeted customer at the time of customer need.
Chordiant believes that companies that use its products can increase the value
derived from their customers through improved retention rates and linked
selling opportunities that result from a personalized customer interaction.
Chordiant's product suite, Chordiant Unified CRM Solution, includes the
Unified CRM Infrastructure, Unified Interfaces, common business services and
relationship marketing, service, self-serve and knowledge management
applications. The Chordiant Unified Infrastructure provides for intelligent
customer interaction management across a client's entire business by unifying
communication channels and business processes from different corporate data
sources containing customer information. The Chordiant Unified Interfaces
contain
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interface products including: Chordiant Unified Knowledge, Chordiant Unified
Touch-Points, Chordiant Unified Response Center, Chordiant Unified Rules and
Workflow. Chordiant's Unified Interface products are designed to unify the
customer information, business processing and application services to provide
consistent service to customers across communications channels including the
Internet, telephone, e-mail and branch offices.
Chordiant's product suite is designed to enable companies to increase the
return from their customers by facilitating individual interactions between
customers and companies that Chordiant believes will help retain customers,
grow revenues and increase profits. Chordiant's customers include multinational
market leading business-to-consumer companies such as: Bank One International,
Barclays Mercantile, British Sky Broadcasting, Canadian Tire Acceptance
Limited, Direct Line Group Services Limited, First USA Bank, OnStar, a division
of General Motors, Lloyds TSB Bank, Metropolitan Life Insurance Company and
Thomas Cook Global Services.
Key benefits of the Chordiant solution include the following:
Comprehensive single view of the customer. Companies that have a
comprehensive single view of their customers and that distribute information
throughout their enterprise to the points of customer contact can provide a
more consistent and personalized consumer experience. Chordiant's data
management technology helps companies develop a single view of the customer by
integrating, consolidating and managing data derived from external and internal
sources. Chordiant's product suite uses multiple data sources, existing
applications and transaction systems to build a comprehensive single view of
the customer and generate the appropriate response at time of contact. A bank,
for example, might use Chordiant's products to integrate information about a
customer contained in internal databases such as credit card, mortgage and
savings account historical transaction systems, Web logs and e-mail management
systems, as well as external databases such as national credit check services.
By integrating this information, the bank has a more comprehensive
understanding of the customer's ability to repay a loan and the value of that
customer's relationship with the bank.
Automated, sophisticated decision making processes. Workflow and rules
driven business processes help companies to make automated, yet informed,
decisions about customer inquiries. Chordiant's workflow processing system
supports customizable business processes allowing companies to develop business
rules that will be implemented consistently. Chordiant's workflow editor is a
graphical user interface application that allows business analysts to customize
and automate their company's unique business rules. Chordiant's sophisticated
routing engine is designed to allow companies to instantly determine how to
respond to specific customer inquiries and generate offers appropriate for
particular customers. A bank, for example, could specify that at the time of
contact, only customers with a solid credit card history, an existing home
loan, a savings account with a minimum balance and a clean credit history
should receive an attractive auto loan rate and free online bill payment
services.
Consistent customer experience across multiple channels. Chordiant believes
that companies providing customers with a consistent experience across multiple
communication channels enjoy greater customer satisfaction because customers
are able to receive the same reliable service and information regardless of how
they choose to contact the company. There are a large and increasing number of
customer communications channels, including: Web, e-mail, fax, self-service
systems, mobile devices, call centers and retail outlets. Chordiant's product
suite implements a common set of business rules uniformly across systems
already existing in different customer communications channels. A bank, for
example, could ensure that a particular customer receives the same attractive
auto loan rate and online bill payment service promotion, regardless of whether
the customer contacts the bank through the Web, e-mail, a customer service call
center or in person at a local branch.
Standard and customizable business services. Chordiant believes that
companies that implement their unique business services will realize greater
levels of efficiency, consistency and customer satisfaction. Chordiant's
products provide a broad set of standard business objects, or fundamental
business functions, that are common across industries. These standard business
objects can be modified to accommodate specific
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customer and business processes, policies and transactions of individual
companies. A bank, for example, could customize Chordiant's business objects by
activating specific financial services objects related to specific
transactions, such as processing auto loans, and alter Chordiant's standard
loan business processes to bypass an external credit check if the customer has
a clean credit and mortgage history.
Strategy
Chordiant's objective is to continue to provide innovative CRM
infrastructure software that enables companies to provide superior relationship
marketing, personalized service and customer support to their individual
customers across multiple communication channels.
Key elements of Chordiant's strategy include the following:
Continue technology leadership. The increasing demands for multi-channel
interactive CRM solutions require products that are adaptable, extensible and
interoperable. To meet these requirements, Chordiant intends to continue to
devote substantial resources to the development of new and innovative product
capabilities. Because Chordiant has designed its products to utilize the
capabilities of the Internet, Chordiant believes that its products are more
easily adapted to a constantly changing e-business environment. For example,
Chordiant's product suite is designed to accommodate additional contact points
such as personal digital assistants, cellular telephones and digital
television.
Extend technology and integration alliances. Chordiant has sought, secured
and continued to seek, strategic alliances to assist in developing, marketing
and selling its product. This approach is intended to leverage the technology
and resources available to perform application design and development services
for Chordiant's customers and provide additional marketing and technical
expertise in industry segments. To help ensure that Chordiant delivers
comprehensive products to its customers, Chordiant has established strategic
relationships with organizations in three general categories:
. computing and network platform vendors;
. software platform vendors; and
. systems integrators.
Target leading global business-to-consumer companies. Chordiant intends to
continue targeting the global leaders in the primary business-to-consumer
markets by providing solutions to the financial services, telecommunications,
travel and retail industries. These industries are characterized by commodity-
like products and large numbers of dispersed customers, partners, vendors and
suppliers. Chordiant believes that companies in these industries will be early
users, and early beneficiaries, of an integrated system that can deliver
personalized, real-time processes utilizing a comprehensive single view of the
customer.
Expand worldwide infrastructure. Chordiant intends to continue to grow its
global presence by expanding worldwide field sales, marketing and services
organizations. Chordiant plans to continue expanding its international presence
by adding direct sales personnel and increasing Chordiant's indirect sales
channels. In particular, Chordiant plans to further expand its European
operations from Chordiant's existing international headquarters in London,
England. Chordiant has established regional offices in both Germany and the
Netherlands.
Growth through customer references. Chordiant plans to achieve additional
market success as Chordiant's customers become successful in using their e-
business initiatives to increase customer retention and revenues. Chordiant's
most successful customers become valuable references for Chordiant's future
sales opportunities. To ensure that all Chordiant customers become Chordiant
references, Chordiant intends to:
. deliver superior customer service to Chordiant's customers, to help
ensure their long-term satisfaction and success with Chordiant's
products;
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. work with experienced and knowledgeable systems integrators to help
enable Chordiant's customers to implement large scale deployments
successfully;
. deliver high quality customer education and training on Chordiant's
products to assist Chordiant's customers to meet and exceed their e-
business expectations; and
. hire and retain expert consultants to assist Chordiant's customers in
implementation of Chordiant's products.
Products
Chordiant's products are designed to address complex and extreme customer
information demands placed on global companies who desire to treat millions of
their customers in an individual, personalized way. Chordiant's Unified CRM
Solution provides companies with e-business infrastructure software that is
typically licensed as an integrated set of applications and functionality.
Chordiant's Unified CRM Solution suite is designed using a three-tiered
technology architecture. This layered architecture insulates software
components from one another which allows enhancements and customization to the
software to be made in a plug-and-play, modular manner. This three-tiered
product architecture is summarized below:
The Chordiant Unified Infrastructure. The Chordiant Unified Infrastructure
brings together data from across the customer's enterprise to create the
customer data model. This customer data model provides a single point of
contact for customer transactions, affording efficient access to all customer
account information. Chordiant's Unified Infrastructure integrates and
communicates with telephony equipment, legacy systems and transactional
applications. The Chordiant Unified Infrastructure enables workflow-driven
interfaces and support for electronic communications, telephony systems and
switches, SQL relational databases, back- office business applications and
legacy data warehouses. As part of the Unified Infrastructure, Chordiant has
developed a unique set of technologies that incorporate separate object-
oriented communications managers for Internet, e-mail, CTI and fax customer
communications. Each communications manager is responsible for representing the
customer's request to the Chordiant workflow engine.
The Chordiant Unified Infrastructure also hosts persistent data connectors
and data routers, which manage communications between the Chordiant workflow
engine and a company's legacy applications, mainframe databases, relational
databases and data warehouses. The Chordiant Unified Infrastructure provides
integration capabilities with these legacy database systems and relational
databases, whether they reside locally or are dispersed across the corporate
enterprise network. Through the persistent data manager and data router,
Chordiant's Unified CRM Infrastructure opens, calls, encapsulates, updates and
manages data resources from one or more databases, providing the complete set
of data and information needed when interacting with a customer.
Customers may also license Chordiant's Unified Rules and Unified Workflow
with Chordiant's Unified Infrastructure. Chordiant Unified Rules and Chordiant
Unified Workflow applications address functionality required by a customer
business analyst who incorporates their company's business processes into the
Chordiant Unified CRM Solution. The Unified Rules and Workflow allow for the
creation of new business processes or the modification of existing ones. By
using Unified Rules, processes can be strung together to provide a fully guided
sequence for complex business process, or a large number of dissimilar
transactions or services.
Chordiant's Unified Touch-points. Chordiant's Unified Touch-points provide a
dynamic interface for creating unique, personalized interactions between the
business and individual. Individuals may contact companies through this layer
by browser-based HTML/XML, e-mail, fax, telephony and mobile devices. Internal
customer service representatives respond to each customer contact based upon
the business process, the company's policies for that process and the
customer's unique profile.
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Chordiant's Unified Response center. Chordiant's Unified Response center
includes three applications: Live Response, Assisted Response and Automated
Response. Live Response is the application used by customer service agents. The
Live Response application uses guided transactions to ensure that the customer
interaction is both personalized and consistent across all touch-points. Live
Response provides a customer interaction environment that empowers a customer
service agent to provide individualized, high-quality sales, support and
service. Application functionality includes:
. Customer Management (create, retrieve, update and delete customer
information)
. Account Management (view, add, delete, update)
. Inquiries (directions, assistance)
. Service Work (view queues, add activities, transfer work, defer work,
view activities in process)
. Local Administration (change password, modify screen layout)
Chordiant's Assisted Response E-mail application routes incoming e-mail to a
queue for assisted response dependent upon on the e-mail content, the customer
profile, or the final results from the query to the Chordiant knowledge base
application. This approach provides a highly flexible way to manage the routing
of incoming messages dependent upon customer case history and profile.
Chordiant's Automated Response E-mail application includes automated e-mail
routing and e-mail response capabilities. This application will receive
incoming e-mail and compare the e-mail to templates to determine if they should
be automatically responded to, or if the e-mail should be immediately forwarded
to a customer service agent for assisted response. When the automated response
feature is enabled, the application will attempt to locate an answer from the
knowledge base application. If an appropriate answer is found, a return answer
to the customer (via e-mail) will be made and the event will be logged into the
customer's case history.
Customers
Chordiant targets multinational market leaders in business-to-consumer
industries, particularly companies in the financial services,
telecommunications, travel and leisure and automotive industries. In the
future, Chordiant plans to expand into the retail and utilities industries.
Below is a list of Chordiant's customers as of December 31, 2000, each of which
during the past two years has purchased $500,000 or more of products from
Chordiant.
. Bank One International
. British Sky Broadcasting (BskyB)
. Barclays Mercantile
. Direct Line Group Services Limited
. First USA Bank
. OnStar, a division of General Motors, Inc.
. Lloyds TSB Bank
. Metropolitan Life Insurance Company
. The Royal Bank of Scotland plc
A small number of customers account for a significant portion of Chordiant's
total revenues. As a result, the loss or delay of individual orders or delays
in the product implementations for a customer can have a large impact on
Chordiant's revenues. In 1998, revenues from KLM Royal Dutch Airlines, Thomas
Cook Global Services, Canadian Tire Acceptance Limited and Chase Manhattan
Mortgage Corporation accounted for 36%,
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19%, 14% and 12% of Chordiant's total net revenues. In 1999, revenues from
Chase Manhattan Mortgage Corporation, First USA, and Electronic Data Systems
Corporation (EDS) accounted for 30%, 19% and 15% of Chordiant's total net
revenues. For the year ended December 31, 2000, revenues from EDS, Lloyds TSB
and Direct Line Group Services Limited accounted for approximately 30%, 19% and
14%, respectively, of Chordiant's total net revenues. Chordiant expects that
revenues from a small number of customers will continue to account for a
majority of Chordiant's total net revenues in the future as historical
implementations are completed and replaced with new projects from new and
existing customers.
Technology
Chordiant designs and builds products to provide customer relationship
management solutions for large enterprises. Chordiant's Unified CRM solution
product suite consists of three layers. These layers are: e-business software
infrastructure, e-business software application code and a software framework,
including several software engines.
The first software-layer, the e-business infrastructure, utilizes a four-
tier architecture: (1) delivering functionality to desktop computers, (2)
multiple consumer touch points (Web, e-mail, fax, etc.), (3) corporate
computing centers, and (4) in the data centers and networks of the company. The
first-tier is used by internal customer service representatives, marketing
professionals, sales and service employees, supervisors, management and other
staff of a company involved with customer contact. The second-tier is for the
consumers who desire to interact with the company using telephones, Web
browsers or wireless personal digital assistants and mobile devices. Telephone
calls, e-mails, Web-collaboration and other interactions are managed by
Chordiant's technology in this second-tier. The third-tier of the architecture
configures and operates the multiple software servers in customer computing
centers. This third-tier queues, routes, responds, initiates and computes the
business processes and applications, based on distributed information and
processing of business logic. All customer data comes from the fourth-tier,
where existing corporate company information systems are accessed and data is
integrated with connector architecture including caching and transactions
capabilities. Underlying this architecture is a persistent data management
system that integrates multiple real time data sources, utilizing object-
computing models.
The second software-layer, the Chordiant e-business application code,
implements a wide variety of common functions often used by retail, financial,
insurance, travel and telecommunications industries for customer relationship
management functions. A flexible object model consisting of common business
fundamentals is contained in this technology layer. For example, common objects
include establishing the initial customer relationship, taking customer orders,
opening accounts, accessing the customer's case history, fulfilling orders and
case tracking.
The third software-layer contains Chordiant's enterprise software framework.
The framework itself implements workload balancing, fail over systems, data
management systems and security systems. The framework also includes several
software engines used by the first and second software-layers. These engines
include a workflow system, a business rules system and a knowledge management
system.
Applications running in the context of this multi-layer, multi-tier
environment, along with the data management system, object model and the
software engines, assist in delivering distributed customer data throughout the
company to form a single and unified view of a customer.
Certain Chordiant products use technology modules from third party
technology providers including Sun Microsystems, IBM and Ilog, Inc. Chordiant
products are based on open system standards and are designed to be scalable and
integrate with a company's various information technology systems, networks and
telephony systems. Chordiant's products are based on industry standards
including Java, CORBA, IIOP, RMI and XML. Chordiant's server software runs on
both UNIX server platforms and Windows NT servers and can be configured for
multiple servers.
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Sales and Marketing
Chordiant licenses its products and sells services primarily through a
direct sales organization which is complemented by the selling and support
efforts of systems integrators and technology vendors. Chordiant's market focus
is in the business-to-consumer segment of the economy with a targeted effort on
leading consumer focused companies and companies using multiple channels as the
means of conducting business and serving customers. Chordiant targets its sales
and marketing efforts, together with its product design efforts, on industries
such as retail banking, consumer financial services, telecommunications, travel
and leisure, automotive and retailers.
The sales process generally ranges from three to twenty-four months
depending on the level of education that prospective customers need about the
use and benefits of Chordiant's products and the involvement of systems
integrators. During the sales process, Chordiant typically approaches senior
executive management teams including the senior marketing officer, chief
information officer and chief executive officer of the potential customer.
Chordiant utilizes sales teams consisting of sales and technical professionals
who work with Chordiant's strategic partners to create organization-specific
proposals, presentations and demonstrations that address the specific needs of
each potential customer.
Chordiant has sales offices in the greater metropolitan areas of Dallas,
Chicago and New York, and in Cupertino, California, London, England, Munich,
Germany and Amsterdam, the Netherlands. Technical sales consultants provide
pre-sales support to potential customers on product information and deployment
capabilities and complement the direct sales professionals. Chordiant plans to
significantly expand the size of its direct sales organization and to establish
additional sales offices domestically and internationally.
Chordiant focuses its marketing efforts on educating potential customers,
generating new sales opportunities and creating awareness of Chordiant's
products. Chordiant conducts a variety of marketing programs to educate its
target market, including seminars, trade shows, press relations and industry
analyst programs.
Chordiant's marketing organization serves an integral role in acquiring,
organizing and prioritizing customer and industry feedback to help provide
product direction to its development organization. Chordiant also has a
detailed product management process that surveys customers and identifies
market needs to help predict and prioritize future customer requirements.
Professional Services, Customer Support and Education Services
Chordiant offers a broad range of customer services including professional
consulting services and product support and training services. Chordiant
believes that providing a high level of customer service is critical to
achieving rapid product implementation, customer success and continued revenues
growth.
Professional Services
Chordiant's professional services consulting teams assist their customers
and systems integrator partners in the design and implementation of products.
Chordiant's professional services organization deploys consultants as part of
the project team alongside systems integration partners and members of the
customer's internal team to provide technical knowledge, business engineering,
project guidance and quality assessments during the project. In the design
stage, Chordiant provides a variety of professional services that help
determine a customer's business objectives and the technical requirements of
the application implementation. In the implementation stage, Chordiant uses a
delivery methodology to assist customers and integration partners in planning
and managing the implementation. Systems integrators, supported by Chordiant's
consultants, manage the overall project and implement the product with a
customer's existing communications, applications, databases and transaction
systems. In the final phases of an implementation, the systems integrators
provide education and training to enable a customer's internal team to deploy
the new system, train internal users and assume control over ongoing support.
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Chordiant's methodology includes:
. user requirements and needs analysis;
. business engineering consultation;
. architectural analysis and performance planning;
. project management support services;
. engineering support for development and deployment; and
. technical support for software integration and communications
integration.
Net services revenues provided by Chordiant in the fiscal year ended
December 31, 2000 accounted for approximately 50% of Chordiant's total net
revenues.
Customer Support
Chordiant's customers have a choice of support and maintenance options
depending on the level of service desired. Chordiant's technical support is
available to clients by telephone, over the Web and by e-mail. The company
maintains a technical support hotline staffed by engineers from 8:00 a.m. to
9:00 p.m., Eastern time, Monday through Friday, from its corporate
headquarters in Cupertino, California and local support during business hours
for European customers from London, England. An optional premium service is
available providing technical support 24 hours a day, seven days a week.
Additionally, Chordiant provides product enhancement releases to all customers
as part of their support and maintenance contract. Chordiant uses a customer
service automation system to track each customer inquiry until it is resolved.
Chordiant also makes use of its Website and a secured customer forum to
provide product information and technical support information worldwide 24
hours a day, seven days a week.
Educational Services
Chordiant provides educational services to train and enable its systems
integrators and customers to use Chordiant's products. Chordiant offers a
comprehensive series of training modules to provide the knowledge and skills
to successfully deploy, use and maintain the company's products. These
training courses focus on the technical aspects of Chordiant's products as
well as business issues and processes. A complete set of modules covering
business engineering, project management and development engineering are
available. Training courses can be provided on-site for a custom session at a
fee and are regularly scheduled through classroom and lab instruction at the
company's Cupertino, California corporate headquarters, and at its London,
England offices for European systems integrators and customers.
Product Development
Chordiant has made substantial investments in research and development
through internal development and technology licensing. Chordiant's product
development efforts are focused on extending Chordiant's software
infrastructure, CRM business services and application functionality, self-
service and Web-based collaboration functionality, and continued integration
of key industry-specific transaction systems and services.
Chordiant's product development resources are organized into a number of
development teams including:
. system services and workflow development;
. business services and application functionality and design;
. tools and Internet development;
. enterprise integration;
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. documentation; and
. quality assurances.
Chordiant's software and Internet applications teams have extensive
experience in object oriented development, data management, workflow
engineering, Java programming and Internet technologies. Chordiant's research
and development expenditures before the effect of non-cash compensation expense
and purchased in-process research and development were $5.9 million in fiscal
year 1998, $6.5 million in fiscal year 1999, and $14.4 million for the year
ended December 31, 2000.
Strategic Relationships
To enhance the productivity of Chordiant's sales and service organizations,
Chordiant has established relationships with systems integrators, complementary
technology providers and alternative service providers.
Systems integrators
Chordiant has established relationships and trained professionals at a
number of systems integrators including: Accenture (formerly known as Andersen
Consulting); Computer Sciences Corporation; Electronic Data Systems Corporation
and Logica plc. Chordiant plans to expand these relationships to increase its
capacity to sell and implement its products. Chordiant has trained a
significant number of consultants in these organizations for the implementation
and support of its products. Chordiant believes that expanding its
relationships with systems integrators and independent consulting firms will
enable the company to gain a greater share of emerging markets more rapidly.
Complementary technology providers
Chordiant designs products to be based on industry standards and
technologies, and to support a number of key software platforms. Chordiant has
relationships with:
. IBM Software for IBM Visual Age and MQ series development tools and
interface software and support;
. Sun Microsystems for Java and Forte developments tools in support of
Chordiant's enterprise data and transaction management services;
. Oracle Corporation and Sybase, Inc., providers of industry-standard
relational databases;
. Cisco Systems, Inc., Genesys Telecommunications Laboratories, Inc. and
Lucent Technologies, Inc., providers of telephony equipment and software
interfaces; and
. Ilog, Inc. a software provider of resource optimization and business
rules technology.
Competition
The market for Chordiant's products is new and rapidly evolving, and is
highly competitive. The competitive landscape is rapidly evolving to address
the convergence of e-business services and customer interaction applications.
To realize the potential of this convergence, companies must be able to offer
personalized marketing and sales and extend e-business services to all points
of customer contact. This must be done through an integrated system and
customer data model tailored by each company to meet its specific customer
requirements.
Chordiant faces three main sources of competition:
. custom-built solutions;
. vendors with help desk, field service, call center or sales force
automation products; and
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. vendors of enterprise resource planning products.
There is no one competitor, nor is there a small number of competitors, that
are dominant in Chordiant's market.
Custom-Built Solutions
Existing enterprise systems supporting branch and call centers have
historically been custom built by professional services organizations or
internally developed. Custom development has the inherent limitation of being a
high cost alternative because it relies on building the entire solution from
scratch and the resulting configuration is difficult to upgrade to take
advantage of new requirements and channels of communication such as the
Internet. Chordiant expects that internal development will continue to be a
significant source of competition.
Stand-Alone Solution Vendors
Chordiant competes with providers of stand-alone solutions for Web based
customer relationship management, such as E.piphany, Inc. and Kana
Communications, Inc. Chordiant also competes against traditional client/server-
based, call center service customer and salesforce automation solutions, such
as Siebel Systems, Inc., Nortel Networks Corporation (including Clarify Inc.)
and Pegasystems Inc. Most point application providers started with a single
application focus, such as service, salesforce automation or help desks, and
then added additional software modules addressing other needs, such as e-mail,
field service or quality tracking. Although these vendors have started to
pursue the enterprise-wide opportunity of providing enterprise-wide solutions
and services to all points of customer contact, their lack of multi-channel
integration, real time data models for integration of multiple data sources and
lack of personalization capability and their client/server architecture are
limitations.
Enterprise Application Vendors
Chordiant anticipates competitive offerings and consolidation from several
major enterprise software developers, such as Oracle, PeopleSoft Inc., IBM and
SAP. Chordiant expects enterprise resource planning software vendors to acquire
and integrate point solutions as they approach different segments of the e-
business and customer relationship management markets.
Other Potential Competitors
The telephony market for equipment and software is in the midst of a major
transition from proprietary systems to open software applications running on
commodity hardware. Software acquisitions by traditional telephony vendors,
such as Lucent Technologies' purchase of Mosaix, Inc. and Nortel Networks'
purchase of Clarify are examples of the desire to move from hardware platforms
into software applications. Examples of companies providing middleware in
support of computer and telephony integration are Genesys Telecommunications
Laboratories and Geotel Communications Corporation, purchased by Cisco Systems.
Providers of client/server and mainframe call center systems include
Pegasystems for financial services and IMA and Quintus for outsourcers and call
centers. These companies have not historically provided enterprise level
software infrastructure and customer management applications but may in the
future.
Chordiant believes that the principal competitive factors in the company's
market include:
. the breadth and depth of solutions;
. product quality and performance;
. relationships with systems integrators;
. the ability to implement solutions;
13
. establishment of a significant base of reference customers;
. the ability of products to operate with multiple software applications;
. customer service; and
. product price.
Although Chordiant believes that its product competes favorably with these
factors, Chordiant's market is relatively new and is evolving rapidly.
Chordiant may not be able to maintain its competitive position against current
and potential competitors, especially those with significantly greater
financial and personnel resources.
Intellectual Property and Propriety Rights
Chordiant's success is dependent upon its ability to develop and protect
proprietary technology and intellectual proprietary rights. Chordiant relies
primarily on a combination of contractual provisions, confidentiality
procedures, trade secrets, and copyright and trademark laws to accomplish these
goals.
Chordiant licenses its product through non-exclusive license agreements that
impose restrictions on customers' ability to utilize the software. In addition,
Chordiant seeks to avoid disclosure of its trade secrets, including requiring
employees, customers and others with access to Chordiant's proprietary
information to execute confidentiality agreements with Chordiant and
restricting access to Chordiant's source code. Chordiant also seeks to protect
its rights in its products, documentation and other written materials under
trade secret and copyright laws. Due to rapid technological change, Chordiant
believes that factors such as the technological and creative skills of its
personnel, new product developments and enhancements to its existing products
are more important than the various legal protections of its technology to
establishing and maintaining a technology leadership position.
Chordiant integrates third party software into its products. This third
party software may not continue to be available on commercially reasonable
terms or at all. In particular, Chordiant licenses Forte Tool and related Forte
products from Forte Software. If Chordiant cannot maintain licenses to the
Forte products or other key third party software, shipments of Chordiant's
products could be delayed until equivalent software is developed or licensed
and integrated into Chordiant's products. Moreover, although Chordiant is
generally indemnified against claims if technology licensed from third parties
infringes the intellectual property and proprietary rights of others, this
indemnification is not always available for all types of intellectual property
and proprietary rights and in some cases the scope of this indemnification is
limited. There can be no assurance that infringement or invalidity claims
arising from the incorporation of third-party technology or claims for
indemnification from Chordiant's customers resulting from these claims will not
be asserted or prosecuted against Chordiant. These claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources, in addition to potential product redevelopment costs and
delays.
Despite Chordiant's efforts to protect its proprietary rights, existing laws
afford only limited protection. Attempts may be made to copy or reverse
engineer aspects of Chordiant's products or to obtain and use information that
Chordiant regards as proprietary. There can be no assurance that Chordiant will
be able to protect Chordiant's proprietary rights against unauthorized third
party copying or use. Use by others of Chordiant's proprietary rights could
materially harm Chordiant's business. Furthermore, policing the unauthorized
use of Chordiant's products is difficult and expensive litigation may be
necessary in the future to enforce Chordiant's intellectual property rights.
It is also possible that third parties will claim that Chordiant has
infringed their current or future products. Chordiant expects that software
developers will increasingly be subject to infringement claims as the number of
products in different industry segments overlap. Any claims, with or without
merit, could be time-consuming, result in costly litigation, prevent product
shipment, cause delays, or require Chordiant to enter into royalty or licensing
agreements, any of which could harm its business. Patent litigation in
particular has complex
14
technical issues and inherent uncertainties. If an infringement claim against
the company was successful and it could not obtain a license on acceptable
terms, license a substitute technology or redesign to avoid infringement,
Chordiant's business would be harmed.
Employees
As of December 31, 2000, Chordiant employed 250 full time employees. Of that
total, 84 were primarily engaged in product development, engineering or systems
engineering, 57 were engaged in sales and marketing, 78 were engaged in
professional services and 31 were engaged in operational, financial and
administrative functions.
None of Chordiant's employees are represented by a labor union and Chordiant
has never experienced a work stoppage. Chordiant believes that its relations
with its employees are good.
15
BUSINESS RISKS
Because Chordiant's short operating history makes it difficult to evaluate its
prospects, Chordiant's future financial performance may disappoint investors
and result in a decline in Chordiant's stock price.
You must consider Chordiant's prospects given the risks, expenses and
challenges Chordiant might encounter because the company is at an early stage
of development and growth in a new and rapidly evolving market. Until September
1997, Chordiant was engaged primarily in the research and development of its
software products. Chordiant licensed its first product in September 1997 and
Chordiant's sales and service organizations are relatively new and still
growing. Due to Chordiant's short operating history, Chordiant's future
financial performance is not predictable and may disappoint investors and
result in a substantial decline in Chordiant's stock price. The revenue and
income potential of Chordiant's products are unproven.
Chordiant expects to continue to incur losses and may not achieve or maintain
profitability, which may cause Chordiant's stock price to decline.
Chordiant incurred net losses of $35.4 million for the year ended December
31, 2000. As of December 31, 2000, Chordiant had an accumulated deficit of
$97.9 million. Chordiant expects to continue to incur losses on both a
quarterly and annual basis at least through the first half of 2001. Moreover,
Chordiant expects to continue to incur significant sales and marketing and
research and development expenses and expenses to establish additional sales
offices domestically and internationally, and, as a result, Chordiant will need
to generate significant revenues to achieve and maintain profitability.
Chordiant cannot be certain that Chordiant can sustain this growth or that it
will generate sufficient revenues to achieve profitability.
Chordiant's operating results fluctuate significantly and an unanticipated
decline in revenues may disappoint investors and result in a decline in
Chordiant's stock price.
Chordiant's quarterly revenues will depend primarily upon product
implementation by its customers. Chordiant has historically recognized most of
the company's license and services revenue using the percentage-of-completion
method using labor hours incurred as the measure of progress towards completion
of implementation of Chordiant's products and Chordiant expects this practice
to continue. Thus, delays in implementation by Chordiant customers and system
integration partners will reduce Chordiant's quarterly revenue. Historically, a
substantial portion of new customer orders have been booked in the third month
of the calendar quarter, with a concentration of these bookings in the last two
weeks of the third month. Chordiant expects this trend to continue and,
therefore, any failure or delay in bookings would decrease Chordiant's
quarterly deferred revenue. If Chordiant's revenues or operating margins are
below the expectations of any securities analysts that may analyze Chordiant,
or investors, Chordiant's stock price is likely to decline.
Chordiant has limited experience with large-scale deployments and if
Chordiant's products do not successfully operate in a company-wide environment,
Chordiant may lose sales and suffer decreased revenues.
If existing customers have difficulty deploying Chordiant's products or
choose not to fully deploy the products, particularly in large-scale
deployments, it could damage Chordiant's reputation and reduce revenues.
Chordiant's success requires that the company's products be highly scalable, or
able to accommodate substantial increases in the number of users. To date, no
large-scale deployment has been operating at any customer site and Chordiant's
products are currently being used by only a limited number of users.
Chordiant's products are expected to be deployed on a variety of computer
hardware platforms and to be used in connection with a number of third-party
software applications by personnel who may not have previously used application
software systems or Chordiant's products. These deployments present very
significant technical challenges, which are difficult or impossible to predict.
16
Failure to successfully customize or implement Chordiant's products for a
customer could prevent recognition of revenues, collection of amounts due or
cause legal claims by the customer.
If a customer is not able to customize or deploy Chordiant's products
successfully, the customer may not complete expected product deployment, which
would prevent recognition of revenues and collection of amounts due, and could
result in claims against Chordiant. Chordiant has, in the past, had disputes
with customers concerning product performance. One dispute, from a 1995
consulting agreement, resulted in a settlement following contractually-
required mediation. One, from a 1997 product license, resulted in a settlement
following litigation. One, from a product license and related service
agreements, was resolved in February, 2000 when the company entered into a new
agreement with the client, Chase Manhattan Mortgage Corporation. For further
details regarding the Chase dispute, see "Chordiant Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
in this Annual Report.
Chordiant's primary products have a long sales and implementation cycle, which
makes it difficult to predict Chordiant's quarterly results and may cause
operating results to vary significantly.
The period between initial contact with a prospective customer and the
implementation of Chordiant's products is unpredictable and often lengthy,
ranging to date from three to twenty-four months. Thus, deferred revenue could
vary significantly from quarter to quarter. Any delays in the implementation of
Chordiant's products could cause reductions in Chordiant's revenues. The
licensing of Chordiant's products is often an enterprise-wide decision that
generally requires Chordiant to provide a significant level of education to
prospective customers about the use and benefits of Chordiant's products. The
implementation of Chordiant's products involves significant commitment of
technical and financial resources and is commonly associated with substantial
implementation efforts that may be performed by Chordiant, by the customer or
by third-party system integrators. Customers generally consider a wide range of
issues before committing to purchase Chordiant's products, including product
benefits, ability to operate with existing and future computer systems, ability
to accommodate increased transaction volume and product reliability.
Because a small number of customers account for a substantial portion of
Chordiant's software license revenues, Chordiant's revenues could decline if
Chordiant loses a major customer.
Chordiant derives a significant portion of its software license revenues in
each quarter from a limited number of customers. Loss of a major customer in a
particular quarter could cause a decrease in revenue, deferred revenues and net
income. For the year ended December 31, 2000, revenues from Electronic Data
Systems Corporation (EDS), Lloyds TSB and Direct Line Group Services Limited
accounted for approximately 30%, 19% and 14% of Chordiant's total net revenues.
For the fiscal year ended December 31, 1999, revenues from Chase Manhattan
Mortgage Corporation, First USA and EDS accounted for 30%, 19%, and 15% of
Chordiant's total net revenues. Chordiant expects that a limited number of
customers will continue to account for a substantial portion of the company's
revenues. As a result, if Chordiant loses a major customer, if a contract is
delayed or cancelled, Chordiant's revenues would be adversely affected. In
addition, customers that have accounted for significant revenues in the past
may not generate revenues in any future period causing Chordiant's failure to
obtain new significant customers or additional orders from existing customers
to materially affect Chordiant's operating results.
Defects in Chordiant's products could diminish demand for Chordiant's products
and result in decreased revenues, decreased market acceptance and injury to
Chordiant's reputation.
Errors may be found from time to time in Chordiant's new or enhanced
products after commencement of commercial shipments resulting in decreased
revenues, decreased sales, injury to Chordiant's reputation and/or increased
warranty and repair costs. Although Chordiant conducts extensive product
testing during product development, Chordiant has in the past discovered
software errors in Chordiant's products as well as in third party products, and
as a result has experienced delays in the shipment of its new products. The
latest version of Chordiant's primary product suite was introduced in June
2000.
17
Chordiant's failure to maintain strong relationships with system integrators
would harm Chordiant's ability to market and implement Chordiant's products and
reduce future revenues.
Failure to establish or maintain relationships with systems integrators
would significantly harm Chordiant's ability to license Chordiant's software
products. System integrators install and deploy Chordiant's products, in
addition to those of Chordiant's competitors, and perform custom integration of
systems and applications. Some system integrators also engage in joint
marketing and sales efforts with Chordiant. If these relationships fail,
Chordiant will have to devote substantially more resources to the sales and
marketing, implementation and support of Chordiant's products than it would
have to otherwise. Chordiant's efforts may also not be as effective as those of
the system integrators, which could reduce revenues. In many cases, these
parties have extensive relationships with Chordiant's existing and potential
customers and influence the decisions of these customers. A number of
Chordiant's competitors have stronger relationships with these system
integrators and, as a result, these system integrators may be more likely to
recommend competitors' products and services.
In particular, Chordiant has established a non-exclusive relationship with
Electronic Data Systems Corporation, or EDS, a large system integrator and one
of Chordiant's principal stockholders. For the fiscal year ended December 31,
2000 and the fiscal year ended December 31, 1999, approximately 30% and 15%,
respectively, of Chordiant's revenues were derived from customers for whom
Electronic Data Systems has been engaged to provide software and system
integration services. Deterioration of Chordiant's relationship with Electronic
Data Systems could have a material adverse effect on sales of Chordiant's
products.
To date, Chordiant's sales have been concentrated in the financial services,
travel and leisure, automotive and telecommunications markets and if Chordiant
is unable to continue sales in these markets or successfully penetrate new
markets, Chordiant's revenues may decline.
Sales of Chordiant's products and services in four markets -- financial
services, travel and leisure, automotive and telecommunications -- accounted
for 94% of total net revenues for the year ended December 31, 2000 and 87% of
total net revenues for the fiscal year ended December 31, 1999. Chordiant
expects that revenues from these four markets will continue to account for a
substantial portion of Chordiant's total net revenues in 2001. If Chordiant is
unable to successfully increase penetration of Chordiant's existing markets or
achieve sales in additional markets, or if the overall economic climate of
Chordiant's target markets deteriorates, Chordiant's revenues may decline.
Continued negative gross margin in services revenues could adversely impact
Chordiant's overall gross margin and income.
Chordiant's gross margin in services revenues has historically been
negative. Service revenues have also had lower gross margins than Chordiant's
license revenues. As a result, an increase in the percentage of total net
revenues represented by services revenues, or an unexpected decrease in license
revenues, could have a detrimental impact on Chordiant's overall gross margins.
Chordiant anticipates that service revenues will continue to represent over 40%
of total net revenues. To increase services revenues, Chordiant must expand
Chordiant's services organization, successfully recruit and train a sufficient
number of qualified services personnel, and obtain renewals of current
maintenance contracts by Chordiant's customers. This expansion could further
reduce gross margins in Chordiant's service revenues.
Because competition for qualified personnel is intense, Chordiant may not be
able to retain or recruit personnel, which could impact the development and
sales of Chordiant's products.
If Chordiant is unable to hire or retain qualified personnel, or if newly
hired personnel fails to develop the necessary skills or fails to reach
expected levels of productivity, Chordiant's ability to develop and market
Chordiant's products will be weakened. Chordiant's success depends largely on
the continued contributions of Chordiant's key management, engineering, sales
and marketing and professional services personnel, including Samuel T.
Spadafora, Chordiant's chairman of the board of directors and chief executive
officer and
18
Stephen Kelly, Chordiant's president and chief operating officer. Except for
Chordiant's chief executive officer and president and chief operating officer,
Chordiant does not have employment agreements with any of Chordiant's key
personnel. Chordiant has experienced turnover in Chordiant's key personnel in
the recent past.
In particular, Chordiant's ability to increase Chordiant's sales will depend
on Chordiant's ability to recruit, train and retain top quality sales people
who are able to target prospective customers' senior management, and who can
productively generate and service large accounts. There is a shortage of
qualified sales personnel and competition for such personnel is intense,
particularly in the Silicon Valley, where Chordiant's principal offices are
located, and in the markets in which Chordiant competes.
Chordiant depends on technology licensed to Chordiant by third parties, and the
loss or inability to maintain these licenses could prevent or delay sales of
Chordiant's products.
Chordiant licenses technology from several software providers that is
incorporated in Chordiant's products. In particular, Chordiant licenses Forte
Tool and related Forte products from Forte Software, Inc., a Sun Microsystems,
Inc. company. Chordiant's license agreement with Forte expires in September
2001, and can be extended upon agreement of the parties. Chordiant anticipates
that Chordiant will continue to license technology from Forte and other third
parties in the future. This software may not continue to be available on
commercially reasonable terms, if at all. The loss of the Forte technology or
other technology licenses could result in delays in the license of Chordiant's
products until equivalent technology, if available, is developed or identified,
licensed and integrated into Chordiant's products. Even if substitute
technologies are available, there can be no guarantee that Chordiant will be
able to license these technologies on commercially reasonable terms, if at all.
Defects in third party products associated with Chordiant's products could
impair Chordiant's products' functionality and injure Chordiant's reputation.
The effective implementation of Chordiant's products depends upon the
successful operation of third party products in conjunction with Chordiant's
products. Any undetected errors in these products could prevent the
implementation or impair the functionality of Chordiant's products, delay new
product introductions or injure Chordiant's reputation. In the past, while
Chordiant's business has not been materially harmed, product releases have been
delayed as a result of errors in third-party software and Chordiant has
incurred significant expenses fixing and investigating the cause of these
errors.
Chordiant's customers and system integration partners have the ability to alter
Chordiant's source code and inappropriate alterations could adversely affect
the performance of Chordiant's products, cause injury to Chordiant's reputation
and increase operating expenses.
Customers and system integration partners have access to Chordiant's
computer source code when they license Chordiant's products and may alter the
source code. Alteration may lead to implementation, operation, technical
support and upgrade problems for Chordiant's customers. This could adversely
affect the market acceptance of Chordiant's products, and any necessary
investigative work and repairs could cause Chordiant to incur significant
expenses and delays in implementation.
If Chordiant fails to introduce new versions and releases of Chordiant's
products in a timely manner, customers may license competing products and
Chordiant's revenues may decline.
If Chordiant is unable to ship or implement enhancements to Chordiant's
products when planned, or fails to achieve timely market acceptance of these
enhancements, Chordiant may suffer lost sales and could fail to achieve
anticipated revenues. A majority of Chordiant's total revenues has been, and is
expected to be, derived from the license of Chordiant's primary product suite.
Chordiant's future operating results will depend on the demand for these
products by future customers, including new and enhanced releases that are
19
subsequently introduced. If Chordiant's competitors release new products that
are superior to Chordiant's products in performance or price, or if Chordiant
fails to enhance Chordiant's products and introduce new features and
functionality in a timely manner, demand for Chordiant's products may decline.
Chordiant has in the past experienced delays in the planned release dates of
new versions of Chordiant's software products and upgrades. New versions or
Chordiant's products may not be released on schedule or may contain defects
when released.
If Chordiant's products do not operate with the hardware and software platforms
used by Chordiant's customers, customers may license competing products and
Chordiant's revenues will decline.
If Chordiant's products fail to satisfy advancing technological
requirements, the market acceptance of these products could be reduced.
Chordiant currently serves a customer base with a wide variety of constantly
changing hardware, software applications and networking platforms. Customer
acceptance of Chordiant's products depends on many factors such as:
. Chordiant's ability to integrate Chordiant's products with multiple
platforms and existing or legacy systems;
. Chordiant's ability to anticipate and support new standards, especially
Internet and enterprise Java standards; and
. the integration of additional software modules and third party software
applications with Chordiant's existing products.
Chordiant's reliance on international operations may cause increased operating
expenses and cause Chordiant's net income to decline.
During the fiscal year ended December 31, 2000, international revenues were
$25.8 million or approximately 77% of Chordiant's total net revenues. During
the fiscal year ended December 31, 1999, international revenues were $6.6
million or approximately 38% of Chordiant's total net revenues. Chordiant
expects international revenues will continue to represent a significant portion
of Chordiant's total net revenues in future periods.
Chordiant has faced, and will continue to face, risks associated with:
. difficulties in managing Chordiant's widespread operations;
. difficulties in hiring qualified local personnel;
. seasonal fluctuations in customer orders;
. longer accounts receivable collection cycles;
. expenses associated with products used in foreign markets;
. currency fluctuation and hedging activities; and
. economic downturns in international economies.
Any of these factors could have a significant impact on Chordiant's ability
to license products on a competitive and timely basis and adversely affect
Chordiant's operating expenses and net income.
Chordiant's international sales are both U.S. dollar and local currency
denominated. As a result, an increase in the value of the U.S. dollar relative
to foreign currencies could make Chordiant's products less competitive in
international markets and could negatively affect Chordiant's operating results
and cash flows.
20
International expansion could be difficult and Chordiant may not achieve sales
growth.
If Chordiant is unable to expand Chordiant's international operations and
sales, and build relationships with third parties outside the United States on
a timely basis, Chordiant may not achieve anticipated sales growth. Chordiant
has expanded, and intends to continue expanding, its international operations
and enter additional international markets. In October 1997, Chordiant opened
an office in London, England, and during 1999 and 2000, Chordiant opened
offices in the Netherlands and Germany, respectively. To increase Chordiant's
international sales opportunities, Chordiant will need to further develop
Chordiant's international sales, professional services and support
organizations, and Chordiant will need to form additional relationships with
system integration partners worldwide.
Chordiant's failure to integrate successfully Chordiant's acquired companies
could prevent Chordiant from operating efficiently.
On July 19, 2000, Chordiant completed its acquisition of White Spider
Software, Inc., an early stage software company that had completed development
of a beta version of a knowledge management software product. Upon the closing
date, White Spider became a wholly-owned subsidiary of Chordiant.
On January 8, 2001, Chordiant entered into an agreement and plan of merger
and reorganization with Prime Response Inc., a Delaware corporation, whose
common stock is listed on the Nasdaq National Market under the symbol "PRME",
pursuant to which Chordiant exchanged 0.60 shares of its common stock for each
outstanding share of Prime Response common stock. On March 27, 2001, the
stockholders of Prime Response approved the merger agreement and the
stockholders of Chordiant approved the issuance of shares of Chordiant common
stock to the stockholders of Prime Response. As of March 27, 2001, Prime
Response is a wholly-owned subsidiary of Chordiant. Prime Response is a
provider of integrated relationship marketing software solutions.
Chordiant's business strategy includes pursuing opportunities to grow
Chordiant's business, both internally and through selective acquisitions and
various types of business combinations. To implement this strategy, Chordiant
may in the future be involved in additional merger and acquisition
transactions. Acquisition transactions are motivated by many factors, including
Chordiant's desire to acquire skilled personnel, Chordiant's desire to obtain
new technologies and Chordiant's desire to expand and enhance Chordiant's
product offerings. Growth through acquisitions has several identifiable risks
including difficulties associated with successfully integrating the previously
distinct businesses into Chordiant's organization, the substantial management
time devoted to integrating the companies, the possibility that Chordiant might
not be successful in retaining the employees of the acquired companies,
undisclosed liabilities, the failure to realize anticipated benefits (such as
cost savings and synergies) and issues related to integrating acquired
technology or content into Chordiant's products and media properties (such as
unanticipated expenses). Realization of any of these risks in connection with
any mergers or acquisitions Chordiant has entered into, or may enter into,
could have a material adverse effect on Chordiant's business, operating results
and financial condition.
Competition in Chordiant's markets is intense and could reduce Chordiant's
sales and prevent Chordiant from achieving profitability.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any one of which could reduce Chordiant's
future revenues. The market for Chordiant's products is intensely competitive,
evolving and subject to rapid technological change. The intensity of
competition is expected to increase in the future. Chordiant's current
competitors include:
. Internal information technology departments: In-house information
technology departments of potential customers have developed or may
develop systems that provide some or all of the functionality of
21
Chordiant's products. Chordiant expects that internally developed
application integration and process automation efforts will continue to be
a significant source of competition.
. Point application vendors: Chordiant competes with providers of stand-
alone point solutions for Web-based customer relationship management and
traditional client/server-based, call-center service customer and
salesforce automation solution providers.
Many of Chordiant's competitors have greater resources and broader customer
relationships than Chordiant does. In addition, many of these competitors have
extensive knowledge of Chordiant's industry. Current and potential competitors
have established, or may establish, cooperative relationships among themselves
or with third parties to offer a single solution and increase the ability of
their products to address customer needs.
If Chordiant is unable to protect Chordiant's intellectual property, Chordiant
may lose a valuable asset or incur costly litigation to protect Chordiant's
rights.
Chordiant's success and ability to compete depends upon Chordiant's
proprietary technology. Chordiant relies on trademark, trade secret and
copyright laws to protect Chordiant's intellectual property. Chordiant has no
patents or patent applications. Chordiant ships source code to Chordiant's
customers, and third party system integrators and partners are given access to
it. Despite Chordiant's efforts to protect Chordiant's intellectual property, a
third party could copy or obtain the source code to Chordiant's software or
other proprietary information without authorization and/or could develop
software competitive to the company's. Chordiant's means of protecting
Chordiant's proprietary rights may not be adequate and Chordiant's competitors
may independently develop similar technology or duplicate Chordiant's products.
Chordiant may have to litigate to enforce Chordiant's intellectual property
rights, to protect Chordiant's trade secrets or know-how or to determine their
scope, validity or enforceability. Enforcing or defending Chordiant's
proprietary technology is expensive, could cause the diversion of Chordiant's
resources and may not prove successful. Chordiant's protective measures may
prove inadequate to protect Chordiant's proprietary rights. If Chordiant is
unable to protect Chordiant's intellectual property, Chordiant may lose a
valuable asset or incur costly litigation to protect Chordiant's rights.
If Chordiant becomes subject to intellectual property infringement claims,
these claims could be costly and time-consuming to defend, divert management's
attention and cause product delays, and have an adverse effect on Chordiant's
revenues and net income.
Chordiant expects that software product developers and providers of software
in markets similar to Chordiant's target markets will increasingly be subject
to infringement claims as the number of products and competitors in Chordiant's
industry grows and the functionality of products overlaps. Any claims, with or
without merit, could be costly and time-consuming to defend, divert Chordiant's
management's attention, or cause product delays. Chordiant has no patents or
patent applications that Chordiant could use defensively against any company
bringing such a claim. If any of Chordiant's products were found to infringe a
third party's proprietary rights, Chordiant could be required to enter into
royalty or licensing agreements to be able to sell Chordiant's products.
Royalty and licensing agreements, if required, may not be available on terms
acceptable to Chordiant or at all.
Chordiant's stock price is subject to significant fluctuations.
Since Chordiant's initial public offering in February 2000, the price of
Chordiant's common stock has fluctuated widely. Chordiant believes that factors
such as the risks described herein or other factors could cause the price of
its common stock to fluctuate, perhaps substantially. In addition, recently,
the stock market, in general, and the market for high technology stocks in
particular, has experienced extreme price fluctuations, which have often been
unrelated to the operating performance of the affected companies. Such
fluctuations could adversely affect the market price of Chordiant's common
stock.
22
ITEM 2. FACILITIES
Chordiant's headquarters are located in offices that are approximately
31,000 square feet in Cupertino, California pursuant to an office lease
expiring in July 2004. Chordiant also leases office space in New York, New
York, Mahwah, New Jersey; Irving, Texas; Chicago, Illinois; Manchester, New
Hampshire; London, England; Neu-Isenberg, Germany; Munich, Germany and
Amsterdam, the Netherlands.
ITEM 3. LEGAL PROCEEDINGS
Chordiant is not a party to any material legal proceedings. Chordiant may be
subject to various claims and legal actions arising in the ordinary course of
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of Chordiant during
the fourth quarter of the fiscal year ended December 31, 2000.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the Nasdaq National Market under the symbol
"CHRD." Public trading of our common stock commenced on February 14, 2000. The
following table shows, for the periods indicated, the high and low per share
prices of our common stock, as reported by the Nasdaq National Market.
Quarter Ended Low High
------------- ------ ------
First Quarter.................................................. $16.25 $39.44
Second Quarter................................................. $ 5.44 $16.63
Third Quarter.................................................. $ 7.38 $17.98
Fourth Quarter................................................. $ 1.88 $ 8.00
As of February 15, 2001, there were approximately 205 stockholders of record
of our common stock. We have never paid or declared any cash dividends. We
currently expect to retain earnings for use in the operation and expansion of
our business and therefore do not anticipate paying any cash dividends.
Recent Sales of Unregistered Securities
We have sold and issued the following unregistered securities during the
period covered by this Annual Report:
(1) In July, 2000, Chordiant issued an aggregate of 476,515 shares of
common stock in exchange for all outstanding shares of White Spider
Software, Inc. and assumed employee stock options granted by White Spider
and exercisable into shares of Chordiant common stock over a term of ten
years from the date of grant of such options, the latest possible date of
exercise being June 23, 2010. Each share of White Spider was exchanged for
approximately .074ths of a share of Chordiant common stock. As of the
closing date of the acquisition, White Spider Software is a wholly owned
subsidiary of Chordiant.
(2) From January 1, 2000 through April 11, 2000, Chordiant issued,
pursuant to the exercise of stock options granted to certain employees,
consultants and directors under our 1999 Equity Incentive Plan, 1,977,823
shares of common stock. All common stock issuable pursuant to then
outstanding options and common stock available for grant under the 1999
Equity Incentive Plan was registered pursuant to a Form S-8 Registration
Statement filed on April 11, 2000.
The sales and issuances of securities described in paragraph (1) above were
deemed to be exempt from registration under the Securities Act by virtue of
Rule 506 of Regulation D of the Securities Act of 1933. Appropriate legends are
affixed to the stock certificates issued in the aforementioned transactions.
The sales and issuances of securities described in paragraph (2) were deemed
to be exempt from registration under the Securities Act by virtue of Rule 701
of the Securities Act of 1933 in that they were offered and sold either
pursuant to a written compensatory benefit plan or pursuant to a written
contract relating to compensation, as provided by Rule 701.
Use of Proceeds from Sales of Registered Securities
We commenced our initial public offering on February 14, 2000 pursuant to a
Registration Statement on Form S-1 (File No. 333-92187) (the "Registration
Statement"), which was declared effective on February 14, 2000. The offering
terminated following the sale of all securities registered. The managing
underwriters of the public offering were Robertson Stephens, Dain Rauscher
Wessels and Thomas Weisel Partners LLC (the "Underwriters"). Pursuant to the
Registration Statement, the Company sold 4,500,000 shares of common stock
24
at $18.00 per share resulting in gross proceeds of $81.0 million, $5.7 million
of which was applied toward the underwriting discount and commissions. Other
expenses related to the offering are estimated to have been $2.0 million and
have been paid or are payable to unaffiliated parties. On February 25, 2000,
the Underwriters exercised their over-allotment options and purchased 675,000
additional shares of common stock at the issuance price of $18.00 per share, of
which 425,000 shares were sold by the Company and 250,000 were sold by two of
our stockholders. In conjunction with its sale of the 425,000 shares, the
Company received $7,114,500, net of commissions and costs. The total net
proceeds to the Company from the initial public offering were approximately
$80.4 million. The Company used a portion of the net proceeds to make a payment
of $1,490,155 representing principal and accrued interest to the holder of our
accounts receivable line of credit. We currently expect to use the remaining
net proceeds primarily for working capital and general corporate purposes,
including increased research and development expenditures, increased sales and
marketing expenditures, and capital expenditures made in the ordinary course of
business. In addition, we may use a portion of the net proceeds to fund
acquisitions or investments in complementary businesses, technologies or
products. Pending such uses, we will invest the net proceeds in short-term,
investment grade, and interest bearing securities.
25
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected financial data in conjunction with
the consolidated financial statements and related notes of Chordiant and
"Chordiant Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Annual Report. The
consolidated statement of operations data for the years ended December 31,
1998, 1999 and 2000 and the consolidated balance sheet data as of December 31,
1999 and 2000 are derived from the audited consolidated financial statements
included in this Annual Report. The consolidated statement of operations data
for the years ended December 31, 1996 and 1997 and the balance sheet data as of
December 31, 1996, 1997 and 1998 are derived from audited consolidated
financial statements not included in this Annual Report. The diluted net loss
per share computation excludes potential shares of common stock (preferred
stock, options and warrants to purchase common stock and common stock subject
to repurchase rights that Chordiant holds), since their effect would be
antidilutive. See the notes to Chordiant's consolidated financial statements
for a detailed explanation of the determination of the shares used to compute
basic and diluted net loss per share. Chordiant's historical results are not
necessarily indicative of results to be expected for future periods.
Year-Ended December 31,
-----------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Net revenues:
License...................... $ -- $ 1,142 $ 4,360 $ 8,007 $ 16,896
Service...................... 2,312 1,766 8,105 9,581 16,793
------- -------- -------- -------- --------
Total net revenues........... 2,312 2,908 12,465 17,588 33,689
------- -------- -------- -------- --------
Cost of net revenues:
License...................... -- 73 425 397 912
Service...................... 2,353 1,462 8,947 14,352 17,510
Non-cash compensation
expense..................... -- 129 127 692 2,040
------- -------- -------- -------- --------
Total cost of net revenues... 2,353 1,664 9,449 15,441 20,462
------- -------- -------- -------- --------
Gross profit (loss)........... (41) 1,244 2,966 2,147 13,227
------- -------- -------- -------- --------
Operating expenses:
Sales and marketing:
Non-cash compensation
expense..................... -- 125 122 739 1,488
Other sales and marketing.... 1,140 5,142 12,580 13,368 22,422
Research and development:
Non-cash compensation
expense..................... -- 158 155 846 2,039
Other research and
development................. 4,598 6,240 5,858 6,494 14,437
Purchased in-process research
and development............. -- -- -- -- 4,234
General and administrative:
Non-cash compensation
expense..................... 3 86 85 383 689
Other general and
administrative.............. 1,860 1,416 2,046 2,668 5,493
Amortization of intangible
assets...................... -- -- -- -- 802
------- -------- -------- -------- --------
Total operating expenses..... 7,601 13,167 20,846 24,498 51,604
------- -------- -------- -------- --------
Loss form operations.......... (7,642) (11,923) (17,880) (22,351) (38,377)
Interest expense.............. (55) (112) (121) (1,067) (269)
Interest income and other
income, net.................. 135 442 561 281 3,290
------- -------- -------- -------- --------
Net loss...................... $(7,562) $(11,593) $(17,440) $(23,137) $(35,356)
======= ======== ======== ======== ========
Net loss per share:
Basic and diluted............ $ (1.51) $ (2.31) $ (3.44) $ (4.34) $ (1.05)
======= ======== ======== ======== ========
Weighted average shares used
in computing basic and
diluted net loss per share.. 5,002 5,009 5,075 5,327 33,690
======= ======== ======== ======== ========
As of December 31,
-----------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
(in thousands, except per share data)
Consolidated Balance Sheet
Data:
Cash and cash equivialents.... $ 2,678 $ 18,916 $ 1,713 $ 6,719 $ 41,465
Working capital (deficit)..... (1,368) 7,767 (10,162) 1,833 60,529
Total assets.................. 7,282 21,360 11,521 22,086 107,448
Short-term and long-term
borrowings................... 1,045 1,268 1,687 13,225 595
Short-term and long-term
deferred revenue............. 4,179 10,487 5,719 10,196 30,045
Mandatorily redeemable
convertible preferred stock.. 9,047 28,949 28,949 51,609 --
Stockholders' equity
(deficit).................... (9,586) (20,682) (37,604) (57,782) 63,320
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Chordiant provides software that is designed for global consumer businesses
serving the needs of one-to-one relationships in industries such as banking,
financial services, insurance, telecommunications, travel and leisure, and
other markets with diverse sets of customers and products. Chordiant's products
are a suite of applications that enables companies to quickly access the right
information and apply a common set of business rules across multiple contact
channels to maximize customer retention and satisfaction. It applies
personalized business processes to business transactions in a consistent
manner, no matter where the interaction occurs. It allows companies to
implement a solution across a wide range of devices such as Internet Websites,
in-car concierge systems, wireless application protocol enabled devices that
support mobile Internet phones and personal digital appliance devices,
traditional call centers and retail sites.
Chordiant was incorporated in California in March 1991 and was
reincorporated in Delaware in October 1997. Before 1997, Chordiant was
primarily engaged in custom consulting services. Chordiant released the first
version of its product suite in September 1997. With the release of this
product suite, Chordiant accelerated the development of its sales and marketing
organizations.
Chordiant derives revenues primarily from licenses of its software and from
related services, which include implementation, consulting, customization and
integration, post-contract customer support and training. Its products are
typically licensed directly to customers for a perpetual term, with pricing
based on the number of servers and the number of users.
On contracts involving significant implementation or customization essential
to the functionality of its products, Chordiant recognizes license and service
revenues under the percentage-of-completion method of accounting using labor
hours worked as the measure of progress towards completion. Chordiant
classifies revenues from these arrangements as license and service revenues
based upon the estimated fair value of each element. Provisions for estimated
contract losses are recognized in the period in which the loss becomes probable
and can be reasonably estimated. When Chordiant sells existing customers
additional seats, revenue for the license of the additional seats is recognized
at either the go-live date or the delivery date, whichever is later.
On contracts not involving significant implementation or customization
essential to the functionality of its products, Chordiant recognizes license
revenues when there is persuasive evidence of an arrangement, the fee is fixed
and determinable, there is probability of collection and delivery has occurred.
For arrangements with multiple elements, Chordiant recognizes revenues for the
delivered elements based upon the residual contract value as prescribed by
Statement of Position No. 98-9, "Modification of SOP No. 97-2 with Respect to
Certain Transactions."
In situations in which Chordiant is not responsible for implementation
services but is obligated to provide unspecified additional software products
in the future, Chordiant recognizes revenue as a subscription ratably over the
term of the commitment period.
Chordiant recognizes service revenues from consulting and training services
as these services are performed. It recognizes service revenues from post-
contract customer support ratably over the contractual support term, generally
one year.
In the future, Chordiant expects to derive revenues from contracts that
provide for implementation services at a fixed hourly rate. On other contracts,
Chordiant expects to derive revenues from the licensing of the installed
product on a per transaction basis. In connection with these types of
arrangements, Chordiant will recognize the fair value of the implementation
services as the services are delivered and will recognize license fees on a
monthly basis at the contractual rate.
27
Chordiant bills customers according to contract terms. Chordiant records as
deferred revenues amounts billed to customers in excess of revenues recognized.
Service revenues as a percentage of total revenues were 65%, 54% and 50% for
the fiscal years ended December 31, 1998, 1999, and 2000, respectively. To help
ensure the success of early product deployments by customers, in early 1998
Chordiant began establishing a significant service organization. The
organization assists customers, and third parties, such as system integrators,
in the design and implementation of Chordiant's products. Since service
revenues have a lower gross margin than license revenues, this service activity
resulted in reduced overall gross margins. Since the fourth quarter of 1998,
Chordiant engaged third parties to provide services to customers, who then
billed Chordiant for their services. As a result of using third party
resources, revenues from these contracts generated small gross margins. As a
result of expansion of its service organization and use of system integrators
that bill its customers directly for services, Chordiant believes that its use
of third party service providers will decline substantially in future periods.
Chordiant expects that service revenue will continue to represent over 40% of
total revenues.
Chordiant sells its products through its direct sales force, and augments
its sales efforts through relationships with system integrators, application
service providers and technology vendors.
For the fiscal years ended December 31, 1998, 1999 and 2000, revenues were
derived from customer accounts in the United States, United Kingdom, South
Africa, Germany, Canada and the Netherlands. For the fiscal years ended
December 31, 1998, 1999 and 2000, international revenues were $9.7 million,
$6.6 million and $25.8 million or approximately 78%, 38%, and 77% of
Chordiant's total net revenues, respectively. Chordiant believes international
revenues will continue to represent a significant portion of its total revenues
in future periods.
A small number of customers account for a significant portion of Chordiant's
total net revenues. As a result, the loss or delay of individual orders or
delays in the product implementations for a customer can have a material impact
on its revenues. For the year ended December 31, 2000, revenues from EDS,
Lloyds TSB and Direct Line Group Services Limited accounted for approximately
30%, 19% and 14% of its total net revenues, respectively. For the year ended
December 31, 1999, revenues from Chase Manhattan Mortgage Corporation, First
USA and EDS accounted for 30%, 19% and 15% of its total net revenues,
respectively. Chordiant expects that revenues from a small number of customers
will continue to account for a majority of its total net revenues in the future
as historical implementations are completed and replaced with new projects from
new and existing customers.
Since its inception, Chordiant has incurred substantial research and
development costs and has invested heavily in the expansion of its product
development, sales, marketing and professional services organizations in order
to build an infrastructure to support its long-term growth strategy. The number
of Chordiant's fulltime employees increased from 118 at December 31, 1998, to
144 at December 31, 1999, to 250 at December 31, 2000, representing increases
of approximately 22% and 74%, respectively. Chordiant anticipates that its
operating expenses will continue to increase as it expands its product
development, sales and marketing and professional services organization.
Chordiant expects to incur net losses in the future.
Chordiant believes that period-to-period comparisons of its operating
results are not meaningful and should not be relied upon as indicative of
future performance. Chordiant's prospects must be considered given the risks,
expenses and difficulties frequently encountered by companies in early stages
of development, particularly companies in new and rapidly evolving businesses.
There can be no assurance Chordiant will be successful in addressing these
risks and difficulties. In addition, although Chordiant has experienced revenue
growth recently, this trend may not continue. In addition, Chordiant may not
achieve or maintain profitability in the future.
28
Results of Operations
The following table provides the percentage of Chordiant's total net
revenues represented by each for the fiscal years ended December 31, 1998, 1999
and 2000. This information has been derived from the consolidated financial
statements included elsewhere in this Annual Report. The following table sets
forth, as a percentage of total net revenues, consolidated statements of
operations data for the periods indicated:
Year ended December 31,
---------------------------
1998 1999 2000
------- ------- -------
As a Percentage of Total Net Revenues:
Net revenues License-third parties............. 35 % 34 % 32 %
License-related parties........................ 0 12 18
Service-third parties.......................... 64 51 12
Service-related parties........................ 1 3 38
------- ------- -------
Total net revenues........................... 100 100 100
------- ------- -------
Cost of net revenues:
License-third parties.......................... 3 1 3
License-related parties........................ 0 1 0
Service-third parties.......................... 71 80 47
Service-related parties........................ 1 2 5
Non-cash compensation expense.................. 1 4 6
------- ------- -------
Total costs of net revenues.................. 76 88 61
------- ------- -------
Gross profit..................................... 24 12 39
------- ------- -------
Operating expenses:
Sales and marketing;
Non-cash compensation expense.................. 1 4 4
Other sales and marketing........................ 101 76 67
Research and development:
Non-cash compensation expense.................. 1 5 6
Other research and development................. 47 37 43
Purchased in-process research and development.. 0 0 13
General and administrative Non-cash compensation
expense........................................ 1 2 2
Other general and administrative............... 16 15 16
Amortization of intangibles.................... 0 0 2
------- ------- -------
Total operating expenses..................... 167 139 153
------- ------- -------
Loss from operations............................. (143) (127) (114)
Interest expense................................. (1) (6) (1)
Interest income and other income, net............ 4 1 10
------- ------- -------
Net loss......................................... (140)% (132)% (105)%
======= ======= =======
Comparison of Fiscal Years Ended December 31, 1999 and 2000
Net Revenues
License. License revenues consist of licenses of Chordiant's e-business
infrastructure software. License revenues increased from $8.0 million for the
year ended December 31, 1999 to $16.9 million, or approximately 111%, for the
year ended December 31, 2000. The revenue increase was primarily due to the
growth in the number of product implementations by new and existing customers
and higher average transaction size. Chordiant's average transaction size has
increased due to an increased number of users per deployment.
29
Service. Service revenues consist of consulting assistance and
implementation, customization and integration and post-contract customer
support and training. Service revenues increased from $9.6 million for the year
ended December 31,1999 to $16.8 million, or approximately 75%, for the year
ended December 31, 2000. The revenue increase was primarily due to a
continuation in large customer implementations as well as maintenance, support
and consulting revenues associated with license agreements signed in earlier
periods.
Cost of Net Revenues
License. Cost of net license revenues consists primarily of royalty payments
to third parties, primarily Forte Software, for technology incorporated into
Chordiant's products. Chordiant expects the relationship with Forte Software to
continue for at least the next twelve months. Cost of net license revenues
increased from $397,000 for the year ended December 31, 1999 to $912,000, or
approximately 130%, for the year ended December 31, 2000. The cost of net
license revenues increase was primarily due to the growth in the number of
product implementations by new and existing customers and higher average
transaction size.
Service. Cost of service revenues consist primarily of salaries, facility
costs and payments to third-party consultants incurred in providing customer
support, training and implementation services. Cost of net service revenues,
before the effect of non-cash compensation expense, increased from $14.4
million for the year ended December 31, 1999 to $17.5 million, or approximately
22%, for the year ended December 31, 2000. The increase in absolute dollars was
primarily due to increased staff to support a higher number of product-related
engagements. Chordiant expects that the cost of net service revenues will
continue to increase in dollar amounts as it continues to expand its
professional services organization to meet anticipated customer demand.
Operating Expenses
Sales and marketing. Sales and marketing expenses consist of salaries,
commissions, field office expenses, travel and entertainment, promotional
expenses and allocated facility costs. Sales and marketing expenses, before the
effect of non-cash compensation expense, increased from $13.4 million for the
year ended December 31, 1999 to $22.4 million, or approximately 67%, for the
year ended December 31, 2000. The increase in these expenses were mainly
attributable to increases of $6.3 million in personnel expenses, $700,000 in
allocated depreciation and overhead costs and $2.0 million in marketing and
advertising costs. Chordiant expects that sales and marketing expenses will
continue to increase in dollar amounts as it continues to expand its sales and
marketing efforts through the establishment of additional domestic and
international sales offices and increased promotional activities.
Research and development. Research and development expenses include costs
associated with the development and enhancement of Chordiant's products,
quality assurance activities and allocated facility costs. These costs consist
primarily of employee salaries, benefits and the cost of consulting resources
that supplement its internal development team. Due to the relatively short time
between the date Chordiant's products achieve technological feasibility and the
date its products become generally available to customers, costs subject to
capitalization under SFAS No. 86 have been immaterial and have been expensed as
incurred. Research and development expenses before the effect of non-cash
compensation expense and purchased in-process research development increased
from $6.5 million for the year ended December 31, 1999 to $14.4 million, or
approximately 122%, for the year ended December 31, 2000. The increase was
mainly due to an increase of $6.6 million in personnel related expenses and
$1.3 million in allocated depreciation and overhead costs. Chordiant
anticipates that it will continue to devote substantial resources to research
and development and that these expenses will continue to increase in dollar
amounts.
Purchased in-process research and development. In-process research and
development expense represents technology acquired which, on the date of
acquisition, had not achieved technological feasibility and had no alternative
future use based on the state of development. The product under development may
not achieve commercial viability. Accordingly, the amount of acquired in-
process research and development of $4.2 million was immediately expensed, of
which $700,000 was attributable to the
30
acquisition of White Spider. The nature of the efforts required to develop the
purchased in-process research and development into a commercially viable
product principally relate to the completion of all planning, designing,
prototyping, verification and testing activities that are necessary to
establish that the product can be produced to meet its designed specifications,
including functions, features and technical performance requirements.
In 1998, Chordiant entered into a license for its products and related
service agreements with Chase Manhattan Mortgage Corporation (Chase). In 2000,
Chase alleged a breach of the agreements between the parties. At December 31,
1999, Chordiant's outstanding receivable balance from Chase was $1.7 million.
On March 1, 2000, Chordiant agreed with Chase to terminate the existing
agreements between them, and Chase agreed to pay Chordiant the $1.7 million
receivable balance under the agreements as of December 31, 1999. The parties
also entered into a separate agreement whereby Chase transferred to Chordiant
ownership of certain technology and intellectual property developed by the
parties under their prior agreements. Chordiant intends to use this technology
to add additional functionality to its core products as well as develop and
market a credit and collections application for the financial services
industry. Chordiant agreed to pay Chase $3.5 million for the intellectual
property rights to the technology. Chase retains an option to purchase a
license to the credit and collections application when it is made commercially
available by Chordiant. Chase has also agreed to assist Chordiant by providing
certain consulting services in designing the application. This acquired
technology was still in development on March 1, 2000 so the entire $3.5 million
paid by Chordiant to Chase was expensed by Chordiant as in-process research and
development. Development work on the acquired technology was completed during
the fourth quarter in 2000. Revenues in connection with the developed
technology also began during the fourth quarter of 2000.
The value of the purchase in-process research and development was determined
by estimating the projected net cash flows related to the product, determined
based upon Chordiant's estimates of costs to complete the development of the
technology and the future revenue to be earned upon commercialization of the
products. The estimated stage of completion (expressed as a percentage of
completion) for each project was calculated and then was applied to the net
cash flows for the product. The cash flows were then discounted back to their
net present value.
General and administrative. General and administrative expenses consist of
salaries for administrative, executive and finance personnel, recruiting costs,
information systems costs, professional service fees and allocated facility
costs. These expenses, before the effect of non-cash compensation expense,
increased from $2.7 million for the year ended December 31, 1999 to $5.5
million, or 104%, for the year ended December 31, 2000. The increase in these
expenses was mainly attributable to increases of $1.8 million in personnel
related expenses and $1.0 million in professional service fees due to an
increase in outside contractor expenses associated with increased recruiting
efforts and expanded human resources programs. Chordiant believes that its
general and administrative expenses will continue to increase in dollar amounts
as a result of its growing operations.
Non-cash compensation expense. Amortization of stock-based compensation is
allocated as non-cash compensation expense to the respective amounts in cost of
net revenues, sales and marketing, research and development and general and
administrative expense and includes the amortization of unearned employee
stock-based compensation and expenses for stock granted to consultants in
exchange for services. Employee stock-based compensation expense is amortized
over a four year vesting schedule using the multiple option approach. In
connection with the grant of some employee stock options, Chordiant recorded
aggregate unearned stock-based compensation expenses of $11.3 million for the
year ended December 31, 1999 and $4.1 million for the year ended December 31,
2000. The amount recorded in fiscal year 2000 included $2.0 million associated
with the acquisition of White Spider. Stock-based compensation included in
operating expenses totaled $2.7 million for the year ended December 31, 1999
and $6.3 million for the year ended December 31, 2000.
Amortization of intangibles. Amortization of intangibles for the year ended
December 31, 2000 was $802,000. Chordiant recorded intangibles in the amount of
$5.4 million ,of which $5.2 million was attributed to goodwill, during the year
ended December 31, 2000 due to the July 2000 purchase of White Spider.
Intangible assets for the White Spider acquisition are being amortized over a
period of three years.
31
Interest and other Income, net, and Interest Expense
Interest and other income, net, and interest expense consists primarily of
interest income generated from Chordiant's cash, cash equivalents and short-
term investments, interest expense incurred in connection with outstanding
borrowings, foreign currency gains and losses and other non-operating income
and expenses. Interest expense decreased from $1.1 million for the year ended
December 31, 1999 to $269,000 for the year ended December 31, 2000. The
decrease is due primarily to decreased borrowings. Interest and other income,
net increased from $281,000 for the year ended December 31, 1999 to $3.3
million for the year ended December 31, 2000. The increase is primarily
attributable to increased interest income earned on Chordiant's cash, cash
equivalents and short-term investments, which grew significantly following the
completion of it