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Proc-Type: 2001,MIC-CLEAR
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UNITED STATES FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March
31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________to _________
Commission File Number 000-29357 Chordiant Software,
Inc. (Exact name of Registrant as specified in its Charter)
Delaware 93-105328 (State or Other Jurisdiction of Incorporation or
Organization) (I.R.S. Employer Identification
Number) 20400 Stevens Creek Boulevard, Suite
400 (408) 517-6100 Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO
[ ] The number of shares of the Registrant's common stock outstanding as of May
5, 2003 was 63,644,598. CHORDIANT SOFTWARE, INC. PART I -- FINANCIAL INFORMATION
CHORDIANT SOFTWARE,
INC. 7,129 ) The accompanying notes are an integral part of
these condensed consolidated financial statements. 3 CHORDIANT SOFTWARE,
INC. Three Months Ended March 31, 2003 March 31, 2002 Revenues: License $ $ Service Total revenues Cost of revenues: License Service Non-cash compensation expense Total cost of revenues 6,651 10,217 Gross profit 7,164 12,591 Operating expenses: Sales and marketing: Non-cash compensation expense Other sales and marketing Research and development: Non-cash compensation expense Other research and development General and administrative: Non-cash compensation expense Other general and administrative Amortization of intangible assets Total operating expenses 13,911 21,041 Loss from operations (6,747 Interest expense Other income (expense), net Net loss $ (6,946 $ (8,209 Net loss per share: Basic and diluted $ (0.12 $ (0.15 Weighted average shares used in computing net
loss per share - basic and diluted 57,210 53,700 The accompanying notes are an integral part of
these condensed consolidated financial statements. 4 CHORDIANT SOFTWARE, INC. The accompanying notes are an integral part of
these condensed consolidated financial statements. 5 CHORDIANT SOFTWARE, INC. NOTE 1-- The accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting of only normal and recurring
items, which in the opinion of management, are necessary to present fairly the
financial position, results of operations and cash flows for the interim periods
presented. The results of operations for interim periods are not necessarily
indicative of the results expected for the full fiscal year or for any future
period. These financial statements should be read in conjunction with the
consolidated financial statements and related notes included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2002. We believe that the effects of our strategic actions implemented to improve
revenue as well as control costs will be adequate to generate sufficient cash
resources to fund our operations. Failure to generate sufficient revenues
or control spending could adversely affect our ability to achieve our business
objectives. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Reclassifications Certain reclassifications have been made to prior year
balances to conform to current year presentation. Principles of consolidation The accompanying condensed consolidated financial statements include our accounts and
the accounts of our wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Use of estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Such estimates include the allowance for
doubtful accounts, valuation of deferred tax assets, restructuring costs and the estimates associated
with the percentage-of-completion method of accounting for certain of our
revenue contracts. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions. Revenue recognition We derive revenues from licenses of our software and related services, which
include assistance in implementation, customization and integration,
post-contract customer support, training and consulting. The amount
and timing of our revenue is difficult to predict and any shortfall in revenue
or delay in recognizing revenue could cause our operating results to vary
significantly from quarter to quarter and could result in operating losses.
At the time of entering into a transaction, we assess whether any services
included within the arrangement require us to perform significant implementation
or customization essential to the functionality of our product so that the
software performs as the customer requests. For contracts involving significant
implementation or customization essential to the functionality of our product, we recognize the license and
professional consulting services revenues using the percentage-of-completion method using labor hours
incurred as the measure of progress towards completion as prescribed by
Statement of Position ("SOP") No. 81-1, "Accounting for Performance of
Construction-Type and Certain Product-Type Contracts." The progress toward
completion is measured based on the "go-live date." We define the "go-live date"
as the date on which the essential functionality has been delivered or on which
the application enters into a production environment or the point at which no
additional Chordiant supplied professional services resources are required. Estimates are subject to revisions as the contract
progresses to completion. We account for the change in estimate in the period
the change has been identified. Provisions for estimated contract losses are
recognized in the period in which the loss becomes probable and can be
reasonably estimated. When we sell additional licenses related to the original
licensing agreement, revenue is recognized either upon delivery if the project
has reached the go-live date, or if the project has not reached the go-live
date, revenue is recognized under the percentage-of-completion method. We
classify revenues from these arrangements as license and service revenues based
upon the estimated fair value of each element. On contracts not involving significant implementation or customization
essential to the functionality of our product, we recognize license revenue
when there is persuasive evidence of an arrangement, the fee is fixed or
determinable, collection of the fee is probable and delivery has occurred as
prescribed by SOP No. 97-2, "Software Revenue Recognition.". We assess collection based on a number of factors, including past transaction
history with the customer and the credit-worthiness of the customer. We do not
request collateral from our customers. If we determine that collection of a fee
is not probable, we defer the fee and recognize revenue at the time collection
becomes probable, which is generally upon receipt of cash. For arrangements with
multiple elements, we recognize revenue for services and post-contract customer
support based upon vendor specific objective evidence ("VSOE") of fair value of
the respective elements. VSOE of fair value for the services element is based
upon the standard hourly rates we charge for services when such services are
sold separately. VSOE of fair value for annual post-contract customer support is
established with the optional stated future renewal rates included in the
contracts. When contracts contain multiple elements, and VSOE of fair value
exists for all undelivered elements, we account for the delivered elements,
principally the license portion, based upon the "residual method" as prescribed
by SOP No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain
Transactions." In situations in which we are not responsible for implementation services but
are obligated to provide unspecified additional software products in the future,
we recognize revenue as a subscription ratably over the term of the commitment
period. For all sales we use either a binding purchase order or signed license
agreement as evidence of an arrangement. Sales through our third party systems
integrators are evidenced by a master agreement governing the relationship
together with binding purchase orders on a transaction-by-transaction basis.
Revenues from reseller arrangements are recognized on the "sell-through" method,
when the reseller reports to us the sale of our software products to end-users.
Our agreements with customers and resellers do not contain product return
rights. We recognize revenue for post-contract customer support ratably over the
support period, generally one year. Our training and consulting services
revenues are
recognized as such services are performed. 6 Restricted cash At March 31, 2003 and December 31, 2002, we had a balance of $1.5 million in the form
of short-term investments, which were restricted from withdrawal. The
balance is classified in long-term other assets and serves as a security deposit
in a post-contract customer support revenue transaction. At March 31, 2003 and December 31, 2002, we also had a interest bearing letter-of-credit for $0.4
million securing a leased facility classified in short-term investments.
Stock-based
Compensation
We have adopted the
disclosure requirements of SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" during the quarter ended March 31,
2003. SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based compensation
and also amends the disclosure requirements of SFAS 123 to require prominent
disclosures in both annual and interim financial statements about the methods of
accounting for stock-based employee compensation and the effect of the method
used on reported results. As permitted by SFAS 148 and SFAS 123, we continue to
apply the accounting provisions of
Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." We generally grant
stock options at exercise prices equal to the fair market value of the
underlying stock on the date of grant and, therefore, under APB Opinion No. 25,
no compensation expense is recognized in the statements of income. Had we have
recorded compensation expense based on the estimated grant date fair value, as
defined by SFAS No. 123, for awards granted under its stock option plans and
stock purchase plan, our net income and earnings per share would have been
reduced to the pro forma amounts below (in thousands, except per share amounts): (in thousands, except per share data) ) ) ) )
7
Concentrations of credit risk
Financial instruments that potentially subject us to concentrations of credit
risk consist of cash, cash equivalents, short-term investments and accounts
receivable. To date, we have invested excess funds in money market accounts,
commercial paper, municipal bonds and term notes. We deposit cash, cash
equivalents and short-term investments with financial institutions that we
believe are credit worthy. Our accounts receivable are derived from revenues
earned from customers principally located in the Americas and Europe. We perform
ongoing credit evaluations of our customers' financial condition and, generally,
we do not require collateral from our customers. We maintain reserves for
potential credit losses on customer accounts when deemed necessary.
The following table summarizes the revenues from customers in excess of 10%
of total revenues: At March 31, 2003, Barclays accounted for approximately 31% of accounts
receivable. At December 31, 2002, Barclays accounted for approximately 38%
of accounts receivable. NOTE 3 - RECENT ACCOUNTING PRONOUNCEMENTS:
Effective January 1, 2003, we
adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations," in August 2001 and also SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS No. 143 requires that the fair value of
an asset retirement obligation be recorded as a liability in the period in which
it incurs the obligation. SFAS No. 145 requires that certain gains and losses
from extinguishment of debt no longer be classified as an extraordinary item.
The adoption of these statements did not have a significant impact on our consolidated financial position or
results of operations. Effective January 1, 2002, we adopted SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 requires that long-lived assets to be disposed of by sale, including
discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 also broadens the
reporting requirements of discontinued operations to include all components of
an entity that has operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The adoption of this statement did not have a significant impact on our
consolidated financial position or results of operations. Effective January 1, 2003, we
adopted SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
requires that a liability for costs associated with an exit or disposal activity
be recognized and measured initially at fair value only when the liability is
incurred. The adoption of this statement did not have a significant impact on
our consolidated financial position or results of operations.
On December 31, 2002, the FASB issued SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure."
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro forma effect of using the
fair value method of accounting for stock-based employee compensation be
displayed more prominently and in a tabular format. Additionally, SFAS No. 148 amends APB Opinion
No. 28, "Interim Financial Reporting," and requires disclosure of the pro forma
effect in interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure requirements of SFAS No. 148 are effective for
interim periods beginning after December 15, 2002 and have been implemented in
our financial statements.
In April 2003, the FASB issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities", which amends SFAS No. 133 for certain decisions made by the FASB
Derivatives Implementation Group. In particular, SFAS No. 149 (1) clarifies
under what circumstances a contract with an initial net investment meets the
characteristic of a derivative, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
language used in FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, and (4) amends certain other existing
pronouncements. This Statement is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. In addition, most provisions of SFAS No. 149 are to be applied
prospectively. We do not expect the adoption of SFAS No. 149 to have a material
impact upon our financial position, cash flows or results of operations.
8
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on
the existing disclosure requirements for most guarantees, including residual
value guarantees issued in conjunction with operating lease agreements. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value of the obligation it assumes
under that guarantee and must disclose that information in its interim and
annual financial statements. The initial recognition and measurement provisions
of this interpretation apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 did
not have a significant impact on our consolidated financial position or
statement of operations. In January 2003, the FASB issued
FIN 46, "Consolidation of Variable Interest Entities." FIN 46 requires us to
consolidate a variable interest entity if we are subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. We do not currently
have any variable interest entities and, accordingly, the adoption of FIN 46 did
not have a significant impact on our
consolidated financial position or results of operations. NOTE 4 - BALANCE SHEET COMPONENTS: The main components of accounts receivable, net
are as follows (in thousands): (unaudited) ) ) Unbilled receivables relate to earned service revenues and
licenses delivered that have not yet been billed and maintenance services for
future periods that have been purchased by our customers, but have not yet been
billed. The main components of property and equipment, net,
are as follows (in thousands):
(unaudited)
Computer hardware
(useful lives of 3 years)
Purchased internal-use
software (useful lives of 3 years)
Furniture and
equipment (useful lives of 3 to 7 years)
Leasehold improvements
(shorter of 7 years or the term of the lease) ) )
9 The main components of accrued expenses are as
follows (in thousands):
(unaudited) The components of intangible assets, excluding
goodwill, are as follows (in thousands):
March 31, 2003
(unaudited)
December 31, 2002
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying Amount
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying Amount
Intangible assets:
Developed technologies
$
2,374
$
(1,255
)
$
1,119
$
2,374
$
(1,059
)
$
1,315
Purchased technologies
7,162
(4,646
)
2,516
7,162
(4,050
)
3,112
Customer list
190
(64
)
126
190
(48
)
142
Tradenames
982
(658
)
324
982
(576
)
406
$
10,708
$
(6,623
)
$
4,085
$
10,708
$
(5,733
)
$
4,975 All of our
acquired intangible assets, excluding goodwill, are subject to amortization and
are carried at cost less accumulated amortization. Amortization is computed over
the estimated useful lives which are as follows: Developed technologies-one and
one half to three years; purchased technologies-three years; tradenames-three
years; customer list-three years. Aggregate amortization expense for intangible
assets totaled $0.9 million and $0.8 million for the three months ended March
31, 2003 and 2002, respectively. We expect amortization expense on purchased
intangible assets to be $2.7 million for the remaining nine months in fiscal
2003, $1.3 million in fiscal 2004 and $0.1 million in fiscal 2005, at which time
existing purchased intangible assets will be fully amortized. 10 NOTE 5 - RESTRUCTURING: Restructuring Costs
During 2002, several areas of the company
were restructured to prioritize our initiatives around services, sales, training
and research and development business, reduce expenses and improve efficiency in
order to achieve cash flow and profitability breakeven in the near future. This
restructuring program included a worldwide workforce reduction, consolidation of
excess facilities and restructuring of certain business functions.
Workforce reduction
The restructuring program resulted
in the reduction of 108 regular employees. All areas of the Company were affected by this
restructuring. We recorded a total workforce reduction charge of approximately
$3.8 million for the year ended December 31, 2002 relating to severance and
benefits.
Consolidation of excess facilities
We accrued for lease costs of $2.8 million
during 2002 pertaining to the estimated future obligations for non-cancelable
lease payments for the consolidation of excess facilities relating to lease
terminations and non-cancelable lease costs. This charge included estimated
sub-lease income based on current comparable rates for leases in the respective
markets. If facilities rental rates continue to decrease in these markets or if
it takes longer than expected to sublease these facilities, the maximum amount
the actual loss could exceed the original estimate is approximately $0.7
million. The consolidation of excess facilities represents an annual saving of
approximately $0.2 million.
A summary of the restructuring expense and
other special charges is outlined as follows (in thousands): Amounts related to net lease expenses due to the consolidation of facilities
will be paid over the lease terms through fiscal 2011. As of March 31,
2003, $3.6 million related to the restructuring reserve remains outstanding and
is included in the accrued expenses line item on the balance sheet. The
remaining accrual primarily relates to the termination and/or sublease of our
excess facilities and to severance and other benefits for impacted employees.
During the three months ended March 31, 2003, there was no restructuring charge
or accrual adjustment. 11 NOTE 6 - BORROWINGS: Notes payable Borrowings consist of several notes payable for equipment
leases assumed by Chordiant upon the acquisition of OnDemand, Inc. Interest rates range from 12.86% to 15.61%. The notes are due at various
times from 2003 through 2004. In February 2003, we entered into a note payable agreement for
our Directors' & Officers' ("D&O") insurance policy totaling $1.0 million.
The interest rate is 6% and principal and interest payments on the note payable
will be made on a monthly basis through October 2003. As of March 31,
2003, the outstanding note payable balance related to the D&O insurance policy
was $0.7 million.
Revolving line of
credit
Our line of credit with
Comerica Bank which is comprised of an accounts receivable line and an equipment
line expired on October 15, 2002. We received a 60-day extension and then
another 30-day extension on our line of credit. We have negotiated a new
two-year credit facility effective from March 28, 2003 and have amended our
financial covenants to amounts that we believe will allow for compliance.
Under the new line of
credit, our assets collateralize borrowings under both elements, require us to
maintain a minimum quick ratio of 2.00 to 1.00, a tangible net worth of at least
$15.0 million plus 60% of the proceeds of any equity offerings and subordinated
debt issuance subsequent to the effective date of this line of credit agreement,
and certain other covenants.
Under the new terms and
conditions of the accounts receivable line, the total amount of the line of
credit is $7.5 million. Borrowings under the accounts receivable line of credit
will bear interest at the lending bank's prime rate plus 0.5%. Advances will be
available on a non-formula basis up to $2,000,000 (non-formula portion),
however, if outstanding receivables exceed $2,000,000, then all outstanding
receivables shall be covered by 80% of Eligible Accounts.
Borrowings under the new
$2.5 million equipment line bear interest at the lending bank's prime rate plus
1.0%. As of March 31, 2003, we had borrowed $2.5 million against the
equipment line of credit. At March
31, 2003, we were in compliance with the respective debt covenants.
We have no material
commitments for capital expenditures or strategic commitments and we anticipate
a low rate of capital expenditures. We may use cash to acquire or license
technology, products or businesses related to our current business. In addition,
we anticipate that we will experience low growth in our
operating expenses for the foreseeable future and that our operating expenses
will be a material use of our cash resources. NOTE 7 - LITIGATION: Beginning in July 2001, we and certain of our officers and
directors, as well as the underwriters of our initial public offering ("IPO")
and hundreds of other companies, individuals and IPO underwriters, were named as
defendants in a series of class action shareholder complaints filed in the
United States District Court for the Southern District of New York. Those cases
are now consolidated under the caption, In re Initial Public Offering Securities
Litigation, Case No. 91 MC 92. In the amended complaint against Chordiant, the
plaintiffs allege that Chordiant, certain of our officers and directors and our
IPO underwriters violated section 11 of the Securities Act of 1933 based on
allegations that Chordiant's registration statement and prospectus failed to
disclose material facts regarding the compensation to be received by, and the
stock allocation practices of, the IPO underwriters. The complaint also contains
a claim for violation of section 10(b) of the Securities Exchange Act of 1934
based on allegations that this omission constituted a deceit on investors. The
plaintiffs seek unspecified monetary damages and other relief. In October 2002, the parties agreed to toll the statute of
limitations with respect to Chordiant's officers and directors until September
30, 2003, and on the basis of this agreement, our officers and directors were
dismissed from the lawsuit without prejudice. In February 2003, the court issued
a decision denying the motion to dismiss the Section 11 claims against Chordiant
and almost all of the other company defendants and denying the motion to dismiss
the Section 10(b) claims against Chordiant and many of the company defendants.
Chordiant believes that this lawsuit is without merit and intends to defend
against it vigorously. We are also subject to various other claims and legal actions
arising in the ordinary course of business. The ultimate disposition of these
various other claims and legal actions is not expected to have a material effect
on our business, financial condition or results of operations. 12 NOTE 8 - COMMITMENTS AND CONTINGENCIES: Future payments due under debt and lease obligations as of March 31, 2003 are
as follows (in thousands): We have entered into a two-year agreement, beginning March 19, 2002, with
Merit International, pursuant to which Merit will provide exclusive training and
certain consulting services for a fixed fee. Upon the effective date of the
agreement, we transferred to Merit our training operations including selected
employees. In addition, Merit will provide to our customers resource development
services in exchange for an agreed-upon fee negotiated on a
transaction-by-transaction basis. We believe this agreement will provide us with
high quality training and consulting services. We will pay Merit certain minimum
revenue amounts, as follows: January 1, 2003 to June 30, 2003: (British Pounds)
996,000; July 1, 2003 to December 31, 2003: (British Pounds) 942,000; and
January 1, 2004 to June 30, 2004: (British Pounds) 429,300, for a total of
(British Pounds) 2.4 million. After six months from the effective date, we may,
at our option, terminate the agreement and pay an early termination fee that
reduces from (British Pounds) 555,000 to (British Pounds) 0 over time. Payment
of the early termination fee will release our obligation related to the minimum
revenue target. As of March 31, 2003, the early termination fee was
approximately (British Pounds) 405,000.
Indemnifications As permitted under Delaware law,
we have agreements whereby we indemnify our officers, directors and certain
employees for certain events or occurrences while the employee,
officer or director is, or was serving, at our request in such capacity. The
term of the indemnification period is for the officer's or director's lifetime.
The maximum potential amount of future payments we could be required to make
under these indemnification agreements is unlimited; however, we have a Director
and Officer insurance policy that limits our exposure and may enables us to
recover a portion of any future amounts paid. As a result of our insurance
policy coverage, we believe the estimated fair value of these indemnification
agreements is minimal. We enter into standard
indemnification agreements in our ordinary course of business. Pursuant to these
agreements, we indemnify, defend, hold harmless, and agree to reimburse the indemnified
party for losses suffered or incurred by the indemnified party, generally our
business partners or customers, in connection with patent, or any copyright
or other intellectual property infringement claim by any third party with
respect to our products. The term of these indemnification agreements is
generally perpetual any time after execution of the agreement. The maximum
potential amount of future payments we could be required to make under these
indemnification agreements is unlimited. We have never incurred costs to defend
lawsuits or settle claims related to these indemnification agreements. As a
result, we believe the estimated fair value of these agreements is minimal.
Accordingly, we have no liabilities recorded for these agreements as of March
31, 2003. We enter into arrangements with
our business partners, whereby the business partner agrees to provide services
as a subcontractor for our implementations. We may, at our discretion and in the
ordinary course of business, subcontract the performance of any of our services.
Accordingly, we enter into standard indemnification agreements with our
customers, whereby we indemnify them for other acts, such as personal property
damage, of our subcontractors. The maximum potential amount of future payments
we could be required to make under these indemnification agreements is
unlimited; however, we have general and umbrella insurance policies
that may enable us to recover a portion of any amounts paid. We have not
incurred significant costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, we believe the estimated fair value of
these agreements is minimal. Accordingly, we have no liabilities recorded for
these agreements as of March 31, 2003. When as part of an acquisition we
acquire all of the stock or all of the assets and liabilities of a company,
we may assume the liability for certain events or occurrences that took
place prior to the date of acquisition. The maximum potential amount of future
payments we could be required to make for such obligations is undeterminable at
this time. All of these obligations were grandfathered under the provisions of
FIN 45 as they were in effect prior to March 31, 2003. Accordingly, we
have no liabilities recorded for these liabilities as of March 31,
2003. We warrant that our software
products will perform in all material respects in accordance with our standard
published specifications and documentation in effect at the time of
delivery of the licensed products to the customer for the life of the product.
Additionally, we warrant that our maintenance services will be performed
consistent with generally accepted industry standards through completion of the
agreed upon services. If necessary, we would provide for the estimated cost of
product and service warranties based on specific warranty claims and claim
history, however, we have not incurred significant expense under our product
or services warranties. As a result, we believe the estimated fair value on
these agreements is minimal. Accordingly, we have no liabilities recorded for
these agreements as of March 31, 2003. 13 NOTE 9 - RELATED PARTY TRANSACTIONS: During the quarter ended March 31, 2002, two of our executives exercised
285,000 stock options in exchange for notes receivable (the "Notes") of
$496,000. The Notes were full-recourse secured by the underlying stock. The
Notes were due in February and March of 2003 and accrued interest between 6.0%
and 6.5% per annum, which was deemed market rates for the individuals. Both
notes were paid in full during the quarter ended March 31, 2003. NOTE 10 - NET LOSS PER SHARE: Basic and diluted net loss per share is computed by dividing
the net loss for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net loss per
share includes potential common stock unless their effect is antidilutive.
Potential common stock consist of common shares issuable upon the exercise of
stock options (using the treasury stock method) and common shares subject to
repurchase by us. The following table sets forth the computation of basic and
diluted net loss per share for the three months ended March 31, 2003 and 2002
(in thousands, except per share data): ) ) The following table sets forth the potential common shares
that are excluded from the calculation of diluted net loss per share as their
effect is antidilutive (in thousands):
14
NOTE 11 - COMPREHENSIVE LOSS:
The components of comprehensive loss, net of tax, are as
follows (in thousands): For the three months ended March 31, 2003 and 2002, amortized
costs of available-for-sale investments approximated their fair values due to
their short maturities. As such, unrealized gains or losses on
available-for-sale investments were insignificant for the three months ended
March 31, 2003 and 2002. NOTE 12 - SEGMENT INFORMATION: Based on the information that our chief operating decision
maker reviews for assessing performance and allocating resources, we have
concluded that we have one reportable segment. License revenues for enterprise solutions amounted to $2.1
million and $9.8 million for the three months ended March 31, 2003 and 2002,
respectively. License revenues for application products were approximately
$2.0 million and $1.3 million for the three months ended March 31, 2003 and 2002,
respectively. Service revenues consist of consulting assistance and
implementation, customization and integration and post-contract customer
support, training and certain reimbursable out-of-pocket expenses. Service
revenues for enterprise solutions were approximately $7.2 million and $8.8
million for the three months ended March 31, 2003 and 2002, respectively.
Service revenues for application products were approximately $2.5 million and $2.9 million
for the three months ended March 31, 2003 and 2002, respectively. Foreign revenues are based on the country in which the
customer is located. The following is a summary of total revenues by geographic
area (in thousands):
15 Property and equipment information is based on the physical
location of the assets. The following is a summary of property and equipment,
net by geographic area (in thousands): NOTE 13 - SUBSEQUENT EVENTS: Restructuring On April 7, 2003, we implemented a workforce reduction intended to align our
cost base with our expected operating performance. We expect to recognize a
restructuring charge to operations of approximately $1 million in the second
quarter ending June 30, 2003 as a result. The restructuring charge will be comprised of
severance and associated employee termination costs and asset write-downs. The
costs associated with the reduction of our workforce will be paid during our
second and third quarters of 2003. As part of the restructuring, we have reduced
our workforce by approximately 30 employees or approximately 10% of our total
workforce across all functional areas. As we continue to monitor our
operating expenses and strategize for the future, further expense
reductions may become necessary to improve operating performance, including further
reductions of our workforce in nonperforming regions. Stock option exchange program As part of the stock option exchange program implemented in
2002, we issued 499,068 replacement options at the current market value of $0.88
per share on April 11, 2003 to employees who elected to cancel eligible options
in exchange for new options to be granted six (6) months and one (1) day
following the the cancellation of the eligible options. 16 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS This discussion and analysis should be read in conjunction with
our financial statements and accompanying notes included in this report and the
2002 audited financial statements and notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2002. Operating results are
not necessarily indicative of results that may occur in future periods. The following discussion and analysis contains forward-looking statements.
These statements are based on our current expectations, assumptions, estimates
and projections about our business and our industry, and involve known and
unknown risks, uncertainties and other factors that may cause our or our
industry's results, levels of activity, performance or achievement to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied in or contemplated by the forward-looking
statements. Words such as "believe," "anticipate," "expect," "intend," "plan,"
"will," "may," "should," "estimate," "predict," "guidance," "potential,"
"continue" or the negative of such terms or other similar expressions, identify
forward-looking statements. Our actual results and the timing of events may
differ significantly from those discussed in the forward-looking statements as a
result of various factors, including but not limited to, those discussed under
the caption "Item 5 Other Information - Risk Factors" and those discussed
elsewhere in this report, in our other SEC filings and in our Annual Report on
Form 10-K. Chordiant undertakes no obligation to update any forward-looking
statement to reflect events after the date of this report. Overview Chordiant Software, Inc. ("Chordiant") is an enterprise software vendor that offers a transactional
customer system for global consumer companies that seek to improve the quality
of customer interactions and to reduce costs through increased employee
productivity and process efficiencies. Chordiant concentrates on serving global
customers in retail financial services, communications and consumer direct
industries. We deliver a complete customer system that includes software applications and
tools and services that enable businesses to successfully integrate their
customer information and corporate systems for an accurate, real-time view of
their customers across all forms of customer interaction. We believe our system offers great flexibility to businesses to set business
policies and processes to control the quality of servicing, fulfillment and
marketing to their customers. Our system enables companies to control and change
their business policies and process. We believe that we are leaders in providing
business process driven solutions for customer management. Our software architecture is based on the J2EE (Java 2 Enterprise Edition)
industry standard that is widely supported by vendors and widely adopted by
business customers in the industries we serve. We believe that solutions based
on other architectures are less capable of meeting the current and future
requirements of global consumer companies. We believe that the application of accounting standards are as important as a
company's reported financial position, results of operations and cash flows. We
believe that our accounting policies are prudent and provide a clear view of our
financial performance. We have formed a Disclosure Committee, composed of senior
financial and legal personnel, to help ensure the completeness and accuracy of
our financial results and disclosures. In addition, prior to the release of our
financial results, our key management reviews our annual and quarterly results,
along with key accounting policies and estimates, with our audit committee,
which is composed of independent board members. We do not use off-balance-sheet
arrangements with unconsolidated related parties, nor do we use other forms of
off-balance-sheet arrangements such as research and development arrangements.
We have had several acquisitions over the past two years. As a result of
these acquisitions, comparison of prior period revenues and expenses may not be
meaningful. Service revenues as a percentage of total revenues were 70% and 51% for the
three months ended March 31, 2003 and 2002, respectively. We expect that
service revenues will continue to represent over 40% of our total
revenues. We sell our products through our direct sales force, and we augment our sales
efforts through relationships with systems integrators, application service
providers and technology vendors. For the three months ended March 31, 2003 and 2002, revenues were principally
derived from customer accounts in the Americas and Europe (principally the
United Kingdom). For the three months ended March 31, 2003 and 2002,
international revenues were $11.7 million and $19.9 million, or approximately
85% and 87% of our total revenues, respectively. We believe international
revenues will continue to represent a significant portion of our total revenues
in future periods. A small number of customers account for a significant portion of our total
revenues. As a result, the loss or delay of individual orders or delays in the
product implementations for a customer can have a material impact on our
revenues. We expect that revenues from a small number of customers will continue
to account for a majority of our total revenues in the future as historical
implementations are completed and replaced with new projects from new and
existing customers. Customer concentration has reduced and we expect that trend
to continue. Pricing pressure during the past year has intensified particularly with
application products. Several of our competitors continue to aggressively price
their products with large discounts in comparison to our prices. Over the past
year, we have continued to see competitive pricing pressure. Our strategy is to
continue to offer products with functionality different and superior to our
competitors. Our international revenue growth rate has continued to outpace our United
States revenue growth rate. We feel this has occurred because our leadership and market presence has been very
strong internationally, particularly in the United Kingdom. 17 We have experienced a lengthening of our customers' contract cycle and have
taken that issue into account for our forecasting model. We expect this
trend to continue so long as the economic environment for enterprise software
remains weak. Since our inception, we have incurred substantial research and development
costs and have invested heavily in the expansion of our product development,
sales, marketing and professional services organizations in order to build an
infrastructure to support our long-term growth strategy. The number of our
full-time employees decreased from 328 at December 31, 2002, to 313 at March 31,
2003, representing a decrease of approximately 5%. On April 7, 2003, we implemented a workforce reduction intended to align our
cost base with our expected operating performance. We expect to recognize a
restructuring charge to operations of approximately $1 million in the second
quarter ending June 30, 2003 as a result. The restructuring charge will be comprised of
severance and associated employee termination costs and asset write-downs. The
costs associated with the reduction of our workforce will be paid during our
second and third quarters of 2003. As part of the restructuring, we have reduced
our workforce by approximately 30 employees or approximately 10% of our total
workforce across all functional areas. As we continue to monitor our
operating expenses and strategize for the future, further expense
reductions may become necessary to improve operating performance, including further
reductions of our workforce in nonperforming regions. Because the restructuring charge and related benefits are derived from
management's estimates, which are based on currently available information, our
restructuring may not achieve the benefits currently anticipated or on the
timetable or at the level, currently contemplated. In addition, our software
license revenues and operating performance may continue to be negatively
impacted by: (i) the uncertainty in the information technology industry and
associated reductions in capital expenditures; (ii) geopolitical uncertainties;
(iii) additional terrorist attacks; (iv) a lack of confidence in corporate
governance and accounting practices; (v) the diversity in global economic
conditions; (vi) continued intense competition; (vii) business and chief
executive officer confidence in the economy, evidenced, in part, by stock market
levels; and (viii) other factors described under "Risk Factors" below.
Accordingly, additional actions, including a further restructuring of our
operations, may be required in the future. As a result, the demand for our
products and services and, ultimately, our future financial performance, are
difficult to predict with any degree of certainty. We believe that period-to-period comparisons of our operating results should
not be relied upon as indicative of future performance. Our prospects must be
considered given the risks, expenses and difficulties frequently encountered by
companies in early stages of development, particularly companies in new and
rapidly evolving businesses. There can be no assurance we will be successful in
addressing these risks and difficulties. Moreover, we
may not achieve or maintain profitability in the future. 18 Results of Operations The following table sets forth, as a percentage of total revenues,
consolidated statements of operations data for the periods indicated: Three Months Ended March 31, 2003 March 31, 2002 Revenues: License 49 Service Total revenues 100 100 Cost of revenues: License Service Non-cash compensation expense Total cost of revenues 48 Gross profit 52 Operating expenses: Sales and marketing: Non-cash compensation expense Other sales and marketing Research and development: Non-cash compensation expense Other research and development General and administrative: Non-cash compensation expense Other general and administrative Amortization of intangible assets Total operating expenses 101 94 Loss from operations (38 Interest expense Other income (expense), net Net loss (50 (37 19 Comparison of the Three Months Ended March 31, 2003 and
2002 Revenues Service. Total service revenues, including reimbursement of
out-of-pocket expenses, decreased to $9.7 million for the quarter ended March
31, 2003 from $11.7 million, or approximately 17%, for the quarter ended March
31, 2002. Service revenues for enterprise solutions decreased to $7.2 million
for the quarter ended March 31, 2003 from $8.8 million, or approximately 19%,
for the quarter ended March 31, 2002. Service revenues for application products
decreased to $2.5 million for the quarter ended March 31, 2003 from $2.9
million, or approximately 13%, for the quarter ended March 31, 2002. The overall
service revenue decrease was primarily due to the lack of growth in the number
of product implementations by new and existing customers as they delayed and
deferred spending decisions. Cost of revenues License. Cost of license revenues
decreased to $0.3 million for the
quarter ended March 31, 2003 from $0.6 million, or approximately 54%, for the
quarter ended March 31, 2002. These costs resulted in license gross margins of
approximately 94% and 95% for the quarters ended March 31, 2003 and 2002,
respectively. The aggregate cost of license revenues is in line with the
decrease of our license revenue. We expect cost of license revenues to
remain in the four to six percent range of license revenues. Service. Cost of service revenues decreased to $5.9 million for the
quarter ended March 31, 2003 from $9.6 million, or approximately 38%, for the
quarter ended March 31, 2002. These costs resulted in service gross margins of
34% and 18% for the quarters ended March 31, 2003 and 2002, respectively.
Service gross margins improved mainly as the result of combined effects of
restructuring actions implemented, increased efficiencies and reduced spending. Operating Expenses Sales and marketing. Sales and
marketing expenses decreased to $6.4 million for the quarter ended March 31,
2003 from $9.3 million, or approximately
30%, for the quarter ended March 31, 2002. The decrease in these expenses were
mainly attributable to a decrease of $2.4 million in personnel related expenses
due to a decrease in headcount and commission expenses and a decrease of $0.8
million in marketing programs and professional services. These decreases
are partially offset by an increase of $0.3 million of non-cash compensation
expense. Research and development. Research and development expenses
decreased to $4.6 million for the quarter ended March 31, 2003 from $5.1
million, or approximately 11%, for the quarter ended March 31, 2002. The
decrease in these expenses were mainly attributable to a decrease of $0.6
million in personnel related expenses due to a decrease in headcount and bonus
expenses and a decrease of $0.2 million in overhead allocations and professional
services. These decreases are partially offset by an increase of $0.3
million of non-cash compensation expense. 20 General and administrative.
General and administrative expenses decreased to $2.0 million for the quarter
ended March 31, 2003 from $2.3 million, or approximately 11%, for the quarter
ended March 31, 2002. The decrease in these expenses were mainly
attributable to a decrease of $0.5 million in personnel related expenses due to
a decrease in headcount and bonus expenses and a decrease of $0.2 million in
professional services and other expenses. These decreases are partially
offset by an increase of $0.4 million of non-cash compensation expense. Non-cash compensation expense. We recorded amortization of stock-based
compensation expense of $0.2 million
for the quarter ended March 31, 2003 compared to $0.5 million for the quarter ended March 31, 2002
in relation to options granted prior to our initial public offering with an
exercise price lower than the deemed fair market value of the underlying common
stock at the date of issuance.
At March 31, 2003, approximately $1.3 million of stock-based compensation remained to be
amortized. On August 23, 2002, we
implemented a stock option exchange program (the "Program"). Under the Program,
holders of outstanding options with an exercise price of $3.00 or greater per
share (the "Eligible Options") were given the choice of retaining these options
or canceling the options in exchange for (i) restricted shares of common stock
("Restricted Stock") to be issued as soon as possible after the expiration of
the Program period and/or (ii) replacement options issuable six (6) months and
one (1) day following the cancellation of the Program at the closing market
price on that date. On October 4, 2002, we amended the Program to provide the
Chief Executive Officer and Chief Financial Officer of the Company, if they
participated in the Program, with a Separate Restricted Stock Agreement (the
"CEO and CFO Agreement"), which includes specific vesting provisions based on
achieving certain performance goals. 11,668,875 options were subject to the
Program, which closed on October 9, 2002.
Employees tendered
8,109,640 stock options and received 2,780,967 shares of Restricted Stock
pursuant to the Program. In addition, employees tendered 672,948 stock options,
which were cancelled and to the extent an employee was still with the Company
were replaced six (6) months and one (1) day following expiration of the
Program. The tendered stock options represented approximately 59% of our total
outstanding stock options as of the expiration date of the Program.
In addition, in October
2002, we issued 3,706,745 shares of Restricted Stock to our employees residing
in the United Kingdom, including to our Chief Executive Officer. The Restricted
Stock issued to our Chief Executive Officer is subject to the CEO and CFO
Agreement.
The Program has been
accounted for under the guidance of Emerging Issues Task Force Issue No. 00-23
"Issues Related to the Accounting for Stock Compensation under APB Opinion No.
25" and Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation - an Interpretation of APB Opinion No. 25." Because we
offered to cancel existing fixed stock options in exchange for a grant of
restricted stock within six months of the cancellation date of the existing
options, the Eligible Options became subject to variable accounting treatment at
the commencement date of the Program. Variable accounting ceased upon
cancellation of the tendered options. A total of 2,886,287 Eligible Options that
were not tendered will remain subject to variable accounting.
We recorded $6.1 million of unearned
stock-based compensation expense based on the fair market value of the
Restricted Stock at the date of issuance. For the quarter ended March 31,
2003, $1.6 million was recorded as stock-based compensation expense. The compensation expense on variable options will
be re-measured at the end of each operating period until the options are
exercised, forfeited or have expired. Depending upon movements in the market value of
our common stock, this accounting treatment may result in significant additional
stock-based compensation charges in future periods.
As part of the Program implemented in 2002, we issued 499,068 replacement options at the current market value of $0.88
per share on April 11, 2003 to employees.
The total stock-based
compensation expense by operating expense is described as follows (in
thousands):
Three Months Ended
March 31, 2003
March 31, 2002
Cost of revenues
$
464
$
97
Sales and marketing
414
136
Research and
development
495
197
General and
administrative
466
86
Total
$
1,839
$
516 Amortization of intangibles. Amortization of intangibles
was $0.9 million for the quarter ended March 31, 2003 compared to $0.8 million
for the quarter ended March 31, 2002. The increase in amortization of
intangibles is due to the amortization of additional intangible assets acquired
as part of the acquisition OnDemand, Inc. in April 2002 . 21 Other Income (Expense), net, and Interest Expense Interest and other income, net, consist primarily of interest income
generated from our cash, cash equivalents, short-term investments, foreign
currency gains and losses and other non-operating income and expenses. Interest
expenses are incurred in connection with outstanding borrowings. Other income
(expense), net, decreased to $(0.2) million for the
quarter ended March 31, 2003 from $0.2 million for the quarter ended March 31,
2002. The decrease is mainly attributable to
a lower return on our investments as a result of declining investment balances
and lower interest rates and the
write-off of a long outstanding acquisition-related balance. Provision for Income Taxes We have not generated taxable income since inception and, as a
result, no provision for income taxes was recorded during the periods presented.
Our deferred tax assets primarily consist of net operating loss carryforwards,
nondeductible allowances and research and development tax credits. We have
recorded a valuation allowance for the full amount of our net deferred tax
assets, as the future realization of the tax benefit is not considered by
management to be more-likely-than-not. Liquidity and Capital Resources Our cash, cash equivalents, restricted cash and
short-term investments consist principally of money market funds, municipal
bonds, and marketable equity securities, which totaled $34.0 million at March 31, 2003. All of our short-term
investments are classified as available-for-sale under the provisions of SFAS
No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
securities are carried at fair market value. Gains and losses on investments are
recognized when realized on the consolidated statements of operations. Net cash used by operating activities was $10.2 million
for the
quarter ended March 31, 2003. Net cash used by operating activities in the
quarter ended March 31, 2003 resulted primarily from our net loss adjusted for
changes in assets and liabilities and non-cash charges for depreciation,
amortization of intangibles and stock-based compensation expense. Additional cash was used by a decrease of deferred
revenue of $3.9 million, a decrease of accrued expenses and accrued
restructuring of $3.1 million and a
decrease of accounts payable of $0.9 million. Additional cash was provided
by a decrease in accounts receivable of $1.1 million. Net cash provided by investing activities was $5.5 million
for the
quarter ended March 31, 2003. Net cash provided by investing activities resulted
primarily from proceeds from sales and maturities of short-term investments, net
of purchases of short-term investments. Net cash provided by financing activities was $4.0
million during the quarter ended March 31, 2003. Net cash provided by financing
activities resulted primarily from proceeds from the issuance of common stock
related to the Employee Stock Purchase Plan of $0.7 million and borrowings of
$3.5 million related mainly to fixed asset financing. At March 31, 2003, we had a balance of $1.5 million in the form of
short-term investments, which were restricted from withdrawal and is now
classified in long-term other assets on our balance sheet. The balance serves as
a security deposit in a revenue transaction. At March 31 ,2003, we also had a
interest bearing letter-of-credit for $0.4 million securing a leased facility
classified in short-term investments. 22 Notes payable Borrowings consist of several notes payable for equipment
leases assumed by Chordiant upon the acquisition of OnDemand, Inc. Then
interest rates range from 12.86% to 15.61%. The notes are due at various
times from 2003 through 2004. In February 2003, we entered into a note payable agreement for
our Directors' & Officers' ("D&O") insurance policy totaling $1.0 million.
The interest rate is 6% and principal and interest payments on the note payable
will be made on a monthly basis through October 2003. As of March 31,
2003, the outstanding note payable balance related to the D&O insurance policy
was $0.7 million.
Revolving line of
credit Our line of credit with Comerica Bank which is comprised of two
elements, an accounts receivable line and an equipment line, is effective from
March 28, 2003.
Under the new line of
credit, our assets collateralize borrowings under both elements, and we are required to
maintain a minimum quick ratio of 2.00 to 1.00, a tangible net worth of at least
$15.0 million plus 60% of the proceeds of any equity offerings and subordinated
debt issuance subsequent to the effective date of this line of credit agreement.
Certain other covenants also apply.
Under the new terms and
conditions of the accounts receivable line, the total amount of the line of
credit is $7.5 million. Borrowings under the accounts receivable line of credit
will bear interest at the lending bank's prime rate plus 0.5%. Advances will be
available on a non-formula basis up to $2,000,000 (non-formula portion),
however, if outstanding receivables exceed $2,000,000, then all outstanding
receivables shall be covered by 80% of Eligible Accounts.
Borrowings under the new
$2.5 million equipment line bear interest at the lending bank's prime rate plus
1.0%. As of March 31, 2003, we had borrowed $2.5 million against the
equipment line of credit. At March
31, 2003, we were in compliance with the respective debt covenants.
We have no material
commitments for capital expenditures or strategic commitments and we anticipate
a low rate of capital expenditures. We may use cash to acquire or license
technology, products or businesses related to our current business. In addition,
we anticipate that we will experience low or no growth or a decline in our
operating expenses for the foreseeable future and that our operating expenses
will be a material use of our cash resources. Future Commitments Future payments due under debt and lease obligations as of March 31, 2003 are
as follows (in thousands): We have entered into a two-year agreement, beginning March 19, 2002, with
Merit International, pursuant to which Merit will provide exclusive training and
certain consulting services for a fixed fee. Upon the effective date of the
agreement, we transferred to Merit our training operations including selected
employees. In addition, Merit will provide to our customers resource development
services in exchange for an agreed-upon fee negotiated on a
transaction-by-transaction basis. We believe this agreement will provide us with
high quality training and consulting services. We will pay Merit certain minimum
revenue amounts, as follows: January 1, 2003 to June 30, 2003: (British Pounds)
996,000; July 1, 2003 to December 31, 2003: (British Pounds) 942,000; and
January 1, 2004 to June 30, 2004: (British Pounds) 429,300, for a total of
(British Pounds) 2.4 million. After six months from the effective date, we may,
at our option, terminate the agreement and pay an early termination fee that
reduces from (British Pounds) 555,000 to (British Pounds) 0 over time. Payment
of the early termination fee will release our obligation related to the minimum
revenue target. As of March 31, 2003, the early termination fee was
approximately (British Pounds) 405,000. 23 Restructuring Restructuring Costs
During 2002, several areas of the company
were restructured to prioritize our initiatives around services, sales, training
and research and development business, reduce expenses and improve efficiency in
order to achieve cash flow and profitability breakeven in the near future. This
restructuring program included a worldwide workforce reduction, consolidation of
excess facilities and restructuring of certain business functions.
Workforce reduction
The restructuring program resulted
in the reduction of 108 regular employees representing annual savings of
approximately $10 million. All areas of the Company were affected by this
restructuring. We recorded a total workforce reduction charge of approximately
$3.8 million for the year ended December 31, 2002 relating to severance and
benefits.
Consolidation of excess facilities
We accrued for lease costs of $2.8 million
during 2002 pertaining to the estimated future obligations for non-cancelable
lease payments for the consolidation of excess facilities relating to lease
terminations and non-cancelable lease costs. This charge included estimated
sub-lease income based on current comparable rates for leases in the respective
markets. If facilities rental rates continue to decrease in these markets or if
it takes longer than expected to sublease these facilities, the maximum amount
the actual loss could exceed the original estimate is approximately $0.7
million. The consolidation of excess facilities represents an annual saving of
approximately $0.2 million.
A summary of the restructuring expense and
other special charges is outlined as follows (in thousands): Amounts related to net lease expenses due to the consolidation of facilities
will be paid over the lease terms through fiscal 2011. As of March 31,
2003, $3.6 million related to the restructuring reserve remains outstanding and
is included in the accrued expenses line item on the balance sheet. The
remaining accrual primarily relates to the termination and/or sublease of our
excess facilities and to severance and other benefits for impacted employees.
During the three months ended March 31, 2003, there was no restructuring charge
or accrual adjustment. 24 Critical Accounting Policies Our discussion and
analysis of our financial condition and results of operations is based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to estimates of percentage of
completion on our service contracts, uncollectible receivables, investment
values, intangible assets, restructuring costs and contingencies. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our condensed consolidated financial statements:
Revenue recognition
We derive revenues from licenses of our software and related services, which
include assistance in implementation, customization and integration,
post-contract customer support, training and consulting. In addition to
determining our results of operations for a given period, our revenue
recognition determines the timing of certain expenses, such as sales commissions
and royalties. Revenue recognition rules for software companies are very complex
and certain judgments affect the application of our revenue policy. The amount
and timing of our revenue is difficult to predict and any shortfall in revenue
or delay in recognizing revenue could cause our operating results to vary
significantly from quarter to quarter and could result in operating losses.
At the time of entering into a transaction, we assess whether any services
included within the arrangement require us to perform significant implementation
or customization essential to the functionality of our product so that the
software performs as the customer requests. For contracts involving significant
implementation or customization essential to the functionality of our product, we recognize the license and
professional consulting services revenues using the percentage-of-completion method using labor hours
incurred as the measure of progress towards completion as prescribed by
Statement of Position ("SOP") No. 81-1, "Accounting for Performance of
Construction-Type and Certain Product-Type Contracts." The progress toward
completion is measured based on the "go-live date." We define the "go-live date"
as the date on which the essential functionality has been delivered or on which
the application enters into a production environment or the point at which no
additional Chordiant supplied professional services resources are required. Estimates are subject to revisions as the contract
progresses to completion. We account for the change in estimate in the period
the change has been identified. Provisions for estimated contract losses are
recognized in the period in which the loss becomes probable and can be
reasonably estimated. When we sell additional licenses related to the original
licensing agreement, revenue is recognized either upon delivery if the project
has reached the go-live date or if the project has not reached the go-live
date under the percentage of completion method. We
classify revenues from these arrangements as license and service revenues based
upon the estimated fair value of each element. On contracts not involving significant implementation or
customization essential to the functionality of our product, we recognize
license revenue when there is persuasive evidence of an arrangement, the fee is
fixed or determinable, collection of the fee is probable and delivery has
occurred as prescribed by SOP No. 97-2, "Software Revenue Recognition." We assess collection based on a number of factors, including past transaction
history with the customer and the credit-worthiness of the customer. We do not
request collateral from our customers. If we determine that collection of a fee
is not probable, we defer the fee and recognize revenue at the time collection
becomes probable, which is generally upon receipt of cash. 25 For arrangements with
multiple elements, we recognize revenue for services and post-contract customer
support based upon vendor specific objective evidence ("VSOE") of fair value of
the respective elements. VSOE of fair value for the services element is based
upon the standard hourly rates we charge for services when such services are
sold separately. VSOE of fair value for annual post-contract customer support is
established with the optional stated future renewal rates included in the
contracts. When contracts contain multiple elements, and VSOE of fair value
exists for all undelivered elements, we account for the delivered elements,
principally the license portion, based upon the "residual method" as prescribed
by SOP No. 98-9, "Modification of SOP No. 97-2 with Respect to Certain
Transactions." In situations in which we are not responsible for implementation services but
are obligated to provide unspecified additional software products in the future,
we recognize revenue as a subscription ratably over the term of the commitment
period. For all sales we use either a binding purchase order or signed license
agreement as evidence of an arrangement. Sales through our third party systems
integrators are evidenced by a master agreement governing the relationship
together with binding purchase orders on a transaction-by-transaction basis.
Revenues from reseller arrangements are recognized on the "sell-through" method,
when the reseller reports to us the sale of our software products to end-users. Our agreements with customers and resellers do not contain product return
rights. We recognize revenue for post-contract customer support ratably over the
support period, generally one year. Our training and consulting services
revenues are
recognized as such services are performed. Allowance for
doubtful accounts and accruals for litigation We must make estimates
of the uncollectability of our accounts receivables. We specifically analyze
accounts receivable and analyze historical bad debts, customer concentrations,
customer credit-worthiness and current economic trends when evaluating the
adequacy of the allowance for doubtful accounts. Generally, we require no
collateral from our customers. Our accounts receivable balance was $14.3
million, net of allowance for doubtful accounts of $0.2 million as of March 31,
2003. If the financial condition of our customers were to deteriorate, resulting
in an impairment of their ability to make payments, additional allowances would
be required.
Our current estimated
range of liability related to some of the pending litigation is based on claims
for which we can estimate the amount and range of loss. We have recorded at
least the minimum estimated liability related to those claims, when there is a
range of loss. Because of the uncertainties related to both the amount and range
of loss on the remaining pending litigation, we are unable to make a reasonable
estimate of the liability that could result from an unfavorable outcome. As
additional information becomes available, we will assess the potential liability
related to our pending litigation and revise our estimates. Such revisions in
our estimates could materially impact our results of operations and financial
position.
Restructuring costs
During fiscal 2002, we
implemented cost-reduction plans as part of our continued effort to streamline
our operations to reduce ongoing operating expenses. These plans resulted in
restructuring charges related to, among others, the consolidation of excess
facilities. These charges relate to facilities and portions of facilities we no
longer utilize and either seek to terminate early or sublease. Lease termination
costs for the abandoned facilities were estimated for the remaining lease
obligations and brokerage fees offset by estimated sublease income. Estimates
related to sublease costs and income are based on assumptions regarding the
period required to locate and contract with suitable sub-lessees and sublease
rates which can be achieved using market trend information analyses provided by
a commercial real estate brokerage retained by us. Each reporting period we
review these estimates and to the extent that these assumptions change due to
continued negotiations with landlords or changes in the market, the ultimate
restructuring expenses for these abandoned facilities could vary by material
amounts. 26
Determining
functional currencies for the purpose of consolidation
We have several foreign
subsidiaries which together accounted for approximately 76% of our revenues, 41%
of our assets and 69% of our total liabilities as of December 31, 2002.
In preparing our condensed
consolidated financial statements, we are required to translate the financial
statements of the foreign subsidiaries from the currency in which they keep
their accounting records, generally the local currency, into United States
dollars. This process results in exchange gains and losses which, under the
relevant accounting guidance are either included within the statement of
operations or as a separate part of our net equity under the caption "cumulative
translation adjustment."
Under the relevant
accounting guidance the treatment of these translation gains or losses is
dependent upon our management's determination of the functional currency of each
subsidiary. The functional currency is determined based on management judgment
and involves consideration of all relevant economic facts and circumstances
affecting the subsidiary. Generally, the currency in which the subsidiary
transacts a majority of its transactions, including billings, financing, payroll
and other expenditures would be considered the functional currency but any
dependency upon the parent and the nature of the subsidiary's operations must
also be considered.
If any subsidiary's
functional currency is deemed to be the local currency, then any gain or loss
associated with the translation of that subsidiary's financial statements is
included in cumulative translation adjustments. However, if the functional
currency were deemed to be the United States dollar then any gain or loss
associated with the translation of these financial statements would be included
within our statement of operations. If we dispose of any of our subsidiaries,
any cumulative translation gains or losses would be realized into our statement
of operations. If we determine that there has been a change in the functional
currency of a subsidiary to the United States dollar, any translation gains or
losses arising after the date of change would be included within our statement
of operations.
Based on our assessment of
the factors discussed above, we consider the relevant subsidiary's local
currency to be the functional currency for each of our international
subsidiaries. Accordingly, we had cumulative translation gains of approximately
$0.2 million which were included as part of accumulated other comprehensive
income within our balance sheet at March 31, 2003.
The magnitude of these
gains or losses is dependent upon movements in the exchange rates of the foreign
currencies in which we transact business against the United States dollar. These
currencies include the United Kingdom Pound Sterling, the Euro and Australian
and Canadian Dollars. Any future translation gains or losses could be
significantly higher than those noted in each of these years. In addition, if we
determine that a change in the functional currency of one of our subsidiaries
has occurred at any point in time we would be required to include any
translation gains or losses from the date of change in our statement of
operations. Recent Accounting Pronouncements
Effective January 1, 2003, we
adopted SFAS No. 143, "Accounting
for Asset Retirement Obligations," and also SFAS No.
145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections." SFAS No. 143 requires that the fair value of
an asset retirement obligation be recorded as a liability in the period in which
it incurs the obligation. SFAS No. 145 requires that certain gains and losses
from extinguishment of debt no longer be classified as an extraordinary item.
The adoption of these statements did not have a significant impact on our consolidated financial position or
results of operations. Effective January 1, 2002, we adopted SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS
No. 144 requires that long-lived assets to be disposed of by sale, including
discontinued operations, be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS No. 144 also broadens the
reporting requirements of discontinued operations to include all components of
an entity that has operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The adoption of this statement did not have a significant impact on our
consolidated financial position or results of operations. Effective January 1, 2003, we
adopted SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
requires that a liability for costs associated with an exit or disposal activity
be recognized and measured initially at fair value only when the liability is
incurred. The adoption of this statement did not have a significant impact on
our consolidated financial position or results of operations. 27
On December 31, 2002, the FASB issued SFAS
No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure."
SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee compensation.
SFAS No. 148 also requires that disclosures of the pro forma effect of using the
fair value method of accounting for stock-based employee compensation be
displayed more prominently and in a tabular format. Additionally, SFAS No. 148 amends APB Opinion
No. 28, "Interim Financial Reporting," and requires disclosure of the pro forma
effect in interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure requirements of SFAS No. 148 are effective for
interim periods beginning after December 15, 2002 and have been implemented in
our financial statements.
In April 2003, the FASB issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities", which amends SFAS No. 133 for certain decisions made by the FASB
Derivatives Implementation Group. In particular, SFAS No. 149 (1) clarifies
under what circumstances a contract with an initial net investment meets the
characteristic of a derivative, (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying to conform it to
language used in FASB Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, and (4) amends certain other existing
pronouncements. This Statement is effective for contracts entered into or
modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. In addition, most provisions of SFAS No. 149 are to be applied
prospectively. We do not expect the adoption of SFAS No. 149 to have a material
impact upon our financial position, cash flows or results of operations.
In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on
the existing disclosure requirements for most guarantees, including residual
value guarantees issued in conjunction with operating lease agreements. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value of the obligation it assumes
under that guarantee and must disclose that information in its interim and
annual financial statements. The initial recognition and measurement provisions
of this interpretation apply on a prospective basis to guarantees issued or
modified after December 31, 2002. The following is a summary of our
agreements that we have determined are within the scope of FIN 45.
As permitted under Delaware law,
we have agreements whereby we indemnify our officers, directors and certain
employees for certain events or occurrences while the employee,
officer or director is, or was serving, at our request in such capacity. The
term of the indemnification period is for the officer's or director's lifetime.
The maximum potential amount of future payments we could be required to make
under these indemnification agreements is unlimited; however, we have a Director
and Officer insurance policy that limits our exposure and may enables us to
recover a portion of any future amounts paid. As a result of our insurance
policy coverage, we believe the estimated fair value of these indemnification
agreements is minimal. We enter into standard
indemnification agreements in our ordinary course of business. Pursuant to these
agreements, we indemnify, hold harmless, and agree to reimburse the indemnified
party for losses suffered or incurred by the indemnified party, generally our
business partners or customers, in connection with patent, or any copyright
or other intellectual property infringement claim by any third party with
respect to our products. The term of these indemnification agreements is
generally perpetual any time after execution of the agreement. The maximum
potential amount of future payments we could be required to make under these
indemnification agreements is unlimited. We have never incurred costs to defend
lawsuits or settle claims related to these indemnification agreements. As a
result, we believe the estimated fair value of these agreements is minimal.
Accordingly, we have no liabilities recorded for these agreements as of March
31, 2003. 28 We enter into arrangements with
our business partners, whereby the business partner agrees to provide services
as a subcontractor for our implementations. We may, at our discretion and in the
ordinary course of business, subcontract the performance of any of our services.
Accordingly, we enter into standard indemnification agreements with our
customers, whereby we indemnify them for other acts, such as personal property
damage, of our subcontractors. The maximum potential amount of future payments
we could be required to make under these indemnification agreements is
unlimited; however, we have general and umbrella insurance policies
that may enable us to recover a portion of any amounts paid. We have never
incurred costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, we believe the estimated fair value of
these agreements is minimal. Accordingly, we have no liabilities recorded for
these agreements as of March 31, 2003. When as part of an acquisition we
acquire all of the stock or all of the assets and liabilities of a company,
we may assume the liability for certain events or occurrences that took
place prior to the date of acquisition. The maximum potential amount of future
payments we could be required to make for such obligations is undeterminable at
this time. All of these obligations were grandfathered under the provisions of
FIN 45 as they were in effect prior to March 31, 2003. Accordingly, we
have no liabilities recorded for these liabilities as of March 31,
2003. We warrant that our software
products will perform in all material respects in accordance with our standard
published specifications and documentation in effect at the time of
delivery of the licensed products to the customer for the life of the product.
Additionally, we warrant that our maintenance services will be performed
consistent with generally accepted industry standards through completion of the
agreed upon services. If necessary, we would provide for the estimated cost of
product and service warranties based on specific warranty claims and claim
history, however, we have never incurred significant expense under our product
or services warranties. As a result, we believe the estimated fair value on
these agreements is minimal. Accordingly, we have no liabilities recorded for
these agreements as of March 31, 2003. In January 2003, the FASB issued
FIN 46, "Consolidation of Variable Interest Entities." FIN 46 requires us to
consolidate a variable interest entity if we are subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 15, 2003. We do not currently
have any variable interest entities and, accordingly, the adoption of FIN 46 did
not have a significant impact on our
consolidated financial position or results of operations. 29 RISK FACTORS
Weakness in technology spending in our target markets combined
with geopolitical concerns and vendor viability concerns continue to make the
closing of license transactions to new and existing customers difficult.
Our revenues fell in 2002. Our revenues will continue to decrease
in 2003 if we are unable to enter into new large-scale license transactions with
new and existing customers. The current state of world affairs and geopolitical
concerns have left many customers reluctant to enter into new license
transactions without some assurance that the vendors will continue to operate
and that the economy both in the customer's home country and worldwide will have
some economic and political stability. The issues of vendor viability and
geopolitical instability will continue to make closing license transactions
difficult. Our ability to enter into new license transactions also directly
affects our ability to create additional consulting services and maintenance
revenues, which we also depend on.
While we anticipate reaching an income statement break-even
position during 2003, we expect to continue to incur losses and use cash and may
not achieve or maintain profitability. In addition, we may continue to reduce
our cash balance, which would cause our stock price to decline.
We incurred losses of $6.9 million and $8.2 million for the quarters
ended March 31, 2003 and 2002, respectively. As of March 31, 2003, we had an
accumulated deficit of $179.4 million. We expect to continue to incur losses during
the next fiscal year. Moreover, we expect to continue to incur significant sales
and marketing and research and development expenses. As a result, we will need
to generate significant revenues to achieve and maintain profitability. We
cannot be certain that we can achieve this growth, maintain our past growth
rates or generate sufficient revenues to achieve profitability. Cash and cash
equivalents, short-term investments and restricted cash at March 31, 2003 and
December 31, 2002 was $34.0 million and $40.0 million, respectively.
Because a small number of customers account for a substantial
portion of our revenues, our revenues are dependent upon our ability to continue
to win large contracts with new and existing customers.
We derive a significant portion of our software license revenues
in each quarter from a limited number of customers. The loss of a major customer
in a particular quarter could cause a decrease in revenue, deferred revenues and
net income. For the quarter ended March 31, 2003, Barclays accounted for 22% of
our total revenues. For the quarter ended March 31, 2002, Hutchinson 3 G, Lloyds
TSB and EDS accounted for 24%, 22% and 11% of our total revenues, respectively.
While our size has increased and customer concentration has fluctuated, we
expect that a limited number of customers will continue to account for a
substantial portion of our revenues. As a result, if we lose a major customer,
or if a contract is delayed or cancelled or we do not contract with new major
customers, our revenues and net loss would be adversely affected. In addition,
customers that have accounted for significant revenues in the past may not
generate revenues in any future period, causing our failure to obtain new
significant customers or additional orders from existing customers to materially
affect our operating results.
Our revenue as a percentage of deferred revenue is declining,
which may reduce our forecasting accuracy resulting in investor disappointment
and resulting stock price reductions.
Historically, a large amount of license revenue flowed through
deferred revenue. For the quarters ended March 31, 2003 and 2002, 50% and 40%,
respectively, of license revenue was derived from deferred revenue. Less
reliance on deferred revenue requires the licensing of software that does not
involve significant implementation or customization essential to its
functionality. If we are unable to increase license revenues from products that
do not involve significant implementation or customization essential to its
functionality, we may miss our revenue forecasts, which may cause our stock
price to decline.
Our reliance on international operations may cause reduced
revenues and increased operating expenses.
For the quarter ended March 31, 2003, international revenues were
$11.7 million or approximately 85% of our total revenues. For the quarter ended
March 31, 2002, international revenues were $19.9 million or approximately 87%
of our total revenues. We expect international revenues will continue to
represent a significant portion of our total revenues in future periods. We have
faced, and will continue to face, risks associated with:
30
Any of these factors could have a significant impact on our
ability to license products on a competitive and timely basis and could
adversely affect our operating expenses and net income. Our international sales
are denominated in both the U.S. dollar and in local currencies. As a result,
increases in the value of the U.S. dollar relative to foreign currencies could
make our products less competitive in international markets and could negatively
affect our operating results and cash flows.
Competition in our markets is intense and could reduce our sales
and prevent us from achieving profitability and maintaining adequate liquidity.
Increased competition in our markets could result in price
reductions, reduced gross margins and loss of market share, any one of which
could reduce our future revenues and liquidity. The market for our products is
intensely competitive, evolving and subject to rapid technological change. The
intensity of competition is expected to increase in the future. As discussed
above, we consider our primary competition to be from internal development,
custom systems integration projects and application software competitors. In
particular, we compete with:
Many of our competitors have greater resources and broader
customer relationships than we do. In addition, many of these competitors have
extensive knowledge of our industry. Current and potential competitors have
established, or may establish, cooperative relationships among themselves or
with third parties to offer a single solution and to increase the ability of
their products to address customer needs.
We may experience a shortfall in revenue or earnings or otherwise
fail to meet public market expectations, which could materially and adversely
affect our business and the market price of our common stock and our liquidity.
Our revenues and operating results may fluctuate significantly
because of a number of factors, many of which are outside of our control. Some
of these factors include:
One or more of the foregoing factors may cause our operating
expenses to be disproportionately high during any given period or may cause our
revenues and operating results to fluctuate significantly. Based upon the
preceding factors, we may experience a shortfall in revenues, earnings or
liquidity or otherwise fail to meet public market expectations, which could
materially and adversely affect our business, financial condition, results of
operations and the market price of our common stock.
Our operating results fluctuate significantly and an unanticipated
decline in revenues or cash flow may disappoint investors and result in a
decline in our stock price.
Our quarterly revenues depend primarily upon product
implementation by our customers. We have historically recognized most of our
license and services revenue through the percentage-of-completion method, using
labor hours incurred as the measure of progress towards completion of
implementation of our products, and we expect this practice to continue. Thus,
delays in implementation by our customers and systems integration partners would
reduce our quarterly revenue. Historically, a significant portion of new
customer orders have been booked in the third month of the calendar quarter,
with many of these bookings occurring in the last two weeks of the third month.
We expect this trend to continue and, therefore, any failure or delay in
bookings would decrease our quarterly deferred revenue. If our revenues or
operating margins are below the expectations of the investment community, our
stock price is likely to decline. 31
Our inability to maintain and grow our relationships with systems
integrators would harm our ability to market and implement our products and
reduce future revenues.
Inability to establish or maintain relationships with systems
integrators would significantly harm our capacity to license our software
products. Systems integrators install and deploy our products, in addition to
those of our competitors, and perform custom integration of systems and
applications. Some systems integrators also engage in joint marketing and sales
efforts with us. If these relationships deteriorate, we will have to devote
substantially more resources to the sales and marketing, implementation and
support of our products than we would have to otherwise. Our efforts may also
not be as effective as those of the systems integrators, which could reduce
revenues. In many cases, these parties have extensive relationships with our
existing and potential customers and influence the decisions of these customers.
A number of our competitors have stronger relationships with these systems
integrators and, as a result, these systems integrators may be more likely to
recommend competitors' products and services.
Failure to successfully customize or implement our products for a
customer could prevent recognition of revenues, collection of amounts due or
cause legal claims by the customer.
If a customer is not able to customize or deploy our products
successfully, the customer may not complete expected product deployment, which
would prevent recognition of revenues and collection of amounts due, and could
result in claims against us. We have, in the past, had disputes with customers
concerning product performance.
Our primary products have a long sales and implementation cycle,
which makes it difficult to predict our quarterly results and may cause our
operating results to vary significantly.
The period between initial contact with a prospective customer and
the implementation of our products is unpredictable and often lengthy, ranging
to date from three to twenty-four months. Thus, revenue, cash receipt and
deferred revenue could vary significantly from quarter to quarter. Any delays in
the implementation of our products could cause reductions in our revenues. The
licensing of our products is often an enterprise-wide decision that generally
requires us to provide a significant level of education to prospective customers
about the use and benefits of our products. The implementation of our products
involves significant commitment of technical and financial resources and is
commonly associated with substantial implementation efforts that may be
performed by us, by the customer or by third-party systems integrators.
Customers generally consider a wide range of issues before committing to
purchase our products, including product benefits, ability to operate with
existing and future computer systems, vendor financial stability and longevity,
ability to accommodate increased transaction volume and product reliability.
Our stock price is subject to significant fluctuations.
Since our initial public offering in February 2000, the price of
our common stock has fluctuated widely. We believe that factors such as the
risks described herein or other factors could cause the price of our common
stock to continue to fluctuate, perhaps substantially. In addition, recently,
the stock market in general, and the market for high technology stocks in
particular, has experienced extreme price fluctuations, which have often been
unrelated to the operating performance of the affected companies. Such
fluctuations could adversely affect the market price of our common stock.
If we are unable to maintain our Nasdaq National Market listing,
the liquidity of our common stock would be seriously limited.
Since July 16, 2002, our stock has had minimum closing bid prices
fluctuating above and below $1.00 per share. The minimum bid price requirement
for continued listing with the Nasdaq National Market is $1.00 per share. If we
fail to comply with the minimum bid price requirement for 30 straight trading
days, we will receive a deficiency notice from the Nasdaq National Market. If we
are in compliance with the core Nasdaq National Market initial listing criteria
at that time, we will then have 180 calendar days (or such additional period
permitted by The Nasdaq Stock Market, Inc., or Nasdaq) to comply with the
minimum bid price requirement. To reestablish compliance, our minimum closing
bid price must be more than $1.00 per share for 10 consecutive trading days.
If we do not reestablish compliance with the minimum bid price
requirement during the 180-day period (or any such additional period permitted
by Nasdaq), Nasdaq will commence delisting proceedings and we may be delisted
from the Nasdaq National Market. In such event, we will attempt to have our
common stock traded on The Nasdaq SmallCap Market. Stock trading on The Nasdaq
SmallCap Market is typically less liquid and usually involves larger variations
between the bid and ask price than stock trading on the Nasdaq National Market.
Therefore, the transfer of our stock from the Nasdaq National Market to The
Nasdaq SmallCap Market could have an adverse effect on the liquidity of our
common stock and your ability to sell our common stock. Moreover, if our common
stock is delisted, it could limit our potential to raise future capital through
the sale of our common stock, which could seriously harm our business.
We may incur in future periods significant stock-based
compensation charges related to certain stock options and stock awards.
Based on certain accounting standards involving stock
compensation, we will incur variable accounting costs related to the issuance of
restricted stock and stock options, including those associated with our stock
option cancellation/re-grant program. Accounting standards require us to
remeasure compensation cost for such options each reporting period based on
changes in the market value of the underlying common stock. Depending upon
movements in the market value of our common stock, the variable accounting
treatment of those stock options may result in significant additional non-cash
compensation costs in future periods. Refer to the discussions under
the caption "Non-Cash Compensation Expenses" set forth in Management's
Discussion and Analysis of Financial Condition and Results of Operations in this
report on Form 10-Q. 32
We are the target of a securities class action complaint and are
at risk of securities class action litigation, which may result in substantial
costs and divert management attention and resources.
Beginning in July 2001, Chordiant and certain of our officers and
directors were named as defendants in several class action shareholder
complaints filed in the United States District Court for the Southern District
of New York, now consolidated under the caption, In re Chordiant Software,
Inc. Initial Public Offering Securities Litigation,
Case No. 01-CV-6222. In the amended complaint, the plaintiffs allege
that Chordiant, certain of our officers and directors and the underwriters of
our initial public offering ("IPO") violated the federal securities laws because
the Company's IPO registration statement and prospectus contained untrue
statements of material fact or omitted material facts regarding the compensation
to be received by, and the stock allocation practices of, the IPO underwriters.
The plaintiffs seek unspecified monetary damages and other relief. Similar
complaints were filed in the same court against hundreds of other public
companies that conducted IPOs of their common stock in the late 1990s. This
action may divert the efforts and attention of our management and, if determined
adversely to us, could have a material impact on our business.
Our products need to successfully operate in a company-wide
environment; if they do not, we may lose sales and suffer decreased revenues.
If existing customers have difficulty deploying our products or
choose not to fully deploy the products, it could damage our reputation and
reduce revenues. Our success requires that our products be highly scalable, and
able to accommodate substantial increases in the number of users. Our products
are expected to be deployed on a variety of computer hardware platforms and to
be used in connection with a number of third-party software applications by
personnel who may not have previously used application software systems or our
products. These deployments present very significant technical challenges, which
are difficult or impossible to predict. If these deployments do not succeed, we
may lose future sales opportunities and suffer decreased revenues.
Defects in our products could diminish demand for our products and
result in decreased revenues, decreased market acceptance and injury to our
reputation.
Errors may be found from time to time in our new, acquired or
enhanced products. Any significant software errors in our products may result in
decreased revenues, decreased sales, injury to our reputation and/or increased
warranty and repair costs. Although we conduct extensive product testing during
product development, we have in the past discovered software errors in our
products as well as in third party products, and as a result have experienced
delays in the shipment of our new products. The latest version of our primary
product suite was introduced in January 2002.
To date, our sales have been concentrated in the financial
services, travel and leisure and telecommunications markets, and if we are
unable to continue sales in these markets or successfully penetrate new markets,
our revenues may decline.
Sales of our products and services in three large
markets-financial and insurance services, travel and leisure and
telecommunications-accounted for approximately 81% and 92% of our total revenues
for the quarters ended March 31, 2003 and 2002, respectively. We expect that
revenues from these three markets will continue to account for a substantial
portion of our total revenues in 2003. If we are unable to successfully increase
penetration of our existing markets or achieve sales in additional markets, or
if the overall economic climate of our target markets deteriorates, our revenues
may decline.
In addition, we cannot predict what effect the terrorist attacks
of September 11, 2001, the related military conflict or the war with Iraq or
elsewhere have had or are continuing to have on our existing and prospective
customers' decision-making process with respect to licensing or implementing
enterprise-level products such as ours. If these or other outside factors cause
existing or prospective customers to cancel or delay deployment of products such
as ours, our operating results would be adversely affected.
Low gross margin in services revenues could adversely impact our
overall gross margin and income.
Our services revenues have had lower gross margins than our
license revenues. As a result, an increase in the percentage of total revenues
represented by services revenues, or an unexpected decrease in license revenues,
could have a detrimental impact on our overall gross margins. We anticipate that
services revenues will continue to represent over 40% of total revenues. To
increase services revenues, we must expand our services organization,
successfully recruit and train a sufficient number of qualified services
personnel and obtain renewals of current maintenance contracts by our customers.
This expansion could further reduce gross margins in our services revenues.
If our service revenues fall below certain contract obligations,
we will incur service expenses without corresponding revenues that would
increase our losses.
We have entered into a two-year agreement, beginning March 19, 2002, with
Merit International, pursuant to which Merit will provide exclusive training and
certain consulting services for a fixed fee. Upon the effective date of the
agreement, we transferred to Merit our training operations including selected
employees. In addition, Merit will provide to our customers resource development
services in exchange for an agreed-upon fee negotiated on a
transaction-by-transaction basis. We believe this agreement will provide us with
high quality training and consulting services. We will pay Merit certain minimum
revenue amounts, as follows: January 1, 2003 to June 30, 2003: (British Pounds)
996,000; July 1, 2003 to December 31, 2003: (British Pounds) 942,000; and
January 1, 2004 to June 30, 2004: (British Pounds) 429,300, for a total of
(British Pounds) 2.4 million. After six months from the effective date, we may,
at our option, terminate the agreement and pay an early termination fee that
reduces from (British Pounds) 555,000 to (British Pounds) 0 over time. Payment
of the early termination fee will release our obligation related to the minimum
revenue target. As of March 31, 2003, the early termination fee was
approximately (British Pounds) 405,000.
Because we have recently reduced the size of our workforce, we may
not have the workforce necessary to support our platform of products, and if we
need to rebuild our workforce in the future, we may not be able to recruit
personnel in a timely manner, which could impact the development and sales of
our products.
In 2002 and 2003, we reduced the size of our workforce and may carry out
further reductions in the future. Our recent reductions were intended to align
our operating expenses with our revenue expectations. However, these reductions
or future reductions could have a negative impact on our operating performance
because we may not have the workforce necessary to support the develop of
additional products. Further, in the event that demand for our products
increases as a result of a positive turn in the economy, we may need to rebuild
our workforce and we may be unable to hire, train or retain qualified personnel
in a timely manner, which may weaken our ability to market our products in a
timely manner, negatively impacting our operations. Our success depends largely
on ensuring that we have adequate personnel to support our platform as well as
the continued contributions of our key management, engineering, sales and
marketing and professional services personnel.
33
If we fail to introduce new versions and releases of functional
and scalable products in a timely manner, customers may license competing
products and our revenues may decline.
If we are unable to ship or implement enhancements to our products
when planned, or fail to achieve timely market acceptance of these enhancements,
we may suffer lost sales and could fail to achieve anticipated revenues. A
majority of our total revenues have been, and are expected to be, derived from
the license of our primary product suite. Our future operating results will
depend on the demand for the product suite by future customers, including new
and enhanced releases that are subsequently introduced. If our competitors
release new products that are superior to our products in performance or price,
or if we fail to enhance our products or introduce new features and
functionality in a timely manner, demand for our products may decline. We have
in the past experienced delays in the planned release dates of new versions of
our software products and upgrades. New versions of our products may not be
released on schedule or may contain defects when released.
We depend on technology licensed to us by third parties, and the
loss or inability to maintain these licenses could prevent or delay sales of our
products.
We license from several software providers technologies that are
incorporated into our products. For example, we license software from Sun
Microsystems and related products from iPlanet, a Sun Microsystems company. In
addition, we license software from other vendors. Our license agreement with Sun
Microsystems was renewed in October 2001. We anticipate that we will continue to
license technology from iPlanet and other third parties in the future. This
software may not continue to be available on commercially reasonable terms, if
at all. The loss of the iPlanet technology or other technology licenses could
result in delays in the license of our products until equivalent technology, if
available, is developed or identified, licensed and integrated into our
products. Even if substitute technologies are available, there can be no
guarantee that we will be able to license these technologies on commercially
reasonable terms, if at all.
Defects in third party products associated with our products could
impair our products' functionality and injure our reputation.
The effective implementation of our products depends upon the
successful operation of third-party products in conjunction with our products.
Any undetected errors in these third-party products could prevent the
implementation or impair the functionality of our products, delay new product
introductions or injure our reputation. In the past, while our business has not
been materially harmed, product releases have been delayed as a result of errors
in third-party software and we have incurred significant expenses fixing and
investigating the cause of these errors.
Our customers and system integration partners may have the ability
to alter our source code and resulting inappropriate alterations could adversely
affect the performance of our products, cause injury to our reputation and
increase operating expenses.
Customers and system integration partners may have access to the
computer source code for certain elements of our products and may alter the
source code. Alteration of our source code may lead to implementation,
operation, technical support and upgrade problems for our customers. This could
adversely affect the market acceptance of our products, and any necessary
investigative work and repairs could cause us to incur significant expenses and
delays in implementation.
If our products do not operate with the hardware and software
platforms used by our customers, our customers may license competing products
and our revenues will decline.
If our products fail to satisfy advancing technological
requirements of our customers and potential customers, the market acceptance of
these products could be reduced. We currently serve a customer base with a wide
variety of constantly changing hardware, software applications and networking
platforms. Customer acceptance of our products depends on many factors such as:
Our failure to successfully integrate future acquired companies
and technologies into our operations and technologies could prevent us from
operating efficiently.
Our business strategy includes pursuing opportunities to grow our
business, both internally and through merger, acquisition and technology and
other asset transactions. To implement this strategy, we may be involved in
additional technology and asset purchase transactions. Merger and acquisition
transactions are motivated by many factors, including, among others, our desire
to acquire skilled personnel, obtain new technologies and expand and enhance our
product offerings. Growth through mergers and acquisitions has several
identifiable risks, including difficulties associated with successfully
integrating the previously distinct businesses into our organization, the
substantial management time devoted to integrating personnel, technology and
entire companies, the possibility that we might not be successful in retaining
the employees of the acquired companies, undisclosed liabilities, the failure to
realize anticipated benefits (such as cost savings and synergies) and issues
related to integrating acquired technology or content into our products (such as
unanticipated expenses). Realization of any of these risks in connection with
any technology acquisition or asset purchase we have entered into, or may enter
into, could have a material adverse effect on our business, operating results
and financial condition.
If we become subject to intellectual property infringement claims,
these claims could be costly and time-consuming to defend, divert management's
attention, cause product delays and have an adverse effect on our revenues and
net income.
We expect that software product developers and providers of
software in markets similar to our target markets will increasingly be subject
to infringement claims as the number of products and competitors in our industry
grows and the functionality of products overlap. Any claims, with or without
merit, could be costly and time-consuming to defend, divert our management's
attention or cause product delays. We have no patents or patent applications
that we could use defensively against any company bringing such a claim. If any
of our products were found to infringe a third party's proprietary rights, we
could be required to enter into royalty or licensing agreements to be able to
sell our products. Royalty and licensing agreements, if required, may not be
available on terms acceptable to us or at all. 34 Item 3. Quantitative and Qualitative
Disclosures about Market Risk 3,739 3,739
Interest Rate
Risk. Our exposure to market rate risk for changes in interest rates
relates primarily to our investment portfolio. We have not used derivative
financial instruments to hedge our investment portfolio. We invest excess cash
in debt instruments of the U.S. Government and its agencies, and in high-quality
corporate issuers and, by policy, limit the amount of credit exposure to any one
issuer. We protect and preserve invested funds by limiting default, market and
reinvestment risk. Investments in both fixed rate and floating rate interest
earning instruments carries a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest
rates or we may suffer losses in principal if forced to sell securities, which
have declined in market value due to changes in interest rates.
Foreign Currency
Risk. International revenues from our foreign subsidiaries accounted for
approximately 85% and 87% of total revenues for the three months ended March 31,
2003 and 2002, respectively. International sales are made
mostly from our foreign sales subsidiaries in their respective countries and are
typically denominated in the local currency of each country. These subsidiaries
also incur most of their expenses in the local currency. Accordingly, all
foreign subsidiaries use the local currency as their functional currency.
Additionally, one of our foreign
subsidiaries holds cash equivalent investments in currencies other than its
respective local currency. Such holdings increase our exposure to foreign
exchange rate fluctuations. As exchange rates vary, the holdings may magnify
foreign currency exchange rate fluctuations or upon translation or adversely
impact overall expected profitability through foreign currency losses incurred
upon the sale or maturity of the investments. Foreign currency gains, net for
the three months ended March 31, 2003 and 2002 were $0.1 million and zero,
respectively.
Our international business is subject to
risks, including, but not limited to changing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions,
and foreign exchange rate volatility when compared to the United States.
Accordingly, our future results could be materially adversely impacted by
changes in these or other factors. 35 Item 4. Controls and
Procedures (a) Evaluation of Disclosure Controls and Procedures. Our chief executive
officer and chief financial officer have concluded that Chordiant's disclosure
controls and procedures (as defined in Securities Exchange Act of 1934, as
amended ("Exchange Act"), Rule 13a-14(c)) are sufficiently effective to ensure
that the information required to be disclosed by the Company in the reports it
files under the Exchange Act is gathered, analyzed and disclosed with adequate
timeliness, accuracy and completeness, based on an evaluation of such controls
and procedures conducted within 90 days prior to the date hereof. (b) Changes in Internal Controls. There have been no significant changes in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation referred to above, nor do we
believe there were any significant deficiencies or material weaknesses in
Chordiant's internal controls. Accordingly, no corrective actions were required
or undertaken. Limitations on the Effectiveness of Controls. Chordiant's
management, including our chief executive officer and chief financial officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within the company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected. Beginning in July 2001, we and certain of our officers and directors, as well
as the underwriters of our initial public offering ("IPO") and hundreds of other
companies, individuals and IPO underwriters, were named as defendants in a
series of class action shareholder complaints filed in the United States
District Court for the Southern District of New York. Those cases are now
consolidated under the caption, In re Initial Public Offering Securities
Litigation, Case No. 91 MC 92. In the amended complaint against Chordiant, the
plaintiffs allege that Chordiant, certain of our officers and directors and our
IPO underwriters violated section 11 of the Securities Act of 1933 based on
allegations that Chordiant's registration statement and prospectus failed to
disclose material facts regarding the compensation to be received by, and the
stock allocation practices of, the IPO underwriters. The complaint also contains
a claim for violation of section 10(b) of the Securities Exchange Act of 1934
based on allegations that this omission constituted a deceit on investors. The
plaintiffs seek unspecified monetary damages and other relief. In October 2002, the parties agreed to toll the statute of limitations
with respect to Chordiant's officers and directors until September 30, 2003, and
on the basis of this agreement, our officers and directors were dismissed from
the lawsuit without prejudice. In February 2003, the court issued a decision
denying the motion to dismiss the Section 11 claims against Chordiant and almost
all of the other company defendants and denying the motion to dismiss the
Section 10(b) claims against Chordiant and many of the company defendants.
Chordiant believes that this lawsuit is without merit and intends to defend
against it vigorously. We are also subject to various other claims and legal actions arising in the
ordinary course of business. The ultimate disposition of these various other
claims and legal actions is not expected to have a material effect on our
business, financial condition or results of operations. 36
Item 2. Changes in Securities and Use of Proceeds None.
Item 3. Defaults Upon Senior Securities None.
Item 4. Submission of Matters to a Vote of Security Holders None.
In
March 2003, William Raduchel joined our board of directors and Kathryn Gould
resigned from our board of directors. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The exhibits listed on the accompanying index to exhibits
are filed or incorporated by reference (as stated therein) as part of this
Quarterly Report on Form 10-Q. (b) Reports on Form 8-K On March 5, 2003, we filed a current
report on Form 8-K announcing the appointment of William Raduchel to our
board of directors and the resignation of Kathryn Gould from our board of
directors. 37
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
Cupertino, CA 95014
(Address of
Principal Executive Offices including Zip Code)
(Registrant's
Telephone Number, Including Area Code)
(Former name, former address and
former fiscal year if changed since last report)
QUARTERLY
REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2003
TABLE OF CONTENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
March 31, 2003
December 31, 2002
ASSETS
Current
assets:
Cash and cash
equivalents
$
30,232
$
30,731
Short-term
investments and restricted cash
3,739
9,245
Accounts receivable,
net
14,270
15,343
Prepaid expenses and other current
assets
3,566
3,162
Total current
assets
51,807
58,481
Restricted cash
1,500
1,500
Property and
equipment, net
4,299
5,069
Goodwill,
net
24,874
24,874
Intangible assets,
net
4,085
4,975
Other
assets
1,383
1,788
Total assets
$
87,948
$
96,687
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
liabilities:
Borrowings
$
2,479
$
1,114
Accounts
payable
5,003
5,936
Accrued
expenses
7,207
9,450
Accrued
restructuring
3,626
4,557
Deferred revenue
13,522
15,990
Total current
liabilities
31,837
37,047
Deferred revenue,
long-term
8,532
Borrowings, long-term
1,594
136
Other liabilities
140
161
Total liabilities
40,700
45,876
Stockholders' equity:
Common
stock
55
55
Treasury stock
(332
(332
)
Additional paid-in
capital
230,808
230,192
Notes receivable from
stockholders
--
(496
)
Deferred stock-based
compensation
(4,699
)
(6,750
)
Accumulated deficit
(179,449
)
(172,503
)
Accumulated other
comprehensive income
865
645
Total stockholders'
equity
47,248
50,811
Total liabilities and
stockholders' equity
$
87,948
$
96,687
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except
per share data)
(Unaudited)
4,138
11,085
9,677
11,723
13,815
22,808
261
566
5,926
9,554
464
97
414
136
6,016
9,114
495
197
4,070
4,935
466
86
1,560
2,190
890
825
Restructuring expense
--
3,558
)
(8,450
)
(47
)
(4
)
(152
)
245
)
)
)
)
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three
Months Ended
March
31, 2003
March
31, 2002
Cash flows from
operating activities:
Net loss
$
(6,946
)
$
(8,209
)
Adjustments to
reconcile net loss to net cash used in operating activities:
Depreciation and
amortization
778
943
Amortization of
intangibles
890
825
Stock-based
compensation expense
1,839
516
Provision for
doubtful accounts
--
174
Loss on
disposal of assets
2
--
Changes in assets and
liabilities:
Accounts receivable
1,073
(3,496
)
Prepaid expenses
and other current assets
(404
)
(204
)
Other
assets
405
139
Accounts payable
(933
)
(190
)
Accrued
expenses
(2,130
)
(355
)
Accrued restructuring
(931
)
2,764
Deferred
revenue
(3,871
)
758
Other
liabilities
(21
)
(698
)
Net cash used in
operating activities
(10,249
)
(7,033
)
Cash flows from
investing activities:
Property and equipment
purchases
(20
)
(245
)
Proceeds from
disposal of property and equipment
15
--
Purchases of
short-term investments
(576
)
--
Proceeds from sales and
maturities of short-term
investments
6,082
10,800
Net cash provided by investing
activities
5,501
10,555
Cash flows from
financing activities:
Exercise of stock
options
36
1,408
Proceeds from
issuance of common stock for Employee Stock Purchase Plan
674
973
Proceeds from
borrowings
3,491
444
Repayment of notes
receivable
496
--
Repayment of borrowings
(668
)
--
Net cash provided by
financing activities
4,029
2,825
Effect of exchange rate
changes
220
(120
)
Net increase
(decrease) in cash and cash equivalents
(499
)
6,227
Cash and cash equivalents at
beginning of period
30,731
27,068
Cash and cash
equivalents at end of period
$
30,232
$
33,295
Supplemental noncash
activities:
Common stock issued
for stockholder notes
$
--
$
496
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Three Months Ended
March 31, 2003
March
31, 2002
Net loss -- as reported
$
(6,946
)
$
(8,209
)
Less:
Stock-based employee compensation expense, net of related tax effects
(1,065
(3,419
Net loss -- proforma
(8,011
(11,628
Basic and diluted net loss per share
-- as reported
$
(0.12
)
$
(0.15
)
Basic and diluted net loss per
share -- proforma
$
(0.14
)
$
(0.22
)
Three Months Ended
March 31,
2003
March 31,
2002
Barclays
22%
--
H3G
--
24%
Lloyds
TSB
--
22%
EDS
--
11%
March 31, 2003
December 31, 2002
Accounts
receivable, net:
Accounts
receivable
$
13,508
$
8,783
Unbilled
receivables
918
6,741
Allowance for doubtful accounts
(156
(181
$
14,270
$
15,343
March 31, 2003
December 31, 2002
Property and equipment, net:
$
11,242
$
11,312
2,490
2,497
1,630
1,634
2,824
2,840
18,186
18,283
Accumulated depreciation and amortization
(13,887
(13,214
$
4,299
$
5,069
March 31, 2003
December 31, 2002
Accrued
expenses:
Accrued payroll and related expenses
$
4,855
$
8,570
Other accrued liabilities
2,352
880
$
7,207
$
9,450
Facilities
Severance and Benefits
Total
Reserve balance at December 31,
2002
$3,366
$1,191
$4,557
Non-cash
--
(113)
(113)
Cash
paid
(85)
(733)
(818)
Reserve balance at March 31, 2003
$3,281
$345
$3,626
Borrowings
Operating Leases
Sublease Income
Total
Remaining portion of Fiscal 2003
$
2,058
$
2,604
$
(415
)
$
4,247
Fiscal 2004
1,144
2,846
(438
)
3,552
Fiscal 2005
750
2,004
(143
)
2,611
Fiscal 2006
--
2,144
--
2,144
Fiscal 2007
--
1,868
--
1,868
Thereafter
--
4,468
--
4,468
Total
$
3,952
$
15,934
$
(996
)
$
18,890
Three Months Ended
March 31, 2003
March
31, 2002
Net loss available to common
stockholders
$
(6,946
)
$
(8,209
)
Weighted
average common stock outstanding
62,670
53,711
Weighted average common stock subject
to repurchase
(5,460
(11
Denominator for basic and diluted net
loss per share calculation
57,210
53,700
Net loss per share - basic and diluted
$
(0.12
)
$
(0.15
)
Three Months Ended
March 31, 2003
March 31, 2002
Warrants outstanding
1,850
1,650
Employee stock options
2,687
8,752
Common stock subject to repurchase
5,460
11
9,997
10,413
Three Months Ended
March 31, 2003
March
31, 2002
Net loss
$
(6,946
)
$
(8,209
)
Other comprehensive income (loss):
Foreign
currency translation gain (loss)
220
(120
)
Comprehensive loss
$
(6,726
)
$
(8,329
)
Three Months Ended
March 31, 2003
March
31, 2002
Americas
$
2,071
$
2,865
Europe
(principally United Kingdom)
11,695
19,713
Other
49
230
$
13,815
$
22,808
March 31, 2003
December 31, 2002
Americas
$
2,392
$
2,867
Europe
(principally United Kingdom)
1,905
2,198
Other
2
4
$
4,299
$
5,069
30
%
%
70
51
2
2
43
42
3
--
44
56
3
1
44
40
4
1
30
22
3
--
11
10
6
4
Restructuring expense
--
16
(49
)
)
--
--
(1
)
1
)%
)%
Borrowings
Operating Leases
Sublease Income
Total
Remaining portion of Fiscal 2003
$
2,058
$
2,604
$
(415
)
$
4,247
Fiscal 2004
1,144
2,846
(438
)
3,552
Fiscal 2005
750
2,004
(143
)
2,611
Fiscal 2006
--
2,144
--
2,144
Fiscal 2007
--
1,868
--
1,868
Thereafter
--
4,468
--
4,468
Total
$
3,952
$
15,934
$
(996
)
$
18,890
Facilities
Severance and Benefits
Total
Reserve balance at December 31,
2002
$3,366
$1,191
$4,557
Non-cash
--
(113)
(113)
Cash
paid
(85)
(733)
(818)
Reserve balance at March 31, 2003
$3,281
$345
$3,626
*
Revenue recognition,
including estimating the total estimated days to complete sales arrangements
involving significant implementation or customization essential to the
functionality of our product;
*
Estimating valuation
allowances and accrued liabilities, specifically the allowance for doubtful
accounts, and assessment of the probability of the outcome of our current
litigation;
*
Restructuring
costs; and
*
Determining
functional currencies for the purposes of consolidating our international
operations.
*
Difficulties in managing our 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.
*
Internal information technology departments: in-house
information technology departments of potential customers have developed
or may develop systems that provide some or all of the functionality of
our products. We expect that internally developed application integration
and process automation efforts will continue to be a significant source of
competition.
*
Point application vendors: we compete with providers
of stand-alone point solutions for web-based customer relationship
management and traditional client/server-based, call-center service
customer and sales-force automation solution providers.
*
Size
and timing of individual license transactions;
*
Delay
or deferral of customer implementations of our products;
*
Lengthening of our sales cycle;
*
Further deterioration and changes in domestic and foreign
markets and economies;
*
Success in expanding our global services organization,
direct sales force and indirect distribution channels;
*
Timing of new product introductions and product
enhancements;
*
Appropriate mix of products licensed and services sold;
*
Levels of international transactions;
*
Activities of and acquisitions by competitors;
*
Product and price competition; and
*
Our
ability to develop and market new products and control costs.
*
Our
ability to integrate our products with multiple platforms and existing or
legacy systems;
*
Our
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 our existing products.
2003
Fair Value
Short-term
investments and restricted cash
$
$
Average interest
rates
2.664
%
Chordiant Software, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 15, 2003
Chordiant Software, Inc. |
(Registrant) |
/s/ Steve G. Vogel |
| |
Steve G. Vogel | |
Senior Vice President of Finance, Chief Financial Officer and Secretary | |
(Principal Financial and Accounting Officer) |
38
I, Stephen Kelly, Chief Executive Officer of Chordiant Software, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chordiant Software, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Stephen Kelly
Chief Executive Officer
* A signed original of this written statement required by Section 906 has been provided to Chordiant and will be retained by Chordiant and furnished to the Securities and Exchange Commission or its staff upon request.
39
CERTIFICATIONS*
I, Steve G. Vogel, Chief Financial Officer of Chordiant Software, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Chordiant Software, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Steve G. Vogel
Chief Financial Officer
* A signed original of this written statement required by Section 906 has been provided to Chordiant and will be retained by Chordiant and furnished to the Securities and Exchange Commission or its staff upon request.
40
EXHIBIT INDEX
3.1 |
Amended and Restated Certificate of Incorporation of Chordiant Software, Inc. (filed as Exhibit 3.1 with Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed on December 6, 1999 and incorporated herein by reference). | |
3.2 |
Amended and Restated Bylaws of Chordiant Software, Inc. (filed as Exhibit 3.2 with Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed on December 6, 1999 and incorporated herein by reference). | |
3.3 |
Amended and Restated Bylaws of Chordiant Software, Inc. (filed as Exhibit 3.2 with Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed on December 6, 1999 and incorporated herein by reference). | |
4.1 |
Specimen Common Stock Certificate (filed as Exhibit 4.2 with Amendment No. 2 to Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed on February 7, 2000 and incorporated herein by reference). | |
4.2 |
Amended and Restated Registration Rights Agreement, dated as of September 28, 1999 (filed as Exhibit 4.3 with Chordiant's Registration Statement on Form S-1 (No. 333-92187) filed on December 6, 1999 and incorporated herein by reference). | |
4.3 |
Subordinated Registration Rights Agreement, dated July 19, 2000, by and among Chordiant Software, Inc. and the Sellers of capital stock of White Spider Software, Inc. (filed as Exhibit 4.3 with Chordiant's Registration Statement on Form S-4 (No. 333-54856) filed on February 2, 2001 and incorporated herein by reference). | |
4.4 |
Registration Rights Agreement, dated May 17, 2001, by and between Chordiant Software, Inc. and ActionPoint, Inc. (filed as Exhibit 4.4 to Chordiant's Annual Report on Form 10-K filed on March 29, 2002 and incorporated herein by reference). |
|
4.5 |
Warrant agreement, dated August 12, 2002, by and between Chordiant Software, Inc. and International Business Machines Corporation ("IBM"). |
10.29* |
Change of Control Agreement, dated April 24, 2003, by and between Chordiant Software, Inc. and Allen Swann. |
|
24.1 |
Power of Attorney (set forth on signature page). | |
99.1++ |
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Management contract or compensatory plan or arrangement. |
++ | This certification "accompanies" the Annual Report on Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Annual Report on Form 10-K), irrespective of any general incorporation language contained in such filing. |
41
THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO SUCH SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
CHORDIANT SOFTWARE, INC.
WARRANT TO PURCHASE COMMON STOCK
No. AW-67
August 12, 2002
Void After August 12, 2007
THIS CERTIFIES THAT, for value received, International Business Machines
Corporation ("IBM") , a New York corporation, having its principal office at New
Orchard Road, Armonk, NY, or its successors and assigns (IBM and its assignee
shall be referred to herein as the "Holder"), is eligible to subscribe for and
purchase at the Exercise Price (defined below) from CHORDIANT SOFTWARE, INC., a
Delaware corporation, with its principal office at 20400 Stevens Creek Blvd.,
Suite 400, Cupertino, CA 95014, USA (the "Company") up to Two Hundred Thousand
(200,000) shares of the common stock of the Company (the "Common Stock"), as
provided herein. This Warrant shall vest and become immediately exerciseable
upon its execution and delivery by the Company.
1. DEFINITIONS. As used herein, the following terms shall have the following
respective meanings:
(a) "Affiliate" means any entity, whether incorporated or not, that is
controlled by, controlling or is under common control with IBM .
(b) "Exercise Period" means the period commencing with the date hereof and
ending at 5:00 p.m. PDT on the Expiration Date.
(c) "Exercise Price" means $2.25 per share subject to adjustment from time to
time pursuant to Section 5 below.
(d) "Exercise Shares" means the shares of the Company's Common Stock issuable
upon exercise of this Warrant.
(e) "Expiration Date" shall mean the date five (5) years after the date of this
Warrant above.
(f) "Market Price" shall mean the following: (i) the average of the closing sale
prices for the shares of Common Stock as reported on the principal trading
exchange or the Nasdaq National Market for the Common Stock for the five (5)
consecutive trading days immediately preceding such date, or if no sale price is
so reported for such period, the last bid price for such period, or (ii) if the
foregoing does not apply, the last sale price of such security in the
over-the-counter market on the pink sheets or bulletin board for such security
on the last trading day immediately preceding such date, or if no sale price is
so reported for such security, the average of the last bid and ask price for
such security on the last trading day immediately preceding such date, or (iii)
if market value cannot be calculated as of such date on any of the foregoing
bases, the Market Price shall be the fair market value as reasonably determined
by an investment banking firm selected by the Company and reasonably acceptable
to the Holder, with the costs of the appraisal to be borne by the Company.
(g) "Sale of the Company" means a merger or consolidation of the Company with or
into any other entity or a sale of stock of the Company, in which the
stockholders of this Company immediately before the merger or stock sale do not
hold more than 50% of the voting power of the surviving corporation immediately
after the merger or stock sale, or a sale, conveyance or disposition of
substantially all of the Company's assets.
2. EXERCISE OF WARRANT. The rights represented by this Warrant may be exercised
in whole or in part at any time during the Exercise Period by delivery of the
following to the Company at its address set forth above (or at such other
address as it may designate by notice in writing to the Holder):
(a) An executed Notice of Exercise in the form attached hereto;
(b) Payment of the Exercise Price in cash or by check or wire transfer (subject
to Section 2.1 hereof); and
(c) This Warrant.
Upon the exercise of the rights represented by this Warrant, a certificate or
certificates for the Exercise Shares so purchased, registered in the name of the
Holder or persons Affiliated with the Holder, if the Holder so designates, shall
be issued and delivered to the Holder within a reasonable time after the rights
represented by this Warrant shall have been so exercised.
The person in whose name any certificate or certificates for Exercise Shares are
to be issued upon exercise of this Warrant shall be deemed to have become the
holder of record of such shares on the date on which this Warrant was
surrendered and payment of the Exercise Price was made, irrespective of the date
of delivery of such certificate or certificates, except that, if the date of
such surrender and payment is a date when the stock transfer books of the
Company are closed, such person shall be deemed to have become the holder of
such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
2.1. Net Exercise. Notwithstanding any provisions herein to the contrary, if the
Market Price of one share of Common Stock is greater than the Exercise Price (at
the date of calculation as set forth below), in lieu of exercising this Warrant
by payment of cash, the Holder may at its option elect to receive Exercise
Shares equal to the value (as determined below) of this Warrant (or the portion
thereof being canceled) by surrender of this Warrant at the principal office of
the Company together with the properly endorsed Notice of Exercise in which
event the Company shall issue to the Holder a number of shares of Common Stock
computed using the following formula:
X = (Y* (A-B))/A
Where X = the number of shares of Exercise Shares to be issued to the Holder
Y = the number of shares of Exercise Shares purchasable under the Warrant or, if
only a portion of the Warrant is being exercised, the portion of the Warrant
being canceled (at the date of such calculation)
A = the Market Price of one share of the Company's Common Stock (at the date of
such calculation)
B = Exercise Price (as adjusted to the date of calculation)
2.2. Net Exercise Upon Termination. In the event that this Warrant is not
exercised in full immediately prior to the end of the Exercise Period and at
such time the then current Market Price of a share of the Common Stock is
greater than the Exercise Price, this Warrant shall be deemed automatically
exercised as to the remaining Exercise Shares immediately prior to the
termination of the Expiration Period pursuant to Section 2.1 without the
delivery of any written notice from the Holder.
3. COVENANTS AND REPRESENTATIONS OF THE COMPANY.
3.1. Covenants as to Exercise Shares. The Company covenants and agrees that all
Exercise Shares that may be issued upon the exercise of the rights represented
by this Warrant will, upon issuance, be validly issued and outstanding, fully
paid and nonassessable, and free from all taxes, liens and charges with respect
to the issuance thereof. The Company further covenants and agrees that the
Company will at all times during the Exercise Period, have authorized and
reserved, free from preemptive rights, a sufficient number of shares of its
Common Stock to provide for the exercise of the rights represented by this
Warrant. If at any time during the Exercise Period the number of authorized but
unissued shares of Common Stock shall not be sufficient to permit exercise of
this Warrant, the Company will take such corporate action as may, in the opinion
of its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purposes.
3.2. No Impairment. Except and to the extent as waived or consented to by the
Holder, the Company will not, by amendment of its Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid or
seek to avoid the observance or performance of any of the terms to be observed
or performed hereunder by the Company, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may be necessary or appropriate in order to protect
the exercise rights of the Holder against impairment.
3.3 Listing. In connection with the Holder's exercise of Registration Rights
hereunder, the Company shall use its best efforts to promptly secure the listing
of the shares of Common Stock issuable upon exercise of this Warrant upon each
national securities exchange or automated quotation system, if any, upon which
shares of Common Stock are then listed or become listed (subject to official
notice of issuance upon exercise of this Warrant) and shall maintain such
listing for so long as any other shares of Common Stock shall be so listed.
3.4 Company Representations and Warrants. The Company represents and warrants
that:
(a) It (A) is a corporation duly organized, validly existing and in good
standing under the laws of the state of its organization, (B) has all requisite
power and authority to conduct its business as now conducted and to consummate
the transactions contemplated hereby and (C) is duly qualified to do business
and is in good standing in each jurisdiction in which the character of the
properties owned or leased by it or in which the transaction of its business
makes such qualification necessary, except for those jurisdictions in which
failure to do so would not have a material adverse effect on the Company or its
business.
(b) The execution, delivery and performance by the Company of this Warrant (A)
has been duly authorized by all necessary corporate action, (B) does not and
will not contravene the Company's certificate of incorporation or bylaws and (C)
does not and will not materially contravene any applicable law or any
contractual restriction binding on or otherwise affecting the Company or any of
its properties or result in a material default under any agreement or instrument
to which the Company is a party or by which the Company or its properties may be
subject.
(c) This Warrant has been duly executed and delivered by the Company, and is a
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as may be limited by applicable
bankruptcy, insolvency, moratorium and other laws affecting the rights of
creditors generally and general principles of equity.
(d) Assuming the accuracy of the representations made by the Holder in Section 4
hereof, no authorization, consent, approval, license, exemption or other action
by, and no registration, qualification, or designation, with, any governmental
authority is or will be necessary in connection with the execution and delivery
by the Company of this Warrant, the issuance by the Company of the Exercise
Shares, the consummation of the transactions contemplated hereby, the
performance of or compliance with the terms and conditions hereof, or to ensure
the legality, validity, and enforceability hereof except such as has been duly
and validly obtained or filed, or with respect to any filings that may or must
be made after the execution and delivery of this Warrant, as will be filed in a
timely manner.
(e) The Company has reserved solely for issuance and delivery upon the exercise
of this Warrant, such number of shares of Common Stock to provide for the
exercise in full of this Warrant.
(f) Neither the Company, nor any of its Affiliates, nor any person acting on its
or their behalf, has directly or indirectly made any offers or sales of any
security or solicited any offers to buy any security under circumstances that
would require registration, or the filing of a prospectus qualifying the
distribution, of this Warrant being issued hereby under the Securities Act or
cause the issuance of this Warrant to be integrated with any prior offering of
securities of the Company for purposes of the Securities Act.
3.5 Further Assurances. The Company agrees and covenants that at any time and
from time to time it will promptly execute and deliver to the Holder such
further instruments and documents and take such further action as the Holder may
reasonably request in order to carry out the full intent and purpose of this
Warrant.
4. REPRESENTATIONS OF HOLDER.
4.1. Acquisition of Warrant for Personal Account. The Holder represents and
warrants that it is acquiring the Warrant and, to the extent it acquires, the
Exercise Shares solely for its account for investment and not with a view to or
for sale or distribution within the meaning of the Securities Act of 1933, as
amended of said Warrant or Exercise Shares or any part thereof.
4.2. Securities Are Not Registered.
(a) The Holder understands that the Warrant and the Exercise Shares have not
been registered under the Securities Act of 1933, as amended (the "Act") on the
basis that no distribution or public offering of the stock of the Company is to
be effected. The Holder has no present intention of selling or otherwise
disposing of the Warrant or the Exercise Shares in violation of such laws.
(b) The Holder recognizes that the Warrant and the Exercise Shares must be held
indefinitely unless they are subsequently registered under the Act or an
exemption from such registration is available. The Holder shall have
registration rights with respect to the Exercise Shares as set forth in Appendix
A.
(c) The Holder is aware that neither the Warrant nor the Exercise Shares may be
sold pursuant to Rule 144 adopted under the Act unless certain conditions are
met, including, among other things, the resale following the required holding
period under Rule 144 and the number of shares being sold during any three month
period not exceeding specified limitations.
4.3. Information and Sophistication. The Holder acknowledges that it has
received all the information it has requested from the Company and it considers
necessary or appropriate for deciding whether to acquire the Securities. The
Holder represents that it has had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the offering of
the Securities and to obtain any additional information necessary to verify the
accuracy of the information given the Purchaser. The Holder further represents
that it has such knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risk of this investment.
4.4. Ability to Bear Economic Risk. The Holder acknowledges that investment in
the Securities involves a high degree of risk, and represents that it is able,
without materially impairing its financial condition, to hold the Securities for
an indefinite period of time and to suffer a complete loss of its investment.
4.5. Disposition of Warrant and Exercise Shares.
(a) The Holder further agrees not to make any disposition of all or any part of
the Warrant or Exercise Shares in any event unless and until:
(i) The Company shall have received a letter secured by the Holder from the U.S.
Securities and Exchange Commission stating that no action will be recommended to
the Commission with respect to the proposed disposition; or
(ii) There is then in effect a registration statement under the Act covering
such proposed disposition and such disposition is made in accordance with said
registration statement; or
(iii) The Holder shall have notified the Company of the proposed disposition and
shall have furnished the Company with a description of the proposed disposition,
and if reasonably requested by the Company, the Holder shall have furnished the
Company with an opinion of counsel reasonably satisfactory to the Company (which
counsel may be in-house counsel to the Holder), for the Holder to the effect
that such disposition will not require registration of such Warrant or Exercise
Shares under the Act or any applicable state securities laws.
(b) The Holder understands and agrees that all certificates evidencing the
Exercise Shares to be issued to the Holder may bear the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE
SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
4.6. Accredited Investor Status. The Holder represents that it is an "accredited
investor" as such term is defined in Rule 501 under the Act.
4.7. Further Assurances. The Holder agrees and covenants that at any time and
from time to time it will promptly execute and deliver to the Company such
further instruments and documents and take such further action as the Company
may reasonably request in order to carry out the full intent and purpose of this
Warrant.
5. ADJUSTMENT OF EXERCISE PRICE. Subject to Section 7, in the event of changes
in the outstanding Common Stock of the Company by reason of stock dividends,
splits, reverse splits, recapitalizations, reclassifications or the like, the
number and class of shares available under the Warrant in the aggregate and the
Exercise Price shall be correspondingly adjusted to give the Holder of the
Warrant, on exercise for the same aggregate Exercise Price, the total number,
class, and kind of shares as the Holder would have owned had the Warrant been
exercised prior to the event and had the Holder continued to hold such shares
until after the event requiring adjustment. The form of this Warrant need not be
changed because of any adjustment in the number of Exercise Shares or Exercise
Price pursuant to this Section 5.
6. FRACTIONAL SHARES. No fractional shares shall be issued upon the exercise of
this Warrant as a consequence of any adjustment pursuant hereto. All Exercise
Shares (including fractions) issuable upon exercise of this Warrant may be
aggregated for purposes of determining whether the exercise would result in the
issuance of any fractional share. If, after aggregation, the exercise would
result in the issuance of a fractional share, the Company shall, in lieu of
issuance of any fractional share, pay the Holder otherwise entitled to such
fraction a sum in cash equal to the product resulting from multiplying the then
current fair market value of an Exercise Share by such fraction.
7. SALE OF THE COMPANY If there shall occur any Sale of the Company, then, as
part of any such Sale of the Company, lawful provision shall be made so that the
Holder of this Warrant shall have the right thereafter to receive upon the
exercise hereof the kind and amount of shares of stock or other securities or
property which such Holder would have been entitled to receive if, immediately
prior to any such reorganization, reclassification, consolidation, merger or
sale, as the case may be, such Holder had held the number of shares of Exercise
Shares which were then purchasable upon the exercise of this Warrant; provided,
however, that in the event (i) the value of the stock, securities or other
assets or property issuable or payable with respect to one share of the Common
Stock of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby (the "Merger Consideration") is in
excess of the Exercise Price hereof effective at the time of such Sale of the
Company, and (ii) the Merger Consideration consists solely of cash and/or
securities of a class that is publically traded, then this Warrant shall expire
unless exercised prior to the consummation of such Sale of the Company.
Appropriate adjustment (as reasonably determined in good faith by the Board)
shall be made in the application of the provisions set forth herein with respect
to the rights and interests thereafter of the Holder of this Warrant, such that
the provisions set forth herein shall thereafter be applicable, as nearly as is
reasonably practicable, in relation to any shares of stock or other securities
or property thereafter deliverable upon the exercise of this Warrant. The
Company shall provided to the Holder at least twenty (20) days advance notice of
any such Sale of the Company.
8. NO STOCKHOLDER RIGHTS. This Warrant in and of itself shall not entitle the
Holder to any voting rights or other rights as a stockholder of the Company.
9. TRANSFER OF WARRANT. The Holder covenants not to transfer this Warrant or the
Exercise Shares except in compliance with Section 4.5. Subject to compliance
with Section 4.5, this Warrant, the Exercise Shares and the rights granted to
the Holder hereof are freely transferable, in whole or in part, upon surrender
of this Warrant, together with an assignment form, at the office or agency of
the Company; provided that such assignment form contains a written
acknowledgment of the transferree to be bound by the conditions of this Warrant
as a Holder hereunder.
10. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this Warrant is lost,
stolen, mutilated or destroyed, the Company may, on such terms as to indemnity
or otherwise as it may reasonably impose (which shall, in the case of a
mutilated Warrant, include the surrender thereof), issue a new Warrant of like
denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed.
Any such new Warrant shall constitute an original contractual obligation of the
Company, whether or not the allegedly lost, stolen, mutilated or destroyed
Warrant shall be at any time enforceable by anyone.
11. NOTICES, ETC. All notices and other communications required or permitted
hereunder shall be in writing and shall be sent by facsimile transmission,
express mail or other form of rapid communications, if possible, and if not then
such notice or communication shall be mailed by first-class mail, postage
prepaid, addressed in each case to the party entitled thereto at the following
addresses: (a) if to the Company, to Chordiant Software, Inc., 20400 Stevens
Creek Blvd., Suite 400, Cupertino, CA 95014, Attention: President and (b) if to
the Holder, to IBM , New Orchard Road, Armonk, New York 10504, Attention: Scott
Martin or at such other address as one party may furnish to the other in
writing. Notice shall be deemed effective on the date dispatched if by personal
delivery or facsimile transmission, two days after mailing if by express mail,
or three days after mailing if by first-class mail.
12. VALUE ADDED TAX. For the avoidance of doubt, the Company shall pay any value
added tax payable in respect of the grant of this Warrant to the Holder and the
value received by the Company for such grant. Any such tax shall be paid within
30 days of receipt of a value added tax invoice.
13. ACCEPTANCE. Receipt of this Warrant by the Holder shall constitute
acceptance of and agreement to all of the terms and conditions contained herein.
14. GOVERNING LAW. This Warrant and all rights, obligations and liabilities
hereunder shall be governed by the laws of the State of California.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
duly authorized officer as of July [12], 2002.
CHORDIANT SOFTWARE, INC.
By: /s/ Donald J. Morrison
Title: EVP, Products & Marketing
Agreed and Accepted:
INTERNATIONAL BUSINESS MACHINES CORPORATION
By: /s/ Pat Murphy
Title: Director, Business Development, IBM Global Services
NOTICE OF EXERCISE
TO: CHORDIANT SOFTWARE, INC.
(1) The undersigned hereby elects to purchase ________ shares of the Common
Stock of Chordiant Software, Inc. (the "Company") pursuant to the terms of the
attached Warrant, and tenders herewith payment of the exercise price in full,
together with all applicable transfer taxes, if any.
The undersigned hereby elects to purchase ________ shares of the Common Stock
of Chordiant Software, Inc. (the "Company") pursuant to the terms of the net
exercise provisions set forth in Section 2.1 of the attached Warrant, and shall
tender payment of all applicable transfer taxes, if any.
(2) Please issue a certificate or certificates representing said shares of
Common Stock in the name of the undersigned or in such other name as is
specified below:
________________________
(Name)
________________________
________________________
(Address)
(3) The undersigned represents that (i) the aforesaid shares of Common Stock are
being acquired for the account of the undersigned for investment and not with a
view to, or for resale in connection with, the distribution thereof within the
meaning of the Securities Act of 1933 as amended and that the undersigned has no
present intention of so distributing or reselling such shares; (ii) the
undersigned is aware of the Company's business affairs and financial condition
and has acquired sufficient information about the Company to reach an informed
and knowledgeable decision regarding its investment in the Company; (iii) the
undersigned is experienced in making investments of this type and has such
knowledge and background in financial and business matters that the undersigned
is capable of evaluating the merits and risks of this investment and protecting
the undersigned's own interests; (iv) the undersigned understands that the
shares of Common Stock issuable upon exercise of this Warrant have not been
registered under the Securities Act of 1933, as amended (the "Act"), by reason
of a specific exemption from the registration provisions of the Act, which
exemption depends upon, among other things, the bona fide nature of the
investment intent as expressed herein, and, because such securities have not
been registered under the Act, they must be held indefinitely unless
subsequently registered under the Act or an exemption from such registration is
available; (v) the undersigned is aware that the aforesaid shares of Common
Stock may not be sold pursuant to Rule 144 adopted under the Act unless certain
conditions are met and until the undersigned has held the shares for the number
of years prescribed by Rule 144; and (vi) the undersigned agrees not to make any
disposition of all or any part of the aforesaid shares of Common Stock unless
and until there is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with said registration statement, or the undersigned has provided the Company
with an opinion of counsel reasonably satisfactory to the Company (which counsel
may be in-house counsel to the undersigned), stating that such registration is
not required.
_______________________
(Signature)
____________________________
(Print name)
____________________________
(Date)
Appendix A
Registration Rights
(a) Piggyback Registration.
(i) Participation. If the Company elects to file a registration statement under
the Act covering the offer and sale of any Common Stock in connection with any
public offering (other than a registration statement on Form S-8 or Form S-4, or
their successors, or any other form for a similar limited purpose, or any
registration statement covering securities of the Company proposed to be issued
in exchange for securities or assets of another corporation or the resale of
such securities of the Company), the Company shall give written notice thereof
to the Holder at least twenty (20) days before filing. Subject to the
limitations of (a)(ii) and c(v) below, the Holder shall have the right to
include in such offering all or part of the Exercise Shares then held by the
Holder upon the giving of notice to the Company within ten business days of
receipt by it of notice from the Company. If the Holder notifies the Company of
its intent to include such Exercise Shares in the registration, subject to (a)(ii)
and (c)( v) below, the Company shall include in such registration statement such
number of shares of Registrable Securities as requested by the Holder. The
Holder agrees to keep any notice delivered by the Company pursuant to this
Section (a) prior to the filing of a registration statement strictly
confidential.
(ii) Underwriters' Cutback. If, in the opinion of the underwriter or
underwriters of such offering the inclusion of all of the Exercise Shares
requested to be registered would be inappropriate, then the number of Exercise
Shares to be included in the offering shall be reduced, with the participation
in such offering to be in the following order of priority: (1) first, securities
to be issued by the Company, (2) second, any other Common Stock required to be
included pursuant to any superior registration rights granted to other holders
of Common Stock (or securities convertible into Common Stock),, and (3) third,
Exercise Shares requested to be included and any other Common Stock held by
other holders of Common Stock (or securities convertible into Common Stock) with
equivalent registration rights requested to be included, on a pro rata basis
(based upon the number of shares of Common Stock requested to be included by the
Holder and the other holders of Common Stock requesting participation in the
offering)..
(iii) Registrant Controls. The Company may decline to file a registration
statement after giving notice to any Holder, or withdraw a registration
statement after filing and after such notice, but prior to the effectiveness
thereof, provided that the Company shall promptly notify the Holder in writing
of any such action and provided further that such registrant shall bear all
reasonable expenses incurred by the Holder in connection with such withdrawn
registration statement.
(iv) Underwriting Agreement. In connection with any registration under this
Section (a) involving an underwriting, the Company shall not be required to
include any Exercise Shares in such registration unless the Holder agrees to
participate in such underwriting and include the Exercise Shares requested to be
included in the underwriting to the extent provided herein. The Holder shall
enter into an underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting by the Company. If the Holder
disapproves of the terms of any such underwriting, such Holder may elect to
withdraw therefrom by written notice to the Company and the underwriter
delivered at least ten (10) days prior to the effective date of the
registrations statement. Any Exercise Shares excluded or withdrawn from such
underwriting shall be excluded and withdrawn from the registration.
(v) Furnishing Information. It shall be a condition precedent to the obligations
of the Company to take any action pursuant to the registration rights granted
herein that the Holder shall furnish to the Company such information regarding
itself and the Exercise Shares held by Holder as shall be required to effect the
registration of the Exercise Shares.
(b) Indemnification.
(i) Indemnification by the Company. In the event any Exercise Shares are
included in a registration statement pursuant to (a) above, the Company agrees
to indemnify and hold harmless the Holder, its officers, directors and agents,
any underwriter (as defined in the Act), and each Person, if any, who controls
Holder within the meaning of Section 15 of the Act or Section 20 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") from and
against any and all losses, claims, damages, or liabilities to which they may
become subject under the Act, the Exchange Act, or other federal or state law
arising out of or based upon any untrue statement or alleged untrue statement of
a material fact contained in any registration statement or final prospectus
relating to the Exercise Shares or in any amendment or supplement thereto or in
any preliminary prospectus, or arising out of or based upon any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, except insofar as
such losses, claims, damages, liabilities or expenses arise out of, or are based
upon, any such untrue statement or omission based upon information furnished in
writing to Company by the Holder or on the Holder's behalf expressly for use
therein; and provided further, that with respect to any untrue statement or
omission made in any preliminary prospectus, the indemnity provided for in this
paragraph shall not apply to the extent that any such loss, claim, damage,
liability or expense results from the fact that a current copy of the prospectus
was not sent or given to the person asserting any such loss, claim, damage,
liability or expense at or prior to the written confirmation of the sale of the
Exercise Shares concerned if it is determined that it was the responsibility of
the Holder to provide such person with a current copy of the prospectus and such
current copy of the prospectus would have cured the defect giving rise to such
loss, claim, damage, liability or expense. The indemnity provided for herein
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or expense if such settlement is effected without the consent of the
Company.
(ii) Indemnification by the Holder. The Holder, , if Exercise Shares are
includied in the securities as to which such registration is being effected,
agrees to indemnify and hold harmless the Company, its directors and officers,
and underwriter, and each Person, if any, who controls the Company within the
meaning of either Section 15 of the Securities Act or Section 20 of the Exchange
Act from and against any and all losses, claims, damages, or liabilities to
which they may become subject under the Act, the Securities Exchange Act of
1934, as amended, or other federal or state law arising out of or based upon any
untrue statement or alleged untrue statement of a material fact contained in any
registration statement or final prospectus relating to the Exercise Shares or in
any amendment or supplement thereto or in any preliminary prospectus, or arising
out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, that occurs in reliance upon and in conformity with
information furnished in writing by the Holder or on the Holder's behalf
expressly for use in any registration statement or final prospectus relating to
the Exercise Shares (or any amendment or supplement thereto, or any preliminary
prospectus). Notwithstanding anything to the contrary contained herein, the
liability of the Holder for indemnification hereunder shall be limited to the
net proceeds from the offering received by the Holder. The indemnity provided
for herein shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or expense if such settlement is effected without the
consent of the Holder.
(iii) Indemnification Procedures. Promptly after receipt by an indemnified party
under this Appendix A of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Appendix A, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense, in either case with counsel mutually
satisfactory to the parties, the fees and expenses of which will be paid by the
indemnifying party; provided, however, that an indemnified party shall have the
right to retain its own counsel, with the fees and expenses to be paid by the
indemnifying party, if (i) the indemnified party fails to assume or participate
in such defense, or (ii) representation of such indemnified party by the counsel
retained by the indemnifying party would be inappropriate due to actual or
potential differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, if materially prejudicial to its ability to defend such action,
shall relieve such indemnifying party of any liability to the indemnified party
under this agreement, but the omission so to deliver written notice to the
indemnifying party will not relieve it of any liability that it may have to any
indemnified party otherwise than under this Appendix A.
(iv) Contribution. If the indemnification provided for in this Appendix A is
held by a court of comptetent jurisdiction to be unavailable to an indemnified
party in respect of any losses, claims, damages, or liabilities referred to
herein, then each such indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, or liabilitiesas
is appropriate to reflect the relative benefits received by the indemnifying
party on the one hand and the indemnified party on the other from the offering,
or if such allocation is not permitted by applicable law, in such proportion as
is appropriate to reflect not only such relative benefits but also the relative
fault of the indemnifying party on the one hand and of the indemnified party on
the other in connection with the statements or omissions which resulted in such
losses, claims, damages, or liabilities as well as any other relevant equitable
considerations. The relative benefits received by the indemnifying party on the
one hand and the indemnified party on the other shall be deemed to be in the
same proportion as the total proceeds from the offering (net of underwriting
discounts and commissions but before deducting expenses) received by each such
party. The relative fault of the indemnifying party and on the one hand and the
indemnified party on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by such party, and the party's relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
Notwithstanding anything to the contrary contained herein, the liability of the
Holder for contribution hereunder shall be limited to the net proceeds from the
offering received by the Holder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(c) Miscellaneous.
(i) Registration Expenses. The Company shall bear all expenses incurred by the
Company in complying with the registration described in (a) above, including,
without limitation, all registration and filing fees, printing expenses, fees
and disbursements of counsel for the Company, blue sky fees and expenses and the
expense of any special audits incident to or required by any such registration.
(ii) Enforcement of Registration Rights. Holder shall have no right to obtain or
seek an injunction restraining or otherwise delaying any registration by the
Company as the result of any controversy that might arise with respect to the
interpretation or implementation of this agreement..
(iii) Assignment of Registration Rights. The rights of the Holder hereunder may
be assigned by each Holder to any transferee of all or any portion of the
Warrant or Exercise Sharesif: (i) the Holder agrees in writing with the
transferee or assignee to assign such rights, and a copy of such agreement is
furnished to the Company after such assignment, (ii) the Company is furnished
with written notice of (A) the name and address of such transferee or assignee,
and (B) the securities with respect to which such registration rights are being
transferred or assigned, (iii) following such transfer or assignment, the
further disposition of such securities by the transferee or assignee is
restricted under the Securities Act and applicable state securities laws, (iv)
such transfer shall have been made in accordance with the applicable
requirements of the Warrant and (v) the Company is furnished with written
acknowledgement bythe transferee, that it takes such rights as a "Holder"
subject to the terms, conditions and obligations contained herein. Upon any
transfer of less than all of its Exercise Shares, the Holder shall retain any
remaining registration rights with respect to Exercise Shares held by it.
(iv) Termination. All registration rights granted under this Appendix A shall
terminate as soon as all Exercise Shares held by and issuable to Holder (and its
affiliates) may be sold pursuant to Rule 144 promulgated under the Act during
any ninety (90) day period.
(v) Prior Rights Agreement. Notwithstanding any other provision of this Appendix
A, if the inclusion of any Exercise Shares pursuant to a request made under (a)
above would adversely affect the rights of any Holder (as such term is defined
in the Prior Rights Agreement) under the Registration Rights Agreement dated
September 28, 1999 by and between the Company and certain of its shareholders
(the "Prior Rights Agreement")) or result in a violation or breach of the Prior
Rights Agreement by the Company, the Company shall limit the number of Exercise
Shares to be included in any registration accordingly so as to comply, at all
times, with the provisions of the Prior Rights Agreement.
CHANGE OF CONTROL AGREEMENT
THIS CHANGE OF CONTROL AGREEMENT ("Agreement") is made by and between CHORDIANT
SOFTWARE, INC. (the "Company") and Gary DanielsAllen Swann ("Executive"). This
Agreement will become effective upon its execution by both parties hereto (the
"Effective Date").
RECITALS
WHEREAS Executive is employed by the Company pursuant to the terms of
Executive's offer letter from the Company;
WHEREAS Executive has been granted restricted shares of the
Company's common stock ("Restricted Shares"), as well as option(s) to purchase
shares of the Company's common stock (the "Options"), pursuant to the applicable
restricted stock agreement(s), stock option agreement(s) and equity incentive
plan(s) (together, the "Prior Grants");
WHEREAS in the future, Executive may be granted additional
shares of restricted stock and/or options to purchase the Company's common
stock, subject to the Board's sole discretion (together with Prior Grants, the
"Stock Awards"); and
WHEREAS the Company believes it is imperative to provide
Executive with accelerated vesting of the Stock Awards, as well as other
severance benefits, in the event that Executive is terminated without Cause (as
defined herein) or resigns for Good Reason (as defined herein) in connection
with a Change of Control (as defined herein).
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants contained herein, and other good and valuable consideration, the
parties hereto hereby agree as follows:
1. TERMINATION OF EMPLOYMENT.
(a) At-Will Employment. Unless specified otherwise in Executive's employment or
offer letter, Executive's employment is at-will, which means that the Company
may terminate Executive's employment at any time, with or without advance
notice, and with or without Cause. Similarly, Executive may resign his/her
employment at any time, with or without advance notice or Good Reason. Executive
shall not receive any compensation of any kind, including, without limitation,
severance benefits, following Executive's last day of employment with the
Company (the "Termination Date"), except as expressly provided herein, as
otherwise agreed in writing between Executive and the Chief Executive Officer of
the Company, or as provided in any plan documents governing the Stock Awards.
Executive shall devote all reasonable efforts to the performance of Executive's
duties, and shall perform such duties in good faith.
(b) Termination Related to a Change of Control. If Executive's employment is
terminated without Cause or Executive resigns for Good Reason within ninety (90)
days prior to or twelve (12) months after a Change of Control, and Executive
signs a release substantially in the form (whichever is applicable) attached
hereto as Exhibit A (the "Release"), then the Company shall provide Executive
with the following severance benefits:
(i) The Company shall make severance payments to Executive in the form of
continuation of Executive's base salary in effect on the Termination Date for
twelve (12) months following the Termination Date (the "Severance Period").
These payments will be made on the Company's ordinary payroll dates and will be
subject to standard payroll deductions and withholdings. Notwithstanding the
preceding, Executive's severance payments specified above will be reduced by the
Company by an amount equal to what Executive is paid or entitled to under any
contractual or statutory notice period contained in any employment
letter/arrangement or by way of law, such that the total severance payments plus
any notice pay shall not exceed twelve (12) months of base salary.
(ii) The Company will pay Executive an amount equal to Executive's annual bonus
(provided the Executive is under a non-commission, Company bonus plan). The
bonus will be calculated at one of the following rates, whichever is higher: (1)
as if both Executive and the Company achieved one hundred (100) percent of their
specified performance objectives; or (2) the actual performance of the Company
and Executive as measured against the specified performance objectives. This
amount will be paid over the entire Severance Period on the Company's ordinary
payroll dates, in equal installments, and will be subject to standard payroll
deductions and withholdings.
(iii) The Company will pay the premiums necessary to continue Executive 's life
and health insurance during the Severance Period.
(iv) Provided that Executive is not, or is no longer, an executive officer or
director of the Company, then the time period in which Executive is required to
repay any promissory note, loan or other indebtedness to the Company shall be
extended by sixty (60) months..
(v) The Company will accelerate the vesting of the Stock Awards such that the
greater of the following shall vest within ten (10) days after the date
Executive signs the Release: (a) 50% of the unvested shares as of the
Termination Date subject to the Stock Awards (after taking into account any
additional acceleration of vesting Executive may be receiving under any plan
document(s) governing the Stock Awards instituted prior to or after this
Agreement is executed, including any additional acceleration of vesting of
restricted stock under any restricted stock agreement(s)); or (b) all such
shares that would have vested if Executive had worked for the Company for twelve
(12) additional months beyond the Termination Date. This acceleration of vesting
will be in addition to any acceleration of vesting that the Executive would
otherwise receive under the Company's 2000 Nonstatutory Equity Incentive Plan,
the Company's 1999 Equity Incentive Plan, or any other plan document(s) and
including any additional acceleration of vesting of restricted stock under any
restricted stock agreement(s)). Executive shall have sixty (60) months to
exercise any vested Options in addition to any time specified in the plan
document(s) governing the Options. The Stock Awards shall continue to be
governed by the terms of the applicable restricted stock agreement(s), stock
option agreements and equity incentive plan documents.
(vi) With respect to any Prior Grant intended to be an incentive stock option,
the acceleration of the vesting of the Prior Grant and the extension of the time
that Executive shall have to exercise the Prior Grant as provided in Paragraph
1(b)(v) of this Agreement are deemed to be a modification of the Prior Grant
within the meaning of Section 424(h) of the Internal Revenue Code ("Code"). Such
modification shall result in the granting of a new option as of the date of
execution of this Agreement, including providing a new grant date for purposes
of starting the holding period specified in Section 422(a)(1) of the Code and
for purposes of the provision that the option price be not less than the fair
market value of the stock at the time such option is granted as specified in
Section 422(b)(4) of the Code. If Executive and the Company agree that the Prior
Grant shall remain an incentive stock option and if the new option meets the
requirements for incentive stock options specified in Section 422(b) of the
Code, and the $100,000 per year limitation specified in Section 422(d) of the
Code as of the date of execution of this Agreement, then the unexercised portion
of the Prior Grant shall be appropriately modified as to the date of grant and
the option price; provided, however, that the option price shall be the greater
of the original option price of the Prior Grant or the fair market value of the
stock on the date of execution of this Agreement. If Executive and the Company
do not agree that such Prior Grant shall remain an incentive stock option, then
the Prior Grant shall be deemed to be a nonstatutory stock option as of the date
of execution of this Agreement, and the Prior Grant shall be appropriately
modified to reflect such changed status.
(c) Termination For Cause Procedure. The Company may not terminate Executive's
employment for Cause unless and until Executive receives a copy of a resolution
duly adopted by the affirmative vote of at least a majority of the Board of
Directors of the Company ("Board") finding that in the good faith opinion of the
Board, Executive was guilty of the conduct constituting "Cause" and specifying
the particulars thereof in detail. The Company shall provide Executive with
reasonable notice of the Board vote and an opportunity for Executive, together
with Executive's counsel, to be heard before the Board.
2. DEFINITIONS.
(a) Definition of Cause. For purposes of this Agreement, "Cause" shall mean that
Executive has committed, or there has occurred, one or more of the following
events: (1) conviction of any felony or misdemeanor involving moral turpitude,
fraud or act of dishonesty against the Company; (2) a finding by the Board,
after a good faith and reasonable factual investigation, that Executive has
engaged in gross misconduct; or (3) material violation or material breach of any
Company policy or statutory, fiduciary, or contractual duty of Executive to the
Company; provided, however, that in the event that any of the foregoing events
occurs, the Company shall provide notice to Executive describing the nature of
such event and Executive shall thereafter have ten (10) days to cure such event
if such event is capable of being cured.
(b) Definition of Good Reason. For purposes of this Agreement, "Good Reason"
shall mean that any one of the following events occurs during the Executive's
employment with the Company without Executive's consent: (i) any reduction of
Executive's annual base salary (including bonus) as of the time period
immediately preceding the Change of Control, except to the extent that the
annual base salary (including bonus) of all other officers of the Company is
similarly reduced; (ii) any material reduction in the package of benefits and
incentives provided to the Executive, or any action by the Company which would
materially and adversely affect the Executive's participation or reduce the
Executive's benefits under any such plans, except to the extent that such
benefits and incentives of all other officers of the Company are similarly
reduced; (iii) any material change in Executive's position or responsibilities
(including the person or persons to whom Executive has reporting
responsibilities) that represents an adverse change from Executive's position or
responsibilities as in effect at any time within ninety (90) days preceding the
date of the Change of Control or at any time thereafter, excluding for this
purpose an isolated, insubstantial and inadvertent action not taken in bad faith
that is remedied by the Company promptly after notice thereof is given by
Executive; (iv) the Company's requiring Executive to relocate to any place
outside of a twenty-five (25) mile driving distance of Executive's current work
site, except for reasonably required travel on the business of the Company or
its affiliates that is not materially greater than such travel requirements
prior to the Change in Control or unless Executive accepts such relocation
opportunity; or (v) any failure to pay Executive any compensation or benefits to
which Executive is entitled within fifteen (15) days of the date due. Executive
may terminate his or her employment for Good Reason so long as Executive tenders
his resignation to the Company within thirty (30) days after the occurrence of
the event which forms the basis for his resignation for Good Reason. Executive
shall provide written notice to the Company describing the nature of the event
which forms the basis for Executive's resignation for Good Reason, and the
Company shall thereafter have ten (10) days to cure such event.
(c) Definition of Change of Control. For purposes of this Agreement, a "Change
of Control" means: (i) a dissolution, liquidation or sale of all or
substantially all of the assets of the Company; (ii) a merger or consolidation
in which the Company is not the surviving corporation; (iii) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise; (iv) the acquisition by any person, entity or group within
the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any comparable successor provisions (excluding
any employee benefit plan, or related trust, sponsored or maintained by the
Company or any Affiliate of the Company) of the beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable
successor rule) of securities of the Company representing at least fifty percent
(50%) of the combined voting power entitled to vote in the election of
directors; or (v) an acquisition by the Company of an unaffiliated company, for
cash or stock of the Company, in which some or all of the members of senior
management of the acquired company are retained by the Company for employment by
the acquired company or the Company.
3. OTHER EMPLOYMENT TERMS AND CONDITIONS. The employment
relationship between the parties shall be governed by the general employment
policies and procedures of the Company, including those relating to the
protection of confidential information and assignment of inventions; provided,
however, that when the terms of this Agreement differ from or are in conflict
with the Company's general employment policies or procedures, this Agreement
shall control.
4. GENERAL PROVISIONS.
(a) This Agreement, including all exhibits hereto, constitutes the complete,
final and exclusive embodiment of the entire agreement between the parties with
regard to the subject matter hereof. It is entered into without reliance on any
promise or representation, written or oral, other than those expressly contained
herein, and it supersedes any other such promises or representations.
Notwithstanding the foregoing, nothing in this Agreement shall affect the
parties' rights or obligations under the October 2002 restricted stock agreement
or any other applicable restricted stock or stock option agreements entered into
prior to or after the effective date of this Agreement or the Executive's
Employee Proprietary Information and Inventions Agreement. This Agreement cannot
be modified except in a writing signed by Executive and a duly-authorized member
of the Board.
(b) Whenever possible, each provision of this Agreement will be interpreted in
such a manner as to be effective under applicable law. The invalidity or
unenforceability of any provision of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement. Any invalid
or unenforceable provision shall be modified so as to be rendered valid and
enforceable in a manner consistent with the intent of the parties insofar as
possible.
(c) The Executive's or the Company's failure to insist upon strict compliance
with any provision of this Agreement or the failure to assert any right the
Executive or the Company may have hereunder shall not be deemed to be a waiver
of such provision or right or any other provision or right of this Agreement.
(d) This Agreement may be executed in several counterparts, each of which shall
be deemed to be an original but all of which together will constitute one and
the same instrument. Facsimile signatures shall be deemed as effective as
originals.
(e) This Agreement is intended to bind and inure to the benefit of and be
enforceable by Executive, the Company and their respective successors, assigns,
heirs, executives and administrators, except that Executive may not assign any
of his duties hereunder and he may not assign any of his rights hereunder
without the written consent of the Company. This Agreement shall be interpreted
and enforced in accordance with the laws of the State of California.
(f) If either party hereto bring any action to enforce such party's rights
hereunder, the prevailing party in any such action shall be entitled to recover
such party's reasonable attorneys' fees and costs incurred in connection with
such action.
(g) For purposes of construction, this Agreement shall be deemed to have been
drafted by the Company, and the rule of construction of contracts that
ambiguities are construed against the drafting party shall be applied against
the Company.
(h) Any notice required to be given or delivered to the Company under the terms
of this Agreement shall be in writing and addressed to the Corporate Secretary
of the Company at its principal corporate offices. Any notice required to be
given or delivered to Executive shall be in writing and addressed to Executive
at the address indicated herein or to the last known address provided by
Executive to the Company. All notices shall be deemed to have been given or
delivered upon: personal delivery; three (3) days after deposit in the United
States mail by certified or registered mail (return receipt requested); one (1)
business day after deposit with any return receipt express courier (prepaid); or
one (1) business day after transmission by facsimile.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year written below.
Signed: /s/ Allen Swann
Name:
Allen Swann
Address:
Date: April 24, 2003
CHORDIANT SOFTWARE, INC.
Signed: /s/ Stephen Kelly
Name: Stephen Kelly
Title: Chief Executive Officer
Date: April 24, 2003
Exhibit A - Release Agreements
EXHIBIT A
RELEASE AGREEMENT FOR EMPLOYEES UNDER 40 YEARS OF AGE
In exchange for the severance benefits I am receiving to which I would not
otherwise be entitled, I hereby release, acquit and forever discharge the
Company, and its officers, directors, agents, servants, employees, attorneys,
shareholders, successors, assigns and affiliates, of and from any and all
claims, liabilities, demands, causes of action, costs, expenses, attorneys'
fees, damages, indemnities and obligations of every kind and nature, in law,
equity, or otherwise, known and unknown, suspected and unsuspected, disclosed
and undisclosed, arising out of or in any way related to agreements, events,
acts or conduct at any time prior to and including the execution date of this
Release Agreement, including but not limited to: all such claims and demands
directly or indirectly arising out of or in any way connected with my employment
with the Company or the termination of that employment; claims or demands
related to salary, bonuses, commissions, stock, stock options, or any other
ownership interests in the Company, vacation pay, fringe benefits, expense
reimbursements, severance pay, or any other form of compensation; claims
pursuant to any federal, state or local law, statute, or cause of action
including, but not limited to, the federal Civil Rights Act of 1964, as amended;
the federal Americans with Disabilities Act of 1990; the California Fair
Employment and Housing Act, as amended; tort law; contract law; wrongful
discharge; discrimination; harassment; fraud; defamation; emotional distress;
and breach of the implied covenant of good faith and fair dealing.
I UNDERSTAND THAT THIS RELEASE INCLUDES A RELEASE OF ALL KNOWN
AND UNKNOWN CLAIMS. In giving this release, which includes claims which may be
unknown to me at present, I acknowledge that I have read and understand Section
1542 of the California Civil Code which reads as follows: "A general release
does not extend to claims which the creditor does not know or suspect to exist
in his favor at the time of executing the release, which if known by him must
have materially affected his settlement with the debtor." I hereby expressly
waive and relinquish all rights and benefits under that section and any law of
any jurisdiction of similar effect with respect to my release of any unknown or
unsuspected claims I may have against the Company.
DATED: AGREED:
[Employee's Name]
RELEASE AGREEMENT FOR EMPLOYEES 40 YEARS OF AGE OR OLDER
In exchange for the severance benefits I am receiving to which I would not
otherwise be entitled, I hereby release, acquit and forever discharge the
Company, and its officers, directors, agents, servants, employees, attorneys,
shareholders, successors, assigns and affiliates, of and from any and all
claims, liabilities, demands, causes of action, costs, expenses, attorneys'
fees, damages, indemnities and obligations of every kind and nature, in law,
equity, or otherwise, known and unknown, suspected and unsuspected, disclosed
and undisclosed, arising out of or in any way related to agreements, events,
acts or conduct at any time prior to and including the execution date of this
Release Agreement, including but not limited to: all such claims and demands
directly or indirectly arising out of or in any way connected with my employment
with the Company or the termination of that employment; claims or demands
related to salary, bonuses, commissions, stock, stock options, or any other
ownership interests in the Company, vacation pay, fringe benefits, expense
reimbursements, severance pay, or any other form of compensation; claims
pursuant to any federal, state or local law, statute, or cause of action
including, but not limited to, the federal Civil Rights Act of 1964, as amended;
the federal Americans with Disabilities Act of 1990; the federal Age
Discrimination in Employment Act of 1967, as amended ("ADEA"); the California
Fair Employment and Housing Act, as amended; tort law; contract law; wrongful
discharge; discrimination; harassment; fraud; defamation; emotional distress;
and breach of the implied covenant of good faith and fair dealing.
I acknowledge that I am knowingly and voluntarily waiving and releasing any
rights I may have under the ADEA, as amended. I also acknowledge that the
consideration given for the waiver and release in the preceding paragraph hereof
is in addition to anything of value to which I was already entitled. I further
acknowledge that I have been advised by this writing, as required by the ADEA,
that: (a) my waiver and release do not apply to any rights or claims that may
arise after the execution date of this Release; (b) I have been advised hereby
that I have the right to consult with an attorney prior to executing this
Release; (c) I have twenty-one (21) days to consider this Release (although I
may choose to voluntarily execute this release earlier); (d) I have seven (7)
days following my execution of this Release to revoke my agreement to it; and
(e) this Release will not be effective until the date upon which the revocation
period has expired, which will be the eighth day after this Release is executed
by me.
I UNDERSTAND THAT THIS RELEASE INCLUDES A RELEASE OF ALL KNOWN
AND UNKNOWN CLAIMS. In giving this release, which includes claims which may be
unknown to me at present, I acknowledge that I have read and understand Section
1542 of the California Civil Code which reads as follows: "A general release
does not extend to claims which the creditor does not know or suspect to exist
in his favor at the time of executing the release, which if known by him must
have materially affected his settlement with the debtor." I hereby expressly
waive and relinquish all rights and benefits under that section and any law of
any jurisdiction of similar effect with respect to my release of any unknown or
unsuspected claims I may have against the Company.
DATED: AGREED:
[Employee's Name]