UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended June 30, 2001
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____ to ____
Commission File Number 000-26867
---------
PIVOTAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
British Columbia, Canada Not Applicable
(State or other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
300-224 West Esplanade
North Vancouver, British Columbia
Canada
V7M 3M6
(Address of Principal Executive Offices)
(Zip Code)
(604) 988-9982
(Registrant's Telephone Number,
Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
N/A N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Shares
--------------------------------------------------------------------------------
(Title of Class)
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 THE
FILING REQUIREMENTS FOR THE PAST 90 DAYS: Yes [X] No [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K: [ ]
The aggregate market value of the voting shares held by non-affiliates of the
registrant, based on the closing sale price of the common shares on September 4,
2001 as reported on the Nasdaq National Market was approximately U.S.$5.44.
Common shares held by each current executive officer and director and by each
person who is known by the Registrant to own 5% or more of the outstanding
common shares have been excluded from this computation in that such persons may
be deemed to be affiliates of the Registrant. This determination of affiliate
status is not a conclusive determination for other purposes.
AS OF SEPTEMBER 1, 2001, 23,996,235 COMMON SHARES OF THE REGISTRANT WERE
OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable.
TABLE OF CONTENTS
PART I 1
ITEM 1. BUSINESS................................................................... 1
ITEM 2. PROPERTIES................................................................. 30
ITEM 3. LEGAL PROCEEDINGS.......................................................... 30
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS......................... 30
PART II 30
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...... 31
ITEM 6. SELECTED FINANCIAL DATA.................................................... 36
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS................................................................. 38
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................... 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................. 80
PART III 80
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT................................... 80
ITEM 11. EXECUTIVE COMPENSATION..................................................... 82
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............. 86
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................. 87
PART IV 87
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............ 87
FORWARD-LOOKING STATEMENTS
Statements in this filing about our future results, levels of activity,
performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in our forward-looking statements.
These factors include, among others, those described in connection with the
forward-looking statements, and the factors described under the heading
"Important factors that may affect our business, our results of operations and
our stock price" in Item 1 and in Item 7 to this report, which is hereby
incorporated by reference in this report.
In some cases, you can identify forward-looking statements by our use of words
such as "may," "will," "should," "could," "expect," "plan," "intend,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or the
negative or other variations of these words, or other comparable words or
phrases.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, achievements or other future events. Moreover, neither we
nor anyone else assumes responsibility for the accuracy and completeness of our
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of this report. You should not place
undue reliance on our forward-looking statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
Pivotal Corporation, incorporated in 1990 in British Columbia, Canada, enables
large and medium-sized businesses worldwide to acquire, serve and manage their
customers by providing customer relationship management and electronic business
solutions. Customer relationship management and electronic business solutions
automate and manage marketing, selling and servicing processes over the
Internet. We refer to our solutions as the Pivotal Customer Relationship
Management and eBusiness solution suite. The Customer Relationship Management
and eBusiness solution suite is designed to complement and integrate with a
business' supply chain, therefore enabling businesses to improve efficiency and
increase revenues.
On December 5, 2000, we announced a joint-three year initiative with Microsoft
to develop, market and sell the Customer Relationship Management and eBusiness
solution suite to large enterprises which will result in incremental
expenditures by Microsoft and us towards this initiative over this period. We
have completed the first phase of our business development initiative with
Microsoft by implementing a training program to educate Microsoft sales
professionals about our solutions and engaged Microsoft in co-marketing and
co-selling initiatives. In addition, we were featured as the premier Customer
Relationship Management partner in the Microsoft Business Advantage tour in
March and April 2001.
On August 14, 2001, we announced the worldwide availability of the Pivotal
ePower Lifecycle Engine - Oracle Edition. In the past, we have focused solely on
Microsoft database platforms. With this new development, our solution can now be
implemented using Microsoft and/or Oracle based platforms and technologies. We
believe this will open up a new set of business opportunities to us as we will
now have access to businesses using an Oracle platform. With our new
Oracle-based solution, we will seek to broaden our market by directly targeting
Oracle-based companies and by expanding our relationships with third party
distributors and systems integrators that have Oracle-based practices.
Our solutions are sold in 35 countries and are available in English, French,
German and Spanish from Pivotal directly and Portuguese, Swedish, Japanese,
Chinese and Hebrew from members of our Pivotal Alliance. Our worldwide customer
base includes more than 1,300 organizations in traditional, commercial, public
market sectors and in the new digital economy and includes companies such as ABN
AMRO Securities LLC, American Medical Security Group Inc., Atlas Copco Airpower
N.V., Belgacom France, Bombardier Aerospace, CIBC World Markets, Commonfund,
Compuware Corporation Japan, Deloitte & Touche, Emerson Electric, Ericsson, Farm
Credit Services of America, FLAG Telecom, Grantham, Mayo, Van Otterloo & Company
L.L.C., Haldex Services Corporation, Heller Financial, Hitachi Telecom (USA)
Inc., Intrawest Corporation, Kikkoman Corporation, KPMG, Miller Heiman, Inc.,
National Air Traffic Services, London, National City Bank of Minneapolis, NEC,
Nissan Motor (Denmark), Novozymes North America, Inc., Panasonic SA, Principal
Financial Group, Qiagen, RBC Dain Rauscher Wessels, Southern Company, Toshiba
Information Systems Corporation, USFilter, and 1201 Financial & Insurance
Services, Inc. We market and sell our solutions through a direct sales force as
well as through third-party solution providers.
1
Our common shares are listed on NASDAQ under the symbol "PVTL" and on the
Toronto Stock Exchange under the symbol "PVT". Our head office is located at 300
- 224 West Esplanade, North Vancouver, British Columbia, Canada V7M 3M6, and our
telephone number is (604) 988-9982. Our home page on the Internet can be found
at www.pivotal.com. Information contained on our website does not constitute
part of this report.
Pivotal Corporation was incorporated in British Columbia in 1990 under the name
Pen Magic Software Corporation, and changed its name to Pen Magic Software Inc.
in 1991, to Pivotal Software Inc. in 1995 and to Pivotal Corporation in 1999.
The terms "Pivotal," "our company" and "we" in this filing refer to Pivotal
Corporation, a British Columbia company, and all of Pivotal Corporation's wholly
owned subsidiaries including Pivotal Corporation, incorporated in Washington
State, Pivotal Corporation Limited, incorporated in the United Kingdom, Pivotal
Corporation France S.A., incorporated in France, Exactium Ltd., incorporated in
Israel, Exactium, Inc., incorporated in Delaware State, Pivotal Technologies
Corporation Limited, incorporated in the Republic of Ireland, Pivotal
Corporation (N.I.) Limited, incorporated in Northern Ireland, Pivotal GmbH,
incorporated in Germany, Digital Conversations Inc., incorporated in British
Columbia, Pivotal Corporation Australia Pty. Ltd., incorporated in Australia,
Project One Business Technologies Inc., incorporated in British Columbia, Nihon
Pivotal K.K., incorporated in Japan and Inform, Inc., incorporated in Ontario,
collectively.
Pivotal Relationship, Pivotal eRelationship, Pivotal eRelationship 2000, Pivotal
eRelationship 2000 IntraHub, Pivotal eRelationship 2000 CustomerHub, Pivotal
eRelationship 2000 PartnerHub, Pivotal ePower, Pivotal ePower 2000, Pivotal
eSelling 2000, PivotalHost, Pivotal Anywhere, Pivotal ePower Intelligence
Engine, Pivotal Sales & Marketing Intelligence, Pivotal ePower Interaction
Engine, PivotalLink for Customer Interaction Center, Pivotal SyncStream, Pivotal
Demand Chain Management, Pivotal Digital Intelligence, Pivotal Instant Action,
Pivotal Commerce, Pivotal PartnerHub, Pivotal CustomerHub, Pivotal eSelling,
Pivotal Service, Pivotal Marketing, Pivotal ePower Lifecycle Engine - Oracle
Edition and Miller Heiman for eRelationship Sales are trademarks and/or
registered trademarks of Pivotal Corporation. All other company names, product
names, marks, logos, and symbols referenced are the trademarks and/or registered
trademarks of their respective owners.
INDUSTRY BACKGROUND
In the mid-1980's businesses began to implement contact management software to
track prospects, customers and customer data. Since then, departmental software
solutions have been developed to track data related to servicing customers on
the demand side of the business. Some examples of departmental software
solutions are sales force automation software which provides prospect and
customer data to sales staff; customer service software which provides customer
service request and history to customer service representatives; and marketing
automation software to provide campaign and prospect and customer data to
marketing staff to generate more demand for products and services. In the 1990s
cross-departmental Customer Relationship Management systems began to emerge that
brought departmental data assets together into centralized customer and prospect
data repositories while allowing these demand side departments to input their
own specific information, providing the company with a unified view of the
customer and prospect. Today Customer Relationship Management has become a
business strategy that seeks to optimize profitability, revenue and customer
satisfaction by organizing around customer segments, fostering customer
satisfying behaviors and implementing customer-centric processes. On July 16,
2001, Giga Information Group IdeaByte published "IT Trends: Midyear CRM Update"
which states "...more than 50 percent of companies today both in the United
States and Europe are embarking on enterprise CRM initiatives. And in the face
of the economic downturn customer relationship management (CRM) interest is not
wavering, but instead there is new emphasis on clear goals and quick, measurable
results from CRM investments."
With the appearance of the Internet in the 1990s as a ubiquitous communication
network, companies began to provide support over the Internet for field and
remote staff who needed access to departmental data assets. As other
communication channels have continued to evolve, such as fax, email and wireless
communications, businesses have looked for Customer Relationship Management
systems that can provide an integrated "real-time" view of customer information
across all these communication channels. In addition, they have recognized that
the Internet is more than just a network for allowing their own remote staff to
access centralized data repositories; the Internet provides a backbone for
businesses to change the way they interact with business partners and customers.
We believe that the Internet and other communication technologies such as
wireless technologies have created a fundamental change in the way many
companies conduct business. Today, the Internet goes beyond simple
communication. It provides a means for prospects and customers to interact with
businesses, and businesses to interact with all their stakeholders, including
employees, customers, partners and suppliers in "real-time" across global and
corporate boundaries. As a result, there has been a demand for enterprise-wide
software solutions that support stakeholders' need to communicate and
collaborate with businesses across departments and communication channels.
2
Today's demand side and enterprise-wide eBusiness solutions support this
business need. These software solutions automate and manage the people and
processes related to customer management in order to increase revenues and
decrease costs. This enterprise-wide solution ties into companies' supply chain
management solutions and enterprise resource planning applications to increase
productivity, decrease costs, and increase revenues.
In March 2001, the Gartner Group published a review of the market performance of
Customer Relationship Management software, finding "tremendous growth during the
past three years." New license revenue for Customer Relationship Management
vendors reached $3.7 billion in 2000. Growth ranging from 57 percent to 76
percent in each of the past three years has continued to confirm the acceptance
and priority of customer relationship management investments by the enterprise.
According to a July 2001 report of the high-tech market research firm Cahners
In-Stat Group, Customer Relationship Management software application revenue is
expected to increase to more than US$30 billion over the period of 2001 to 2005,
with much of that growth coming in Europe and Asia. Gartner also points to the
highest levels of growth in the Asia/Pacific region, where new license revenue
for Customer Relationship Management software achieved 153 percent growth in
2000.
The Impact of Changing Technologies
Developments in technology have dramatically affected the marketplace for
Customer Relationship Management solutions. These developments include:
- The Internet. With the emergence of the Internet as a dominant
platform for global interactive communication, coordination and
commerce, businesses are seeking better ways to use the Internet as a
platform to conduct their business. As a result, businesses are
investing in technologies that support and exploit the capabilities of
the Internet. Emerging new technology standards based on XML and
Internet services are being embraced by enterprises seeking to
integrate internal systems and provide collaboration with partners and
suppliers in a drive to reduce costs, increase revenues, increase
market intelligence and improve customer satisfaction. Increasingly,
these new technologies are also supplanting non-Internet native
architectures, such as client server computing.
- Widespread Adoption of Microsoft Technologies. Microsoft Windows NT,
Microsoft Windows 2000 and Microsoft .NET platforms offer businesses
the opportunity to develop, deploy and maintain information technology
systems with increased flexibility on a cost-effective basis. These
platforms are also widely used and well understood by technical
personnel. With the recent addition of Microsoft Commerce Server 2000,
Share Point Server 2001 and BizTalk Server, Microsoft is delivering a
rich and cost-effective application development platform to support
the requirement for integration, application customization and
flexibility, and document exchange.
- Growth of Wireless Computing. The proliferation of wireless computing
devices, such as palm computers, Internet-enabled cell phones and
improved remote computing has empowered the mobile professional.
Electronic solutions enable users to access information from any
location using their preferred wireless computing device.
- Availability of Intelligence Systems. Intelligence systems include
customer profiling technologies that enable software to respond to or
anticipate user needs with less input from the user and more analysis
of profiles or actual website visitor behavior. These include guided
selling technologies to help users make purchases on the Internet,
even for very complex products and services. With these
customer-profiling technologies, the customer's buying experience is
personalized and targeted to fulfill its specific needs.
THE OPPORTUNITY
The customers we serve are typically mid-size companies, divisions of large
businesses and large businesses. Many of these businesses are responding to
pressures to implement cross-departmental or enterprise-wide business models
that put the customer at the center of their business in order to increase
revenues, decrease costs, and increase productivity. Many of these businesses
require close integration and collaboration between the organization and their
customers and partners, not only to deliver the high levels of customer service
but also to use the strengths of their partner networks at reduced cost to
themselves. Until recently, most electronic business applications designed on
the Microsoft platform were designed primarily to address the needs of the
smaller enterprise, were often considered too unstable, were not appropriately
scalable for large enterprises and were considered not designed for the
Internet. Today, Microsoft Windows NT, Microsoft Windows 2000, Microsoft
BackOffice platforms and Microsoft .NET servers are considered highly scalable,
enterprise class solutions.
3
The recent development of our solutions for use on the Oracle 8i database has
allowed us to target larger customers and to access an increased market
opportunity by accessing Oracle database customers. Oracle databases are
typically deployed at larger customer sites than the Microsoft SQL Server
database.
We believe that a significant market opportunity exists for an enterprise-wide
customer relationship management and electronic business solution that can be
easily customized, quickly integrated with current systems and business
processes and rapidly deployed. Many businesses have adopted the Internet,
Oracle, Microsoft Windows NT, Microsoft Windows 2000, Microsoft BackOffice, and
Microsoft .NET server platforms. As a result, a new opportunity also has emerged
for an enterprise-wide customer relationship management and electronic business
solution and departmental or business unit applications optimized for these
platforms and to meet the requirement for maximum flexibility. Such a solution
must incorporate many of the benefits enabling businesses to take control of the
demand side of their business in response to pressure from prospects and
customers to deliver powerful and productive customer experiences. We believe
that such a solution must:
- support the need for a modular or phased application deployment and be
usable by a business without significant customization, to enable
rapid deployment at low total cost of ownership;
- support Internet-based collaboration and the sharing of information
with customers and partners;
- support integration and collaboration among sales, marketing and
customer service employees;
- support integration between other internal business systems such as
supply chain, enterprise resource planning and finance systems through
an XML-based computing platform;
- have the ability to support multiple enterprise database platforms,
such as Oracle and Microsoft;
- support mobile professionals and their wireless computing devices;
- provide tools for easy implementation to meet specific needs;
- be easy to use by all end-users without extensive training; and
- support the emerging needs of high-growth industry segments such as
manufacturing, finance and health care.
PIVOTAL SOLUTIONS
We are a leading provider of customer relationship management and electronic
business solutions. These solutions include applications for sales force
automation, marketing automation, service automation, call center management,
partner relationship management and electronic commerce. These solutions enable
companies to increase revenues and decrease costs by increasing efficiency
within the sales, marketing and service activities that ultimately impact
customer acquisition and retention. To achieve this, our solutions connect
employees, partners and customers into one unified business network. Our
electronic business solutions include award-winning, Internet-based applications
supported by an array of professional services and our global Pivotal Alliance
network of third-party distributors. Our solutions are designed and optimized
for the Internet, Microsoft and Oracle platforms. In July 2000, Pivotal was
named the North American Packaged Application of the Year by Microsoft. In
December 2000, we won the Microsoft Industry Solution Award for - "Best
Integrated Customer Relationship Management/eBusiness Solution".
We believe our solutions deliver the following benefits:
- Enables Businesses to Improve Productivity by Increasing Revenues and
Decreasing Costs. Our solutions unify sales, marketing and customer
service employees and partners around customer processes and
interactions. By maintaining all customer information in a shared
database, our solutions make it easy for different users to maximize
their contribution to customer relationship management by better
capturing customer profiles and building one-to-one customer
relationships. We believe this improvement in customer focus enables
businesses to increase revenues through better customer loyalty and
retention. Our customers also realize decreased costs by streamlining
processes and interactions between employees, partners and customers,
through more effective and more targeted marketing, sales and service
campaigns, the reduction of inefficient communications and the
increased effectiveness of targeted communications efforts.
- Improves the Collaboration and Interaction Between Businesses and Their
Customers. Using Pivotal solutions, businesses can transform their
static website into a collaborative tool used to increase their
customer base, and to service and sell to customers. Prospective
customers can obtain information regarding businesses' products and
services over the Internet. Customers can place orders and retrieve
information on products and services over the Internet and directly
interact online
4
with sales, marketing and customer service departments. This direct
interaction can result in improved customer service and generation of
leads, as well as lower customer service costs.
- Improves the Collaboration and Interaction Between Businesses and
Their Partners. Pivotal solutions enables businesses to improve their
efficiency and selling processes by facilitating interaction and
collaboration with their partners over the Internet. Our application
maintains a shared database consisting of customer's information
related to products, services, customer contacts and sales
opportunities. By enabling their partners to access and update the
shared database, our solutions simplify the sharing of information
between businesses and their partners so they can jointly service
their customers' needs and concerns.
- Enables Rapid Implementation and Simple Customization. Businesses can
use our solutions without significant customization which expedites
the implementation process. If they desire, businesses can customize
our solutions to reflect their own internal processes easily using the
industry standard business programming language Microsoft Visual
Basic. In addition, businesses can choose one of our solutions for a
particular industry - solutions already optimized and configured for
such industries as financial services, healthcare and manufacturing.
These industry solutions allow businesses to immediately gain benefit
from our solutions as we have already done the industry-specific
customizations.
- Yields a Low Total Cost of Ownership. Our solutions can be
cost-effectively deployed and customized and thus require few
resources for ongoing support, system maintenance and end-user
training. Our solutions are also relatively easy for end-users to
learn, which results in lower ongoing training costs. In addition, our
software applications permit modifications and upgrades to be
transmitted to all users, including mobile users, thereby reducing the
cost of modifying the solutions.
- Scales With the Growing Needs of Pivotal's Customers. Many of our
customers require that our solutions support their growing number of
employees, online customers and partners. Our solutions' structure
enables our customers to expand our solutions as their businesses grow
by adding servers in a number of locations. This capability improves
performance and enables our solutions to support larger numbers of
concurrent users.
- Increases the Efficiency of Mobile Professionals. Mobile professionals
can access our solutions remotely across local-area networks,
wide-area networks or over the Internet by using a number of portable
computing devices including laptops, palm computers and
Internet-enabled cell phones. Mobile professionals also can work
unconnected to a network and transmit and receive information to
automatically update their own files and the shared corporate
database. These capabilities increase the efficiency of mobile
professionals.
BUSINESS STRATEGY
Our goal is to become a leading global provider of electronic business solutions
which combine Customer Relationship Management, electronic commerce and wireless
technologies. The key elements of our growth strategy are as follows:
- Extend Application and Solution Scope. We intend to continue the
development of our applications to add new functions, with a
particular emphasis on Internet-based selling, marketing and customer
services. We also intend to continue to develop industry solutions for
specific industries that will further simplify the deployment and use
of applications. In addition, we plan to offer new versions of our
applications that support a wider variety of international customers
and their respective business practices and languages.
- Deepen Collaboration and Interaction with Members of the Pivotal
Alliance. We plan to continue broadening our network of strategic
relationships, including our Pivotal Alliance network. The Pivotal
Alliance network includes over 50 independent companies that
distribute our products, install the software purchased by our
customers and provide other software or related services to address
specific customer needs. This network has allowed us to focus on our
core competencies while taking advantage of the strengths of Pivotal
Alliance members who may have specific industry expertise or better
regional presence, which enables them to better address the needs of
our customers and provide them with a complete electronic business
solution. New strategic relationships for the coming year include Cap
Gemini Ernst and Young, and Intel. Additionally, we have significantly
expanded our relations with Microsoft.
- Deepen Collaboration and Interaction Between Pivotal and Our
Customers. We will continue to focus on providing customer solutions
that help our customers achieve business success. In particular, we
plan to maintain a customer-focused culture by inviting repeat
business from existing customers as we make new features available,
and to gain new customers as our existing customers become independent
references for our solutions. We believe that the benefits of our
solutions have helped us to develop a loyal base of customers. We
intend to continue to focus significant resources on customer success
5
programs, including a systematic customer surveying process, to
improve our customer-driven product development initiatives and
ultimately improve our solutions.
- Extend Relationships with Application Service Providers to Deliver Our
Solutions on a Usage Fee Basis. We will continue to expand our
relationships with application service providers to provide an
alternative licensing arrangement through these third party
application service providers that enables customers to pay a usage
fee to access our software on servers operated by the application
service providers. This enables businesses to outsource their
electronic business solutions and related information technology
infrastructure through an alternative pricing model, such as a monthly
fee.
- Continue Expansion of Our Worldwide Distribution Capacity. We
currently have a distribution strategy that includes direct sales
personnel and resellers which enables us to target a wide variety of
customers in different industries and geographical regions. We plan to
continue to invest in our worldwide distribution capacity to increase
market share and penetration. This investment will include expanding
our direct sales force, continuing to expand relationships with
existing and new resellers and entering into bundling arrangements
with technology providers to provide complimentary niche products to
our customers.
- Expand Industry Solution Program. We will continue to develop
solutions in response to industry need. Today's core industry
solutions include solutions for the following industries: financial
services, healthcare, manufacturing, technology, and electronic market
places.
PRODUCTS AND PROFESSIONAL SERVICES
Our solution consists of six suites that help companies control the sales,
marketing, and service processes core to their business. These suites are:
Pivotal Sales, Pivotal Marketing, Pivotal Service, Pivotal Collaboration Hubs,
Pivotal Commerce, and Pivotal eBusiness Platform. In addition, we market
industry specific solutions.
These solution suites are comprised of our core products including Pivotal
eRelationship, Pivotal CustomerHub, Pivotal PartnerHub, Pivotal eSelling,
Pivotal ePower, Pivotal Intelligence Suite, Pivotal Interaction Center, Pivotal
Anywhere, Pivotal Instant Action, Pivotal Toolkit and PivotalHost. These core
products and other leading technology options provide an integrated,
collaborative network that helps to manage information, transactions, and
interactions for every stakeholder in the customer lifecycle.
PIVOTAL SOLUTIONS
Our six solutions are comprised of a variety of core products. For detailed
information on the products which are bundled together into the six solutions,
see the "Core Products" section ahead.
Pivotal Sales
Pivotal Sales empowers sales professionals to create a meaningful and relevant
buying experience by focusing on one-to-one relationships with the customer.
Pivotal Sales expedites sales processes with "best practice" sales
methodologies, and identifies cross-selling and up-selling opportunities for
mobile sales professionals regardless of their location or the time of day.
Pivotal Sales supports sales strategy with integrated forecasting and analysis
through all sales channels.
The Pivotal Sales solution supports the electronic management of the following
capabilities:
o Quote and Proposal Management
o Consolidated Revenue Forecast
o Territory Management
o Opportunity Management
o Team-selling Enablement
o Best Practices Enablement
o Multi-Channel Sales Integration
o Real-Time Product Configuration
o Expense Management
o Sales Efficiency Tools
o Prospecting Campaigns
o Web-based Collaborative Services
6
o Up/Cross-Selling Automation
o Competitive & Industry Intelligence
Pivotal Marketing
Pivotal Marketing empowers a business to attract and retain more profitable
customers by enabling the business to understand the value of each customer and
create a differentiated customer experience with highly personalized
interactions. With Pivotal Marketing, businesses maximize profitability through
one-to-one marketing strategies that deliver optimal customer acquisition,
retention, cross-selling and up-selling results.
The Pivotal Marketing solution supports the electronic management of the
following key marketing capabilities:
o Campaign Management
o Lead Capturing & Tracking
o Intelligence Repository
o Forecasting: campaign impact, market shifts and customer perception
o Customer Profiling
o Event Management
o ROI Calculation and Analysis
o Best Practices
o Data Mining
o Strategic Analysis
o Direct Mail Campaign Management
o Collaborative Action Plans
Pivotal Service
Pivotal Service provides service professionals with the intelligence and
knowledge they need to deliver precise and timely resolutions to customers in
personalized interactions that help foster long-term relationships and loyalty.
Pivotal Service can assist in maximizing revenue by empowering service
professionals to transform customer interactions into cross-sell and up-sell
transactions.
The Pivotal Service solution supports the electronic management of the following
key service capabilities:
o Integrated Communication Platform
o Multi-channel Interactions
o End-to-End Reporting
o Online Issue Resolution
o Online Request Tracking and Escalation
o Service-to-Order Integration
o Personalized Self-Service
o Online Frequently Asked Questions Management
o Interactive Voice Response Self-Service
o Knowledge Base Management
o Sales/Marketing Integration
o Market-driven Product Enhancement
o Time & Activity Management
o Productivity & Performance Analysis
Pivotal Collaboration Hubs
Pivotal Collaboration Hubs are Internet solutions that empower customers and
partners to become active participants in every marketing, sales and service
activity through highly personalized self-service and commerce. Pivotal
Collaboration Hubs create a collaboration and communication network for
employees, customers, and partners to conduct business in a synchronized manner.
The Pivotal Collaboration Hub solution supports the electronic management of the
following capabilities:
o Partner Management
7
o Joint Account Management
o Customer Self-Service
o Online Partner & Customer Training
o Multi-channel Data Repository
o Multi-Channel Lead Management & Forecasting
o Sales Tools & Literature Fulfillment
o Order Entry & Tracking
o Service request management & tracking
o Joint Marketing Management
o Issue management & tracking
o Partner Recruitment
o Partner Profiling
o Partner Performance Reporting & Analytics
o Customer Self-Service
o Online Customer Training
o Order Entry and Tracking
o Service Request Management and Tracking
Pivotal Commerce
The Pivotal Commerce solution is an integrated transaction platform for
business-to-business commerce. It efficiently manages financial transactions
across traditional channels and the Internet, delivering personalized
transactions that are coordinated and integrated with the back office. By
guiding customers across multiple channels at every phase of the customer
lifecycle, Pivotal Commerce allows companies to quickly develop proposals,
generate quotes, manage complex pricing configurations, and link leads and sales
activity with traditional channels.
Pivotal Commerce has the following capabilities to support the requirements of
sophisticated online selling:
o Electronic Data Repository: product, pricing, sales data
o Dynamic Proposals
o Quotes
o Reports & Orders
o Browser-based Authoring Environment
o Catalog Management
o Configuration Management
o Supply Chain Integration
o Guided Product, Pricing
o Service Configuration
o Web-based Product and Configuration Management
o Site Management
o Multi-Currency & Language
o Single Source Shipping & Tracking
o Quote and Proposal Management
o Multi-channel Sales Management
Pivotal eBusiness Platform
The Pivotal eBusiness platform delivers the full range of personalization,
collaboration, communication, and commerce technologies that enable rapid
deployment of strategic electronic business and electronic commerce initiatives.
This platform includes the tools, engines, and templates required to create an
integrated Information Technology infrastructure that responds to market demand
and adapts to the ongoing expansion of enterprise-scale electronic business and
electronic commerce systems.
Pivotal Industry Specific Solutions
We provide industry-focused solutions in financial services, healthcare,
manufacturing, technology, and electronic marketplaces.
8
o Our finance solution is an industry specific solution that enables
financial services companies to achieve increased revenue generation
and business agility by delivering quick, intelligent customer service
across all communication channels including direct, electronic mail,
wireless, and facsimile. It identifies customer buying trends and
service preferences; builds extensive profiles that identify
cross-selling and up-selling opportunities; and conducts marketing
campaigns that are personal, precise, relevant and timely. It also
provides security feature that financial companies require to
confidently conduct business across all Internet and traditional
communications channels.
o Our healthcare solution addresses the health insurance industry's need
to adopt technologies that address the needs of the organization to
create administrative efficiencies in their front office activities.
ManagedCare.NET is a solution suite built on the Pivotal ePower
platform that provides healthcare insurance organizations a cohesive
customer relationship management platform across the entire
enterprise.
o Our manufacturing solution helps organizations meet their business
targets and respond to demand side pressures by helping them move
complex product and service sales to the Internet to decrease selling
cycles and improve customer and prospect satisfaction; changing
marketing approaches with highly targeted campaigns based on extensive
customer and prospect data; networking suppliers, distributors,
wholesalers and other partners to improve opportunity management and
inventory levels; and increasing field sales and service
representatives success with real-time access to product and customer
data.
o Our technology solution helps technology companies create a
comprehensive loyalty plan through consolidating and segmenting
customer information based on buying trends so they can develop
aggressive sales and marketing efforts. Our technology solution also
enables technology companies to support their sales force with
information about their most valuable customers' needs and
preferences. It helps ensure successful relationships with customers
and prospects by integrating new Internet sales and communication
channels; supports field sales and service representative success with
real-time access to product and customer data; increases marketing
return on investment with highly targeted campaigns; helps to decrease
sales cycles and improve satisfaction by implementing Internet service
and sales; and can improve opportunity management, tighten channel
forecasting and decrease inventory levels by networking suppliers,
distributors and resellers online.
o Our eMarketplace solution can turn a transactional marketplace into a
collaborative electronic marketplace that increases buyer satisfaction
and loyalty, improves seller participation and maximizes revenues. It
enables organizations to manage the complex relationships and
interactions between marketplace buyers and sellers by leveraging the
power of customer relationship management, partner relationship
management, interactive selling, and marketing analytics.
CORE PRODUCTS
The above Pivotal solutions are comprised of a variety of core products, as
follows:
Pivotal eRelationship
Pivotal eRelationship 2000 is our award-winning Customer Relationship Management
product. It is the application that delivers the capabilities for the Pivotal's
Sales, Marketing and Service solutions. Pivotal eRelationship connects these
three areas of a company into one unified database that is fully integrated for
seamless interaction and information sharing.
Pivotal CustomerHub
Pivotal CustmerHub is one of two applications that deliver the capabilities for
the Pivotal Collaboration Hub solutions. Pivotal CustomerHub improves customer
satisfaction by providing a secure self service channel for customers to place
orders or resolve problems twenty-four hours a day, seven days a week with
highly personalized Internet, email, and phone-based interactions. Pivotal
CustomerHub gives customers the ability to become active participants in every
marketing, sales and service activity.
Pivotal PartnerHub
Pivotal PartnerHub is one of two applications that deliver the capabilities for
the Pivotal Collaboration Hub solution. Pivotal PartnerHub empowers demand side
partners to become collaborative members of your extended business team to
generate sales,
9
deliver customer value, and keep customers satisfied. Pivotal PartnerHub creates
a collaborative inter-company framework to exchange knowledge, manage
relationships, and synchronize transactions over marketing, sales, service, and
commerce processes.
Pivotal ePower
Pivotal ePower 2000 is the core product which comprises the Pivotal eBusiness
Platform. It is an XML-based technology platform that includes the tools,
engines and templates required to rapidly deploy and operate Pivotal's customer
relationship management and electronic business solution. This platform is
optimized for use in conjunction with the Microsoft .NET platform, can be scaled
to work in any size of business and is designed to allow all employees,
customers and business partners the ability to access and manipulate the same
information.
Pivotal eSelling
Pivotal eSelling is the core application which delivers the capabilities for the
Pivotal Commerce solution. Pivotal eSelling simplifies the online buying
experience for sophisticated products and services with interactive needs
analysis and intelligent guided selling services. Pivotal eSelling maximizes
revenue with system knowledge that guarantees the execution of each enables
customers to increase their revenue through obtaining information regarding
cross-sell and up-sell opportunities and instantly synchronization of online
transactions across the enterprise.
ADDITIONAL APPLICATIONS
We offer a number of different applications that extend the capabilities of our
solutions. These include:
Pivotal Intelligence Suite. Pivotal Intelligence Suite includes Digital
Intelligence and Pivotal Business Intelligence. These add on applications
provide Internet-based tools for data mining, data analysis, and marketing
campaign management that help sales, marketing, and customer service
professionals analyze data and extract knowledge and insight which allows for
better business decisions.
Pivotal Digital Intelligence. Pivotal Digital Intelligence is
intelligence an application that tracks actual website visitor
interests. As website content changes, Pivotal Digital Intelligence
continues to recognize themes, creating a profile of visitor interests
through a specific period. Pivotal Digital Intelligence can be used to
collect the entire visitor text content stream and the data required to
interpret visitor behavior.
Pivotal Business Intelligence. Pivotal Business Intelligence in an
application that combines analytical processing reporting tools, data
mining, and other technologies into an integrated platform, navigated
with an intuitive Internet-browser interface. It provides enhanced data
analysis, greater insight and detailed reports that help evaluate
present performance and establish effective plans for the future. This
highly scalable solution, which is both easy to use and integrated into
marketing and sales applications, allows organizations to use data
mining to its full potential.
Pivotal Interaction Center. Pivotal Interaction Center routes phone calls,
voice-mail, email, faxes, Internet chat, Internet callback requests, and
voice-over-Internet calls. This allows organizations to replace traditional
systems made up of a private branch exchange, interactive voice response unit,
and automatic call distribution using a single application.
Pivotal Anywhere. Pivotal Anywhere enables mobile professionals to access our
solutions remotely over the Internet by using a number of portable computing
devices including palm computers and Internet-enabled cell phones.
Pivotal Instant Action Pivotal Instant Action is an alert-based task manager
that is ideal for companies that depend on valuable, time-sensitive information
that require input from multiple individuals. As a web-based solution, Pivotal
Instant Action routes critical communications and tasks and tracks the status
between individuals and user groups based on specific business rules and
workflow process. Pivotal Instant Action employs Internet, wireless and
traditional communication channels to accelerate response times to critical
business issues. This solution allows companies to address urgent customer needs
with speed and intelligence even when workforces are dispersed and mobile.
Pivotal Toolkit. Pivotal Toolkit helps businesses to easily customize,
administer and adapt our products, without programming, to meet business
specific needs. This option helps to reduce implementation and customization
costs, ongoing administrative burden and the need for employees with advanced
technical skills. Using Pivotal Toolkit's simple graphical, point-and-click user
interface, businesses can modify any aspect of our products without altering
source code. Pivotal Toolkit also includes visual scripting tools,
10
called agents, which allow users to create workflow processes that do not
require programming. By simply connecting arrows between objects on the screen,
users can automate and model business processes, develop sales scripts and
create online tutorials to guide other users through complex tasks.
PivotalHost. PivotalHost is an Internet hosting solution for our technology.
PivotalHost is a solution whereby we provide customers access to our
applications on a monthly subscription basis over the Internet through an
application service provider. This solution includes our software and
Microsoft's software, server hardware, data center, secure Internet connectively
from the data center, and information technology staff to administer and support
the customer's solution.
PRODUCT PRICING
We license platform products on a "per processor" basis, user licenses on a
"named user" basis and/or applications and a "flat fee" basis. All our products
may be licensed on a monthly subscription basis or as a one-time fee for
perpetual licenses.
PRODUCT AWARDS
The following table lists some of the awards our solutions have won:
SPONSOR DATE AWARD
Microsoft December 2000 Industry Solution Awards for 2000
- Best Integrated Customer Relationship Management/eBusiness
Solution
Microsoft July 2000 North American Packaged Application Partner of the Year
Microsoft February 2000 World Record for Scalability and Performance
Microsoft December 1999 Industry Solution Awards for 1999
- Best Internet Solution for Customer Service
- Best Integrated Customer Relationship Management
December 1998 Industry Solution Awards for 1998 - Best Overall Customer
Relationship Management Solution
December 1997 Industry Solution Awards -- Best Mobile Sales Solution
May 1997 Solutions Provider Awards -- Best Solution by a Solution
Developer
Upside Magazine February 2000 eBusiness Winner
Information Systems Marketing February 2001 Top 15 CRM Software Award
February 2000 Top 15 CRM Software Award
February 1999 Top 15 CRM Software Award
December 1997 Top 15 CRM Software Award
December 1996 Top 15 CRM Software Award
Open Systems Advisors January 1999 Crossroads 99 A-List Award
Information Week Magazine February 1999 IT Innovators for 1999
British Columbia Technology Industry June 2000 Company of the Year
Association
start Magazine July 2000 Hottest Companies of 2000
Deloitte & Touche November 2000 Technology Fast 500
Deloitte & Touche September 2000 Fastest Growing Canadian Technology Company
Aberdeen Group April 2001 Aberdeen List of Top Ten Significant CRM Applications for
2000
11
PROFESSIONAL SERVICES
We provide customers with access to a combination of services to successfully
implement and effectively maintain a customer relationship management and
electronic business solution.
These services include:
- Technical Support and Maintenance. We maintain technical support
centers that provide telephone, Internet and email based problem
identification, analysis and resolution to our worldwide customer
base. Various levels of support are available depending on the needs
of the customer. Our technical support and maintenance services
include upgrades of our software applications.
- Education. Our education services are designed to educate our
customers and Pivotal Alliance members about the customization, use
and administration of our solutions. We offer education, training and
certification that help our customers and selling partners to improve
their ability to implement our solutions. We also offer customized and
on-site training classes to customers with specific needs.
- Implementation Services. We offer implementation services that include
project management, customization and systems engineering. We provide
a standardized implementation methodology, which we call the rapid
productivity methodology and solution development centers that enables
the efficient implementation of our solutions. Customers can work with
us directly or retain one of the Pivotal Alliance members to implement
their customer relationship management solutions. Members of the
Pivotal Alliance currently provide the majority of implementation
services for our products. See "Strategic Relationships."
- Business Consulting. We offer business consulting services that are
focused on key customer relationship management trends such as the
impact of the Internet on customer relationships and the
implementation of one-to-one marketing and business practices. We also
assist our customers in measuring and maximizing return on customer
relationship management investments.
Our technical support and maintenance services are sold on a per license basis
and renewed annually. Our education fees are standardized on a per day rate. Our
business consulting services and implementation services are priced on a time
and materials basis. As of June 30, 2001, we had 214 employees in our
Professional Services department.
CUSTOMERS AND MARKETS
We have licensed our applications on a worldwide basis to more than 1,300
customers across a wide range of industries. Customers in North America
accounted for 67%, 72% and 80% of our total revenues in the years ended June 30,
2001, 2000 and 1999, respectively. Customers in Canada accounted for 12%, 11%
and 6% of our total revenues in the years ended June 30, 2001, 2000 and 1999,
respectively. Customers in the U.S. accounted for 55%, 62% and 74% of total
revenues.
Some of our customers which purchased a minimum of US$100,000 of software
licenses from us prior to June 30, 2001, are set forth in the table below:
CONSULTING MANUFACTURING TECHNOLOGY
---------- ------------- ----------
Burntsand Inc. Foss Electric A/S AremisSoft Manufacturing
KPMG SA IMI Norgren Limited Captivate Network, Inc.
KPMG Consulting AG James Hardie Industries Limited Compaq Computer Corporation
KPMG Peat Marwick LLP Newport Corporation HeadHunter.NET, Inc.
Net-Commerce Siemens SAS ProClarity Corporation
The Wynford Group Teknion Corporation Research in Motion
Toshiba Corporation SecureWorks, Inc
FINANCIAL SERVICES Wilo GmbH Allen Systems Group, Inc.
------------------ Crystal Decisions Corporation
Eprise Corporation
BoE Bank Limited EMARKETPLACE Evolve Software, Inc.
CIBC World Markets ------------ Interactive Intelligence, Inc.
The Common Fund for Nonprofit HIT International Trading AG Software Spectrum Inc.
Organizations (formerly PaperExchange.com Inc.) VERITAS Software Corporation
Dresdner RCM Global Investors(UK)Ltd
Farm Credit Services TELECOMMUNICATIONS
------------------
12
RETAIL
Grantham, Mayo, Van Otterloo & Co. LLC Alcatel e-Business Distribution GmbH ------
The Principal Financial Group Belgacom France Taco Bell Corporation
Raymond James Ltd FLAG Telecom Ltd. The Brand Factory
Hitachi Telecom (USA), Inc. Wickes Building Supply Supplies Limited
HEALTH CARE
-----------
OTHER SERVICES
Marriott International (Senior Living ---------------
Services)
McKesson Corporation (formerly Miller Heiman, Inc.
Medical Management Group) United Business Media International Ltd.
NDC Health Information Services Intrawest Corporation
Televerde
Total Information Systems (DAC Services)
SALES AND MARKETING
We sell our solutions through a direct sales force and over 50 independent
members of the Pivotal Alliance which resell our solutions. Our direct sales
force is located in the United States, Canada, the United Kingdom, France,
Germany, Australia, New Zealand, Japan, and Mexico. Members of the Pivotal
Alliance are located worldwide in North and South America, Europe, the Middle
East and Asia.
Our marketing efforts are directed at promoting our solutions and services,
creating market awareness and generating leads. Our marketing activities include
Internet business seminars, print and Internet advertising campaigns and
attendance at industry trade show events and trade conferences. We use the
Internet extensively to communicate with potential customers, existing
customers, partners and others. We also conduct comprehensive public relations
programs that establish and maintain relationships with key trade press,
business press and industry analysts. We have a customer communications team
targeted at working directly with our customers to obtain feedback and to track
ongoing customer success stories. This team also performs a series of surveys on
each customer to assess the customer's satisfaction with our solutions and to
anticipate any further needs of the customer. As of June 30, 2001, we employed a
total of 250 people on our sales and marketing team.
STRATEGIC RELATIONSHIPS
THE PIVOTAL ALLIANCE PROGRAM
Pivotal Alliance Members help us market, sell, implement, support and enhance
our solutions. Members of the Pivotal Alliance Program include:
- Systems Integrators. We have agreements with third parties that have
been granted the right to provide implementation, customization and
training services to customers who have purchased solutions through
our direct sales team. We refer to these third parties as systems
integrators. Some of our systems integrators operate worldwide, such
as KPMG, Cap Gemini Ernst & Young and Hewlett Packard while other
focus on specific regional markets such as Internosis Inc., Sierra
Systems and ePartners.
- Solution Providers. We have agreements with third parties that have
been granted the right to market and re-sell our solutions and to
provide education, implementation and customization services for
solutions they sell, as well as for most sales made through our direct
sales team. We refer to these third parties as solution providers.
Solution providers address the market needs of a specific region,
permitting us to sell our solutions in markets that might otherwise be
difficult for us to serve directly. In some foreign markets, we rely
on selected solution providers to customize our solutions and
translate our software applications into local languages.
- Solution Alliances. We have agreements with third parties that supply
software applications that are integrated with our solutions to
address specific industry or customer requirements. We refer to our
relationships with these third parties as solution alliances. We are
developing solution alliances in a number of product categories
including Internet applications, client/server applications, business
productivity, reporting, finance, mobile office products,
communications, sales configurators, data mining, business information
suppliers and vertical market solutions. The purpose of these
relationships is to expand the breadth of technology and services
available to our customers.
- Application Service Providers. We have agreements with third party
application service providers that provide hosting services to
businesses that purchase our solutions but who do not wish to house,
support or maintain the solutions on their
13
internal information technology systems. Application service providers
provide businesses with server hardware, data center, secure Internet
connectivity from the data center, and information technology staff to
administer and support the customer's solution.
We provide education and training services to members of the Pivotal Alliance
Program to increase their understanding of our solution suite. We are
implementing a certification program that will require members that perform
implementation and customization services, to meet our certification standards
in the areas of business analysis, systems design, installation, customization,
training and support. We intend to expand the Pivotal Alliance Program by
upgrading the capabilities of its members.
MICROSOFT
Our applications are optimized for the Microsoft Windows NT, Microsoft Windows
2000 and Microsoft BackOffice platforms. Our focused development efforts have
enabled us to create solutions that exploit the capabilities of Microsoft's
products, including SQL Server, that are bundled and licensed with our
solutions. We also created a direct link between our products' databases and
Microsoft Outlook which allows our customers to use the familiar interface of
Microsoft Outlook to update their calendar, tasks and contact information. In
addition, our solutions use Microsoft Internet technologies to publish
information across the Internet.
Pivotal and Microsoft are jointly educating the market on our unique value
proposition and how our demand chain management solution suite increases revenue
and improves customer retention. To support this, we participate with Microsoft
in numerous industry conferences and trade shows, partner focused national and
regional events and public relations initiatives.
On December 5, 2000, we announced a joint three-year initiative with Microsoft
to develop, market and sell the Pivotal Customer Relationship Management and
eBusiness solution suite to large enterprises which will result in incremental
expenditures by Microsoft and us towards this initiative over this period. We
have executed on the first phase our business development initiative with
Microsoft by implementing a training program to educate Microsoft sales
professionals about our solutions and engaging Microsoft in co-marketing and
co-selling initiatives. In addition, we were featured as the premier Customer
Relationship Management partner in the Microsoft Business Advantage -tour in
March and April 2001.
Our strong relationship with Microsoft is also evidenced by our participation in
the launch of Microsoft Windows 2000 and the optimization of our Customer
Relationship Management and eBusiness solution suite to leverage the new
productivity features offered in Microsoft Office XP - the latest version of
Microsoft Office - has enabled us to participate in early product development
initiatives with Microsoft.
CAP GEMINI ERNST & YOUNG
In May 2001, we signed a strategic alliance agreement with Cap Gemini Ernst &
Young, one of the largest management and IT consulting firms in the world. The
two companies will jointly deliver the Pivotal Customer Relationship Management
and eBusiness solution suite, together with the consulting services of Cap
Gemini Ernst & Young. Cap Gemini Ernst & Young has built a Pivotal practice team
consisting of sales professionals, senior executives, practice managers and
consultants. They are currently working jointly and collaborating with our sales
executives and professional services to deliver our solution suite in North
America, France and New Zealand. Cap Gemini Ernst & Young offers management and
IT consulting services, systems integration, and technology development, design
and outsourcing capabilities on a global scale to help businesses continue to
implement growth strategies and leverage technology in the new economy. We
expect to work closely with Cap Gemini Ernst & Young to develop industry
solutions, sales and marketing strategies and a specific implementation
methodology for deployment of the Pivotal Customer Relationship Management and e
Business solution suite.
OTHER
We continue to experience growth with other existing systems integrator partners
such as and KPMG LLP.
TECHNOLOGY
Our software architecture provides a foundation for the development of new and
innovative products and allows our solutions to be easily adaptable, to operate
with other applications and to address the needs of users on multiple computing
devices. This software architecture also allows our solutions to be used over
the Internet. We have invested in the following technologies which serve as a
basis for our customer relationship management and electronic business
solutions:
14
- Microsoft Technology. Our solutions are optimized for the Microsoft
Windows NT, Microsoft Windows 2000 and Microsoft BackOffice platforms.
Our focused development efforts have enabled us to create solutions
that exploit the capabilities of Microsoft's products, including SQL
Server, that are bundled and licensed with our solutions. We also
created a direct link between our products' databases and Microsoft
Outlook that allows our customers to use the familiar interface of
Microsoft Outlook to update their calendar, tasks and contact
information. In addition, our solutions use Microsoft Internet
technologies to publish information across the Internet.
- eBusiness Platform Architecture. Our solutions are structured to be
able to use XML both within the platform architecture and for
interfacing to our products, including our PartnerHub and CustomerHub
products which support users' which are external to the enterprise.
Our solutions are also structured to support multiple user access such
as wireless devices and electronic mail. This allows our professional
service staff, partners and customers the ability to work in the
applications in an industry standard fashion allowing integration with
other systems and technologies. This also allows for a well-defined
interface between our applications, thereby reducing the dependency
between such applications. In addition, it allows us to more easily
integrate other XML-capable technologies and products into our
solutions.
- Internet Commerce Platform Architecture. Pivotal eSelling, an
electronic sales channel for delivering a personalized, one-to-one
buying experience, implements an object-oriented database to store
complex product and selling relationships, with a scalable middle tier
supporting both declarative and procedural rule definition, rendered
via XML as a web commerce application. We believe that this is a
powerful and cost-effective architecture and data representation for
selling complex products and managing the rules associated with this
process.
- Metadata Repository. Our software contains a database, called a
metadata repository, that is the blueprint for each application's data
structure, forms, lists, business rules, workflow, queries and
reports. The inclusion of this database allows for rapid adaptability
and deployment by enabling customization to occur without source code
modification. A business can distribute custom application changes
throughout its organization in the normal data synchronization
process. We believe these benefits differentiate our solution from
those of our competitors.
- Pivotal's SyncStream. Our SyncStream captures any additions,
modifications or deletions to our application and the shared corporate
database and transmits only the net changes to the appropriate users.
This technology eases the deployment of new applications, minimizes
the connection costs associated with the synchronization of data,
transmits changes securely and enables mobile users to receive the
correct data when synchronizing.
- Distributed Database Design. Our solution is designed to support
various databases that reside on multiple servers, including both
Microsoft SQL Server and Oracle 8i. Due to our distributed database
design, data from the central database can be replicated to servers in
different locations and on various mobile remote databases (eg.
laptops), and to be updated by our SyncStream. This allows for
scalability and configuration flexibility as customers can upgrade
network hardware and software in a modular fashion with minimal loss
of performance and downtime.
- Pivotal's Enterprise Manager. Our Enterprise Manager provides
centralized configuration management through a graphical user
interface. The Enterprise Manager enables system administrators to
audit and apply configuration changes to the application, manage and
test customization changes off-line and replicate custom data sets for
mobile users. From a single interface, customers can distribute an
updated system online across the entire enterprise without downtime
for users.
RESEARCH AND DEVELOPMENT
Our research and development department is divided into six functional areas:
Advanced Technology, Software Development, Documentation, Quality Assurance,
Program Management and Product Management. As of June 30, 2001, there were 156
employees in our research and development department. Where appropriate, we
contract with third-party developers to expand the capacity of our research and
development department.
For the years ended June 30, 2001, 2000 and 1999, we spent approximately $18.8
million, $9.0 million and $5.0 million, respectively on research and
development.
Our software development approach consists of a methodology that provides
guidelines for planning, controlling and implementing projects. Our advanced
technology team focuses on tracking and evaluating new technologies with a view
to incorporating the best technologies available into our solutions. Our product
management team gathers and documents market requirements and trends in a
requirements analysis. After the requirements analysis has been reviewed for
feasibility and the proposed project approved by management, a product team is
established to implement the project. Our program management team takes
responsibility for
15
documenting a detailed product specification. The software development team may
build prototypes to assess the risks and business requirements of a project and
then concentrates on research and development activities. Through the later
stages of development we perform final testing and quality assurance. Our
program and product management teams are involved at all stages of development
so that market requirements continue to be addressed. The program and product
management teams also assists with the introduction of the product by training
our direct sales force and internal professional services staff.
We place particular emphasis on quality assurance and testing throughout the
development process. We use version control software as well as standard test
tools, scripts and agents developed by us in order to automate our testing
processes and increase the quality of code we develop.
COMPETITION
The market for our software is intensely competitive and rapidly changing. The
past year has been one of vendor consolidation. Today, the direct competitors
are fewer in number as companies are looking for business technology solutions
that deliver rapid results. We face competition from companies in the Customer
Relationship Management software market and in the overall enterprise business
application market. Some competitors include Siebel Systems Inc., Oracle
Corporation, SAP AG, Onyx Corporation and PeopleSoft, Inc.
Other competitors may enter the market by developing or acquiring new products
and applications.
Microsoft has entered the Customer Relationship Management market with its MS
portal site called bCentral, which is designed for small businesses. It is
possible that Microsoft may decide to introduce solutions or services that
directly compete with our solutions. The introduction of these solutions or
services could result from Microsoft acquiring one of our competitors or one of
our competitor's products. If Microsoft becomes our competitor, it may harm or
end our co-marketing and co-selling initiatives with Microsoft. Such competition
with Microsoft would likely have a material adverse affect on our business,
market share, financial condition and results of operations.
In addition, as we develop new products, particularly applications focused on
electronic commerce or on specific industries, we may begin competing with
companies with whom we have not previously competed. It is also possible that
new competitors will enter the market or that our competitors will form
alliances that may enable them to rapidly increase their market share. Some of
our actual and potential competitors are larger, better established companies
that have greater technical, financial and marketing resources. Increased
competition may result in price reductions, lower gross margins or loss of our
market share, any of which could materially adversely affect our business,
financial condition and operating results.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We rely on a combination of copyright, trade secret and trademark laws,
confidentiality procedures, contractual provisions and other similar measures to
protect our proprietary information and technology. We do not currently hold any
patents nor do we have any patent applications pending. There can be no
assurance that any copyrights or trademarks held by us will not be challenged or
determined to be invalid.
As part of our confidentiality procedures, we have a policy of entering into
non-disclosure and confidentiality agreements with our employees, consultants,
corporate alliance members, customers and prospective customers. We also enter
into license agreements with respect to our technology, documentation and other
proprietary information. These licenses are perpetual and are generally
transferable subject to obtaining our prior consent. Despite the efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain the use of our products or technology that we consider
proprietary and third parties may attempt to develop similar technology
independently. We pursue registration and protection of our trademarks primarily
in the United States, although we do seek protection elsewhere in selected key
markets. Effective protection of intellectual property rights may be unavailable
or limited in some countries. The laws of some countries do not protect our
proprietary rights to the same extent as in the United States and Canada. There
can be no assurance that protection of our proprietary rights will be adequate
or that our competitors will not independently develop similar technology.
We anticipate that companies that develop software applications will be subject
to infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. As a result, we may become involved in these claims. Any of these
claims, with or without merit, could result in costly litigation, divert our
management's time, attention and resources, delay our product shipments or
require us to enter into royalty or license agreements. If a claim of product
infringement against us is successful, our business and operating results could
be seriously harmed.
16
EMPLOYEES
As of June 30, 2001 we had a total of 714 employees, excluding independent
contractors and temporary employees. Of this number, 156 people were engaged in
research and development, 250 people were engaged in sales and marketing, 214
people were engaged in professional services and 94 people were engaged in
general administration. No employees are known by us to be represented by a
collective bargaining agreement and we have never experienced a strike or work
stoppage. We consider our employee relations to be good. Our ability to achieve
our financial and operational objectives depends in large part upon our ability
to attract, retain and motivate highly qualified sales, technical and managerial
personnel. There can be no assurance that we will be able to attract and retain
such employees in the future.
RECENT ACQUISITIONS
Ionysys Technology Corporation Acquisition
On October 16, 2000, we acquired 100% of the assets of Ionysys Technology
Corporation, a privately held provider of Internet solutions based in Vancouver,
British Columbia. Pivotal paid an aggregate cash purchase price of $1.0 million
including acquisition related expenditures of $360,000.
Project One Business Technologies Inc. Acquisition
On October 31, 2000, we acquired 100% of the outstanding shares of Project One
Business Technologies Inc., a privately held provider of Internet solutions
specifically designed for the health care industry based in North Vancouver,
British Columbia. We paid an aggregate purchase price of $1.4 million consisting
of 19,000 common shares and stock options and cash of $460,000, which includes
acquisition related expenditures of $380,000.
The agreement for the acquisition of Project One also provided for additional
consideration of approximately 96,000 common shares to be paid based on
achieving certain product development and operating targets over the next 3
years. All earn-out payments will be recorded as additional purchase price when
determinable. No earn-out payments were required to be made in connection with
the acquisition of Project One since acquisition to the period ended March 31,
2001.
Software Spectrum CRM, Inc. Acquisition
On December 5, 2000, we acquired 100% of the outstanding shares of Software
Spectrum CRM, Inc. Software Spectrum, based in Dallas, Texas, delivers solutions
and consulting expertise in multi-channel contact centers and customer
relationship management. We paid an aggregate purchase price of $7.5 million
consisting of 138,000 common shares and cash of $1.9 million, which includes
acquisition related expenditures of $1.2 million.
Inform, Inc. Acquisition
On June 22, 2001, we acquired all of the shares of Inform Inc. a company located
in Toronto, Canada, which specializes in implementation services for the
financial services industry. We paid an aggregate purchase price of $1.3 million
consisting of 45,446 common shares and cash of $359,000, which includes
acquisition related expenditures of $266,000.
IMPORTANT FACTORS THAT MAY AFFECT OUR BUSINESS, OUR RESULTS OF OPERATIONS AND
OUR STOCK PRICE.
Holders of our common shares are subject to the risks and uncertainties inherent
in our business. You should consider the following factors, as well as other
information set forth in this report, in connection with any investment in our
common shares. If any of the risks described below occurs, our business, results
of operations and financial condition could be adversely affected. In such
cases, the price of our common shares could decline, and you could lose part or
all of your investment.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy or completeness of
forward-looking statements. You should consider our forward-looking statements
in light of the following risk factors and other information in this report. If
any of the risks described below occurs, our business, results of operation and
financial condition could differ from those projected in our forward-looking
statements. We are under no duty to
17
update any of our forward-looking statements after the date of this report. You
should not place undue reliance on forward-looking statements.
FACTORS RELATING TO OUR BUSINESS AND THE MARKET FOR CUSTOMER RELATIONSHIP
MANAGEMENT AND ELECTRONIC BUSINESS SOLUTIONS MAKE OUR TOTAL REVENUE AND FUTURE
OPERATING RESULTS UNCERTAIN AND MAY CAUSE THEM TO FLUCTUATE FROM PERIOD TO
PERIOD.
Our operating results have varied in the past, and we expect that they may
continue to fluctuate in the future. In addition, our operating results may not
follow any past trends. Some of the factors that could affect the amount and
timing of our revenues from software licenses and related expenses and cause our
operating results to fluctuate include:
o general economic conditions, which may affect our customers' capital
investment levels in management information systems;
o changes in the economy and foreign currency exchange rates;
o market acceptance of our solutions;
o the length and variability of the sales cycle for our solutions, which
typically ranges between two and eight months from our initial contact
with a potential customer to the signing of a license agreement;
o the size and timing of customer orders, which can be affected by
customer order deferrals in anticipation of new solution
introductions, solution enhancements, and customer budgeting and
purchasing cycles;
o our ability to successfully expand our sales force and marketing
programs;
o increases in the cost of software and professional services;
o our ability to successfully expand our international operations;
o the introduction or enhancement of our solutions or our competitors'
solutions;
o changes in our or our competitors' pricing policies;
o activities of and acquisitions by competitors;
o our ability to develop, introduce and market new solutions on a timely
basis and control our costs; and
o customer satisfaction and our reputation relating to our products and
services.
One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our net revenue and
operating results to fluctuate significantly. Based upon the preceding factors,
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, financial condition, results of operations and the market price of our
common stock.
18
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONAL TRENDS AND
VARIATIONS IN THE FISCAL OR QUARTERLY CYCLES OF OUR CUSTOMERS
Our total revenue and operating results may vary significantly from quarter to
quarter. The main factors that may affect these fluctuations are:
o seasonal variations in operating results;
o variations in the fiscal or quarterly cycles of our customers;
o the discretionary nature of our customers' purchase and budget cycles;
o the size and complexity of our license transactions;
o the potential delays in recognizing revenue from license transactions;
and
o the timing of new product releases.
We have experienced, and expect to continue to experience, seasonality with
respect to solution license revenues. Except for the year ended June 30, 2001,
we have historically recognized more license revenues in the fourth quarter of
our fiscal year and recognized less license revenues in the subsequent first
quarter. We believe that these fluctuations are caused in part by customer
buying patterns and the efforts of our direct sales force to meet or exceed
fiscal year-end quotas. In addition, our sales in Europe are generally lower
during the summer months than during other periods. We expect that these
seasonal trends are likely to continue in the future. If revenues for a quarter
ending September 30 are lower than the revenues for the prior quarter, it may be
hard to determine whether the reason for the reduction in revenues involves
seasonal trends or other factors adversely affecting our business.
Our solution revenues are not predictable with any significant degree of
certainty and future solution revenues may differ from historical patterns. If
customers cancel or delay orders, it can have a material adverse impact on our
revenues and results of operations from quarter to quarter. Because our results
of operations may fluctuate from quarter to quarter, you should not assume that
you could predict results of operations in future periods based on results of
operations in past periods.
Even though our revenues are difficult to predict, we base our expense levels in
part on future revenue projections. Many of our expenses are fixed, and we
cannot quickly reduce spending if revenues are lower than expected. This could
result in significantly lower income or greater loss than we anticipate for any
given period. We will react accordingly to minimize any impact.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT HOW OUR BUSINESS
WILL DEVELOP AND FUTURE OPERATING RESULTS.
We commenced operations in January 1991. We initially focused on the development
of application software for pen computers. In September 1994, we changed our
focus to research and development of customer relationship management and
electronic business solutions. We commercially released the versions of our
solutions on the following dates: o Pivotal Relationship - April 1996.
o Pivotal eRelationship - February 1999.
o Pivotal eRelationship 2000 - February 2000.
o Pivotal Anywhere - October 1999.
o Pivotal eSelling - June 2000.
o Pivotal eSelling 2.0 - March 2001.
19
o Pivotal ePower (originally a component of eRelationship) - February 2000.
o Pivotal ePower 2.0 - March 2001.
o Pivotal Digital Intelligence - March 2001.
o Pivotal PartnerHub 2.0 - May 2001.
o Pivotal Instant Action - May 2001.
o Pivotal ePower Lifecycle Engine - Oracle Edition - August 2001.
We have a limited operating history and we face many of the risks and
uncertainties encountered by early-stage companies in rapidly evolving markets.
These risks and uncertainties include:
o no history of profitable operations;
o uncertain market acceptance of our solutions;
o our reliance on a limited number of solutions;
o the risks that competition, technological change or evolving customer
preferences could adversely affect sales of our solutions;
o the need to expand our sales and support capabilities;
o our reliance on third parties to market, install, and support our
solutions;
o our dependence on a limited number of key personnel, including our
co-founders;
o our dependence on the adoption and success of the Microsoft. NET
platform; and
o the risk that our management will not be able to effectively manage
growth or acquisitions we have undertaken or may undertake in the
future.
The new and evolving nature of the customer relationship management and
electronic business market increases these risks and uncertainties. Our limited
operating history makes it difficult to predict how our business will develop
and our future operating results.
WE HAVE A HISTORY OF LOSSES, WE MAY INCUR LOSSES IN THE FUTURE AND OUR LOSSES
MAY INCREASE IF PROJECTED REVENUES ARE NOT ACHIEVED TO SUPPORT THE LEVEL OF
OPERATING EXPENSES.
We have incurred net losses in each fiscal year since inception, except for the
year ended June 30, 1998, in which we had net income of approximately $4,000. As
at June 30, 2001, we had an accumulated deficit of approximately $48.2 million.
We have increased our operating expenses in recent periods and expect them to
remain approximately the same in the first quarter of fiscal 2002. We will
continue to examine the level of operating expenses based on projected revenues.
Any planned increases in operating expenses may result in larger losses in
future periods if projected revenues are not achieved. As a result, we will need
to generate significantly greater revenues than we have to date to achieve and
maintain profitability. We cannot be certain that our revenues will increase.
Our business strategies may not be successful and we may not be profitable in
any future period.
THE MARKET FOR OUR SOLUTIONS IS HIGHLY COMPETITIVE.
The market for our software is intensely competitive and rapidly changing. The
past year has been one of vendor consolidation. Today, the direct competitors
are fewer in number as companies are looking for business technology solutions
that deliver rapid results. We face competition from companies in the Customer
Relationship Management software market and in the overall enterprise
20
business application market. Some of our actual and potential competitors are
larger, better established companies and have greater technical, financial and
marketing resources. Increased competition may result in price reductions, lower
gross margins or loss of our market share, any of which could materially
adversely affect our business, financial condition and operating results. Some
competitors include Siebel Systems Inc., Oracle Corporation, SAP AG, Onyx
Corporation and PeopleSoft, Inc.
Microsoft has also entered the Customer Relationship Management market with its
MS portal site called bCentral which is designed for small businesses. It is
possible that Microsoft may introduce solutions that compete directly with us.
In addition, as we develop new solutions, particularly applications focused on
electronic commerce or specific industries, we may begin competing with
companies with whom we have not previously competed. It is also possible that
new competitors will enter the market or that our competitors will form
alliances that may enable them to rapidly increase their market share.
WE DEPEND UPON MICROSOFT AND THE CONTINUED ADOPTION AND PERFORMANCE OF THE
MICROSOFT .NET PLATFORM.
We have designed our solutions to operate on the Microsoft .NET platform,
including Windows .NET and .NET Enterprise Servers. Microsoft .NET is a new
platform initiative of Microsoft announced in June 2000. We have spent
considerable resources developing and testing the compatibility of our solutions
for Microsoft .NET. The performance of our solutions with Windows .NET and the
.NET Enterprise Servers has limited experience in the marketplace. As a result,
we market our solutions exclusively to customers who have developed their
computing systems around this platform.
Our future financial performance will depend on the continued growth and
successful adoption of Microsoft .NET -including, Windows .NET and the .NET
Enterprise Servers. Microsoft .NET faces competition, particularly from
computing platforms such as Unix and the Java 2 Platform, Enterprise Edition
(J2EE), and databases from companies such as Oracle. Acceptance of Microsoft
.NET may not continue to increase in the future. The market for software
applications that run on these platforms has in the past been significantly
affected by the timing of new solution releases, competitive operating systems
and enhancements to competing computing platforms. If the number of businesses
that adopt Microsoft Windows .NET fails to grow or grows more slowly than we
currently expect, or if Microsoft delays the release of new or enhanced
solutions, our revenues from the Pivotal Customer Relationship Management and
eBusiness solution suite could be adversely affected.
The performance of our solutions depends, to some extent, on the technical
capabilities of the Microsoft .NET platform. If this platform does not meet the
technical demands of our solutions, the performance or scalability of our
solutions could be limited and, as a result, our revenues from the Pivotal
Customer Relationship Management and eBusiness solution suite could be adversely
affected.
We have also launched a global business development initiative with Microsoft
aimed at leading the emerging customer relationship management and electronic
business market. The success of this initiative will depend on the ability of
Pivotal and Microsoft to jointly market and sell to Global 2000 companies the
Pivotal Customer Relationship Management and eBusiness solution suite combined
with Microsoft .NET Enterprise Servers.
Microsoft has entered the Customer Relationship Management market with its MS
portal site called bCentral, which is designed for small businesses. It is
possible that Microsoft may decide to introduce solutions or services that
directly compete with our solutions. The introduction of these solutions or
services could result from Microsoft acquiring one of our competitors or one of
our competitor's products. If Microsoft becomes our competitor, it may harm or
end our co-marketing and co-selling initiatives with Microsoft. Such competition
with Microsoft would likely have a material adverse affect on our business,
market share, financial condition and results of operations.
Broad antitrust actions initiated by federal and state regulatory authorities
resulted in a verdict against Microsoft in the U.S. District Court for the
District of Columbia. The U.S. District Court adopted the government's proposed
remedy and held that Microsoft should be divided into two companies. Microsoft
appealed this verdict to the U.S. Court of Appeals for the District of Columbia.
The U.S. Court of Appeals affirmed the U.S. District Court's findings of
antitrust violations, but overturned the ruling that Microsoft should be divided
into two companies. The U.S. Court of Appeals also removed the judge presiding
over this matter in the U.S. District Court and remanded to the U.S. District
Court the determination as to what remedies should be pursued against Microsoft.
Microsoft has appealed the finding of a violation of antitrust laws to the U.S.
Supreme Court. Recently, the Justice Department determined not to seek a
break-up of Microsoft as a remedy to the case.
21
European Union regulators are currently investigating whether Microsoft has
violated European antitrust laws.
Any outcome to these actions that weakens the competitive position of Microsoft
.NET solutions could adversely affect the market for our solutions.
THE MARKET FOR PIVOTAL EPOWER LIFECYCLE ENGINE - ORACLE EDITION IS UNKNOWN.
We have announced the availability of our Pivotal ePower Lifecycle Engine -
Oracle Edition whereby our solution can now be implemented using Oracle based
platforms and technologies. We do not know whether our new Oracle based solution
will prove to be attractive to Oracle customers or if it will result in any
material revenue for us.
THE SUCCESS OF OUR STRATEGIC ALLIANCE WITH CAP GEMINI ERNST & YOUNG IS UNKNOWN.
We entered a strategic alliance agreement with Cap Gemini Ernst & Young in May
2001 whereby we will jointly market and sell the Pivotal solution suite. We do
not know if this will prove to be a successful relationship in the future or if
it will result in any material revenue for Pivotal.
THE MARKET FOR OUR SOLUTIONS IS NEW AND HIGHLY UNCERTAIN AND OUR PLAN TO FOCUS
ON INTERNET-BASED APPLICATIONS AND INTEGRATE ELECTRONIC COMMERCE FEATURES ADDS
TO THIS UNCERTAINTY.
The market for customer relationship management and electronic business
solutions is still emerging and continued growth demand for and acceptance of
the Pivotal Customer Relationship Management and eBusiness solution suite
remains uncertain. Even if the market for customer relationship management
electronic business solutions grows, businesses may purchase our competitors'
products or develop their own. We believe that many of our potential customers
are not fully aware of the benefits of the Pivotal Customer Relationship
Management and eBusiness solution suite and, as a result, these solutions may
never achieve full market acceptance.
The development of our Internet-based Pivotal Customer Relationship Management
and eBusiness solution suite for customer relationship management and electronic
business and our plan to integrate additional features presents additional
challenges and uncertainties. We are uncertain how businesses will use the
Internet as a means of communication and commerce and whether a significant
market will develop for Internet-based customer relationship management and
electronic business solutions such as those developed by us. The use of the
Internet is evolving rapidly, and many companies are developing new products and
services that use the Internet. We do not know what forms of products and
services may emerge as alternatives to our existing solutions or to any future
Internet-based customer relationship management and electronic business
solutions we may introduce. We have spent, and will continue to spend,
considerable resources educating potential customers about our solutions and
customer relationship management and electronic business software solutions.
However, even with these educational efforts, market acceptance of our solutions
may not increase. If the markets for our solutions do not grow or grow more
slowly than we currently anticipate, our revenues may not grow and may even
decline.
OUR SALES CYCLE IS INCREASING AND THE AVERAGE SIZE OF OUR LICENSING TRANSACTIONS
VARIES WIDELY FROM QUARTER TO QUARTER, WHICH COULD HARM OUR OPERATING RESULTS.
We believe that an enterprise's decision to purchase a customer relationship
management and electronic business solution is discretionary, involves a
significant commitment of its resources and is influenced by its budget cycles.
To successfully sell licenses for our solutions, we typically must educate our
potential customers regarding the use and benefits of customer relationship
management and electronic business solutions in general and our solutions in
particular, which can require significant time and resources. Consequently, the
period between initial contact and the purchase of licenses for our solutions is
often long and subject to delays associated with the lengthy budgeting, approval
and competitive evaluation processes that typically accompany significant
capital expenditures. We frequently must invest substantial resources to develop
a relationship with a potential customer and educate its personnel about our
solutions and services with no guarantee that our efforts will be rewarded with
a sale.
Our sales cycles are lengthy and variable and have been growing longer over the
last quarter. In recent months we were impacted by a significant reduction in
our customers' project sizes, deferral of purchasing and lack of an urgency to
purchase and the overall unpredictability of customer decision-making. In
addition, we have also recently seen a reduction in size of customer orders in
the
22
final stages of negotiations as a result of reduction in the customer's project
size. We do not know if these trends will continue and the increase in sales
cycle and varying transaction sizes could harm our operating results
OUR SUCCESS WILL DEPEND UPON THE SUCCESS OF OUR SOLUTIONS.
We anticipate that a majority of our revenues and growth in the foreseeable
future will come from license and service related sales of our integrated
solution suite, consisting of Pivotal Sales, Pivotal Marketing, Pivotal Service,
Pivotal Collaboration Hubs, Pivotal Commerce, and Pivotal eBusiness Platform, as
well as industry specific solutions. Accordingly, failure of our integrated
solution suite to gain increased market acceptance and compete successfully
would adversely affect our business, results of operations and financial
condition. Our future financial performance will depend on our ability to
succeed in the continued sale of our integrated solution suite and related
services as well as the development of new versions and enhancements of these
solutions.
THE SUCCESS OF OUR SOLUTIONS WILL DEPEND UPON THE CONTINUED USE AND EXPANSION OF
THE INTERNET.
Increased sales of our solutions and any future Internet-based applications and
electronic commerce features we integrate with our current solutions, will
depend upon the expansion of the Internet as a leading platform for commerce and
communication. If the Internet does not continue to become a widespread
communications medium and commercial marketplace, the demand for our solutions
could be significantly reduced and our solutions and any future Internet-based
and electronic commerce features may not be commercially successful. The
Internet infrastructure may not be able to support the demands placed on it by
continued growth. The Internet could lose its viability due to delays in the
development or adoption of new equipment, standards and protocols to handle
increased levels of Internet activity, security, reliability, cost, ease of use,
accessibility and quality of service.
Other concerns that could inhibit the growth of the Internet and its use by
business as a medium for communication and commerce include:
o concerns about security of transactions conducted over the Internet;
o concerns about privacy and the use of data collected and stored
recording interactions over the Internet;
o the possibility that federal, state, local or foreign governments will
adopt laws or regulations limiting the use of the Internet or the use
of information collected from communications or transactions over the
Internet; and
o the possibility that governments will seek to tax Internet commerce.
WE DEPEND ON THIRD-PARTY WIRELESS SERVICE PROVIDERS FOR THE SUCCESSFUL
IMPLEMENTATION OF OUR PIVOTAL ANYWHERE SOLUTION.
Our Pivotal Anywhere solution provides a wireless platform that allows our other
solutions to be accessed wirelessly. We depend on third-party providers of
wireless services for the successful implementation of Pivotal Anywhere. Because
Pivotal Anywhere relies on wireless services developed and maintained by third
parties, we depend on these third parties' abilities to deliver and support
reliable wireless services. The wireless industry is new and rapidly developing
and involves many risks, including:
o extensive government regulation in licensing, construction, operation,
sale and interconnection arrangements of wireless telecommunications
systems which may prevent our third-party providers from successfully
expanding their wireless services;
o rapid expansion of the wireless services infrastructure which may
result in flaws in the infrastructure; and
o concerns over the radio frequency emissions or other health and safety
risks that may discourage use of wireless services.
OUR FUTURE REVENUE GROWTH COULD BE IMPAIRED IF WE ARE UNABLE TO EXPAND OUR
DIRECT SALES AND SUPPORT INFRASTRUCTURE.
23
Our future revenue growth will depend in large part on our ability to
successfully expand our direct sales force and our customer support capability.
We may not be able to successfully manage the expansion of these functions or to
recruit and train additional direct sales, consulting and customer support
personnel. There is presently a shortage of qualified personnel to fill these
positions. If we are unable to hire and retain additional highly skilled direct
sales personnel we may not be able to increase our license revenue to the extent
necessary to achieve profitability. If we are unable to hire highly trained
consulting and customer support personnel we may be unable to meet customer
demands. We are not likely to be able to increase our revenues as we plan if we
fail to expand our direct sales force or our consulting and customer support
staff. Even if we are successful in expanding our direct sales force and
customer support capability, the expansion may not result in revenue growth.
WE RELY ON OUR PIVOTAL ALLIANCE NETWORK OF INDEPENDENT COMPANIES TO SELL,
INSTALL AND SERVICE OUR SOLUTIONS AND TO PROVIDE SPECIALIZED SOFTWARE FOR USE
WITH THEM AND OUR PIVOTALHOST PROGRAM RELIES ON THIRD-PARTY APPLICATION SERVICE
PROVIDERS.
We do not have the internal implementation and customization capability to
support our current level of sales of licenses. Accordingly, we have established
and relied on our international network of independent companies we call the
Pivotal Alliance. Members of the Pivotal Alliance market and sell our solutions,
provide implementation and customization services, provide technical support and
maintenance on a continuing basis and provide us with software applications that
we can bundle with our solutions to address specific industry and customer
requirements. Approximately 20% and 24% of our license revenues for the year
ended June 30, 2001 and 2000, respectively were from sales made through
third-party resellers. The majority of our customers retain members of the
Pivotal Alliance to install and customize our solutions. If we fail to maintain
our existing Pivotal Alliance relationships, or to establish new relationships,
or if existing or new members of the Pivotal Alliance do not perform to our
expectations, our ability to sell, install and service our solutions may suffer.
There is an industry trend toward consolidation of systems integrators that
implement, customize and maintain software solutions. Some of the systems
integrators in the Pivotal Alliance have engaged in discussions concerning
business consolidations. We are uncertain as to the effect that any
consolidation may have on our relationships with members of the Pivotal
Alliance.
The success of our PivotalHost program will depend on the commitment and
performance of third-party application service providers to successfully
implement and market services that incorporate our solutions.
THE LOSS OF OUR CO-FOUNDERS OR OTHER KEY PERSONNEL OR OUR FAILURE TO ATTRACT AND
RETAIN ADDITIONAL PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends largely upon the continued service of our executive officers
and other key management, sales and marketing and technical personnel. The loss
of the services of one or more of our executive officers or other key employees
could have a material adverse effect on our business, results of operations and
financial condition. In particular, we rely on our co-founders, Norman Francis,
Chairman of the Board of Directors, and Keith Wales, our Executive Vice
President, Corporate Projects and director. We also rely on Bo Manning, our
President, Chief Executive Officer and director, Vincent Mifsud, our Chief
Operating Officer, Chief Financial Officer and Executive Vice President. We do
not have an employment agreement with Mr. Wales and, therefore, he could
terminate his employment with us at any time without penalty. We maintain key
man insurance on the lives of Messrs. Francis and Wales but do not maintain key
man insurance on the lives of Messrs. Manning and Mifsud.
Our future success also depends on our ability to attract and retain highly
qualified personnel. The competition for qualified personnel in the computer
software and Internet markets is intense, and we may be unable to attract or
retain highly qualified personnel. Due to intense competition for qualified
employees, it may be necessary for us to increase the level of compensation paid
to existing and new employees such that our operating expenses could be
materially increased. The price of our common shares has declined significantly
in the past year. Many of our key employees hold options to purchase common
shares with exercise prices significantly greater than the current market price
of the common shares. Accordingly, our current share option program may be of
limited value in retaining and motivating employees.
WE FACE RISKS FROM THE EXPANSION OF OUR INTERNATIONAL OPERATIONS.
We have permanent offices in the United States, Canada, Ireland, Northern
Ireland, England, Japan, Australia, New Zealand, Germany and France. We are
constantly reviewing our international sales and operations to determine if
offices are required in other
24
countries. As a result, we expect to continue this expansion of our
international operations in the future. International operations are subject to
numerous inherent potential risks, including:
o unexpected changes in regulatory requirements;
o export restrictions, tariffs and other trade barriers;
o changes in local tax rates or rulings by local tax authorities;
o challenges in staffing and managing foreign operations, differing
technology standards, employment laws and practices in foreign
countries;
o less favorable intellectual property laws;
o longer accounts receivable payment cycles and difficulties in
collecting payments;
o political and economic instability; and
o fluctuations in currency exchange rates and the imposition of currency
exchange controls.
Any of these factors could have a material adverse effect on our business,
financial condition or results of operations.
Our international expansion has and will continue to require significant
management attention and financial resources. We have had to significantly
enhance our direct and indirect international sales channels and our support and
services capabilities. We may not be able to maintain or increase international
market demand for our solutions. We may not be able to sustain or increase
international revenues from licenses or from consulting and customer support.
In some foreign countries we rely on selected solution providers to translate
our software into local languages, adapt it to local business practices and
complete installations in local markets. We are highly dependent on the ability
and integrity of these solution providers, and if any of them should fail to
properly translate, adapt or install our software, our reputation could be
damaged and we could be subjected to liability. If any of these solution
providers should fail to adequately secure our software against unauthorized
copying, our proprietary software could be compromised.
POLITICAL UNREST MAY ADVERSELY AFFECT THE OPERATION OF OUR EUROPEAN CUSTOMER
SUPPORT CENTER LOCATED IN NORTHERN IRELAND.
We have 15 employees located in our Belfast, Northern Ireland customer support
center. This center provides customer support primarily to all of our customers
in Europe and provides back-up support for other customers around the world.
Northern Ireland has historically experienced periods of religious, civil and
political unrest. Northern Ireland may experience further unrest which could
disrupt our ability to provide customer support and have material adverse effect
on our results of operations and financial condition.
FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND RISKS ASSOCIATED WITH OUR RISK
MANAGEMENT POLICIES MAY AFFECT OUR OPERATING RESULTS.
Substantially all of our revenues and corresponding receivables are in U.S.
dollars. However, a majority of our research and development expenses, customer
support costs and administrative expenses are in Canadian dollars. Accordingly,
we are exposed to fluctuations in the exchange rates between the U.S. dollar and
the Canadian dollar.
We have adopted a foreign currency risk management policy intended to reduce the
effects of potential fluctuations on the results of operations stemming from our
exposure to these risks. As part of this risk management, we identify our future
Canadian currency requirements related to payroll costs, capital expenditure and
operating lease commitments and enter into forward exchange contracts or
purchase Canadian dollars in the open market at the beginning of an operation
period to cover these anticipated currency needs.
25
For additional information regarding our forward exchange contracts, see Item 3
"Quantitative Disclosures About Market Risk" contained in this Report.
If our actual currency requirement in the period forecasted differ materially
from the notional amount of our forward contracts and/or the amount of Canadian
dollars purchased in the open market during a period of currency volatility or
if we do not continue to manage our exposure to foreign currency through forward
contracts or other means, we could experience unanticipated foreign currency
gains or losses.
Our foreign currency risk management policy subjects us to risks relating to the
creditworthiness of the commercial banks with which we enter into forward
contracts. If one of these banks cannot honor its obligations, we may suffer a
loss.
We also invest in our international operations which will likely result in
increased future operating expenses denominated in United Kingdom and Irish
pounds, French Francs, euros, German marks, Japanese yen, Australian dollars and
New Zealand dollars. Our exposure to exchange fluctuations in foreign currencies
is not material to date and accordingly, our current foreign currency risk
management practices do not cover foreign exchange risks related to these other
currencies. In the future, our exposure to foreign currency risks from these
other foreign currencies may increase and if not managed appropriately, we could
experience unanticipated foreign currency gains and losses.
The purpose of our foreign currency risk management policy is to reduce the
effect of exchange rate fluctuation on our results of operations. Therefore,
while our foreign currency risk management policy may reduce our exposure to
losses resulting from unfavorable changes in currency exchange rates, it also
reduces or eliminates our ability to profit from favorable changes in currency
exchange rates.
FLUCTUATIONS IN THE MARKET VALUE OF OUR SHORT-TERM INVESTMENTS AND IN INTEREST
RATES MAY AFFECT OUR OPERATING RESULTS.
For additional information regarding the sensitivity of and risks associated
with the market value of short-term investments and interest rates, see Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in this Report.
WE HAVE EXPERIENCED RAPID GROWTH WHICH HAS PLACED A STRAIN ON OUR RESOURCES AND
ANY FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD CAUSE OUR BUSINESS TO SUFFER.
We have been expanding our operations rapidly and intend to continue this
expansion for the foreseeable future. The number of our employees increased from
526 on June 30, 2000 to 714 on June 30, 2001. This expansion has placed, and is
expected to continue to place, a significant strain on our managerial,
operational and financial resources as we integrate and manage new employees,
more locations, more customers, suppliers and other business relationships. In
the past we have decided to, and in the future we may need to, improve or
replace our existing operational and customer service systems, procedures and
controls. Any failure by us to properly manage our growth or these systems and
procedural transitions could impair our ability to efficiently manage our
business, to maintain and expand important relationships with members of the
Pivotal Alliance and other third parties and to attract and service customers.
It could also cause us to incur higher operating costs and delays in the
execution of our business plan or in the reporting or tracking of our financial
results.
THE INTEGRATION OF CURRENT AND FUTURE ACQUISITIONS MAY BE DIFFICULT AND
DISRUPTIVE.
We are in the process of integrating the Inform business with our business and
we are expending financial and management resources in this effort. We
anticipate that we may acquire other companies in the future. Acquisitions and
the integration of new companies take significant financial and management
resources and are subject to risks commonly encountered in acquisitions,
including, among others, risk of loss of key personnel, difficulties associated
with assimilating ongoing businesses and the ability of our sales force and
consultants to become educated on new products and solutions. We will also need
to integrate the solutions of acquired companies into our solution offering. We
may not successfully overcome these risks or any other problems that may be
encountered in connection with the acquisition of Inform or future acquisitions.
Accordingly, it is uncertain whether we will receive the benefits we anticipate
from these acquisitions and we may not realize value from these acquisition
comparable to the resources we invest in them.
Amortization of intangible assets resulting from acquisitions will adversely
affect our reported income. In connection with our acquisitions of Transitif,
Exactium, Simba, Ionysys, Project One, Software Spectrum and Inform we allocated
an aggregate of $73.2
26
million of the purchase prices to intangible assets that we have been amortizing
over a period of three years on a straight-line basis. Future acquisitions may
result in the creation of significant additional intangible assets.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and SFAS
No.142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination and SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other assets. These
standards require all future business combinations to be accounted for using the
purchase method of accounting. Goodwill will no longer be amortized but instead
will be subject to impairment tests at least annually. We are required to adopt
SFAS No. 141 and 142 on a prospective basis as of July 1, 2002, but are
permitted to adopt in the first quarter of 2002. We are currently evaluating the
impact the adoption of these pronouncements may have on its financial position
and results of operations; however, due to these pronouncements being issued in
late July 2001 and due to our expectation that the FASB will issue further
guidance with respect to the adoption of both SFAS No. 141 and 142, we are
currently unable to determine the impact the adoption of these pronouncements
may have on its financial position or results of operations. Although we cannot
determine the impact SFAS the adoption of SFAS 141 and SFAS would have on our
operating results, once adopted there could be a material impact on further
operating results if there was an impairment in the value of goodwill.
As part of our business strategy, we regularly review acquisition opportunities
and we may seek to grow by making additional acquisitions. We may not
effectively select acquisition candidates, negotiate or finance acquisitions or
integrate the acquired businesses and their personnel or acquired products or
technologies into our business. We cannot be certain that we can complete any
acquisition we pursue on favorable terms, or that any acquisition will
ultimately benefit our business.
OUR PLAN TO EXPAND OUR SERVICE CAPABILITY COULD ADVERSELY AFFECT GROSS PROFIT
MARGINS AND OPERATING RESULTS.
Revenues from services and maintenance have lower gross margins than revenues
from licenses. Therefore, an increase in the percentage of revenues generated
from services and maintenance as compared to revenues from licenses will lower
our overall gross margins. In addition, an increase in the cost of revenues from
services and maintenance as a percentage of revenues from services and
maintenance could have a negative impact on overall gross margins.
Although margins related to revenues from services and maintenance are lower
than margins related to revenues from licenses, our services organization
currently generates gross profits, and we are seeking to expand our service
capability and our revenues from services and maintenance.
Revenues from services and maintenance depend in part on renewals of technical
support contracts by our customers, some of which may not be renewed. Our
ability to increase revenues from services and maintenance will depend in large
part on our ability to increase the scale of our services organization,
including our ability to successfully recruit and train a sufficient number of
qualified services personnel. We may not be able to do so.
To meet our expansion goals, we expect to hire additional services personnel. If
demand for our services organization does not increase in proportion to the
number of additional personnel we hire, gross profits could fall, or we may
incur losses from our services activities. In addition, the costs of delivering
services could increase and any material increase in these costs could reduce or
eliminate the profitability of our services activities.
WE RELY ON SOFTWARE LICENSED TO US BY THIRD PARTIES FOR FEATURES WE INCLUDE IN
OUR SOLUTIONS.
We incorporate into our solutions, software that is licensed to us by
third-party software developers including Microsoft SQL Server 2000, Microsoft
SQL Server 7.0, Sheridan Calendar Control, InstallShield 3, Crystal Reports,
E.piphany E.4, and Interactive Intelligence Enterprise Interaction Center. We
are seeking to further increase the capabilities of our solutions by licensing
additional applications from third parties. A significant interruption in the
availability of any of this licensed software could adversely affect our sales,
unless and until we can replace this software with other software that performs
similar functions. Because our solutions incorporate software developed and
maintained by third parties, we depend on these third parties' abilities to
deliver and support reliable products, enhance their current products, develop
new products on a timely and cost-effective basis, and respond to emerging
industry standards and other technological changes. If third-party software
offered now or in the future in conjunction with our
27
solutions becomes obsolete or incompatible with future versions of our
solutions, we may not be able to continue to offer some of the features we
presently include in our solutions unless we can license alternative software or
develop the features ourselves.
WE MUST CONTINUE TO DEVELOP ENHANCEMENTS TO OUR SOLUTIONS AND NEW APPLICATIONS
AND FEATURES THAT RESPOND TO THE EVOLVING NEEDS OF OUR CUSTOMERS, RAPID
TECHNOLOGICAL CHANGE AND ADVANCES INTRODUCED BY OUR COMPETITORS.
The software market in which we compete is characterized by rapid change due to
changing customer needs, rapid technological changes and advances introduced by
competitors. Existing products become obsolete and unmarketable when products
using new technologies are introduced and new industry standards emerge. New
technologies could change the way customer relationship management and
electronic business solutions are sold or delivered. As a result, the life
cycles of our solutions are difficult to estimate. We also may need to modify
our solutions when third parties change software we integrate into our
solutions. To be successful we must continue to enhance our current solutions
and develop new applications and features.
We may not be able to successfully develop or license the applications necessary
to offer these or other features, or to integrate these applications with our
existing solutions. We have delayed enhancements and new solution release dates
several times in the past and may not be able to introduce new solutions,
solution enhancements, new applications or features successfully or in a timely
manner in the future. If we delay release of our new solutions or solution
enhancements or new applications or features or if they fail to achieve market
acceptance when released, we may not be able to keep up with the latest
developments in the market and our revenues may fall. We may not be able to
respond effectively to customer needs, technological changes or advances
introduced by our competitors, and our solutions could become obsolete.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS.
Our success depends in part on our ability to protect our proprietary software
and our other proprietary rights from copying, infringement or use by
unauthorized parties. To protect our proprietary rights we rely primarily on a
combination of copyright, trade secret and trademark laws, confidentiality
agreements with employees and third parties, and protective contractual
provisions such as those contained in license agreements with consultants,
vendors and customers, although we have not signed these types of agreements in
every case. Despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our solutions and obtain and use information that we
regard as proprietary. Other parties may breach confidentiality agreements and
other protective contracts we have entered into. We may not become aware of, or
have adequate remedies in the event of, these types of breaches or unauthorized
activities.
CLAIMS BY OTHER COMPANIES THAT OUR SOLUTIONS INFRINGE THEIR COPYRIGHTS OR
PATENTS COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR SOLUTIONS AND INCREASE
OUR COSTS.
If any of our solutions violates third-party proprietary rights, including
copyrights and patents, we may be required to reengineer our solutions or obtain
licenses from third parties to continue offering our solutions without
substantial reengineering. Although some of our current and potential
competitors have sought patent protection for similar customer relationship
management and electronic business solutions, we have not sought patent
protection for our solutions. If a patent has been issued or is issued in the
future to a third-party that prevents us from using technology included in our
solutions, we would need to obtain a license or re-engineer our solution to
function without infringing the patent. Any efforts to re-engineer our solutions
or obtain licenses from third parties may not be successful and, in any case,
could substantially increase our costs, force us to interrupt sales or delay
solution releases.
OUR SOLUTIONS AND PRODUCTS WE RELY ON MAY SUFFER FROM DEFECTS OR ERRORS.
Software solutions as complex as ours may contain errors or defects, especially
when first introduced or when new versions are released. We have had to delay
commercial release of some versions of our solutions until software problems
were corrected, and in some cases have provided solution enhancements to correct
errors in released solutions. Our new solutions and solution enhancements or new
applications or features may not be free from errors after commercial shipments
have begun. Any errors that are discovered after commercial release could result
in loss of revenues or delay in market acceptance, diversion of development
resources, damage to our reputation, increased service and warranty costs and
liability claims.
Our end-user licenses contain provisions that limit our exposure to product
liability claims, but these provisions may not be enforceable in all
jurisdictions. In some cases, we have been required to waive these contractual
limitations. Further, we may be exposed to product liability claims in
international jurisdictions where our solution provider has supplied our
solutions and negotiated
28
the license without our involvement. A successful product liability claim could
result in material liability and damage to our reputation.
In addition, products we rely on, such as Microsoft platform products, may
contain defects or errors. Our solutions rely on these products to operate
properly. Therefore, any defects in these products could adversely affect the
operation of and market for our solutions, reduce our revenues, increase our
costs and damage our reputation.
IF OUR CUSTOMERS' SYSTEM SECURITY IS BREACHED, OUR BUSINESS AND REPUTATION COULD
SUFFER.
A fundamental requirement for online communications is the secure transmission
of confidential information over the Internet. Users of our solutions transmit
their and their customers' confidential information over the Internet. In our
license agreements with our customers, we disclaim responsibility for the
security of confidential data and have contractual indemnities for any damages
claimed against us. However, if unauthorized third parties are successful in
obtaining confidential information from users of our solutions, our reputation
and business may be damaged and, if our contractual disclaimers and indemnities
are not enforceable, we may be subjected to liability.
CHANGES IN ACCOUNTING STANDARDS AND IN THE WAY WE CHARGE FOR LICENSES COULD
AFFECT OUR FUTURE OPERATING RESULTS.
We recognize revenues from the sale of software licenses on delivery of our
solutions if:
o persuasive evidence of an arrangement exists,
o the fee is fixed and determinable,
o we can objectively allocate the total fee among all elements of the
arrangement, and
o collection of the license fee is probable.
Under some license arrangements, with either a fixed or indefinite term, our
customers agree to pay for the license with periodic payments extending beyond
one year. We recognize revenues from these arrangements as the periodic payments
become due, provided all other conditions for revenue recognition are met. We
have not entered into many of these arrangements, however, if they become
popular with our customers, we may have lower revenues in the short term than we
would otherwise, because revenues for licenses sold under these arrangements
will be recognized over time rather than upon delivery of our solution.
We recognize maintenance revenues ratably over the contract term, typically one
year, and recognize revenues for consulting, education and implementation and
customization services as the services are performed.
Administrative agencies responsible for setting accounting standards, including
the Securities and Exchange Commission and the Financial Accounting Standards
Board, are also reviewing the accounting standards related to business
combinations and stock-based compensation.
Any changes to these accounting standards or any other accounting standards or
the way these standards are interpreted or applied could require us to change
the manner in which we recognize revenue or the way we account for share
compensation or for any acquisition we may pursue or other aspects of our
business, in a manner that could adversely affect our reported financial
results.
29
OUR SHARE PRICE MAY CONTINUE TO BE VOLATILE.
Our share price has fluctuated substantially since our initial public offering
in August 1999. The trading price of our common shares is subject to significant
fluctuations in response to variations in quarterly operating results, the gain
or loss of significant orders, changes in revenues and earnings estimates by
securities analysts, announcements of technological innovations or new solutions
by us or our competitors, general conditions in the software and computer
industries and other events or factors. In addition, the stock market in general
has experienced extreme price and volume fluctuations that have affected the
market price for many companies in industries similar or related to ours and
have been unrelated to the operating performance of these companies. These
market fluctuations have adversely affected and may continue to adversely affect
the market price of our common shares.
CERTAIN SHAREHOLDERS MAY BE ABLE TO EXERCISE CONTROL OVER MATTERS
REQUIRING SHAREHOLDER APPROVAL.
Our current officers, directors and entities affiliated with us together
beneficially owned a significant portion of our outstanding common shares as of
June 30, 2001. While these shareholders do not hold a majority of our
outstanding common shares, they will be able to exercise significant influence
over matters requiring shareholder approval, including the election of directors
and the approval of mergers, consolidations and sales of our assets. This may
prevent or discourage tender offers for our common shares.
ITEM 2. PROPERTIES
Our principal administrative, professional services and education facilities are
located in North Vancouver, British Columbia, Canada, and our research and
development campus is located in Vancouver, British Columbia, Canada and
together consist of approximately 85,288 square feet of office space in three
separate buildings. The leases for the buildings in North Vancouver expire in
September 2002 and the lease for the building in Vancouver expires in April
2002. We intend to consolidate these offices to one newly constructed facility
in Vancouver, British Columbia with a scheduled completion in the fall of 2002.
Pursuant to an offer to lease this facility, our obligation to occupy the
premises and commence paying rent does not arise until construction of the
building is complete. Once construction is finished, the building will consist
of 126,790 square feet of office space under a lease that expires in July 2017.
Our principal marketing facility is located in Kirkland, Washington and consists
of approximately 13,600 square feet of office space held under a lease that
expires in December 2003. We also have a significant research and development
facility in Atlanta, Georgia that consists of approximately 26,708 square feet
of office space under a lease that expires on April 2006. We also have a
significant professional services facility in Dallas, Texas that consists of
7,877 square feet of space under a lease that expires in September 2003.
Our main administrative office for Europe, the Middle East and Africa is located
in Dublin, Ireland held under a lease expiring in November 2001. Our principal
sales and marketing office for Europe, the Middle East and Africa is located in
Luton, England held under a lease that expires in November 2005. Our European
customer support center is located in Belfast, Northern Ireland and consists of
approximately 9,648 square feet of office space under a lease that expires in
May 2010.
As of June 30, 2001, we also leased offices in: Tokyo, Japan; Sydney, Australia;
Auckland, New Zealand; Mainz, Germany; High Point, North Carolina; Des Plaines,
Illinois; San Bruno and Irvine, California; Dallas, Texas; Denver, Colorado;
Levallois-Perret, France; Paris, France; North Andover, Massachusetts;
Morristown, New Jersey; New York, New York; Bethesda, Maryland; St. Paul,
Minnesota and Toronto, Ontario.
ITEM 3. LEGAL PROCEEDINGS
We are subject to legal proceedings, claims and litigation arising in the
ordinary course of business. Management, after review and consultation with
legal counsel, considers that any liability from the disposition of such
lawsuits would not have a material adverse effect upon our consolidated
financial condition.
We are currently in arbitration with one of our business partners, following a
breach of contract claim against us. We believe the claim is without merit and
we have made a counterclaim. While the results of arbitration and claims cannot
be predicted with certainty, we believe that the final outcome of this matter
will not have a material adverse effect on our business, financial condition,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not Applicable.
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common shares began trading on the Nasdaq National Market on August 5, 1999
under the symbol PVTL. The table below lists the high and low closing prices per
share of our common shares for each quarterly period during the past fiscal
year, as reported on the Nasdaq National Market.
Price Range
of Common Shares
Price Range for Year Ended
of Common Shares June 30, 2000
for Year Ended (beginning
June 30, 2001 August 5, 1999)
----------------- -----------------
High Low High Low
----- --- ---- ---
First Quarter..........................$...59.38 $ 23.44 $ 19.69 $ 12.06
Second Quarter.............................70.23 31.00 59.00 18.13
Third Quarter..............................35.56 10.31 68.56 30.06
Fourth Quarter.............................25.10 9.44 45.50 18.78
Our common shares began trading on The Toronto Stock Exchange on August 17, 2000
under the symbol PVT. The table below lists the high and low closing prices per
share of our common shares for each quarterly period during the past fiscal
year, as reported on The Toronto Stock Exchange.
Price Range
of Common Shares
-----------------
High Low
---- ---
Year Ended June 30, 2001
First Quarter (beginning August 17, 2000)..............Cdn$ 88.25 Cdn$ 54.75
Second Quarter............................................. 105.00 48.00
Third Quarter.............................................. 54.00 16.20
Fourth Quarter............................................. 38.46 14.70
SHAREHOLDERS
As of September 1, 2001, there were approximately 388 registered holders of our
common shares. This does not include the number of persons whose shares are in
nominee or "street name" accounts through brokers.
DIVIDENDS
We have never declared or paid any cash dividends on our share capital. We
currently intend to retain any future earnings to fund the development and
growth of our business and we do not anticipate paying any cash dividends in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On June 22, 2001, in connection with the acquisition of Inform Inc. we issued
45,446 common shares. We relied on the exclusion from registration provided by
Rule 903(b)(2) of Regulation S under the Securities Act of 1933. We were a
"foreign issuer", as defined by Regulation S and issued our shares to persons
outside the United States and not for the account or benefit of any "U.S.
Person." We imposed offering restrictions in compliance with Rule 903(b)(2).
USE OF PROCEEDS
On August 4, 1999, our registration statement on Form F-1, Registration No.
333-82871, became effective. The offering date was August 5, 1999. The offering
has terminated as a result of all of the shares offered being sold. The managing
underwriters were Merrill Lynch & Co., Bear, Stearns & Co. Inc. and Dain
Rauscher Wessels. The offering consisted of 3,975,000 of our common shares,
which included 475,000 common shares offered pursuant to the subsequent exercise
of the underwriter's over allotment option
31
on August 19, 1999. The aggregate price of the shares offered and sold was $47.7
million. Proceeds to us, after $3.3 million in underwriting discounts and
commissions and $1.3 million in other expenses, were $43.1 million. During the
year ended June 30, 2000, we used $14.5 million of the net proceeds in
connection with acquisitions of Exactium, Simba and Transitif. During the year
ended June 30, 2001, we used $5.7 million of the net proceeds in connection with
acquisitions of Ionysys, Project One, Software Spectrum and Inform. Another $6.0
million of the net proceeds was used for working capital. The remaining $16.9
million of the net proceeds continues to be invested in investment-grade,
interest bearing short-term instruments.
None of the net offering proceeds were paid, and none of the initial public
offering expenses related to payments, directly or indirectly, to our directors,
officers or general partners or their associates, persons owning 10% or more of
any class of securities or our affiliates.
Exchange Controls
There are no government laws, decrees or regulations in Canada which restrict
the export or import of capital or which affect the remittance of dividends,
interest or other payments to non-resident holders of our common shares. Any
remittances of dividends to United States residents and to other non-residents
are, however, subject to withholding tax. See "Taxation" below.
Taxation
Canadian Federal Income Taxation
We consider that the following summary fairly describes in general the principal
Canadian federal income tax consequences applicable to a holder of our common
shares who at all material times deals at arm's length with us, who holds all
common shares as capital property, who is resident in the United States, who is
not a resident of Canada and who does not use or hold, and is not deemed to use
or hold, his common shares of Pivotal in connection with carrying on a business
in Canada (a "non-resident holder"). It is assumed that the common shares will
at all material times be listed on a stock exchange that is prescribed for
purposes of the Income Tax Act (Canada) (the "ITA") and regulations thereunder.
The Canadian federal income tax consequences applicable to holders of our common
shares will not change if we are deemed inactive by The Toronto Stock Exchange.
Investors should however be aware that the Canadian federal income tax
consequences applicable to holders of our common shares will change if we cease
to be listed on a prescribed stock exchange like The Toronto Stock Exchange.
Accordingly, holders and prospective holders of our common shares should consult
with their own tax advisors with respect to the income tax consequences of them
purchasing, owing and disposing of our common shares should we cease to be
listed on a prescribed stock exchange.
This summary is based upon the current provisions of the ITA, the regulations
thereunder, the Canada-United States Tax Convention as amended by the Protocols
thereto (the "Treaty") as at the date of the registration statement and the
currently publicly announced administrative and assessing policies of the Canada
Customs and Revenue Agency (the "CCRA"). This summary does not take into account
Canadian provincial income tax consequences. This description is not exhaustive
of all possible Canadian federal income tax consequences and does not take into
account or anticipate any changes in law, whether by legislative, governmental
or judicial action. This summary does, however, take into account all specific
proposals to amend the ITA and regulations thereunder, publicly announced by the
Government of Canada to the date hereof.
This summary does not address potential tax effects relevant to us or those tax
considerations that depend upon circumstances specific to each investor.
Accordingly, holders and prospective holders of our common shares should consult
with their own tax advisors with respect to the income tax consequences to them
of purchasing, owning and disposing of our common shares.
Dividends
The ITA provides that dividends and other distributions deemed to be dividends
paid or deemed to be paid by a Canadian resident corporation (such as Pivotal)
to a non-resident of Canada shall be subject to a non-resident withholding tax
equal to 25% of the gross amount of the dividend of deemed dividend. Provisions
in the ITA relating to dividend and deemed dividend payments to and gains
realized by non-residents of Canada, who are residents of the United States, are
subject to the Treaty. The Treaty may reduce the withholding tax rate on
dividends as discussed below.
Article X of the Treaty as amended by the US-Canada Protocol ratified on
November 9, 1995 provides a 5% withholding tax on gross dividends or deemed
dividends paid to a United States corporation which beneficially owns at least
10% of our voting stock paying the dividend. In cases where dividends or deemed
dividends are paid to a United States resident (other than a corporation) or a
United
32
States corporation which beneficially owns less than 10% of our voting stock, a
withholding tax of 15% is imposed on the gross amount of the dividend or deemed
dividend paid. We will be required to withhold any such tax from the dividend
and remit the tax directly to CCRA for the account of the investor.
The reduction in withholding tax from 25%, pursuant to the Treaty, will not be
available:
(a) if the shares in respect of which the dividends are paid formed part
of the business property or were otherwise effectively connected with
a permanent establishment or fixed base that the holder has or had in
Canada within the 12 months preceding the disposition, or
(b) the holder is a U.S. LLC which is not subject to tax in the U.S.
The Treaty generally exempts from Canadian income tax dividends paid to a
religious, scientific, literary, educational or charitable organization or to an
organization exclusively administering a pension, retirement or employee benefit
fund or plan, if the organization is resident in the U.S. and is exempt from
income tax under the laws of the U.S.
Capital Gains
A non-resident holder is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of our share unless the share
represents "taxable Canadian property" to the holder thereof. Our Common shares
will be considered taxable Canadian property to a non-resident holder only if-.
(a) the non-resident holder;
(b) persons with whom the non-resident holder did not deal at arm's
length- or
(c) the non-resident holder and persons with whom he did not deal at arm's
length,
owned not less than 25% of our issued shares of any class or series at any time
during the five year period preceding the disposition. In the case of a
non-resident holder to whom our shares represent taxable Canadian property and
who is resident in the United States, no Canadian taxes will generally be
payable on a capital gain realized on such shares by reason of the Treaty
unless:
(a) the value of such shares is derived principally from real property
(including resource property) situated in Canada,
(b) the holder was resident in Canada for 120 months during any period of
20 consecutive years preceding, and at any time during the 10 years
immediately preceding, the disposition and the shares were owned by
him when he ceased to be a resident of Canada,
(c) they formed part of the business property or were otherwise
effectively connected with a permanent establishment or fixed base
that the holder has or bad in Canada within the 12 months preceding
the disposition, or
(d) the holder is a U.S. LLC which is not subject to tax in the U.S.
If subject to Canadian tax on such a disposition, the taxpayer's capital gain
(or capital loss) from a disposition is the amount by which the taxpayer's
proceeds of disposition exceed (or are exceeded by) the aggregate of the
taxpayer's adjusted cost base of the shares and reasonable expenses of
disposition. For Canadian income tax purposes, the "taxable capital gain" is
equal to one-half of the capital gain.
United States Federal Income Taxation
The following is a general discussion of the material United States Federal
income tax consequences, under current law, generally applicable to a U.S.
Holder (as defined below) of our common shares who holds such shares as capital
assets. This discussion does not address all potentially relevant United States
Federal income tax matters and it does not address consequences peculiar to
persons subject to special provisions of United States Federal income tax law,
such as those described below as excluded from the definition of a U.S. Holder.
In addition, this discussion does not cover any state, local, or foreign tax
consequences. (See "Canadian Federal Income
33
Tax Consequences" above.)
The following discussion is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations, published Internal Revenue Service
("IRS") rulings, published administrative positions of the IRS and court
decisions that are currently applicable, any or all of which could be materially
and adversely changed, possibly on a retroactive basis, at any time. In
addition, this discussion does not consider the potential effects, both adverse
and beneficial, of any proposed legislation which, if enacted, could be applied,
possibly on a retroactive basis, at any time.
The discussion below does not address potential United States Federal income tax
effects relevant to us or those United States Federal income tax considerations
that depend upon circumstances specific to each investor. In addition, this
discussion does not address United States Federal income tax consequences that
may be relevant to particular investors subject to special treatment under
certain U.S. Federal income tax laws, such as those described below as excluded
from the definition of a U.S. Holder. Purchasers of our common stock should
therefore satisfy themselves as to the overall tax consequences of their
ownership of the common stock, including the State, local and foreign tax
consequences thereof (which are not reviewed herein), and should consult their
own tax advisors with respect to their particular circumstances.
U.S. Holders
As used herein, a "U.S. Holder" means a beneficial holder of our common shares
who is a citizen or resident of the United States, a corporation or partnership
created or organized in or under the laws of the United States or of any
political subdivision thereof, an estate whose income is taxable in the United
States irrespective of source and any trust if a US court is able to exercise
primary supervision over the administration of the trust and one or more US
persons have the authority to control all substantial decisions of the trust. A
U.S. Holder does not include persons subject to special provisions of United
States Federal income tax law, such as tax-exempt organizations, individual
retirement accounts and other tax-deferred accounts, qualified retirement plans,
financial institutions, insurance companies, real estate investment trusts,
regulated investment companies, broker-dealers, shareholders subject to the
alternative minimum tax provisions of the Code, shareholders who hold our shares
as part of a straddle, hedging, conversion transaction, constructive sale or
other arrangement involving more than one position, and shareholders who
acquired their shares through the exercise of employee stock options or
otherwise as compensation. This summary does not address the consequences to a
person or entity holding an interest in a shareholder or the consequences to a
person of the ownership, exercise or disposition of any options, warrants or
other rights to acquire common shares.
Dividend Distribution on our Shares
U.S. Holders receiving dividend distributions (including constructive dividends)
with respect to our common shares are required to include in gross income for
United States Federal income tax purposes the gross amount of such distributions
to the extent that we have current or accumulated earnings and profits, without
reduction for any Canadian income tax withheld from such distributions. Such
Canadian tax withheld may be deducted or may be credited against actual tax
payable, subject to certain limitations and other complex rules, against the
U.S. Holder's United States Federal taxable income. See "Foreign Tax Credit"
below. To the extent that distributions exceed our current or accumulated
earnings and profits, they will be treated first as a return of capital to the
extent of the U.S. Holder's basis in our common shares and thereafter as gain
from the sale or exchange of our common shares. Preferential tax rates for net
long term capital gains may be applicable to a U.S. Holder which is an
individual, estate or trust. There are currently no preferential tax rates for
net long term capital gains of a U.S. Holder that is a corporation.
In general, dividends paid on our common shares will not be eligible for the
dividends received deduction provided to corporations receiving dividends from
certain United States corporations.
In the case of foreign currency received as a dividend that is not converted by
the recipient into U.S. dollars on the date of receipt, a U.S. Holder will have
a tax basis in the foreign currency equal to its U.S. dollar value on the date
of receipt. Generally any gain or loss recognized upon a subsequent sale or
other disposition of the foreign currency, including the exchange for U.S.
dollars, will be ordinary income or loss. However, an individual whose realized
gain does not exceed $200 will not recognize that gain, to the extent that there
are no expenses associated with the transaction that meet the requirements for
deductibility as a trade or business expense (other than travel expenses in
connection with a business trip) or as an expense for the production of income.
Certain information reporting and backup withholding rules may apply with
respect to our common shares. In particular, a payor or middleman within the
U.S., or in certain cases outside the U.S., will be required to withhold 31%
(which rate is scheduled for periodic reduction on payments made subsequent to
August 6, 2001) of any payments to a holder of our common shares of dividends
on, or
34
proceeds from the sale of, such common shares within the U.S., unless the holder
is an exempt recipient, if the holder fails to furnish its correct taxpayer
identification number or otherwise fails to comply with, or establish an
exemption from, the backup withholding tax requirements. Any amounts withheld
under the U.S. backup withholding tax rules will be allowed as a refund or a
credit against the U.S. Holder's U.S. federal income tax liability, provided the
required information is furnished to the IRS. U.S. Holders are urged to consult
their own tax counsel regarding the information reporting the backup withholding
rules applicable to our common shares.
Foreign Tax Credit
A U.S. Holder who pays (or who has had withheld from distributions) Canadian
income tax with respect to the ownership of our common shares may be entitled,
at the election of the U.S. Holder, to either a deduction or a tax credit for
such foreign tax paid or withheld. This election is made on a year-by-year basis
and generally applies to all foreign income taxes paid by (or withheld from) the
U.S. Holder during that year. There are significant and complex limitations
which apply to the credit, among which is the general limitation that the credit
cannot exceed the proportionate share of the U.S. Holder's United States income
tax liability that the U.S. Holder's foreign source income bears to his or its
world-wide taxable income. In determining the application of this limitation,
the various items of income and deduction must be classified into foreign and
domestic sources and into various categories, such as "passive income", "high
withholding tax interest", "financial services income", "shipping income" and
certain other classifications of income. A U.S. Holder that is a domestic U.S.
corporation owning 10% or more of our voting stock is also entitled to a deemed
paid foreign tax credit in certain circumstances for our underlying foreign tax
related to dividends received or Subpart F income deemed received from us. (See
the discussion below of Controlled Foreign Corporations). The availability of
the foreign tax credit and the application of the limitations on the foreign tax
credit are fact specific and holders and prospective holders of our common
shares should consult their own tax advisors regarding their individual
circumstances.
Disposition of Common Shares
Gain or loss realized on a sale of our common shares by a U.S. Holder will
generally be a capital gain or loss, and will be long-term if the shareholder
has a holding period of more than one year. The amount of gain or loss
recognized by a selling U.S. Holder will be measured by the difference between
(i) the amount realized on the sale and (ii) his tax basis in our common shares.
Preferential tax rates for net long term capital gains may be applicable to a
U.S. Holder that is an individual, estate or trust. There are currently no
preferential tax rates for net long term capital gain for a U.S. Holder that is
a corporation. Capital losses are deductible only to the extent of capital
gains. However, in the case of taxpayers other than corporations (U.S.)$3,000
($1,500 for married individuals filing separately) of capital losses are
deductible against ordinary income annually. In the case of individuals and
other non-corporate taxpayers, capital losses that are not currently deductible
may be carried forward to other years. In the case of corporations, capital
losses that are not currently deductible are carried back to each of the three
years preceding the loss year and forward to each of the five years succeeding
the loss year.
Other Considerations for U.S. Holders
In the following circumstances, the above sections of this discussion may not
describe the United States Federal income tax consequences resulting to a U.S.
Holder from the holding and disposition of our common shares. Management of
Pivotal is of the opinion that there is little, if any, likelihood of us being
deemed a "Foreign Personal Holding Company", a "Foreign Investment Company" or a
"Controlled Foreign Corporation" (each as defined below) under current and
anticipated conditions.
Foreign Personal Holding Company
If at any time during a taxable year more than 50% of the total combined voting
power or the total value of our outstanding shares is owned, actually or
constructively, by five or fewer individuals who are citizens or residents of
the United States and 60% or more of our gross income for such year was "foreign
personal holding company income" (e.g., income from dividends, interest and
similar income), we would be treated as a "foreign personal holding company." In
that event, U.S. Holders that hold common shares would be required to include in
income for such year their allocable portion of our "foreign personal holding
company income" to the extent that we do not distribute such income.
Foreign Investment Company
If 50% or more of the combined voting power or total value of our outstanding
shares are held, actually or constructively, by citizens or residents of the
United States, United States domestic partnerships or corporations, or estates
or trusts other than foreign estates or trusts (as defined by the Code Section
7701(a)(31)), and we are found to be engaged primarily in the business of
investing,
35
reinvesting, or trading in securities, commodities, or any interest therein, it
is possible that we might be treated as a "foreign investment company" as
defined in Section 1246 of the Code, causing all or part of any gain realized by
a U.S. Holder selling or exchanging our common shares to be treated as ordinary
income rather than capital gains.
Passive Foreign Investment Company
As a foreign corporation with U.S. Holders, we could potentially be treated as a
passive foreign investment company ("PFIC"), as defined in Section 1297 of the
Code, depending upon the percentage of our income which is passive, or the
percentage of our assets which produce or are held for the production of passive
income. U.S. Holders owning common shares of a PFIC are subject to the highest
rate of tax on ordinary income in effect for the applicable taxable year and to
an interest charge based on the value of deferral of tax for the period during
which the common shares of the PFIC are owned with respect to certain "excess
distributions" on and dispositions of PFIC stock. However, if the U.S. Holder
makes a timely election to treat a PFIC as a qualified electing fund ("QEF")
with respect to such shareholder's interest therein, the above-described rules
generally will not apply. Instead, the electing U.S. Holder would include
annually in his gross income his pro rata share of the PFIC's ordinary earnings
and net capital gain regardless of whether such income or gain was actually
distributed. A U.S. Holder of a QEF can, however, elect to defer the payment of
United States federal income tax on such income inclusions. Special rules apply
to U.S. Holders who own their interests in a PFIC through intermediate entities
or persons. In addition, subject to certain limitations, U.S. Holders owning,
actually or constructively, marketable (as specifically defined) stock in a PFIC
will be permitted to elect to mark that stock to market annually, rather than be
subject to the excess distribution regime of section 1291 described above.
Amounts included in or deducted from income under this alternative (and actual
gains and losses realized upon disposition, subject to certain limitations) will
be treated as ordinary gains or losses. This alternative will apply to taxable
years of U.S. Holders beginning after 1997 and taxable years of foreign
corporations ending with or within such taxable years of U.S. Holders.
We believe that we were not a PFIC for our fiscal year ended June 30, 2001.
There can be no assurance that our determination concerning our PFIC status will
not be challenged by the IRS, or that we will be able to satisfy record keeping
requirements which will be imposed on QEFs in the event that we qualify as a
PFIC.
Controlled Foreign Corporation Status
If more than 50% of the voting power of all classes of stock or the total value
of our stock is owned, directly or indirectly, by citizens or residents of the
United States, United States domestic partnerships or corporations, or estates
or trusts other than foreign estates or trusts (as defined by the Code Section
7701(a)(31)), each of which own, directly or indirectly, 10% or more of our
total combined voting power, we would be treated as a "controlled foreign
corporation" or "CFC" under Subpart F of the Code. This classification would
bring into effect many complex results including the required inclusion by such
10% U.S. Holders in income of their pro rata shares of our "Subpart F income"
(as defined by the Code) and our earnings invested in "U.S. property" (as
defined by Section 956 of the Code). In addition, under Section 1248 of the
Code, if we are considered a CFC at any time during the five year period ending
with the sale or exchange of our stock, gain from the sale or exchange of our
common shares by such a 10% U.S. Holder at any time during the five year period
ending with the sale or exchange is treated as ordinary dividend income to the
extent of our earnings and profits attributable to the stock sold or exchanged.
Because of the complexity of Subpart F, and because we may never be a CFC, a
more detailed review of these rules is beyond of the scope of this discussion.
If we are both a PFIC and a CFC, we generally will not be treated as a PFIC with
respect to any 10% U.S. Holders as described above. This rule generally will be
effective for taxable years of 10% U.S. Holders beginning after 1997 and for our
taxable years ending with or within such taxable years of such 10% U.S. Holders.
Special rules apply to 10% U.S. Holders who are subject to the special PFIC
taxation rules discussed above. Because of the complexity of Subpart F, a more
detailed review of these rules is outside of the scope of this discussion.
ALL PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF PURCHASING OUR COMMON SHARES.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements and Notes thereto, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report. The consolidated statement of
operations data for each of the three years ended June 30, 2001, 2000 and 1999
and the
36
consolidated balance sheet data as of June 30, 2001 and 2000 are derived from
audited financial statements included elsewhere in this report. The consolidated
statement of operations data for the years ended June 30, 1998 and 1997 and the
consolidated balance sheet data as of June 30, 1999, 1998 and 1997 are derived
from audited consolidated financial statements not included in this report.
YEAR ENDED JUNE 30,
------------------------------------------------------------------
2001 2000(1) 1999 1998 1997
--------- ---------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
REVENUES:
Licenses $ 58,510 $ 37,384 $ 18,819 $ 11,311 $ 2,916
Services and maintenance 36,780 15,555 6,508 2,898 590
-------- -------- -------- -------- -------
Total revenues 95,290 52,939 25,327 14,209 3,506
-------- -------- -------- -------- -------
COST OF REVENUES:
Licenses 3,800 2,141 536 401 121
Services and maintenance 20,166 8,147 3,078 1,281 387
-------- -------- -------- -------- -------
Total cost of revenues 23,966 10,288 3,614 1,682 508
-------- -------- -------- -------- -------
Gross profit 71,324 42,651 21,713 12,527 2,998
OPERATING EXPENSES:
Sales and marketing 51,230 31,165 16,830 9,226 2,646
Research and development 18,750 8,906 4,958 1,910 1,163
General and administrative 13,567 4,190 2,466 1,513 725
Amortization of goodwill 23,062 1,409 -- -- --
In-process research and development and -- 6,979 -- -- --
other charges -------- -------- -------- -------- -------
Total operating expenses 106,609 52,649 24,254 12,649 4,534
-------- -------- -------- -------- -------
37
YEAR ENDED JUNE 30,
-------------------------------------------------------------------------
2001 2000(1) 1999 1998 1997
----------- ---------- --------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Loss from operations (35,285) (9,998) (2,541) (122) (1,536)
Interest and other income (loss) 3,333 2,193 (24) 136 142
---------- --------- --------- -------- ---------
Income (loss) before income taxes (31,952) (7,805) (2,565) 14 (1,394)
Income taxes 503 557 243 10 --
---------- --------- -------- -------- ---------
Net income (loss) for the period $(32,455) $ (8,362) $ (2,808) $ 4 $(1,394)
========== ========= ========= ========= =========
Basic and diluted earnings (loss) per share $ (1.40) $ (0.45) $ (0.72) $ -- $ (0.41)
Pro forma basic and diluted loss per share(2) $ (0.39) $ (0.18) -- --
Shares used to calculate earnings (loss) per share
Basic 23,173 18,643 3,888 3,720 3,393
Diluted 23,173 18,643 3,888 14,927 3,393
Pro forma basic and diluted loss per share(2) 21,339 15,940
AS OF JUNE 30,
-----------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- ------- ------- ------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 13,247 $ 4,734 $ 9,338 $ 1,202 $ 3,898
Working capital 58,366 28,297 7,257 3,317 4,417
Total assets 168,443 121,945 21,722 10,752 6,729
Long-term obligations 592 -- -- -- --
Redeemable convertible preferred shares -- -- 17,500 9,500 9,500
Total shareholders' equity (deficit) 128,201 96,097 (7,192) (4,455) (4,533)
NOTES:
(1) Results for the year ended June 30, 2000 include a charge for in
process research and development and other charges related to the
acquisition of Exactium and Simba. See note 2 to consolidated
financial statements.
(2) See note 1 of notes to consolidated financial statements for an
explanation of the method used to calculate basic and diluted per
share amounts. The 2000 and 1999 amounts are calculated on a pro forma
basis.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Pivotal Corporation, incorporated in 1990 British Columbia, Canada, enables
large and medium-sized businesses worldwide to increase, acquire and manage
their customers by providing customer relationship management and electronic
business solutions. Customer Relationship management and electronic business
solutions automate and manage marketing, selling and servicing processes over
the Internet and through traditional channels by integrating customer
relationship management, electronic selling, electronic commerce and wireless
technologies. We refer to our customer relationship management and electronic
solutions as the Pivotal Customer Relationship Management and eBusiness solution
suite. The Pivotal Customer Relationship Management and eBusiness solution suite
is designed to complement and integrate with a business' supply chain, therefore
enabling businesses to improve efficiency and increase revenues.
Our solutions are sold in 35 countries and are available in English, French,
German and Spanish from Pivotal directly and Portuguese, Swedish, Japanese,
Chinese and Hebrew from members of our Pivotal Alliance. Our worldwide customer
base includes more than
38
1,300 organizations in traditional, commercial, public market sectors and in the
new digital economy and includes companies such as ABN AMRO Securities LLC,
American Medical Security Group Inc., Atlas Copco Airpower N.V., Belgacom
France, Bombardier Aerospace, CIBC World Markets, Commonfund, Compuware
Corporation Japan, Deloitte & Touche, Emerson Electric, Ericsson, Farm Credit
Services of America, FLAG Telecom, Grantham, Mayo, Van Otterloo & Company
L.L.C., Haldex Services Corporation, Heller Financial, Hitachi Telecom (USA)
Inc., Intrawest Corporation, Kikkoman Corporation, KPMG, Miller Heiman, Inc.,
National Air Traffic Services, London, National City Bank of Minneapolis, NEC,
Nissan Motor (Denmark), Novozymes North America, Inc., Panasonic SA, Principal
Financial Group, Qiagen, RBC Dain Rauscher Wessels, Southern Company, Toshiba
Information Systems Corporation, USFilter, and 1201 Financial & Insurance
Services, Inc. We market and sell our solutions through a direct sales force as
well as through third-party solution providers.
RECENT ACQUISITIONS
During the year ended June 30, 2001, we completed acquisitions including those
described below which were accounted for under the purchase method of
accounting. Accordingly, the results of operations of each acquisition are
included in our consolidated statement of operations since the acquisition date,
and the related assets and liabilities were recorded based upon their respective
fair values at the date of acquisition. Pro forma results of operations have not
been presented because the effects of these acquisitions were not material on
either an individual or an aggregate basis.
Ionysys Technology Corporation
On October 16, 2000, we acquired all of the assets of Ionysys Technology
Corporation, a privately held provider of Internet solutions based in Vancouver,
British Columbia. We paid an aggregate cash purchase price of $1.0 million
including acquisition related expenditures of $360,000.
Project One Business Technologies Inc.
On October 31, 2000, we acquired all of the shares of Project One Business
Technologies Inc., a privately held provider of Internet solutions specifically
designed for the health care industry based in North Vancouver, British
Columbia. We paid an aggregate purchase price of $1.4 million consisting of
19,000 common shares and cash of $460,000, which includes acquisition related
expenditures of $380,000.
The agreement for the acquisition of Project One also provided for additional
consideration of approximately 96,000 common shares to be paid based on
achieving specified product development and operating targets over the next 3
years. All earn-out payments will be recorded as additional purchase price when
determinable. There were no earn-out payments required to be made in connection
with the acquisition of Project One since acquisition to the period ended June
30, 2001.
Software Spectrum CRM, Inc.
On December 5, 2000, we acquired all of the shares of Software Spectrum CRM,
Inc. Software Spectrum, based in Dallas, Texas, delivers solutions and
consulting expertise in multi-channel contact centers, demand chain network
management and customer relationship management. We paid an aggregate purchase
price of $7.5 million consisting of 138,000 common shares and cash of $1.9
million, which includes acquisition related expenditures of $1.2 million.
Inform, Inc.
On June 22, 2001, we acquired all of the shares of Inform Inc. a company located
in Toronto, Canada, which specializes in implementation services for the
financial services industry. We paid an aggregate purchase price of $1.3 million
consisting of 45,446 common shares and cash of $359,000, including acquisition
related expenditures of $266,000.
The total consideration, including acquisition costs, was allocated based on
estimated fair values on the acquisition date as follows:
39
Project Software
(all amounts in thousands) Ionysys One Spectrum Inform Other Total
----------- ----------- ------------ -------------------- -----------
Consideration (inclusive of cash
received of $372)
Cash $1,014 $460 $1,925 $359 $2,296 $6,054
Fair value of common shares
issued - 904 5,549 951 - 7,404
----------- ----------- ------------ -------------------- -----------
$1,014 $1,364 $7,474 $1,310 $2,296 $13,458
=========== =========== ============ ==================== ===========
See note 2 of the Consolidated Financial Statements for additional details
related to these acquisitions.
SOURCE OF REVENUE AND REVENUE RECOGNITION POLICY
We derive our revenues from the sale of licenses and services and maintenance to
end-users, value added resellers and application service providers and, to a
lesser extent, through distribution of third party products. We recognize
license revenues on delivery to the customer of our solutions if:
- there is persuasive evidence of an arrangement;
- the fee is fixed or determinable;
- there is vendor-specific objective evidence supporting allocating the
total fee among all elements of a multiple-element arrangement; and
- the collection of the license fee is probable.
Multiple-element arrangements could consist of software licenses, upgrades,
enhancements, maintenance and consulting services. Under some license
arrangements, with either a fixed or indefinite term, our customers agree to pay
for the license with periodic payments extending beyond one year. We recognize
revenues from these arrangements as the periodic payments become due, provided
all other conditions for revenue recognition are met.
We enter into reseller and sub-licensing arrangements that provide a fee payable
to us based on a percentage of list price. We recognize revenue only on the fees
payable to us, net of any amount payable to the reseller by the customer.
We typically sell first year maintenance with the related software license.
Revenue related to maintenance is recognized over the term of the maintenance
contract, typically one year. Revenues relating to technical support and
maintenance have increased due to our increasing customer base and the renewal
of technical support and maintenance contracts upon expiration of first year
maintenance arrangements.
We recognize revenues from consulting, implementation services, and education as
these services are performed. We derive revenue from these services primarily on
a time-and-materials basis under a separate service arrangement with the
customer. The majority of the implementation services provided to our customers
in connection with installations of our solutions are provided by third-party
consulting and implementation service providers. These third-party service
providers contract directly with the customer.
Our cost of license revenues primarily consists of costs related to media, the
packaging and distribution of solutions, the related documentation and other
production costs and royalty fees due to third parties for integrated
technology. Our cost of services revenues includes salaries and related expenses
for our implementation, consulting support and education organizations and an
allocation of facilities, communications and depreciation expenses. Our
operating expenses are classified into three general categories: sales and
marketing, research and development and general and administrative. We classify
all charges to these operating expense categories based on the nature of the
expenditures. We allocate the costs for overhead and facilities to each of the
functional areas based on their headcount. Our customers include a number of our
suppliers. On occasion, we have purchased goods or services for our operations
from these vendors at or about the same time we have licensed our software to
these organizations. These transactions are negotiated separately and recorded
at terms we consider to be arms-length.
40
Software development costs incurred prior to the establishment of technological
feasibility are included in research and development costs as incurred. Since
license revenues from our solutions are not recognized until after technological
feasibility has been established, software development costs are not generally
expensed in the same period in which license revenues for the developed
solutions are recognized.
RESULTS OF OPERATIONS
The following table sets forth the consolidated statement of operations data for
each of the years in the three years ended June 30, 2001 expressed as a
percentage of total revenues:
Year ended June 30,
--------------------------------------------------------------------------------------------
2001 2000 1999
--------------------------------------------------------------------------------------------
REVENUES:
Licenses 61% 71% 74%
Services and maintenance 39% 29% 26%
--------------------------------------------------------------------------------------------
Total revenues 100% 100% 100%
--------------------------------------------------------------------------------------------
COST OF REVENUES:
Licenses 4% 4% 2%
Services and maintenance 21% 15% 12%
--------------------------------------------------------------------------------------------
Total cost of revenues 25% 19% 14%
--------------------------------------------------------------------------------------------
Gross profit 75% 81% 86%
--------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 54% 59% 66%
Research and development 20% 17% 20%
General and administrative 14% 8% 10%
Amortization of goodwill 24% 3% -
In-process research and development and other charges - 13% -
--------------------------------------------------------------------------------------------
Total operating expenses 112% 100% 96%
--------------------------------------------------------------------------------------------
Loss from operations (37%) (19%) (10%)
Interest and other income 4% 4% -
--------------------------------------------------------------------------------------------
Loss before income taxes (33%) (15%) (10%)
Income taxes 1% 1% 1%
--------------------------------------------------------------------------------------------
Net loss (34%) (16%) (11%)
============================================================================================
YEARS ENDED JUNE 30, 2001 AND 2000
REVENUES
Total revenues increased 80% to $95.3 million for the year ended June 30, 2001
from $52.9 million for the year ended June 30, 2000.
Licenses
Revenues from licenses increased 57% to $58.5 million for the year ended June
30, 2001 from $37.4 million for the year ended June 30, 2000.
Our revenues from licenses increased due to sale of licenses to new customers
and to follow-on sales to existing customers. These increases were attributable
to increased market acceptance of our solutions and increased sales as a result
of our expansion of our direct and indirect channels of distribution both in
North America and internationally. In addition, we believe that the availability
of new features added to the Pivotal Customer Relationship Management and
eBusiness solution suite has increased revenues as this has
41
extended the overall functionality of our solutions by permitting organizations
to collaborate with customers and partners over the Internet. In recent months,
the buying patterns of our potential customers were different than prior
quarters due to economic downturn in North America. This weakening of the North
American economy has resulted in longer sales cycles making it difficult to
predict when sales of licenseswill close.
Revenues from licenses represented 61% and 71% of total revenues for the years
ended June 30, 2001 and 2000, respectively. License revenues decreased as a
percentage of total revenues primarily due to growth in our professional
services business to meet the demand for implementation of our products. North
American license revenues accounted for 67% and 72% of total license revenues in
the years ended June 30, 2001 and 2000, respectively. International license
revenues increased as a percentage of total revenues as demand for our products
increased as we expanded our European and other international operations
combined with a weakening U.S. economy. No single customer accounted for 10% or
more of our revenues for the years ended June 30, 2001 and 2000.
Our license revenue growth depends on the overall demand for customer
relationship management solutions and electronic business solutions. The overall
demand for our software depends in large part on the general economic and
business conditions. Due primarily to the general weakening of the U.S. economy
in the first half of calendar 2001, we experienced a decrease in the
year-on-year growth rate of our software license revenues in the fourth quarter
of 2001. Software license revenues as a percentage of total revenues decreased
from 64% in the three month ended December 31, 2000 to 62% in the third quarter
ended March 31, 2001 and to 54% in the fourth quarter ended June 30, 2001.
Software license revenues decreased as a percentage of total revenues primarily
due to a slower growth rate of our software license revenues, which we believe
was due primarily as a result of the weakening U.S. economy and the growth of
our professional servicesdue to an increase in the number of technical support
and maintenance contracts we obtained as our customer base grew.
Revenues are difficult to forecast and will be significantly influenced by the
overall global economy and corporate spending trends.
Services and Maintenance
Revenues from services and maintenance increased 136% to $36.8 million for the
year ended June 30, 2001 from $15.6 million for the year ended June 30, 2000.
This resulted from an increase of $9.9 million in revenues from technical
support and maintenance contracts, which entitles the customer to new versions
of the product and to technical support and maintenance services and an increase
of $11.3 million in revenues from implementation, education and consulting
service engagements.
Our revenues from services and maintenance represented 39% and 29% of total
revenues for the years ended June 30, 2001 and 2000, respectively. We believe
that revenues from services and maintenance will continue to increase as a
percentage of total revenues, due to an increase in the number of technical
support and maintenance contracts we expect to obtain as our customer base
grows. We intend to expand consulting services targeted at helping customers
understand more about matters such as effective one-to-one marketing and using
the Internet to increase revenues and improve customer service. We plan to
continue relying on third parties to provide a majority of implementation
services to our customers, rather than providing those services directly.
COST OF REVENUES
Total cost of revenues increased 133% to $24.0 million for the year ended June
30, 2001 from $10.3 million for the year ended June 30, 2000.
Licenses
Cost of revenues from licenses consists of costs relating to the packaging and
distribution of solutions, related documentation and other production costs and
royalty fees paid for incorporation of third-party solutions into our solutions.
Cost of revenues from licenses increased 77% to $3.8 million for the year ended
June 30, 2001 from $2.1 million for the year ended June 30, 2000. The increase
is due primarily to increased costs for third-party technology integrated with
our solutions. Cost of revenues from licenses as a percentage of revenues from
licenses was 6% for each of the years ended June 30, 2001 and 2000. We expect
that the cost of licenses as a percentage of revenue from licenses will remain
approximately the same for fiscal 2002.
Services and Maintenance
Cost of revenues from services and maintenance consists of personnel and other
expenses relating to the cost of providing maintenance and customer support,
education and consulting services. Cost of revenues from services and
maintenance will vary
42
depending on the mix of services we provide between support and maintenance,
education, implementation and consulting services. Gross profit margins are
higher for support and maintenance services than they are for education and
consulting services. Support and maintenance services involve the delivery of
software upgrades, which the customers download and install themselves and
customer support. Education and consulting services generally require more
involvement by our employees, resulting in higher compensation, travel and
similar expenses.
Cost of revenues from services and maintenance increased 148% to $20.2 million
for the year ended June 30, 2001 from $8.1 million for the year ended June 30,
2000. The increase in dollar amount resulted from the hiring of consulting,
customer support and education personnel to support our growing customer base.
Cost of revenues from services and maintenance as a percentage of revenues from
services and maintenance was 55% and 52% for the years ended June 30, 2001 and
2000, respectively.
We expect that cost of revenues from services and maintenance will be comparable
to the fourth quarter of fiscal 2001 as a percent of revenues from services and
maintenance as we expand our service capabilities in international markets to
support planned expansion of our international business and as we expand our
consulting services.
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, commissions, bonuses
and benefits earned by sales and marketing personnel, direct expenditures such
as travel, communication and occupancy for direct sales offices and marketing
expenditures related to direct mail, online marketing, trade shows, advertising
and promotion.
Sales and marketing expenses increased 64% to $51.2 million for the year ended
June 30, 2001 from $31.2 million for the year ended June 30, 2000. The increase
in dollar amounts reflects the expansion of our international sales capacity,
which required an increase in the number of sales and marketing professionals.
Sales and marketing expenses decreased as a percentage of total revenues to 54%
in the year ended June 30, 2001 from 59% in the year ended June 30, 2000. This
decrease of sales and marketing expenses as a percentage of total revenues
resulted from the improved productivity of our sales and marketing personnel and
programs.
During the fourth quarter ended June 30, 2001, we increased program spending
which caused sales and marketing costs to increase as a percentage of revenue.
These costs are expected to remain at approximately the same levels in the first
quarter of fiscal 2002. We will continue to examine the level of sales and
marketing costs based on our revenue projections.
Research and Development
Research and development expenses include costs associated with new products,
enhancements of existing products and quality assurance activities and consist
primarily of salaries, benefits and equipment for software engineers, quality
assurance personnel, program managers, product managers, technical writers and
outside contractors used to augment the research and development efforts.
Research and development expenses increased 111% to $18.8 million for the year
ended June 30, 2001 from $8.9 million for the year ended June 30, 2000. The
increase was due to the increase in the number of research and development
employees. Research and development expenses were 20% and 17% of total revenues
for the years ended June 30, 2001 and 2000, respectively. We expect to continue
to keep research and development expenditures as the same percentage of revenues
as we expand the Demand Chain Management solution suite.
General and Administrative
General and administrative expenses consist primarily of salaries and occupancy
costs for executive, finance, administrative, human resources and information
services personnel. General and administrative expenses also include legal and
other professional fees and bad debt expense.
General and administrative expenses increased 224% to $13.6 million for the year
ended June 30, 2001 from $4.2 million for the year ended June 30, 2000. General
and administrative expenses were 14% and 8% of total revenues, respectively, for
the same periods. The increase of $9.4 million in general and administrative
expenses included $3.6 million of additional charges which related to the
impairment of long-lived assets and an additional provision for doubtful
accounts. The remaining $5.8 million increase in the general and administrative
expenses during the year ended June 30, 2001 relates to the hiring of additional
personnel and the implementation of internal financial and administrative
systems.
The impairment of long-lived assets of $1.4 million relates to assets which we
will no longer be using as we are currently re-configuring our business systems.
The total bad debt expense was $3.6 million for the year ended June 30, 2001
which included an additional provision for doubtful accounts of $1.7 million
during the fourth quarter ended June 30, 2001. This additional provision
43
was made because we are experiencing delay in payments from certain customers
due to a weakening in the North American economy.
Over the next year we expect general and administrative expenses to remain at
approximately the same level as the fourth quarter ended June 30, 2001.
Amortization of Goodwill
Amortization of goodwill was $23.1 million in the year ended June 30, 2001. This
amount is comprised of a full year of amortization and a partial year of
amortization for additions to goodwill for acquisitions which totaled$15.1
million and $58.1 million for fiscal 2001 and 2000 respectively. Included in
goodwill is $239,000 in additional consideration paid based on the net after-tax
earnings of Transitif and license revenues received by Transitif from sale of
licenses for our products. We are amortizing goodwill from these acquisitions
over a period of three years. Amortization of goodwill totaling $1.4 million in
the year ended June 30, 2000, related to goodwill of arising from the
acquisitions of Transitif and Exactium.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and SFAS
No.142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination and SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other assets. These
standards require all future business combinations to be accounted for using the
purchase method of accounting. Goodwill will no longer be amortized but instead
will be subject to impairment tests at least annually. We are required to adopt
SFAS No. 141 and 142 on a prospective basis as of July 1, 2002, but are
permitted to adopt in the first quarter of fiscal 2002. We are currently
evaluating the impact the adoption of these pronouncements may have on our
financial position and results of operations; however, due to these
pronouncements being issued in late July 2001 and due to our expectation that
the FASB will issue further guidance with respect to the adoption of both SFAS
No. 141 and 142, we are currently unable to determine the impact the adoption of
these pronouncements may have on our financial position or results of
operations. Although we cannot determine the impact the adoption of SFAS 141 and
SFAS 142 will have on our operating results, once adopted there could be a
material impact on future operating results if there was an impairment in the
value of goodwill.
Pursuant to the foregoing, we estimate amortization of goodwill to be $27.4
million from existing acquisitions for the year ended June 30, 2002 if we do not
adopt SFAS No. 141 and 142 effective in the first quarter of fiscal 2002. As we
are subject to an annual goodwill valuation test on each balance sheet date, the
charge to the Consolidated Statement of Operations could be higher if there were
an impairment in the value of goodwill. If we choose to adopt SFAS 141 and 142
during the first quarter of fiscal 2002 SFAS No. 141 and SFAS No. 142 and
further FASB guidance, we may not be required to continue amortizing past
acquisitions. This determination has not been made at this time.
INTEREST AND OTHER INCOME (LOSS)
Interest and other income consists of earnings on cash and cash equivalents and
short term investments net of interest expense and foreign exchange gains and
losses. Interest and other income was $3.3 million and $2.2 million for the
years ended June 30, 2001 and 2000, respectively. The increase of $1.1 million
during the year ended June 30, 2001 was due primarily to our higher cash and
cash equivalents and short-term investments. This was a result of the equity
financing completed in November 2000, which generated $51.8 million net of
expenses and brokers commissions. Interest and other income for the year ended
June 30, 2001 included foreign exchange gains of $65,000 compared to losses of
$168,000 for the year ended June 30, 2000. The other components of interest and
other income were not material for the periods presented.
INCOME TAXES
The provision for income taxes was $503,000 and $557,000 for the years ended
June 30, 2001 and 2000, respectively. These income tax amounts were attributable
to our operations in the United States, the United Kingdom and France and were
offset by $470,000 and $127,000 related to Canadian research and development tax
incentives received during the years ended June 30, 2001 and 2000 respectively.
44
YEARS ENDED JUNE 30, 2000 AND 1999.
REVENUES
Total revenues increased 109% to $52.9 million for the year ended June 30, 2000
from $25.3 million for the year ended June 30, 1999.
Licenses
Revenues from licenses increased 99% to $37.4 million for the year ended June
30, 2000 from $18.8 million for the year ended June 30, 1999.
Our revenues from licenses increased due to sales to new customers and follow-on
sales to existing customers. These increases were attributable to increased
market acceptance of our solutions, increased sales as a result of our expansion
of our direct and indirect channels of distribution and our marketing
organization. We believe that the availability of our Pivotal eRelationship 2000
product suite and Pivotal eSelling 2000 product contributed to the increase in
revenue from licenses, as they extended the overall functionality of our
solutions by permitting organizations to collaborate with customers and partners
over the Internet.
Revenues from licenses represented 71% and 74% of total revenues for the years
ended June 30, 2000 and 1999, respectively. No single customer accounted for 10%
or more of our revenues for the years ended June 30, 2000 and 1999. North
American license revenues accounted for 72% and 80% of total license revenues in
the years ended June 30, 2000 and 1999, respectively.
Services and Maintenance
Revenues from services and maintenance increased 139% to $15.6 million for the
year ended June 30, 2000 from $6.5 million for the year ended June 30, 1999.
This resulted from an increase of $4.6 million in revenues from technical
support and maintenance contracts, which entitles the customer to new versions
of the product and to technical support and maintenance services and an increase
of $4.5 million in revenues from implementation, education and consulting
service engagements. Our revenues from services and maintenance represented 29%
and 26% of total revenues for the years ended June 30, 2000 and 1999,
respectively.
COST OF REVENUES
Total cost of revenues increased 185% to $10.3 million for the year ended June
30, 2000 from $3.6 million for the year ended June 30, 1999.
Licenses
Cost of revenues from licenses increased to $2.1 million for the year ended June
30, 2000 from $536,000 for the year ended June 30, 1999. The increase is due
primarily to increased costs for third-party technology integrated with our
solutions. Cost of revenues from licenses as a percentage of revenues from
licenses was 6% and 3% for the years ended June 30, 2000 and 1999, respectively.
Services and Maintenance
Cost of revenues from services and maintenance increased 165% to $8.1 million
for the year ended June 30, 2000 from $3.1 million for the year ended June 30,
1999. The increase in dollar amount resulted from the hiring of consulting,
customer support and educating personnel to support our growing customer base.
Cost of revenues from services and maintenance as a percentage of revenues from
services and maintenance was 52% and 47% for the years ended June 30, 2000 and
1999, respectively.
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expenses increased 85% to $31.2 million for the year ended
June 30, 2000 from $16.8 million for the year ended June 30, 1999. The increase
in dollar amounts reflects the expansion of our international sales capability
which required an increase in the number of sales and marketing professionals.
Sales and marketing expenses decreased as a percentage of total revenues to 59%
in the year ended June 30, 2000 from 66% in the year ended June 30, 1999. This
decrease of sales and marketing expenses as a percentage of total revenues
resulted from the improved productivity of our sales and marketing personnel and
programs.
Research and Development
Research and development expenses increased 80% to $8.9 million for the year
ended June 30, 2000 from $5.0 million for the year ended June 30, 1999. The
increase was due to the increase in the number of research and development
employees as we expanded our Customer Relationship Management and eBusiness
solution suite. Research and development expenses were 17% and 20% of total
revenues for the years ended June 30, 2000 and 1999, respectively. This decrease
in the percentage of research and development
45
expenditures compared to total revenues resulted from the higher growth rate of
revenues in the year ended June 30, 2000 compared to the growth rate of research
and development expenditures.
General and Administrative
General and administrative expenses increased 70% to $4.2 million for the year
ended June 30, 2000 from $2.5 million for the year ended June 30, 1999. General
and administrative expenses were 8% and 10% of total revenues, respectively, for
the same periods. The increase in general and administrative expenses was due to
hiring additional personnel and the implementation of internal financial and
administrative systems.
In-Process Research and Development and Other Charges
During the year ended June 30, 2000, we recorded in-process research and
development charges of $4.7 million related to the acquisitions of Exactium and
Simba. These amounts were expensed as the underlying projects had not reached
technical feasibility, had no alternative future uses and successful development
was uncertain. We also recorded a write-down of $2.3 million of our other assets
which were made redundant as a result of the acquisitions of Exactium and Simba.
Exactium Ltd.
On June 2, 2000, we completed the purchase of Exactium and recorded a charge to
income of $2.8 million, or $0.15 per share, for in-process research and
development.
Purchased in-process research and development was related to the completion of
Exactium's electronic selling technology and its integration into our solutions.
At the time of acquisition, a prototype of Exactium's product existed and was
being used in limited trials. This prototype was not stable or sufficiently
developed to be scaleable on an enterprise-wide basis. We estimated that
Exactium's product was approximately 80% complete as of the acquisition date.
There was a considerable amount of uncertainty related to increasing the
product's scalability for deployment on an enterprise-wide basis, improving the
stability of the application and identifying and fixing bugs. In the opinion of
management, the acquired in-process research and development had not yet reached
technological feasibility and had no alternative future uses. Accordingly, we
recorded a charge of $2.8 million in the fourth quarter of fiscal year 2000
related to the acquired in-process research and development.
Our valuation of in-process research and development was based upon the
forecasted operating cash flows from the technology acquired, giving effect to
the stage of completion at the acquisition date. These forecasted cash flows
were then discounted at a rate commensurate with the risk involved in completing
the acquired in-process technology. The forecasted cash flows assumed inclusion
of the product developed from acquired technology into our existing product
suite. The purchased in-process research and development expense related to
completion of Exactium's eSelling 2000 product. This product was completed in
late June 2000. We estimated that revenues related to the sale of solutions
incorporating Exactium's technology would commence in the year ending June 30,
2001 and would increase thereafter. Revenue increases were based upon the
historical growth rate of software sales for the customer relationship
management and electronic business market.
The estimated operating costs as a percentage of estimated revenue were based
upon our normal operating margin. Operating cash flows were reduced by an
expected effective tax rate of 40%. Net cash flows were discounted to their
present value at the acquisition date using an appropriate after-tax
risk-adjusted discount rate reflecting the risk of unproven but partially
developed software products.
The Exactium technology was subsequently completed and the eSelling product was
released in late June 2000.
Simba Technologies Inc.
On June 26, 2000, we completed the purchase of Simba. We recorded a charge to
income of $1.9 million for in-process research and development or $0.10 per
share.
At the time of the acquisition, Simba did not have a first-generation product.
There were a considerable number of uncertainties as to completion of the
product. In the opinion of management, the acquired in-process research and
development had not yet reached technological feasibility and had no alternative
future uses. Accordingly, we recorded a charge of $1.9 million in the fourth
quarter of fiscal 2000 related to the acquired in-process research and
development.
Our valuation of the acquired research and development was based upon the
present value of forecasted operating cash flows from the technology acquired,
giving effect to the stage of completion at the acquisition date. These
forecasted cash flows were then discounted at a rate commensurate with the risk
involved in completing the acquired technology. The forecasted cash flows
assumed inclusion of the product developed from acquired technology into our
existing product suite.
46
Our valuation of acquired research and development was prepared using the income
approach and contemplated that sales of solutions incorporating Simba's
technology would commence in late 2000 and increase thereafter. Revenue
increases were based upon our historical growth rate and that of software sales
for the electronic marketing market. Operating costs as a percentage of revenue
were estimated based upon our normal operating margin. Operating cash flows were
reduced by an expected effective tax rate of 40%. Net cash flows were discounted
to their present value at the acquisition date using an appropriate after-tax
risk-adjusted discount rate reflecting the risk of unproven but partially
developed solutions.
To date, progress and development costs incurred on the Simba technology has
been in line with our initial expectations.
Failure to achieve the expected levels of revenues and net income from the
Exactium and Simba products will negatively impact the return on investment
expected at the time the acquisitions were completed and may potentially result
in impairment of other assets related to the acquisitions.
Amortization of Goodwill
Amortization of goodwill was $1.4 million in the year ended June 30, 2000
related to goodwill arising from the acquisitions of Transitif and Exactium.
There was no amortization of goodwill in the year ended June 30, 1999.
INTEREST AND OTHER INCOME (LOSS)
Interest and other income (loss) increased to income of $2.2 million for the
year ended June 30, 2000 from a loss of $24,000 for the year ended June 30,
1999. These increases are primarily due to interest earned from cash, cash
equivalents and short-term investments generated by our initial public offering.
Interest and other income for the year ended June 30, 2000 included foreign
exchange losses of $168,000 compared to losses of $191,000 for the year ended
June 30, 1999. The other components of interest and other income were not
material for the periods presented.
INCOME TAXES
Income taxes increased to $557,000 for the year ended June 30, 2000 from
$243,000 for the year ended June 30, 1999. These taxes related to the United
States and the United Kingdom. As a result of net operating losses and the
availability of loss carry forwards in Canada, we have not incurred significant
Canadian income taxes.
QUARTERLY RESULTS OF OPERATIONS
The following tables present our unaudited quarterly results of operations both
in absolute dollars and on percentage of revenue basis for each of our last
eight quarters. This data has been derived from unaudited consolidated financial
statements that have been prepared on the same basis as the annual audited
consolidated financial statements and, in our opinion, include all normal
recurring adjustments necessary for the fair presentation of such information.
These unaudited quarterly results should be read in conjunction with our
consolidated financial statements.
Three months ended
---------------------------------------------------------------------------------------------------------------------------
(all amounts in thousands) Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1999 1999 2000 2000 2000 2000 2001 2001
----------------------------------------------------------------------------------------------------------------------------
REVENUES:
Licenses $6,097 $ 8,026 $ 10,125 $ 13,136 $13,768 $ 16,346 $ 16,368 $ 12,028
Services and maintenance 2,578 3,516 4,412 5,049 7,290 9,385 10,026 10,079
----------------------------------------------------------------------------------------------------------------------------
Total revenues 8,675 11,542 14,537 18,185 21,058 25,731 26,394 22,107
----------------------------------------------------------------------------------------------------------------------------
COST OF REVENUES:
Licenses 284 410 635 812 866 979 1,009 946
47
Services and maintenance 1,368 1,813 2,295 2,671 3,870 4,979 5,346 5,971
----------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 1,652 2,223 2,930 3,483 4,736 5,958 6,355 6,917
----------------------------------------------------------------------------------------------------------------------------
Gross profit 7,023 9,319 11,607 14,702 16,322 19,773 20,039 15,190
----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 5,715 6,917 8,214 10,319 11,498 12,914 12,689 14,129
Research and development 1,569 2,125 2,409 2,803 3,917 4,509 5,096 5,228
General and administrative 707 968 1,197 1,318 1,776 2,100 2,787 6,904
Amortization of goodwill -- 32 97 1,280 4,995 5,405 6,068 6,594
In-process research and
development and other charges -- -- -- 6,979 -- -- -- --
----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 7,991 10,042 11,917 22,699 22,186 24,928 26,640 32,855
----------------------------------------------------------------------------------------------------------------------------
Loss from operations (968) (723) (310) (7,997) (5,864) (5,155) (6,601) (17,665)
Interest and other income 357 685 673 478 343 644 994 1,352
----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (611) (38) 363 (7,519) (5,521) (4,511) (5,607) (16,313)
Income tax expense (recovery) 75 126 139 217 (67) 170 56 344
----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (686) $ (164) $ 224 $ (7,736) $(5,454) $ (4,681) $ (5,663) $(16,657)
=============================================================================================================================
48
Three months ended
-----------------------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1999 1999 2000 2000 2000 2000 2001 2001
------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Licenses 70% 70% 70% 72% 65% 64% 62% 54%
Services and maintenance 30% 30% 30% 28% 35% 36% 38% 46%
-----------------------------------------------------------------------------------------------------------------------------
Total revenues 100% 100% 100% 100% 100% 100% 100% 100%
-----------------------------------------------------------------------------------------------------------------------------
COST OF REVENUES:
Licenses 3% 3% 4% 4% 4% 4% 4% 4%
Services and maintenance 16% 16% 16% 15% 18% 19% 20% 27%(1)
-----------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 19% 19% 20% 19% 22% 23% 24% 31%
-----------------------------------------------------------------------------------------------------------------------------
Gross profit 81% 81% 80% 81% 78% 77% 76% 69%
-----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 66% 60% 56% 57% 55% 50% 48% 64%(2)
Research and development 18% 19% 17% 15% 19% 18% 19% 24%
General and administrative 8% 8% 8% 7% 8% 8% 11% 31%(3)
Amortization of goodwill -- -- 1% 7% 24% 21% 23% 30%
In-process research and
development and other charges -- -- -- 39% -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 92% 87% 82% 125% 106% 97% 101% 149%
-----------------------------------------------------------------------------------------------------------------------------
Loss from operations (11%) (6%) (2%) (44%) (28%) (20%) (25%) (80%)
Interest and other income 4% 6% 5% 3% 2% 3% 4% 6%
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (7%) -- 3% (41%) (26%) (17%) (21%) (74%)
Income taxes 1% 1% 1% 1% - 1% - 1%
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss) (8%) (1%) 2% (42%) (26%) (18%) (21%) (75%)
=============================================================================================================================
(1) Cost of revenues for services and maintenance increased during the fourth
quarter as a result of increased numbers of technical support and
maintenance contracts we obtained as our customer base grew.
(2) During the fourth quarter ended June 30, 2001, we increased program
spending which caused sales and marketing costs to increase as a percentage
of revenue. These costs are expected to remain approximately the same in
the first quarter of fiscal 2002. We will continue to examine the level of
sales and marketing costs based on revenue projections.
(3) Fourth quarter general and administrative expenses includes $3.6 million
for non recurring charges which related to the impairment of long lived
assets and an additional provision for doubtful accounts.
49
For the years ended June 30, 1999 and 2000 we experienced an increase in
revenues during our fourth fiscal quarter, which we believe was primarily
related to sales compensation policies and annual objectives. We believe the
decrease in revenue in the quarter ended June 30, 2001 is due to the current
economic slowdown and related reluctance of companies to acquire significant
software and systems at this time. In addition, a pattern of reduced buying by
European customers during July and August has resulted in lower European license
revenues in the quarters ended September 30.
We incurred operating losses as we increased the level of investment in all
facets of our business. Our quarterly operating results have fluctuated
significantly in the past and will continue to fluctuate in the future as a
result of a number of factors, many of which are outside of our control. As a
result of our limited operating history and recent acquisitions, we cannot
forecast operating expenses based on historical results. Accordingly, we base
our anticipated level of expense in part on future revenue projections. Most of
our expenses are fixed in the short-term and we may not be able to quickly
reduce spending if revenues are lower than we have projected. Our ability to
forecast our quarterly revenues accurately is limited given our limited
operating history, length of the sales cycle of our solutions and other
uncertainties in our business. If revenues in a particular quarter do not meet
projections, our net losses in a given quarter would be greater than expected.
As a result, we believe that our quarter-to-quarter comparisons of our operating
results are not necessarily meaningful. Investors should not rely on the results
of one quarter as an indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, we had $13.2 million in cash and cash equivalents, $55.5
million in short term investments and $58.4 million in working capital. During
the quarter ended December 31, 2000, we successfully concluded an equity
financing in Canada, generating $51.8 million, net of expenses and brokers'
commissions.
Our cash and cash equivalents and short-term investments increased to $68.7
million as of June 30, 2001 from $35.5 million as of June 30, 2000. Our working
capital increased to $58.4 million at June 30, 2001 from $28.3 million at June
30, 2000. The increase is partly attributable to the equity financing completed
November 28, 2000, which generated $51.8 million, net of expenses and broker
commissions, offset by acquisitions and working capital requirements.
Net cash used in operating activities for the year ended June 30, 2001 was $4.5
million compared to net cash generated of $4.9 million in the same period in
2000.
Net cash used in investing activities was $43.2 million and $54.3 million for
the year ended June 30, 2001 and 2000, respectively. During the years ended June
30, 2001 and 2000, we used $24.7 million and $30.8 million, respectively, for
net purchases of short-term investments. Capital expenditures totalled $6.8
million and $6.1 million for the years ended June 30, 2001 and 2000,
respectively. Long-term investments and other assets totaled $6.3 million and
$2.9 million for the years ended June 30, 2001 and 2000, respectively. During
the year ended June 30, 2001, we used $5.4 million (net of cash acquired) on
acquisitions including Ionysys, Project One , Software Spectrum, and Inform.
During the year ended June 30, 2000, we used $14.5 million (net of cash
acquired) on the acquisitions of Transitif, Exactium and Simba.
Cash provided by financing activities was $56.2 million and $44.8 million for
the years ended June 30, 2001 and 2000, respectively. Net cash provided by
financing activities resulted from the issuance of common shares.
Our principal source of liquidity at June 30, 2001 was our cash, cash
equivalents and short-term investments of $68.7 million. We have a credit
facility with a Canadian chartered bank which includes a revolving term
operating line of $2.0 Million (CDN $3.0 Million), bearing interest at the
bank's prime rate plus 1% per year, secured by a charge on all our current and
future personal property. As of June 30, 2001 and 2000, no amounts were
outstanding under the credit facility.
O ur accounts receivable at June 30, 2001, were 101 days of sales outstanding,
which is above our target range of 76 to 80 days. Days of sales outstanding
increased because our international revenues represented a higher percentage of
total revenue. International receivables, on average, tend to lag over North
American receivables. In addition, our accounts receivables included amounts
with extended payment terms that were not due at June 30, 2001.
In June 2000, we entered into a $723,000 (Cdn. $ 1.1 million) irrevocable letter
of credit with a Canadian chartered bank. The letter of credit expired June 19,
2001. Subsequent to June 30, 2001, we entered into a new irrevocable letter of
credit with the same bank for $2.5 Million (Cdn $3.8 million). The letter of
credit, which expires July 3, 2002, collaterizes our obligations to a third
party for tenant improvement costs.
We believe that the total amount of cash and cash equivalents and short-term
investments, along with the credit facilities, will be sufficient to meet our
anticipated cash needs for working capital or other purposes at least for the
next twelve months. Thereafter, depending on the development of our business, we
may need to raise additional cash for working capital or other expenses. We also
may encounter opportunities for acquisitions or other business initiatives that
require significant cash commitments, or unanticipated problems or expenses that
could result in a requirement for additional cash before that time. If we need
to raise additional cash, financing may not be available to us on favorable
terms, or at all.
50
AUDIT COMMITTEE
We have established an Audit Committee of the Board of Directors, the charter of
which is to oversee the activities of management and our external auditors as
they relate to the financial reporting process. Currently, the Audit Committee
was comprised of Robin Louis, Jeremy Jaech and Steven Gordon. In particular, the
Audit Committee's role includes ensuring that management properly develops and
adheres to a sound system of internal controls, and that our external auditors,
through their own review, assess the effectiveness of those controls and
management's adherence to them.
In fulfilling their responsibilities, the Audit Committee conducted regular,
quarterly meetings with our external auditors. In these meetings, the Audit
Committee discussed with management and our external auditors the quality and
acceptability of accounting policies and significant transactions or issues
encountered during the period. In addition, the Audit Committee met with our
external auditors independent of management to provide for independent and
confidential assessment of management and the internal controls as they relate
to the quality and reliability of our financial statements. In the year ended
June 30, 2001, we adopted an Audit Committee Charter as required by the Nasdaq
Stock Exchange, Inc. in compliance with the Nasdaq Stock Exchange, Inc.'s
Marketplace Rules. We are committed to supporting this process and the Audit
Committee in fulfilling their role of ensuring the integrity of our internal
controls and financial reporting.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates
and foreign currencies.
FOREIGN CURRENCY RISK
We have operations in Canada and a number of countries outside of the United
States and therefore we are subject to risks typical of an international
business including, but not limited to differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions
and foreign exchange rate volatility. Accordingly, our future results could be
materially adversely affected by changes in these or other factors.
Our sales and corresponding receivables are substantially in U.S. dollars.
Through our operations in Canada and outside North America, we incur the
majority of our research and development, customer support costs and
administrative expenses in Canadian and other local currencies. We are exposed,
in the normal course of business, to foreign currency risks on these
expenditures. We have evaluated our exposure to these risks and have determined
that our only significant foreign currency exposure at this time is to the
Canadian dollar through our operations in Canada. At this time, we do not
believe our exposure to other currencies is material.
We use forward contracts to minimize the risks associated with transactions
originating in Canadian dollars. We have not designated these forward contracts
to be hedging instruments, therefore, all gains or losses resulting from the
change in fair value of these contracts have been included in earnings in the
current period.
If we were to designate these types of forward contracts or other derivatives as
hedges in the future and such derivatives satisfy the criteria for hedging
instruments, then depending on the nature of the hedge, changes in the fair
value of the derivatives will be offset against the change in fair value of
assets, liabilities, or firm commitments through earnings (fair value hedges) or
recognized in other comprehensive income until the related hedged item is
recognized in earnings (cash flow hedges). Any change in fair value related to
the ineffective portion of a derivative will be recognized in earnings through
periodic mark to market adjustments.
Prior to the year ended June 30, 1999, we did not engage in hedging transactions
and our gains and losses on foreign currency transactions were not significant.
In addition to the use of foreign exchange forward contracts noted above, from
time to time we may also purchase Canadian dollars in the open market and hold
these funds in order to satisfy forecasted operating needs in Canadian dollars
for the next operating period, which is generally limited to six months or less.
51
At June 30, 2001, we had no outstanding currency forward exchange contracts,
because forward contracts generally mature at the end of a quarterly period. As
of June 30, 2000, we had outstanding currency forward exchange contracts of $5.5
million. During the year ended June 30, 2001, we recorded a foreign exchange
gain of $65,000 compared to a loss of $168,000 from the unhedged portion of our
foreign currency exposure during the year ended June 30, 2000.
INTEREST RATE RISK
We invest our cash in a variety of short-term financial instruments, including
government bonds, commercial paper and money market instruments. Our portfolio
is diversified and consists primarily of investment grade securities to minimize
credit risk. These investments are typically denominated in U.S. dollars. Cash
balances in foreign currencies are operating balances and are only invested in
demand or short-term deposits of the local operating bank.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted because of 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 because of changes in interest rates or we may suffer losses in
principal if forced to sell securities which have seen a decline in market value
because of changes in interest rates.
Our investments are made in accordance with an investment policy approved by our
Board of Directors. Under this policy, all short term investments must be made
in investment grade securities with original maturities of less than one year at
the time of acquisition.
We do not attempt to reduce or eliminate our exposure to interest rate risk
through the use of derivative financial instruments due to the short-term nature
of the investments. Based on a sensitivity analysis performed on our balances as
of June 30, 2001, the fair value of our short term investment portfolio would
not be significantly impacted by either a 100 basis point increase or decrease
in interest rates.
52
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Pivotal Corporation
We have audited the accompanying consolidated balance sheets of Pivotal
Corporation as of June 30, 2001 and 2000 and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the three years
in the period ended June 30, 2001. Our audit also included the financial
statement schedule listed in the Index at Item 14(a). These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pivotal
Corporation as of June 30, 2001 and 2000 and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 2001 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Vancouver, Canada
July 20, 2001
53
PIVOTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars; all amounts in thousands)
June 30,
-----------------------------
2001 2000
-------------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 13,247 $ 4,734
Short-term investments 55,468 30,788
Accounts receivable 26,610 16,764
Prepaid expenses 2,691 1,859
-------------- -----------
Total current assets 98,016 54,145
Property and equipment, net 9,183 7,231
Goodwill, intangibles and other assets, net 61,244 60,569
-------------- -----------
Total assets $ 168,443 $ 121,945
============== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 25,324 $ 16,877
Deferred revenue 13,810 8,971
Current portion of obligations under capital leases and
long-term debt 516 -
-------------- -----------
Total current liabilities 39,650 25,848
Non-current portion of obligations under capital leases and
long-term debt 592 -
-------------- -----------
Total liabilities 40,242 25,848
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred shares, undesignated, no par value, authorized
shares - 20,000 at June 30, 2001 and June 30, 2000; no shares
issued and outstanding - -
Common shares and additional paid-in capital, no par value,
authorized shares - 200,000 at June 30, 2001 and June 30, 2000;
issued and outstanding shares - 23,933 and 22,057 at June 30, 2001
and June 30, 2000, respectively 176,728 112,078
Deferred share-based compensation (81) (193)
Accumulated other comprehensive loss (203) -
Accumulated deficit (48,243) (15,788)
-------------- -----------
Total shareholders' equity 128,201 96,097
-------------- -----------
Total liabilities and shareholders' equity $ 168,443 $ 121,945
============== ===========
See accompanying Notes to the Consolidated Financial Statements.
54
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in United States dollars;
all amounts in thousands except per share data)
Years ended June 30,
-----------------------------------------
2001 2000 1999
---------- ---------- ----------
Revenues:
License $ 58,510 $ 37,384 $ 18,819
Services and maintenance 36,780 15,555 6,508
---------- ---------- ----------
Total revenues 95,290 52,939 25,327
---------- ---------- ----------
Cost of revenues:
License 3,800 2,141 536
Services and maintenance 20,166 8,147 3,078
---------- ---------- ----------
Total cost of revenues 23,966 10,288 3,614
---------- ---------- ----------
Gross profit 71,324 42,651 21,713
---------- ---------- ----------
Operating expenses:
Sales and marketing 51,230 31,165 16,830
Research and development 18,750 8,906 4,958
General and administrative 13,567 4,190 2,466
Amortization of goodwill 23,062 1,409 -
In process research and development and other charges - 6,979 -
---------- ---------- ----------
Total operating expenses 106,609 52,649 24,254
---------- ---------- ----------
Loss from operations (35,285) (9,998) (2,541)
Interest and other income (loss) 3,333 2,193 (24)
---------- ---------- ----------
Loss before income taxes (31,952) (7,805) (2,565)
Income taxes 503 557 243
---------- ---------- ----------
Net loss for the year $ (32,455) $ (8,362) $ (2,808)
========== =========== ==========
Loss per share
Basic and diluted $ (1.40) $ (0.45) $ (0.72)
Pro forma basic and diluted $ (0.39) $ (0.18)
Weighted average number of shares used to
calculate loss per share:
Basic and diluted 23,173 18,643 3,888
Pro forma basic and diluted 21,339 15,940
See accompanying Notes to the Consolidated Financial Statements.
55
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Expressed in United States dollars;
all amounts in thousands except per share data)
Common Shares
and
Class A Additional
Convertible Paid-in Class B Accumulated
Preferred Shares Capital Common Shares Deferred Other Total
-------------- ---------------- ------------- Share-based Comprehensive Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Compensation Loss Deficit Equity (Deficit)
------ ------ ------ -------- ------ ------ ------------ ------------- ----------- ---------------
Balance, June 30, 1998 2,000 $ 83 3,853 $ 80 - $ - $ - $ - $ (4,618) $ (4,455)
Issuance of common
shares on exercise
of stock options - - 78 14 - - - - - 14
Conversion of common
shares into Class B
common shares - - (477) (4) 477 4 - - - -
Deferred share-based
compensation - - - 473 - - (473) - - -
Amortization of
share-based
compensation - - - - - - 57 - - 57
Net loss - - - - - - - - (2,808) (2,808)
------ ------ ------ -------- ------ ------ ------------ ------------- ----------- ---------------
Balance, June 30, 1999 2,000 83 3,454 563 477 4 (416) - (7,426) (7,192)
Conversion of
Class B common shares
into common shares - - 477 4 (477) (4) - - - -
Conversion of
Class A preferred
shares into common
shares (2,000) (83) 2,000 83 - - - - - -
Conversion of redeemable
convertible preferred
shares into common
shares - - 10,052 17,500 - - - - - 17,500
Issuance of common shares
on exercise of
stock options - - 375 995 - - - - - 995
Issuance of common shares
on initial public
offering, net of
offering costs - - 3,975 43,101 - - - - - 43,101
Issuance of common shares
related to Employee
Stock Purchase Plan - - 69 707 - - - - - 707
Acquisitions - - 1,655 49,125 - - - - - 49,125
Amortization of
share-based
compensation - - - - - - 223 - - 223
Net loss - - - - - - - - (8,362) (8,362)
------ ------ ------ ------ ------ ------ ------------ ------------- ----------- ---------------
Balance, June 30, 2000 - - 22,057 112,078 - - (193) - (15,788) 96,097
Tax benefit from employee
stock option plans - - - 876 - - - - - 876
Issuance of common shares
on exercise of
stock options - - 506 3,109 - - - - - 3,109
Issuance of common shares
related to Employee Stock
Purchase Plan - - 72 1,440 - - - - - 1,440
Acquisitions - - 298 7,404 - - - - - 7,404
Amortization of
share-based
compensation - - - - - - 112 - - 112
Compensation related to
stock options - - - 65 - - - - - 65
Issuance of common shares
on equity financing,
net of offering costs - - 1,000 51,756 - - - - - 51,756
Unrealized loss on
available-for-sale
investment - - - - - - - (203) - (203)
Net loss - - - - - - - - (32,455) (32,455)
------ ------ ------ -------- ------ ------ ------------ ------------- ----------- ---------------
Balance, June 30, 2001 - $ - 23,933 $176,728 $ - $ (81) $ (203) $(48,243) $ 128,201
====== ====== ====== ======== ====== ====== ============ ============= =========== ===============
See accompanying Notes to the Consolidated Financial Statements.
56
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars; all amounts in thousands)
Years ended June 30,
-------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net loss for the year $ (32,455) $ (8,362) $ (2,808)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Amortization of goodwill 23,062 1,409 -
Depreciation 4,556 2,215 1,017
In process research and development and other charges - 6,979 -
Tax benefit from employee stock option plans 876 - -
Impairment loss on property and equipment 948 - 52
Amortization of deferred share-based compensation 112 223 57
Non-cash share-based compensation expense 65 - -
Change in operating assets and liabilities (1,368) 2,469 4,196
------------ ------------ ------------
Net cash (used in) provided by operating activities (4,204) 4,933 2,514
------------ ------------ ------------
Cash flows for investing activities:
Purchases, sales and maturities of short-term investments, net (24,680) (30,788) -
Purchase of property and equipment (6,833) (6,110) (2,392)
Purchase of long-term investments and other assets (6,276) (2,921) -
Acquisitions (net of cash acquired) (5,682) (14,520) -
------------ ------------ ------------
Net cash used in investing activities (43,471) (54,339) (2,392)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from equity financing 51,756 - -
Net proceeds from initial public offering of common shares - 43,101 -
Proceeds from issuance of common shares 4,550 1,701 14
Repayment of long-term debt (118) - -
Proceeds from issuance of redeemable convertible preferred shares - - 8,000
------------ ------------ ------------
Net cash provided by financing activities 56,188 44,802 8,014
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 8,513 (4,604) 8,136
Cash and cash equivalents, beginning of period 4,734 9,338 1,202
------------ ------------ ------------
Cash and cash equivalents, end of period $ 13,247 $ 4,734 $ 9,338
============ ============ ============
Supplemental cash flow disclosure:
Income taxes (recovered) paid $ (132) $ 324 $ 137
============ ============ ============
Interest paid $ 10 $ 1 $ -
============ ============ ============
Supplemental non-cash investing disclosure:
Issuance of common shares and options on acquisitions $ 7,404 $ 49,125 $ -
============ ============ ============
Supplemental non-cash financing disclosure:
Issuance of common shares and options on acquisitions $ 7,404 $ 49,125 $ -
============ ============ ============
Conversion of preferred shares into common shares $ - $ 17,583 $ -
============ ============ ============
See accompanying Notes to the Consolidated Financial Statements.
57
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of the Company
Pivotal Corporation enables large and medium-sized businesses worldwide to
make, serve, and manage customers efficiently and intelligently by
providing customer relationship management and electronic business
solutions based on Microsoft standards. Pivotal helps companies manage
collaborative relationships between customers, business partners, and
employees; guides intelligent commerce transactions across multiple
channels; and seamlessly integrates the demand side of business with the
supply side. Pivotal's software solutions include Pivotal eRelationship,
developed to manage business relationships, Pivotal eSelling, designed to
sell complex products over the Internet, and Pivotal ePower, an integrated
Internet application platform that is built on best-in-class resources.
Principals of Consolidation
These consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP) and include the accounts of Pivotal and its
wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated.
Revenue Recognition
The Company recognizes revenue in accordance with accounting standards for
software companies including Statement of Position No. 97-2, Software
Revenue Recognition, as amended by Statement of Position No. 98-9, Software
Revenue Recognition with Respect to Certain Arrangements.
Pivotal generates revenues through two sources: (1) license revenues and
(2) services and maintenance revenues. License revenues are normally
generated from licensing with end-users, value-added resellers (VARs) and
application service providers and, to a lesser extent, through distribution
of third party products. When software licenses are sold indirectly to
end-users through VARs, Pivotal recognizes as revenue only the fee payable
from the reseller upon sell-through to the end-customer by the reseller.
Service revenues are generated from consulting services, education and
maintenance.
Revenues from software license agreements are recognized upon delivery of
software if persuasive evidence of an arrangement exists, collection is
probable, the fee is fixed or determinable, and vendor-specific objective
evidence exists to allocate the total fee to elements of the arrangement.
Vendor-specific objective evidence is typically based on the price charged
when an element is sold separately, or, in the case of an element not yet
sold separately, the price established by authorized management, if it is
probable that the price, once established, will not change before market
introduction. Elements included in multiple element arrangements could
consist of software products, upgrades, enhancements, customer support
services, or consulting services. If an acceptance period is required,
revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. Pivotal's agreements with its
customers and resellers do not contain product return rights. Revenues for
license arrangements with payment terms extending beyond one year are
recognized periodically as payments become due, provided all other
conditions for revenue recognition are met.
Maintenance revenues are recognized ratably over the term of the contract,
typically one year. Consulting revenues are primarily related to
implementation services performed on a time-and-materials basis under
separate service arrangements related to the installation and use of
Pivotal's software products. Revenues from consulting and education
services are recognized as services are performed. If a transaction
includes both license and service elements, license fee revenues are
recognized separately on shipment of the software, provided services do not
include significant customization or modification of the base product, and
the payment terms for licenses are not subject to acceptance criteria. In
cases where license fee payments are contingent on acceptance of services,
Pivotal defers recognition of revenues from both the license and the
service elements until the acceptance criteria are met.
58
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
During the fourth quarter of fiscal 2001, Pivotal adopted Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, (SAB 101).
The adoption of SAB 101 did not have a material effect on Pivotal's
consolidated financial position or results of operations.
Pivotal's customers include a number of suppliers. On occasion, Pivotal has
purchased goods or services for Pivotal's operations from vendors on or
about the same time Pivotal has licensed its software to these
organizations. These transactions are separately negotiated and recorded at
amounts and terms Pivotal considers to be at arm's-length.
Cost of Revenues
Cost of license revenues consists primarily of media, product packaging and
shipping, documentation and other production costs, and third party
royalties. Cost of services and maintenance revenues consists primarily of
salaries, benefits and allocated overhead costs related to consulting,
training and global services personnel, including the cost of services
provided by third-party consultants engaged by Pivotal.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Estimates are used for,
but not limited to, the accounting for doubtful accounts, depreciation and
amortization, income taxes and contingencies. Actual results may differ
from those estimates.
Cash and Cash Eqivalents
Cash equivalents consist of highly liquid short-term investments with
original maturities at the date of acquisition of 90 days or less and are
recorded at cost.
Short-Term Investments
Under Financial Accounting Standard ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, management classifies
investments as available-for-sale or held-to-maturity at the time of
purchase and re-evaluates such designation as of each balance sheet date.
Investments classified as held-to-maturity securities are stated at
amortized cost with corresponding premiums or discounts amortized against
interest income over the life of the investment.
Marketable equity and debt securities not classified as held-to-maturity
are classified as available-for-sale and reported at fair value. Unrealized
gains and losses on these investments, net of any related tax effect, are
included in equity as a separate component of shareholders' equity.
Short-term investments consist of money market instruments with maturities
of less than one year. As at June 30, 2001, Pivotal's short-term
investments consisted solely of held-to-maturity investments and their
carrying value was substantially the same as their market value.
Investments in Public Companies
At June 30, 2001, Pivotal held an investment in a publicly traded company
in which it has less than 20% of the voting rights and in which it does not
exercise significant influence. The investment is included in goodwill,
intangibles and other assets and is recorded at fair value, which is
determined based on quoted market prices, with net unrealized gains and
losses included in accumulated other comprehensive loss.
59
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments in Non-Public Companies
Pivotal has certain investments in non-publicly traded companies in which
it has less than 20% of the voting rights and in which it does not exercise
significant influence. These investments are included in goodwill and other
assets and are carried at cost. Pivotal monitors these investments for
impairment and makes appropriate reductions in carrying values when
necessary.
Fair Value of Financial Instruments
At June 30, 2001 and 2000, Pivotal has the following financial instruments:
cash and cash equivalents, short-term investments, accounts receivable,
investments in public and non-public companies, accounts payable and
accrued liabilities, and at June 30, 2001, long-term debt. The carrying
value of cash and cash equivalents, short-term investments, accounts
receivable and accounts payable and accrued liabilities approximates their
fair value based on their liquidity or based on their short-term nature. At
June 30, 2001, the carrying value of long-term debt also approximates fair
value.
The fair values of investments in publicly traded companies are determined
using quoted market prices for those securities. The fair values of
investments in non-publicly traded companies are not readily determinable.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation of property and equipment is provided using the following
rates and methods:
Computer software 2 year straight line
Computer hardware and equipment 30% declining balance or 3 year
straight line
Furniture and fixtures 20% declining balance
Leasehold improvements are amortized using the straight-line method over
three to five years.
Goodwill, Intangibles and other Assets
Goodwill, core technology and other intangible assets are carried at cost
less accumulated amortization and are being amortized on a straight-line
basis over the economic lives of the respective assets, generally three
years.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangible assets to be held and
used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the asset and its
eventual disposition. Measurement of an impairment loss for long-lived
assets and certain identifiable intangible assets that management expects
to hold and use are based on the fair value of the asset. Long-lived assets
and certain identifiable intangible assets to be disposed of are reported
at the lower of carrying amount or fair value less costs to sell. In 2001,
Pivotal recorded an impairment loss of $948 related to long-lived assets
having carrying values in excess of the cash flows expected to result from
their disposal. No such impairment losses had been identified by Pivotal
for the years ended June 30, 2000 and 1999.
60
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Research and Development
Research and development costs, which consist primarily of software
development costs, are expensed as incurred. SFAS No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,
provides for the capitalization of certain software development costs after
technological feasibility of the software is established. Under Pivotal's
current practice of developing new products and enhancements, the
technological feasibility of the underlying software is not established
until substantially all product development is complete, including the
development of a working model. No such costs have been capitalized because
the impact of capitalizing such costs would not be material.
Concentration of Credit Risk
Financial instruments that potentially subject Pivotal to a concentration
of credit risk consist principally of cash and cash equivalents, short-term
investments and accounts receivable. Cash and cash equivalents are
custodied with high-quality financial institutions and short-term
investments are made in investment grade securities to mitigate exposure to
credit risk. Pivotal's customer base is dispersed across many different
geographic areas throughout North America, Europe and the Asia Pacific and
consists of companies in a variety of industries. Pivotal performs ongoing
credit evaluations of its customers and does not require collateral or
other security to support credit sales. Pivotal provides an allowance for
bad debts based on historical experience and specifically identified risks.
During 2001, 2000 and 1999, no single customer accounted for more than 10%
of revenues.
Derivation Financial Instruments
Pivotal's use of derivative financial instruments is limited to short-term
foreign currency forward exchange contracts also referred to as forward
contracts, used to manage exposure related to certain Canadian currency
transactions. Pivotal does not enter into derivative financial instruments
for trading purposes. Pivotal identifies future Canadian currency
commitments and enters into forward contracts to hedge exposure to
fluctuations in the Canadian dollar. Gains and losses on forward contracts
that are designated and effective as hedges of firm foreign currency
commitments are recognized when the related transaction is recognized.
Gains and losses not meeting the criteria for hedge accounting are
recognized in operations in the current period.
As of June 30, 2001, Pivotal had no outstanding forward contracts.
As at June 30, 2000, Pivotal had outstanding forward contracts to purchase
Canadian dollars for U.S.$5.5 million. The unrealized loss on these
contracts at June 30, 2000 was $79.
Foreign Currency Translation
The functional currency of Pivotal and its subsidiaries is the U.S. dollar.
Assets and liabilities denominated in other than the U.S. dollar are
translated using the exchange rates prevailing at the balance sheet date.
Revenues and expenses are translated using average exchange rates
prevailing during the period. Gains and losses on foreign currency
transactions and translation are recorded in the consolidated statements of
operations.
Advertising
Pivotal expenses advertising costs as they are incurred. Advertising
expense is included in sales and marketing expenses and amounted to $1,305,
$924 and $538 in 2001, 2000 and 1999, respectively.
Income Taxes
Pivotal accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. This statement provides for a liability
approach under which deferred income taxes are provided based upon
currently enacted tax laws and rates. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amounts expected to be
realized.
61
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Share-Based Compensation
As permitted under SFAS No. 123, Accounting for Stock-Based Compensation,
Pivotal has accounted for employee stock options in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and has made the pro forma disclosures required by
SFAS No. 123 in Note 11.
Deferred compensation charges arise from those situations where options are
granted at an exercise price lower than the deemed fair value of the
underlying common shares. These amounts are amortized as charges to
operations, over the vesting periods of the individual stock options.
Loss per common share
Basic loss per share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share amounts reflect the potential
dilution by including other common share equivalents, including stock
options and redeemable convertible preferred shares, in the weighted
average number of common shares outstanding for a period, if dilutive.
Pro forma loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding and the weighted average
redeemable convertible preferred shares and Class A convertible preferred
shares outstanding as if such shares were converted into common shares and
had been outstanding at the beginning of the fiscal year. No convertible
preferred shares were outstanding during the year ended June 30, 2001.
Pivotal had a net loss for all periods presented herein; therefore, none of
the stock options outstanding during each of the periods presented were
included in the computation of diluted loss per share as they were
antidilutive.
The following table sets forth the computation of basic and diluted, and
pro forma basic and diluted loss per share:
Years ended June 30,
--------------------------------------
2001 2000 1999
---------- ---------- ----------
Net loss (A) $ (32,455) $ (8,362) $ (2,808)
========== ========== ==========
Weighted average number of
common shares outstanding (B) 23,173 18,643 3,888
==========
Pro forma adjustment for convertible preferred shares 2,696 12,052
---------- ----------
Pro forma basic and diluted weighted average
number of shares (C) 21,339 15,940
========== ==========
Loss per share
Basic and diluted (A/B) $ (1.40) $ (0.45) $ (0.72)
Pro forma basic and diluted (A/C) $ (0.39) $ (0.18)
62
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, Business Combinations and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 addresses the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination and SFAS No. 142 addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination
whether acquired individually or with a group of other assets. These
standards require all future business combinations to be accounted for
using the purchase method of accounting. Goodwill will no longer be
amortized but instead will be subject to impairment tests at least
annually.
Pivotal is required to adopt SFAS No. 141 and 142 on a prospective basis as
of July 1, 2002, but is permitted to adopt them in the first quarter of
2002. Pivotal is currently evaluating the impact that the adoption of these
pronouncements may have on its financial position and results of
operations; however, due to these pronouncements being issued in late July
2001 and due to the Pivotal's expectations that the FASB will issue further
guidance with respect to adoption of both SFAS No. 141 and No. 142, Pivotal
is currently unable to determine the impact that the adoption of these
pronouncements may have on its financial position or results of operations.
Reclasifications
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. BUSINESS COMBINATIONS
During the years ended June 30, 2001 and 2000, Pivotal completed the
acquisitions described below which were accounted for using the purchase
method of accounting. Accordingly, the results of operations of each
acquisition are included in the consolidated statement of operations since
the acquisition date, and the related assets and liabilities were recorded
based upon their respective fair values at the date of acquisition.
Fiscal 2001
Ionysys Technology Corporation
On October 16, 2000, Pivotal acquired 100% of Ionysys Technology
Corporation, a privately held company providing consulting and
implementation services related to Internet solutions based in Vancouver,
British Columbia. Pivotal paid an aggregate cash purchase price of $1,014
including acquisition related expenditures of $360.
Project One Business Technologies Inc.
On October 31, 2000, Pivotal acquired 100% of Project One Business
Technologies Inc., a privately held company providing consulting and
implementation services specifically designed for the health care industry
based in North Vancouver, British Columbia. Pivotal paid an aggregate
purchase price of $1,364 consisting of 19 common shares and cash of $460,
which includes acquisition related expenditures of $380.
The agreement for the acquisition of Project One also provided for
additional consideration to a maximum of approximately 96 common shares to
be paid based on achieving certain targets over the next 3 years. All share
consideration will be recorded as additional purchase price when issued. No
shares were required to be issued in connection with the acquisition of
Project One during the period ended June 30, 2001.
63
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
2. BUSINESS COMBINATIONS (Continued)
Sofware Spectrum CRM, Inc.
On December 5, 2000, Pivotal acquired 100% of Software Spectrum CRM, Inc..
Software Spectrum, based in Dallas, Texas, delivers solutions and
consulting expertise in multi-channel contact centers, and customer
relationship management to help organizations increase revenue and customer
satisfaction. Pivotal paid an aggregate purchase price of $7,474 consisting
of 138 common shares and cash of $1,925, which includes acquisition related
expenditures of $1,175.
Inform Inc.
On June 22, 2001, Pivotal acquired 100% of Inform Inc., a company located
in Toronto, Ontario, which specializes in implementation services for the
financial services industry. Pivotal paid an aggregate purchase price of
$1,310 consisting of 45 common shares and cash of $359, which includes
acquisition related expenditures of $266.
Other
Other acquisitions consist of asset acquisitions of implementation services
business during the third quarter ended March 31, 2001.
The total consideration, including acquisition costs, was allocated based
on estimated fair values on the acquisition date as follows:
Project Software
Ionysys One Spectrum Inform Other Total
------- ------- ---------- -------- ------- -------
Tangible assets acquired $ 86 $ 62 $ 2,697 $ 1,374 $ 103 $ 4,322
Liabilities assumed - (1,008) (2,534) (2,022) (413) (5,977)
------- ------- ---------- -------- ------- -------
Net identifiable assets (liabilities)
acquired 86 (946) 163 (648) (310) (1,655)
Goodwill and other intangibles 928 2,310 7,311 1,958 2,606 15,113
------- ------- ---------- -------- ------- -------
Purchase price $1,014 $ 1,364 $ 7,474 $ 1,310 $2,296 $13,458
======= ======= ========== ======== ======= ========
Consideration (inclusive of cash
received of $372)
Cash $1,014 $ 460 $ 1,925 $ 359 $2,296 $ 6,054
Fair value of common shares
issued - 904 5,549 951 - 7,404
------- ------- ---------- -------- ------- -------
$1,014 $ 1,364 $ 7,474 $ 1,310 $2,296 $13,458
======= ======= ========== ======== ======= ========
The fair value of the common shares of Pivotal issued in connection with
the acquisitions was determined by taking an average of the opening and
closing trading price of the common shares for a short period just before
and just after the terms of the transaction were agreed to by the parties
and announced to the public or the closing price on the acquisition dates.
64
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
2. BUSINESS COMBINATIONS (Continued)
Pro Forma Information
Unaudited pro forma results of operations assuming Pivotal had acquired
Ionysys, Project One, Software Spectrum, Inform and Other at the beginning
of the 2001 fiscal year have not been presented because the effects of
these acquisitions were not material on either an individual or aggregate
basis.
Fiscal 2000
Transitif S.A.
Effective December 3, 1999, Pivotal acquired 100% of Transitif S.A., a
French corporation that distributed customer relationship management
solutions. Transitif deploys Pivotal solutions through its network of
systems integrators throughout France. Pivotal paid an aggregate cash
purchase price of $1,266, including acquisition related expenditures of
$120 with additional consideration payable based on the net after-tax
earnings of Transitif and license revenues received by Transitif from the
future sale of licenses for Pivotal products to June 2002. All earn-out
payments will be recorded as additional purchase price when determinable
and Pivotal may elect to pay up to fifty percent of the additional purchase
price, if any, in Pivotal common shares. Pivotal made earn-out payments of
$239 during the year ended June 30, 2001.
Exactium Ltd.
Effective June 2, 2000, Pivotal acquired 100% of Exactium Ltd., an Israeli
company based in Atlanta, Georgia that provides e-selling solutions for
internet and Microsoft standards. Pivotal paid an aggregate purchase price
of $45,140 consisting of 1,225 common shares and stock options, cash of
$13,150 including a shareholder loan repayment of $5,402 and acquisition
related expenditures of $775.
Simba Digital Technologies Inc.
On June 26, 2000, Pivotal acquired 100% of Simba Digital Technologies Inc..
Pivotal paid an aggregate purchase price of $17,590 consisting of 837
common shares and stock options, and acquisition related expenditures of
$455.
65
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
2. BUSINESS COMBINATIONS (Continued)
The total consideration, including acquisition costs, was allocated based
on estimated fair values on the acquisition date as follows:
Transitif Exactium Simba Total
------------- ------------- ------------- -------------
Assets acquired
In process research and development $ - $ 2,830 $ 1,890 $ 4,720
Core developed technology - 290 - 290
Acquired workforce - 770 560 1,330
Other assets 1,146 370 720 2,236
------------- ------------- ------------- -------------
1,146 4,260 3,170 8,576
Liabilities assumed (1,050) (926) (683) (2,659)
------------- ------------- ------------- -------------
Net identifiable assets acquired 96 3,334 2,487 5,917
Goodwill 1,170 41,806 15,103 58,079
------------- ------------- ------------- -------------
Purchase price $ 1,266 $ 45,140 $ 17,590 $ 63,996
============= ============= ============= =============
Consideration (inclusive of cash received of $351)
Cash $ 1,266 $ 13,150 $ 455 $ 14,871
Fair value of common shares and
stock options issued - 31,990 17,135 49,125
------------- ------------- ------------- -------------
$ 1,266 $ 45,140 $ 17,590 $ 63,996
============= ============= ============= =============
The fair value of the common shares of Pivotal issued in conjunction with
the acquisitions was determined by taking an average of the opening and
closing trading price of the common shares for a short period just before
and just after the terms of the transaction were agreed to by the parties
and announced to the public. The purchase price was increased by the
estimated fair value of the stock options of Pivotal exchanged for the
Exactium and Simba options outstanding.
Purchased in Process Research and Development
Purchased in process research and development charges relate to
acquisitions of companies accounted for under the purchase method in which
a portion of the purchase price was allocated to acquired in process
technology. During 2000, Pivotal acquired Exactium and Simba and included
in the purchase price was an aggregate amount of purchased in process
research and development of $4,720.
66
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
2. BUSINESS COMBINATIONS (Continued)
Purchased in Process Research and Development (Continued)
Independent valuations were performed to assess and allocate a value to
purchased in process research and development. The value allocated to in
process research and development was based upon the forecasted operating
after-tax cash flows from the technology acquired, giving effect to the
stage of completion at the acquisition date. These forecasted cash flows
were then discounted at a rate commensurate with the risk involved in
completing the acquired technology taking into consideration the
characteristics and applications of each product, existing and future
markets, and assessments of the life cycle stage of each product. Based on
this analysis, the existing technology that had reached technological
feasibility was capitalized. Existing technology, that had not reached
technological feasibility and for which no future alternative use existed,
was expensed. Future cash flows were adjusted for the value contributed by
any core technology and development efforts expected to be completed post
acquisition. Research and development costs to bring the products from the
acquired companies to technological feasibility are not expected to have a
material impact on Pivotal's future results of operations or cash flows.
The forecasted data employed in the analysis was based upon both forecast
information maintained by the management of Exactium and Simba, and
Pivotal's estimate of the future potential of the acquired technology. The
inputs used by Pivotal in analyzing purchased in process research and
development were based upon assumptions that management believes reasonable
but which are inherently uncertain and unpredictable. These assumptions may
be incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur. Accordingly, actual
results may vary from the forecasted results. While management believes
that all of the development projects will be successfully completed,
failure of any of these projects to achieve technological feasibility,
and/or any variance from forecasted results, may result in a material
adverse effect on Pivotal's financial condition and results of operations.
A description of the purchased in process research and development for each
acquisition is set forth below.
Exactium
The allocation to in process research and development was related to the
Exactium eSelling technology. At the time of acquisition, a prototype of
Exactium's product existed and it was being used in limited trials. This
prototype was not stable or sufficiently developed to be scalable on an
enterprise-wide basis. Forecasted revenues used in the valuation reflected
historical growth rates of software sales for the eBusiness management
market and Pivotal, and contemplated revenues related to the sale of
products incorporating Exactium technology commencing during the summer of
2000 and increasing thereafter. Pivotal estimated that the technology was
approximately 80% complete as of the acquisition date. Net cash flows were
discounted to net present value at the acquisition date using an
appropriate tax adjusted rate reflecting the risk of unproven but partially
developed software products. The Exactium technology was subsequently
completed and the eSelling product was released in late June 2000.
Simba
The allocation to in process research and development was related to the
Simba electronic marketing product. At the time of acquisition, Simba did
not have a first-generation product and there were considerable
uncertainties as to completion of the product. The valuation of acquired in
process research and development was prepared using the income approach and
contemplated that revenues related to the sale of products incorporating
the Simba technology would commence in late 2000 and increase thereafter.
Revenue increases were based upon the historical growth rate of software
sales for the electronic marketing market and Pivotal. Net after tax cash
flows were discounted to their present value at the acquisition date using
an appropriate after-tax risk-adjusted discount rate reflecting the risk of
unproven but partially developed software products. To date, progress and
development costs incurred on the Simba technology have been in line with
the Company's initial expectation.
In addition to the charge for in-process research and development, Pivotal
recorded a write-down of other assets of Pivotal made redundant as a result
of the acquisitions in the amount of $2,259.
67
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
2. BUSINESS COMBINATIONS (Continued)
Pro Forma Information
The following table presents the unaudited pro forma results of operations
for informational purposes assuming Pivotal had acquired Exactium and Simba
at the beginning of the 1999 fiscal year.
June 30,
----------------------------------
2000 1999
----------------------------------
Net revenues $ 58,602 $ 30,594
Net loss $ (33,943) $ (25,905)
Basic and diluted loss per share $ (1.68) $ (4.67)
The pro forma results of operations give effect to certain adjustments
including amortization of purchased intangibles and goodwill. Included in
the pro forma net loss for the year ended June 30, 2000 is a $6,979 charge
for in-process research and development and other charges by Pivotal. The
information may not necessarily be indicative of the future combined
results of operations of Pivotal, Exactium and Simba. The pro forma results
of operations have not been presented for the Transitif transaction because
the effect of this acquisition was not considered to be material to
Pivotal.
3. ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $2,200
and $740 at June 30, 2001 and 2000, respectively.
4. PROPERTY AND EQUIPMENT
June 30,
-------------------------
2001 2000
----------- -----------
Computer software and equipment $ 11,619 $ 6,889
Furniture and fixtures 2,944 2,389
Leasehold improvements 2,054 1,695
----------- -----------
16,617 10,973
Accumulated depreciation (7,434) (3,742)
----------- -----------
Net book value $ 9,183 $ 7,231
=========== ===========
68
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
5. GOODWILL, INTANGIBLES AND OTHER ASSETS
June 30,
-------------------------
2001 2000
----------- -----------
Goodwill $ 75,408 $58,079
Acquired intangibles 1,620 1,620
Other assets 8,698 2,288
----------- -----------
85,726 61,987
Accumulated amortization (24,482) (1,418)
----------- -----------
Net book value $ 61,244 $60,569
=========== ===========
Other assets in the amount of $8,698 consist of prepaid long-term royalties
and long-term investments. Amortization of $24,482 includes the
amortization of goodwill and acquired intangibles.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities were as follows:
June 30,
-------------------------
2001 2000
----------- -----------
Accounts payable $ 12,721 $ 9,369
Accrued compensation 3,867 3,020
Accrued acquisition costs 5,227 1,229
Other accrued liabilities 3,509 3,259
----------- -----------
$ 25,324 $16,877
=========== ===========
7. LINE OF CREDIT
Pivotal has a credit facility with a Canadian chartered bank which includes
a revolving term operating line of $1,982 (Cdn.$3,000), bearing interest at
the bank's prime rate plus 1% per year, secured by a charge on all current
and future personal property of Pivotal. As of June 30, 2001 and 2000, no
amounts were outstanding under the facility.
69
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
8. OBLIGATIONS UNDER CAPITAL LEASES AND LONG-TERM DEBT
Obligations under capital leases and long-term debt were as follows:
June 30,
-------------------------------
2001 2000
------------ ------------
Obligation under capital lease with an interest rate of 5% $ 625 $ -
Note payable, non-interest bearing, unsecured, repaid
subsequent to year-end 365
Other obligations 118
------------ ------------
1,108 -
Less: Current portion (516) -
------------ ------------
$ 592 $ -
============ ============
As of June 30, 2001, future annual minimum lease payments for capital
leases were $500, including $89 of imputed interest.
9. COMMITMENTS AND CONTINGENCIES
Operating Leases
Pivotal leases office facilities under operating leases which generally
require Pivotal to pay a share of operating costs, including property
taxes, insurance and maintenance. Pivotal also leases certain equipment
under operating leases.
Future minimum operating lease payments for the years ending June 30
pursuant to leases outstanding as of June 30, 2001 are as follows:
2002 $9,253
2003 6,839
2004 4,176
2005 3,736
2006 2,912
-----------
$26,916
===========
Rent expense totaled approximately $4,755, $2,237 and $1,075 in the years
ended June 30, 2001, 2000 and 1999, respectively. Certain of these lease
obligations have been secured by irrevocable letters of credit for $799, $0
and $50 at June 30, 2001, 2000 and 1999, respectively.
Other Letters of Credit
Subsequent to June 30, 2001, the Company arranged a letter of credit of
$2,477 (Cdn.$3,750). The letter of credit, which expires July 3, 2002,
secures Pivotal's obligations to a third party for tenant improvement
costs.
Legal Proceedings
Pivotal is currently in arbitration with one of its business partners
related to a breach of contract claim against the Company. The Company
believes the claim is without merit and has made a counterclaim. While the
results of the arbitration and claims cannot be predicted with certainty,
the Company believes that the final outcome of this matter will not have a
material adverse effect on Pivotal's business, financial condition, results
of operations or cash flows.
70
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
10. REDEEMABLE CONVERTIBLE PREFERRED SHARES
During the year ended June 30, 1999, Pivotal's shareholders approved an
increase in the authorized capital of Pivotal by authorizing 1,288 Class F
preferred shares which were issued during that year for total proceeds of
$8,000.
The holders of each class of preferred shares had the right to one vote for
each common share into which the preferred shares could be converted.
All of the redeemable preferred shares had the right to receive
non-cumulative dividends at amounts as determined by the directors of
Pivotal. When dividends were paid on any other outstanding class of shares
of Pivotal, the holders of the Class B, Class D, Class E and Class F
preferred shares were entitled to an amount per share equal to that paid on
the other class of shares, as determined on a basis as if all of the
outstanding redeemable preferred shares had been converted into common
shares.
The Class B, Class D, Class E and Class F preferred shares were redeemable
at Pivotal's option with the approval of the holders of 75% of the
outstanding shares of the applicable class, and were retractable at the
holder's option on or after June 30, 2001 at the issue price plus any
declared and unpaid dividends.
Each class of redeemable preferred shares was convertible into common
shares at any time at the option of the holder, using the formula of 0.95
to 1.00 for the Class B preferred shares and one-for-one for Class D, Class
E and Class F preferred shares as provided in the Articles of Pivotal. All
classes of preferred shares were also automatically convertible into common
shares at the conversion price in certain circumstances. All of these
shares were converted into common shares during the year ended June 30,
2000.
11. SHAREHOLDERS' EQUITY
Initial Public Offering
On August 4, 1999, Pivotal's registration statement on Form F-1,
Registration No. 333-92971, became effective. The offering date was August
5, 1999. The offering was terminated as a result of all of the shares
offered being sold. The managing underwriters were Merrill Lynch & Co.,
Bear, Stearns & Co. Inc. and Dain Rauscher Incorporated. The offering
consisted of 3,975 common shares of Pivotal, which included 475 common
shares offered pursuant to the subsequent exercise of the underwriters'
over allotment option on August 19, 1999. The aggregate price of the shares
offered and sold was $47.7 million. Proceeds to Pivotal, after $3.3 million
in underwriting discounts and commissions and $1.3 million in other
expenses, were $43.1 million. Simultaneous with the closing of the
Offering, all outstanding preferred shares were converted into common
shares.
Equity Financing
On November 21, 2000, Pivotal completed an equity financing in Canada of
one million common shares for aggregate proceeds of approximately $55
million. Proceeds to Pivotal were $51.8 million, after $2.2 million in
underwriting discounts and commissions and $1.0 million in other expenses.
This transaction was exempt from Securities Act registration pursuant to
the exclusion from registration provided by Regulation S under the
Securities Act.
71
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
11. SHAREHOLDERS' EQUITY
Preferred Shares, Common Shares and Class B Common Shares
On December 16, 1998, Pivotal's shareholders approved the redesignation of
common shares without par value to Class A common shares without par value.
Pivotal's shareholders also approved the increase in authorized capital by
creating 600 Class B common shares with a par value of Cdn.$0.03 each.
In December 1998 and January 1999, Pivotal issued an aggregate of 477 Class
B common shares in exchange for 477 Class A common shares. Prior to
completion of the initial public offering, all of the issued and
outstanding Class A convertible preferred shares and Class B common shares
were exchanged for common shares on a one-for-one basis.
On June 17, 1999, Pivotal's shareholders approved an increase in the number
of authorized Class A common shares from 50,000 to 200,000 and an increase
in authorized capital by creating 20,000 unissued preferred shares without
par value. Pivotal's shareholders also approved the redesignation of Class
A common shares, both issued and unissued, to common shares without par
value.
The holder of each common share has the right to one vote per share. The
preferred shares could at any time and from time to time be issued in one
or more series and the Board of Directors could determine the special
rights and restrictions of each series including any dividend, conversion
or redemption rights, subject to the approval of at least 75% of the
holders of any outstanding Class A, B, D, E and F preferred shares.
The holders of the Class A preferred shares had the right to one vote for
each common share into which the preferred shares could be converted. The
Class A preferred shares had the same rights to receive dividends as the
redeemable preferred shares discussed in Note 10, and were convertible into
common shares on a one-for-one basis, subject to adjustment under certain
circumstances. The Class A preferred shares were not redeemable or
retractable.
On June 17, 1999, Pivotal's shareholders also approved, subject to the
conversion of the redeemable convertible preferred shares, the Class A
convertible preferred shares and the Class B common shares into common
shares, the cancellation of the authorized Class B common share capital and
the authorized Class A, B, D, E, and F preferred share capital.
Employee Stock Option Plan
Under the terms of the 1999 Pivotal Incentive Stock Option Plan, as amended
(the "Plan"), the Board of Directors may grant incentive and non-qualified
stock options to employees, officers, directors, independent consultants
and contractors of Pivotal and subsidiaries, partnerships, and joint
ventures including directors thereof. Generally, Pivotal grants stock
options with exercise prices equal to the quoted market value of the common
shares on the date of grant, as determined by the Board of Directors.
Options generally vest over a four-year period, but the Board of Directors
may provide for different vesting schedules in particular cases. Options
generally expire five years from the date of grant.
On June 17, 1999, Pivotal's shareholders approved changes to the Plan that
increase the number of shares reserved for issuance pursuant to the Plan by
(a) 1,076 common shares plus (b) an automatic increase on the first day of
each fiscal year beginning on July 1, 2001, equal to the lesser of 800
shares or 4% of the average number of common shares outstanding as used to
calculate fully diluted earnings per share for the preceding year.
On October 25, 2000, Pivotal's shareholders approved an amendment to the
Plan that increased the maximum number of common shares reserved for
issuance under the Plan by 1,500 common shares to 6,576 in order to ensure
sufficient options are available to permit the Company to maintain its
policy of granting options to employees.
72
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
11. SHAREHOLDERS' EQUITY (Continued)
Employee Stock Option Plan (Continued)
Pivotal has assumed certain options granted to former employees of acquired
companies (the "Acquired Options"). The Acquired Options were assumed by
Pivotal outside of the Plan, but all are administered as if issued under
the Plan. All of the Acquired Options have been adjusted to give effect to
the conversion under the terms of the Agreements and Plans of
Reorganization between Pivotal and the companies acquired. The Acquired
Options generally become exercisable over a four year period and generally
expire either five or ten years from the date of grant. No additional
options will be granted under any of the acquired companies' plans.
A summary of stock option activity and information concerning currently
outstanding and exercisable options is as follows:
Options Outstanding
------------------------------
Options Number of Weighted
Available Common Average
for Grant Shares Exercise Price
----------- ----------- ---------------
(Expressed in
Canadian
dollars, except
as noted)
Balances, June 30, 1998 758 742 Cdn.$0.94
----------- ----------- ---------------
Options authorized 2,576 - -
Options granted (866) 866 9.71
Options exercised - (78) 0.28
Options cancelled 75 (75) 3.74
----------- ----------- ---------------
Balances, June 30, 1999 2,543 1,455 Cdn.$6.07
----------- ----------- ---------------
Options authorized 408 - -
Options granted (1,837) 1,837 23.12
Options exercised - (375) 2.96
Options cancelled 270 (270) 10.37
Balances, June 30, 2000 1,384 2,647 US$16.95
----------- ----------- ---------------
Options authorized 1,500 - -
Options granted (2,341) 2,341 26.34
Options exercised - (506) 6.14
Options cancelled (net) 724 (811) 25.80
----------- ----------- ---------------
Balances, June 30, 2001 1,267 3,671 US$22.87
=========== =========== ==============
73
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
11. SHAREHOLDERS' EQUITY (Continued)
Employee Stock Option Plan (Continued)
The U.S. dollar equivalents of the weighted average exercise price
calculated using the year end exchange rates were as follows: $4.12 and
$0.64 as of June 30, 1999 and 1998, respectively.
The following tables summarize information concerning outstanding and
exercisable options at June 30, 2001:
Options Exercisable
----------------------------
Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Exercise Prices Number Contractual Price Number Price
per Share Outstanding Life (in years) per Share Exercisable per Share
---------------- ----------- --------------- -------------- ----------- -------------
$ 0.00 - $ 5.85 395 3.8 $ 2.52 229 $ 1.35
$ 5.85 - $11.70 868 9.5 9.31 29 7.90
$11.70 - $17.55 358 8.7 12.67 43 13.32
$17.55 - $23.40 48 8.9 21.25 10 20.76
$23.40 - $29.25 815 9.0 25.38 162 25.81
$29.25 - $35.10 329 9.0 31.20 35 31.87
$35.10 - $40.95 287 9.3 36.17 28 36.53
$40.95 - $46.80 231 8.9 43.39 13 41.50
$46.80 - $52.65 240 8.9 50.57 42 51.05
$52.65 - $58.50 100 9.3 58.50 3 58.50
---------------- ----------- --------------- -------------- ----------- -------------
$ 0.00 - $58.50 3,671 9.0 $ 22.87 594 $ 17.68
================ =========== =============== ============== =========== =============
Employee Stock Purchase Plan
On June 17, 1999, Pivotal's shareholders approved the adoption of an
employee stock purchase plan and authorized the issuance of up to 1,000
common shares under the plan with amendments as the Board of Directors of
Pivotal may deem desirable. Under the employee stock purchase plan, a
qualified employee may authorize payroll deductions of up to 10% of the
employee's compensation (as defined) to a maximum of $25 to purchase common
stock at 85% of the lower of fair market value at the beginning or end of
the related subscription period.
Common Shares Reserved for Future Issuance
Pivotal has reserved common shares as of June 30, 2001 as follows:
Exercise of stock options 4,937
Employee Stock Purchase Plan 859
---------
5,796
=========
74
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
11. SHAREHOLDERS' EQUITY (Continued)
Employee Stock Option Plan (Continued)
Under APB Opinion No. 25, because the exercise price of Pivotal's employee
stock options generally equals the fair value of the underlying stock on
the date of grant, no compensation expense is recognized. Deferred
compensation expense of $473 was recorded during 1999 for those situations
where the exercise price of an option was lower than the deemed fair value
for financial reporting purposes of the underlying common stock. The
deferred compensation is being amortized over the vesting period of the
underlying options. Amortization of the deferred share-based compensation
balance of $81 at June 30, 2001 will approximate $58 and $23 during the
fiscal years ending June 30, 2002 and 2003, respectively.
An alternative method of accounting for stock options is SFAS No. 123,
Accounting for Stock-Based Compensation. Under SFAS No. 123, employee stock
options are valued at the grant date using the Black-Scholes valuation
model and the resultant compensation cost is recognized ratably over the
vesting period. Had compensation cost for Pivotal's share option plan been
determined based on the Black-Scholes value at the grant dates for awards
as prescribed by SFAS No. 123, the pro forma net loss and basic and diluted
loss per share would have been as follows:
Years Ended June 30,
--------------------------------------
2001 2000 1999
------------ ------------ ------------
Net loss
As reported $ (32,455) $ (8,362) $ (2,808)
SFAS No. 123 pro forma (48,901) (10,541) (2,849)
Basic and diluted loss per share
As reported $ (1.40) $ (0.45) $ (0.72)
SFAS No. 123 pro forma (2.11) (0.57) (0.73)
Compensation expense recognized in providing pro forma disclosures may not
be representative of the effects on pro forma earnings for future years
since SFAS No. 123 applies only to options granted after 1996.
The weighted average Black-Scholes option pricing model value of options
granted under the share option plan during the years ended June 30, 2001,
2000 and 1999 were U.S.$20.76, U.S.$15.45 and Cdn.$1.92 (U.S.$1.30) per
share, respectively. The fair value for these options was estimated at the
date of grant using the following weighted average assumptions:
Years Ended June 30,
--------------------------------------
2001 2000 1999
------------ ------------ ------------
Assumptions
Volatility factor of expected
market price of Pivotal's shares 121.2% 85.0% 0.0%
Dividend yield 0.0% 0.0% 0.0%
Weighted average expected
life of stock options (years) 4.0 years 4.0 years 4.0 years
Risk free interest rate 5.0% 7.0% 5.6%
75
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
12. INCOME TAXES
Details of the income tax provision (recovery) were as follows:
Years Ended June 30,
--------------------------------------
2001 2000 1999
------------ ------------ ------------
Current
Canadian $ (547) $ - $ (47)
Foreign 1,050 557 290
------------ ------------ ------------
503 557 243
Deferred
Canadian - - -
------------ ------------ ------------
Income tax provision $ 503 $ 557 $ 243
============ ============ ============
The reported income tax provision differs from the amount computed by
applying the Canadian basic statutory rate to the loss before income taxes.
The reasons for this difference and the related tax effects are as follows:
Years Ended June 30,
--------------------------------------
2001 2000 1999
------------ ------------ ------------
Canadian basic statutory tax rate 45% 45% 45%
------------ ------------ ------------
Expected income tax recovery $(14,378) $ (3,512) $(1,154)
Foreign tax rate differences (137) (155) (144)
Goodwill amortization and other
non-deductible expenses 10,087 2,661 56
Research and development tax credits (470) (127) (47)
Benefit of losses not tax affected 3,407 389 1,484
Benefit of temporary differences
not recognized 1,994 1,301 48
------------ ------------ ------------
$ 503 $ 557 $ 243
============ ============ ============
76
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
12. INCOME TAXES (Continued)
Deferred income taxes result principally from temporary differences in the
recognition of certain revenue and expense items for financial and income
tax reporting purposes. Significant components of Pivotal's deferred tax
assets and liabilities as of June 30, 2001 and 2000 are as follows:
2001 2000
---------- ----------
Deferred income tax assets
Net operating tax loss carry-forwards $ 6,158 $ 4,547
Research and development expenses 220 85
Book and tax base differences on assets 2,388 -
Other 87 80
---------- ----------
Total deferred income tax assets 8,853 4,712
Valuation allowance for deferred income tax assets (8,831) (4,547)
---------- ----------
Net deferred income tax assets 22 165
Deferred income tax liabilities
Book and tax base differences on assets - 187
---------- ----------
Net deferred income tax liabilities included in accounts
payable and accrued liabilities $ 22 $ 22
========== ==========
Due to the uncertainty surrounding the realization of the deferred income
tax assets in future income tax returns, Pivotal has a 100% valuation
allowance against its deferred income tax assets. The net change in the
total valuation allowance for the years ended June 30, 2001 and 2000 was a
provision of $(4,284) and $1,346, respectively.
As of June 30, 2001, Pivotal has tax loss carry-forwards of approximately
$13,685 available to reduce future years' income for tax purposes. These
carry-forward losses expire at various dates between 2003 to 2007.
13. COMPREHENSIVE LOSS
The components of comprehensive loss were as follows:
Years ended June 30,
-----------------------------------------
2001 2000 1999
---------- ---------- -----------
Net loss $(32,455) $(8,362) $(2,808)
Change in unrealized loss on
available-for-sale securities (203) - -
---------- ---------- -----------
Total $(32,658) $(8,362) $(2,808)
========== ========== ===========
77
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
14. CHANGE IN OPERATING ASSETS AND LIABILITIES
The change in operating assets and liabilities was as follows:
Years ended June 30
-----------------------------------------
2001 2000 1999
---------- ---------- -----------
Accounts receivable $(9,156) $(7,511) $(1,188)
Prepaid expenses (761) (545) (323)
Accounts payable and accrued liabilities 4,141 7,260 4,370
Deferred revenue 4,408 3,265 1,337
---------- ---------- -----------
$(1,368) $ 2,469 $ 4,196
========== ========== ===========
15. RELATED PARTY TRANSACTIONS
During the year ended June 30, 2000, Pivotal entered into an agreement to
license software from a company with a former director in common under
which Pivotal paid $350.
During the year ended June 30, 2001, Pivotal loaned a total of $320 to two
officers of the Company. One of these loans is secured by certain shares of
a private company and the other is unsecured. Both loans are non-interest
bearing and are due within one year.
16. SEGMENTED INFORMATION
Pivotal operates in one business segment, the development, marketing, and
supporting of Internet and corporate network-based software applications
used for managing customer and selling partner relationships.
Pivotal licenses and markets its products internationally. The following
table presents a summary of revenues by geographical region:
Years ended June 30
-----------------------------------------
2001 2000 1999
---------- ---------- -----------
United States $ 52,409 $ 32,591 $ 18,779
Canada 11,435 5,574 1,463
International 31,446 14,774 5,085
---------- ---------- -----------
$ 95,290 $ 52,939 $ 25,327
========== ========== ===========
Pivotal attributes revenue among the geographical areas based on the
location of the customers involved.
78
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
16. SEGMENTED INFORMATION (Continued)
The following table presents a summary of property and equipment by
geographic region:
June 30,
------------------------------
2001 2000
------------ --------------
Property and equipment
United States $1,012 $1,395
Canada 5,836 4,624
International 2,335 1,212
------------ --------------
$9,183 $7,231
============ ==============
Schedule II -- Valuation and Qualifying Accounts Years ended June 30, 2001, 2000
and 1999 (in thousands) Allowance for Doubtful Accounts
Balance at Additions Additions
beginning of charged to costs charged to Balance at
Year year and expenses other accounts Write-offs end of Year
-------- ----------- ------------- -------------- ----------- ------------
2001 $740 3,312 -- 1,792 $2,260
2000 $ 334 626 -- 220 $740
1999 $ 91 243 -- -- $334
79
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The table below provides the names, ages, and positions with Pivotal of our
executive officers and directors:
NAME AGE POSITION
----------------------------------------- ---- ---------------------
Kent Roger (Bo) Manning......................43 President,.Chief.Executive.Officer and Director
Norman B. Francis............................52 Chairman of the Board of Directors
Keith R. Wales ............................. 56 Executive Vice President, Corporate Projects and
Director
Vincent D. Mifsud............................34 Chief Operating Officer, Chief Financial Officer
and Executive Vice President
Robert A. Runge..............................47 Chief Marketing Officer
Kirk T. Herrington ..........................43 Chief Technical Oficer & Exectuive Vice
President, Product Development
Martin Palacios..............................38 Chief Information Officer
Jeremy A. Jaech .............................46 Director
Robert J. Louis..............................56 Director
Douglas J. Mackenzie ........................41 Director
Steven M. Gordon.............................42 Director
-----------
KENT ROGER (BO) MANNING has served as President, Chief Executive Officer
and a director since August 2001. Prior to joining Pivotal, Mr. Manning served
as co-founder and Chief Executive Officer of Roundarch, a CRM solutions joint
venture between Deloitte Consulting, BroadVision, and WPP Group (holding company
for Ogilvy & Mather, Young & Rubicam Inc., J. Walter Thompson),from January 2000
to August 2001. Mr. Manning served as Global CRM Practice Leader, for Deloitte
Consulting, from 1995 to 1999. Mr. Manning also served as a Consultant to
Deloitte Consulting from 1987 to 1995. Prior to that, Mr. Manning served as
General Manager of Infopro from 1984 to 1987. Mr. Manning holds a triple
Bachelor of Arts degree from the University of Michigan in business, economics
and psychology and received his MBA in 1987, from Northwestern University with a
double major in marketing and finance.
NORMAN B. FRANCIS co-founded Pivotal in 1990 and has served a director
since December 1990 and as President and Chief Executive Officer from December
1990 to August 2001. Mr. Francis' experience prior to co-founding Pivotal
includes co-founding Basic Software Group Inc., an accounting software company,
in 1979. Mr. Francis served as Basic Software Group's Vice President, Operations
until the company was acquired by Computer Associates International, Inc., a
software company, in 1985. Mr. Francis served as Vice President, Micro Products
Division of Computer Associates International Inc. from 1985 to 1990. Mr.
Francis holds a bachelor of science degree in Computer Science from the
University of British Columbia, Canada and is a Chartered Accountant.
80
KEITH R. WALES co-founded Pivotal in 1990 and has served as a director
since December 1990 and as Executive Vice President, Corporate Projects since
January 2001. Mr. Wales also served as Chief Technical Officer from July 1999
through December 2000 and as Vice President, Research and Development from
December 1990 through July 1999. Mr. Wales' experience prior to co-founding
Pivotal includes co-founding Basic Software Group Inc., an accounting software
company, in 1979. Mr. Wales served as Basic Software Group's Vice President,
Research and Development until the company was acquired by Computer Associates
International, Inc. in 1985. Mr. Wales served as Divisional Vice President,
Research and Development of Computer Associates International, Inc. from 1985 to
1986. Mr. Wales holds a bachelor of science degree in Mathematics and a master's
of science degree in Computer Science from the University of British Columbia,
Canada.
VINCENT D. MIFSUD has served as Chief Operating Officer since January 2001,
Chief Financial Officer since December 1998 and Executive Vice President since
July 2000. Mr. Mifsud also served as Vice President, Operations from December
1998 to July 2000. Prior to joining Pivotal, Mr. Mifsud served as Controller,
Vice President, Finance and Chief Financial Officer of Rand Technology, Inc., a
software developer and value added reseller of mechanical design automation
tools and services, from May 1993 to December 1998. Prior to this, Mr. Mifsud
worked for three years with Arthur Andersen LLC in their Enterprise Division.
Mr. Mifsud holds a bachelor's degree in Commerce and Economics from the
University of Toronto, Canada and is a Chartered Accountant.
ROBERT A. RUNGE has served as Chief Marketing Officer since July 2000. Mr.
Runge also served as Vice President, Worldwide Marketing from September 1997 to
July 2000. Before joining Pivotal, Mr. Runge served as Vice President, Marketing
of BroadVision, Inc., an Internet marketing software company, from September
1995 to September 1997. Mr. Runge served as Director of Product Marketing of
Sybase, a software company, from September 1990 to September 1995. Prior to
joining Sybase, Mr. Runge served as Director of Education Services of Oracle
Corporation, a software company, from July 1988 to September 1990. Mr. Runge
holds two bachelors' degrees from the University of Illinois, Champagne-Urbana
and a master's degree in Business Administration (Marketing) from the University
of Illinois, Chicago.
KIRK T. HERRINGTON has served as Executive Vice President, Product
Development since July 2001, Chief Technical Officer since January 2001 and
Deputy Chief Technical Officer from June 2000 to January 2001. Mr. Herrington
co-founded and served as Chief Executive Officer of Simba Technologies Inc., a
leader in ODBC connectivity for proprietary data stores and OLAP data access
solutions, from January 1998 to June 2000, when Simba was acquired by Pivotal.
Mr. Herrington also served as Vice President and Chief Technical Officer of
Simba from July 1992 to December 1997. Prior to co-founding Simba, Mr.
Herrington co-founded Paradigm Development Corporation and served as Vice
President, Research & Development from March 1989 to June 1992. Mr. Herrington
also served as Software Development Manager of Synex Systems Corporation from
1982 to 1989. Mr. Herrington holds a bachelor's degree in Science from
University of British Columbia, Canada and has completed the Advanced Technology
Management Program at Simon Fraser University, Canada.
MARTIN E. PALACIOS has served as Chief Information Officer since January
2001. Before joining Pivotal, Mr. Palacios served as Vice-President of
Information Technology and Facilities of Seagate Software from April 1998 to
February 2000. Mr. Palacios also served as Director of Information Technology of
Seagate Software from December 1995 to April 1998. Prior to joining Seagate, Mr.
Palacios served as Director of Telecommunications and Networks of Memorial
Health Systems from December 1994 to November 1995. Mr. Palacios also served as
Manager of Information Systems of Florida Hospital Healthcare System from
September 1989 to December 1994. Mr. Palacios holds a bachelors degree in
Science and Math from Technical Institute of Higher Studies of Monterey, Mexico
and an Associate of Science in Industrial Electronics with a Computer Science
Specialty from Santa Fe Community College, Gainesville, Florida.
JEREMY A. JAECH has served as a director since July 1996. Mr. Jaech
currently serves as Managing Member, Poseidon Ventures LLC. Prior to Poseidon
Ventures, Mr. Jaech served as Vice President for the Business Tools Division at
Microsoft Corporation. Prior to Microsoft, Mr. Jaech co-founded Visio
Corporation in September 1990, a supplier of enterprise-wide business
diagramming and technical drawing software for Microsoft Windows, which was
later sold to Microsoft. Prior to co-founding Visio Corporation, Mr. Jaech
co-founded Aldus Corporation in 1984 and served as Vice President, Engineering.
Aldus Corporation was purchased by Adobe Systems Incorporation in 1989. Mr.
Jaech holds a bachelor's degree in Mathematics and a master's degree in Computer
Science from the University of Washington.
ROBERT J. LOUIS has served as a director since June 1995. Since March 1999,
Mr. Louis has served as President of Ventures West Management Ltd., a venture
capital firm which he joined as an Executive Vice President in January 1991. Mr.
Louis earned a bachelor of science degree and a master's degree in Science from
the University of Victoria, British Columbia, Canada and a Ph.D. in Physics from
the University of British Columbia, Canada.
81
DOUGLAS J. MACKENZIE has served as a director since July 1992. Mr.
Mackenzie has served as a Limited Partner of Kleiner, Perkins, Caufield & Byers,
a venture capital firm specializing in high-tech companies, since June 1989 and
a General Partner since April 1994. Mr. Mackenzie also serves as a director of
Marimba, Inc. and E.piphany, Inc. Mr. Mackenzie holds a bachelor's degree in
Economics and a master's degree in Industrial Engineering from Stanford
University and a master's degree in Business Administration from Harvard
University.
Steven M. Gordon has served as a director since November 2000. Mr. Gordon
currently serves as Strategic Advisor to Wavelink Corporation. Prior to
Wavelink, Mr. Gordon has served as Vice President of Microsoft Corporation from
January 2000 to August 2000, as Senior Vice President and Chief Financial
Officer of Visio Corporation from February 1997 to January 2000, as Vice
President and Chief Financial Officer of Data I/O Corporation from October 1993
to February 1997, as Vice President, Finance of Data I/O Corporation from May
1992 to October 1993 and as Corporate Controller of Data I/O Corporation from
April 1989 to May 1992. Mr. Gordon holds a Bachelor of Arts degree from
Washington State University and is a Certified Public Accountant.
ITEM 11. EXECUTIVE COMPENSATION
The following table describes the compensation we paid to, or that was earned
by, our Chief Executive Officer, President and our four most highly compensated
executive officers during the fiscal year ended June 30, 2001.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------------------------------------
SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER UNDERLYING
OPTIONS
-----------------------------------------------------------------------------------------------------------------------------------
Norman B. Francis 2001 Cdn.$175,000 Cdn.$ 19,689 -- 25,000
President and Chief 2000 Cdn.$175,000 Cdn.$ 78,983 -- 25,000
Executive Officer (1) 1999 Cdn.$120,000 -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Keith R. Wales 2001 Cdn.$112,500 Cdn.$ 9,063 -- 25,000
Executive Vice President, Corporate Projects (2) 2000 Cdn.$150,000 Cdn.$ 35,931 -- 25,000
1999 Cdn.$120,000 Cdn.$ 37,064 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Vincent D. Mifsud 2001 Cdn.$225,000 Cdn.$ 108,532 -- 250,000
Chief Operating Officer, Chief Financial Officer 2000 Cdn.$175,000 Cdn.$ 103,755 -- 20,000
and Executive Vice President 1999 Cdn.$85,192 Cdn.$ 47,068 Cdn.$14,269 160,000
-----------------------------------------------------------------------------------------------------------------------------------
Robert A. Runge 2001 US$190,000 -- -- 70,000
Chief Marketing Officer 2000 US$160,000 US$ 53,665 -- 20,000
1999 US$141,282 US$ 39,651 -- 60,000
-----------------------------------------------------------------------------------------------------------------------------------
Kirk Herrington 2001 Cdn.$125,000 -- -- 10,000
Chief Technical Officer and Executive Vice 2000 -- -- -- 80,636
President, Product Development (3)
------------------
(1) On August 27, 2001 Mr. Francis resigned as President and Chief Executive
Officer and Kent Roger (Bo) Manning was appointed President and Chief
Executive Officer
(2) We hired Mr. Mifsud in December 1998. Mr. Mifsud's annual salary was
Cdn.$150,000 of which Cdn. $85,192 was paid to Mr. Mifsud during the fiscal
year ended June 30, 2000. Mr. Mifsud's guaranteed annual bonus was
Cdn.$57,750 of which Cdn.$32,799 was paid to Mr. Mifsud during the fiscal
year ended June 30, 1999. We also have accrued a performance-based bonus of
Cdn.$14,269 to Mr. Mifsud for the year ended June 30, 1999.
(3) Mr. Herrington's salary is from September 1, 2000 to June 30, 2001.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding stock option grants to our
chief executive officer and our named executive officers during the fiscal year
ended June 30, 2001. The potential realizable value of the options is calculated
based on the assumption that the common shares appreciate at the annual rate
shown, compounded annually, from the date of grant until the expiration of their
term.
82
These numbers are calculated based on Securities and Exchange Commission
requirements and do not reflect our projection or estimate of future share price
growth. Potential realizable values are computed by:
-- multiplying the number of common shares subject to a given option by the
exercise price
- assuming that the aggregate share value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table
for the entire term of the option; and
-- subtracting from that result the aggregate option exercise price.
INDIVIDUAL GRANTS
------------------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES OF SHARE
NUMBER OF OPTIONS PRICE APPRECIATION FOR OPTION TERM
SECURITIES GRANTED TO EXERCISE ----------------------------------------
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION
NAME OPTIONS FISCAL YEAR SHARE DATE 5% 10%
------------------ --------------- ---------------- -------------- -------------- ------------------- ---------------
Norman B. Francis 25,000 1.06% $ 35.375 Jul. 26, 2010 $ 556,179 $1,409,466
Keith R. Wales 25,000 1.06% $ 35.375 Jul. 26, 2010 $ 556,179 $1,409,466
Vincent D. Mifsud 20,000 0.85% $ 35.375 Jul. 26, 2010 $ 444,943 $1,127,573
80,000 3.40% $ 50.00 Nov. 13, 2010 $2,515,579 $6,374,970
20,000 0.85% $ 23.75 Jan. 8, 2011 $ 298,725 $ 757,028
130,000 5.53% $ 9.4375 Apr. 3, 2011 $ 771,575 $1,955,323
Robert A. Runge 20,000 0.85% $ 35.375 Jul. 26, 2010 $ 444,943 $1,127,573
20,000 0.85% $ 29.8125 Jan. 25, 2011 $ 374,978 $ 950,269
20,000 0.85% $ 22.00 Apr. 26, 2011 $ 276,714 $ 701,247
10,000 0.43% $ 9.4375 April 3, 2011 $ 59,352 $ 150,409
Kirk Herrington 10,000 0.43% $ 9.375 Apr. 3, 2011 $ 59,352 $ 150,409
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information regarding the exercise of options to
purchase common shares by our Named Executive Officers during the fiscal year
ended June 30, 2001. The value of unexercised in-the-money options is based on
the closing price of our common shares on the Nasdaq National Market on July 2,
2001 of $18.20, minus the exercise price per share.
AGGREGATED OPTIONS EXERCISED DURING 2001 FISCAL YEAR
AND FINANCIAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
SHARES ACQUIRED VALUE -------------------------- -----------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------ --------------------- ----------- ----------------- ------------------ ----------------- ----------------
Norman B. Francis -- -- 50,762 47,088 $738,307 $ 113,244
Keith R. Wales -- -- 9,375 40,625 $ --
Vincent D. Mifsud 52,500 $1,068,983 28,750 308,750 $127,752 $1,905,635
Robert A. Runge 15,000 $ 503,538 10,000 102,500 $ -- $ 382,695
Kirk Herrington 1,442 $ 84,761 20,157 69,037 $ 22,495 $ 132,631
------------------------
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationships exist between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.
DIRECTOR COMPENSATION
We do not currently pay cash compensation to directors for serving on our board
of directors, but we do reimburse directors for out-of-pocket expenses for
attending board and committee meetings. We do not provide additional
compensation for committee participation or special assignments of the Board of
Directors. Of our directors, Messrs. MacKenzie, Jaech, Gordon, Francis and Wales
received stock options for their participation on our board of directors for the
year ended June 30, 2001. Messrs. Francis and Wales received options to purchase
25,000 common shares at a price of $35.375 per share. Messrs. MacKenzie, Jaech
and Gordon received options to purchase 40,000 common shares at a price of
$36.25 per share.
83
EMPLOYMENT CONTRACTS
We entered into an employment contract with Robert Runge on August 14, 1997. Mr.
Runge's current base salary is $200,000, with a potential incentive compensation
of $90,000. Mr. Runge's salary is reviewed annually by the Compensation
Committee. Mr. Runge was also granted options to purchase common shares and is
eligible to receive further grants in the future.
We entered into an employment contract with Vincent Mifsud on November 16, 1999.
Mr. Mifsud's current base salary is Cdn. $300,000, with a potential incentive
compensation of US$150,000. Mr. Mifsud's salary is reviewed annually by the
Compensation Committee. Mr. Mifsud was also granted options to purchase common
shares and is eligible to receive further grants in the future.
We entered into an employment contract with Kirk Herrington on June 7, 2000. Mr.
Herrington's current base salary is Cdn.$150,000. Mr. Herrington's salary is
reviewed annually by the Compensation Committee. Mr. Herrington was also granted
options to purchase common shares in Pivotal and is eligible to receive further
grants in the future.
We entered into an employment contract with Kent Roger (Bo) Manning on August
22, 2001. Mr. Manning's current base salary is US$350,000 with a potential
incentive compensation of US$300,000. Mr. Manning's salary is reviewed annually
by the Compensation Committee. Mr. Manning was also granted 1,000,000 options to
purchase common shares and is eligible to receive further grants in the future.
REPORT ON EXECUTIVE COMPENSATION BY THE COMPENSATION COMMITTEE
The Compensation Committee currently consists of Jeremy A. Jaech and Robert J.
Louis. The committee is responsible for establishing and monitoring our long
range plans and programs for attracting, training, developing and motivating
employees. The committee reviews recommendations for the appointment of persons
to senior executive positions, considers terms of employment, including
succession planning and matters of compensation, and recommends awards under our
incentive stock option plan and the employee share purchase plan.
Our compensation policies and programs are designed to be competitive with
similar customer relationship management companies in the electronic commerce
environment and to recognize and reward executive performance consistent with
the success of our business. These policies and programs are intended to attract
and retain capable and experienced people.
In addition to industry comparables, the Committee considers a variety of
factors when determining both compensation policies and programs and individual
compensation levels. These factors include our long-range interests, overall
financial and operating performance and the committee's assessment of each
executive's individual performance and contribution towards meeting goals and
objectives.
The total compensation plan for executive officers is comprised of the following
three components: competitive base salary, annual cash bonuses and stock
options.
Base Salary. In establishing base salaries of all executive officers, the
committee reviews competitive market data for each of the executive positions
and determines placement at an appropriate level in a range. Compensation levels
are typically negotiated with the candidate for the position prior to his or her
final selection as an executive officer. Additionally, a review of the chief
executive officer's performance and a general review of our stock price are
considered. The compensation range for executive officers normally moves
annually to reflect external factors such as inflation. The chief executive
officer's annual base salary remained the same at Cdn$175,000 for the years
ended June 30, 2001 and 2000. The base salary of the chief executive officer is
set at an amount the committee believes is competitive with salaries paid to
executives of companies of comparable size in similar industries and located
within the local area.
Bonuses. Cash bonuses are used to reward executive officers for meeting specific
performance targets as mutually agreed upon on an annual basis. During the year
ended June 30, 2001, the chief executive officer was awarded a bonus in the
amount of Cdn$19,689. This bonus was paid to the chief executive officer for his
ongoing contributions to Pivotal during the past fiscal year.
Stock Option Grants. We provide our executive officers and other employees with
long-term incentives through our incentive stock option plan, which is intended
to emphasize management's commitment to our growth and the enhancement of
shareholder value. The committee relies on a variety of subjective factors when
granting options, including the responsibilities of the individual officers and
their expected future contribution. In the year ended June 30, 2001, Norman
Francis, the chief executive officer, was granted options to purchase 25,000
common shares as an incentive for his continued commitment to the our success.
PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total shareholder return
for Pivotal, the S&P 500 Index, theXCI and TSE. The graph shows the value of
$100 invested on August 5, 1999 in our common shares, the S&P 500 Index, XCI and
TSE.
84
[PERFORMANCE GRAPH OMITTED]
--------------------------------------------------------------------------------
August 5, 1999 August 4, 2000 August 3, 2001
--------------------------------------------------------------------------------
Pivotal Corporation $ 100.00 $ 275.52 $72.85
S&P 500 $ 100.00 $ 129.15 $92.44
XCI $ 100.00 $ 147.21 $80.94
TSE $ 100.00 $ 153.01 $112.13
85
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information concerning the beneficial ownership of
our common shares as of September 1, 2001:
-- our chief executive officer;
-- all officers whose annual compensation was more than US$100,000 during
fiscal 2001;
-- each of our directors;
-- each shareholder that we know owns more than 5% of our outstanding
common shares; and
-- all our directors and executive officers as a group.
The principal address of each of the shareholders below is 224 West Esplanade,
Suite 300, North Vancouver, BC, Canada V7M 3M6, except where another address is
listed.
NUMBER OF SHARES PERCENT OF COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED SHARES OWNED
------------------------------------------------- ------------------------- ------------------
Kent Roger (Bo) Manning.......................... 0 0%
Norman B. Francis (1)............................ 2,026,843 8.43%
Keith R. Wales (2)............................... 991,424 4.13%
Vincent D. Mifsud (3)............................ 64,750 0.27%
Jeremy A. Jaech (4).............................. 120,556 0.5%
Robert J. Louis (5).............................. 1,559,458 6.5%
Douglas J. Mackenzie (6)......................... 865,365 3.61%
Steven M. Gordon................................. 0 0%
Robert A. Runge (7).............................. 29,592 0.12%
Kirk Herrington (8).............................. 46,665 0.19
Ventures West Capital Limited (9)................ 1,559,458 6.5%
Kleiner Perkins Caufield & Byers VI (10)......... 865,365 3.61%
2750 Sand Hill Road
Menlo Park, CA 94025
Integral Capital Partners II, L.P. (11).......... 1,350,415 5.63%
2750 Sand Hill Road
Menlo Park, CA 94025
All directors and executive officers as a group
(11 persons) (12)................................ 7,055,068 29.08%
---------
(1) Includes (a) 400,800 shares held of record by The Francis Family
Trust, a family trust for the benefit of Mr. Francis and his three
children; (b) 697,143 shares held of record by Boardwalk Ventures
Inc., a holding company owned 50% by Mr. Francis and 50% by his
spouse; and (c) 60,243 shares subject to options exercisable by Mr.
Francis within 60 days of September 1, 2001.
(2) Includes (a) 378,572 shares held of record by Daybreak Software Inc.,
a holding company owned solely by Mr. Wales, of which Mr. Wales has
sole voting power; (b) 15,624 shares subject to options exercisable by
Mr. Wales within 60 days of September 1, 2001. Mr. Wales disclaims
beneficial ownership of any shares held by his former spouse, Patricia
Wales.
(3) Includes 63,750 shares subject to options exercisable within 60 days
of September 1, 2001.
(4) Includes 65,000 shares subject to options exercisable within 60 days
of September 1, 2001.
(5) Includes (a) 363,514 shares held of record by Bank of Montreal Capital
Corporation which is managed by Ventures West Management TIP Inc., an
entity wholly owned by Ventures West Capital Ltd.; and (b) 1,195,944
shares held of record by VW B.C. Technology Investment Fund Limited
Partnership, of which Ventures West Management B.C. Ltd. is the
general partner. Ventures West Management B.C. Ltd. is wholly owned by
Ventures West Capital Ltd. Mr. Louis, as President of Ventures West
Capital Ltd., a venture capital firm with controlled subsidiaries
which include
86
Ventures West Management TIP Inc. and Ventures West Management B.C.
Ltd., disclaims beneficial ownership of such shares except to the
extent of his pecuniary interest.
(6) Includes (a) 795,296 shares held by Kleiner Perkins Caufield & Byers
VI, an entity affiliated with Kleiner Perkins Caufield & Byers of
which Mr. Mackenzie is a limited partner. Mr. Mackenzie disclaims
beneficial ownership of such shares except to the extent of his
pecuniary interest. Brook Byers, L. John Doerr, Vinod Khosla, E. Floyd
Kvamme, Joseph Lacob, Bernie Lacroute and Jim Lally are the General
Partners of KPCB VI Associates, the General Partner of Kleiner Perkins
Caufield and Byers Vi and (b) 5,000 shares subject to options
exercisable by Mr. Mackenzie within 60 days of September 1, 2001.
(7) Includes 28,750 shares subject to an option exercisable within 60 days
of September 1, 2001. Of the shares held by Mr. Runge, up to 31,250
shares are subject to repurchase by Pivotal at the option exercise
price paid by Mr. Runge if Mr. Runge's employment is terminated.
(8) Includes 22,849 shares subject to an option exercisable within 60 days
of September 1, 2001.
(9) Includes (a) 363,514 shares held of record by Bank of Montreal Capital
Corporation which is managed by Ventures West Management TIP Inc., an
entity wholly owned by Ventures West Capital Ltd.; and (b) 1,195,944
shares held of record by VW B.C. Technology Investment Fund Limited
Partnership, of which Ventures West Management B.C. Ltd. is the
general partner. Ventures West Management B.C. Ltd. is wholly owned by
Ventures West Capital Ltd. Mr. Louis, as President of Ventures West
Capital Ltd., a venture capital firm with controlled subsidiaries
which include Ventures West Management TIP and Ventures West
Management B.C. Ltd., disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest.
(10) Includes 795,296 shares held by Kleiner Perkins Caufield & Byers VI,
an entity affiliated with Kleiner Perkins Caufield and Byers of which
Mr. Mackenzie is a limited partner. Mr. Mackenzie disclaims beneficial
ownership of such shares except to the extent of his pecuniary
interest. Brook Byers, L. John Doerr, Vinod Khosla, E. Floyd Kvamme,
Joseph Lacob, Bernie Lacroute and Jim Lally are the General Partners
of KPCB VI Associates, the General Partner of Kleiner Perkins Caufield
and Byers VI.
(11) Includes (a) 1,025,608 shares held of record by Integral Capital
Partners II, L.P.; (b) 324,807 shares held of record by
Integral Capital Partners International II C.V.
(12) Includes 261,216 shares subject to options exercisable within 60 days
of September 1, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended June 30, 2001, we loaned a total of $320,000 to two of our
officers. Of the $320,000, $250,000 was loaned to Vincent Mifsud, Chief
Operating Officer, Chief Financial Officer and Executive Vice President. The
loan to Mr. Mifsud is non-interest bearing, due within one year and is secured
by certain shares of a private company. The other loan is non-interest bearing,
due within one year and is unsecured.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
1. Index to Consolidated Financial Statements
Page
Independent Auditor's Report........................................ 53
Consolidated Balance Sheets......................................... 54
Consolidated Statements of Operations............................... 55
Consolidated Statements of Shareholders' Equity 56
Consolidated Statements of Cash Flows............................... 57
Notes to Consolidated Financial Statements.......................... 58
87
2. Index to Financial Statement Schedules
Page
Schedule II - Valuation and Qualifying Accounts..................... 79
(b) Reports on Form 8-K
Not Applicable
(c) Exhibits
EXHIBIT NO. DESCRIPTION
------------ -------------
2.1(1) Share Purchase Agreement by and between Pivotal and Pierre
Marcel, Marc Bahda, Bernard Wach and Other Shareholders of
Transitif S.A., dated December 3, 1999
2.2(2) Stock Purchase Agreement among Pivotal and Industrial & Financial
Systems AB and Eli Barak, Alon Hod and Tony Topaz concerning all
of the Shares of Exactium Ltd. dated April 11, 2000
2.3(3) Share Purchase Agreement among Pivotal and David Pritchard, Kirk
Herrington, Michael Satterfield, Calvin Mah, VW B.C. Technology
Investment Fund, LP, Venrock Associates, Venrock Associates II,
LP, Working Ventures Canadian Fund Inc., Bank of Montreal Capital
Corporation, Sussex Capital Inc. and the Other Shareholders of
Simba Technologies Inc. concerning all of the Shares of Simba
Technologies Inc. dated May 29, 2000
3.2(4) Memorandum and Articles
4.1(4) Specimen of common share certificate
4.2(4) Registration Rights (included in Exhibit 10.15)
4.3(2) Registration Rights Agreement dated June 2, 2000 (included in
Exhibit 2.2)
4.4(3) Registration Rights Agreement dated June 26, 2000 (included in
Exhibit 2.3)
4.5 Specimen of common share certificate as of August 17, 2000
10.1(4) Employee Share Purchase Plan
10.2(4) Lease dated as of July 18, 1997 between Sodican (B.C.) Inc. and
Pivotal for premises located in North Vancouver, B.C.
10.3(4) Lease dated as of May 26, 1998 between Novo Esplanade Ltd. and
Pivotal for premises located in North Vancouver, B.C.
10.4(4) Lease(1) dated as of December 14, 1998 between B.C. Rail Ltd. and
Pivotal for premises located in North Vancouver, B.C.
10.5(4) Lease(2) dated as of December 14, 1998, between B.C. Rail Ltd.
and Pivotal with respect to premises located in North Vancouver,
B.C.
88
10.6(4) Lease dated as of December 11, 1998 between The Plaza at Yarrow
Bay Inc. (previously Yarrow Bay Office III Limited Partnership)
and Pivotal with respect to premises located in Kirkland,
Washington
#10.7(4) Letter agreement dated November 21, 1997 between Pivotal and
Robert A. Runge granting an option to purchase 250,000 common
shares
10.8(4) Canadian Imperial Bank of Commerce Cdn$2,000,000 Committed
Installment Loan dated March 18, 1998
10.9(4) Canadian Imperial Bank of Commerce Cdn$3,000,000 Operating Line
of Credit dated March 18, 1998
10.10(4) Security Agreement with Canadian Imperial Bank of Commerce dated
for reference April 15, 1998
10.11(4) Contract Relative to Special Security under the Bank Act between
Canadian Imperial Bank of Commerce and Pivotal dated April 30,
1998
10.12(4) Canadian Imperial Bank of Commerce Schedule - Standard Credit
Terms dated March 18, 1998
10.13(4) Canadian Imperial Bank of Commerce Schedule-Standard Credit Terms
dated March 18, 1998
10.14(4) Form of Indemnity Agreement between Pivotal and directors and
officers of Pivotal
10.15(4) Investors' Rights Agreement dated January 15, 1999
10.16(5) Assignment Agreement dated July 12, 2000 between Pivotal and Meta
Creations International Limited for premises located in Dublin,
Republic of Ireland; Sub-Lease dated September 22, 1999 between
The H.W. Wilson Company Inc. and Meta Creations International
Limited for premises located in Dublin, Republic of Ireland
10.17(5) Lease dated April 14, 2000 among Deramore Holdings Limited(1),
Pivotal Corporation (NI) Limited (2) and Pivotal for premises
located in Belfast, Northern Ireland
#10.18(5) Employment Agreement between Vince Mifsud and Pivotal dated
November 10, 1998
10.19(6) Exactium Ltd. 1999 Stock Option Plan
10.20(7) Simba Technologies Incentive Stock Option Plan, as amended
10.21 Amended and Restated Incentive Stock Option Plan
10.22 Restated Offer to Lease dated July 28, 2000 between CB Richard
Ellis Limited and Pivotal with respect to premises located in
Vancouver, B.C.
10.23 First Amendment to Restated Offer to Lease dated October 16, 2000
between PCI Properties Corp. and Pivotal with respect to premises
located in Vancouver, B.C.
89
10.24 Second Amendment to Restated Offer to Lease dated May 18, 2001
between PCI Properties Corp. and Pivotal with respect to premises
located in Vancouver, B.C.
10.25 Lease dated June 3, 1996 between Yonge Wellington Property
Limited and Simba Technologies Incorporated with respect to
premises located in Vancouver, B.C.
10.26 Sublease dated January 1, 1999 between Brewster Transport Company
Limited and Simba Technologies Incorporated with respect to
premises located in Vancouver, B.C.
10.27 Lease dated September 1, 2000 between Landgem Office I, Ltd.
(previously Dallas Office Portfolio L.P.) and Software Spectrum
CRM, Inc. for premises located in Dallas, Texas
10.28 Lease dated December 19, 2000 between 485 Properties, LLC and
Pivotal for premises located in Atlanta, Georgia
10.29 Lease dated as of November 24, 2000 between Scholl Consumer
Products Limited and Pivotal for premises located in Luton,
England
#10.30 Employment Agreement between Kirk Herrington and Pivotal dated
June 7, 2000
#10.31 Employment Agreement between Kent Roger (Bo) Manning and Pivotal
dated August 22, 2001
10.32 Amendment No.1 dated June 19, 2001 to the Canadian Imperial Bank
of Commerce Cdn$3,000,000 Operating Line of Credit dated March
18, 1998
10.33 Amendment No.2 dated July 3, 2001 to the Canadian Imperial Bank
of Commerce Cdn$3,000,000 Operating Line of Credit dated March
18, 1998
21.1 Subsidiaries of Pivotal
23.1 Consent of Deloitte & Touche
24.1 Powers of Attorney (included on signature page)
99.1 Notice of Meeting and Management Information and Proxy Circular
for the Annual General Meeting to be held on Thursday, November
15, 2001.
# Indicates management contract.
(1) Incorporated by reference to Pivotal's Form 8-K filed on January 25, 2000.
(2) Incorporated by reference to Pivotal's Form 8-K filed on June 19, 2000.
(3) Incorporated by reference to Pivotal's Form 8-K filed on July 11, 2000.
(4) Incorporated by reference to Pivotal's Registration Statement on Form F-1
(No. 333-82871).
(5) Incorporated by reference to Pivotal's Annual Report on Form 10-K for the
year ended June 30, 2000.
(6) Incorporated by reference to Pivotal's Registration Statement on Form S-8
(No. 333-39922).
(7) Incorporated by reference to Pivotal's Registration Statement on Form S-8
(No. 333-42460).
90
SIGNATURES
Registrant. Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Vancouver, British Columbia, Canada, on September 28, 2001.
PIVOTAL CORPORATION
(Registrant)
By: /s/ Kent Roger (Bo) Manning
----------------------------
Kent Roger (Bo) Manning
(President and Chief Executive Officer)
91
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kent Roger (Bo) Manning and Vincent D.
Mifsud, and each of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Report, and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all said attorneys-in-fact
and agents of them or their substitute or substitutes, may lawfully do or cause
to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date(s) indicated.
SIGNATURE TITLE DATE
-------------------------------------------------- ------------------------ -----------
President, Chief Executive September 28, 2001
/s/ Kent Roger (Bo) Manning Officer and Director
--------------------------------------------------
Kent Roger (Bo) Manning
Chief Operating Officer, September 28, 2001
/s/ Vincent D. Mifsud Executive Vice President
--------------------------------------------------
Vincent D. Mifsud
Executive Vice President, September 28, 2001
/s/ Keith R. Wales Director
--------------------------------------------------
Keith R. Wales
/s/ Norman B. Francis Director September 28, 2001
--------------------------------------------------
Norman B. Francis
/s/ Jeremy A. Jaech Director September 28, 2001
--------------------------------------------------
Jeremy A. Jaech
/s/ Douglas J. Mackenzie Director September 28, 2001
--------------------------------------------------
Douglas J. Mackenzie
/s/ Robert J. Louis Director September 28, 2001
--------------------------------------------------
Robert J. Louis
/s/ Steven M. Gordon Director September 28, 2001
--------------------------------------------------
Steven M. Gordon
EXHIBIT NO. DESCRIPTION
------------ -------------
2.1(1) Share Purchase Agreement by and between Pivotal and Pierre
Marcel, Marc Bahda, Bernard Wach and Other Shareholders of
Transitif S.A., dated December 3, 1999
2.2(2) Stock Purchase Agreement among Pivotal and Industrial & Financial
Systems AB and Eli Barak, Alon Hod and Tony Topaz concerning all
of the Shares of Exactium Ltd. dated April 11, 2000
2.3(3) Share Purchase Agreement among Pivotal and David Pritchard, Kirk
Herrington, Michael Satterfield, Calvin Mah, VW B.C. Technology
Investment Fund, LP, Venrock Associates, Venrock Associates II,
LP, Working Ventures Canadian Fund Inc., Bank of Montreal Capital
Corporation, Sussex Capital Inc. and the Other Shareholders of
Simba Technologies Inc. concerning all of the Shares of Simba
Technologies Inc. dated May 29, 2000
3.2(4) Memorandum and Articles
4.1(4) Specimen of common share certificate
4.2(4) Registration Rights (included in Exhibit 10.15)
4.3(2) Registration Rights Agreement dated June 2, 2000 (included in
Exhibit 2.2)
4.4(3) Registration Rights Agreement dated June 26, 2000 (included in
Exhibit 2.3)
4.5 Specimen of common share certificate as of August 17, 2000
10.1(4) Employee Share Purchase Plan
10.2(4) Lease dated as of July 18, 1997 between Sodican (B.C.) Inc. and
Pivotal for premises located in North Vancouver, B.C.
10.3(4) Lease dated as of May 26, 1998 between Novo Esplanade Ltd. and
Pivotal for premises located in North Vancouver, B.C.
10.4(4) Lease(1) dated as of December 14, 1998 between B.C. Rail Ltd. and
Pivotal for premises located in North Vancouver, B.C.
10.5(4) Lease(2) dated as of December 14, 1998, between B.C. Rail Ltd.
and Pivotal with respect to premises located in North Vancouver,
B.C.
10.6(4) Lease dated as of December 11, 1998 between The Plaza at Yarrow
Bay Inc. (previously Yarrow Bay Office III Limited Partnership)
and Pivotal with respect to premises located in Kirkland,
Washington
#10.7(4) Letter agreement dated November 21, 1997 between Pivotal and
Robert A. Runge granting an option to purchase 250,000 common
shares
10.8(4) Canadian Imperial Bank of Commerce Cdn$2,000,000 Committed
Installment Loan dated March 18, 1998
10.9(4) Canadian Imperial Bank of Commerce Cdn$3,000,000 Operating Line
of Credit dated March 18, 1998
10.10(4) Security Agreement with Canadian Imperial Bank of Commerce dated
for reference April 15, 1998
10.11(4) Contract Relative to Special Security under the Bank Act between
Canadian Imperial Bank of Commerce and Pivotal dated April 30,
1998
10.12(4) Canadian Imperial Bank of Commerce Schedule - Standard Credit
Terms dated March 18, 1998
10.13(4) Canadian Imperial Bank of Commerce Schedule-Standard Credit Terms
dated March 18, 1998
10.14(4) Form of Indemnity Agreement between Pivotal and directors and
officers of Pivotal
10.15(4) Investors' Rights Agreement dated January 15, 1999
10.16(5) Assignment Agreement dated July 12, 2000 between Pivotal and Meta
Creations International Limited for premises located in Dublin,
Republic of Ireland; Sub-Lease dated September 22, 1999 between
The H.W. Wilson Company Inc. and Meta Creations International
Limited for premises located in Dublin, Republic of Ireland
10.17(5) Lease dated April 14, 2000 among Deramore Holdings Limited(1),
Pivotal Corporation (NI) Limited (2) and Pivotal for premises
located in Belfast, Northern Ireland
#10.18(5) Employment Agreement between Vince Mifsud and Pivotal dated
November 10, 1998
10.19(6) Exactium Ltd. 1999 Stock Option Plan
10.20(7) Simba Technologies Incentive Stock Option Plan, as amended
10.21 Amended and Restated Incentive Stock Option Plan
10.22 Restated Offer to Lease dated July 28, 2000 between CB Richard
Ellis Limited and Pivotal with respect to premises located in
Vancouver, B.C.
10.23 First Amendment to Restated Offer to Lease dated October 16, 2000
between PCI Properties Corp. and Pivotal with respect to premises
located in Vancouver, B.C.
10.24 Second Amendment to Restated Offer to Lease dated May 18, 2001
between PCI Properties Corp. and Pivotal with respect to premises
located in Vancouver, B.C.
10.25 Lease dated June 3, 1996 between Yonge Wellington Property
Limited and Simba Technologies Incorporated with respect to
premises located in Vancouver, B.C.
10.26 Sublease dated January 1, 1999 between Brewster Transport Company
Limited and Simba Technologies Incorporated with respect to
premises located in Vancouver, B.C.
10.27 Lease dated September 1, 2000 between Landgem Office I, Ltd.
(previously Dallas Office Portfolio L.P.) and Software Spectrum
CRM, Inc. for premises located in Dallas, Texas
10.28 Lease dated December 19, 2000 between 485 Properties, LLC and
Pivotal for premises located in Atlanta, Georgia
10.29 Lease dated as of November 24, 2000 between Scholl Consumer
Products Limited and Pivotal for premises located in Luton,
England
#10.30 Employment Agreement between Kirk Herrington and Pivotal dated
June 7, 2000
#10.31 Employment Agreement between Kent Roger (Bo) Manning and Pivotal
dated August 22, 2001
10.32 Amendment No.1 dated June 19, 2001 to the Canadian Imperial Bank
of Commerce Cdn$3,000,000 Operating Line of Credit dated March
18, 1998
10.33 Amendment No.2 dated July 3, 2001 to the Canadian Imperial Bank
of Commerce Cdn$3,000,000 Operating Line of Credit dated March
18, 1998
21.1 Subsidiaries of Pivotal
23.1 Consent of Deloitte & Touche
24.1 Powers of Attorney (included on signature page)
99.1 Notice of Meeting and Management Information and Proxy Circular
for the Annual General Meeting to be held on Thursday, November
15, 2001.
# Indicates management contract.
(1) Incorporated by reference to Pivotal's Form 8-K filed on January 25, 2000.
(2) Incorporated by reference to Pivotal's Form 8-K filed on June 19, 2000.
(3) Incorporated by reference to Pivotal's Form 8-K filed on July 11, 2000.
(4) Incorporated by reference to Pivotal's Registration Statement on Form F-1
(No. 333-82871).
(5) Incorporated by reference to Pivotal's Annual Report on Form 10-K for the
year ended June 30, 2000.
(6) Incorporated by reference to Pivotal's Registration Statement on Form S-8
(No. 333-39922).
(7) Incorporated by reference to Pivotal's Registration Statement on Form S-8
(No. 333-42460).