<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 1999.
REGISTRATION NO. 333-82871
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
AMENDMENT NO. 2
TO
Form F-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
------------------------------------
Pivotal Corporation
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
BRITISH COLUMBIA, CANADA 7372 NOT APPLICABLE
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
NORMAN B. FRANCIS
VINCENT D. MIFSUD
300 - 224 WEST ESPLANADE, NORTH VANCOUVER, BRITISH COLUMBIA, CANADA V7M 3M6
(604) 988-9982
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
CT CORPORATION SYSTEM
1633 BROADWAY
NEW YORK, NEW YORK 10019
(212) 664-1666
(Name, address, including zip code, and telephone number, including area code of
agent for service)
------------------------------------
COPIES TO:
<TABLE>
<S> <C> <C> <C>
CHRISTOPHER J. BARRY ALBERT J. HUDEC GAVIN B. GROVER CHRISTOPHER A. HEWAT
BRIGID CONYBEARE BRITTON ROBERT B. SWIFT PETER E. WILLIAMS III GEOFFREY S. BELSHER
DORSEY & WHITNEY LLP DAVIS & COMPANY MORRISON & FOERSTER LLP BLAKE, CASSELS & GRAYDON
U.S. BANK BUILDING CENTRE, 2800-666 BURRARD STREET 425 MARKET STREET BOX 25, COMMERCE COURT WEST
SUITE 4200 VANCOUVER, BRITISH COLUMBIA SAN FRANCISCO, CALIFORNIA TORONTO, ONTARIO
1420 FIFTH AVENUE CANADA V6C 2Z7 94105-2482 CANADA M5L 1A9
SEATTLE, WASHINGTON 98101 (604) 687-9444 (415) 268-7000 (416) 863-2400
(206) 903-8800
</TABLE>
------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 2, 1999
PROSPECTUS
3,500,000 SHARES
LOGO
COMMON SHARES
------------------------
This is Pivotal's initial public offering of common shares. The
underwriters will offer 3,500,000 common shares in the United States and British
Columbia, Canada. This is a firm commitment underwriting.
We expect the public offering price to be between $12.00 and $14.00 per
common share. Currently, no public market exists for the shares. After pricing
of the offering, we expect that the common shares will trade on the Nasdaq
National Market under the symbol "PVTL."
INVESTING IN THE COMMON SHARES INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discount...................................... $ $
Proceeds, before expenses, to Pivotal...................... $ $
</TABLE>
The underwriters may also purchase up to an additional 525,000 common
shares at the public offering price, less the underwriting discount, within 30
days from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER
INCORPORATED
------------------------
The date of this prospectus is , 1999.
<PAGE> 3
[INSIDE FRONT COVER]
[PIVOTAL LOGO]
Pivotal enables business to increase revenues, by better managing
relationships with customers and partners in the selling process.
Ten pictured in the visual encircling text.
Text
Making customers everybody's business.
[INSIDE PULL-OUT]
[ARTWORK - INTERACTIVE SELLING NETWORK]
DESCRIPTION
Conceptual overview of the Pivotal 360 degree customer relationship management
solution. Includes visual representation of Pivotal Relationship 99, depicting
the automation and unification of sales, marketing and customer service
employees via a shared database and of sales, and customer service. Pivotal
eRelationship PartnerHub and Pivotal eRelationship CustomerHub, depicting the
collaboration and sharing of information between employees and partners and
employees and customers via the Internet. Three groups of figures: (i) Partners
in the selling process; (ii) sales, marketing and customer service; and (iii)
mobile sales, online prospects and online self-serve customers. All will include
accompanying text to explain a relevant component of the solution.
TEXT
Will include the following:
- HEADING - Pivotal 360(Degree) Customer Relationship Management
- COPY - Four blocks:
PIVOTAL'S GLOBAL SOLUTION
- Our 360 degree Customer Relationship Management(TM) solution
includes Pivotal Relationship(TM), a software product that
automates and unifies the internal marketing, sales, and
customer service functions within a business, and Pivotal
eRelationship(TM), our Internet application that simplifies
collaboration and sharing of information with customers and
partners in the selling process.
PIVOTAL eRELATIONSHIP(TM) PARTNERHUB(TM)
- Enables sharing of information and collaboration over the
Internet among employees and partners to address customer needs
and concerns.
PIVOTAL RELATIONSHIP(TM) 99
- Employees can collaborate and share information to allow better
management of customer relationships.
PIVOTAL eRELATIONSHIP(TM) CUSTOMERHUB(TM)
- Enables businesses to transform their Web site into a
collaborative tool used to service and sell to customers.
[INSIDE BACK COVER]
Pivotal's Industry Recognition
Pivotal has been widely recognized as a leader and innovator
in the Customer Relationship Management industry.
Product Awards with logos of sponsors:
<TABLE>
<S> <C> <C>
Information Systems Marketing February 1999 Top 15 CRM Software Award
December 1997 Top 15 CRM Software Award
December 1996 Top 15 CRM Software Award
Information Week February 1999 IT Innovators for 1999
Microsoft December 1998 Industry Solutions Award 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 Provider
Open Systems Advisors January 1999 Crossroads 99 A-List Award
Technology Industry Association June 1998 Excellence in Product Innovation
- --------------------------------------------------------------------------------------------------------
</TABLE>
[PIVOTAL LOGO]
Making Customers Everybody's Business
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 4
Forward-Looking Statements.................................. 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 17
Capitalization.............................................. 18
Dilution.................................................... 19
Selected Consolidated Financial Data........................ 20
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 32
Management.................................................. 45
Transactions Between Pivotal and its Officers, Directors or
Significant Shareholders.................................. 53
Principal Shareholders...................................... 55
Description of Share Capital................................ 57
Shares Eligible for Future Sale............................. 59
Income Tax Consequences..................................... 61
Underwriting................................................ 65
Legal Matters............................................... 68
Experts..................................................... 68
Where You Can Find More Information......................... 69
Index to Financial Statements............................... F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
------------------------
"Pivotal Relationship," "Pivotal Place," "Pivotal (design format),"
"LetterExpress" and "Pivotal Development Solutions" are registered trademarks of
Pivotal in the United States. Some of these marks are also registered trademarks
of Pivotal in Canada and the United Kingdom. We have applied for registration of
the trademarks "Pivotal," "Pivotal eRelationship (design format)," "Pivotal
eRelationship," "CustomerHub," "PartnerHub," "IntraHub," "SyncStream," "Planet
CRM" and "PivotalHost" in the United States. The "Pivotal" trademark application
has been published, a statement of use filed and we expect to receive the
registration certificate shortly. We have also applied for registration of the
"Pivotal" and "Pivotal Relationship" trademarks in Japan and the European
Community. All other trademarks or service marks appearing in this prospectus
are trademarks or service marks of the companies that use them.
------------------------
Unless otherwise indicated, all references to "$" or dollars in this
prospectus refer to United States dollars and all references to "Cdn.$" refer to
Canadian dollars. As of July 30, 1999, the noon buying rate in New York City for
cable transfers in Canadian dollars was U.S.$1.00 = Cdn.$.6636.
<PAGE> 5
The following table sets forth, for each period presented, the high and low
exchange rates, the average of the exchange rates on the last day of each month
during the period indicated, and the exchange rates at the end of the period
indicated for one Canadian dollar, expressed in United States dollars, based on
the noon buying rate in New York City for cable transfers payable in Canadian
dollars as certified for customs purposes by the Federal Reserve Bank of New
York.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1999 1998 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
End of period...................................... .6787 .6798 .7241 .7322 .7279
Average for the period............................. .6612 .7028 .7308 .7349 .7258
High for the period................................ .6891 .7292 .7513 .7527 .7457
Low for the period................................. .6341 .6784 .7145 .7235 .7023
</TABLE>
<PAGE> 6
PROSPECTUS SUMMARY
This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including the financial data and
related notes, before making an investment decision.
PIVOTAL
We are a leading provider of customer relationship management solutions
that enable businesses to increase revenues by more effectively managing their
interactions with customers and partners in the selling process. Our "360
degrees Customer Relationship Management" solution includes corporate network-
and Internet-based applications supported by an array of professional services
and our global network of partners which we call the Pivotal Alliance. This
solution includes our Pivotal Relationship software product, that automates and
unifies the internal sales, marketing and customer service functions within a
business, and our recently introduced Internet application, Pivotal
eRelationship, that simplifies the collaboration and sharing of information with
customers and partners that are external to the business. Our products have won
numerous awards including Microsoft's Industry Solutions Award for Best Overall
Customer Management Solution in December 1998.
The businesses we serve have recognized the value of improving their
customer focus in order to increase revenues. Until recently, most customer
relationship management software applications were designed primarily to address
the needs of employees in large enterprises and were often considered too costly
for most other businesses. To compete against larger organizations and to
maintain the same or higher levels of customer service as their larger
competitors, many mid-size businesses and divisions of large businesses have
adopted business models that require close integration and collaboration with
their customers and partners. As a result, many of these businesses are now
seeking customer relationship management solutions that integrate software
applications used to automate internal functions with Internet applications used
to collaborate and share information with their customers and partners, and that
can be implemented rapidly and cost effectively. AMR Research estimates that
worldwide customer relationship management license revenues will grow at a
compound rate of 58% for the five year period from 1997 to 2002 to approximately
$7.5 billion by 2002.
We offer a comprehensive customer relationship management solution that
includes our award-winning Pivotal Relationship and Pivotal eRelationship
products. These products are fully integrated with one another and rely on a
shared database that contains all information about interactions with customers.
Our Pivotal Relationship product enables businesses to improve customer
relationships by capturing information regarding customer interactions and by
helping sales, marketing and customer service employees share this information
and collaborate to meet customer needs. Our Internet-based product family,
Pivotal eRelationship is comprised of two separate products:
- Pivotal eRelationship CustomerHub aids in the conversion of an existing
Web site from an information site to a collaborative tool for customer
self-service and for interacting and communicating with existing and
prospective customers.
- Pivotal eRelationship PartnerHub improves selling processes and
efficiency by enabling businesses and their partners to share information
related to sales opportunities, co-marketing projects, sales order status
and customer service inquiries.
We have designed and optimized our solution exclusively for the Internet,
Microsoft Windows NT and Microsoft BackOffice platforms to take advantage of
their lower cost and widespread adoption by many businesses. Our solution also
enables mobile professionals to increase their efficiency by remotely accessing
the shared database using portable and palm computers.
1
<PAGE> 7
Our goal is to become a leading global provider of electronic business
solutions which combine customer relationship management and electronic commerce
solutions. To achieve this goal we intend to:
- extend the scope of our applications with a focus on our Internet-based
applications, including additional electronic commerce features,
- expand our worldwide distribution capacity,
- broaden our network of strategic relationships,
- continue focusing on our customers' success, and
- offer an alternative licensing arrangement through third parties, called
application service providers, that will enable customers to pay a usage
fee to access our software on servers operated and maintained by the
application service providers.
We sell our software products and services through a direct sales force and
a global network of resellers. We provide support for our customers through our
professional services organization and our Pivotal Alliance of over 95
independent companies that sell, install and service our products and offer
specialized software for use with them. In 1998, we co-founded the Enterprise
360 consortium with KPMG, Microsoft and Hewlett-Packard, to provide
comprehensive customer relationship management solutions. We have licensed our
applications on a global basis to over 540 customers across a wide range of
industries, including technology, manufacturing, health care, consulting,
financial services and telecommunications.
Pivotal Corporation was incorporated in British Columbia in 1990 under the
name Pen Magic Software Corporation. We changed our name to PenMagic Software
Inc. in 1991. In 1995, we changed our name to Pivotal Software Inc. and in June
1999 we changed our name to Pivotal Corporation. The terms "Pivotal," "our
company" and "we" in this prospectus refer to Pivotal Corporation, Pivotal
Software USA, Inc., its wholly owned subsidiary incorporated in Washington, and
Pivotal Software Limited, its wholly owned subsidiary incorporated in the United
Kingdom, collectively.
Our head office address is 300 - 224 West Esplanade, North Vancouver,
British Columbia and our telephone number is (604) 988-9982. We maintain a World
Wide Web site address at www.pivotal.com. Information on our Web site is not
part of this prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common shares offered.............................. 3,500,000 shares
Common shares to be outstanding after this 19,483,123 shares
offering.........................................
Use of proceeds.................................... We intend to use the offering proceeds for
working capital and general corporate
purposes.
Proposed Nasdaq National Market symbol............. PVTL
Risks of the offering.............................. A discussion of risks of the offering appears
under the heading "Risk Factors" beginning on
page 4.
</TABLE>
- ---------------
Unless otherwise indicated, the information in this prospectus assumes:
- the underwriters have not exercised their over-allotment option;
- the conversion of all of our outstanding redeemable convertible preferred
shares and all of our outstanding Class A convertible preferred shares
into common shares; and
- the exchange of all our outstanding Class B common shares for common
shares.
2
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues................................ $ 80 $ 399 $ 3,506 $14,209 $25,327
Gross profit............................ 73 397 2,998 12,527 21,713
Loss from operations.................... (811) (1,346) (1,536) (122) (2,541)
Net income (loss)....................... $ (792) $(1,261) $(1,394) $ 4 $(2,808)
Basic and diluted earnings (loss) per
share................................. $(0.24) $ (0.37) $ (0.41) $ -- $ (0.72)
Pro forma basic and diluted loss per
share(1).............................. $ (0.18)
Shares used to calculate earnings (loss)
per share:
Basic................................. 3,348 3,372 3,393 3,720 3,888
Diluted............................... 3,348 3,372 3,393 14,927 3,888
Pro forma basic and diluted........... 15,940
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-------------------------------------
PRO PRO FORMA AS
ACTUAL FORMA(1) ADJUSTED(1)(2)
------- -------- --------------
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 9,338 $ 9,338 $50,713
Working capital........................................... 7,257 7,257 48,632
Total assets.............................................. 21,722 21,722 63,097
Long-term obligations..................................... -- -- --
Redeemable convertible preferred shares................... 17,500 -- --
Total shareholders' equity (deficit)...................... (7,192) 10,308 51,683
</TABLE>
- ---------------
(1) Pro forma to give effect to the (a) exchange of all our outstanding Class B
common shares for common shares and (b) conversion of all of our redeemable
convertible preferred shares and all of our Class A convertible preferred
shares into common shares.
(2) As adjusted to reflect the estimated net proceeds from the sale of common
shares we are offering in this prospectus at an assumed initial public
offering price of $13.00 per share, after deducting underwriting discounts
and commissions and estimated offering expenses. See "Use of Proceeds,"
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
3
<PAGE> 9
RISK FACTORS
Investing in our common shares will provide you with an equity ownership
interest in Pivotal. As a Pivotal shareholder, you will be subject to risks
inherent in our business. You should carefully consider the following factors as
well as other information contained in this prospectus before deciding to invest
in our common shares. If any of the risks described below occurs, our business,
results of operation and financial condition could be adversely affected. In
such cases, the price of our common shares could decline, and you may lose part
or all of your investment.
FACTORS RELATING TO OUR BUSINESS AND THE MARKET FOR CUSTOMER RELATIONSHIP
MANAGEMENT SOLUTIONS MAKE OUR 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:
- market acceptance of our products, particularly our new Pivotal
eRelationship product;
- the length and variability of the sales cycle for our products, which
typically ranges between two and six months from our initial contact
with a potential customer to the signing of a license agreement;
- the timing of customer orders, which can be affected by customer order
deferrals in anticipation of new product introductions, product
enhancements, concerns about Year 2000 issues, and customer budgeting
and purchasing cycles;
- our ability to successfully expand our sales force and marketing
programs;
- our ability to successfully expand our international operations;
- the introduction or enhancement of our products or our competitors'
products;
- changes in our or our competitors' pricing policies;
- our ability to develop, introduce and market new products on a timely
basis; and
- general economic conditions, which may affect our customers' capital
investment levels in management information systems.
Our product revenues are not predictable with any significant degree of
certainty and future product revenues may differ from historical patterns.
Historically, we have recognized a substantial portion of our revenues in the
last month of a quarter. 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 can 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 EXPECT SEASONAL TRENDS TO CAUSE OUR QUARTERLY REVENUES TO FLUCTUATE, AND IN
RECENT YEARS OUR REVENUES FOR THE FOURTH QUARTER OF OUR FISCAL YEAR HAVE
EXCEEDED THE REVENUES FOR THE FOLLOWING QUARTER.
We have experienced, and expect to continue to experience, seasonality with
respect to product license revenues. In recent years, we have experienced
relatively greater revenues from licenses in the fourth quarter of our fiscal
year, which ends June 30th, than in each of the first three quarters,
particularly the first quarter. 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
4
<PAGE> 10
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.
In particular, these factors could cause revenues for our quarter ending
September 30, 1999 to be less than revenues for the quarter ended June 30, 1999.
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 LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT HOW OUR BUSINESS
WILL DEVELOP AND OUR 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 software. We commercially released the initial version of our
principal product, Pivotal Relationship, in April 1996. We commercially released
the initial version of Pivotal eRelationship in February 1999. 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:
- no history of profitable operations;
- uncertain market acceptance of our products;
- our reliance on a limited number of products;
- the risks that competition, technological change or evolving customer
preferences could adversely affect sales of our products;
- the need to expand our sales and support capabilities;
- our reliance on third parties to market, install, and support our
products;
- our dependence on a limited number of key personnel, including our
co-founders; and
- the risk that our management will not be able to effectively manage
growth or any acquisition we may undertake.
The new and evolving nature of the customer relationship management 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 BECAUSE OF OUR PLAN TO INCREASE 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. In the year ended June 30, 1999, we had a net loss of approximately $2.8
million, and at June 30, 1999, we had an accumulated deficit of approximately
$7.4 million. We have increased our operating expenses in recent periods and
plan further increases in the future. Our planned increases in operating
expenses may result in larger losses in future periods. As a result, we will
need to generate significantly greater revenues than we have to date to achieve
and maintain profitability. We cannot assure you 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 PRODUCTS IS HIGHLY COMPETITIVE.
The market for our software is intensely competitive, fragmented and
rapidly changing. We face competition from companies in two distinct markets,
the customer relationship management software market and the electronic commerce
software market. See "Business -- Competition."
5
<PAGE> 11
It is also possible that Microsoft Corporation may decide to introduce
products that compete with ours.
In addition, as we develop new products, 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.
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.
WE DEPEND ON MICROSOFT AND THE CONTINUED ADOPTION AND PERFORMANCE OF THE
MICROSOFT WINDOWS NT AND MICROSOFT BACKOFFICE PLATFORMS.
We have designed our products to operate on the Microsoft Windows NT and
Microsoft BackOffice platforms. As a result, we market our products exclusively
to customers who have developed their computing systems around these platforms.
Our future financial performance will depend on continued growth in the number
of businesses that successfully adopt the Microsoft Windows NT and Microsoft
BackOffice computing platforms. The Microsoft Windows NT and Microsoft
BackOffice computing platforms face increasing competition, particularly from
platforms such as Unix and Linux, databases from companies such as Oracle and
Internet server software from companies such as Netscape. Acceptance of the
Microsoft Windows NT and Microsoft BackOffice platforms 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
product releases, competitive operating systems and enhancements to competing
computing platforms. If the number of businesses that adopt Microsoft Windows NT
and Microsoft BackOffice fails to grow or grows more slowly than we currently
expect, or if Microsoft delays the release of new or enhanced products, our
revenues from Pivotal Relationship and Pivotal eRelationship could be adversely
affected.
The performance of our products depends, to some extent, on the technical
capabilities of the Microsoft Windows NT and Microsoft BackOffice platforms. If
these platforms do not meet the technical demands of our products, the
performance or scalability of our products could be limited and, as a result,
our revenues from Pivotal Relationship and Pivotal eRelationship could be
adversely affected.
Federal and state regulatory authorities have recently initiated broad
antitrust actions against Microsoft. Any outcome to these actions that weakens
the competitive position of Microsoft Windows NT or Microsoft BackOffice would
adversely affect the market for our products.
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 software is still emerging
and continued growth in demand for and acceptance of customer relationship
management products remains uncertain. Even if the market for customer
relationship management software 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 customer relationship management
solutions, and as a result, these solutions may never achieve full market
acceptance.
The development of our Internet-based Pivotal eRelationship applications
for customer relationship management and our plan to integrate additional
electronic commerce features with Pivotal eRelationship present 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
applications such as Pivotal eRelationship. The use of the Internet is evolving
rapidly, and many companies are developing new products and services that use
the Internet. We
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<PAGE> 12
do not know what forms of products and services may emerge as alternatives to
our existing products or to any future Internet-based or electronic commerce
features and services we may introduce. We have spent, and will continue to
spend, considerable resources educating potential customers about our products
and customer relationship management software solutions in general. However,
even with these educational efforts, market acceptance of our products may not
increase. If the markets for our products do not grow or grow more slowly than
we currently anticipate, our revenues may not grow and may even decline.
OUR SUCCESS WILL DEPEND ON THE SUCCESS OF OUR TWO RELATED PRODUCTS, PIVOTAL
RELATIONSHIP AND PIVOTAL ERELATIONSHIP.
We anticipate that virtually all of our revenues and growth in the
foreseeable future will come from sales of Pivotal Relationship and Pivotal
eRelationship product licenses and related services. Accordingly, failure of
either of these products to gain increased market acceptance and compete
successfully would adversely affect our business, results of operations and
financial condition. Pivotal Relationship accounted for 97% of our revenues from
licences for the year ended June 30, 1999. Our future financial performance will
depend on our ability to succeed in the continued sale of licenses of Pivotal
Relationship and related services as well as the development of new versions and
enhancements of the product.
In February 1999, we introduced Pivotal eRelationship, and sold licenses
for Pivotal eRelationship to 22 customers in the year ended June 30, 1999. We
intend to continue to invest heavily in research and development and sales and
marketing activities related to Pivotal eRelationship. It is uncertain whether
we will recognize significant revenues from Pivotal eRelationship. See
"Business -- Products and Services."
THE SUCCESS OF PIVOTAL ERELATIONSHIP WILL DEPEND ON THE CONTINUED USE AND
EXPANSION OF THE INTERNET.
Increased sales of Pivotal eRelationship, and any future Internet-based
applications and electronic commerce features we integrate with it, 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 Pivotal
eRelationship could be significantly reduced, and Pivotal eRelationship 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:
- concerns about security of transactions conducted over the Internet;
- concerns about privacy and the use of data collected and stored recording
interactions over the Internet;
- 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
- the possibility that governments will seek to tax Internet commerce.
OUR FUTURE REVENUE GROWTH COULD BE IMPAIRED IF WE ARE UNABLE TO EXPAND OUR
DIRECT SALES AND SUPPORT INFRASTRUCTURE.
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
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<PAGE> 13
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 PRODUCTS AND TO PROVIDE SPECIALIZED SOFTWARE FOR USE
WITH THEM.
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 products,
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 28% of our revenues for the year ended June 30, 1999
were from sales made through third-party resellers. Almost all of our customers
retain members of the Pivotal Alliance to install and customize our products. 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
products 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.
Enterprise 360 is a consortium founded in 1998 to integrate and promote our
products as part of a turnkey customer relationship management solution. The
terms of our relationship with the members of the consortium have not been
formalized and are subject to change, and any of the members may withdraw at any
time. We have not generated a significant amount of revenues through this
relationship and do not know whether it will be successful. See "Business --
Strategic Relationships."
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, President, Chief Executive Officer and director, and Keith
Wales, our Chief Technical Officer, Vice-President, Research and Development and
director. Messrs. Francis and Wales do not have employment agreements and,
therefore, could terminate their employment with us at any time without penalty.
We have key man insurance on the lives of Messrs. Francis and Wales in the
amount of Cdn.$1,000,000 each. However, this insurance would not sufficiently
compensate us for the loss of services of either Mr. Francis or Mr. Wales.
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 in the future. In addition, 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 to the degree that our
operating expenses could be materially increased. See "Management."
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<PAGE> 14
WE FACE RISKS FROM THE EXPANSION OF OUR INTERNATIONAL OPERATIONS.
We intend to substantially expand our operations outside the United States
and Canada. International operations are subject to numerous inherent potential
risks, including:
- unexpected changes in regulatory requirements;
- export restrictions, tariffs and other trade barriers;
- changes in local tax rates or rulings by local tax authorities;
- challenges in staffing and managing foreign operations, differing
technology standards, employment laws and practices in foreign countries;
- less favorable intellectual property laws;
- longer accounts receivable payment cycles and difficulties in collecting
payments;
- political and economic instability; and
- 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 will require significant management attention
and financial resources. We will have 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
products. 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.
FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE UNITED STATES DOLLAR AND THE CANADIAN
DOLLAR MAY AFFECT OUR OPERATING RESULTS.
Substantially all of our revenues and corresponding receivables are in
United States dollars. However, a majority of our research and development
expenses, customer support costs and administrative expenses are in Canadian
dollars. We are exposed to fluctuations in the exchange rates between the U.S.
dollar and the Canadian dollar through our operations in Canada. In the quarter
ended March 31, 1999, we adopted a hedging policy intended to reduce the effects
of these fluctuations on our results of operations. As part of our hedging
policy, we identify our future Canadian currency requirements related to payroll
costs, capital expenditures and operating lease commitments, and purchase
forward exchange contracts at the beginning of an operational period to cover
these currency needs. The operational period for our contracts is generally
limited to one quarter. If our actual currency requirements differ materially
from our hedged position during periods of currency volatility, or if we do not
continue to hedge our Canadian currency commitments, we could experience
unanticipated currency gains or losses, as we did in the quarter ended June 30,
1999. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Foreign Currency Translation and Hedging."
Our hedging policy subjects us to risks relating to the creditworthiness of
the commercial banks that we contract with in our hedging transactions. If one
of these banks cannot honor its obligations, we may suffer a loss.
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<PAGE> 15
The purpose of our hedging policy is to reduce the effect of exchange rate
fluctuations on our results of operations. Therefore, while our hedging policy
reduces 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.
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
59 on June 30, 1997 to 150 on June 30, 1998. As of June 30, 1999, we had 270
employees. 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 and more customer, supplier
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. We are currently replacing our
financial accounting system. 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, and could 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.
WE MAY SEEK TO GROW BY MAKING ACQUISITIONS, BUT WE HAVE NEVER ACQUIRED
ANOTHER BUSINESS AND WE MAY NOT BE ABLE TO SUCCESSFULLY COMPLETE ANY
ACQUISITIONS WE UNDERTAKE OR INTEGRATE ANY ACQUIRED BUSINESSES OR PRODUCTS WITH
OUR OWN.
As a part of our business strategy we may seek to grow by acquiring
businesses, products or technologies or establishing joint ventures that we
believe will complement our current or future business. We have never acquired
another business. We may not effectively select acquisition candidates or
negotiate or finance acquisitions or integrate the acquired businesses and their
personnel or acquired products or technologies into our business. We cannot
assure you that we can complete any acquisition we pursue on favorable terms, or
that any acquisition we complete will ultimately benefit our business.
OUR SALES CYCLE IS LONG AND SALES DELAYS COULD CAUSE OUR OPERATING RESULTS TO
VARY WIDELY.
We believe that an enterprise's decision to purchase a customer
relationship management system is discretionary, involves a significant
commitment of its resources and is influenced by its budget cycles. To
successfully sell licenses for our products, we typically must educate our
potential customers regarding the use and benefits of customer relationship
management software 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 products 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 products and services
with no guarantee that our efforts will be rewarded with a sale. Our sales
cycles are lengthy and variable, typically ranging between two and six months
from our initial contact with a potential customer to the signing of a license
agreement, although sales sometimes require substantially more time. Sales
delays could cause our operating results to vary widely. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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.
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<PAGE> 16
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 renew their
technical support contracts. 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 PRODUCTS.
We incorporate into our products software that is licensed to us by
third-party software developers including Microsoft's SQL Server 7.0, Sheridan
Calendar Control, InstallShield 3 and Seagate Crystal Reports. We are seeking to
further increase the capabilities of our products 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 products 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 products becomes obsolete or incompatible with
future versions of our products, we may not be able to continue to offer some of
the features we presently include in our products unless we can license
alternative software or develop the features ourselves.
WE MUST CONTINUE TO DEVELOP ENHANCEMENTS TO OUR PRODUCTS 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
products are sold or delivered. As a result, the life cycles of our products are
difficult to estimate. We also may need to modify our products when third
parties change software we integrate into our products.
To be successful we must continue to enhance our current product line and
develop new applications and features. For example, we currently plan to
integrate electronic commerce features with Pivotal eRelationship and to offer
customers the ability to pay a service fee to access our software or servers
operated and maintained by third parties. See "Business -- Growth Strategy."
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 products. We have delayed enhancements and new product release
dates several times in the past and may not be able to introduce new products,
product enhancements, new applications or features successfully or in a timely
manner in the future. If we delay release of our new products or product
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 products could become obsolete.
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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 products 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 PRODUCTS INFRINGE THEIR COPYRIGHTS OR PATENTS
COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND INCREASE OUR COSTS.
If any of our products violates third-party proprietary rights, including
copyrights and patents, we may be required to reengineer our products or obtain
licenses from third parties to continue offering our products without
substantial reengineering. Although some of our current and potential
competitors have sought patent protection for similar customer relationship
management systems, 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 products, we would need to obtain a
license or re-engineer our product to function without infringing the patent.
Any efforts to re-engineer our products or obtain licenses from third parties
may not be successful and, in any case, could substantially increase our costs,
or force us to interrupt product sales or delay product releases. See "Business
- -- Intellectual Property and Other Proprietary Rights."
OUR PRODUCTS AND PRODUCTS WE RELY ON MAY SUFFER FROM DEFECTS OR ERRORS.
Software products 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 products until software
problems were corrected, and in some cases have provided product enhancements to
correct errors in released products. Our new products and product 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
products and negotiated 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 products rely on these products to operate
properly. Therefore, any defects in these products could adversely affect the
operation of and market for our products, 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
products 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
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<PAGE> 18
our products, 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 product licenses on
delivery of our products if:
- persuasive evidence of an arrangement exists,
- the fee is fixed and determinable,
- we can objectively allocate the total fee among all elements of the
arrangement, and
- collection of the license fee is probable.
In July 1999, we began to offer licensing arrangements in which our
customer purchases a license for a fixed or indefinite term and agrees to pay
for the license with periodic payments rather than in a lump sum. We plan to
recognize revenues from these arrangements as the periodic payments become due
provided the other conditions for revenue recognition are met. If these
arrangements become popular with our customers, we may have lower revenues in
the short term than we otherwise would, because revenues for licenses sold under
these arrangements will be recognized over time rather than upon delivery of our
product.
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.
Statement of Position 97-2, "Software Revenue Recognition," was issued in
October 1997 by the American Institute of Certified Public Accountants and
amended by Statement of Position 98-4. We adopted Statement of Position 97-2
effective January 1, 1998. The American Institute of Certified Public
Accountants has also issued Statement of Position 98-9, which is effective for
us for transactions entered into beginning January 1, 2000. However, full
implementation guidelines for this standard have not yet been issued. Once
available, these implementation guidelines could lead to unanticipated changes
in our current revenue accounting practices.
Accounting standard setters, 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 stock
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.
AFTER THIS OFFERING, OUR PRESENT OFFICERS, DIRECTORS AND 5% SHAREHOLDERS WILL
OWN MORE THAN 77.6% OF OUR COMMON SHARES, AND WILL BE ABLE TO CONTROL ALL
MATTERS SUBMITTED TO SHAREHOLDERS FOR APPROVAL.
After this offering, our present officers, directors and 5% shareholders
together will control approximately 77.6% of our outstanding common shares if
the underwriters do not exercise their overallotment option and 75.6% if the
underwriters exercise their over-allotment option in full. As a result, these
shareholders, if they act together, will be able to control all matters
requiring shareholders' approval including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may delay, deter or prevent actions that would result in a change of control and
might affect the market price of our common shares. See "Principal
Shareholders."
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THE MARKET PRICE OF OUR COMMON SHARES MAY FLUCTUATE SUBSTANTIALLY.
Prior to this offering, there has been no public market for our common
shares. An active public trading market may not develop following completion of
this offering or, if an active public market develops, it may not be sustained.
The initial public offering price of the common shares will be determined by
negotiation between us and representatives of the underwriters. This price will
not necessarily reflect the market price of the common shares following this
offering. See "Underwriting."
A number of factors may affect the market price for the common shares
following this offering, including the following:
- the announcement of new products or product enhancements by us or our
competitors;
- quarterly and annual variations in our or our competitors' results of
operations;
- developments in our industry;
- our ability to timely announce our quarterly or fiscal year-end
operating results; and
- general market conditions and other factors, including factors unrelated
to our operating performance or the operating performance of our
competitors.
Our results of operations are difficult to predict and may fluctuate from
quarter to quarter. If our results of operations in any particular quarter fail
to meet the expectations of securities analysts or the market generally, the
price of our shares could decline significantly.
Share prices for many companies in the technology industry have experienced
wide fluctuations that have often been unrelated to the operating performance of
the companies themselves. The above factors and share price fluctuations, as
well as general economic, political and market conditions, may materially
adversely affect the market price of our common shares.
WE EXPECT ABOUT 16,000,000 COMMON SHARES TO BECOME AVAILABLE FOR SALE 180 DAYS
FROM THE DATE OF THIS PROSPECTUS, AND SALES OF THESE SHARES MAY DEPRESS OUR
SHARE PRICE.
After this offering we will have outstanding 19,483,123 common shares.
Sales of a substantial number of our common shares in the public market
following this offering could cause the market price of our common shares to
drop. All the shares sold in this offering will be freely tradable. The
remaining common shares outstanding after this offering will be available for
sale in the public market as follows:
<TABLE>
<CAPTION>
DATE OF AVAILABILITY FOR SALE NUMBER OF SHARES
----------------------------- ----------------
<S> <C>
, the date of this prospectus................... 320
, 1999 (90 days after the date of this
prospectus)............................................... 1,812
, 2000 (180 days after the date of this
prospectus)............................................... 15,921,483
At various times thereafter upon the expiration of one-year
holding periods........................................... 59,508
</TABLE>
See "Shares Eligible for Future Sale" and "Underwriting."
WE FACE YEAR 2000 RISKS.
If past or present versions of our products prove to have significant Year
2000 defects, we could suffer material liabilities and damage to our business
and reputation. We provide a warranty covering Year 2000 problems in the current
versions of our software products, including products licensed from third
parties that we supply with our products. We may face claims based on Year 2000
issues if our past or present products contain significant Year 2000 defects, or
claims arising from problems with third-party software embedded in or delivered
with our products or with the integration of multiple products within an overall
system. Year 2000 claims could result in costly and distracting litigation and
in material liability. If our products have significant Year 2000 defects,
correcting them could be costly and time consuming, and we could be forced to
delay sales while we make corrections.
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Year 2000 problems with our own internal systems could cause disruption of
our business. Any disruption in the business of any of our key suppliers or
selling partners as a result of Year 2000 issues, or any general disruption or
failure of the financial, telecommunications, power, transportation or other
infrastructure also could disrupt our business.
We may also experience reduced sales as existing and potential customers
reduce their budgets for relationship management solutions due to increased
expenditures on their own Year 2000 compliance efforts. In addition, during the
remainder of 1999, our existing or potential customers may choose to delay new
software product purchases and deployments until after January 1, 2000 to avoid
distractions from Year 2000 compliance efforts and to preclude the possibility
of introducing any new Year 2000 issues. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Year 2000 Issues."
OUR BOARD OF DIRECTORS MAY ISSUE, WITHOUT SHAREHOLDER APPROVAL, PREFERRED SHARES
THAT HAVE RIGHTS AND PREFERENCES SUPERIOR TO THOSE OF COMMON SHARES AND THAT MAY
DELAY OR PREVENT A CHANGE OF CONTROL.
Our memorandum and articles allow the issuance of up to 20,000,000
preferred shares. After the offering, there will be no preferred shares
outstanding. However, our board of directors may set the rights and preferences
of any class of preferred shares in its sole discretion without the approval of
the holders of common shares. The rights and preferences of these preferred
shares may be superior to those of the common shares. Accordingly, the issuance
of preferred shares may adversely affect the rights of holders of common shares.
The issuance of preferred shares also could have the effect of delaying or
preventing a change of control of our company. See "Description of Share
Capital."
YOU MAY NOT BE ABLE TO OBTAIN ENFORCEMENT OF CIVIL LIABILITIES AGAINST US
OUTSIDE THE UNITED STATES.
We are formed under the laws of the Province of British Columbia, Canada.
Many of our assets are located outside the United States. In addition, a
majority of the members of our board of directors and our officers and the
experts named in this prospectus are residents of countries other than the
United States. As a result, it may be impossible for you to effect service of
process within the United States upon us or these persons or to enforce against
us or these persons any judgments in civil and commercial matters, including
judgments under United States federal securities laws. In addition, a Canadian
court may not permit you to bring an original action in Canada or to enforce in
Canada a judgment of a U.S. court based upon civil liability provisions of U.S.
federal securities laws. No treaty exists between the United States and Canada
for the reciprocal enforcement of foreign court judgments.
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<PAGE> 21
FORWARD-LOOKING STATEMENTS
Statements under "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus 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 listed under "Risk Factors" or
described elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by our use of
words such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "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 or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy and completeness of
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of this prospectus. You should not
place undue reliance on forward-looking statements.
16
<PAGE> 22
USE OF PROCEEDS
We expect to receive approximately $41,375,000 in net proceeds from the
sale of 3,500,000 common shares in this offering, assuming an initial public
offering price of $13.00 per common share. We estimate the net proceeds will be
approximately $47,722,000 if the underwriters' over-allotment option is
exercised in full. The principal purposes of this offering are to obtain
additional capital, create a public market for our common shares and facilitate
our future access to the public capital markets.
We intend to use the net proceeds of this offering primarily for additional
working capital and other general corporate purposes, including increased
domestic and international sales and marketing expenditures, increased research
and development expenditures and capital expenditures made in the ordinary
course of our business. The amounts that we actually expend for working capital
purposes will vary significantly depending on a number of factors, including
future revenue growth, if any, the amount of cash we generate from operations
and the progress of our product development efforts. We may also use a portion
of the net proceeds to acquire additional businesses, products or technologies
or to establish joint ventures that we believe will complement our current or
future business. However, we have no specific plans, agreements or commitments
to do so, and are not currently negotiating any such acquisition or joint
venture. We will retain broad discretion in allocating the net proceeds of this
offering. Pending the uses described above, we will invest the net proceeds in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
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.
17
<PAGE> 23
CAPITALIZATION
The table below describes our capitalization as of June 30, 1999:
- on an actual basis;
- on a pro forma basis to reflect the exchange of all of our outstanding
Class B common shares for common shares and the conversion of all of our
redeemable convertible preferred shares and Class A convertible preferred
shares into common shares; and
- on a pro forma as adjusted basis to reflect the estimated net proceeds
from the sale of common shares we are offering in this prospectus at an
assumed offering price of $13.00 per share.
<TABLE>
<CAPTION>
JUNE 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Redeemable convertible preferred shares, 9,946,474
authorized, issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma and pro
forma as adjusted(1)..................................... $17,500 $ -- $ --
Shareholders' equity (deficit):
Preferred shares, undesignated, no par value; 20,000,000
shares authorized, no shares issued or outstanding,
actual, pro forma and pro forma as adjusted........... -- -- --
Class A convertible preferred shares, no par value;
2,000,000 shares authorized, issued and outstanding,
actual; no shares authorized, issued or outstanding,
pro forma and pro forma as adjusted................... 83 -- --
Common shares, no par value; 200,000,000 shares
authorized, 3,454,600 shares issued or outstanding,
actual; 15,983,123 shares issued and outstanding pro
forma; and 19,483,123 shares issued and outstanding,
pro forma as adjusted(2).............................. 563 18,150 59,525
Class B common shares, par value Cdn.$0.03; 600,000
shares authorized, 476,786 shares issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted(2)... 4 -- --
Deferred share-based compensation........................ (416) (416) (416)
Accumulated deficit...................................... (7,426) (7,426) (7,426)
------- ------- -------
Total shareholders' equity (deficit).................. (7,192) 10,308 51,683
------- ------- -------
Total capitalization............................. $10,308 $10,308 $51,683
======= ======= =======
</TABLE>
- ---------------
(1) At June 30, 1999, we had the following classes of redeemable convertible
preferred shares authorized, issued and outstanding: (a) 2,000,000 shares of
Class B, Cdn.$1.17 par value, redeemable at $1.00 each; (b) 2,658,228 shares
of Class D, no par value, redeemable at $0.79 each; (c) 4,000,000 shares of
Class E, no par value, redeemable at $1.35 each; and (d) 1,288,246 shares of
Class F, no par value, redeemable at $6.21 each.
(2) Includes 12,051,737 common shares issuable upon conversion of outstanding
redeemable convertible preferred shares and Class A convertible preferred
shares and exchange of 476,786 Class B common shares for common shares.
Excludes (a) 1,454,687 common shares issuable upon the exercise of options
outstanding as of June 30, 1999 with a weighted average exercise price of
Cdn.$6.07 per share; (b) 2,543,313 shares reserved for issuance in
connection with future stock options under our incentive stock option plan;
and (c) 1,000,000 shares reserved for issuance under our employee share
purchase plan which will become effective upon consummation of this
offering. See "Management -- Employee Benefit Plans" and note 8 of notes to
consolidated financial statements.
18
<PAGE> 24
DILUTION
If you invest in our common shares, your interest will be diluted by the
amount of the difference between the public offering price per common share and
the pro forma as adjusted net tangible book value per common share after this
offering. Dilution per share represents the difference between the amount per
share paid by purchasers of common shares in this offering and the pro forma net
tangible book value per common share immediately after completion of this
offering.
Our pro forma net tangible book value as of June 30, 1999 was $10,308,000,
or $0.64 per common share, after giving effect to:
- the exchange of all our outstanding Class B common shares for common
shares; and
- the conversion of all our outstanding preferred shares into common
shares.
Pro forma net tangible book value per share is equal to our total tangible
assets less total liabilities, divided by the number of outstanding common
shares after giving effect to the exchange of all our outstanding Class B common
shares for common shares and the conversion of all our outstanding preferred
shares into common shares.
After giving effect to our sale of 3,500,000 common shares in this offering
at an assumed initial public offering price of $13.00 per common share, and
after deducting the commissions and estimated offering expenses, our as adjusted
pro forma net tangible book value as of June 30, 1999 would have been
$51,683,000 or $2.65 per common share. This figure represents an immediate
increase in net tangible book value of $2.01 per common share to existing
shareholders and an immediate dilution of $10.35 per common share to new
investors. Dilution is determined by subtracting the net tangible book value per
common share after the offering from the amount of cash a new investor pays for
a common share. The following table illustrates this per common share dilution
to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per common share.............. $13.00
Pro forma net tangible book value per common share as of
June 30, 1999.......................................... $0.64
Increase per common share attributable to this offering... 2.01
Pro forma net tangible book value per common share after
this offering............................................. 2.65
------
Dilution per common share to new investors in this
offering.................................................. $10.35
======
</TABLE>
The table below shows on a pro forma basis as of June 30, 1999, after
giving effect to the exchange of our Class B common shares for common shares and
the conversion of all our outstanding preferred shares into common shares, the
difference between our existing shareholders and our new investors with respect
to the number of common shares purchased, the total consideration paid and the
average price per share paid, before deducting discounts and commissions and
estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............... 15,983,123 82.0% $17,677,000 28.0% $1.11
New investors....................... 3,500,000 18.0 45,500,000 72.0 13.00
---------- ----- ----------- -----
Total.......................... 19,483,123 100.0% $63,177,000 100.0%
========== ===== =========== =====
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of common shares held by new investors will increase to 4,025,000, or 20.1%, of
the total common shares outstanding after this offering.
As of June 30, 1999, we had 1,454,687 outstanding options to purchase
common shares under our incentive stock option plan at a weighted average
exercise price of Cdn.$6.07. In addition, there are 2,543,313 options available
for future grant under our incentive stock option plan and 1,000,000 common
shares will be available for issuance under our employee share purchase plan. If
the option holders exercise these outstanding options, or any options we grant
in the future, there will be further dilution to new investors.
19
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto, with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other financial data included elsewhere in this prospectus. The
consolidated statement of operations data for each of the three years ended June
30, 1997, 1998 and 1999 and the consolidated balance sheet data as of June 30,
1998 and 1999 are derived from audited financial statements included elsewhere
in this prospectus. The consolidated statement of operations data for the years
ended June 30, 1995 and 1996 and the consolidated balance sheet data as of June
30, 1995, 1996 and 1997 are derived from audited consolidated financial
statements not included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- ------- -------
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues:
Licenses........................................ $ 80 $ 368 $ 2,916 $11,311 $18,819
Services and maintenance........................ -- 31 590 2,898 6,508
------ ------- ------- ------- -------
Total revenues................................ 80 399 3,506 14,209 25,327
------ ------- ------- ------- -------
Cost of revenues:
Licenses........................................ 7 2 121 401 536
Services and maintenance........................ -- -- 387 1,281 3,078
------ ------- ------- ------- -------
Total cost of revenues........................ 7 2 508 1,682 3,614
------ ------- ------- ------- -------
Gross profit...................................... 73 397 2,998 12,527 21,713
------ ------- ------- ------- -------
Operating expenses:
Sales and marketing............................. 261 604 2,646 9,226 16,830
Research and development........................ 399 742 1,163 1,910 4,958
General and administrative...................... 224 397 725 1,513 2,466
------ ------- ------- ------- -------
Total operating expenses...................... 884 1,743 4,534 12,649 24,254
------ ------- ------- ------- -------
Loss from operations.............................. (811) (1,346) (1,536) (122) (2,541)
Interest and other income......................... 19 85 142 136 (24)
------ ------- ------- ------- -------
Income (loss) before income taxes................. (792) (1,261) (1,394) 14 (2,565)
Income taxes...................................... -- -- -- 10 243
------ ------- ------- ------- -------
Net income (loss) for the period.................. $ (792) $(1,261) $(1,394) $ 4 (2,808)
====== ======= ======= ======= =======
Basic and diluted earnings (loss) per share....... $(0.24) $ (0.37) $ (0.41) $ -- $ (0.72)
Pro forma basic and diluted loss per share(1):.... $ (0.18)
Shares used to calculate earnings (loss) per share
Basic........................................... 3,348 3,372 3,393 3,720 3,888
Diluted......................................... 3,348 3,372 3,393 14,927 3,888
Pro forma basic and diluted loss per
share(1):..................................... 15,940
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
AS OF JUNE 30, -------------------------
---------------------------------------- PRO FORMA
1995 1996 1997 1998 1999 AS ADJUSTED(2)
------- ------- ------- ------- ------- --------------
CONSOLIDATED BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 2,222 $ 706 $ 3,898 $ 1,202 $ 9,338 $50,713
Working capital.................... 2,091 731 4,417 3,317 7,257 48,632
Total assets....................... 2,361 1,114 6,729 10,752 21,722 63,097
Long-term obligations.............. -- -- -- -- -- --
Redeemable convertible preferred
shares........................... 4,100 4,100 9,500 9,500 17,500 --
Total shareholders' equity
(deficit)........................ (1,969) (3,229) (4,533) (4,455) (7,192) 51,683
</TABLE>
- ---------------
(1) See note 1 of notes to consolidated financial statements for calculation of
pro forma earnings (loss) per share.
(2) Reflects (a) the exchange of Class B common shares for common shares, (b)
the conversion of all preferred shares into common shares, and (c) the sale
of common shares we are offering in this prospectus at an assumed initial
public offering price of $13.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses. See "Use of
Proceeds," and "Capitalization."
20
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the notes thereto included elsewhere in this prospectus.
OVERVIEW
We began developing our customer relationship management software in early
September 1994. In April 1996, we released the initial version of our principal
product, Pivotal Relationship. Initially, we sold the product on a limited basis
through resellers. During the year ended June 30, 1997, we began direct sales of
Pivotal Relationship. In fiscal 1998, we began expanding internationally by
opening our office in London, England. We also invested in the development of
our brand, continued research and development to improve the functionality of
Pivotal Relationship, and began development of Pivotal eRelationship. In fiscal
1999, we invested in all areas of our business with a particular emphasis on
sales, marketing and research and development. In February 1999, we released and
shipped our Internet-based product Pivotal eRelationship. Our revenues increased
78% to $25.3 million from $14.2 million for the years ended June 30, 1999 and
1998, respectively.
We market and sell our products on a global basis primarily through our
direct sales force and resellers that are members of our Pivotal Alliance.
During the year ended June 30, 1999, 72% of our license revenues were generated
from our direct sales force and 28% from resellers. We have sold licenses to
over 540 customers worldwide. No single customer accounted for 10% of our
revenues for the years ended June 30, 1997, 1998 or 1999. Customers in North
America accounted for 96%, 90% and 80% of our revenues in the years ended June
30, 1997, 1998 and 1999, respectively. Customers in Canada accounted for 14%, 6%
and 6%, respectively, of our revenues for these years.
We have incurred significant losses since inception, and at June 30, 1999,
we had an accumulated deficit of $7.4 million. We have recently increased our
sales and marketing and general and administrative expenses as we sought to
expand our capabilities in these areas and increase our corporate infrastructure
to support the growth of our business. We have also increased research and
development expenses as we have focused on Pivotal eRelationship and other
Internet-based applications. We plan to continue to increase our operating
expenses to expand our sales operations, fund greater levels of research and
development, particularly in the Internet-based product lines, broaden our
professional services, improve operational and financial systems and expand our
international operations. As a result, we are likely to continue to incur
losses, and if our revenues do not continue to grow significantly, we may not
ever be able to achieve profitable operations.
We derive our revenues from the sale of software product licenses and
services. We recognize product license revenues on delivery of our products if:
- persuasive evidence of an arrangement exists,
- the fee is fixed and determinable,
- we can objectively allocate the total fee among all elements of the
arrangement, and
- the collection of the license fee is probable.
In July 1999, we began to offer licensing arrangements in which our
customer purchases a license and for a fixed or indefinite term agrees to pay
for the license with periodic payments rather than in a lump sum. We plan to
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 as revenue only
the fees payable to us, net of any amount payable to the reseller by the
customer.
21
<PAGE> 27
Revenues from services and maintenance include fees for consulting,
education, implementation, customization and technical support services. We
recognize revenues from consulting, education and implementation and
customization services as these services are performed. These services are
charged primarily on a time-and-materials basis under a separate service
arrangement with the customer. Over 95% of the implementation and customization
services in connection with installations of our software products are provided
by independent companies that are members of the Pivotal Alliance but which
contract directly with the customer. We do not recognize revenue from services
provided by members of the Pivotal Alliance. We recognize revenues from
technical support and maintenance services ratably over the term of our contract
with the customer, typically one year.
RESULTS OF OPERATIONS
The following table sets forth certain items from our statements of
operations as a percentage of total revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues:
Licenses.................................................. 83% 80% 74%
Services and maintenance.................................. 17 20 26
--- --- ---
Total revenues......................................... 100 100 100
--- --- ---
Cost of revenues:
Licenses.................................................. 3 3 2
Services and maintenance.................................. 11 9 12
--- --- ---
Total cost of revenues................................. 14 12 14
--- --- ---
Gross profit................................................ 86 88 86
--- --- ---
Operating expenses:
Sales and marketing....................................... 76 65 66
Research and development.................................. 33 13 20
General and administrative................................ 21 11 10
--- --- ---
Total operating expenses............................... 130 89 96
--- --- ---
Loss from operations........................................ (44) (1) (10)
Interest and other income................................... 4 1 --
--- --- ---
Income (loss) before income taxes........................... (40) -- (10)
Income taxes................................................ -- -- 1
--- --- ---
Net income (loss) for the period............................ (40)% --% (11)%
=== === ===
</TABLE>
YEARS ENDED JUNE 30, 1999 AND 1998
Revenues
Total revenues increased 78% to $25.3 million from $14.2 million for the
years ended June 30, 1999 and 1998, respectively.
Revenues from licenses increased 66% to $18.8 million from $11.3 million
for the years ended June 30, 1999 and 1998, respectively. Increased sales of
licenses for Pivotal Relationship and related products contributed $6.9 million
of this increase and sales of the new Pivotal eRelationship products contributed
approximately $600,000.
Revenues from licenses represented 74% and 80% of total revenues for the
years ended June 30, 1999 and 1998, respectively. Revenues from licenses have
decreased as a percentage of total revenues due to a significant increase in our
revenues from services and maintenance.
Revenues from services and maintenance increased 125% to $6.5 million from
$2.9 million for the years ended June 30, 1999 and 1998, respectively. This
resulted from an increase of $2.8 million in revenues from technical support and
maintenance contracts, which entitle the customer to new versions of
22
<PAGE> 28
the product and to technical support and maintenance services, and an increase
of $800,000 in revenues from implementation, consulting and education service
engagements. As we have increased our customer base, revenues relating to
technical support and maintenance also have increased because almost all of our
customers have purchased these services from us and renewed their technical
support and maintenance contracts as they expired.
Revenues from services and maintenance represented 26% and 20% of total
revenues for the years ended June 30, 1999 and 1998, respectively. We believe
that revenues from services and maintenance may continue to increase as a
percentage of total revenues, due to the increase in the number of technical
support and maintenance contracts 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 to rely on
members of the Pivotal Alliance to provide the great majority of implementation
and customization services to our customers, rather than providing those
services directly.
Cost of Revenues
Total cost of revenues increased 115% to $3.6 million from $1.7 million for
the years ended June 30, 1999 and 1998, respectively.
Cost of revenues from licenses consists of costs relating to the
manufacturing, packaging and distribution of products and related documentation,
and fees paid for incorporation of third-party software products.
Cost of revenues from services and maintenance consists of personnel and
direct expenses relating to the cost of providing customer support, education
and professional services. Cost of revenues from services and maintenance will
vary 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, implementation and consulting services because support and
maintenance services principally involve the delivery of software upgrades which
the customers download and install themselves, while education, implementation
and customization services generally require more involvement by our employees,
resulting in higher compensation, travel and similar expenses.
Cost of revenues from licenses increased 34% to $536,000 from $401,000 for
the years ended June 30, 1999 and 1998, respectively. Cost of revenues from
licenses as a percentage of revenues from licenses was 3% and 4% for the years
ended June 30, 1999 and 1998, respectively. We expect that cost of licenses as a
percentage of revenue from licenses will increase because we expect to integrate
into our products additional software applications licensed from third parties.
Cost of revenues from services and maintenance increased 140% to $3.1
million from $1.3 million for the years ended June 30, 1999 and 1998,
respectively. Cost of revenues from services and maintenance as a percentage of
revenues from services and maintenance was 47% and 44% for the years ended June
30, 1999 and 1998, respectively. We expect that cost of revenues from services
and maintenance may increase 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 seek to expand
our consulting services. This may occur because we will be incurring expenses to
hire and train employees before we will be earning revenue for their services,
and because we may not generate enough demand for our services to use all the
capacity we add.
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, occupancy and
marketing expenditures related to direct mail, online marketing, trade shows,
advertising and promotion.
23
<PAGE> 29
Sales and marketing expenses increased 82% to $16.8 million from $9.2
million for the years ended June 30, 1999 and 1998, respectively. Sales and
marketing expenses also increased as a percentage of total revenues to 66% from
65% for the same periods. This increase resulted from the significant
investments made in expanding our North American and international sales and
marketing organizations and increased expenditures required to launch Pivotal
eRelationship in early calendar 1999. We expect that sales and marketing
expenses will continue to increase as we continue to expand our North American
and international sales and marketing efforts.
Research and Development. Research and development expenses consist
primarily of salaries, benefits and equipment for software engineers, quality
assurance personnel, program managers, technical writers and outside contractors
used to augment the research and development efforts. To date we have not
capitalized any development costs, nor do we expect to capitalize such costs in
the future.
Research and development expenses increased 160% to $5.0 million from $1.9
million for the years ended June 30, 1999 and 1998, respectively. Research and
development expenses also increased as a percentage of total revenues to 20%
from 13% for the same periods. This increase was due to the development of
Pivotal eRelationship but we also increased our ongoing research and development
projects relating to our other products. We expect to continue to significantly
increase research and development expenditures with a particular emphasis on
Internet-related development projects.
General and Administrative. General and administrative expenses consist
primarily of salaries, benefits and related costs for executive, finance,
administrative, human resources and information services personnel. General and
administrative expenses also include legal and other professional fees.
General and administrative expenses increased 63% to $2.5 million from $1.5
million for the years ended June 30, 1999 and 1998, respectively. General and
administrative expenses decreased as a percentage of total revenues to 10% from
11% for the same periods. About half of the increase in general and
administrative expenses was due to hiring additional personnel, $243,000 was due
to an increase in our allowance for doubtful accounts and $150,000 was due to
the implementation of internal financial and administrative systems. We expect
general and administrative expenses will increase as we continue to expand the
business and begin to increase our administrative capability in international
markets.
Share Compensation. We recorded deferred compensation expenses of $473,000
during the year ended June 30, 1999 in connection with grants of employee share
purchase options with exercise prices lower than the deemed fair market value of
our common shares. We are amortizing this amount over the four year period in
which the options vest, and we will allocate the expense among operating expense
categories based on the primary activity of the employee that holds the option.
We recognized $57,000 in compensation expense in the year ended June 30, 1999
and currently expect to recognize $216,000, $113,000, $59,000 and $28,000 in the
years ending June 30, 2000, 2001, 2002 and 2003, respectively.
Interest and Other Income (Loss)
Interest and other income consists of earnings on cash and cash equivalents
net of interest expense, foreign exchange gains and losses, and gains and losses
on sale of property and equipment. Interest and other income (loss) declined to
a loss of $24,000 from income of $136,000 for the years ended June 30, 1999 and
1998, respectively. This decline occurred because our interest income was offset
by $191,000 in foreign exchange losses and a $52,000 loss on disposal of
property and equipment. We have not had significant interest expense, as we have
not borrowed.
Income Taxes
Income taxes increased to $243,000 from $10,000 for the years ended June
30, 1999 and 1998, respectively. As a result of net operating losses and the
availability of loss carry forwards in Canada, we have not incurred significant
Canadian income taxes. Income taxes related to the United States and the United
Kingdom were $290,000 and $120,000 for the years ended June 30, 1999 and 1998,
respectively.
24
<PAGE> 30
The total income tax provision for the years ended June 30, 1999 and 1998
included recoveries of $47,000 and $132,000, respectively, related to research
and development tax incentives in Canada.
YEARS ENDED JUNE 30, 1998 AND 1997
Revenues
Total revenues increased 305% to $14.2 million from $3.5 million for the
years ended June 30, 1998 and 1997, respectively.
Revenues from licenses increased 288% to $11.3 million from $2.9 million
for the years ended June 30, 1998 and 1997, respectively. This increase was due
to the increase in sales of licenses for the Pivotal Relationship product.
Revenues from licenses represented 80% and 83% of total revenues for the years
ended June 30, 1998 and 1997, respectively.
Revenues from services and maintenance increased 391% to $2.9 million from
$590,000 for the years ended June 30, 1998 and 1997, respectively. This resulted
from an increase of $1.3 million in revenues from technical support and
maintenance contracts and an increase of $1.0 million in revenues from
implementation, consulting and education service engagements. Revenues from
services and maintenance represent 20% and 17% of total revenues for the years
ended June 30, 1998 and 1997, respectively.
Cost of Revenues
Total cost of revenues increased 231% to $1.7 million from $508,000 for the
years ended June 30, 1998 and 1997, respectively.
Cost of revenues from licenses increased 231% to $401,000 from $121,000 for
the years ended June 30, 1998 and 1997, respectively. Cost of revenues from
licenses as a percentage of revenues from licenses was 4% for each of the years
ended June 30, 1998 and 1997.
Cost of revenues from services and maintenance increased 231% to $1.3
million from $387,000 for the years ended June 30, 1998 and 1997, respectively.
This increase was due to the personnel and other resources devoted to providing
services for our expanding customer base. Cost of revenues from services and
maintenance as a percentage of revenues from services and maintenance was 44%
and 66% for the years ended June 30, 1998 and 1997, respectively. This increase
in the cost of revenues from services and maintenance was due to the low level
of services and maintenance activity in 1997.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 249% to $9.2
million from $2.6 million for the years ended June 30, 1998 and 1997,
respectively. Sales and marketing expenses decreased as a percentage of total
revenues to 65% from 75% for the same periods. The increase in sales and
marketing expenses related to higher personnel-related expenses for sales and
marketing employees, which includes compensation, recruiting fees, travel
expenses and related facility and equipment costs. During the year ended June
30, 1998, we tripled the number of sales and marketing personnel in the United
States and Europe. The decrease in sales and marketing expenses as a percentage
of revenues resulted from higher productivity.
Research and Development. Research and development expenses increased 64%
to $1.9 million from $1.2 million for the years ended June 30, 1998 and 1997,
respectively. Research and development expenses decreased as a percentage of
total revenues to 13% from 33% for the same periods. The increase in research
and development expenses was due to personnel costs related to development
efforts focused on Pivotal Relationship and Pivotal eRelationship.
General and Administrative. General and administrative expenses increased
109% to $1.5 million from $725,000 for the years ended June 30, 1998 and 1997,
respectively. General and administrative expenses decreased as a percentage of
total revenues to 11% from 21% for the same periods. The increase in general and
administrative expenses primarily related to the establishment of administrative
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<PAGE> 31
infrastructure necessary to enable us to continue to grow. Most of this increase
related to additional salaries and facility expenses and, to a lesser extent,
increases in information systems capacity.
Interest and other income
Interest and other income decreased to $136,000 from $142,000 for the years
ended June 30, 1998 and 1997, respectively. Foreign exchange gains and losses
were insignificant for both years.
Income Taxes
We recorded an income tax provision of $10,000 in fiscal 1998, which
principally reflected income taxes payable in United States and United Kingdom,
offset by $132,000 related to Canadian research and development tax incentives
received. In 1997, we had no income tax provision due to losses incurred.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly results of operations
both in absolute dollars and on a 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Licenses......................... $1,258 $2,917 $3,033 $4,103 $3,276 $4,323 $5,006 $6,214
Services and maintenance......... 444 532 897 1,025 1,292 1,390 1,717 2,109
------ ------ ------ ------ ------ ------ ------ ------
Total revenues................. 1,702 3,449 3,930 5,128 4,568 5,713 6,723 8,323
------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Licenses......................... 45 119 109 128 73 97 268 98
Services and maintenance......... 204 274 361 442 562 589 822 1,105
------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues......... 249 393 470 570 635 686 1,090 1,203
------ ------ ------ ------ ------ ------ ------ ------
Gross profit....................... 1,453 3,056 3,460 4,558 3,933 5,027 5,633 7,120
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Sales and marketing.............. 1,323 2,353 2,428 3,122 3,488 3,933 4,404 5,005
Research and development......... 329 429 517 635 808 1,166 1,184 1,800
General and administrative....... 222 414 432 445 543 512 566 845
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses....... 1,874 3,196 3,377 4,202 4,839 5,611 6,154 7,650
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from operations...... (421) (140) 83 356 (906) (584) (521) (530)
Interest and other income (loss)... 44 35 40 17 107 1 (63) (69)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before taxes......... (377) (105) 123 373 (799) (583) (584) (599)
Income taxes....................... 1 7 1 1 60 60 63 60
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).................. $ (378) $ (112) $ 122 $ 372 $ (859) $ (643) $ (647) $ (659)
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
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<PAGE> 32
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Licenses........................ 74% 85% 77% 80% 72% 76% 74% 75%
Services and maintenance........ 26 15 23 20 28 24 26 25
--- --- --- --- --- --- --- ---
Total revenues................ 100 100 100 100 100 100 100 100
--- --- --- --- --- --- --- ---
Cost of revenues:
Licenses........................ 3 3 3 2 2 2 4 1
Services and maintenance........ 12 8 9 9 12 10 12 13
--- --- --- --- --- --- --- ---
Total cost of revenues........ 15 11 12 11 14 12 16 14
--- --- --- --- --- --- --- ---
Gross profit...................... 85 89 88 89 86 88 84 86
--- --- --- --- --- --- --- ---
Operating expenses:
Sales and marketing............. 78 68 62 61 76 69 66 60
Research and development........ 19 13 13 12 18 20 17 22
General and administrative...... 13 12 11 9 12 9 8 10
--- --- --- --- --- --- --- ---
Total operating expenses...... 110 93 86 82 106 98 91 92
--- --- --- --- --- --- --- ---
Income (loss) from operations..... (25) (4) 2 7 (20) (10) (7) (6)
Interest and other income
(loss).......................... 3 1 1 -- 2 -- (1) (1)
--- --- --- --- --- --- --- ---
Income (loss) before taxes........ (22) (3) 3 7 (18) (10) (8) (7)
Income taxes...................... -- -- -- -- 1 1 1 1
--- --- --- --- --- --- --- ---
Net income (loss)................. (22)% (3)% 3% 7% (19)% (11)% (9)% (8)%
=== === === === === === === ===
</TABLE>
We have typically experienced an increase in revenues during our fourth
fiscal quarter ended June 30, which we believe is primarily related to sales
compensation policies and annual objectives. In addition, a pattern of reduced
buying by European customers during July and August has resulted in lower
European revenues in the quarter ending September 30, and our revenues for the
quarters ended September 30 have been lower than revenues for the previous
quarter ended June 30.
Over the past four quarters, we have incurred operating losses as we
increased the level of investment in all facets of our business. In particular,
expenses related to development of Pivotal eRelationship resulted in an increase
in research and development expenses to 20% of revenues for the year ended June
30, 1999 compared with 13% of revenues for the year ended June 30, 1998.
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 our control. As a result of our limited
operating history, 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 and in the short term 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 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.
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<PAGE> 33
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations and met our capital
expenditure requirements primarily through private sales of equity securities,
which have resulted in net proceeds of $17.7 million through June 30, 1999. At
June 30, 1999, we had $9.3 million in cash and cash equivalents and $7.3 million
in working capital.
We generated positive cash from operating activities for the year ended
June 30, 1999 of $2.5 million, as a result of obtaining improved payment terms
from our principal suppliers and of improving the collection of accounts
receivable. Cash used in operating activities was $1.1 million and $1.8 million
for the years ended June 30, 1998 and 1997, respectively. Although we generated
cash from operating activities for the year ended June 30, 1999, we do not
expect to generate cash from operations for the year ending June 30, 2000.
To date, our investing activities have consisted of capital expenditures
totaling $2.4 million, $1.7 million and $450,000, for the years ended June 30,
1999, 1998 and 1997, respectively. The capital expenditures related primarily to
the acquisition of computer software and equipment as well as furniture and
fixtures used to support our growing employee base.
Net cash provided by financing activities for the years ended June 30,
1999, 1998 and 1997 were $8.0 million $74,000, and $5.4 million, respectively.
Net cash provided by financing activities resulted from sales of equity
securities.
We have credit facilities with a Canadian chartered bank, which include an
operating facility of Cdn.$3.0 million bearing interest at the bank's prime rate
plus 1%, and a term loan facility of Cdn.$2.0 million bearing interest at the
bank's prime rate plus 4% to be used for various capital expenditures. The
credit facilities are secured by all of our personal property, including our
inventory, equipment and accounts receivable and the shares of our subsidiaries.
At June 30, 1999, no amounts were outstanding under the operating facility or
the term loan facility.
We believe that the net proceeds of this offering, together with cash and
cash equivalents and commercial credit facilities, will be sufficient to meet
our anticipated cash needs for working capital and capital expenditure
requirements at least through the year ending June 30, 2000. 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.
FOREIGN CURRENCY TRANSLATION AND HEDGING
We are exposed to foreign currency fluctuations through our operations in
Canada. Substantially all of our revenues and corresponding receivables are in
United States dollars. However, a majority of our research and development
expenses, customer support costs and administrative expenses are in Canadian
dollars. As part of our hedging policy implemented during the quarter ended
March 31, 1999, we identify our future Canadian currency requirements related to
payroll costs, capital expenditures and operating lease commitments, and
purchase forward exchange contracts to cover our currency needs at the beginning
of an operational period, generally one quarter. We do not enter into forward
exchange contracts or any derivative financial instruments for trading purposes.
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.
Under our current hedging policy, we identify our forward contracts related
to operating lease commitments and commitments for capital expenditures as
hedges of firm, identifiable Canadian currency commitments. We recognize the
gains and losses on these contracts when the related lease commitment is paid or
the capital expenditure is made. We recognize gains and losses on other forward
contracts in
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<PAGE> 34
earnings in the current period. As of June 30, 1999, we had no outstanding
currency forward exchange contracts because forward contracts generally mature
at the end of a quarterly period.
During the quarter ended June 30, 1999, we recorded a foreign exchange loss
of $122,000 from the unhedged portion of our foreign currency exposure as the
Canadian dollar strengthened substantially during the quarter.
While we expect to continue to use our current method of hedging our
foreign currency risk in the future, we may change our hedging methodology. If
our currency requirements differ materially from our hedged position during
periods of currency volatility, or if we do not continue to hedge our Canadian
currency commitments, we could experience unanticipated currency gains or
losses.
We assume the risk relating to the creditworthiness of our counterparties
when we engage in hedging transactions. We mitigate this risk by dealing only
with substantial commercial banks we believe to be creditworthy. We do not
believe that the credit risk associated with these transactions is material.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AcSEC issued SOP 98-5, Reporting on the Costs of
Start-up Activities. SOP 98-5 provides that the cost of start-up activities must
be expensed as incurred. We do not expect that the adoption of SOP 98-5 will
have a material impact on our financial position or results of operations. We
will adopt SOP 98-5 in fiscal 2000.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133
requires us to recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. We
will adopt SFAS No. 133 as required in our financial statements for fiscal year
2001, which we expect will not have a material effect on our financial position
or results of operations.
In December 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-9, or SOP 98-9, modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions. SOP 98-9 amends SOP
97-2 to require that an entity recognize revenue for multiple element
arrangements by means of the "residual method". Under the "residual method," the
total fair value of the undelivered elements is deferred and substantially
recognized in accordance with SOP 97-2. We do not expect SOP 98-9 to have a
material effect on its financial position or results of operations.
YEAR 2000 ISSUES
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with these Year 2000
requirements. The use of software and computer systems that are not Year 2000
ready could result in system failures or miscalculations causing disruptions of
operations including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Year 2000 complications may disrupt the operations, viability or commercial
acceptance of the Internet, which could adversely affect the market acceptance
of our new Pivotal eRelationship product.
Our State of Readiness
We have conducted a review of our products, including the third-party
products embedded into or delivered with our products, and believe that they are
substantially Year 2000 ready as they relate to our product applications.
Despite being generally classified as Year 2000 compliant, some of the older
versions of our products had some display and leap year issues for the Year
2000. We believe these issues are fully addressed in various service packs that
we have made available to our customers as upgrades. Nevertheless, it is
possible that we will experience Year 2000 problems with our products. With
respect to third-party products embedded or delivered with our products, we have
relied on disclosure statements provided by the
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<PAGE> 35
third parties which reveal no Year 2000 issues specifically relating to the use
of the products with our product. We have no assurance of the accuracy of these
third-party disclosure statements.
We currently believe that our internal software systems are Year 2000
ready. We make it our regular practice to obtain Year 2000 warranties and our
MIS department has been meeting with hardware and other suppliers in order to
obtain reassurances regarding the impact of the Year 2000 on our internal
systems. Nevertheless, failure of the internal hardware or software systems to
operate properly with regard to the Year 2000 and thereafter could disrupt our
business and require us to incur significant unanticipated expenses to remedy
any problems or replace products of affected vendors, and could have a material
adverse effect on our business, operating results and financial condition.
Our Year 2000 Risk
We cannot assure you that other Internet applications, database software or
computer hardware of our customers, which interface with our products and which
may be necessary in order to use our products, are Year 2000 ready. Therefore,
we cannot assure you that implementations of our products on our customers'
systems are, or will be, Year 2000 ready.
We provide a warranty covering Year 2000 problems in the current versions
of our software products, including products licensed from third parties that we
supply with our products. We may face claims based on Year 2000 issues if our
products do not prove to be Year 2000 compliant, or claims arising from problems
with third-party software embedded in or delivered with our products or with the
integration of multiple products within an overall system. Year 2000 claims
could result in costly and distracting litigation and in material liability to
us. If our products have significant Year 2000 defects, we could suffer damage
to our business and reputation. Correcting any defects could be costly, and we
might have to delay sales of our products while we make corrections. Any Year
2000 problems that occur in our internal systems could cause disruption of our
business. Any disruption in the business of our key suppliers or selling
partners as a result of Year 2000 issues, or any general disruption or failure
of the financial, telecommunications, power, transportation or other
infrastructure also could disrupt our business.
The Year 2000 issue may also cause us to experience reduced sales during
the remainder of 1999, as existing and potential customers reduce their budgets
for discretionary expenditures, such as customer relationship management
solutions, due to increased expenditures on the Year 2000 issue generally.
Potential customers may also defer new software purchases and deployments to
avoid distracting from Year 2000 compliance efforts and to preclude the
possibility of introducing new Year 2000 issues.
Cost to Complete and Contingency Plan
To date, we have not incurred significant incremental costs in order to
comply with Year 2000 requirements for our products or internal systems, and we
do not believe that we will incur significant incremental costs in the
foreseeable future. We have not currently developed a contingency plan for
unanticipated Year 2000 issues relating to our products. We have identified the
mission critical functions for our internal systems and have completed a
contingency plan for unanticipated Year 2000 problems that arise with respect to
those functions. This contingency plan includes the following components.
- We plan to purchase and pre-configure two back-up servers to be installed
if our present servers fail.
- Our internal information technology staff will be on alert during the
critical period in late December 1999 and early January 2000 to address
any Year 2000 issues we encounter.
- Members of our internal research and development staff will be on alert
to supplement the efforts of our information technology staff.
- We intend to coordinate with our principal hardware and software vendors
so we will know where to get help if our internal systems experience Year
2000 problems we cannot handle ourselves.
- We have identified replacement products for important third-party
products we depend on, in case they fail and cannot be quickly fixed.
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<PAGE> 36
- We plan to be prepared to shift to manual processing if key automated
systems, such as our financial and accounting systems, should fail.
We will be continuing to test our internal systems for Year 2000 issues and
expect to update our contingency plan to reflect the results of these tests.
Despite the measures we are taking, we cannot assure you that Year 2000
issues will not be discovered in our products or internal software systems. If
Year 2000 issues are discovered, we cannot assure you that our contingency plan
will be adequate to deal with them effectively, or that the costs of making the
products and systems Year 2000 ready will not have a material adverse effect on
our business, operating results and financial condition.
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BUSINESS
OVERVIEW
We are a leading provider of customer relationship management solutions
that enable businesses to increase revenues by more effectively managing their
interactions with their customers and partners in the selling process. Our "360
degreesCustomer Relationship Management" solution includes award-winning
corporate network- and Internet-based software applications supported by an
array of professional services and the Pivotal Alliance, our global network of
partners. This solution includes our Pivotal Relationship software product that
automates and unifies the internal sales, marketing and customer service
functions within a business, and our recently introduced Pivotal eRelationship
Internet application, that simplifies the collaboration and sharing of
information with customers and partners that are external to the business. Our
solution is designed and optimized exclusively for the Internet, Microsoft
Windows NT and Microsoft BackOffice platforms. We have licensed our applications
on a global basis to over 540 customers across a wide range of industries.
INDUSTRY BACKGROUND
The Customer Relationship Management Market
Businesses have recognized the value of improving their customer focus in
order to increase revenues. In the early 1990s, businesses used various software
applications to automate customer relationship functions such as sales,
marketing and customer service. These software applications typically provided a
separate program for each of these internal business functions, suffered from
limited functionality and were difficult to integrate with one another. Large
organizations were able to overcome some of these limitations by developing
highly customized applications, which were costly to develop and maintain. In
recent years, cost-effective customer relationship management software
applications have become available that enable information to be shared across
different business functions. AMR Research estimates that worldwide customer
relationship management license revenues will grow at a compound annual rate of
58% for the five-year period from 1997 to 2002 to approximately $7.5 billion by
2002.
Although many businesses have benefited from these customer relationship
management applications, businesses are increasingly seeking solutions that
accomplish more than the automation of internal business functions. To be more
responsive to customers, many businesses are now seeking solutions that enable
online collaboration and sharing of information with customers and partners,
improve one-to-one relationships with each customer and partner and facilitate
electronic commerce.
The Impact of Changing Technologies
Recent technological advances are dramatically affecting the marketplace
for customer relationship management solutions. These advances include:
The Internet. The Internet is emerging as a dominant platform for
worldwide interactive communication and commerce, and therefore businesses are
seeking better ways to use the Internet as an application platform. As a result,
businesses have begun to invest heavily in technologies that support and exploit
the capabilities of the Internet. International Data Corporation estimates that
the Internet commerce software applications market will grow at a compound
annual rate of 97% for the five-year period from 1998 to 2003 to approximately
$13.2 billion by 2003. Businesses that implement customer relationship
management solutions may gain further competitive advantage by exploiting the
capabilities of the Internet to allow online collaboration, electronic commerce
and sharing of information with customers and partners.
Widespread Adoption of Microsoft Technologies. Microsoft Windows NT and
Microsoft BackOffice platforms offer businesses the opportunity to easily
develop, deploy and maintain information technology systems with increased
flexibility at a lower cost than was previously possible. These platforms are
also widely used and well understood by technical personnel. International Data
Corporation estimates that the
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Microsoft Windows NT installed base will grow at a compound annual rate of 29%
for the five-year period from 1997 to 2002 to approximately 5.8 million users by
2002. Customer relationship management solutions that are compatible with these
platforms are likely to benefit from this growth.
Growth of Mobile Computing. Businesses, customers and partners expect
their employees to be able to share information regardless of their location.
The proliferation of portable computing devices, such as laptops and palm
computers, and improved remote computing has empowered the mobile professional.
As a result, customer relationship management solutions should enable users to
access information from any location, to synchronize information with the
business's shared customer knowledge database and to use their preferred
portable computing device.
The Opportunity
The businesses we serve are typically mid-size businesses and divisions of
large businesses with annual revenues of between $25 million and $2 billion. To
compete against larger organizations, these businesses need to maintain the same
or higher levels of customer service as their larger competitors and must be
able to respond quickly to changes in their competitive environment. As a
result, many of these businesses often adopt business models that require close
integration and collaboration with their customers and partners. Until recently,
most customer relationship management software applications were designed
primarily to address the needs of the large enterprise, were often considered
too costly to purchase, install and maintain and were not designed for the
Internet, Microsoft Windows NT or Microsoft BackOffice platforms.
We believe that a significant market opportunity exists for a customer
relationship management solution that is designed with the needs of our target
customers in mind. Many of these businesses have adopted the Internet, Microsoft
Windows NT and Microsoft BackOffice platforms. As a result, a new opportunity
also has emerged for a customer relationship management solution that is
optimized for these platforms. Such a solution must incorporate many of the
benefits of customer relationship management solutions for larger enterprises,
yet enable businesses to respond quickly to changes to their competitive
environment and to operate more cost-effectively than their larger competitors.
We believe that such a solution must:
- 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 mobile professionals and their portable computing devices,
- be usable by a business without significant customization, to enable
rapid deployment at low total cost of ownership, and
- provide tools for easy customization to meet specific needs.
THE PIVOTAL SOLUTION
We are a leading provider of customer relationship management solutions
that enable businesses to increase revenues by more effectively managing their
interactions with customers and partners. Our 360 degrees Customer Relationship
Management solution includes award-winning, corporate network- and Internet-
based applications supported by an array of professional services and our global
Pivotal Alliance network. Our solution is designed and optimized exclusively for
the Internet, Microsoft Windows NT and Microsoft BackOffice platforms. In
December 1998, Pivotal Relationship won Microsoft's Industry Solutions Award for
Best Overall Customer Management Solution. We believe our solution delivers the
following benefits:
Increases Revenues by Enabling Businesses to Improve Customer Focus. Our
solution unifies sales, marketing and customer service employees and partners
around customer processes and interactions. By maintaining all customer
information in a shared database, our applications make it easy for different
users to maximize their contribution to customer relationship management.
Furthermore, our applications enable
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<PAGE> 39
businesses to better capture customer profiles and build one-to-one customer
relationships. We believe this improvement in customer focus results in
increased revenues through better customer loyalty and retention.
Improves the Collaboration and Interaction Between Businesses and Their
Customers. Using Pivotal eRelationship CustomerHub, businesses can transform
their static Web site into a collaborative tool used to service and sell to
customers. Prospective customers can obtain information regarding businesses'
products and services over the Internet. Customers can place online orders,
retrieve information on products and services and directly interact online with
sales, marketing and customer service departments. This direct interaction can
result in improved customer service and lead generation, as well as lower
customer service costs.
Improves the Collaboration and Interaction Between Businesses and Their
Partners. Pivotal eRelationship PartnerHub 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 information related to products, services, customer
contacts and sales opportunities. By enabling partners to access and update the
shared database, our solution simplifies the sharing of information between
businesses and their partners so they can jointly service their customers' needs
and concerns.
Increases the Efficiency of Mobile Professionals. Mobile professionals can
access our solution remotely across local-area networks, wide-area networks or
over the Internet by using a number of portable computing devices including
laptops and palm computers. Mobile professionals also can work offline and
transmit and receive information to automatically update their own files and the
shared corporate database. These capabilities increase the efficiency of mobile
professionals.
Enables Rapid Implementation and Simple Customization. Businesses can use
our solutions without significant customization, which expedites the
implementation process. If they desire, businesses can also easily customize our
solution to reflect their own internal processes without programming by using
our graphical, point-and-click tools.
Yields a Low Total Cost of Ownership. Our solution can be cost-effectively
deployed and customized and thus requires few resources for ongoing support,
system maintenance and end-user training. Our solution is also 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
solution.
Scales With the Growing Needs of Our Customers. Many of our customers
require that our solution support their growing number of employees, online
customers and partners. Our solution's architecture enables our customers to
expand our solution as their businesses grow by adding servers in a number of
locations. This capability improves performance and enables our solution to
support larger numbers of concurrent users.
GROWTH STRATEGY
Our goal is to become a leading global provider of electronic business
solutions which combine customer relationship management and electronic commerce
solutions. The key elements of our growth strategy are as follows:
Extend the Scope of Our Applications. We intend to continue the aggressive
development of our applications to add new functionality, with a particular
emphasis on our Internet-based application, Pivotal eRelationship. We intend to
integrate additional electronic commerce features with Pivotal eRelationship. We
also intend to provide our customers with business modules designed 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.
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Expand Our Worldwide Distribution Capacity. We currently have a
distribution strategy that includes our 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 in the Pivotal Alliance network
and entering into bundling arrangements with technology providers to provide
complementary niche products to our customers.
Broaden Our Network of Strategic Relationships. We plan to continue
broadening our network of strategic relationships, including our Pivotal
Alliance network. The Pivotal Alliance network includes over 95 independent
companies that distribute our products, install the software purchased by
Pivotal customers and provide other software to address specific customer needs.
This network has allowed us to focus on our core competencies while leveraging
the strengths of Pivotal Alliance members to provide our customers with a
complete customer relationship management solution. We have also recently
co-founded Enterprise 360, a consortium that includes KPMG, Microsoft and
Hewlett-Packard. Enterprise 360 offers a complete customer relationship
management solution, which includes hardware, software and services.
Continue Focusing on Our Customers' Success. 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 to invite repeat
business from existing customers as we make new features available and as their
businesses grow, and to gain new customers as our existing customers become
independent references for our solution. We believe that the benefits of our
solution have helped us develop a loyal base of customers. We intend to continue
to focus significant resources on customer success programs, including a
systematic customer surveying process, to improve our customer-driven product
development initiatives and ultimately improve our solution.
Partner with Application Service Providers to Offer Our Solutions on a
Usage Fee Basis. We are developing a new product and seeking to enter into
relationships to provide an alternative licensing arrangement through third
party application service providers that will enable customers to pay a usage
fee to access our software on servers operated by the application service
providers. This will enable businesses to outsource their customer relationship
management applications and related information technology infrastructure
through an alternative pricing model, such as a monthly fee.
PRODUCTS AND PROFESSIONAL SERVICES
Products
Our solution includes four major products: Pivotal Relationship, Pivotal
eRelationship (including PartnerHub and CustomerHub), Pivotal Toolkit and
Pivotal eToolkit. Our products serve the needs of every stakeholder in the
customer life cycle, including employees, customers and partners and improve
collaboration and sharing of information among these stakeholders. Users can
access our solution with convenient portable computing devices. Our solution
provides many access options, including local-area network-based, mobile and Web
browser users, including a special option that extends customer relationship
management capabilities to all Microsoft Outlook users. Our products are fully
integrated with one another and share a common database.
Pivotal Relationship. Pivotal Relationship enables marketing, inside
sales, field and mobile sales, order administration, telemarketing and customer
service employees to interact and share information. This enables businesses to
better manage the people, processes and programs involved in the customer life
cycle. Businesses can improve their employee interaction, become more organized
and improve information flow, resulting in more effective customer relationship
management. Pivotal Relationship 99 represents the most recent version of this
application suite. Pivotal Relationship 99 now has Microsoft SQL 7.0 database
embedded and pre-installed, which results in significant performance
improvements, and has reduced the time required to install the product.
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<PAGE> 41
An important part of Pivotal Relationship is Pivotal Relationship Web
Client, which enables sales, marketing and customer service employees to access
Pivotal Relationship applications from a Web browser. Using the Pivotal
Relationship Web Client, mobile users can benefit by sharing and exchanging
critical customer information with 24-hour, worldwide access.
Pivotal Relationship supports the following functional groups and processes
within an organization:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------
FUNCTIONAL GROUPS PROCESSES
- -----------------------------------------------------------------------------------------------
Marketing Marketing employees can build and manage complex marketing
campaigns, tailor communications and track market,
competitor and customer trends.
- -----------------------------------------------------------------------------------------------
Telemarketing Telemarketing employees can qualify leads, manage
opportunities and process orders.
- -----------------------------------------------------------------------------------------------
Inside Sales Inside sales employees can efficiently capture and track
prospects, customize sales processes, manage sales
opportunities, forecast sales and report on performance.
- -----------------------------------------------------------------------------------------------
Field and Mobile Sales Field and mobile sales employees have the same functionality
available to them as inside sales employees and in addition
can work both connected to and disconnected from their
corporate network.
- -----------------------------------------------------------------------------------------------
Order Administration Order administration employees can capture and track orders
in multiple currencies, track order status and product
movement and report on order history and trends.
- -----------------------------------------------------------------------------------------------
Customer Service Customer service employees can efficiently capture, track
and resolve customer problems and notify, alert, and
coordinate activities with customer relationship team
members.
- -----------------------------------------------------------------------------------------------
Management By providing access to valuable information such as
forecasts and product sales statistics, management can
better measure and predict business performance and more
efficiently manage their operations.
- -----------------------------------------------------------------------------------------------
</TABLE>
Pivotal eRelationship. Our Internet-based product family, Pivotal
eRelationship, enables businesses to manage their customer and partner
relationships over the Internet. Introduced in February 1999, Pivotal
eRelationship is comprised of two separate products, Pivotal eRelationship
CustomerHub for online current and prospective customers and Pivotal
eRelationship PartnerHub for partners that assist in the selling process. Both
of these products can be completely integrated with the Pivotal Relationship
product.
Pivotal eRelationship CustomerHub. Pivotal eRelationship CustomerHub
enables a business to transform a static information Web site into a
dynamic collaborative tool used to service and sell to both existing and
prospective customers. Customers can access information about products and
services, place orders and access a shared database of solutions to
previous customer requests without interacting with customer service
employees. Customers also can choose to interact with customer service
employees in real-time using online meeting options. Prospective customers
can register on a Web site to request information, sign-up for marketing
programs, submit information regarding demographic data and specific needs
and request an immediate call back from an online salesperson. Businesses
can use this information to prepare a customized response for each
prospect.
Pivotal eRelationship PartnerHub. Pivotal eRelationship PartnerHub
enables businesses to establish Web sites that allow sales, marketing and
customer service employees to coordinate their
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<PAGE> 42
activities with partners that assist in the selling process. Pivotal
eRelationship PartnerHub allows a partner to share information regarding
sales opportunities, co-marketing projects and sales order status, and to
order marketing material online. Pivotal eRelationship PartnerHub also
allows partners to share information about customer service requests and
their status.
Pivotal Toolkit and Pivotal eToolkit. Pivotal Toolkit and Pivotal eToolkit
help businesses to easily customize, administer and adapt their Pivotal products
without programming to meet business specific needs. Both toolkits reduce
implementation and customization costs, ongoing administrative burden and the
need for employees with advanced technical skills. Using the toolkits' simple
graphical, point-and-click user interface, businesses can modify any aspect of
their Pivotal system without altering source code.
Our Pivotal Toolkit also includes visual scripting tools, called Pivotal
agents, which allow users to create work flow processes that do not require
programming. By simply connecting arrows between objects on the screen, users
can automate and model business processes, create sales scripts and create
online tutorials to guide other users through complex tasks.
Product Pricing. Pivotal Relationship and Pivotal eRelationship licenses
are priced on a "per user" basis. Pivotal Relationship licenses include
solutions for telemarketing, inside sales, field and mobile sales, marketing,
order administration, customer service and management. Pivotal eRelationship
CustomerHub and PartnerHub are sold separately with pricing based on the number
of Internet users. The Pivotal Toolkit and Pivotal eToolkit are licensed on a
per-site basis.
Product Awards
The following table lists some of the awards our products have won:
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
SPONSOR DATE AWARD
- ---------------------------------------------------------------------------------------------
Microsoft 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
- ---------------------------------------------------------------------------------------------
Information Systems Marketing 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
- ---------------------------------------------------------------------------------------------
Technology Industry June 1998 Excellence in Product Innovation
Association
- ---------------------------------------------------------------------------------------------
</TABLE>
Professional Services
We provide customers with access to a combination of services to
successfully implement and effectively maintain a customer relationship
management solution. These services include:
Technical Support and Maintenance. We maintain a technical support center
that provides telephone-, Internet- and email-based problem identification,
analysis and resolution to our customers. 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 solution. We offer a pre-packaged certification program that helps our
customers and selling partners to improve their ability to implement our
solution. We also offer customized and on-site training classes to customers
with specific needs.
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<PAGE> 43
Implementation and Customization. We offer implementation and
customization services that include project management and systems engineering.
We provide a standardized implementation methodology, which we call the rapid
productivity methodology, that enables the efficient implementation of our
solution. Customers can work with us directly or retain one of our Pivotal
Alliance members to implement and customize their Pivotal customer relationship
management solution. Members of the Pivotal Alliance currently provide more than
95% of the implementation and customization 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 implementing 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 user basis
and renewed annually. Our education fees are standardized on a per day rate. Our
business consulting services and implementation and customization services are
priced on a time and materials basis. As of June 30, 1999, we had 70 employees
in our Professional Services department.
CUSTOMERS AND MARKETS
We have licensed our applications on a worldwide basis to over 540
customers across a wide range of industries. Customers in North America
accounted for 96%, 90% and 80% of our revenues in the years ended June 30, 1997,
1998 and 1999, respectively. Customers in Canada accounted for 14%, 6% and 6%,
respectively, of our revenues for these fiscal years.
Some of our customers, who have purchased a minimum of $100,000 of software
licenses from us in the past, are set forth in the table below:
<TABLE>
<S> <C> <C>
CONSULTING INTERNET TECHNOLOGY
- ----------- -------- ------------
Deloitte & Touche broadcast.com Bottomline Technologies
Diamond Technology Partners BroadVision Cadence Design Systems
KPMG E.piphany Hewlett-Packard
Malcom Pirnie Icarian Lernout & Hauspie
Peppers and Rogers Group INTERSHOP Communications Lucent Technologies
Roy F. Weston Active Touch MacOla
Micrografx
FINANCIAL SERVICES MANUFACTURING Net Wireless
- ------------------- --------------- Olicom A/S
Allied Capital Holophane Peregrine Systems
Dain Rauscher Wessels Kimberly-Clark Seagate Software
Principal Financial Group M.A. Hanna Siemens Electric
Savills US Gypsum Solectron
USAA Sterling Software
OTHER SERVICES ZD Market Intelligence
HEALTH CARE ---------------
- ------------- Addison-Wesley Longman OTHERS
Australian Red Cross Miller Freeman -------
Blue Cross Blue Shield of Vance Publishing Australian New Zealand
Michigan Waggener Edstrom Direct Line
Novamed Eyecare Management U.S. Naval Reserve Recruiting
Novartis Protezione Piante UTILITIES Command
Pfizer Animal Health --------------------- The Conference Board
Sun Healthcare Group CSW Energy Services Virginia Economic
Syncor International Southern Company Services Development Partnership
</TABLE>
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<PAGE> 44
The following case studies provide illustrations of how selected customers
have used our products and services to address their customer relationship
management requirements.
Holophane Corporation. Holophane Corporation is a leading international
manufacturer and marketer of premium quality, custom lighting fixtures and
systems for a wide range of commercial and outdoor applications with 1997
revenues of approximately $200 million. Holophane realized that in order to
continue to expand its business and reduce manufacturing costs it needed to
improve the selling process by better coordinating its sales, engineering,
customer service and its manufacturing system. Pivotal Relationship was bundled
with software provided by one of the members of our Pivotal Alliance to enable
320 sales employees in North America and Europe to integrate their systems from
preorder to order entry with manufacturing. Holophane reports that through
process improvements structured around these new technologies it has cut the
number of changes occurring in orders by 18%, reduced order clarification delays
by 44% and saved money by reducing the total number of "rush orders" by 6% over
the last 18 months.
Addison-Wesley Longman. Addison Wesley Longman is one of the largest
global educational publishers of books, multimedia and learning programs in all
major academic disciplines with 1997 revenues of approximately $1 billion.
Addison needed a system that had the flexibility required to manage multiple
sales processes and the ability to automate and improve its process for ordering
book samples. Addison selected Pivotal Relationship to better manage its
multiple sales processes and to integrate with its mainframe-based inventory
management system. Addison reports that it has improved the accuracy of book
sample shipments to educators by up to 25%, reduced the time each sales
representative spends on administration by up to 30 minutes per day, decreased
the number of duplicate books sent in error and provided sales staff and senior
management with a real-time history of book samples sent to customers.
Savills PLC. Savills PLC is a British residential and commercial property
services group with 1998 revenues of approximately $125 million. Savills
identified the opportunity to increase revenues by providing customers financial
services subsequent to a real estate transaction. Savills needed a customer
tracking system to identify cross-selling opportunities with existing customers.
In addition, Savills wanted a solution to actively manage the lead to client
process in order to adapt to the United Kingdom's changing regulatory provisions
for the financial services sector. Savills chose Pivotal Relationship as its
customer relationship management solution to fulfill these requirements. Since
implementing Pivotal Relationship, it has reported significant improvements in
its ability to track sales leads, increase revenues, and develop long-term
customer relationships. Based on the success achieved, Savills is now increasing
the use of Pivotal Relationship from 350 to 800 seats nationally.
Cambridge Energy Research Associates. Cambridge Energy Research Associates
(CERA) is a leading international independent energy research and advisory firm
with 1998 revenues of approximately $40 million. CERA identified an opportunity
to tailor its sales and marketing activities to its individual customers by
monitoring their activities on its Web site. CERA chose Pivotal Relationship to
track these activities and other communications with customers. CERA has advised
us that it has been able to more than double the number of major products and
services that it can now offer to its client base, and that CERA views our
solution as strategic to its growth and as a method of effectively empowering
its employees to sell and service the unique needs of its clients.
Seagate Software Inc. Seagate Software Inc., a subsidiary of Seagate
Technologies Inc., develops business intelligence tools and applications that
help organizations make better business decisions by accessing, analyzing,
reporting and sharing their vital data, which they have stored in systems such
as data warehouses. Seagate Software had 1998 revenues of approximately $118
million. It has been an important goal of Seagate Software to rapidly integrate
acquired companies' sales and marketing organizations. To accomplish this goal
and create a cohesive view of its customers, Seagate Software selected Pivotal
Relationship. Pivotal Relationship facilitated the replication of best practices
in technical support processes across five offices in four countries. As a
result, Seagate Software now offers a unified sales and marketing approach and
common customer data across every service center. Pivotal Relationship permitted
Seagate Software to offer two new revenue-generating customer support services.
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<PAGE> 45
SALES AND MARKETING
We sell our products through a direct sales force and over 50 independent
members of the Pivotal Alliance which resell our products. Our direct sales
force is located in the United States, Canada and the United Kingdom, and our
Pivotal Alliance solution providers are located in North and South America,
Europe and Asia Pacific. We have also recently established a telebusiness group
whose primary objective is to generate and qualify sales opportunities for both
our direct sales organization and solution provider channels.
Our marketing efforts are directed at promoting our products and services,
creating market awareness and generating leads. Our marketing activities include
online business seminars, print and online advertising campaigns and attendance
at industry trade show events and trade conferences. We use the Internet
extensively to increase awareness of Pivotal and 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 solution and to anticipate any further needs of the
customer.
As of June 30, 1999, we employed a total of 105 people on our sales and
marketing team.
STRATEGIC RELATIONSHIPS
Pivotal Alliance
Our Pivotal Alliance members help us market, sell, implement, support and
enhance our solutions. Members of our Pivotal Alliance include:
Solution Providers. We have arrangements with over 50 third parties that
grant them the right to market and re-sell our products and to provide
education, implementation and customization for the solutions they sell as well
as for most of the sales made through our direct sales team. We refer to these
third parties as solution providers. Solution providers usually address the
market needs of a specific region, permitting us to sell our solutions in
markets that might otherwise be difficult for us to address directly. Over 20 of
our solution providers are outside the United States and Canada. In some foreign
markets, we rely on selected solution providers to customize our solution and
translate our software applications into local languages.
Systems Integrators. We have arrangements with over 20 third parties that
grant them 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. Our systems
integrators include worldwide partners such as KPMG as well as partners focused
on specific regional markets.
Technology Providers. We have arrangements with over 25 third parties that
supply software applications that can be integrated with our solutions to
address specific industry or customer requirements. We refer to these third
parties as technology providers. We are developing relationships with technology
providers 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.
We provide education and training services to members of our Pivotal
Alliance to increase their understanding of our solutions. We are implementing a
certification program that will require members of our Pivotal Alliance 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
and to upgrade the capabilities of its members.
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<PAGE> 46
Microsoft
We participate with Microsoft in numerous industry tradeshows, partner
focused events, public relations activities, seminars and presentations. We have
chosen to align our product development, sales and marketing strategies with
Microsoft. Our strong relationship with Microsoft has enabled us to participate
in early product development initiatives with them. As a result, our products
are optimized for Microsoft platforms. We have won several Microsoft awards
based on our solution in specific customer applications and our ability to
demonstrate success on the Microsoft platform.
Enterprise 360
Enterprise 360 is a consortium founded in 1998 by Pivotal, KPMG, Microsoft
and Hewlett-Packard. Members of this consortium combine hardware, software and
services to provide comprehensive customer relationship management solutions.
Members of this consortium participate in joint sales and marketing activities,
including trade shows, marketing materials and a common World Wide Web site at
www.enterprise360.com, which should not be considered part of this prospectus.
Peppers and Rogers Group
We have formed a strategic alliance with internationally acclaimed authors
Don Peppers and Martha Rogers and Marketing 1to1, Inc. that is exclusive to us
in the customer relationship management marketplace. Marketing 1to1, Inc. has
pioneered many of the principles of one-to-one marketing and we have joined
forces with them to produce industry seminars, keynote presentations and
business consulting services. Marketing 1to1, Inc. has also chosen to deploy our
solution internally to manage and improve its own customer relationships.
TECHNOLOGY
Our Pivotal software architecture provides a foundation for the development
of new and innovative products and allows our applications 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
applications to be used over the Internet. We have invested in the following
technologies which serve as a basis for our customer relationship management
solution:
Microsoft Technology. Our applications are optimized for the Microsoft
Windows NT 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 Pivotal eRelationship software application uses Microsoft Internet
technologies to publish information across the Internet.
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, work flow, queries and reports. This 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 SyncStream. Pivotal 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. Pivotal Relationship and Pivotal
eRelationship are designed to support databases that reside on multiple servers.
This design allows data from the central database to be
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<PAGE> 47
replicated to servers in different locations and mobile users, and to be updated
by Pivotal SyncStream. This allows for scalability and configuration flexibility
as customers can upgrade network hardware and software in a modular fashion
without loss of performance and downtime.
Pivotal Transporter. The Pivotal Transporter is a module of the Pivotal
Toolkit that allows our customers to easily import new application functionality
without losing or being forced to re-implement their existing application
customizations.
Pivotal Enterprise Manager. The Pivotal 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 teams: Advanced
Technology, Software Development, Documentation, Quality Assurance, Program
Management and Product Management. To expand the capacity of our research and
development department, where appropriate, we contract with third-party
developers.
Our software development approach consists of a well defined 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 solution.
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
cross-functional team is established to implement the project. Our Program
Management team takes responsibility for documenting a detailed product
specification. The Program Management team designs prototypes to assess the
risks and business requirements of a project at this stage. This enables
programmers in the Software Development team to concentrate solely on research
and development activities. Through the later stages of development we perform
final testing and quality assurance. Our Product Management team is involved at
all stages of development so that market requirements continue to be addressed.
The Product Management team 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.
As of June 30, 1999, there were 56 employees in our research and
development department.
COMPETITION
The market for our software is intensely competitive, fragmented and
rapidly changing. We face competition from companies in two distinct markets,
the customer relationship management software market and the electronic commerce
software market. Competitors in the customer relationship management software
market include:
- vendors such as Siebel Systems, Inc., Onyx Software Corporation,
Clarify, Inc. and The Vantive Corporation;
- large enterprise software vendors such as Baan Company N.V. and Oracle
Corporation; and
- internal information technology departments may develop proprietary
customer relationship management applications.
Competitors in the electronic commerce software market include Internet
relationship management and other electronic commerce software companies such as
Vignette Corporation and Silknet Software,
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Inc. We expect competition from companies like these to increase as we focus
more on our Pivotal eRelationship application and Internet-based applications
involving electronic commerce.
It is also possible that Microsoft Corporation may decide to introduce
products that compete with ours.
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
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.
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
invalidated.
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. See "Risk Factors -- We may be unable to adequately protect
our proprietary rights."
EMPLOYEES
As of June 30, 1999, we had a total of 270 employees, excluding independent
contractors and temporary employees. Of this number, 56 people were engaged in
research and development, 105 people were engaged in sales and marketing, 70
people were engaged in professional services and 39 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.
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FACILITIES
Our principal administrative, professional services and research and
development facilities are located in North Vancouver, British Columbia, Canada,
and consists of approximately 43,000 square feet of office space in three
separate buildings. Each of the leases for these buildings expire in September
2002. Our principal sales and 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 sales
and training center in Chicago which consists of approximately 8,309 square feet
of space under a lease which expires in August, 2003. As of June 30, 1999, we
also leased offices in San Francisco, Irvine, Dallas, New York, Washington DC,
Boston, Toronto and London.
LEGAL PROCEEDINGS
We are not currently party to any material pending legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL
The table below provides the names, ages, and positions with Pivotal of our
executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Norman B. Francis................... 49 President, Chief Executive Officer and Director
Keith R. Wales...................... 53 Chief Technical Officer and Director
Vincent D. Mifsud................... 31 Chief Financial Officer and Vice President,
Operations
Glenn S. Hasen...................... 38 Vice President, Worldwide Sales
Christine E. Rogers................. 43 Vice President, Professional Services, North America
Robert A. Runge..................... 44 Vice President, Worldwide Marketing
Salvatore Sanci..................... 40 Vice President, Research and Development
Jeremy A. Jaech(1).................. 44 Director
Robert J. Louis (1)(2).............. 54 Director
Douglas J. Mackenzie(1)(2).......... 39 Director
Donald A. Mattrick.................. 35 Director
Roger S. Siboni(2).................. 44 Director
</TABLE>
- ---------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
DIRECTORS AND EXECUTIVE OFFICERS
NORMAN B. FRANCIS co-founded Pivotal in 1990 and has served as President,
Chief Executive Officer and a director since December 1990. 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.
KEITH R. WALES co-founded Pivotal in 1990 and has served as a director
since December 1990 and as Chief Technical Officer since May 1999. Mr. Wales
also served 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 Financial Officer and Vice President,
Operations since December 1998. Prior to joining Pivotal, Mr. Mifsud served as
Controller, Vice President, Finance and Chief Financial Officer of Rand A
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.
GLENN S. HASEN has served as Vice President, Worldwide Sales since October
1996. Prior to joining Pivotal, Mr. Hasen served as Director of International
Sales of Information Builders Inc., a global software tools and middleware
company, from February 1994 to October 1996. In addition, he served as General
45
<PAGE> 51
Manager of Information Builders Inc., from January 1990 to February 1994. Mr.
Hasen also served as Director of Sales of Computer Associates International,
Inc. from 1985 to 1990. Mr. Hasen holds a bachelor's degree from the University
of Waterloo, Ontario, Canada and a Certificate in Finance from the Wharton
School, University of Pennsylvania.
CHRISTINE E. ROGERS has served as Vice President, Professional Services,
North America since April 1999. Ms. Rogers served as Associate Partner of
Andersen Consulting's Customer Relationship Management practice from September
1998 to April 1999. Ms. Rogers served as Director of Andersen Consulting's
Customer Relationship Management practice from October 1996 to September 1998.
Ms. Rogers served as the Director of Database Marketing of AT&T Wireless
Services from January 1995 to September 1996. Ms. Rogers served as the Director,
Channel Sales of the Tracker Corporation from July 1994 to December 1994. Ms.
Rogers served as Director, National Retail Sales of Rogers Cantel Mobile
Communications Inc., a cable and telecommunications service provider from
November 1987 to June 1994.
ROBERT A. RUNGE has served as Vice President, Worldwide Marketing since
September 1997. 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 that, 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.
SALVATORE SANCI has served as Vice President, Research and Development
since August 1999. Before joining Pivotal, Mr. Sanci served as Vice President,
Research and Development for PC DOCS Group International Inc., a software
company, from January 1998 to July 1999. Mr. Sanci served as Vice President,
Research and Development for InContext Corporation, a software company, from
July 1991 to August 1997. Prior to that, Mr. Sanci served as Vice President,
Research and Development for Amberon Inc., a predecessor to InContext
Corporation, from July 1987 to June 1991. Mr. Sanci holds a bachelor's degree in
Electrical Engineering and Computer Science from Ryerson Polytechnical
Institute.
JEREMY A. JAECH has served as a director since July 1996. Mr. Jaech
co-founded and currently serves as President, Chief Executive Officer and
director of Visio Corporation, a supplier of enterprise-wide business
diagramming and technical drawing software for Microsoft Windows. Prior to
co-founding Visio Corporation in September 1990, Mr. Jaech co-founded Aldus
Corporation in 1984 and served as Vice President, Engineering. Aldus Corporation
was purchased by Adobe Systems Incorporated 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.
DOUGLAS J. MACKENZIE has served as a director since July 1992. Mr.
Mackenzie has served as General Partner of Kleiner, Perkins Caufield & Byers, a
venture capital firm specializing in high-tech companies, since April 1994. Mr.
Mackenzie also serves as a director of Marimba, Inc. and Visio Corporation. 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.
DONALD A. MATTRICK has served as a director since May 1999. Mr. Mattrick
has served as the President of Electronic Arts Worldwide Studios, a manufacturer
of gaming software, since September 1997. Mr. Mattrick served as Executive Vice
President, North American Studios of Electronic Arts Worldwide Studios from
October 1995 to September 1997 and as Executive Vice President and General
Manager of Electronic Arts Worldwide Studios from 1991 to October 1995.
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<PAGE> 52
ROGER S. SIBONI has served as a director since June 1998. Mr. Siboni has
served as the President and Chief Executive Officer of E.piphany Inc., a
packaged enterprise relationship management systems company, since August 1998.
Mr. Siboni served as Deputy Chairman and Chief Operating Officer of KPMG LLP in
the United States from October 1996 to July 1998. Prior to that, Mr. Siboni
served as National Managing Partner of KPMG LLP in the United States from 1993
to September 1996. Mr. Siboni also serves as a director of Macromedia Inc.,
FileNet Corporation, Cadence Design Systems, Inc. and Active Software, Inc.
BOARD COMMITTEES
Our board of directors has established an audit committee and a
compensation committee.
Audit Committee. The audit committee of the board of directors reviews our
internal accounting procedures and consults with and reviews the services
provided by our independent auditors. Messrs. Siboni, Mackenzie and Louis are
members of this committee.
Compensation Committee. The compensation committee of the board of
directors reviews and recommends to the board of directors the compensation and
benefits of all our executive officers and establishes and reviews general
policies relating to compensation and benefits of our employees. Messrs. Jaech,
Mackenzie and Louis are members of this committee. Except as described in
"Transactions between Pivotal and its Officers, Directors or Significant
Shareholders," 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 any cash compensation to directors for serving on
our board, 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, only Messrs. Siboni, Jaech and Mattrick received
stock options for their participation on our board. Mr. Siboni received options
to purchase 60,000 common shares at a price of Cdn.$2.50 per share, Mr. Jaech
received options to purchase 60,000 common shares at a price of Cdn.$0.12 per
share and Mr. Mattrick received options to purchase 15,000 common shares at a
price of Cdn.$19.00 per share.
DIRECTOR AND OFFICER INDEMNIFICATION
Under the British Columbia Company Act we may, if we obtain court approval,
indemnify our directors and officers and former directors and officers and
current and former directors and officers of our subsidiaries against costs and
expenses, including amounts paid to settle an action or satisfy a judgment in a
civil, criminal or administrative action or proceeding to which they are made
parties because they have been directors or officers, including an action
brought by us. Indemnification of a director or officer under the British
Columbia Company Act is possible only if it is shown that the director or
officer acted honestly and in good faith with a view to our best interests, and
in the case of a criminal or administrative action or proceeding the director or
officer had reasonable grounds for believing that his conduct was lawful.
Our articles require us, if we obtain court approval, to indemnify our
current and former directors. Under our articles we may, if we obtain court
approval, indemnify our subsidiaries' current and former directors and our and
our subsidiaries' current and former officers, employees and agents. Our
articles also provide that, to the fullest extent permitted by the British
Columbia Company Act:
- the rights conferred in the articles are not exclusive; and
- we are authorized to purchase and maintain insurance on behalf of our
and our subsidiaries' current and past directors, officers, employees
and agents against any liability incurred by them in their duties.
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<PAGE> 53
Our board of directors has authorized us to enter into indemnity agreements
with each of our directors and officers and the directors and officers of our
subsidiaries. We are currently in the process of entering into indemnity
agreements with each of our directors and officers and the directors and
officers of our subsidiaries. The indemnity agreements call for us to indemnify
the director or officer against all liabilities in connection with any claim
arising out of the individual's status or service as a director or officer of
Pivotal, or our subsidiaries, other than liabilities arising from gross
negligence or willful misconduct. These agreements also call for us to advance
expenses incurred by the individual in connection with any action with respect
to which the individual may be entitled to indemnification by Pivotal.
The British Columbia Company Act currently requires us to obtain the
approval of a court before we indemnify directors or officers. Under proposed
legislation now before the British Columbia legislature, this requirement will
be removed.
Currently, there is no pending litigation or proceeding where a current or
past director, officer or employee is seeking indemnification, nor are we aware
of any threatened litigation that may result in claims for indemnification.
We maintain directors and officers liability insurance with an annual
aggregate coverage limit of Cdn.$5 million.
EXECUTIVE COMPENSATION
The following table describes the compensation we paid to, or was earned
by, our chief executive officer and our executive officers who earned more than
$100,000 during the fiscal year ended June 30, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
-------------------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
- --------------------------- ------------ ---------------
<S> <C> <C>
Norman B. Francis
President and Chief Executive Officer................... Cdn.$120,000 --
Keith R. Wales
Chief Technical Officer and Vice
President, Research and Development..................... Cdn.$120,000 Cdn.$ 37,064
Vincent D. Mifsud(1)
Chief Financial Officer and Vice President,
Operations.............................................. Cdn.$ 85,192 Cdn.$ 47,068
Glenn S. Hasen
Vice President, Worldwide Sales......................... $118,750 $ 87,425
Robert A. Runge
Vice President, Marketing............................... $141,282 $ 39,651
</TABLE>
- ---------------
(1) We hired Mr. Mifsud in December 1998. Mr. Mifsud's annual salary is
Cdn.$150,000 of which Cdn.$85,192 was paid to Mr. Mifsud during the fiscal
year ended June 30, 1999. Mr. Mifsud's guaranteed annual bonus is
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.
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<PAGE> 54
On October 21, 1997, Pivotal granted to Glenn Hasen, and Mr. Hasen
immediately exercised, an option to purchase 136,000 common shares at an
exercise price of Cdn.$0.25 per share. The option vested immediately subject to
a right to repurchase the common shares at the exercise price of Cdn.$0.25 by
Pivotal. The common shares are released from the repurchase right over a period
of three years beginning with 34,000 common shares on November 1, 1997 and
17,000 common shares every 6 months thereafter. Currently, 51,000 common shares
remain subject to the repurchase right.
On October 21, 1997, Pivotal granted to Robert Runge, and Mr. Runge
immediately exercised, an option to purchase 250,000 common shares at an
exercise price of Cdn.$0.25 per share. The option vested immediately subject to
a right to repurchase the common shares at the exercise price of Cdn.$0.25 by
Pivotal. The common shares are released from the repurchase right over a period
of four years beginning with 62,500 common shares on October 21, 1998 and 31,250
every six months thereafter. Currently, 156,250 common shares remain subject to
the repurchase right.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding stock option grants to
our chief executive officer and our executive officers who earned more than
$100,000 during the fiscal year ended June 30, 1999. 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. 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:
- converting the Canadian dollar exercise price per share to U.S. dollars
using the exchange rate at June 30, 1999, which was Cdn.$1.00 =
U.S.$.6787;
- 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.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS ASSUMED ANNUAL RATES OF SHARE
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION -----------------------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- ---- ---------- ------------ --------- ---------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Norman B. Francis...... -- -- -- -- -- --
Keith R. Wales......... -- -- -- -- -- --
Vincent D. Mifsud...... 160,000 18.48% Cdn.$8.00 12/01/03 $1,545,832.10 $1,950,649.60
Glenn S. Hasen......... 90,000 10.39% Cdn.$7.50 07/01/03 $ 908,584.83 $1,146,521.90
Robert A. Runge........ 60,000 6.93% Cdn.$7.50 10/01/03 $ 605,723.22 $ 764,348.04
</TABLE>
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<PAGE> 55
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information regarding the exercise of options
to purchase common shares by our chief executive officer and our executive
officers who earned more than $100,000 during fiscal 1999. The value of
unexercised in-the-money options is based on an assumed initial public offering
price of $13.00 per share, the assumed initial public offering price per common
share, minus the exercise price per share.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FISCAL MONEY OPTIONS AT
YEAR-END FISCAL YEAR-END
SHARES --------------------------- -----------------------------
ACQUIRED ON VALUE
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Norman B. Francis.............. -- -- 16,142 31,708 $ 204,672 $ 398,042
Keith R. Wales................. -- -- -- -- -- --
Vincent D. Mifsud.............. -- -- -- 160,000 -- $ 1,211,264
Glenn S. Hasen................. -- -- 35,250 78,750 $ 399,030 $ 622,893
Robert A. Runge................ -- -- 7,500 52,500 $ 59,323 $ 415,263
</TABLE>
EMPLOYMENT AGREEMENTS
We have not entered into written employment agreements with any of our
executive officers.
EMPLOYEE BENEFIT PLANS
Incentive Stock Option Plan
Our board of directors and shareholders approved our Incentive Stock Option
Plan in July 1992. Initially, 1,096,800 common shares were reserved for issuance
under the plan. This reserve has been increased several times. Initially, the
eligible persons under the plan were our directors, officers and employees and
the directors, officers and employees of our subsidiaries. The plan was
subsequently amended to extend eligibility to include our independent
contractors and consultants, independent contractors and consultants of our
subsidiaries and any partnership, joint venture, or other entity in which we
hold a 50% voting interest, and directors of any such partnership, joint
venture, or other entity. The exercise price for options granted under the plan
is determined by the board of directors, and must not be less than the fair
market value of the common shares on the date of grant as determined by the
board of directors, less any discount permitted by law and by regulatory bodies
having jurisdiction over us. In the case of U.S. residents and citizens, the
plan provides for the grant of both incentive stock options that may qualify
under section 422 of the U.S. Internal Revenue Code and non-qualified stock
options on terms determined by the board of directors, subject to statutory and
other limitations in the plan, including limitations on the exercise price,
which for incentive options to comply with section 422 of the Code may not be
less than 100% of the fair market value of the common shares on the date of
grant. Incentive options may be granted to our employees and those of our
subsidiaries, while non-qualified options may be issued to non-employee
directors, and independent contractors, as well as to employees.
The plan is administered by the board of directors, which determines the
individuals who shall receive options, the time period during which the options
may be partially or fully exercised, the number of shares issuable upon the
exercise of each option and the option exercise price.
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<PAGE> 56
No option may be transferred by an optionee other than by the laws of
succession, descent and distribution, and, during the lifetime of an optionee,
the option is exercisable only by the optionee. We have a right of first refusal
exercisable in connection with any proposed sale of shares acquired by an
optionee under the plan, but this right will lapse upon the occurrence of
several conditions, including a firm commitment underwritten public offering of
our common shares.
If an optionee's employment or engagement is terminated other than by death
or disability, no further installments of options that have not vested as of the
date of termination will become exercisable, and the optionee will be entitled
to exercise vested options for a period of 30 days following termination. If an
optionee is terminated for cause, any option or unexpired portion granted to the
optionee terminates immediately. Upon termination of employment or engagement of
an optionee by reason of death or permanent and total disability, the optionee's
options remain exercisable for 12 months to the extent that the options had
vested and were exercisable on the date of termination.
Each option vests and becomes exercisable at such times determined by the
board of directors at the time of grant. Holders of options granted before June
1999 under the plan cannot exercise these options more than five years from the
date of grant, or an earlier date as may be fixed by the board of directors. In
June 1999, our shareholders approved amendments to the plan which will be
effective upon closing of this offering. These amendments, among other things:
- permit the grant of options with a duration of up to ten years;
- extend the expiry date for the plan from July 31, 2002 to July 31, 2006;
- delete the requirements for shareholder approval for future amendments to
the plan, other than as required by law;
- allow administration of the plan by a committee of the board of
directors; and
- permit the plan administrator to authorize two of our officers acting
together to make option grants to eligible individuals other than
executive officers or directors within limits set by the plan
administrator.
The amendments also increase the number of shares reserved for issuance pursuant
to the plan by
- 1,076,186 common shares; plus
- an automatic increase on the first day of each fiscal year beginning in
2001, equal to the lesser of 800,000 shares or 4% of the average common
shares outstanding as used to calculate fully diluted earnings per share
as reported in our annual report to shareholders for the preceding year.
The usual period over which options become vested under the plan is four
years, with vesting as to 25% on the first anniversary of the date of grant and
12.5% at the end of each six month period thereafter, but the plan administrator
may provide for different vesting schedules in particular cases. The exercise
price payable for shares purchased under the plan must be paid in cash or by
certified check, or other consideration with equivalent value at the time of
purchase as the plan administrator may determine.
Any unexercised options that expire or that terminate upon an employee
ceasing to be employed by us become available again for issuance under the plan.
The plan as amended will terminate on July 31, 2006. As of June 30, 1999,
1,078,186 common shares had been issued pursuant to the exercise of options
granted under the plan, options to purchase 1,454,687 common shares were
outstanding under the plan, and 2,543,313 shares were available for future
option grants.
Employee Share Purchase Plan
We are instituting an employee share purchase plan that becomes effective
upon the effectiveness of the offering. We intend that the plan will qualify
under section 423 of the Internal Revenue Code for employees in the United
States and will afford tax benefits to employees in Canada. The share purchase
plan will permit our eligible employees to purchase common shares through
payroll deductions of up to
51
<PAGE> 57
10% of their cash compensation or, in the case of eligible British Columbia
resident employees, the greater of 10% of the cash compensation or Cdn.$10,000
per year. The plan provides for six month offering periods, beginning on each
January 1 and July 1, except for the first offering period, which begins on the
business day immediately preceding the date of our initial public offering and
ends on December 31, 1999. No employee may purchase more than $12,500 in common
shares in any offering period. We are authorizing the issuance of up to a total
of 1,000,000 common shares pursuant to the plan.
The price of common shares issued under the employee share purchase plan
will be the lesser of 85% of the fair market value on the first day of the
offering period and 85% of the fair market value on the last day of the offering
period, however the purchase price for common shares in the first offering
period will be the lesser of 85% of the initial public offering price for the
common shares and 85% of the fair market value on December 31, 1999.
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<PAGE> 58
TRANSACTIONS BETWEEN PIVOTAL AND ITS OFFICERS, DIRECTORS
OR SIGNIFICANT SHAREHOLDERS
Since May 31, 1994, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we or any of our
subsidiaries was or is to be a party in which the amount involved exceeded or
will exceed $60,000 and in which any director, executive officer, holder of more
than 5% of our common shares or any member of the immediate family of any of the
foregoing persons had or will have a direct or indirect material interest other
than compensation agreements and other arrangements, which are described below
or in the "Management" section of this prospectus.
COMMON SHARE EXCHANGE AGREEMENTS. On December 29, 1998 we changed the
designation of our common shares to Class A common shares and we increased our
authorized capital by creating 600,000 Class B common shares, which are
subordinate on liquidation but otherwise have the same rights and restrictions
as the Class A common shares. In transactions effective on December 31, 1998 and
January 5, 1999, we issued an aggregate of 476,786 Class B common shares to 22
of our shareholders in exchange for Class A common shares on a one for one
basis. The 22 shareholders included Norman B. Francis, The Francis Family Trust,
Keith R. Wales and Patricia Wales. These exchanges were made to permit the 22
shareholders to realize a capital gains deduction on the disposition of their
Class A common shares for Canadian income tax purposes. We received no
consideration from these shareholders other than the Class A common shares that
were exchanged for Class B common shares. In June 1999, the Class A common
shares were redesignated as common shares. All of the outstanding Class B common
shares will be exchanged for common shares on a one for one basis. See
"Description of Share Capital."
PREFERRED SHARE FINANCINGS. Since May 31, 1994, we have sold the following
preferred shares in a series of private placements:
<TABLE>
<CAPTION>
SHARES PRICE PER SHARE DATE
------ --------------- -------------
<S> <C> <C>
2,658,228 Class D preferred shares.......... $0.79 June 1995
4,000,000 Class E preferred shares.......... $1.35 November 1996
1,288,246 Class F preferred shares.......... $6.21 January 1999
</TABLE>
Upon the completion of this offering, each of these preferred shares will
convert into one common share.
We sold these shares under preferred share purchase agreements and
investors' rights agreements on substantially similar terms, except for terms
relating to date and price. All these classes of preferred shares are
convertible to common shares and all classes are redeemable. Under these
agreements, we made standard representations, warranties and covenants, and we
granted the purchasers registration rights, information rights, a right of first
offer, co-sale rights and rights of first refusal. All of these rights other
than registration rights terminate upon consummation of the offering. See
"Description of Share Capital -- Registration Rights."
The purchasers of these preferred shares included the following beneficial
owners of 5% or more of our common shares, directors and entities associated
with directors:
<TABLE>
<CAPTION>
PREFERRED SHARES
---------------------------------
INVESTOR CLASS D CLASS E CLASS F
- -------- --------- --------- -------
<S> <C> <C> <C>
Bank of Montreal Capital Corporation..................... 40,259 370,370 204,848
Integral Capital Partners II, L.P........................ 126,582 548,148 383,802
Integral Capital Partners International II, C.V.......... -- 192,593 99,290
Kleiner Perkins Caufield & Byers VI...................... 820,318 951,852 309,557
Oak Investment Partners VI, LLP.......................... 24,918 1,476,658 129,718
Oak VI Affiliates Fund, L.P.............................. 581 34,453 --
VW B.C. Technology Investment Fund Limited Partnership... 1,645,570 370,370 --
Jeremy A. Jaech.......................................... -- 55,556 --
</TABLE>
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<PAGE> 59
E.PIPHANY TRANSACTIONS. In March 1996, we purchased products and services
for internal use from E.piphany for $277,000. At the same time, E.piphany
purchased products and services for internal use from us for $277,000. In
addition, we have entered into a letter of understanding to enter into an
agreement pursuant to which we would agree to resell E.piphany products that we
would purchase at a discount, and to pay a fee to E.piphany for making sales
referrals to us. Douglas Mackenzie and Roger Siboni, directors of Pivotal, serve
as directors of E.piphany.
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<PAGE> 60
PRINCIPAL SHAREHOLDERS
The following table provides information concerning the beneficial
ownership of our common shares, including our preferred shares on an
as-converted basis for common shares, as of June 30, 1999 and as adjusted to
reflect the sale of the common shares in this offering for:
- our chief executive officer;
- all officers whose annual compensation was more than $100,000 during
fiscal 1999;
- 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. The information provided in the table below assumes no
exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
PERCENT OF COMMON
SHARES OWNED
-----------------------
NUMBER OF SHARES BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------------------ ------------------ ---------- ---------
<S> <C> <C> <C>
Norman B. Francis(1)................................... 2,445,973 15.3% 12.6%
Keith R. Wales(2)...................................... 1,225,800 7.7 6.3
Vincent D. Mifsud...................................... -- -- --
Patricia Wales(3)...................................... 1,200,800 7.5 6.2
420 Westholme Rd.
West Vancouver, British Columbia
Canada V7V 2N1
Roger S. Siboni(4)..................................... 15,000 * *
Jeremy A. Jaech(5)..................................... 90,356 * *
Robert J. Louis(6)..................................... 2,631,417 16.5 13.5
Douglas J. Mackenzie(7)................................ 3,976,464 24.9 20.4
Donald A. Mattrick(4).................................. 15,000 * *
Glenn S. Hasen(8)...................................... 182,500 1.1 1.0
Robert A. Runge(9)..................................... 257,500 1.6 1.3
Ventures West Capital Ltd.(10)......................... 2,631,417 16.5 13.5
280 -- 1285 West Pender Street
Vancouver, BC V6E 4B1
Kleiner Perkins Caufield & Byers VI(11)................ 3,976,464 24.9 20.4
2750 Sand Hill Road
Menlo Park, CA 94025
Oak Investment Partners VI, L.P.(12)................... 1,666,328 10.4 8.5
525 University Avenue, Suite 1300
Palo Alto, CA 94301
Integral Capital Partners I, L.P.(13).................. 1,560,941 9.8 8.0
2750 Sand Hill Road
Menlo Park, CA 94025
All directors and executive officers as a group (11
persons)(14)......................................... 10,840,010 67.8 55.6
</TABLE>
- ---------------
* Less than 1%
(1) Includes (a) 700,800 shares held of record by The Francis Family Trust, a
family trust for the benefit of Mr. Francis and his three children; (b)
857,143 shares held of record by Boardwalk Ventures Inc., a holding company
owned 50% by Mr. Francis and 50% by his spouse; and (c) 19,373 shares
subject to options exercisable by Mr. Francis within 60 days of June 30,
1999.
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<PAGE> 61
(2) Includes 428,572 shares held of record by Daybreak Software Inc., a holding
company owned solely by Mr. Wales, of which Mr. Wales has sole voting
power. Mr. Wales disclaims beneficial ownership of any shares held by his
former spouse, Patricia Wales.
(3) Includes 428,571 shares held of record by Fireweed Investments Inc., a
holding company owned solely by Ms. Wales, of which Ms. Wales has sole
voting power. Ms. Wales disclaims beneficial ownership of any shares held
by her former spouse Keith Wales.
(4) Includes 15,000 shares subject to an option exercisable within 60 days of
June 30, 1999.
(5) Includes 34,800 shares subject to an option exercisable within 60 days of
June 30, 1999.
(6) Includes (a) 615,477 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) 2,015,940 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 Inc. and Ventures West Management B.C. Ltd. disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest.
(7) Includes 3,976,464 shares held by Kleiner Perkins Caufield & Byers VI, an
entity affiliated with Kleiner Perkins Caufield & Byers of which Mr.
Mackenzie is the general partner. Mr. Mackenzie disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest.
(8) Includes 46,500 shares subject to an option exercisable within 60 days of
June 30, 1999. Of the shares held by Mr. Hasen, up to 51,000 shares are
currently subject to repurchase by Pivotal at the option exercise price
paid by Mr. Hasen if Mr. Hasen's employment is terminated. See
"Management."
(9) Includes 7,500 shares subject to an option exercisable within 60 days of
June 30, 1999. Of the shares held by Mr. Runge, up to 156,250 shares are
subject to repurchase by Pivotal at the option exercise price paid by Mr.
Runge if Mr. Runge's employment is terminated. See "Management."
(10) Includes (a) 615,477 shares held of record by Bank of Montreal Capital
Corporation, which is managed by Ventures West Management TIP Inc., an
entity wholly owned by VW B.C. Technology Investment Fund Limited
Partnership, and (b) 2,015,940 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. The following individuals are
shareholders of Ventures West Capital Ltd. and exercise the powers to
direct the voting of the shares beneficially owned by Ventures West Capital
Ltd.: Edward G. Anderson, Barry Gekiere, Nancy Harrison, Robert J. Louis,
Howard L. Riback and Samuel Znaimer. Mr. Louis, a director of Pivotal, also
serves as the President of Ventures West Capital Ltd.
(11) 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.
(12) Includes 35,034 shares held of record by Oak VI Affiliates Fund, L.P., an
entity affiliated with Oak Investment Partners VI, L.P. Bandel Carano,
Jerry Gallagher, Ed Glassmeyer, Fred Harman, Ann Lamont and Eileen More are
the Managing Members of Oak Associates VI, LLC, the General Partner of Oak
Investment Partners VI, L.P. and the Managing Members of Oak VI Affiliates,
LLC, the General Partner of Oak VI Affiliates Fund, L.P.
(13) Includes (a) 1,058,532 shares held of record by Integral Capital Partners
II, L.P., and (b) 291,833 shares held of record by Integral Capital
Partners International II, C.V., entities affiliated with Integral Capital
Partners I, L.P. Roger McNamee and John Powell are the General Partners of
Integral Capital Management, L.P., the General Partner of Integral Capital
Partners I, L.P. Pamela Hagenah, Roger McNamee and John Powell are the
General Partners of Integral Capital Management II, L.P., the General
Partner and Investment General Partner, respectively, of Integral Capital
Partners II, L.P. and Integral Capital Partners International II C.V.
(14) Includes 138,173 shares subject to options exercisable within 60 days of
June 30, 1999.
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DESCRIPTION OF SHARE CAPITAL
Effective upon completion of this offering, we will be authorized to issue
up to 200,000,000 common shares without par value and up to 20,000,000 preferred
shares without par value. The following is only a summary of provisions of the
common shares and the preferred shares. It is not complete and may not contain
all the information you should consider before investing in the common shares.
You should carefully read our memorandum and articles, which are included as an
exhibit to the registration statement containing this prospectus.
COMMON SHARES
As of June 30, 1999, we were authorized to issue 200,000,000 common shares,
of which 3,454,600 shares were issued and outstanding, and we were authorized to
issue 600,000 Class B common shares, of which 476,786 were issued and
outstanding. Prior to completion of this offering as part of a recapitalization,
all of the issued and outstanding Class B common shares will be exchanged for
common shares on a one-for-one basis. The balance of the authorized Class B
common shares will be cancelled. As of June 30, 1999, giving effect to the
exchange of outstanding Class B common shares for common shares and conversion
of all currently outstanding preferred shares to common shares, but prior to
giving effect to this offering and assuming no exercise of currently outstanding
options, there will be 15,983,123 common shares outstanding held of record by 82
shareholders. After giving effect to the offering, but assuming no exercise of
the underwriters' over-allotment option and no exercise of outstanding options,
there will be 19,483,123 common shares outstanding.
Holders of common shares are entitled to one vote per share on all matters
to be voted on by the shareholders. Subject to preferences of any outstanding
preferred shares, the holders of common shares are entitled to receive any
dividends the board of directors declares out of funds legally available for the
payment of dividends. Upon the liquidation, dissolution or winding up of
Pivotal, the holders of common shares are entitled to share all of our assets
remaining after payment of liabilities and after giving effect to the
liquidation preferences of any outstanding preferred shares. All outstanding
common shares are fully paid and nonassessable, and the common shares to be
issued following this offering will be fully paid and nonassessable.
PREFERRED SHARES
Effective upon completion of this offering, all of our outstanding Class A
convertible preferred shares and Class B, D, E and F redeemable convertible
preferred shares will be converted into common shares and these classes of
preferred shares will be cancelled. Our memorandum and articles provide that the
board of directors will have the authority, without further action by the
shareholders, to issue up to 20,000,000 preferred shares in one or more series.
The preferred shares are entitled to dividend and liquidation preferences over
the common shares. The board may also fix the designations, powers, preferences,
privileges and relative, participating, optional or special rights of any
preferred shares issued, including any qualifications, limitations or
restrictions. Special rights which may be granted to a series of preferred
shares may include dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any of which may be superior to the
rights of the common shares. Preferred share issuances could decrease the market
price of the common shares and may adversely affect the voting and other rights
of the holders of common shares. The issuance of preferred shares also could
have the effect of delaying or preventing a change of control of our company.
REGISTRATION RIGHTS
After this offering, the holders of 12,051,737 common shares will be
entitled to require us to register their shares under the Securities Act as
provided in an investors' rights agreement. If we propose to register any of our
securities under the Securities Act, either for our account or for the account
of other security holders exercising registration rights, the holders are
entitled to notice of the registration and to include their common shares in the
registration. These holders are also entitled to demand registration, which
would require us to register their shares under the Securities Act. We are
responsible for paying the expenses of
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<PAGE> 63
any such registration. These registration rights are subject to conditions and
limitations, including the right of the underwriters of an offering to limit the
number of shares and our right to decline to effect a registration before
October 31, 1999. All of these shareholders have agreed not to exercise this
right prior to six months from the date of the effectiveness of the registration
statement. See "Underwriting."
ANTI-TAKEOVER PROVISIONS
There are provisions of our memorandum and articles and of British Columbia
law which may hinder or impede take-over bids. For example, as described above,
our board of directors may, without shareholder approval, issue preferred shares
with rights superior to the rights of the holders of common shares. As a result,
preferred shares could be issued quickly and easily, adversely affecting the
rights of holders of common shares and could be issued with terms calculated to
delay or prevent a change in control of Pivotal or make removal of management
more difficult. In addition, under the British Columbia Company Act, certain
business combinations, including a merger or reorganization or the sale, lease,
or other disposition of all or a substantial part of our assets, must be
approved by at least 75% of the votes cast by shareholders or, in certain cases,
holders of each class of shares. In some cases, a business combination must be
approved by a British Columbia court. Shareholders may also have a right to
dissent from the transaction, in which case, we would be required to pay
dissenting shareholders the fair value of their shares provided they have
followed the required procedures. The British Columbia Company Act also provides
that a transaction such as a share exchange must be approved by a majority of
minority shareholders.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING HOLDERS OF COMMON SHARES
There is no law, governmental decree or regulation in Canada that restricts
the export or import of capital, or which would affect the remittance of
dividends or other payments by us to non-resident holders of our common shares,
other than withholding tax requirements. See "Income Tax Consequences --
Canadian Federal Income Tax Considerations."
There are no limitations imposed by Canadian law or our memorandum and
articles on the right of non-residents of Canada to hold or vote our common
shares, other than those imposed by the Investment Canada Act (Canada). This
legislation subjects an acquisition of control of Pivotal by a non-Canadian to
government review if the value of our assets at the time exceeds a threshold
amount which is adjusted annually to reflect inflation and the Canadian real
growth rate. Currently, the threshold amount is Cdn.$184 million where the
acquiror is a national or permanent resident of the United States or another
country which is a member of the World Trade Organization. The review threshold
is currently Cdn.$5 million for acquisitions of control by other non-Canadians.
A reviewable acquisition may not proceed unless the government review concludes
there is likely to be net benefit to Canada from the transaction.
The acquisition of a majority of our voting shares is deemed to be an
acquisition of control. The acquisition of less than a majority but one-third or
more of our voting shares is presumed to be an acquisition of control unless the
acquiror can establish that there is no control in fact by the acquiror through
the ownership of voting shares. The acquisition of less than one-third of our
voting shares is deemed not to be an acquisition of control. Share acquisitions
in the ordinary course of an acquiror's business as a trader or dealer in
securities are exempt from review under this legislation.
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent for our common shares will be the American
Stock Transfer Corporation. Its address is 40 Wall Street, 46th Floor, New York,
New York, 10005, and its telephone number at this location is (800) 937-5449.
LISTING
Our common shares have been approved for listing on the Nasdaq National
Market, subject to official notice of issuance, under the symbol "PVTL."
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SHARES ELIGIBLE FOR FUTURE SALE
We cannot provide any assurance that a significant public market for our
common shares will develop or be sustained after this offering has been
completed. The sale of substantial numbers of common shares in the public
market, or the possibility of such a sale, could adversely affect prevailing
market prices for our common shares.
Upon completion of the offering, a total of 19,483,123 of our common shares
will be outstanding, assuming no exercise of the underwriters' over-allotment
option or of any outstanding options.
All of the common shares sold in the offering in the United States and
Canada will be freely tradable without restriction under the U.S. Securities
Act, except by "affiliates" as defined in Rule 144 under the U.S. Securities
Act, or applicable Canadian securities laws, except by "control persons" as
defined under those laws.
For the reasons set forth below, we believe that the following presently
outstanding common shares will be eligible for resale in the public market in
the United States at the following times and by the following persons:
<TABLE>
<CAPTION>
BRITISH COLUMBIA
RESIDENTS U.S. RESIDENTS OTHER TOTAL
---------------- -------------- ------- ----------
<S> <C> <C> <C> <C>
On the date of this prospectus................. -- 320 -- 320
90 days after the date of this prospectus...... -- 1,812 -- 1,812
180 days after the date of this prospectus..... 7,476,282 7,831,371 613,830 15,921,483
Later than 180 days after the date of this
prospectus................................... 59,133 375 -- 59,508
</TABLE>
Holders of 15,919,483 common shares have entered lock-up agreements
pursuant to which they have agreed not to dispose of or hedge any of their
common shares for 180 days following the date of the prospectus without the
consent of Merrill Lynch on behalf of the underwriters. See "Underwriting -- No
Sales of Similar Securities."
Upon completion of this offering, options to purchase 1,454,687 common
shares will be held by existing optionees, based on options outstanding at June
30, 1999. Holders of all of these options have signed lock-up agreements.
We intend to file with the U.S. Securities and Exchange Commission a
registration statement on Form S-8 after the date of this prospectus. The S-8
registration statement will allow holders of common shares that are issued under
equity incentive arrangements, in connection with option exercises or under our
share purchase plan to resell those shares in the public market, subject to the
lock-up agreements and any restrictions imposed by British Columbia law.
As a result of the lock-up agreements, the S-8 registration statement and
the provisions of Rule 144 and Rule 701 under the U.S. Securities Act, and the
continued vesting of outstanding options, shares subject to presently
outstanding options will be available for sale in the public market in the
United States as follows, subject in some cases to Rule 144 limitations:
<TABLE>
<CAPTION>
BRITISH COLUMBIA
RESIDENTS U.S. RESIDENTS OTHER TOTAL
---------------- -------------- ------ -------
<S> <C> <C> <C> <C>
At the date of this prospectus................... -- -- -- --
90 days after the date of this prospectus........ -- -- -- --
180 days after the date of this prospectus....... 249,291 248,614 10,354 508,259
Later than 180 days after the date of this
prospectus..................................... 574,698 351,886 19,146 945,730
</TABLE>
BRITISH COLUMBIA RESALE RESTRICTIONS
Upon completion of this offering, British Columbia residents will hold
7,535,415 of our common shares and options to purchase 823,989 common shares
excluding any common shares bought in this offering. Of these common shares,
7,499,250 common shares issued (a) upon conversion of our
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<PAGE> 65
redeemable convertible preferred shares or our Class A convertible preferred
shares and (b) in exchange for our Class B common shares will be eligible for
resale under British Columbia securities laws, subject to limitations on control
persons, this lock-up agreement and any limitations imposed by United States
law. The British Columbia Securities Commission has issued a discretionary
exemption order which permits the holders of the remaining 36,165 common shares
held by British Columbian residents, and all common shares issued upon exercise
of options held by British Columbian residents, to sell their shares beginning
180 days after the date we file a final Canadian prospectus in British Columbia,
which we intend to file on the date of the final prospectus for the offering.
U.S. RESALE RESTRICTIONS
Upon completion of this offering, 15,983,123 common shares will be held by
U.S. residents or others (including residents of British Columbia who acquired
common shares prior to this offering and whose shares were "restricted
securities" when issued). As a result of the lock-up agreements and the
provisions of Rule 144 and Rule 701 under the U.S. Securities Act, such shares
will be available for sale in the public market in the United States as set
forth in the table above, subject in some cases to Rule 144 limitations.
In general, under Rule 144, as in effect on the date of this prospectus,
any person, including an affiliate of Pivotal, who has beneficially owned common
shares for at least one year will be entitled to sell, in any three-month
period, a number of shares that, together with sales of any common shares with
which such person's sales must be aggregated, does not exceed the greater of:
- 1% of the then outstanding common shares; and
- the average weekly trading volume of the common shares on the Nasdaq
National Market during the four calendar weeks immediately preceding the
date on which such sale is made.
Sales of restricted securities pursuant to Rule 144 are subject to
requirements relating to manner of sale, notice and availability of current
public information about Pivotal. Persons who are affiliates of Pivotal must
also comply with the restrictions and requirements of Rule 144, other than the
one-year holding period requirement, in order to sell common shares in the
public market which are not restricted securities.
Our employees, directors, officers, consultants or advisers may rely on
Rule 701 to resell common shares issued to them, pursuant to written
compensatory benefit plans or written contracts relating to their compensation.
Rule 701 also will apply to shares acquired upon exercise of options granted
before the date of this prospectus, including exercises after the date of this
prospectus. Common shares issued in reliance on Rule 701 are restricted
securities and, subject to the 180-day lock-up agreements described above, may
be sold beginning 90 days after the date of this prospectus:
- by persons other than affiliates of Pivotal, subject only to the manner
of sale provisions of Rule 144; and
- by persons deemed to be affiliates of Pivotal under Rule 144 without
compliance with its one-year minimum holding period requirements.
Holders of 12,051,737 common shares will be entitled to require us to
register their common share under the U.S. Securities Act, subject to the
lock-up agreements. See "Description of Share Capital -- Registration Rights."
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INCOME TAX CONSEQUENCES
In this section we summarize the material anticipated United States and
Canadian federal income tax considerations relevant to a purchase of shares in
this offering by individuals and corporations which:
- for purposes of the United States Internal Revenue Code, the Income Tax
Act (Canada) and the Canada-United States Income Tax Convention, are
resident in the United States and not in Canada;
- hold shares as capital assets for purposes of the Internal Revenue Code
and capital property for purposes of the Income Tax Act;
- deal at arm's length with us for purposes of the Income Tax Act; and
- do not use or hold the shares in carrying on a business through a
permanent establishment or in connection with a fixed base in Canada
and, in the case of individual holders, are also U.S. citizens.
We will refer to persons who satisfy the above conditions as "Unconnected U.S.
Shareholders."
We will assume, for purposes of this discussion, that you are an
Unconnected U.S. Shareholder. The tax consequences of a purchase of common
shares by persons who are not Unconnected U.S. Shareholders may differ
substantially from the tax consequences discussed in this section. The Income
Tax Act contains rules relating to securities held by some financial
institutions. We do not discuss these rules and holders that are financial
institutions should consult their own tax advisors.
This discussion is based upon the current provisions of:
- the Income Tax Act and regulations under the Income Tax Act;
- the Internal Revenue Code and regulations under the Internal Revenue
Code;
- the Canada-United States Income Tax Convention;
- our understanding of the current administrative policies and practices
published by Revenue Canada;
- all specific proposals to amend the Income Tax Act and the regulations
under the Income Tax Act that have been publicly announced by the
Minister of Finance (Canada) prior to the date of this prospectus;
- the administrative policies published by the U.S. Internal Revenue
Service; and
- judicial decisions,
all of which are subject to change either prospectively or retroactively. We do
not discuss the potential effects of any recently proposed legislation in the
United States and do not take into account the tax laws of the various provinces
or territories of Canada or the tax laws of the various state and local
jurisdictions of the United States or foreign jurisdictions.
WE INTEND THIS DISCUSSION TO BE A GENERAL DESCRIPTION OF THE U.S. FEDERAL
AND CANADIAN FEDERAL INCOME TAX CONSIDERATIONS MATERIAL TO A PURCHASE OF COMMON
SHARES. THIS DISCUSSION DOES NOT DEAL WITH ALL POSSIBLE TAX CONSEQUENCES
RELATING TO AN INVESTMENT IN OUR COMMON SHARES. WE HAVE NOT TAKEN INTO ACCOUNT
YOUR PARTICULAR CIRCUMSTANCES AND DO NOT ADDRESS CONSEQUENCES PECULIAR TO YOU
UNDER PROVISIONS OF U.S. OR CANADIAN INCOME TAX LAW. THEREFORE, YOU SHOULD
CONSULT YOUR OWN TAX ADVISOR REGARDING YOUR INDIVIDUAL TAX CONSEQUENCES OF
PURCHASING COMMON SHARES IN THIS OFFERING.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
As an Unconnected U.S. Shareholder, you generally will include in income
dividend distributions paid by us to the extent of our current or accumulated
earnings and profits. You must include in income an amount equal to the U.S.
dollar value of such dividends on the date of receipt based on the exchange rate
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on such date, without reduction for the Canadian withholding tax. You will
generally be entitled to a foreign tax credit, or deduction for U.S. federal
income tax purposes, in an amount equal to the Canadian tax withheld. To the
extent dividend distributions paid by us exceed our current or accumulated
earnings and profits, they will be treated first as a return of capital up to
your adjusted tax basis in the shares, and then as a gain from the sale or
exchange of the shares.
Dividends paid by us generally will constitute "passive income" for
purposes of the foreign tax credit, which could reduce the amount of foreign tax
credit available to you. The Internal Revenue Code applies various limitations
on the amount of foreign tax credit that may be available to a U.S. taxpayer.
Because of the complexity of those limitations, you should consult your own tax
advisor with respect to the potential consequences of those limitations.
Dividends paid by us on the shares will not generally be eligible for the
"dividends received" deductions. An Unconnected U.S. Shareholder which is a
corporation may, under some circumstances, be entitled to a 70% deduction of the
U.S. source portion of dividends received from us if such Unconnected U.S.
Shareholder owns shares representing at least 10% of our voting power and value.
If you sell the shares, you generally will recognize gain or loss in an
amount equal to the difference, if any, between the amount realized on the sale
and your adjusted tax basis in the shares. Any gain or loss you recognize upon
the sale of shares held as capital assets will be long-term or short-term
capital gain or loss, depending on whether the shares have been held by you for
more than one year.
Under current U.S. tax regulations, dividends paid by us on the shares
generally will not be subject to U.S. information reporting or the 31% backup
withholding tax unless they are paid in the United States through a U.S. or
U.S.-related paying agent, including a broker. If you furnish the paying agent
with a duly completed and signed Form W-9 such dividends will not be subject to
the backup withholding tax. You will be allowed a refund or a credit equal to
any amounts withheld under the U.S. backup withholding tax rules against your
U.S. federal income tax liability, provided you furnish the required information
to the Internal Revenue Service.
PERSONAL HOLDING COMPANIES
We could be classified as a personal holding company for U.S. federal
income tax purposes if both of the following tests are satisfied:
- if at any time during the last half of our taxable year, five or fewer
individuals own or are deemed to own more than 50% of the total value of
our shares; and
- we receive 60% or more of our U.S. related gross income from specified
passive sources, such as royalty payments.
A personal holding company is taxed on a portion of its undistributed U.S.
source income, including specific types of foreign source income which are
connected with the conduct of a U.S. trade or business, to the extent this
income is not distributed to shareholders. We do not believe we are a personal
holding company presently, and we do not expect to become one. However, we can
not assure you that we will not qualify as a personal holding company in the
future.
FOREIGN PERSONAL HOLDING COMPANIES
We could be classified as a foreign personal holding company if in any
taxable year both of the following tests are satisfied:
- five or fewer individuals who are United States citizens or residents
own or are deemed to own more than 50% of the total voting power of all
classes of our shares entitled to vote or the total value of our shares;
and
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- at least 60%, 50% in some cases, of our gross income consists of
"foreign personal holding company income," which generally includes
passive income such as dividends, interest, gains from the sale or
exchange of shares or securities, rent and royalties.
If we are classified as a foreign personal holding company and if you hold
shares on the last day of our taxable year, you must include in your gross
income as a dividend your pro rata portion of our undistributed foreign personal
holding company income. If you dispose of your shares prior to such date, you
will not be subject to tax under these rules. We do not believe we are a foreign
personal holding company presently, and we do not expect to become one. However,
we can not assure you that we will not qualify as a foreign personal holding
company in the future.
PASSIVE FOREIGN INVESTMENT COMPANIES
The rules governing "passive foreign investment companies" can have
significant tax effects on Unconnected U.S. Shareholders. We could be classified
as a passive foreign investment company if, for any taxable year, either:
- 75% or more of our gross income is "passive income," which includes
interest, dividends and some types of rents and royalties, or
- the average percentage, by fair market value, or, in some cases, by
adjusted tax basis, of our assets that produce or are held for the
production of "passive income" is 50% or more.
Distributions which constitute "excess distributions," as defined in
Section 1291 of the Internal Revenue Code, from a passive foreign investment
company and dispositions of shares of a passive foreign investment company are
subject to the highest rate of tax on ordinary income in effect and to an
interest charge based on the value of the tax deferred during the period during
which the shares are owned. However, if an Unconnected U.S. Shareholder makes a
timely election to treat us as a qualified electing fund under section 1295, the
above-described rules generally will not apply. Instead, the Unconnected U.S.
Shareholder would include annually in his gross income his pro rata share of our
ordinary earnings and net capital gain, regardless of whether such income or
gain was actually distributed. Tax on this income, however, may be deferred.
In addition, subject to specific limitations, Unconnected U.S. Shareholders
owning actually or constructively marketable shares in a passive foreign
investment company may make an election under section 1296 of the Internal
Revenue Code to mark that stock to market annually, rather than being subject to
the above-described rules. Amounts included in or deducted from income under
this mark to market election and actual gains and losses realized upon
disposition, subject to specific limitations, will be treated as ordinary gains
or losses.
In addition, special rules apply if we qualify as both a passive foreign
investment company and a "controlled foreign corporation," as defined below, and
an Unconnected U.S. Shareholder owns, actually or constructively, 10% or more of
the total combined voting power of all classes of our shares entitled to vote.
We believe that we will not be a passive foreign investment company for the
current fiscal year and we do not expect to become a passive foreign investment
company in future years. You should be aware, however, that if we are or become
a passive foreign investment company we may not be able to satisfy
record-keeping requirements that would permit you to make a qualified electing
fund election. You should consult your tax advisor with respect to how the
passive foreign investment company rules affect your tax situation, including
the advisability of making an election to treat us as a qualified electing fund
or making a mark to market election.
CONTROLLED FOREIGN CORPORATION
If more than 50% of the voting power of all classes of our shares or the
total value of our shares is owned, directly or indirectly, by citizens of the
United States, U.S. domestic partnerships and corporations or estates or trusts
other than foreign estates or trusts, each of which owns 10% or more of the
total combined voting power of all classes of our shares, we could be treated as
a "controlled foreign
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corporation" under Subpart F of the Internal Revenue Code. This classification
would effect many complex results, including requiring such shareholders to
include in income their pro rata shares of our "Subpart F Income," as defined by
the Internal Revenue Code. In addition, under Section 1248 of the Internal
Revenue Code, gain from the sale or exchange of shares by an Unconnected U.S.
Shareholder who is or was a 10% or greater shareholder at any time during the
five-year period ending with the sale or exchange will be ordinary dividend
income to the extent of our earnings and profits attributable to the shares sold
or exchanged.
We do not believe that we are a controlled foreign corporation and we do
not anticipate that we will become a controlled foreign corporation as a result
of the offering. We are not a controlled foreign corporation presently, and we
do not expect to become one. However, we can not assure you that we will not
qualify as a controlled foreign corporation in the future.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In this section, we summarize the material anticipated Canadian federal
income tax considerations relevant to your purchase of shares.
Under the Income Tax Act, as modified by the Canada-United States Income
Tax Convention, assuming you are an Unconnected U.S. Shareholder you will
generally be exempt from Canadian tax on a capital gain realized on an actual or
deemed disposition of the shares unless:
- you have or had a permanent establishment in Canada, or a fixed base in
Canada is or was available to you, in each case within the twelve-month
period before the disposition; or
- you and persons with whom you did not deal at arm's length for the
purposes of the Income Tax Act owned or had interests in or rights to
acquire 25% or more of our issued shares of any class or series at any
time during the five year period before the disposition.
Dividends paid, credited or deemed to have been paid or credited on the
shares to Unconnected U.S. Shareholders will be subject to a Canadian
withholding tax at a rate of 25% under the Income Tax Act. Under the
Canada-United States Income Tax Convention, the rate of withholding tax
generally applicable to Unconnected U.S. Shareholders who beneficially own the
dividends is reduced to 15%. In the case of Unconnected U.S. Shareholders that
are companies that beneficially own at least 10% of our voting shares, the rate
of withholding tax on dividends is reduced to 5%.
Canada does not currently impose any estate taxes or succession duties,
however, if you die, there is generally a deemed disposition of the shares held
at that time for proceeds of disposition equal to the fair market value of the
shares immediately before the death. Capital gains realized on the deemed
disposition, if any, will generally have the income tax consequences described
above.
64
<PAGE> 70
UNDERWRITING
GENERAL
Subject to the terms and conditions set forth in a purchase agreement
between us and each of the underwriters named below, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co. Inc. and Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated, are acting as
representatives, we have agreed to sell to the underwriters, and each of the
underwriters severally and not jointly has agreed to purchase from us, the
number of common shares set forth opposite its name below at a price that was
determined by negotiations between the underwriters and us:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Bear, Stearns & Co. Inc. ...................................
Dain Rauscher Wessels.......................................
--------
Total.......................................... 3,500,000
========
</TABLE>
In the purchase agreement, the several underwriters have agreed, subject to
the terms and conditions set forth in that agreement, to purchase all of our
common shares being sold under the terms of the agreement if any of the common
shares are purchased. The obligations of the underwriters under the purchase
agreement may be terminated at their discretion on the basis of their assessment
of the state of the financial markets and also upon the occurrence of certain
stated events. Under the purchase agreement, the commitments of non-defaulting
underwriters may be increased.
This offering is being made concurrently in the United States and in the
Province of British Columbia. The common shares will be offered in the United
States through the underwriters and through certain registered broker-dealers.
The common shares will be offered in British Columbia by Merrill Lynch Canada
Inc., the Canadian affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated and, subject to applicable law, will not be offered or sold in any
other province of Canada except pursuant to an exemption from the prospectus
requirements under the securities legislation of any such province.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act and British Columbia securities legislation, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.
The expenses of this offering, exclusive of the underwriting discount, are
estimated at $940,000 and are payable by us.
The common shares are being offered by the several underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of legal matters by counsel for the underwriters and other conditions. The
underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part.
The common shares will be ready for delivery in New York, New York on or
about , 1999.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose initially
to offer our common shares to the public at the initial public offering price
set forth on the cover page of this prospectus, and to dealers at such price
less a concession not in excess of $ per common share. The underwriters
65
<PAGE> 71
may allow, and such dealers may reallow, a discount of not more than $
per common share to other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no exercise
or full exercise by the underwriters of their over-allotment options.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
--------- ------- ------
<S> <C> <C> <C>
Public offering price................................. $ $ $
Underwriting discount................................. $ $ $
Proceeds, before expenses, to Pivotal................. $ $ $
</TABLE>
OVER-ALLOTMENT OPTION
We have granted an option to the underwriters, exercisable for 30 days
after the date of this prospectus, to purchase up to an aggregate of an
additional 525,000 common shares at the initial public offering price set forth
on the cover of this prospectus, less the underwriting discount. The
underwriters may exercise this option solely to cover over-allotments, if any,
made on the sale of our common shares offered hereby. To the extent that the
underwriters exercise this option, each underwriter will be obligated to
purchase a number of additional common shares proportionate to such
underwriter's initial amount reflected in the foregoing table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 10% of the shares offered hereby to be sold to some
of our directors and other persons, such as Pivotal Alliance members, with
relationships with Pivotal. Certain of these reserved shares will be offered
directly by us to directors or other persons residing in provinces of Canada
other than British Columbia. The number of our common shares available for sale
to the general public will be reduced to the extent that those persons purchase
the reserved shares. Any reserved shares which are not orally confirmed for
purchase within one day of the pricing of the offering will be offered by the
underwriters to the general public on the same terms as the other shares offered
by this prospectus.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and holders of 15,921,483
common shares have agreed not to directly or indirectly
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of, lend or otherwise dispose of or
transfer any of our common shares or securities convertible into or
exchangeable or exercisable for or repayable with our common shares,
whether now owned or later acquired by the person executing the
agreement or with respect to which the person executing the agreement
later acquires the power of disposition, or file a registration
statement under the Securities Act relating to any of our common shares
or
- enter into any swap or other agreement or any other agreement that
transfers, in whole or in part, the economic consequence of ownership of
our common shares whether any such swap or
66
<PAGE> 72
transaction is to be settled by delivery of our common shares or other
securities, in cash or otherwise,
without the prior written consent of Merrill Lynch on behalf of the underwriters
for a period of 180 days after the date of this prospectus. Merrill Lynch has
agreed that we may
- issue common shares upon exercise of an option or warrant or the
conversion of any security outstanding on the date we sign the purchase
agreement with the underwriters;
- grant options and issue common shares under our stock option and stock
purchase plans;
- issue common shares under any non-employee director stock option plan or
dividend reinvestment plan; and
- issue up to 800,000 common shares in connection with acquisitions of
businesses or assets of businesses or in connection with strategic
alliances; provided that
- each person receiving common shares enters into a lock-up agreement
pursuant to which they agree not to dispose of or hedge any of their
common shares for 180 days following the date of this prospectus without
the consent of Merrill Lynch on behalf of the underwriters; and
- we do not grant any rights that are exercisable for a period of six
months from the date we sign the purchase agreement with the
underwriters entitling the persons receiving common shares to require us
to register their shares under the Securities Act.
See "Shares Eligible for Future Sale."
NASDAQ NATIONAL MARKET LISTING AND FACTORS CONSIDERED IN DETERMINING THE INITIAL
PUBLIC OFFERING PRICE
Before this offering, there has been no public market for our common
shares. The initial public offering price will be determined through
negotiations between us and the representatives of the underwriters. The factors
to be considered in determining the initial public offering price, in addition
to prevailing market conditions, include:
- the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;
- some of our financial information;
- the history of, and the prospects for, us and the industry in which we
compete;
- an assessment of our management;
- our past and present operations;
- the prospects for and anticipated timing of future revenues;
- the present state of our development;
- the percentage interest being sold as compared to the valuation for
Pivotal; and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
There can be no assurance that an active trading market will develop for
our common shares or that our common shares will trade in the public market
subsequent to the offering at or above the initial public offering price.
Our common shares have been approved for listing on the Nasdaq National
Market, subject to official notice of issuance, under the symbol "PVTL."
67
<PAGE> 73
The underwriters do not expect sales of our common shares to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares being offered under this prospectus.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of our common shares is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase our common shares. As an exception
to these rules, the underwriters are permitted to engage in transactions that
stabilize the price of our common shares. Such transactions consist of bids or
purchases for the purpose of pegging, fixing or maintaining the price of our
common shares.
If the underwriters create a short position in our common shares in
connection with the offering, i.e., if they sell more of our common shares than
are set forth on the cover page of this prospectus, the underwriters may reduce
that short position by purchasing our common shares in the open market. The
underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
PENALTY BIDS
The underwriters may also impose a penalty bid on other underwriters and
selling group members. This means that if the underwriters purchase our common
shares in the open market to reduce their short position or to stabilize the
price of our common shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those shares
as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of our common shares to the extent that
it discourages resales of our common shares.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or the magnitude of any effect that the
transactions described above may have on the price of our common shares. In
addition, neither we nor any of the underwriters makes any representation that
the representatives will engage in any of these transactions or that any of
these transactions, once commenced, will not be discontinued without notice.
LEGAL MATTERS
Davis & Company, Vancouver, British Columbia, Canada will pass upon the
legality of the common shares offered by this prospectus. Dorsey & Whitney LLP,
Seattle, Washington, is acting as our United States legal counsel with respect
to the offering. Morrison & Foerster LLP, San Francisco, California and Blake,
Cassels & Graydon, Toronto, Ontario, Canada are acting as United States and
Canadian counsel respectively to the Underwriters.
EXPERTS
The financial statements as of June 30, 1998 and 1999 and for each of the
two years ended June 30, 1999 included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein, and have been so included in reliance upon the reports of that
firm given upon their authority as experts in accounting and auditing. We have
included our financial statements as of June 30, 1997 and for the year then
ended in this prospectus in reliance upon the report of KPMG LLP, independent
Chartered Public Accountants, that appears elsewhere in this prospectus and upon
the authority of KPMG LLP as experts in accounting and auditing.
In July 1998, KPMG LLP in Canada resigned as our independent auditors
because we were considering a strategic alliance with their affiliated firm in
the United States. KPMG LLP has not been associated with any of our financial
statements subsequent to June 30, 1997. The change in independent chartered
accountants was effective for fiscal 1998, was approved by our board of
directors and was not due to any disagreement between us and KPMG LLP. During
the period preceding the change in
68
<PAGE> 74
independent auditors, there were no disagreements with KPMG LLP on any matter of
accounting principles or practices, financial statement disclosures or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
KPMG LLP would have caused them to make reference thereto in their report on our
financial statements for the period. The audit reports of KPMG LLP as of and for
the years ended June 30, 1997 and 1996 did not contain an adverse opinion or a
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
KPMG LLP's affiliated firm in the United States is a member of Enterprise
360, provides implementation and customization services to some of our customers
as a member of the Pivotal Alliance, and holds 161,031 Class F convertible
preferred shares that it purchased for $6.21 per share in January 1999. These
shares will convert into 161,031 common shares upon completion of the offering
and will represent less than 1% of the outstanding common shares.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission 450 Fifth Street
N.W., Washington, D.C. 20549, a registration statement on Form F-1 covering the
common shares being sold in this offering. We have not included in this
prospectus all the information contained in the registration statement, and you
should refer to the registration statement and its exhibits for further
information.
Any statement in this prospectus about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this prospectus. You must review the
exhibits themselves for a complete description of the contract or document.
You may review a copy of the registration statement, including exhibits and
schedules filed with it, at the Commission's public reference facilities in Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549, and at
the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies
of such materials from the Public Reference Section of the Commission, Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549, at
prescribed rates. You may call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. The Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as Pivotal, that file
electronically with the Commission.
You may read and copy any reports, statements or other information that we
file with the Commission at the addresses indicated above, and you may also
access them electronically at the web site set forth above. These Commission
filings are also available to the public from commercial document retrieval
services.
Prior to this offering, we have not been required to file reports with the
Commission. Following consummation of the offering, we will be required to file
reports and other information with the Commission under the U.S. Securities
Exchange Act and with the British Columbia Securities Commission. You are
invited to read and copy any reports, statements or other information, other
than confidential filings, that we file with the British Columbia Securities
Commission at its public reference room. These filings are also electronically
available from the Canadian System for Electronic Document Analysis and
Retrieval (SEDAR) (http://www.sedar.com), the Canadian equivalent of the
Commission's electronic document gathering and retrieval system.
We have agreed to file with the Commission reports on Form 10-K and Form
10-Q. We also intend to furnish our shareholders with annual reports containing
consolidated financial statements prepared in accordance with U.S. GAAP and
examined by our independent auditors and proxy statements that substantially
comply with the Commission's proxy rules. We intend to file our proxy statements
with the Commission as part of or as exhibits to reports under the Securities
Exchange Act. We also intend to make available quarterly reports containing
condensed unaudited financial information for each of the first three quarters
of each fiscal year, prepared in accordance with U.S. GAAP.
69
<PAGE> 75
PIVOTAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Deloitte & Touche LLP, Independent Auditors....... F-2
Report of KPMG LLP, Independent Auditors.................... F-3
Consolidated Balance Sheets................................. F-4
Consolidated Statement of Operations........................ F-5
Consolidated Statement of Cash Flows........................ F-6
Consolidated Statement of Shareholders' Deficit............. F-7
Notes to the Consolidated Financial Statements.............. F-8
</TABLE>
F-1
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Pivotal Corporation (formerly Pivotal Software Inc.)
We have audited the accompanying consolidated balance sheet of Pivotal
Corporation (formerly Pivotal Software Inc.) as of June 30, 1998 and 1999 and
the related consolidated statements of operations, shareholders' deficit and
cash flows for the years then ended. 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. 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 audit provides 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
the Company as of June 30, 1998 and 1999 and the results of its operations and
its cash flows for the years ended June 30, 1998 and 1999 in conformity with
accounting principles generally accepted in the United States.
/s/ Deloitte & Touche LLP
Chartered Accountants
Vancouver, Canada
July 9, 1999
F-2
<PAGE> 77
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Pivotal Corporation (formerly Pivotal Software Inc.)
We have audited the accompanying consolidated statements of operations,
shareholders' deficit and cash flows of Pivotal Corporation (formerly Pivotal
Software Inc.) for the year ended June 30, 1997. 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 audit.
We conducted our audit in accordance with Canadian generally accepted
auditing standards. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows for the year ended June 30, 1997 in conformity with accounting
principles generally accepted in the United States.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
September 17, 1997
F-3
<PAGE> 78
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
JUNE 30, EQUITY AT
------------------ JUNE 30,
1998 1999 1999
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,202 $ 9,338
Accounts receivable....................................... 7,116 8,304
Prepaid expenses.......................................... 706 1,029
------- -------
Total current assets................................. 9,024 18,671
Property and Equipment, net................................. 1,728 3,051
------- -------
Total assets................................................ $10,752 $21,722
======= =======
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 1,959 $ 6,329
Deferred revenue.......................................... 3,748 5,085
------- -------
Total current liabilities............................ 5,707 11,414
------- -------
Commitments (Note 6)
Redeemable convertible preferred shares, authorized, issued
and outstanding shares -- 8,658 and 9,946 in 1998 and
1999, respectively (none pro forma)....................... 9,500 17,500
------- -------
Shareholders' (deficit) equity
Preferred shares, undesignated, no par value, authorized
shares -- none and 20,000 in 1998 and 1999,
respectively, no shares issued and outstanding (none
pro forma)............................................. -- -- $ --
Class A convertible preferred shares, no par value,
authorized, issued and outstanding shares -- 2,000 in
1998 and 1999 (none pro forma)......................... 83 83 --
Common shares, no par value, authorized shares -- 50,000
and 200,000 in 1998 and 1999, respectively, issued and
outstanding shares -- 3,853 and 3,454 in 1998 and 1999,
respectively (15,983 pro forma)........................ 80 563 18,150
Class B common shares, Cdn.$0.03 par value, authorized
shares -- none and 600 in 1998 and 1999, respectively,
issued and outstanding shares -- none, and 477 in 1998
and 1999, respectively (none pro forma)................ -- 4 --
Deferred share-based compensation......................... -- (416) (416)
Accumulated deficit....................................... (4,618) (7,426) (7,426)
------- ------- -------
Total shareholders' (deficit) equity........................ (4,455) (7,192) $10,308
------- ------- =======
Total liabilities and shareholders' deficit................. $10,752 $21,722
======= =======
</TABLE>
See accompanying notes
F-4
<PAGE> 79
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Revenues:
Licenses.................................................. $ 2,916 $11,311 $18,819
Services and maintenance.................................. 590 2,898 6,508
------- ------- -------
Total revenues......................................... 3,506 14,209 25,327
------- ------- -------
Cost of revenues:
Licenses.................................................. 121 401 536
Services and maintenance.................................. 387 1,281 3,078
------- ------- -------
Total cost of revenues................................. 508 1,682 3,614
------- ------- -------
Gross profit................................................ 2,998 12,527 21,713
------- ------- -------
Operating expenses:
Sales and marketing....................................... 2,646 9,226 16,830
Research and development.................................. 1,163 1,910 4,958
General and administrative................................ 725 1,513 2,466
------- ------- -------
Total operating expenses............................... 4,534 12,649 24,254
------- ------- -------
Loss from operations........................................ (1,536) (122) (2,541)
Interest and other income (loss)............................ 142 136 (24)
------- ------- -------
Income (loss) before income taxes........................... (1,394) 14 (2,565)
Income taxes................................................ -- 10 243
------- ------- -------
Net income (loss) for the year.............................. $(1,394) $ 4 $(2,808)
======= ======= =======
Earnings (loss) per share:
Basic..................................................... $ (0.41) $ -- $ (0.72)
Diluted................................................... $ (0.41) $ -- $ (0.72)
Pro forma basic and diluted............................... $ (0.18)
Weighted average number of shares used to calculate earnings
(loss) per share:
Basic..................................................... 3,393 3,720 3,888
Diluted................................................... 3,393 14,927 3,888
Pro forma basic and diluted............................... 15,940
</TABLE>
See accompanying notes
F-5
<PAGE> 80
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) for the year............................ $(1,394) $ 4 $(2,808)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation........................................... 120 410 1,017
Loss on disposal of property and equipment............. 4 55 52
Non-cash share-based compensation expense.............. -- -- 57
Change in operating assets and liabilities................ (492) (1,596) 4,196
------- ------- -------
Net cash (used in) provided by operating activities....... (1,762) (1,127) 2,514
Cash flows from investing activities:
Purchase of property and equipment........................ (450) (1,666) (2,392)
Proceeds on disposal of property and equipment............ 2 23 --
------- ------- -------
Net cash used in investing activities..................... (448) (1,643) (2,392)
Cash flows from financing activities:
Proceeds from issuance of redeemable convertible preferred
shares................................................. 5,400 -- 8,000
Proceeds from issuance of common shares................... 2 74 14
------- ------- -------
Net cash provided by financing activities................. 5,402 74 8,014
Net increase (decrease) in cash and cash equivalents........ 3,192 (2,696) 8,136
Cash and cash equivalents, beginning of year................ 706 3,898 1,202
------- ------- -------
Cash and cash equivalents, end of year...................... $ 3,898 $ 1,202 $ 9,338
======= ======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURE
Income taxes recovered (paid)............................. $ -- $ 12 $ (137)
======= ======= =======
</TABLE>
See accompanying notes
F-6
<PAGE> 81
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A
CONVERTIBLE CLASS B
PREFERRED SHARES COMMON SHARES COMMON SHARES DEFERRED TOTAL
----------------- --------------- --------------- SHARE-BASED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT COMPENSATION (DEFICIT) DEFICIT
------ ------ ------ ------ ------ ------ ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1996......... 2,000 $83 3,374 $ 4 -- $ -- $ -- $(3,228) $(3,141)
Issuance of common shares on
exercise of stock options.... -- -- 56 2 -- -- -- -- 2
Net loss....................... -- -- -- -- -- -- -- (1,394) (1,394)
----- --- ----- ---- ---- ---- ----- ------- -------
Balance, June 30, 1997......... 2,000 83 3,430 6 -- -- -- (4,622) (4,533)
Issuance of common shares on
exercise of stock options.... -- -- 423 74 -- -- -- -- 74
Net income..................... -- -- -- -- -- -- -- 4 4
----- --- ----- ---- ---- ---- ----- ------- -------
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 to
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)
===== === ===== ==== ==== ==== ===== ======= =======
</TABLE>
See accompanying notes
F-7
<PAGE> 82
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Pivotal Corporation (the "Company") provides customer relationship
management software applications that enable businesses to more effectively
manage their interactions with customers and selling partners. The
Company's software applications include Pivotal Relationship, developed to
automate and unify the sales, marketing and customer service functions
within a business, and the recently developed Pivotal eRelationship, which
simplifies the collaboration and sharing of information over the Internet
between businesses and their customers and selling partners.
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United
States ("U.S. GAAP") and include the accounts of Pivotal Corporation, a
British Columbia, Canada incorporated company, and its fully integrated
wholly-owned subsidiaries, Pivotal Software USA Inc. and Pivotal Software
Limited. All significant intercompany accounts and transactions have been
eliminated.
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, amortization,
taxes and contingencies. Actual results may differ from those estimates.
REVENUE RECOGNITION
Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), was
issued in October 1997 by the American Institute of Certified Public
Accountants and was amended by Statement of Position 98-4 (SOP 98-4). The
Company adopted SOP 97-2 effective for the Company's year ended June 30,
1998. Based upon their interpretation of SOP 97-2 and SOP 98-4, the Company
believes its current revenue recognition polices and practices are
consistent with SOP 97-2 and SOP 98-4. However, full implementation
guidelines for this standard have not yet been issued. Once available, such
implementation guidance could lead to unanticipated changes in current
revenue accounting practices, and such changes could materially affect the
timing of the Company's future revenues and earnings. Additionally, the
AICPA recently issued SOP 98-9, which provides certain amendments to SOP
97-2, which is effective for transactions entered into beginning July 1,
1999. This pronouncement is not expected to materially impact the Company's
revenue recognition practices.
The Company generates revenues through two sources: (1) software license
revenues and (2) services and maintenance revenues. Software license
revenues are normally generated from licensing the perpetual right to use
the Company's products directly to end-users and indirectly through
resellers and, to a lesser extent, through third-party products the Company
distributes. The Company recognizes as revenue only the fee payable from
the reseller, net of any discount. Service revenues are generated from
consulting services, including implementation and customization of licenced
software, education and maintenance.
F-8
<PAGE> 83
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. The Company's agreements with its
customers and resellers do not contain product return rights.
Maintenance revenues are recognized ratably over the term of the contract,
typically one year. 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 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.
Revenues that have been prepaid or invoiced but do not yet qualify for
recognition under the Company's policies are reflected as deferred
revenues.
CASH AND CASH EQUIVALENTS
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1998 and 1999, the Company has the following financial
instruments: cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities and redeemable convertible preferred
shares. The carrying value of cash and cash equivalents, accounts
receivable and accounts payable and accrued liabilities approximates their
fair value based on their liquidity or based on their short-term nature.
Due to the uncertainty surrounding the actual date that the redeemable
convertible preferred shares may be redeemed, it is not practical to
determine the fair value of this financial instrument.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company's use of derivative financial instruments is limited to
short-term foreign currency forward exchange contracts ("forward
contracts") used to manage exposure related to certain Canadian currency
transactions. The Company does not enter into derivative financial
instruments for trading purposes. The Company 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 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 income in the current period.
As of June 30, 1998 and 1999, the Company had no outstanding forward
contracts.
F-9
<PAGE> 84
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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:
<TABLE>
<S> <C>
Computer software and
equipment 30% declining balance or 3 year straight line
Furniture and fixtures 20% declining balance
</TABLE>
Leasehold improvements are amortized using the straight-line basis over
three years.
The Company makes reviews for the impairment of long-lived assets whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Under Statement of Financial Accounting
Standard ("SFAS") No. 121, an impairment loss would be recognized when
estimates of future cash flows expected to result from the use of an asset
and its eventual disposition are less than its carrying amount. No such
impairment losses have been identified by the Company for the years ended
June 30, 1997, 1998 and 1999.
RESEARCH AND DEVELOPMENT COSTS
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 the
Company'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 the Company to a
concentration of credit risk consist principally of accounts receivable.
The Company'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. The Company does not require
collateral or other security to support credit sales, but provides an
allowance for bad debts based on historical experience and specifically
identified risks.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company 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.
F-10
<PAGE> 85
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company 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 enacted
tax laws and rates applicable to the periods in which the taxes become
payable.
SHARE-BASED COMPENSATION
As permitted under SFAS No. 123, Accounting for Stock-Based Compensation,
the Company 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 8.
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, using the graded method, over the vesting periods of the
individual stock options.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings per share is computed by dividing net income (loss)
available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities 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 earnings per share is computed by dividing net income (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 since July 1, 1998.
F-11
<PAGE> 86
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net income (loss) (A)................................. $(1,394) $ 4 $(2,808)
======= ======= =======
Weighted average number of common shares (B).......... 3,393 3,720 3,888
Dilutive effect of:
Stock options....................................... -- 444 --
Convertible preferred shares........................ -- 10,763 --
------- ------- -------
Diluted weighted average shares (C)................. 3,393 14,927 3,888
======= =======
Pro forma adjustment for convertible preferred
shares.............................................. 12,052
-------
Pro forma basic and diluted weighted average shares
(D)................................................. 15,940
=======
Earnings (loss) per share:
Basic (A/B)......................................... $ (0.41) $ -- $ (0.72)
Diluted (A/C)....................................... $ (0.41) $ -- $ (0.72)
Pro forma basic and diluted (A/D)................... $ (0.18)
</TABLE>
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, establishes standards for the
reporting and display of comprehensive income and its components (revenue,
expenses, gains, and losses) in a full set of general-purpose financial
statements. The Company adopted SFAS No. 130 in 1999. The Company has no
comprehensive income items, other than the net earnings (loss), in any of
the periods presented.
BUSINESS SEGMENTS
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for reporting information about
operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. Information related to SFAS No. 131 is contained
in Note 11.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AcSEC issued SOP 98-5, Reporting on the Costs of
Start-up Activities. Under SOP 98-5, the cost of start-up activities should
be expensed as incurred. The Company expects that the adoption of SOP 98-5
will not have a material impact on its financial position, results of
operations. The Company will be required to adopt SOP 98-5 in fiscal 2000.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and
reporting standards for derivative instruments and hedging activities. SFAS
No. 133 requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The Company will adopt SFAS No. 133 as currently
required in its financial statements for fiscal year 2001, which the
Company expects will not have a material effect on its financial position
or results of operations.
F-12
<PAGE> 87
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current period presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $91
and $334 at June 30, 1998 and 1999, respectively.
3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
JUNE 30,
----------------
1998 1999
------ -------
<S> <C> <C>
Computer software and equipment............................. $1,387 $ 2,793
Furniture and fixtures...................................... 539 1,169
Leasehold improvements...................................... 443 626
------ -------
2,369 4,588
Accumulated depreciation.................................... (641) (1,537)
------ -------
Net book value.............................................. $1,728 $ 3,051
------ -------
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The principal components of accounts payable and accrued liabilities were
as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------
1998 1999
------ ------
<S> <C> <C>
Accounts payable............................................ $ 602 $3,054
Accrued compensation........................................ 798 2,368
Other accrued liabilities................................... 559 907
------ ------
$1,959 $6,329
------ ------
</TABLE>
5. LINE OF CREDIT
The Company has negotiated a credit facility with a Canadian chartered bank
which includes: a term operating line of $2,043 (Cdn.$3,000), bearing
interest at bank prime rate (6.5% at June 30, 1999) plus 1% per year,
secured by a charge on all current and future property of the Company, and
a committed term loan of $1,361 (Cdn.$2,000), bearing interest at the bank
prime rate (6.5% at June 30, 1999) plus 4%, secured by a second charge on
all current and future personal property of the Company. As of June 30,
1998 and 1999, no amounts were outstanding under the credit facility.
6. COMMITMENTS
OPERATING LEASES
The Company leases office facilities under operating leases which generally
require the Company to pay a share of operating costs, including property
taxes, insurance and maintenance.
F-13
<PAGE> 88
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
6. COMMITMENTS (CONTINUED)
Future minimum operating lease payments for the years ending June 30
pursuant to leases outstanding as of June 30, 1999 are due as follows:
<TABLE>
<S> <C>
2000........................................................ $1,610
2001........................................................ 1,266
2002........................................................ 1,266
2003........................................................ 778
2004........................................................ 259
------
$5,179
======
</TABLE>
Rent expense totalled approximately $113, $496 and $1,075 in the years
ended June 30, 1997, 1998 and 1999, respectively. Certain of these lease
obligations have been secured by irrevocable letters of credit for $0,
$170, and $50 at June 30, 1997. 1998 and 1999, respectively.
7. REDEEMABLE CONVERTIBLE PREFERRED SHARES
The redeemable convertible preferred shares at June 30, 1998 and 1999 are
as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------
1998 1999
------ -------
<S> <C> <C>
Class B, 2,000 shares with par value of Cdn.$1.17 each,
redeemable at $1.00 each, authorized, issued and
outstanding in 1998 and 1999.............................. $2,000 $ 2,000
Class D, 2,658 shares with no par value, redeemable at $0.79
each, authorized, issued and outstanding in 1998 and
1999...................................................... 2,100 2,100
Class E, 4,000 shares with no par value, redeemable at $1.35
each, authorized, issued and outstanding in 1998 and
1999...................................................... 5,400 5,400
Class F, 1,288 shares with no par value, redeemable at $6.21
each, authorized, issued and outstanding in 1999.......... -- 8,000
------ -------
$9,500 $17,500
====== =======
</TABLE>
During the year ended June 30, 1997, the Company's shareholders approved an
increase in the authorized capital of the Company by authorizing 4,000
Class E preferred shares. During the year ended June 30, 1997, the Company
issued 4,000 Class E preferred shares for total proceeds of $5,400.
During the year ended June 30, 1999, the Company's shareholders approved an
increase in the authorized capital of the Company by authorizing 1,288
Class F preferred shares. During the year ended June 30, 1999, the Company
issued 1,288 Class F preferred shares for total proceeds of $8,000.
The holders of each class of preferred shares have the right to one vote
for each common share into which the preferred shares could be converted.
All of the redeemable preferred shares have the right to receive
non-cumulative dividends at amounts as determined by the directors of the
Company. When dividends are paid on any other outstanding class of shares
of the Company, the holders of the Class B, Class D, Class E and Class F
preferred shares are 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.
F-14
<PAGE> 89
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
7. REDEEMABLE CONVERTIBLE PREFERRED SHARES (CONTINUED)
Each class of redeemable preferred shares is convertible into common shares
at any time at the option of the holder, using the formula provided in the
Articles of the Company, which is currently at a ratio 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. All classes of preferred shares automatically convert
into common shares at the conversion price immediately upon the earlier of:
(a) the acquisition of the assets or the take-over of the Company by a
third party which results in payment to all of the shareholders of the
Company of not less than $7.50 per common share (adjusted to reflect
subsequent stock dividends, stock splits or recapitalizations) calculated
on a basis that all of the preferred shares have been converted into common
shares and without regard to any liquidation preferences for any class of
shares; and, (b) the consummation of the Company's sale of its common
shares in a bona fide, firm commitment underwriting pursuant to a
registration statement under the Securities Act of 1933 of the United
States, as amended, the public offering price of which is not less than
$7.50 per share (adjusted to reflect subsequent stock dividends, stock
splits or recapitalizations) and $15,000 in the aggregate, provided that
the underwriters in such public offering are acceptable to the holders of a
majority of the outstanding Class B, Class D, Class E and Class F preferred
shares, such acceptance not to be unreasonably withheld.
The Class B, Class D, Class E and Class F preferred shares are redeemable
at the Company's option with the approval of the holders of 75% of the
outstanding shares of the applicable class, and are retractable at the
holder's option on or after June 30, 2001 at the issue price plus any
declared and unpaid dividends.
8. SHAREHOLDERS' (DEFICIT) EQUITY
INITIAL PUBLIC OFFERING
On April 22, 1999, the directors authorized management to file a
registration statement with the Securities and Exchange Commission to
permit the Company to offer its common shares to the public. If the
offering is consummated under terms presently anticipated, all outstanding
shares of redeemable convertible preferred shares, all of the Class A
convertible preferred shares and the Class B common shares will convert
into 12,529 common shares. Unaudited pro forma shareholders' equity
reflects the exchange of the Class B common shares, for common shares and
the assumed conversion of the redeemable convertible preferred shares and
the Class A convertible preferred shares outstanding at June 30, 1999 into
common shares.
PREFERRED SHARES, COMMON SHARES AND CLASS B COMMON SHARES
On December 1, 1997, the Company's shareholders approved an increase in the
number of authorized common shares from 20,000 to 50,000 shares.
On December 16, 1998, the Company's shareholders approved the redesignation
of common shares without par value to Class A common shares without par
value. The Company'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, the Company 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,
F-15
<PAGE> 90
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
8. SHAREHOLDERS' (DEFICIT) EQUITY (CONTINUED)
all of the issued and outstanding Class B common shares will be exchanged
for common shares on a one-for-one basis.
On June 17, 1999, the Company'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. The Company'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 may at any time and from time to time be issued in one or
more series and the directors may 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 Class A, B, D, E and F preferred shares.
The holders of the Class A preferred shares have the right to one vote for
each common share into which the preferred shares could be converted. The
Class A preferred shares have the same rights to receive dividends as the
redeemable preferred shares discussed in Note 7, and are convertible into
common shares on a one-for-one basis, subject to adjustment under certain
circumstances. The Class A preferred shares are not redeemable or
retractable.
On June 17, 1999, the Company'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 to 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 1992 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 the Company and subsidiaries, partnerships,
joint ventures including directors thereof. Generally, the Company grants
stock options with exercise prices equal to the fair market value of the
common share on the date of grant, as determined by the Company's 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, the Company's shareholders approved changes to the Plan
that would automatically 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.
F-16
<PAGE> 91
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
8. SHAREHOLDERS' (DEFICIT) EQUITY (CONTINUED)
A summary of stock option activity and information concerning currently
outstanding and exercisable option is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------
OPTIONS NUMBER OF WEIGHTED
AVAILABLE COMMON AVERAGE
FOR GRANT SHARES EXERCISE PRICE
--------- --------- --------------
(EXPRESSED IN
CANADIAN
DOLLARS)
<S> <C> <C> <C>
Balances, June 30, 1996......................... 453 174 Cdn.$0.10
----- ----- -----
Options authorized............................ 353 -- --
Options granted............................... (269) 269 0.12
Options exercised............................. -- (57) 0.06
Options cancelled............................. 49 (49) 0.12
----- ----- -----
Balances, June 30, 1997......................... 586 337 0.12
----- ----- -----
Options authorized............................ 1,000 -- --
Options granted............................... (877) 877 0.88
Options exercised............................. -- (423) 0.25
Options cancelled............................. 49 (49) 0.26
----- ----- -----
Balances, June 30, 1998......................... 758 742 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
===== ===== =====
</TABLE>
The U.S. dollar equivalents of the weighted average exercise price
calculated using the year end exchange rates were as follows: $0.08, $0.64,
and $4.12 as of June 30, 1997, 1998 and 1999 respectively.
F-17
<PAGE> 92
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
8. SHAREHOLDERS' (DEFICIT) EQUITY (CONTINUED)
The following tables summarize information concerning outstanding and
exercisable options at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
----------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL EXERCISE PRICE NUMBER EXERCISE PRICE
PER SHARE OUTSTANDING LIFE (IN YEARS) PER SHARE EXERCISABLE PER SHARE
--------------- ----------- --------------- -------------- ----------- --------------
(EXPRESSED IN (EXPRESSED IN (EXPRESSED IN
CANADIAN CANADIAN CANADIAN
DOLLARS) DOLLARS) DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Cdn. $ 0.12 239 2.4 Cdn.$ 0.12 121 Cdn.$ 0.12
0.25 31 3.2 0.25 10 0.25
1.00 157 3.6 1.00 39 1.00
2.50 200 3.9 2.50 50 2.50
7.50 234 4.1 7.50 24 7.50
8.00 230 4.4 8.00 2 8.00
9.47 233 4.7 9.47 1 9.47
15.55 45 4.8 15.55 -- 15.55
19.00 86 4.9 19.00 15 19.00
-------------- ----- ------ --- ------
Cdn. $0.12-$19.00 1,455 Cdn.$ 6.07 262 Cdn.$ 2.56
============== ===== ====== === ======
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN ("ESPP")
On June 17, 1999, the Company's shareholders approved the adoption of an
ESPP and authorized the issuance of up to 1,000 common shares under the
plan with amendments as the directors of the Company may deem desirable.
Under the ESPP, 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
The Company has reserved common shares as of June 30, 1999 as follows:
<TABLE>
<S> <C>
Exercise of stock options................................... 3,998
Employee Stock Purchase Plan................................ 1,000
Conversion of Class A convertible preferred shares.......... 2,000
Conversion of redeemable convertible preferred shares
Class B................................................... 2,105
Class D................................................... 2,658
Class E................................................... 4,000
Class F................................................... 1,288
------
17,049
======
</TABLE>
F-18
<PAGE> 93
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
8. SHAREHOLDERS' (DEFICIT) EQUITY (CONTINUED)
SHARE-BASED COMPENSATION
Under APB No. 25, because the exercise price of the Company'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 $416 at June 30, 1999 will approximate $216, $113, $59 and $28
the fiscal years ending June 30, 2000, 2001, 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 the Company's share option plan
been determined based on the Black-Scholes value at the grant dates for
awards as prescribed by SFAS No. 123, pro forma net income (loss) and net
earnings (loss) per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1997 1998 1999
------- ---- -------
<S> <C> <C> <C>
Net income (loss)
As reported............................................... $(1,394) $ 4 $(2,808)
SFAS No. 123 pro forma.................................... $(1,395) $(2) $(2,849)
Basic and diluted earnings (loss) per share
As reported............................................... $ (0.41) $-- $ (0.72)
SFAS No. 123 pro forma.................................... $ (0.41) $-- $ (0.73)
</TABLE>
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, 1997,
1998 and 1999 were Cdn.$0.03, Cdn.$0.21 and Cdn.$1.92 per share
respectively. The fair value for these options was estimated at the date of
grant using the following weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Assumption
Volatility factor of expected market price of the
Company's shares................................. 0.0% 0.0% 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............................ 6.2% 5.5% 5.6%
</TABLE>
F-19
<PAGE> 94
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
9. INCOME TAXES
Details of the income tax provision (recovery) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
1997 1998 1999
---- ----- ----
<S> <C> <C> <C>
Current
Canadian.................................................. $-- $(132) $(47)
Foreign................................................... -- 120 290
--- ----- ---
-- (12) 243
Deferred
Canadian.................................................. -- 22 --
Foreign................................................... -- -- --
--- ----- ---
-- 22 --
--- ----- ---
Income tax provision........................................ $-- $ 10 $243
=== ===== ===
</TABLE>
The reported income tax provision (recovery) differs from the amount
computed by applying the Canadian basic statutory rate to the income (loss)
before income taxes. The reasons for this difference and the related tax
effects are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------
1997 1998 1999
----- ----- -------
<S> <C> <C> <C>
Canadian basic statutory tax rate........................... 45% 45% 45%
----- ----- -------
Expected income tax provision (recovery).................... $(627) $ 6 $(1,154)
Foreign tax rate differences................................ -- (20) (144)
Losses producing no current tax benefit..................... 564 -- 1,484
Non-deductible expenses..................................... 63 82 56
Research and development tax credits........................ -- (132) (47)
Benefit of temporary differences not recognized............. -- 74 48
----- ----- -------
$ -- $ 10 $ 243
===== ===== =======
</TABLE>
F-20
<PAGE> 95
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
9. 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 the Company's deferred
tax assets and liabilities as of June 30, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Deferred income tax assets
Net operating tax loss carry-forwards..................... $ 1,645 $ 3,129
Research and development expenses......................... 87 87
Book and tax base differences on assets................... -- 66
Other..................................................... 92 84
------- -------
Total deferred income tax assets....................... 1,824 3,366
Valuation allowance for deferred income tax assets.......... (1,824) (3,366)
------- -------
Net deferred income tax assets.............................. $ -- $ --
======= =======
Deferred income tax liabilities
Book and tax base differences on assets................... $ 22 $ --
------- -------
Net deferred income tax liabilities included in accounts
payable and accrued liabilities........................... $ 22 $ --
======= =======
</TABLE>
Due to the uncertainty surrounding the realization of the deferred income
tax assets in future income tax returns, the Company 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, 1998 and 1999 was a
provision (recovery) of $(38) and $1,542, respectively.
As of June 30, 1999, the Company has Canadian tax loss carry-forwards of
approximately $6,954 available to reduce future years' income for tax
purposes. These carry-forward losses expire in 2000 to 2006.
10. CHANGE IN OPERATING ASSETS AND LIABILITIES
The change in operating assets and liabilities is as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Accounts receivable....................................... $(1,994) $(4,971) $(1,188)
Prepaid expenses.......................................... (104) (570) (323)
Accounts payable and accrued liabilities.................. 688 1,117 4,370
Deferred revenue.......................................... 918 2,828 1,337
------- ------- -------
$ (492) $(1,596) $ 4,196
======= ======= =======
</TABLE>
11. SEGMENTED INFORMATION
The Company 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.
F-21
<PAGE> 96
PIVOTAL CORPORATION
(FORMERLY PIVOTAL SOFTWARE INC.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
11. SEGMENTED INFORMATION (CONTINUED)
The Company licenses and markets its products internationally. The
following table presents a summary of revenues by geographical region.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
United States.............................................. $2,885 $11,931 $18,779
Canada..................................................... 481 903 1,463
International.............................................. 140 1,375 5,085
------ ------- -------
$3,506 $14,209 $25,327
====== ======= =======
</TABLE>
The Company attributes revenue among the geographical areas based on the
location of the customers involved.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------
1998 1999
------- -------
<S> <C> <C>
Property and equipment
United States............................................. $ 267 $ 449
Canada.................................................... 1,433 2,435
International............................................. 28 167
------ ------
$1,728 $3,051
====== ======
</TABLE>
During 1997, 1998 and 1999, no single customer accounted for 10% or more of
total revenue.
F-22
<PAGE> 97
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH AND INCLUDING , 1999 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,500,000 SHARES
LOGO
COMMON SHARES
-----------------------
PROSPECTUS
-----------------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 98
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The table below lists the fees and expenses, other than underwriting
discounts and commissions, which the registrant will pay in connection with the
offering described in this registration statement. All the expenses are
estimates, except for the Securities and Exchange Commission registration fee,
the Nasdaq National Market listing fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Securities and Exchange Commission registration fee......... $ 15,665
NASD filing fee............................................. 5,733
Nasdaq National Market listing fee.......................... 95,000
Legal fees and expenses..................................... 490,000
Accounting fees and expenses................................ 160,000
Printing and engraving expenses............................. 160,000
Transfer agent and registrar fees........................... 3,500
Miscellaneous expenses...................................... 10,102
--------
Total.................................................. $940,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the British Columbia Company Act we may, if we obtain court approval,
indemnify our directors and officers and former directors and officers and
current and former directors and officers of our subsidiaries against costs and
expenses, including amounts paid to settle an action or satisfy a judgment in a
civil, criminal or administrative action or proceeding to which they are made
parties because they have been directors or officers, including an action
brought by us. Indemnification of a director or officer under the British
Columbia Company Act is possible only if it is shown that the director or
officer acted honestly and in good faith with a view to our best interests, and
in the case of a criminal or administrative action or proceeding the director or
officer had reasonable grounds for believing that his conduct was lawful.
Our articles require us, if we obtain court approval, to indemnify our
current and former directors. Under our articles we may, if we obtain court
approval, indemnify our subsidiaries' current and former directors and our and
our subsidiaries' current and former officers, employees and agents. Our
articles also provide that, to the fullest extent permitted by the British
Columbia Company Act:
- the rights conferred in the articles are not exclusive; and
- we are authorized to purchase and maintain insurance on behalf of our
and our subsidiaries' current and past directors, officers, employees
and agents against any liability incurred by them in their duties.
Our board of directors has authorized us to enter into indemnity agreements
with each of our directors and officers and the directors and officers of our
subsidiaries. We are currently in the process of entering into indemnity
agreements with each of our directors and officers and the directors and
officers of our subsidiaries. The indemnity agreements call for us to indemnify
the director or officer against all liabilities in connection with any claim
arising out of the individual's status or service as a director or officer of
Pivotal, or our subsidiaries, other than liabilities arising from gross
negligence or willful misconduct. These agreements also call for us to advance
expenses incurred by the individual in connection with any action with respect
to which the individual may be entitled to indemnification by Pivotal.
The British Columbia Company Act currently requires us to obtain the
approval of a court before we indemnify directors or officers. Under proposed
legislation now before the British Columbia legislature, this requirement will
be removed.
II-1
<PAGE> 99
Currently, there is no pending litigation or proceeding involving a current
or past director, officer or employee regarding which indemnification is sought,
nor are we aware of any threatened litigation that may result in claims for
indemnification.
We maintain directors and officers liability insurance with an annual
aggregate coverage limit of Cdn.$5 million.
Insofar as indemnification for liabilities arising under the U.S.
Securities Act may be permitted for directors, officers or persons controlling
Pivotal pursuant to the foregoing provisions, Pivotal has been informed that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since May 31, 1996, the registrant has issued and sold unregistered
securities as follows:
1. Pivotal granted stock options to purchase 1,816,021 common shares at
exercise prices ranging from Cdn.$0.12 to Cdn.$15.55 per share to
employees, directors and consultants pursuant to its incentive stock
option plan. These options and common shares issuable upon their
exercise are not required to be registered by virtue of Rule 903 of
Regulation S with respect to optionees outside the United States and
Rule 701 with respect to optionees in the United States. After the
completion of the offering, Pivotal plans to file a registration
statement on Form S-8 with respect to its stock option plan and stock
purchase plan.
2. Pivotal issued and sold an aggregate of 555,051 common shares to
employees, directors and consultants for aggregate consideration of
Cdn.$129,945 pursuant to exercises of options granted under its
incentive stock option plan. These shares were either exempt from
registration pursuant to Rule 701 under the Securities Act or were
not required to be registered by virtue of Regulation S thereunder.
3. In November 1996 Pivotal issued and sold 4,000,000 Class E preferred
shares for an aggregate purchase price of $5,400,000 to a group of
seven institutional accredited investors and one sophisticated
individual accredited investor pursuant to a share subscription and
purchase agreement. This sale was exempt from registration pursuant
to section 4(2) under the Securities Act.
4. In December 1998 and January 1999 Pivotal issued 476,786 Class B
common shares to 22 of its existing shareholders in exchange for
476,786 Class A common shares. No other consideration was paid by the
holders of the securities and no commission or other remuneration was
paid for soliciting exchanges. These shares were exempt from
registration pursuant to section 3(a)(9) of the Securities Act or
were not required to be registered by virtue of Regulation S
thereunder.
5. In January 1999 Pivotal issued and sold 1,288,246 Class F preferred
shares for an aggregate purchase price of $8,000,000 to a group of
five institutional accredited investors pursuant to a share
subscription and purchase agreement. This sale was exempt from
registration pursuant to section 4(2) under the Securities Act.
6. Prior to the closing Pivotal is effecting a recapitalization pursuant
to which the following will take place:
(i) Class A common shares will be redesignated as common shares in
June 1999,
(ii) Pivotal will authorize 20,000,000 new undesignated preferred
shares in June 1999,
(iii) all holders of Class B common shares will exchange their shares
for common shares prior to the effectiveness of the registration
statement, and
(iv) immediately prior to the effectiveness of the registration
statement (and after the exchange of the Class B common shares) all
of Pivotal's convertible preferred shares will convert
automatically to common shares.
II-2
<PAGE> 100
In the recapitalization no other consideration is being paid by the
holders of the securities and no commission or other remuneration is
being paid to solicit conversions or exchanges. The issuance of the
common shares is exempt from registration pursuant to section 3(a)(9)
under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Memorandum and Articles*
3.2 Form of Memorandum and Articles of the Registrant to be
effective at closing of this offering*
4.1 Specimen of Common Share certificate*
4.2 Registration Rights (included in Exhibit 10.15)*
5.1 Opinion of Davis & Company*
10.1 Amended and Restated Incentive Stock Option Plan dated as of
January 28, 1999*
10.2 Form of Amended and Restated Incentive Stock Option Plan to
be effective at closing of this offering*
10.3 Employee Share Purchase Plan
10.4 Lease dated as of July 18, 1997 between Sodican (B.C.) Inc.
and the Registrant for premises located in North Vancouver,
B.C.*
10.5 Lease dated as of May 26, 1998 between Novo Esplanade Ltd.
and the Registrant for premises located in North Vancouver,
B.C.*
10.6 Lease(1) dated as of December 14, 1998 between B.C. Rail
Ltd. and the Registrant for premises located in North
Vancouver, B.C.*
10.7 Lease(2) dated as of December 14, 1998, between B.C. Rail
Ltd. and the Registrant with respect to premises located in
North Vancouver, B.C.*
10.8 Lease dated as of December 11, 1998 between Yarrow Bay
Office III Limited Partnership and the Registrant with
respect to premises located in Kirkland, Washington*
10.9 Lease dated as of March 12, 1999 between Erachange Limited
and the Registrant for premises located in London, England*
10.10 Lease dated as of April 19, 1999 between Massachusetts
Mutual Life Insurance Company and the Registrant for
premises located in Des Plaines, Illinois*
**10.11 Letter agreement dated November 21, 1997 between the
Registrant and Robert A. Runge granting an option to
purchase 250,000 common shares*
**10.12 Letter agreement dated November 2, 1997 between the
Registrant and Glenn S. Hasen granting an option to purchase
136,000 common shares*
10.13 Class F Preferred Share Subscription and Purchase Agreement
dated January 15, 1999, with respect to Class F Preferred
Shares*
10.14 Shareholders' Agreement dated January 15, 1999*
10.15 Investors' Rights Agreement dated January 15, 1999*
10.16 Form of Share Purchase Agreement with respect to the
issuance of Class B common shares*
10.17 Form of Share Purchase Agreement with respect to the
issuance of common shares in exchange for Class B common
shares*
10.18 Form of Lock-up Agreement*
10.19 Canadian Imperial Bank of Commerce $2,000,000 Committed
Installment Loan dated March 18, 1998*
10.20 Canadian Imperial Bank of Commerce $3,000,000 Operating Line
of Credit dated March 18, 1998*
10.21 Security Agreement with Canadian Imperial Bank of Commerce
dated for reference April 15, 1998*
10.22 Contract Relative to Special Security under the Bank Act
between Canadian Imperial Bank of Commerce and the
Registrant dated April 30, 1998*
</TABLE>
II-3
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.23 Canadian Imperial Bank of Commerce Schedule -- Standard
Credit Terms dated March 18, 1998*
10.24 Canadian Imperial Bank of Commerce Schedule -- Standard
Credit Terms dated March 18, 1998*
10.25 Form of Indemnity Agreement between the Registrant and
directors and officers of the Registrant*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Davis & Company (included in Exhibit 5.1)
24.1 Powers of Attorney (included on signature page)*
</TABLE>
- ---------------
** Indicates management contract.
* Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules are omitted because they are inapplicable
or the requested information is shown in our consolidated financial statements,
and related notes.
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(3) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be a part of this registration
statement as of the time it was declared effective; and
(b) For the purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing of Form F-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Vancouver, British Columbia, Canada, on August 2,
1999.
PIVOTAL CORPORATION
By: /s/ NORMAN B. FRANCIS
------------------------------------
Norman B. Francis
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ NORMAN B. FRANCIS President, Chief Executive Officer August 2, 1999
- --------------------------------------------------- and Director
Norman B. Francis
* Chief Financial Officer and Vice August 2, 1999
- --------------------------------------------------- President, Operations
Vincent D. Mifsud
* Chief Technical Officer and August 2, 1999
- --------------------------------------------------- Director
Keith R. Wales
* Director August 2, 1999
- ---------------------------------------------------
Jeremy A. Jaech
* Director August 2, 1999
- ---------------------------------------------------
Roger S. Siboni
Director
- ---------------------------------------------------
Douglas J. Mackenzie
* Director August 2, 1999
- ---------------------------------------------------
Robert J. Louis
* Director August 2, 1999
- ---------------------------------------------------
Donald A. Mattrick
</TABLE>
By: /s/ NORMAN B. FRANCIS
--------------------------------------------------
Norman B. Francis
Attorney-in-fact
II-5
<PAGE> 103
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of Section 6(a) of the Securities Act of 1933,
as amended, the undersigned has signed this Registration Statement solely in the
capacity of the duly authorized representative of Pivotal Corporation in the
United States, on August 2, 1999.
PIVOTAL CORPORATION, a Washington
corporation
By: /s/ NORMAN B. FRANCIS
---------------------------------------
Norman B. Francis
President, Chief Executive Officer and
Director
II-6
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Memorandum and Articles*
3.2 Form of Memorandum and Articles of the Registrant to be
effective at closing of this offering*
4.1 Specimen of Common Share certificate*
4.2 Registration Rights (included in Exhibit 10.15)*
5.1 Opinion of Davis & Company*
10.1 Amended and Restated Incentive Stock Option Plan dated as of
January 28, 1999*
10.2 Form of Amended and Restated Incentive Stock Option Plan to
be effective at closing of this offering*
10.3 Employee Share Purchase Plan
10.4 Lease dated as of July 18, 1997 between Sodican (B.C.) Inc.
and the Registrant for premises located in North Vancouver,
B.C.*
10.5 Lease dated as of May 26, 1998 between Novo Esplanade Ltd.
and the Registrant for premises located in North Vancouver,
B.C.*
10.6 Lease(1) dated as of December 14, 1998 between B.C. Rail
Ltd. and the Registrant for premises located in North
Vancouver, B.C.*
10.7 Lease(2) dated as of December 14, 1998, between B.C. Rail
Ltd. and the Registrant with respect to premises located in
North Vancouver, B.C.*
10.8 Lease dated as of December 11, 1998 between Yarrow Bay
Office III Limited Partnership and the Registrant with
respect to premises located in Kirkland, Washington*
10.9 Lease dated as of March 12, 1999 between Erachange Limited
and the Registrant for premises located in London, England*
10.10 Lease dated as of April 19, 1999 between Massachusetts
Mutual Life Insurance Company and the Registrant for
premises located in Des Plaines, Illinois*
**10.11 Letter agreement dated November 21, 1997 between the
Registrant and Robert A. Runge granting an option to
purchase 250,000 common shares*
**10.12 Letter agreement dated November 2, 1997 between the
Registrant and Glenn S. Hasen granting an option to purchase
136,000 common shares*
10.13 Class F Preferred Share Subscription and Purchase Agreement
dated January 15, 1999, with respect to Class F Preferred
Shares*
10.14 Shareholders' Agreement dated January 15, 1999*
10.15 Investors' Rights Agreement dated January 15, 1999*
10.16 Form of Share Purchase Agreement with respect to the
issuance of Class B common shares*
10.17 Form of Share Purchase Agreement with respect to the
issuance of common shares in exchange for Class B common
shares*
10.18 Form of Lock-up Agreement*
10.19 Canadian Imperial Bank of Commerce $2,000,000 Committed
Installment Loan dated March 18, 1998*
10.20 Canadian Imperial Bank of Commerce $3,000,000 Operating Line
of Credit dated March 18, 1998*
10.21 Security Agreement with Canadian Imperial Bank of Commerce
dated for reference April 15, 1998*
10.22 Contract Relative to Special Security under the Bank Act
between Canadian Imperial Bank of Commerce and the
Registrant dated April 30, 1998*
10.23 Canadian Imperial Bank of Commerce Schedule -- Standard
Credit Terms dated March 18, 1998*
10.24 Canadian Imperial Bank of Commerce Schedule -- Standard
Credit Terms dated March 18, 1998*
</TABLE>
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
10.25 Form of Indemnity Agreement between the Registrant and
directors and officers of the Registrant*
21.1 Subsidiaries of the Registrant*
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Davis & Company (included in Exhibit 5.1)
24.1 Powers of Attorney (included on signature page)*
</TABLE>
- ---------------
** Indicates management contract.
* Previously filed.
<PAGE> 1
================================================================================
PIVOTAL CORPORATION
(a British Columbia company)
3,500,000 Common Shares
PURCHASE AGREEMENT
Dated: o, 1999
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 1. Representations and Warranties....................................................4
(a) Representations and Warranties by the Company...................................4
(i) Compliance with Registration Requirements...............................4
(ii) Independent Accountants.................................................5
(iii) Financial Statements....................................................5
(iv) No Material Adverse Change in Business..................................6
(v) Good Standing of the Company............................................6
(vi) Good Standing of Subsidiaries...........................................6
(vii) Capitalization..........................................................7
(viii) Authorization of Agreement..............................................7
(ix) Authorization and Description of Securities.............................7
(x) Absence of Defaults and Conflicts.......................................9
(xi) Absence of Labor Dispute................................................9
(xii) Absence of Proceedings..................................................9
(xiii) Accuracy of Exhibits....................................................9
(xiv) Possession of Intellectual Property.....................................9
(xv) Absence of Further Requirements.........................................9
(xvi) Possession of Licenses and Permits......................................9
(xvii) Title to Property......................................................10
(xviii) Compliance with Cuba Act...............................................10
(xix) Investment Company Act
(xx) Environmental Laws.....................................................10
(xxi) Registration Rights....................................................11
(xxii) Compliance with Laws...................................................11
(xxiii) Taxes..................................................................11
(xxiv) No Market Stabilization Activities.....................................11
(xxv) Registrar and Transfer Agent...........................................11
(xxvi) Insurance..............................................................11
(xxvii) No Broker..............................................................12
(xxviii)Adequate Accounting....................................................12
(b) Officer's Certificates.........................................................12
Section 2. Sale and Delivery to Underwriters; Closing.......................................12
(a) Initial Securities.............................................................12
(b) Option Securities..............................................................13
(c) Payment........................................................................13
(d) Denominations; Registration....................................................14
Section 3. Covenants of the Company.........................................................14
(a) Compliance with Securities Regulations and Commission Requests.................14
(b) Filing of Amendments...........................................................14
(c) Delivery of Registration Statements............................................15
(d) Delivery of Prospectuses.......................................................15
(e) Continued Compliance with Securities Laws......................................15
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(f) Blue Sky Qualifications........................................................16
(g) Rule 158 and Continuous Disclosure.............................................16
(h) Use of Proceeds................................................................16
(i) Listing........................................................................16
(j) Restriction on Sale of Securities..............................................16
(k) Reporting Requirements.........................................................17
(l) Compliance with NASD Rules.....................................................17
(m) Compliance with Rule 463.......................................................17
(n)..Copies of Documents to Underwriters............................................17
(o)..Miscellaneous..................................................................18
(p)..Prior to the Closing Time......................................................18
(q)..Canadian Private Placement.....................................................18
Section 4. Payment of Expenses..............................................................18
(a) Expenses.......................................................................18
(b) Termination of Agreement.......................................................19
Section 5. Conditions of Underwriters' Obligations..........................................19
(a) Effectiveness of Registration Statement........................................19
(b) Opinion of U.S. Counsel for Company............................................19
(c) Opinion of Canadian Counsel for Company........................................19
(d) Opinion of U.S. Counsel for Underwriters.......................................20
(e) Opinion of Canadian Counsel for Underwriters...................................20
(f) Officers' Certificate..........................................................20
(g) Accountant's Comfort Letter....................................................20
(h) Bring-down Comfort Letter......................................................21
(i) Approval of Listing............................................................21
(j) No Objection...................................................................21
(k) Lock-up Agreements.............................................................21
(l) Conditions to Purchase of Option Securities....................................21
(i) Officers' Certificate..................................................21
(ii) Opinion of Counsel for Company.........................................21
(iii) Opinion of Counsel for Underwriters....................................21
(iv) Bring-down Comfort Letter..............................................22
(m) Additional Documents...........................................................22
(n) Termination of Agreement.......................................................22
Section 6. Indemnification..................................................................22
(a) Indemnification of Underwriters................................................22
(b) Indemnification of Company, Directors and Officers.............................24
(c) Actions against Parties; Notification..........................................24
(d) Settlement without Consent if Failure to Reimburse.............................25
(e) Indemnification for Reserved Securities........................................25
Section 7. Contribution.....................................................................25
Section 8. Representations, Warranties and Agreements to Survive Delivery...................26
Section 9. Termination of Agreement.........................................................26
</TABLE>
ii
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
(a) Termination; General...........................................................26
(b) Liabilities....................................................................27
Section 10. Default by One or More of the Underwriters......................................27
Section 11. Notices.........................................................................28
Section 12. Parties.........................................................................28
Section 13. GOVERNING LAW AND TIME..........................................................28
Section 14. Effect of Headings..............................................................28
SCHEDULES
Schedule A - List of Underwriters...........................................Sch A-1
Schedule B - Pricing Information............................................Sch B-1
Schedule C - List of Persons subject to Lock-up.............................Sch C-1
EXHIBITS
Exhibit A- Form of Opinion of Company's Counsel............................A-1
Exhibit B- Form of Lock-up Letter..........................................B-1
</TABLE>
iii
<PAGE> 5
PIVOTAL CORPORATION
(a British Columbia company)
Common 3,500,000 Shares
(Without Par Value)
PURCHASE AGREEMENT
o, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Bear, Stearns & Co. Inc.
Dain Rauscher Wessels
(a division of Dain Rauscher Incorporated)
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Pivotal Corporation, a company incorporated under the laws of British
Columbia, Canada (the "Company"), confirms its agreement with Merrill Lynch &
Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
each of the other Underwriters named in Schedule A hereto (collectively, the
"Underwriters", which term shall also include any underwriter substituted as
hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Bear,
Stearns & Co. Inc. and Dain Rauscher Wessels (a division of Dain Rauscher
Incorporated) are acting as representatives (in such capacity, the
"Representatives"), with respect to the issue and sale by the Company and the
purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of Common Shares, without par value per share, of the Company
set forth in said Schedule A, and with respect to the grant by the Company to
the Underwriters, acting severally and not jointly, of the option described in
Section 2(b) hereof to purchase all or any part of 525,000 additional Common
Shares of the Company to cover over-allotments, if any. The aforesaid 3,500,000
Common Shares of the Company (the "Initial Securities") to be purchased by the
Underwriters and all or any part of the 525,000 Common Shares of the Company
subject to the option described in Section 2(b) hereof (the "Option Securities")
are hereinafter called, collectively, the "Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities in the United States and Merrill Lynch Canada Inc.
("Merrill Lynch Canada"), the Canadian affiliate of Merrill Lynch, proposes to
make a public offering of the Initial Securities in British Columbia, Canada,
all as soon as the Representatives deem advisable after this Agreement has been
executed and delivered. The Company also understands that although this
agreement to purchase is presented on behalf of the Underwriters as purchaser,
Merrill Lynch Canada will endeavour to arrange for substituted purchasers (the
"Substituted Purchasers") for
<PAGE> 6
the Initial Securities in certain of the provinces of Canada other than British
Columbia. It is further understood that, subject to Section 5 hereof, the
Underwriters agree to purchase or cause to be purchased the Initial Securities
being issued by the Company and that this commitment is not subject to Merrill
Lynch Canada being able to arrange Substituted Purchasers. Each Substituted
Purchaser shall purchase the Initial Securities at the gross price per share
before the Underwriters' commission per share as set forth in Section 1 of
Schedule B pursuant to the prospectus exemption(s) set out below opposite to the
province of Canada in which such Substitute Purchaser is resident:
<TABLE>
<CAPTION>
PROVINCE PROSPECTUS EXEMPTIONS(S)
-------- ------------------------
<S> <C>
Alberta Section 107(1)(d) of the Securities Act (Alberta)
Saskatchewan Section 81(1)(d) of the Securities Act (Saskatchewan)
Manitoba Section 58(1)(a) of the Securities Act (Manitoba)
Ontario Section 3.1 of Rule 45-501 of the Securities Act (Ontario)
Section 3.6 of Rule 45-501 of the Securities Act
(Ontario) Section 2.2 of Rule 45-503 of the
Securities Act (Ontario)
Quebec Section 51 of the Securities Act (Quebec)
</TABLE>
Merrill Lynch Canada will notify the Company with respect to the identity of any
such Substituted Purchasers as soon as practicable and with a view to leaving
time sufficient to allow the Company to secure compliance with all relevant
regulatory requirements relating to the sale of the Initial Securities to such
Substituted Purchasers. Any reference in this Purchase Agreement hereafter to
"the purchasers" shall accordingly be taken to be a reference to the
Underwriters, as the initial committed purchasers, and to the Substituted
Purchasers, if any.
The Company and the Underwriters agree that up to 525,000 Common Shares
of the Securities to be purchased by the Underwriters (the "Reserved
Securities") shall be reserved for sale by the Underwriters to certain eligible
employees and persons having business relationships with the Company, as part of
the distribution of the Securities by the Underwriters (including without
limitation on a Substituted Purchaser basis), subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. and all other applicable laws, rules and
regulations. To the extent that such Reserved Securities are not orally
confirmed for purchase by such eligible employees and persons having business
relationships with the Company by the end of the first business day after the
date of this Agreement, such Reserved Securities may be offered to the public as
part of the public offering contemplated hereby.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form F-1 (No. 333-o)
covering the registration of the Securities under the Securities Act of 1933, as
amended (the "1933 Act"), including the related Preeffective Prospectus or U.S.
Prospectuses (as hereinafter defined). The Company will as soon as possible and
in any event not later than 5:00 p.m. (o time) on o, 1999, either (i) prepare
and file a prospectus in accordance with the provisions of Rule 430A ("Rule
430A") of the rules and regulations of the Commission under the 1933 Act (the
"1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the
1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434
("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
2
<PAGE> 7
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "Preeffective Prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "U.S. Prospectus." If Rule 434 is relied on, the term "U.S.
Prospectus" shall refer to the preliminary prospectus dated _____, 1999 together
with the Term Sheet and all references in this Agreement to the date of the U.S.
Prospectus shall mean the date of the Term Sheet. For purposes of this
Agreement, all references to the Registration Statement, any Preeffective
Prospectus, the U.S. Prospectus or any Term Sheet or any amendment or supplement
to any of the foregoing shall be deemed to include the copy thereof filed with
the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR").
The Company has prepared and filed with the British Columbia Securities
Commission (the "BCSC") a preliminary long form prospectus dated July 14, 1999
(together with any amendment or amendment and restatement thereof, the
"Preliminary Prospectus") with respect to the Initial Securities (and a receipt
therefor has been obtained from the BCSC) and has heretofore been delivered by
the Company to the Underwriters. The Company shall as soon as possible and in
any event by 5:00 p.m. (Vancouver time) on o, 1999 (or such later date as may be
agreed in writing by the Underwriters) fulfill and comply with, to the
satisfaction of the Underwriters, the BC Securities Laws (as hereinafter
defined) required to be fulfilled or complied with to enable the Initial
Securities to be lawfully distributed and sold to the public in British Columbia
through investment dealers or brokers appropriately registered in such
jurisdiction. The final prospectus relating to the Initial Securities filed with
the BCSC for which a receipt is obtained is herein called the "Final
Prospectus". For the purposes of this Agreement, all references to the
Preliminary Prospectus or the Final Prospectus (as hereinafter defined) or any
amendment or supplement to any of the foregoing shall be deemed to include the
copy thereof filed with the BCSC pursuant to the System for Electronic Document
Analysis and Retrieval ("SEDAR").
For the purposes of this Agreement, the "Prospectuses" means the U.S.
prospectus and the Final Prospectus.
3
<PAGE> 8
Section 1. Representations and Warranties.
(a) Representations and Warranties by the Company The Company represents
and warrants to each Underwriter as of the date hereof, as of the Closing Time
referred to in Section 2(c) hereof, and as of each Date of Delivery (if any)
referred to in Section 2(b) hereof, and agrees with each Underwriter, as
follows:
(i) Compliance with Registration Requirements. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or, to
the knowledge of the Company, are contemplated by the Commission, and
any request on the part of the Commission for additional information has
been complied with. Neither the BCSC nor any stock exchange has issued
or threatened to issue any order preventing or suspending the use of any
Preliminary Prospectus, the Amended Preliminary Prospectus or the Final
Prospectus, nor, to the knowledge of the Company, is any such order
contemplated by the BCSC, and any request on the part of the BCSC for
additional information has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement, the
Rule 462(b) Registration Statement and any amendments and supplements
thereto complied and will comply in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations and did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and the U.S. Prospectus, any
Preeffective Prospectus and any supplement thereto or prospectus wrapper
prepared in connection therewith, at their respective times of issuance
and at the Closing Time, complied and will comply in all material
respects with any applicable laws or regulations of foreign
jurisdictions in which the U.S. Prospectus and such Preeffective
Prospectus, as amended or supplemented, if applicable, are distributed
in connection with the offer and sale of Reserved Securities. Neither
the U.S. Prospectus nor any amendments or supplements thereto (including
any prospectus wrapper), at the time the U.S. Prospectus or any such
amendment or supplement was issued and at the Closing Time (and, if any
Option Securities are purchased, at the Date of Delivery), included or
will include an untrue statement of a material fact or omitted or will
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the U.S. Prospectus shall not be
"materially different", as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective. Each Preeffective Prospectus and the prospectus filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations.
4
<PAGE> 9
As at its date, the Preliminary Prospectus complied in all
material respects with the requirements of all applicable securities
laws in the Province of British Columbia and the regulations and rules
thereunder, together with applicable published policy statements,
blanket orders and published notices of the BCSC (the "BC Securities
Laws") and upon filing the Final Prospectus with the BCSC, the issuance
of a receipt therefor by the BCSC and delivery thereof to the
Underwriters, the Final Prospectus and any amendments and supplements
thereto complied and will comply in all material respects with the
requirements of the BC Securities Laws. As at its date, neither the
Preliminary Prospectus nor any prospectus wrapper prepared in connection
therewith, included or will include an untrue statement of a material
fact or omitted or will omit to state a material fact necessary to make
the statements therein, in light of the circumstances under which they
were made, not misleading. At its date of issue and at all times
subsequent thereto up to and including the Closing Time (and, if any
Option Securities are purchased, at the Date of Delivery), the Final
Prospectus constitutes and will constitute full, true and plain
disclosure of all material facts relating to the Company and the
Securities, and none of the Final Prospectus, nor any amendment or
supplement thereto, nor any prospectus wrapper prepared in connection
therewith, included or will include any untrue statement of a material
fact or omitted or will omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading.
Each Preeffective Prospectus and the U.S. Prospectus delivered
to the Underwriters for use in connection with this offering was
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T. Each Preliminary Prospectus and Final Prospectus
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the BCSC pursuant to SEDAR.
There is no franchise, lease, contract, agreement or document
required to be described in the Final Prospectus or to be filed as an
exhibit to the Registration Statement or with the BCSC which is not
described or filed therein or therewith as required; and all
descriptions of any such franchises, leases, contracts, agreements or
documents contained in the Registration Statement or the Final
Prospectus are accurate.
The representations and warranties in this subsection shall not
apply to statements in or omissions from the Registration Statement or
the Prospectuses made in reliance upon and in conformity with
information furnished to the Company in writing by any Underwriter
through Merrill Lynch expressly for use in the Registration Statement or
the Prospectuses.
(ii) Independent Accountants. The accountants who certified the
financial statements and supporting schedules included in the
Registration Statement and the Prospectuses are independent public
accountants as required by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements, together
with the related schedules and notes, included in the Registration
Statement and the Prospectuses present
5
<PAGE> 10
fairly the financial position of the Company and its consolidated
subsidiaries at the dates indicated and the statement of operations,
cash flows and shareholders' deficit of the Company and its consolidated
subsidiaries for the periods specified; said financial statements,
related notes and schedules have been prepared in accordance with U.S.
generally accepted accounting principles and also in accordance with
Canadian generally accepted accounting principles applied on a
consistent basis throughout the periods involved, except as may be set
forth in the Prospectuses. The selected financial data and the summary
financial information included in the Prospectuses present fairly the
information shown therein and have been compiled on a basis consistent
with that of the audited financial statements included in the
Registration Statement and the Prospectuses.
(iv) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectuses, except as otherwise stated therein, (A)
there has been no material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of
the Company and its subsidiaries considered as one enterprise, whether
or not arising in the ordinary course of business (a "Material Adverse
Effect"), (B) there have been no transactions entered into by the
Company or any of its subsidiaries, other than those in the ordinary
course of business, which are material with respect to the Company and
its subsidiaries considered as one enterprise and (C) there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(v) Good Standing of the Company. The Company has been duly
organized and is validly existing and in good standing as a company
under the laws of British Columbia and has corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its
obligations under this Agreement; and the Company is duly qualified as a
foreign corporation to transact business and is in good standing in each
other jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. Each "significant
subsidiary" of the Company (as such term is defined in Rule 1-02 of
Regulation S-X) and Pivotal Software Limited (each a "Subsidiary" and,
collectively, the "Subsidiaries") has been duly organized and is validly
existing and in good standing as a corporation under the laws of the
jurisdiction of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except where the failure to so qualify or to be in good standing would
not result in a Material Adverse Effect; except as otherwise disclosed
in the Registration Statement and the Prospectuses, all of the issued
and outstanding share capital of each such Subsidiary has been duly
authorized and validly issued, is fully paid and non-assessable and is
owned by the Company,
6
<PAGE> 11
directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity; none of
the outstanding shares of any Subsidiary was issued in violation of the
preemptive or similar rights of any securityholder of such Subsidiary.
The only subsidiaries of the Company are (a) the subsidiaries listed on
Exhibit 21 to the Registration Statement and (b) certain other
subsidiaries which, considered in the aggregate as a single Subsidiary,
do not constitute a "significant subsidiary" as defined in Rule 1-02 of
Regulation S-X.
(vii) Capitalization. The authorized, issued and outstanding
share capital of the Company is as set forth in the Prospectuses in the
column entitled "Actual" under the caption "Capitalization", and under
the caption "Description of Share Capital" (except for subsequent
issuances, if any, pursuant to this Agreement, pursuant to reservations,
agreements or employee benefit plans referred to in the Prospectuses or
pursuant to the exercise of convertible securities or options referred
to in the Prospectuses). The issued and outstanding share capital of the
Company has been duly authorized and validly issued and is fully paid
and non-assessable and has been issued in compliance with all U.S. and
British Columbia securities laws; none of the outstanding shares of the
Company was issued in violation of the preemptive or other similar
rights of any securityholder of the Company. Except as disclosed in and
or contemplated by the Prospectuses and the financial statements of the
Company and related notes thereto included in the Prospectuses, the
Company does not have any options or warrants to purchase, or any
pre-emptive rights or other rights to subscribe for or to purchase any
securities or obligations convertible into, or any contracts or
commitments to issue or sell, any of its share capital or any such
options, rights, convertible securities or obligations except for
options granted subsequent to the date of the information provided in
the Prospectuses pursuant to the Company's employee stock option plan
disclosed in the Prospectuses. The description of the Company's stock
option and other stock plans or arrangements, and the options or other
rights granted thereunder, as set forth in the Prospectuses, accurately
and fairly presents the information required to be disclosed with
respect to such plans, arrangements, options and rights. Except as
disclosed in the Prospectuses, to the knowledge of the Company, there
are no agreements, arrangements or understandings among or between any
shareholder of the Company with respect to the Company or the voting or
disposition of the Company's capital stock that will survive the sale of
the Securities pursuant to this Agreement.
(viii) Authorization of Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
(ix) Authorization and Description of Securities. The Securities
have been duly authorized for issuance and sale to the Underwriters
pursuant to this Agreement and, when issued and delivered by the Company
pursuant to this Agreement against payment of the consideration set
forth herein, will be duly and validly issued and fully paid and
non-assessable; the Common Shares of the Company conform to all
statements relating thereto contained in the Prospectus and such
description conforms to the rights set forth in the instruments defining
the same; no holder of the Securities will be subject to personal
liability by reason of being such a holder; and the issuance of the
Securities will
7
<PAGE> 12
not be subject to the preemptive or other similar rights of any
securityholder of the Company upon a final Prospectus being filed with
the BCSC and a receipt obtained therefor.
(x) Absence of Defaults and Conflicts. Neither the Company nor
any of its subsidiaries is in violation of its memorandum or articles or
in default in the performance or observance of any obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, deed of trust, loan or credit agreement, note, lease or other
agreement or instrument to which the Company or any of its subsidiaries
is a party or by which it or any of them may be bound, or to which any
of the property or assets of the Company or any subsidiary is subject
(collectively, the "Agreements and Instruments") except for such
defaults that would not result in a Material Adverse Effect; and the
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated herein and in the
Registration Statement and in the Prospectuses (including the issuance
and sale of the Securities and the use of the proceeds from the sale of
the Securities as described in the Prospectuses under the caption "Use
of Proceeds") and compliance by the Company with its obligations
hereunder have been duly authorized by all necessary corporate action
and do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any subsidiary pursuant to, the
Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a
Material Adverse Effect), nor will such action result in any violation
of the provisions of the memorandum or articles of the Company or any
subsidiary in effect on or after the Closing Time or any applicable law,
statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any subsidiary or any of their
assets, properties or operations. As used herein, a "Repayment Event"
means any event or condition which gives the holder of any note,
debenture or other evidence of indebtedness (or any person acting on
such holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company or any
subsidiary.
(xi) Absence of Labor Dispute. No labor dispute with the
employees of the Company or any subsidiary exists or, to the knowledge
of the Company, is imminent, and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its or
any subsidiary's principal suppliers, manufacturers, customers or
contractors, which, in either case, may reasonably be expected to result
in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company or any subsidiary, which is required to be disclosed in the
Registration Statement and in the Prospectuses (other than as disclosed
therein), or which
8
<PAGE> 13
might reasonably be expected to result in a Material Adverse Effect, or
which might reasonably be expected to materially and adversely affect
the properties or assets thereof or the consummation of the transactions
contemplated in this Agreement or the performance by the Company of its
obligations hereunder; the aggregate of all pending legal or
governmental proceedings to which the Company or any subsidiary is a
party or of which any of their respective property or assets is the
subject which are not described in the Registration Statement and in the
Prospectuses, including ordinary routine litigation incidental to the
business, could not reasonably be expected to result in a Material
Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or documents
which are required to be described in the Registration Statement or the
Prospectuses or to be filed as exhibits thereto which have not been so
described and filed as required.
(xiv) Possession of Intellectual Property. Except as described
in the Prospectus, the Company and its subsidiaries own or possess, or
can acquire on reasonable terms, adequate patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and
other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade
names or other intellectual property (collectively, "Intellectual
Property") necessary to carry on the business now operated by them, and
neither the Company nor any of its subsidiaries has received any notice
or is otherwise aware of any infringement of or conflict with asserted
rights of others with respect to any Intellectual Property or of any
facts or circumstances which would render any Intellectual Property
invalid or inadequate to protect the interest of the Company or any of
its subsidiaries therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity or
inadequacy, singly or in the aggregate, would result in a Material
Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance or
sale of the Securities hereunder or the consummation of the transactions
contemplated by this Agreement, except (i) such as have been already
obtained or as may be required under the 1933 Act or the 1933 Act
Regulations or state securities laws or the BC Securities Laws and (ii)
such as have been obtained or as may be required under the laws and
regulations of jurisdictions outside the United States and British
Columbia, Canada in which the Reserved Securities are offered.
(xvi) Possession of Licenses and Permits. The Company and its
subsidiaries possess such permits, licenses, approvals, consents and
other authorizations (collectively, "Governmental Licenses") issued by
the appropriate federal, state, provincial, local or foreign regulatory
agencies or bodies necessary to conduct the business now operated by
them; the Company and its subsidiaries are in compliance with the terms
and conditions of all such Governmental Licenses, except where the
failure so to comply would not, singly or in the aggregate, have a
Material Adverse Effect; all of the Governmental Licenses are valid and
in full force and effect, except when the invalidity of such
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Governmental Licenses or the failure of such Governmental Licenses to be
in full force and effect would not have a Material Adverse Effect; and
neither the Company nor any of its subsidiaries has received any notice
of proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(xvii) Title to Property. The Company and its subsidiaries have
good and marketable title to all real property owned by the Company and
its subsidiaries and good title to all other properties owned by them,
in each case, free and clear of all mortgages, pledges, liens, security
interests, claims, restrictions or encumbrances of any kind except such
as (a) are described in the Prospectuses or (b) do not, singly or in the
aggregate, materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by
the Company or any of its subsidiaries; and all of the leases and
subleases material to the business of the Company and its subsidiaries,
considered as one enterprise, and under which the Company or any of its
subsidiaries holds properties described in the Prospectuses, are in full
force and effect, and neither the Company nor any subsidiary has any
notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any subsidiary under any
of the leases or subleases mentioned above, or affecting or questioning
the rights of the Company or such subsidiary to the continued possession
of the leased or subleased premises under any such lease or sublease.
(xviii) Compliance with Cuba Act. The Company has complied with,
and is and will be in compliance with, the provisions of that certain
Florida act relating to disclosure of doing business with Cuba, codified
as Section 517.075 of the Florida statutes, and the rules and
regulations thereunder (collectively, the "Cuba Act") or is exempt
therefrom.
(xix) Investment Company Act. The Company is not, and upon the
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectus
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the Registration
Statement and the Prospectuses and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the Company
nor any of its subsidiaries is in violation of any federal, state,
provincial, local or foreign statute, law, rule, regulation, ordinance,
code, policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative order,
consent, decree or judgment, relating to pollution or protection of
human health, the environment (including, without limitation, ambient
air, surface water, groundwater, land surface or subsurface strata) or
wildlife, including, without limitation, laws and regulations relating
to the release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances, petroleum
or petroleum products (collectively, "Hazardous Materials") or to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
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"Environmental Laws"), (B) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements,
(C) there are no pending or threatened administrative, regulatory or
judicial actions, suits, demands, demand letters, claims, liens, notices
of noncompliance or violation, investigation or proceedings relating to
any Environmental Law against the Company or any of its subsidiaries and
(D) there are no events or circumstances known to the Company that might
reasonably be expected to form the basis of an order for clean-up or
remediation, or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company or any of
its subsidiaries relating to Hazardous Materials or any Environmental
Laws.
(xxi) Registration Rights. No person or entity has the right to
require registration of common shares or other securities of the Company
because of the filing or effectiveness of the Registration Statement or
the issuance of a receipt by the BCSC for the Final Prospectus of the
Company or otherwise that has not waived that right.
(xxii) Compliance with Laws. The Company and its Subsidiaries
are in all materials respects in compliance with, and conduct their
businesses in conformity with, all applicable U.S. and Canadian federal,
state, provincial, local and foreign laws, rules and regulations or any
court or governmental agency or body.
(xxiii) Taxes. The Company and its Subsidiaries have filed all
necessary U.S. and Canadian federal, state, provincial, local and
foreign income, payroll, franchise and other tax returns and have paid
all taxes shown as due thereon or with respect to any of their
properties or any transactions to which any such entity was a party, and
there is no tax deficiency that has been, or to the knowledge of the
Company is likely to be, asserted against the Company or any of its
Subsidiaries or any of their respective properties or assets that would
result in a Material Adverse Effect.
(xxiv) No Market Stabilization Activities. Neither the Company
nor, to its knowledge, any of its officers, directors or affiliates has
taken or will take, directly or indirectly, any action designed or
intended to stabilize or manipulate the price of any security of the
Company, or which caused or resulted in, or which might in the future
reasonably be expected to cause or result in, stabilization or
manipulation of the price of any security of the Company.
(xxv) Registrar and Transfer Agent. American Stock Transfer &
Trust Company, at its principal offices in New York, New York, has been
duly appointed as a registrar and transfer agent in respect of the
Common Shares of the Company.
(xxvi) Insurance. Except as described in or contemplated by the
Prospectuses, the Company and its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and
in such amounts as are customary in the businesses in which they are
engaged or propose to engage; and neither the Company nor any subsidiary
of the Company has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires
or to obtain similar
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<PAGE> 16
coverage from similar insurers as may be necessary to continue their
business at a cost that would not result in a Material Adverse Effect.
(xxvii) No Broker. Other than as contemplated by this Agreement,
there is no broker, finder or other party that is entitled to receive
from the Company any brokerage or finder's fee or other fee or
commission as a result of any of the transactions contemplated by this
Agreement.
(xxviii) Adequate Accounting. The Company and each of its
subsidiaries maintains a system of internal accounting controls
sufficient to provide reasonable assurances that: (i) transactions are
executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with U.S. generally
accepted accounting principles and Canadian generally accepted
accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability
for assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(xxix) To the knowledge of the Company, after due inquiry, none
of the directors or officers or shareholders of the Company listed under
"Principal Shareholders" in the Prospectuses is or has ever been subject
to prior criminal or bankruptcy proceedings in the United States, Canada
or elsewhere.
(xxx) To the knowledge of the Company, after due inquiry, except
as disclosed in writing to the Underwriters or in the Prospectuses
(namely, employment, option and severance agreements between the Company
and its Chairman, President, Managing Directors, Vice-Presidents and
certain Managers), the Company is not a party to any contract, agreement
or understanding with any officer, director, employee or any other
person not dealing at arm's length with the Company which is required to
be disclosed by the BC Securities Laws.
(b) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby.
Section 2. Sale and Delivery to Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company, at the gross price per share less the Underwriters' commission
per share to be paid by the Company, all as set forth in Schedule B, the number
of Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof. Each Underwriter shall, to the extent
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<PAGE> 17
that any Initial Securities are purchased by Substituted Purchasers, be entitled
to payment from the Company of a commission per share equal to the commission
per share set forth in Section 2 of Schedule B multiplied by the product of (i)
the aggregate number of Initial Securities purchased by Substituted Purchasers
and (ii) a fraction, the numerator of which is the number of Initial Securities
set forth opposite the name of the Underwriters in Schedule A and the
denominator of which is 3,500,000 (the aggregate amounts of such commission
payable to the Underwriters referred to as the "Agency Commission").
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional 525,000 shares of Common Shares
of the Company at the price per share set forth in Schedule B, less an amount
per share equal to any dividends or distributions declared by the Company and
payable on the Initial Securities but not payable on the Option Securities. The
option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial Securities upon notice by the Representatives to the
Company setting forth the number of Option Securities as to which the several
Underwriters are then exercising the option and the time and date of payment and
delivery for such Option Securities. Any such time and date of delivery (a "Date
of Delivery") shall be determined by the Representatives, but shall not be later
than seven full business days after the exercise of said option, nor in any
event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the Option Securities, each of the
Underwriters, acting severally and not jointly, will purchase that proportion of
the total number of Option Securities then being purchased which the number of
Initial Securities set forth in Schedule A opposite the name of such Underwriter
bears to the total number of Initial Securities, subject in each case to such
adjustments as the Representatives in their discretion shall make to eliminate
any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities and payment of the Agency Commission,
if any, shall be made at the offices of Davis & Company, 2800 Park Place, 666
Burrard Street, Vancouver, British Columbia, Canada V6C 2Z7, or at such other
place as shall be agreed upon by the Representatives and the Company, at 7:00
A.M. (California time) on the third (fourth, if the pricing occurs after 4:30
P.M. (Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Representatives and the Company (such time and date of payment and delivery
being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and delivery
of certificates for, such Option Securities shall be made at the above-mentioned
offices, or at such other place as shall be agreed upon by the Representatives
and the Company, on each Date of Delivery as specified in the notice from the
Representatives to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representatives for the
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<PAGE> 18
respective accounts of the Underwriters of certificates for the Securities to be
purchased by them. It is understood that each Underwriter has authorized the
Representatives, for its account, to accept delivery of, receipt for, and make
payment of the purchase price for, the Initial Securities and the Option
Securities, if any, which it has agreed to purchase. Merrill Lynch, individually
and not as representative of the Underwriters, may (but shall not be obligated
to) make payment of the purchase price for the Initial Securities or the Option
Securities, if any, to be purchased by any Underwriter whose funds have not been
received by the Closing Time or the relevant Date of Delivery, as the case may
be, but such payment shall not relieve such Underwriter from its obligations
hereunder. The Underwriters shall be entitled to deduct from the payment to be
made to the Company referred to in the preceding paragraph an amount equal to
the Agency Commission, if any.
(d) Denominations; Registration. Certificates for the Initial Securities
and the Option Securities, if any, shall be in such denominations and registered
in such names as the Representatives may request in writing at least one full
business day before the Closing Time or the relevant Date of Delivery, as the
case may be. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Representatives in New York, New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time or the relevant Date of Delivery,
as the case may be.
Section 3. Covenants of the Company. The Company covenants with each
Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and the BC Securities Laws, and will notify the
Representatives immediately, and confirm the notice in writing, (i) when any
post-effective amendment to the Registration Statement shall become effective,
or any supplement to the Prospectuses or any amended Prospectuses shall have
been filed with the Commission or the BCSC, (ii) of the receipt of any comments
from the Commission or the BCSC, (iii) when the BCSC issues to the Company a
receipt for the Final Prospectus, (iv) of any request by the Commission or the
BCSC for any amendment to the Registration Statement or any amendment or
supplement to the Prospectuses or for additional information, and (v) of the
issuance by the Commission or the BCSC of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any Preeffective Prospectus or Preliminary Prospectus, or
of the suspension of the qualification of the Securities for offering or sale in
any jurisdiction, or of the initiation or threatening of any proceedings for any
of such purposes. The Company will promptly effect the filings necessary
pursuant to Rule 424(b) and will take such steps as it deems necessary to
ascertain promptly whether the form of prospectus transmitted for filing under
Rule 424(b) was received for filing by the Commission and, in the event that it
was not, it will promptly file such prospectus. The Company will make every
reasonable effort to prevent the issuance of any stop order and, if any stop
order is issued, to obtain the lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Representatives
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), the Preliminary Prospectus,
any Term Sheet or any amendment, supplement
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<PAGE> 19
or revision to either the prospectus included in the Registration Statement at
the time it became effective or to the Prospectuses and will furnish the
Representatives with copies of any such documents a reasonable amount of time
prior to such proposed filing or use, as the case may be, and will not file or
use any such document to which the Representatives or counsel for the
Underwriters shall object.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Representatives and counsel for the Underwriters, without
charge, signed copies of the Registration Statement, the Preliminary Prospectus
and the Final Prospectus as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will also deliver
to the Representatives, without charge, a conformed copy of the Registration
Statement as originally filed and of each amendment thereto (without exhibits)
for each of the Underwriters. The copies of the Registration Statement and each
amendment thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T. The copies of the
Preliminary Prospectus, each Amended Preliminary Prospectus, the Final
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the BCSC pursuant to SEDAR.
(d) Delivery of Prospectuses. The Company has delivered to each
Underwriter, without charge, as many copies of each Preeffective Prospectus,
Preliminary Prospectus and any prospectus wrappers prepared in connection with
the distribution of the Reserved Securities as such Underwriter reasonably
requested, and the Company hereby consents to the use of such copies for
purposes permitted by the 1933 Act and the BC Securities Laws. The Company will
furnish to each Underwriter, without charge, during the period when the (i) U.S.
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), and (ii) the Final Prospectus is required
to be delivered under the BC Securities Laws, such number of copies of the U.S.
Prospectus and the Final Prospectus (as amended or supplemented) as such
Underwriter may reasonably request. The U.S. Prospectus and any amendments or
supplements thereto furnished to the Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T. The Final Prospectus
and any amendments or supplements thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with the BCSC
pursuant to SEDAR.
(e) Continued Compliance with Securities Laws The Company will comply
with the 1933 Act, the 1933 Act Regulations and the BC Securities Laws so as to
permit the completion of the distribution of the Securities as contemplated in
this Agreement and in the Prospectuses. If at any time when a prospectus is
required by the 1933 Act or the BC Securities Laws to be delivered in connection
with sales of the Securities, any event shall occur or condition shall exist as
a result of which it is necessary, in the opinion of counsel for the
Underwriters or for the Company, to amend the Registration Statement or amend or
supplement the Prospectuses in order that the Prospectuses will not include any
untrue statements of a material fact or omit to state a material fact necessary
in order to make the statements therein not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary,
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in the opinion of such counsel, at any such time to amend the Registration
Statement or amend or supplement the Prospectuses in order to comply with the
requirements of the 1933 Act, the 1933 Act Regulations or the BC Securities
Laws, the Company will promptly prepare and file with the Commission or the
BCSC, as the case may be, subject to Section 3(b), such amendment or supplement
as may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectuses comply with such requirements, and
the Company will furnish to the Underwriters such number of copies of such
amendment or supplement as the Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the Underwriters, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other jurisdictions
(domestic or foreign) as the Representatives may designate and to maintain such
qualifications in effect for a period of not less than one year from the later
of the effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the effective date of the Registration Statement and any Rule
462(b) Registration Statement.
(g) Rule 158 and Continuous Disclosure. The Company will timely file
such reports pursuant to the 1934 Act as are necessary in order to make
generally available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated by, the
last paragraph of Section 11(a) of the 1933 Act. The Company will, for a period
of 3 years after the date of the BCSC issues a receipt for the Final Prospectus,
prepare all such documents, make all such filings, and do all such things as are
required to maintain its status as a "reporting issuer" in British Columbia and
to prevent the Company from being added to the list of reporting issuers in
default maintained by the BCSC; provided that nothing in this Subsection (g)
shall be construed as preventing the Company from entering into any merger or
similar transaction which would result in the Company losing its status as a
"reporting issuer".
(h) Use of Proceeds. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the Prospectuses
under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect and
maintain the quotation of the Securities on the Nasdaq National Market and will
file with the Nasdaq National Market all documents and notices required by the
Nasdaq National Market of companies that have securities that are traded in the
over-the-counter market and quotations for which are reported by the Nasdaq
National Market.
(j) Restriction on Sale of Securities. During a period of 180 days from
the date of the Prospectuses, the Company will not, without the prior written
consent of Merrill Lynch, (i) directly or indirectly, offer, pledge, sell,
contract to sell, sell any option or contract to
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purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase or otherwise transfer or dispose of any Common Shares of the
Company or any securities convertible into or exercisable or exchangeable for
Common Shares of the Company or file any registration statement under the 1933
Act or any prospectus under the BC Securities Laws with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Shares of the Company, whether any such
swap or transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Shares of the Company or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (A) the Securities to be
sold hereunder, (B) any Common Shares issued by the Company upon the exercise of
an option or warrant or the conversion of a security outstanding on the date
hereof and referred to in the Prospectuses, (C) any Common Shares issued or
options to purchase Common Shares granted pursuant to existing employee benefit
plans of the Company referred to in the Prospectuses, (D) any Common Shares
issued by the Company pursuant to any non-employee director stock plan or
dividend reinvestment plan or (E) a total of not more than 800,000 Common Shares
(or securities convertible into, or exchangeable for, Common Shares) issued by
the Company in connection with the formation or furtherance of a strategic
alliance or as consideration or partial consideration for the acquisition of all
or substantially all of the assets or equity of a third party; provided, that in
connection with the issuance or issuance and sale permitted under subclause (E)
of this Section 3(j) hereof, the Company agrees (i) to obtain from each person
receiving Common Shares (or securities convertible into, or exchangeable for,
Common Shares) a letter substantially consistent with Exhibit B hereto and (ii)
not to grant any rights exercisable prior to the six month anniversary of this
Agreement with respect to the registration under the Act of any Common Shares
(or securities convertible into, or exchangeable for, Common Shares) issued in
connection with such transaction.
(k) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act, the 1934 Act or
the BC Securities Laws, will file all documents required to be filed with the
Commission pursuant to the 1934 Act or the BCSC pursuant to the BC Securities
Laws, as the case may be, within the time periods required by (i) the 1934 Act
and the rules and regulations of the Commission thereunder and (ii) the BC
Securities Laws.
(l) Compliance with NASD Rules. The Company hereby agrees that it will
ensure that the Reserved Securities will be restricted as required by the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules
from sale, transfer, assignment, pledge or hypothecation for a period of three
months following the date of this Agreement. The Underwriters have notified the
Company as to which persons will need to be so restricted. At the request of the
Underwriters, the Company will direct the transfer agent to place a stop
transfer restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the Reserved
Securities, the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
(m) Compliance with Rule 463. The Company will file with the Commission
such reports on Form SR as may be required pursuant to Rule 463 of the 1933 Act
Regulations.
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(n) Copies of Documents to Underwriters. The Company shall supply to the
Underwriters the following:
(i) forthwith upon receipt, copies of all correspondence to
and from, and all documents issued to and by (i) the
Commission in connection with the registration of the
Securities under the 1933 Act and (ii) the BCSC in
connection with the transactions contemplated hereby;
and
(ii) prior to the Closing Time (and, if any Option Securities
are purchased, to the Date of Delivery) as soon as they
have been prepared, copies of any unaudited interim
consolidated financial statements of the Company and its
subsidiaries required to be prepared by BC Securities
Laws for any periods subsequent to the periods covered
by the financial statements appearing in the
Registration Statement and the Prospectuses.
(o) Miscellaneous. The Company shall:
(i) maintain a transfer agent and registrar for its Common
Shares in the United States; and
(ii) prior to filing its quarterly statements on Form 10-Q
and the equivalent in British Columbia, have the
independent auditors of the Company perform a limited
quarterly review of its quarterly numbers.
(p) Press Releases and Press Conferences. Prior to the Closing Time (and
if any Option Securities are purchased, to the Date of Delivery), the Company
shall not, without the prior written consent of Merrill Lynch, issue a press
release or hold a press conference with respect to the Company or any of its
subsidiaries, including without limitation their financial contribution, results
of operations, business prospectus, assets, liabilities, or the offering of the
Securities.
(q) Canadian Private Placement. The Company will use its best efforts,
in cooperation with the Underwriters, to qualify the Securities for offering and
sale on a private placement basis under the applicable securities laws of such
jurisdictions in Canada as the Representatives may designate.
Section 4. Payment of Expenses.
(a) Expenses. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement and the
Prospectuses (including financial statements and exhibits including any
prospectus wrappers prepared in connection therewith) as originally filed and of
each amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any agreement among the Underwriters and such
other documents as may be required in connection with the offering, purchase,
sale, issuance or delivery of the Securities, (iii) the preparation, issuance
and delivery of the certificates for the Securities to the Underwriters,
including any stock or other transfer taxes and any stamp or other duties
payable
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upon the sale, issuance or delivery of the Securities to the Underwriters, (iv)
the fees and disbursements of the Company's counsel, accountants and other
advisors, (v) the qualification of the Securities under securities laws in
accordance with the provisions of Section 3(f) hereof, including filing fees and
the reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each Preliminary Prospectus, any Term Sheets and of
the Prospectuses and any amendments or supplements thereto and any prospectus
wrappers prepared in connection therewith, (vii) the preparation, printing and
delivery to the Underwriters of copies of the Blue Sky Survey and any supplement
thereto, (viii) the fees and expenses of any transfer agent or registrar for the
Securities, (ix) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. (the "NASD") of the terms
of the sale of the Securities, (x) the fees and expenses incurred in connection
with the inclusion of the Securities in the Nasdaq National Market, and (xi) all
costs and expenses of the Underwriters, including the fees and disbursements of
counsel for the Underwriters, in connection with matters related to the Reserved
Securities which are designated by the Company for sale to employees and others
having a business relationship with the Company.
(b) Termination of Agreement. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
Section 5. Conditions of Underwriters' Obligations. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any subsidiary of the Company
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriters. A prospectus containing
the Rule 430A Information shall have been filed with the Commission in
accordance with Rule 424(b) (or a post-effective amendment providing such
information shall have been filed and declared effective in accordance with the
requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434,
a Term Sheet shall have been filed with the Commission in accordance with Rule
424(b). A receipt shall have been issued to the Company by the BCSC in respect
of the Final Prospectus and at the Closing Time no stop order suspending the use
of the Final Prospectus shall have been issued under the BC Securities Laws or
proceedings therefor initiated or threatened by the BCSC, and any request on the
part of the BCSC for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriters.
19
<PAGE> 24
(b) Opinion of U.S. Counsel for Company. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Dorsey & Whitney LLP, U.S. counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, together with signed or
reproduced copies of such letter for each of the other Underwriters to the
effect set forth in Exhibit A-1 hereto and to such further effect as counsel to
the Underwriters may reasonably request.
(c) Opinion of Canadian Counsel for Company. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Davis & Company, Canadian counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, together with signed or
reproduced copies of such letter for each of the other Underwriters to the
effect set forth in Exhibit A-2 hereto and to such further effect as counsel to
the Underwriters may reasonably request.
(d) Opinion of U.S. Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Morrison & Foerster LLP, U.S. counsel for the Underwriters, together
with signed or reproduced copies of such letter for each of the other
Underwriters with respect to the matters set forth in clauses (i), (ii), (v),
(vi) (solely as to preemptive or other similar rights arising by operation of
law or under the memorandum or articles of the Company), (viii) through (x),
inclusive, (xii), (xiv) (solely as to the information in the Prospectus under
"Description of Capital Stock--Common Stock") and the penultimate paragraph of
Exhibit A-1 hereto. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the State of
California, the federal law of the United States and the General Corporation Law
of the State of Delaware, upon the opinions of counsel satisfactory to the
Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its subsidiaries and certificates of
public officials.
(e) Opinion of Canadian Counsel for Underwriters. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Blake, Cassels & Graydon, Canadian counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of the other
Underwriters with respect to the matters set forth in clauses (i), (ii), (v),
(vi) (solely as to preemptive or other similar rights arising by operation of
law or under the memorandum or articles of the Company), (viii) and the
penultimate paragraph of Exhibit A-2 hereto. In giving such opinion such counsel
may rely, as to all matters governed by the laws of jurisdictions other than the
law of British Columbia and Canada, upon the opinions of counsel satisfactory to
the Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its subsidiaries and certificates of
public officials.
(f) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectuses, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the
Representatives shall have received a certificate of the President or a Vice
President of the Company and of the chief
20
<PAGE> 25
financial or chief accounting officer of the Company, dated as of Closing Time,
to the effect that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and correct with
the same force and effect as though expressly made at and as of Closing Time,
(iii) the Company has complied with all agreements and satisfied all conditions
on its part to be performed or satisfied at or prior to Closing Time, and (iv)
no stop order suspending the effectiveness of the Registration Statement, or the
use of the Final Prospectus, has been issued and no proceedings for that purpose
have been instituted or are pending or are contemplated by the Commission or the
BCSC, respectively.
(g) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the Representatives shall have received from Deloitte & Touche LLP a
letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter for
each of the other Underwriters containing statements and information of the type
ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectuses.
(h) Bring-down Comfort Letter. At Closing Time, the Representatives
shall have received from Deloitte & Touche LLP a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (g) of this Section, except that the specified
date referred to shall be a date not more than three business days prior to
Closing Time.
(i) Approval of Listing. At Closing Time, the Securities shall have been
approved for inclusion in the Nasdaq National Market, subject only to official
notice of issuance.
(j) No Objection. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(k) Lock-up Agreements. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the form of
Exhibit B hereto signed by the persons listed on Schedule C hereto.
(l) Conditions to Purchase of Option Securities. In the event that the
Underwriters exercise their option provided in Section 2(b) hereof to purchase
all or any portion of the Option Securities, the representations and warranties
of the Company contained herein and the statements in any certificates furnished
by the Company or any subsidiary of the Company hereunder shall be true and
correct as of each Date of Delivery and, at the relevant Date of Delivery, the
Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of the
chief financial or chief accounting officer of the Company confirming
that the certificate delivered at the Closing Time pursuant to Section
5(f) hereof remains true and correct as of such Date of Delivery.
21
<PAGE> 26
(ii) Opinions of Counsel for Company. The favorable opinion of
Dorsey & Whitney LLP, U.S. counsel for the Company, together with the
favorable opinion of Davis & Company, Canadian counsel for the Company,
each in form and substance satisfactory to counsel for the Underwriters,
dated such Date of Delivery, relating to the Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect as
the opinion required by Sections 5(b) and (c), respectively, hereof.
(iii) Opinions of Counsel for Underwriters. The favorable
opinion of Morrison & Foerster LLP, U.S. counsel for the Underwriters,
together with the favorable opinion of Blake, Cassels & Graydon, special
Canadian counsel for the Underwriters, dated such Date of Delivery,
relating to the Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Sections 5(d) and (e), respectively, hereof.
(iv) Bring-down Comfort Letter. A letter from Deloitte & Touche
LLP, in form and substance satisfactory to the Representatives and dated
such Date of Delivery, substantially in the same form and substance as
the letter furnished to the Representatives pursuant to Section 5(h)
hereof, except that the "specified date" in the letter furnished
pursuant to this paragraph shall be a date not more than five days prior
to such Date of Delivery.
(m) Additional Documents. At Closing Time and at each Date of Delivery,
counsel for the Underwriters shall have been furnished with such documents and
opinions as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the Underwriters.
(n) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Company at
any time at or prior to Closing Time or such Date of Delivery, as the case may
be, and such termination shall be without liability of any party to any other
party except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
Section 6. Indemnification.
(a) Indemnification of Underwriters. The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material
22
<PAGE> 27
fact contained in the Registration Statement (or any amendment thereto),
including the Rule 430A Information and the Rule 434 Information, if
applicable, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements
therein not misleading or arising out of any untrue statement or alleged
untrue statement of a material fact included in any Preeffective
Prospectus, Preliminary Prospectus or the Prospectuses (or any amendment
or supplement thereto), or the omission or alleged omission therefrom of
a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of (A) the violation of any
applicable laws or regulations of jurisdictions other than the United
States and British Columbia where Reserved Securities have been offered
and (B) any untrue statement or alleged untrue statement of a material
fact included in the supplement or prospectus wrapper material
distributed in [_______________________] in connection with the
reservation and sale of the Reserved Securities to certain Company
directors and other persons with relationships with the Company or the
omission or alleged omission therefrom of a material fact necessary to
make the statements therein, when considered in conjunction with the
Prospectuses, Preeffective Prospectus or Preliminary Prospectus, not
misleading;
(iii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or proceeding
by any governmental agency or body, commenced or threatened, or of any
claim whatsoever based upon any such untrue statement or omission, or
any such alleged untrue statement or omission or in connection with any
violation of the nature referred to in Section 6(a)(ii)(A) hereof;
provided that (subject to Section 6(d) below) any such settlement is
effected with the written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission or in connection with any violation
of the nature referred to in Section 6(a)(ii)(A) hereof, to the extent
that any such expense is not paid under (i) , (ii) or (iii) above;
provided, however, that this indemnity agreement shall not apply to any
loss, liability, claim, damage or expense to the extent arising out of
any untrue statement or omission or alleged untrue statement or omission
made in reliance upon and in conformity with written information
furnished to the Company by any Underwriter through Merrill Lynch
expressly for use in the Registration Statement (or any amendment
thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any Preeffective Prospectus, Preliminary
Prospectus or the Prospectuses (or any amendment or supplement thereto);
and provided further that this indemnity agreement shall not apply
23
<PAGE> 28
to any loss, liability, claim, damage or expense to the extent that the
Company shall sustain the burden of proving that any such loss,
liability, claim, damage or expense resulted from the fact that such
Underwriter, in contravention of a requirement of this Agreement or
applicable law, sold Securities to a person to whom such Underwriter
failed to send or give, at or prior to the Closing Date, a copy of
either of the Prospectuses, as then amended or supplemented if: (i) the
Company has previously furnished copies thereof (sufficiently in advance
of the Closing Date and in sufficient quantity to allow for distribution
by the Closing Date) to the Underwriters and the loss, liability, claim,
damage or expense of such Underwriter resulted from an untrue statement
or omission of a material fact contained in or omitted from the
Preeffective Prospectus or the Preliminary Prospectus which was
corrected in the U.S. Prospectus or Final Prospectus as, if applicable,
amended or supplemented prior to the Closing Date and such U.S.
Prospectus or Final Prospectus, as applicable was required by law to be
delivered at or prior to the written confirmation of sale to such person
and (ii) such failure to give or send such U.S. Prospectus or Final
Prospectus, as applicable, by the Closing Date to the party or parties
asserting such loss, liability, claim, damage or expense would have
constituted a defense to the claim asserted by such person.
(b) Indemnification of Company, Directors and Officers. Each Underwriter
severally agrees to indemnify and hold harmless the Company, its directors, each
of its officers who signed the Registration Statement or the Final Prospectus,
and each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss,
liability, claim, damage and expense described in the indemnity contained in
subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any Preeffective
Prospectus, Preliminary Prospectus, Amended Preliminary Prospectus or the
Prospectuses (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through Merrill Lynch expressly for use in the Registration Statement (or any
amendment thereto) or such Preeffective Prospectus, Preliminary Prospectus,
Amended Preliminary Prospectus or the Prospectuses (or any amendment or
supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any
24
<PAGE> 29
local counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(iii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement; provided that an indemnifying party shall not be liable for any such
settlement effected without its consent if such indemnifying party, prior to the
date of such settlement, (i) reimburses such indemnified party in accordance
with such request for the amount of such fees and expenses of counsel as the
indemnifying party believes in good faith to be reasonable, and (ii) provides
written notice to the indemnified party that the indemnifying party disputes in
good faith the reasonableness of the unpaid balance of such fees and expenses.
(e) Indemnification for Reserved Securities. In connection with the
offer and sale of the Reserved Securities, the Company agrees, promptly upon a
request in writing, to indemnify and hold harmless the Underwriters from and
against any and all losses, liabilities, claims, damages and expenses incurred
by them as a result of the failure of any of the directors of the Companty or
other persons with relationships with the Company to pay for and accept delivery
of Reserved Securities which, by the end of the first business day following the
date of this Agreement, were subject to a properly confirmed agreement to
purchase.
Section 7. Contribution. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other hand from the offering of the Securities
pursuant to this Agreement or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and of the Underwriters on the
other hand in connection with the
25
<PAGE> 30
statements or omissions, or in connection with any violation of the nature
referred to in Section 6(a)(ii)(A) hereof, which resulted in such losses,
liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectuses, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission or any violation of the nature referred to in Section
6(a)(ii)(A) hereof.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement or the Final Prospectus, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company.
The Underwriters' respective obligations to contribute pursuant to this Section
7 are several in proportion to the
26
<PAGE> 31
number of Initial Securities set forth opposite their respective names in
Schedule A hereto and not joint.
Section 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company, and shall
survive delivery of the Securities to the Underwriters.
Section 9. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectuses, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States or Canada, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the Representatives, impracticable to
market the Securities or to enforce contracts for the sale of the Securities, or
(iii) if trading in any securities of the Company has been suspended or
materially limited by the Commission or the Nasdaq National Market, or if
trading generally on the American Stock Exchange or the New York Stock Exchange
or in the Nasdaq National Market has been suspended or materially limited, or
minimum or maximum prices for trading have been fixed, or maximum ranges for
prices have been required, by any of said exchanges or by such system or by
order of the Commission, the National Association of Securities Dealers, Inc. or
any other governmental authority, or (iv) if a banking moratorium has been
declared by either United States Federal, New York or Canadian authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
Section 10. Default by One or More of the Underwriters. If one or more
of the Underwriters shall fail at Closing Time or a Date of Delivery to purchase
the Securities which it or they are obligated to purchase under this Agreement
(the "Defaulted Securities"), the Representatives shall have the right, within
24 hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, the Representatives shall not have
completed such arrangements within such 24-hour period, then:
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<PAGE> 32
(a) if the number of Defaulted Securities does not exceed 10% of
the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the Underwriters to purchase and of the Company
to sell the Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representatives or the Company shall have the
right to postpone Closing Time or the relevant Date of Delivery, as the case may
be, for a period not exceeding seven days in order to effect any required
changes in the Registration Statement or the Prospectuses or in any other
documents or arrangements. As used herein, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 10.
Section 11. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201 and at 101 California Street,
Suite 1420, San Francisco California 94111, attention of o; and notices to the
Company shall be directed to it at Pivotal Corporation, 300-224 West Esplanade,
North Vancouver, British Columbia, Canada V7M 3M6, attention of Norman B.
Francis.
Section 12. Parties. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters and the Company and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Securities from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
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<PAGE> 33
Section 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS
OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
Section 14. Effect of Headings. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
Pivotal CORPORATION
By:
-------------------------------
Title:
CONFIRMED AND ACCEPTED, as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
(a division of Dain Rauscher Incorporated)
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
-------------------------------
Authorized Signatory
For themselves and as Representatives of the other Underwriters named in
Schedule A hereto.
29
<PAGE> 34
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial
Name of Underwriter Securities
- ------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .............................................
Bear, Stearns & Co. Inc ................................................
Dain Rauscher Wessels ..................................................
Merrill Lynch Canada Inc ...............................................
Total................................................................... 3,500,000
=========
</TABLE>
Sch A-1
<PAGE> 35
SCHEDULE B
PIVOTAL SOFTWARE INC.
3,500,000 Common Shares
(Without Par Value)
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be $o.
2. The gross purchase price per share for the Securities to be
paid by the several Underwriters shall be an amount equal to the initial
public offering price set forth above and the Underwriters' commission
to be paid by the Company shall be $o per share; provided that the
purchase price per share for any Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be
reduced by an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial Securities but not
payable on the Option Securities.
Sch B-1
<PAGE> 36
Exhibit A-1
FORM OF OPINION OF COMPANY'S U.S. COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) Pivotal Corporation, a Washington corporation, (the "U. S.
Subsidiary") has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to our knowledge is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business,
except where the failure so to qualify or to be in good standing would
not result in a Material Adverse Effect; except as otherwise disclosed
in the Registration Statement, all of the issued and outstanding capital
stock of the U. S. Subsidiary has been duly authorized and validly
issued, is fully paid and non-assessable and, to our knowledge, except
as described in the Prospectus is owned by the Company, directly or
through subsidiaries, free and clear of any security interest, mortgage,
pledge, lien, encumbrance, claim or equity; none of the outstanding
shares of capital stock of the U. S. Subsidiary was issued in violation
of the preemptive or similar rights of any securityholder of the U. S.
Subsidiary.
(ii) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act;
any required filing of the Prospectus pursuant to Rule 424(b) has been
made in the manner and within the time period required by Rule 424(b);
and, to our knowledge, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has
been issued under the 1933 Act and no proceedings for that purpose have
been instituted or are pending or threatened by the Commission.
(iii) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the U.S. Prospectus and each amendment or
supplement to the Registration Statement and U.S. Prospectus as of their
respective effective or issue dates (other than the financial statements
and supporting schedules included therein or omitted therefrom, as to
which we need express no opinion) complied as to form in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
(iv) If Rule 434 has been relied upon, the U.S. Prospectus was
not "materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time it became
effective.
(v) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable requirements of
the Nasdaq National Market.
(vi) To our knowledge, there is not pending or threatened any
action, suit, proceeding, inquiry or investigation, to which the Company
or any subsidiary is a party, or to which the property of the Company or
any subsidiary is subject, before or brought by any court or
governmental agency or body, domestic or foreign, which might reasonably
be expected to result in a Material Adverse Effect, or which might
reasonably be expected to materially and adversely
Exh. A-1-1
<PAGE> 37
affect the properties or assets thereof or the consummation of the
transactions contemplated in the Purchase Agreement or the performance
by the Company of its obligations thereunder.
(vii) The information in the U.S. Prospectus under "Income Tax
Consequences--United States Federal Income Tax Consequences" and "Shares
Eligible for Future Sale--United States Resale Restrictions" to the
extent that it constitutes matters of law, summaries of legal matters or
legal conclusions, has been reviewed by us and is correct in all
material respects
(viii) To our knowledge, there are no United States statutes or
regulations that are required to be described in the U.S. Prospectus
that are not described as required.
(ix) All descriptions in the Registration Statement of contracts
and other documents to which the Company or its subsidiaries are a party
are accurate in all material respects; to our knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes,
leases or other instruments required to be described or referred to in
the Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed or incorporated by
reference as exhibits thereto, and the descriptions thereof or
references thereto are correct in all material respects.
(x) To our knowledge, the U.S. Subsidiary is not in violation of
its articles of incorporation or by-laws and no default by the Company
or any subsidiary exists in the due performance or observance of any
material obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other
agreement or instrument that is filed as an exhibit to the Registration
Statement.
(xi) No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any court or
governmental authority or agency, of the United States or the State of
Washington, (other than under the 1933 Act and the 1933 Act Regulations,
which have been obtained, or as may be required under state securities
or blue sky laws, as to which we need express no opinion) is necessary
or required in connection with the due authorization, execution and
delivery of the Purchase Agreement or for the offering, issuance or sale
of the Securities.
(xii) The execution, delivery and performance of the Purchase
Agreement and the consummation of the transactions contemplated in the
Purchase Agreement and in the Registration Statement (including the
issuance and sale of the Securities and the use of the proceeds from the
sale of the Securities as described in the U.S. Prospectus under the
caption "Use Of Proceeds") and compliance by the Company with its
obligations under the Purchase Agreement do not and will not, whether
with or without the giving of notice or lapse of time or both, conflict
with or constitute a breach of, or default or Repayment Event (as
defined in Section 1(a)(x) of the Purchase Agreement) under or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any subsidiary pursuant to any
contract, indenture, mortgage, deed of trust, loan or credit agreement,
note, lease or any other agreement or instrument that is filed as an
exhibit to the Registration Statement, to which the Company or any
subsidiary is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company
Exh. A-1-2
<PAGE> 38
or any subsidiary is subject (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not have a
Material Adverse Effect), nor will such action result in any violation
of the provisions of the articles of incorporation or by-laws of the
U.S. Subsidiary, or any applicable law, statute, rule, regulation,
judgment, order, writ or decree, known to us, of any government,
government instrumentality or court of the United States or the State of
Washington having jurisdiction over the Company or any subsidiary or any
of their respective properties, assets or operations.
(xiii) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in
the 1940 Act.
Such counsel shall also include substantially the following
statement:
Nothing has come to our attention that has caused us to believe
that the Registration Statement or any post effective amendment thereto,
including the Rule 430A Information and Rule 434 Information (if
applicable), (except for financial statements and schedules and other
financial data included therein or omitted therefrom, as to which we
need make no statement), at the time such Registration Statement or any
such post effective amendment became effective, contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that the U.S. Prospectus or any amendment or
supplement thereto (except for financial statements and schedules and
other financial data included therein or omitted therefrom, as to which
we need make no statement), at the time the U.S. Prospectus was issued,
at the time any such amended or supplemented prospectus was issued or at
the Closing Time, included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
In rendering such opinion, such counsel may rely as to matters
of fact (but not as to legal conclusions), to the extent they deem
proper, on certificates of responsible officers of the Company and its
subsidiaries and public officials. Such opinion shall not state that it
is to be governed or qualified by, or that it is otherwise subject to,
any treatise, written policy or other document relating to legal
opinions, including, without limitation, the Legal Opinion Accord of the
ABA Section of Business Law (1991).
Exh. A-1-3
<PAGE> 39
[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT
TO SECTION 5(I)]
Exhibit B
o, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
BEAR, STEARNS & CO. INC.
DAIN RAUSCHER WESSELS
(a division of Daim Rauscher Incorporated)
as Representatives of the several
Underwriters to be named in the
within-mentioned Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Pivotal Software Inc.
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of
Pivotal Software Inc., a corporation incorporated under the laws of British
Columbia, Canada (the "Company"), understands that Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") Bears, Stearns &
Co. Inc. and Dain Rauscher Wessels (a division of Dain Rauscher Incorporated)
proposes to enter into a Purchase Agreement (the "Purchase Agreement") with the
Company providing for the public offering of the Company's common shares (the
"Securities"), without par value (the "Common Shares"). In recognition of the
benefit that such an offering will confer upon the undersigned as a stockholder
[and an officer and/or director] of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
undersigned agrees with each underwriter to be named in the Purchase Agreement
that, during a period of 180 days from the date of the Purchase Agreement, the
undersigned will not, without the prior written consent of Merrill Lynch,
directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of, or otherwise dispose of or
transfer any shares of the Company's Common Shares or any securities convertible
into or exchangeable or exercisable for Common Stock, whether now owned or
hereafter acquired by the undersigned or with respect to which the undersigned
has or hereafter acquires the power of disposition, or file any registration
statement under the Securities Act of 1933, as amended, with respect to any of
the foregoing
M-4
<PAGE> 40
or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Shares, whether any such swap or transaction is to be
settled by delivery of Common Shares or other securities, in cash or otherwise.
Very truly yours,
Signature:
-------------------------------
Print Name:
------------------------------
M-5
<PAGE> 1
EXHIBIT 10.3
PIVOTAL CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
This 1999 Employee Stock Purchase Plan (the "ESPP") was approved by the Board of
Directors of Pivotal Corporation (the "Company") on May 28, 1999 and by the
Shareholders of the Company on June 17, 1999 and is intended to be a qualified
plan pursuant to the provisions of Section 423 of the Code and a registered plan
under the provisions of the EIA.
1. DEFINITIONS
As used herein:
"ADMINISTRATOR" means the person designated under the EIA to perform the duties
of the administrator under the EIA;
"B.C. PARTICIPANT" means a Participant who is resident in British Columbia,
employed by the Company, or a predecessor or affiliate of the Company on a
continuing basis for an average of twenty hours a week and is not a major
shareholder (as defined in the EIA) of the Company.
"CODE" means the Internal Revenue Code of 1986 (United States), as amended from
time to time.
"COMMON SHARES" means common shares in the capital of the Company.
"COMMITTEE" means the Compensation Committee of the Board of Directors of the
Company.
"COMPANY" means Pivotal Corporation, a British Columbia company.
"CONSTITUTION" means the Memorandum and Articles of the Company, as amended from
time to time.
"COMPENSATION" means a Participant's base salary plus any bonuses and
commissions paid.
"DESIGNATED SUBSIDIARY" means any parent, subsidiary or other affiliate of the
Company designated by the Committee and whose employees are qualified
participants in this ESPP in accordance with the provisions of the Code or the
EIA.
"EIA" means the Employee Investment Act, R.S.B.C. 1996, c.112, as amended from
time to time, together with its accompanying Regulations and Policy Statements;
pursuant to and under which the British Columbia Employee Share Ownership
Program is established and administered.
"EMPLOYEE SHAREHOLDER" means any B.C. Participant who, at any relevant time, is
a person who has subscribed for and continues to hold Common Shares under the
ESSP and who continues to be an employee of the Company, and includes any B.C.
Participant who continues to be employed by the Company and who is an annuitant
under an RRSP Trust that continues to hold Common Shares under the ESSP.
<PAGE> 2
-2-
"ESPP" means this Pivotal Corporation 1999 Employee Stock Purchase Plan.
"FAIR MARKET VALUE" of the Common Shares as of any day except the first day of
the first Offering Period means the closing price (rounded to the next highest
cent in the case of fractions of a cent) of the Common Shares on the Nasdaq
National Market or any other recognized stock market or exchange upon which the
Common Shares are quoted or listed and where the majority of the Common Shares
are traded (the "Market"), as reported on such day or, if such day is not a
trading day, on the immediately preceding trading day on which the Common Shares
traded on the Market; provided however that with respect to the first day of the
first offering period Fair Market Value means the initial public offering price;
provided further that if the Common Shares cease to be traded on a Market, a
single arbitrator shall be appointed by the Company and the Employee
Shareholders in accordance with the provisions of the Commercial Arbitration Act
(British Columbia) which arbitrator shall determine a new method for determining
Fair Market Value and for redeeming Common Shares in accordance with the EIA,
including the inclusion of price and dilution protection acceptable to the
Administrator. The Committee, in its sole discretion, shall make all
determinations required by this definition.
"FINANCIAL STATEMENTS" means the financial statements of the Company filed with
the Administrator under the ETA or any more recent financial statements of the
Company delivered to Participants.
"PARTICIPANT" means any employee of the Company, or a Designated Subsidiary, who
is eligible to participate in this ESPP in accordance with the provisions of the
Code or the EIA and who elects to participate, provided that the Committee may
establish such additional eligibility criteria, in accordance with the Code and
the EIA, as it deems desirable.
"PURCHASE DATE" means Purchase Date as defined in Section 7.
"OFFERING PERIOD" means a six month period commencing on January 1 or July 1;
provided however that the first Offering Period shall commence on the business
day immediately preceding the date of the Company's initial public offering and
end on December 31, 1999.
"REPORT PERIOD" means the annual period from July 1st in each year to June 30th
in the next succeeding year, which annual period is the annual fiscal year of
the Company.
"RRSP TRUST" means a registered retirement savings plan under the Income Tax Act
(Canada);
"SHARE OFFERING DOCUMENT" means a prospectus, offering memorandum or other
document delivered to Participants in connection with obtaining subscriptions
for Common Shares under the ESSP;
"SUBSCRIPTION FORM" means the form of subscription for Common Shares to be used
by B.C. Participants making purchases under the ESSP eligible for tax credits
under the EIA;
"TRUSTEE" means American Stock Transfer & Trust Company, or such other bank,
trust company, broker-dealer, transfer agent or similar depository or custodian
that has agreed to hold Common Shares for the accounts of the respective
Participants as may be appointed by the Committee to administer this ESPP.
<PAGE> 3
-3-
"U.S. PARTICIPANT" means a Participant who, by virtue of his citizenship or
residence, or otherwise, is subject to taxation under the Code on his or her
Compensation and who is regularly scheduled to work 20 or more hours per week.
2. PURPOSE
The purpose of this ESPP is to enable Participants to acquire a larger personal
proprietary interest in the Company, and to encourage Participants to remain in
the employ of the Company or a Designated Subsidiary and to have a strong
commitment to and a personal interest in the success of the Company. This ESPP
is intended to constitute an "employee stock purchase plan" as defined in
Section 423(b) of the Code, and, for so long as the Company qualifies as an
'Eligible Company' under the EIA, as an "Employee Share Ownership Plan" under
the EIA. It is the intention of the Company and the Committee that this ESPP and
its administration comply in all respects with the Code, the EIA, applicable
securities laws and the Company Act (British Columbia).
This ESPP is intended to provide Common Shares for investment and not for
resale. The Company does not, however, intend to restrict or influence the
conduct of any Participant's affairs. A Participant, therefore, may sell Common
Shares that are purchased under this ESPP at any time, subject to compliance
with all applicable federal, provincial or state tax and securities laws. B.C.
Participants who resell Common Shares purchased under the ESPP prior to the end
of a three year hold period may be required to repay tax credits received under
the EIA. THE PARTICIPANT ASSUMES THE RISK OF ANY MARKET FLUCTUATIONS IN THE
PRICE OF THE COMMON SHARES.
3. GOVERNMENTAL REGULATIONS
The Company's obligation to sell and deliver the Common Shares under this ESPP
is subject to the availability of registration and prospectus exemptions under
applicable securities law, and the receipt of any required approval of any stock
exchange or market upon which the Common Shares are listed or quoted, and any
approval by a governmental authority required in connection with the
authorization, issuance or sale of such Common Shares, including the Code and
the EIA.
4. ADMINISTRATION
This ESPP shall be administered by the Committee which shall have plenary
authority, in its discretion, to interpret the ESPP, to prescribe, amend and
rescind rules and regulations relating to it, and to make all other
determinations necessary or advisable for the administration of the ESPP.
Without limitation, the Committee may establish such further requirements for or
limitations on participation in the ESPP as are necessary to assure
qualification of this ESPP under the Code and the EIA. The Committee's
determinations of the matters referred to in this Section 4 shall be conclusive.
<PAGE> 4
-4-
5. SHARES SUBJECT TO THE ESPP
The Company has reserved for issuance under this ESPP an aggregate of 1,000,000
Common Shares, which may be purchased by Participants pursuant to this ESPP,
subject to adjustment as provided in Section 14. The Company may, from time to
time, as it sees fit, authorize and allot additional Common Shares for issuance
under the Plan. Funds received by the Company from the issuance of Common Shares
under the EIA shall be used for general corporate purposes or for any other
purpose determined by the Company, provided that such purpose is not a
prohibited purpose prescribed under the EIA or the regulations thereunder.
6. PAYROLL DEDUCTIONS
Any person who is properly enrolled as a Participant at the beginning of an
Offering Period may elect, in accordance with procedures prescribed by the
Committee, to have the Company deduct a specified percentage of the
Participant's Compensation for the purchase of Common Shares pursuant to the
ESPP.
The maximum rate of deduction that a Participant may elect for any Offering
Period is 10% of Compensation accrued or paid during the Offering Period,
provided that the maximum rate of deduction for B.C. Participants during any
Offering Period shall be the greater of 10% of Compensation or Cdn. $5,000 per
offering period, it being the intent that all B.C. Participants shall have equal
access to the EIA tax credit program. An amount equal to the elected percentage
of the Participant's Compensation will be deducted on each regular pay day
falling within the Offering Period. All amounts will be deducted from a
Participant's Compensation on an after-tax basis. No interest will be paid on
payroll deductions accumulated under this ESPP, which will be held in trust for
the Participants by the Trustee.
A Participant who is enrolled in this ESPP at the end of an Offering Period
will, unless the Participant gives notice of his or her intent to withdraw from
the ESPP, automatically be enrolled as a Participant in the subsequent Offering
Period. B.C. Participants who wish to enroll for purchases during an Offering
Period eligible for tax credits under the EIA must request a Share Offering
Document to read, and must provide an executed Subscription Form prior to the
Offering Period.
7. PURCHASE OF COMMON SHARES
Effective on the first business day following the end of an Offering Period (the
"Purchase Date"), a Participant's accumulated payroll deductions will, subject
to the limitations of Section 8 and the termination provisions of Section 13, be
applied to the purchase of Common Shares at a purchase price (the "Purchase
Price") equal to the lesser of:
(a) 85% of the Fair Market Value for the Common Shares on the first day of
the Offering Period; or
(b) 85% of the Fair Market Value for the Common Shares on the Purchase
Date.
<PAGE> 5
-5-
Common Shares may be purchased under the ESPP only with a Participant's
accumulated payroll deductions. Fractional Common Shares cannot be purchased.
All purchases will be made in US dollars and all contributions will be converted
into US dollars at the rate quoted by its principal bankers for transactions
with the Company. At the conclusion of each Offering Period, the Company will
automatically re-enroll each Participant in the next Offering Period (subject to
the requirement for B.C. Participants who wish to make purchases eligible for
tax credits under the EIA to deliver an executed Subscription Form prior to
commencement of the Offering Period), and any portion of a Participant's
accumulated payroll deductions not used for the purchase of Common Shares at the
end of an Offering Period will be applied to the purchase of Common Shares in
the next Offering Period if the Participant is participating in the ESPP during
that Offering Period, or returned to the Participant. An investment confirmation
will be issued to each Participant by the Company within 30 days of the Purchase
Date, setting out the number of Common Shares purchased, the price paid per
Common Share, the total amount paid, the name, address, telephone number and
contact person at the Trustee, and for B.C. Participants, the procedure for
obtaining the tax credit certificate under the EIA.
8. LIMITATIONS ON SHARE PURCHASES
During any Offering Period the maximum amount of payroll deductions by a
Participant that can be used to purchase Common Shares may not exceed US$12,500.
During any calendar year, the maximum amount of payroll deductions by a
Participant that can be used to purchase Common Shares under this ESPP, together
with all other employee stock purchase plans of the Company, its parents,
subsidiaries and affiliates, is US$25,000. The foregoing limitations are
intended to and shall be interpreted in such a manner as will comply with
Section 423(b)(8) of the Code. Tax credits are available to B.C. Participants
under the EIA in respect of the first Cdn$5,000,000, or such lesser amount as is
allocated to the Company by the Administrator, aggregate of subscriptions in any
two year period but are limited to 20% of the subscription price to a maximum
for each B.C. Participant of Cdn$2,000 annually and Cdn$10,000 lifetime. No U.S.
Participant shall be permitted to subscribe for any Common Shares under this
ESPP if such Participant, immediately after such subscription, owns Common
Shares that account for (including all Common Shares that may be purchased under
outstanding subscriptions under the ESPP and any other outstanding options to
purchase Common Shares) five percent (5%) or more of the total combined voting
power or value of all classes of shares of the Company. For the foregoing
purposes the rules of Section 424(d) of the Code shall apply in determining
share ownership. B.C. Participants who wish to remain eligible for tax credits
under the EIA may not hold more than ten percent (10%) of the issued share
capital of the Company, calculated in the manner prescribed by the EIA.
9. WITHDRAWAL FROM THE ESPP
At any time prior to the last two weeks of an Offering Period, a Participant may
elect, in accordance with procedures prescribed by the Committee, to withdraw
from the ESPP. If a Participant withdraws from the ESPP, all of the
Participant's payroll deductions for that Offering Period will be promptly
returned to the Participant, and the Participant will not be eligible to
participate in the
<PAGE> 6
-6-
ESPP again before the next Offering Period. If a Participant withdraws effective
for an Offering Period that has not yet commenced, the Participant may elect to
participate in any subsequent Offering Period. If a Participant's payroll
deductions are interrupted by any garnishment or other legal process, the
Participant will be deemed to have elected to withdraw from the ESPP for the
Offering Period in which the interruption occurs.
A Participant's participation and payroll deductions will continue during a paid
leave of absence unless the Participant elects to stop his or her payroll
deductions. Such participation will end automatically at the end of the current
Offering Period. A Participant may re-enroll to participate in subsequent
Offering Periods which commence following the employee's return from the leave
of absence.
10. ISSUANCE OF COMMON SHARES TO PARTICIPANTS
The certificates for the Common Shares purchased by Participants will be issued
by the Company and credited electronically by the Trustee to the Participants
custodial account as soon as practicable after each Purchase Date. Common Shares
purchased under the ESPP will be issued only in the name of: (a) the
Participant, or (b) the trustee of the RRSP Trust of which the Participant or
the Participant's spouse is the annuitant, provided in the case of a spousal
RRSP that the Participant is the designated beneficiary of the spousal RRSP.
A Participant or his or her legal representative may withdraw Common Shares from
his or her account held by the Trustee at any time, not sooner than 30 days
after a Purchase Date; however any withdrawal by a U.S. Participant within 2
years of the first day of the Offering Period and one year of the Purchase Date
will be treated by the Company as a disqualifying disposition under Sections 421
and 423 of the Code and be reported on the Participant's tax Form W-2. B.C.
Participants who dispose of Common Shares within three years of the Purchase
Date may be required to repay the tax credits received under the EIA. Upon
termination, all payroll deductions not used to purchase Common Shares will be
refunded to the Participant entitled thereto.
11. EXPENSES AND TAXES
Fees and expenses of the Trustee shall be paid by the Company or allocated among
the respective Participants in such manner as the Committee determines. The
Company shall have the right to withhold from any payroll deductions made by the
Participant under this ESPP an amount equal to any required withholding tax.
12. TRANSFERABILITY
A Participant's rights under this ESPP, including rights to accumulated payroll
deductions, may not be pledged, assigned, encumbered or otherwise transferred
for any reason other than by will or the laws of descent and distribution. Any
such attempt will be treated as an election by the Participant to withdraw from
this ESPP.
<PAGE> 7
-7-
13. TERMINATING EVENTS
Upon (a) the dissolution or liquidation of the Company, (b) a merger,
amalgamation, arrangement or other reorganization of the Company with one or
more corporations as a result of which the Company will not be a surviving
corporation, (c) the sale of all or substantially all of the assets of the
Company or a material division of the Company, (d) a sale or other transfer,
pursuant to a tender offer, takeover bid or otherwise, of more than fifty
percent (50%) of the then outstanding Common Shares of the Company, (e) an
acquisition by the Company resulting in an extraordinary expansion of the
Company's business or the addition of a material new line of business (any of
such events is herein referred to as a "Terminating Event"), the Committee may
but shall not be required to:
(a) make provision for the continuation of the Participants' rights under
this ESPP on such terms and conditions as the Committee determines to
be appropriate and equitable, including where applicable, but not
limited to, an arrangement for the substitution on an equitable basis,
for each Common Share that could otherwise be purchased at the end of
the Offering Period in progress at the time of the Terminating Event,
of any consideration payable with respect to each then outstanding
Common Share in connection with the Terminating Event; or
(b) terminate all rights of Participants under the ESPP for such Payment
Period and
(i) return to the Participants all of their payroll deductions for
such Payment Period; and
(ii) for each Common Share, if any, that could otherwise be
purchased under the ESPP by a Participant at the end of such
Offering Period (determined by assuming that payroll
deductions at the rate elected by the Participant were
continued to the end of the Offering Period and used to
purchase Common Shares based on the Fair Market Value of the
Common Shares on the first day of the Offering Period) and
with respect to which (A) the purchase price at which such
Common Share could be purchased (determined with reference
only to the Fair Market Value of the Common Shares on the
first day of the Offering Period) is exceeded by (B) the Fair
Market Value of Common Shares on the date of the Terminating
Event, as determined by the Committee, pay to the Participant
an amount equal to such excess.
The Committee shall make all determinations necessary or advisable in connection
with Terminating Events, and its determinations shall, in the absence of fraud
or patent mistake, be conclusive and binding on all persons with any interest in
the ESPP.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
In the event of any changes in the outstanding Common Shares of the Company by
reason of stock dividends, stock splits, recapitalisation, mergers,
consolidations, combinations or exchanges of Common Shares, split-ups,
split-offs, spin-offs, liquidations or other similar changes in capitalization,
or any distribution to shareholders other than cash dividends, the Committee
shall make such adjustments, if any, in light of the change or distribution as
the Committee in its sole discretion shall determine to be appropriate in the
number and class of shares and the purchase prices of the Common Shares which
may be purchased by Participants during the current Offering Period. In the
event of any such change in the outstanding Common Shares of the Company, the
aggregate
<PAGE> 8
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number and class of shares available under this ESPP and the maximum number of
shares which may be purchased and their purchase price shall be appropriately
adjusted by the Committee.
Upon the happening of an event specified in this Section 14, the class and
aggregate number of shares available under this ESPP, as set forth in Section 5
shall be appropriately adjusted to reflect the event. Notwithstanding the
foregoing, such adjustments shall be made only to the extent that the Committee,
based on advice of counsel for the Company, determines that such adjustments
will not constitute a change requiring shareholder approval under Section
423(b)(2) of the Code, the EIA, the rules of any stock exchange or market upon
which the Common Shares are listed or quoted, or applicable Canadian law.
15. TERMINATION OF PARTICIPANT'S RIGHTS
Subject to the provisions of the next paragraph, a Participant's rights under
this ESPP will terminate if he or she for any reason (including death,
disability or voluntary or involuntary termination of employment) ceases to be
an employee of the Company or a Designated Subsidiary. To the extent that the
rights of a Participant terminate in accordance with this Section 15, any of the
Participant's accrued payroll deductions will be promptly returned to the
Participant or his or her personal representative.
This ESPP does not, directly or indirectly, create any right for the benefit of
any employee or class of employees to preferentially purchase any Common Shares
under the ESPP, or create in any employee or class of employees any right with
respect to continuation of employment by the Company, and it shall not be deemed
to interfere in any way with the Company's right to terminate, or otherwise
modify, an employee's employment at any time.
16. TERMINATION AND AMENDMENTS TO ESPP
This ESPP may be terminated at any time by the Committee with the approval of a
majority of the Employee Shareholders and the Administrator, but, except as
provided in Section 13, such termination shall not affect the rights of
Participants under the ESPP for the Offering Period in progress at the time of
termination. This ESPP will terminate in any case when all or substantially all
of the unissued Common Shares reserved for the purposes of the ESPP, as
specified from time to time by the Company, have been purchased. If at any time
the Common Shares reserved for the purpose of the ESPP remain available for
purchase but not in sufficient number to satisfy all then unfilled purchase
requirements, the available Common Shares shall be apportioned among
Participants in proportion to the respective amounts of their accumulated
payroll deductions, and the ESPP shall terminate. Upon such termination or any
other termination of the ESPP, all payroll deductions not used to purchase
Common Shares will be refunded to the Participants entitled thereto.
This ESPP may be terminated, modified or amended by the Board of Directors of
the Company. Such termination, modification or amendment will not require the
approval of Participants or of the shareholders of the Company unless
shareholder approval of Participants or Employee Shareholder approval is
specifically required for such termination, modification or amendment by the
Code, the EIA or other applicable law or by the rules of any stock exchange or
market upon which the Company's Common Shares are listed or quoted.
<PAGE> 9
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17. INFORMATION TO PARTICIPANTS
A Participant in this ESPP shall not have any rights as a shareholder of the
Company on account of the Common Shares that may be purchased under the ESPP
prior to the time such Common Shares are actually purchased by and issued to the
Participant. Notwithstanding the foregoing, the Company shall make available or
deliver to each Participant under this ESPP who does not otherwise receive such
materials annually, within 140 days of the end of each Reporting Period; (a) a
copy of the Company's annual Financial Statements, together with management's
discussion and analysis of financial condition and results of operations for the
fiscal year, and (b) a copy of all reports, proxy statements and other
communications distributed to the Company's security holders generally, and
shall make available to each Participant, upon request, a copy of the
Constitution.
18. MISCELLANEOUS
This ESPP is governed by and shall be construed and enforced in accordance with
the laws of the Province of British Columbia and as it applies to B.C.
Participants, shall be supplemented by any further provisions or rules as may be
required to maintain eligibility of this ESPP under the EIA. This ESSP is
binding upon the Company, its successors and assigns, and will enure to the
benefit of each Participant and Employee Shareholder and their respective
personal representatives and assigns. All references to currency herein are to
U.S. funds unless otherwise indicated. THE ADMINISTRATOR HAS NOT REVIEWED THE
INVESTMENT MERITS OF THE COMMON SHARES AND IN NO WAY GUARANTEES AN INVESTMENT IN
COMMON SHARES. ASSESSMENT OF THE INVESTMENT MERIT, ADEQUACY OF THIS ESSP, AND
DUE DILIGENCE REVIEW IS ENTIRELY THE RESPONSIBILITY OF PARTICIPANTS.
Approved by the Board of Directors of the Company on May 28, 1999 and as
subsequently supplemental under Section 18 hereof.
The common seal of PIVOTAL )
CORPORATION was affixed in the )
presence of: )
) c/s
- ------------------------------------------- )
Authorized Signatory )
)
)
- ------------------------------------------- )
Authorized Signatory )
<PAGE> 1
EXHIBIT 23.1
[DELOITTE & TOUCHE LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Pivotal Corporation
(formerly, Pivotal Software Inc.) on Form F-1 of our report dated July 9, 1999
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
CHARTERED ACCOUNTANTS
Vancouver, British Columbia
August 2, 1999
<PAGE> 1
EXHIBIT 23.2
[KPMG CHARTERED ACCOUNTANTS LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Pivotal Corporation
(formerly Pivotal Software Inc.)
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in this registration statement on Form F-1.
/s/ KPMG LLP
Chartered Accountants
Vancouver, Canada
August 2, 1999
