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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the quarterly period ended September 30, 1999
[ ] Transition report pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934.
For the Transition Period From ______ to ______
COMMISSION FILE NUMBER 000-26867
PIVOTAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
BRITISH COLUMBIA, CANADA Not applicable
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
300 - 224 WEST ESPLANADE,
NORTH VANCOUVER, BRITISH COLUMBIA, V7M 3M6
CANADA
(Address of principal executive offices)
Telephone (604) 988-9982
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
-------- -------
COMMON SHARES OUTSTANDING AT OCTOBER 19, 1999: 20,020,598
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PIVOTAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART 1 FINANCIAL INFORMATION
Item l Consolidated Financial Statements 1
Consolidated Balance Sheets as of June 30, 1999 and September 30, 1999 1
Consolidated Statements of Operations for the Three Months Ended
September 30, 1998 and 1999 2
Consolidated Statement of Shareholders' Equity
(Deficit) for the Three Months ended September 30, 1999 3
Consolidated Statements of Cash flows for the Three Months Ended
September 30, 1998 and 1999 4
Notes to the Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk 16
PART 2 OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 2 Changes in Securities and Use of Proceeds 17
Item 6 Exhibits and Reports on Form 8-K 17
Signatures 18
</TABLE>
<PAGE> 3
PART I - ITEM I: CONSOLIDATED FINANCIAL STATEMENTS
PIVOTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1999 SEPTEMBER 30, 1999
------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 9,338 $ 51,710
Accounts receivable 8,304 9,208
Prepaid expenses 1,029 1,493
--------- -----------
Total current assets 18,671 62,411
Property and Equipment, net 3,051 3,588
--------- ------------
Total assets $ 21,722 $ 65,999
========= ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current Liabilities
Accounts payable and accrued liabilities $ 6,329 $ 7,584
Deferred revenue 5,085 5,574
--------- ------------
Total current liabilities 11,414 13,158
Redeemable convertible preferred shares, authorized, issued and
outstanding shares - 9,946 at June 30, 1999, none at September 30, 1999 17,500 -
--------- ------------
Shareholders' (Deficit) Equity
Preferred shares, undesignated, no par value; authorized shares - 20,000 at
June 30, 1999 and September 30, 1999; no shares issued
and outstanding - -
--------- -----------
Class A convertible preferred shares, no par value; authorized, issued and
outstanding shares - 2,000 at June 30, 1999, none at September 30, 1999 83 -
Common shares, no par value; authorized shares - 200,000 at June 30, 1999
and September 30, 1999; issued and outstanding shares - 3,454 and 20,020
at June 30, 1999 and September 30, 1999, respectively 563 61,318
Class B common shares, Cdn.$0.03 per share par value; authorized shares -
600 at June 30, 1999, none at September 30, 1999; issued and outstanding
shares - 477 and none at June 30, 1999 and September 30, 1999,
respectively 4 -
Deferred share-based compensation (416) (365)
Accumulated deficit (7,426) (8,112)
--------- ------------
Total shareholders' (deficit) equity (7,192) 52,841
--------- ------------
Total liabilities and shareholders' (deficit) equity $ 21,722 $ 65,999
========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
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PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN UNITED STATES DOLLARS;
ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------
1998 1999
------ ------
<S> <C> <C>
REVENUES:
Licences $3,276 $6,097
Services and maintenance 1,292 2,578
------ ------
Total revenues 4,568 8,675
====== ======
COST OF REVENUES:
Licenses 73 284
Services and maintenance 562 1,368
------ ------
Total cost of revenues 635 1,652
====== ======
Gross profit 3,933 7,023
------ ------
OPERATING EXPENSES
Sales and marketing 3,488 5,715
Research and development 808 1,569
General and administrative 543 707
------ ------
Total operating expenses 4,839 7,991
====== ======
Loss from operations (906) (968)
Interest and other income 107 357
------ ------
Loss before income taxes (799) (611)
Income taxes 60 75
------ ------
Net loss $ (859) $ (686)
====== ======
LOSS PER SHARE:
Basic and diluted $(0.22) $(0.05)
Pro-forma basic and diluted $(0.06) $(0.04)
WEIGHTED AVERAGE NUMBER OF SHARES USED TO CALCULATE LOSS PER SHARE:
Basic and diluted 3,854 13,693
Pro-forma basic and diluted 14,618 18,380
</TABLE>
See accompanying notes to consolidated financial statements.
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PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
CONVERTIBLE CLASS B DEFERRED TOTAL
PREFERRED SHARES COMMON SHARES COMMON SHARES 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, 1999 2,000 $ 83 3,454 $ 563 477 $ 4 $ (416) $(7,426) $ (7,192)
Conversion of Class B common
to common shares 477 4 (477) (4) --
Conversion of Class A preferred
into common shares (2,000) (83) 2,000 83 --
Conversion of redeemable convertible
preferred shares into common shares 10,052 17,501 17,501
Issuance of common shares on exercise 62 66 66
of stock options
Issuance of common shares on initial 3,975 43,101 43,101
public offering, net of offering
costs (note 4)
Amortization of share-based compensation 51 51
Net loss (686) (686)
------ ------ ------ ------- ------ ------ ------------ --------- ------------
Balance September 30, 1999 -- $ -- 20,020 $61,318 -- $ -- $ (365) $(8,112) $ 52,841
====== ====== ====== ======= ====== ====== ============ ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
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PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION> Three months ended September 30,
--------------------------------
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period $ (859) $ (686)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation 196 335
Non-cash share based compensation expense -- 51
Change in operating assets and liabilities
Accounts receivable 2,031 (904)
Prepaid expenses 98 (464)
Accounts payable and accrued liabilities (432) 1,255
Deferred revenue (887) 489
-------- --------
Net cash provided by operating activities 147 76
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of property and equipment (289) (871)
-------- --------
Net cash used in investing activities (289) (871)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common shares 1 43,167
-------- --------
Net cash provided by financing activities 1 43,167
-------- ------- -
Net increase (decrease) in cash and cash equivalents (141) 42,372
Cash and cash equivalents, beginning of period 1,202 9,338
-------- --------
Cash and cash equivalents, end of period $1,061 $51,710
======== ========
Supplemental cash flow disclosure:
Cash paid for income taxes $ 194 $ 179
</TABLE>
See accompanying notes to consolidated financial statements.
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PIVOTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Pivotal Corporation
Pivotal Corporation is a global provider of electronic business relationship
management solutions. These solutions combine electronic commerce with customer
relationship management applications that enable businesses to increase revenues
by improving relationships with their customers and business partners. We sell
our products and services through a direct sales force and through a global
network of resellers. We provide support, education, implementation and other
consulting services to our customers through our professional service
organization and our Pivotal Alliance of over 100 independent companies that
sell, install and service our products and offer specialized software for use
with them.
Interim Financial Information
The accompanying unaudited financial statements have been prepared in conformity
with generally accepted accounting principles for interim financial information
and with the instructions for Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed, or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission. In our opinion, the
statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction with
our audited consolidated financial statements for the year ended June 30, 1999,
included in our prospectus, dated August 4, 1999, filed with the Securities and
Exchange Commission in connection with our initial public offering. Our results
of operations for any interim period are not necessarily indicative of the
results of operations for any other interim period or for a full fiscal year.
2. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Three months ended September 30,
-----------------------------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Net loss (A) $ (859) $ (686)
------------------ ------------------
Weighted average number of common shares (B) 3,854 13,693
Pro forma adjustment for redeemable convertible preferred shares 10,764 4,687
------------------ ------------------
Pro forma basic and diluted weighted average shares (D) 14,618 18,380
================== ==================
Loss per share:
Basic and diluted (A/B) $ (0.22) $ (0.05)
------------------ ------------------
Pro forma basic and diluted (A/D) $ (0.06) $(0.04)
------------------ ------------------
</TABLE>
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PIVOTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Pro forma earnings per share are computed by dividing net loss by the weighted
average number of common shares outstanding and the weighted average redeemable
convertible preferred shares and Class A convertible preferred shares
outstanding as if such shares were converted into common shares and had been
outstanding since July 1, 1998.
3. ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $434 and
$334 at September 30, 1999 and June 30, 1999, respectively.
4. INITIAL PUBLIC OFFERING
On August 5, 1999, we completed an initial public offering of 3,500,000 common
shares. On August 19, 1999, the underwriters exercised their overallotment
option and purchased a further 475,000 common shares. The total 3,975,000 common
shares sold generated net proceeds to the Company of approximately $43.1
million. Concurrent with the offering, all 476,786 Class B common shares and
11,946,474 redeemable convertible preferred shares automatically converted into
12,528,523 common shares.
5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The principal components of accounts payable and accrued liabilities were as
follows:
<TABLE>
<CAPTION>
June 30, September 30,
----------------- ------------------
1999 1999
----------------- ------------------
<S> <C> <C>
Accounts payable $3,054 $4,813
Accrued compensation 2,368 2,096
Accrued liabilities 907 675
----------------- ------------------
$6,329 $7,584
================= ==================
</TABLE>
6. SEGMENTED INFORMATION
The Company operates in one business segment, the development, marketing,
supporting and implementation of our electronic business relationship management
solutions.
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PIVOTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company licenses and markets its products internationally. The following
table presents a summary of revenues by geographical region.
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1998 1999
------ ------
<S> <C> <C>
United States $3,426 $5,760
Canada 274 781
International 868 2,134
------ ------
$4,568 $8,675
====== ======
</TABLE>
The Company attributes revenue among the geographical areas based on the
location of the customers involved.
During the quarters ended September 30, 1998 and September 30,1999, no single
customer accounted for 10% or more of total revenue.
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PART 1 - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investors should read the following in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part 1 - Item 1
of this Quarterly Report, and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Financial Conditions
and Results of Operations in our Form F-1 dated August 4, 1999.
FORWARD LOOKING STATEMENTS
Statements in this filing about our future results, levels of activity,
performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in our forward-looking statements.
These factors include, among others, those described in connection with the
forward-looking statements, and the factors listed in Exhibit 99 to this report,
which is hereby incorporated by reference in this report.
In some cases, you can identify forward-looking statements by our use of words
such as "may," "will," "should," "could," "expect," "plan," "intend,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or the
negative or other variations of these words, or other comparable words or
phrases.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance 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 filing. You should not place
undue reliance on forward-looking statements.
OVERVIEW
Pivotal Corporation is a global provider of electronic business relationship
management solutions. These solutions combine electronic commerce with customer
relationship management applications that enable businesses to increase revenues
by improving relationships with their customers and business partners. We sell
our products and services through a direct sales force and through a global
network of resellers. We provide support, education, implementation and other
consulting services to our customers through our professional service
organization and our Pivotal Alliance of over 100 independent companies that
sell, install and service our products and offer specialized software for use
with them.
In August 1999, we completed our initial public offering generating net proceeds
of approximately $43.1 million.
On October 12, 1999, we announced PivotalHost, an Internet hosting program for
our software. PivotalHost is a program whereby we will provide customers access
to our software applications on a monthly subscription basis over the Internet
through an application service provider. We commenced this program during the
quarter ended September 30, 1999 with the signing of our first customer. On
October 26, 1999 Microsoft Corporation and Cisco Systems Inc. also announced
their plans to develop a hosting program which, through an alliance of
application service providers, will provide customers with access to a variety
of different software applications which will address a company's entire
business needs. Microsoft and Cisco announced us as their initial choice of
vendors to provide the electronic business relationship management software
portion of this program.
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The terms "Pivotal," "our company" and "we" in this filing refer to Pivotal
Corporation, a British Columbia company, Pivotal Corporation, its wholly owned
subsidiary incorporated in Washington, and Pivotal Corporation Limited, its
wholly owned subsidiary incorporated in the United Kingdom, collectively.
Pivotal Relationship, Pivotal eRelationship and PivotalHost are trademarks
and/or registered trademarks of Pivotal Corporation.
PIVOTAL'S RESULTS OF OPERATIONS
The following table presents selected financial data, derived from our unaudited
statements of operations, as a percentage of total revenues for the periods
indicated. The operating results for the three months ended September 30, 1999
and 1998 are not necessarily indicative of the results that may be expected for
the full fiscal year or any future period.
<TABLE>
<CAPTION>
Three months ended September 30,
--------------------------------
1998 1999
---------- ----------
<S> <C> <C>
Consolidated Statement of Operations
Revenues
License 72 % 70 %
Services and maintenance 28 % 30 %
----- -----
Total revenues 100 % 100 %
----- -----
Cost of Revenues
Licenses 2 % 3 %
Services and maintenance 12 % 16 %
----- -----
Total cost of revenues 14 % 19 %
----- -----
Gross Margin 86 % 81 %
----- -----
Operating Expenses
Sales and marketing 76 % 66 %
Research and development 18 % 18 %
General and administrative 12 % 8 %
----- -----
Total operating expenses 106 % 92 %
----- -----
Loss from operations (20 %) (11 %)
Interest and other income 2 % 4 %
----- -----
Loss before income taxes (18 %) (7 %)
Income tax provision (1 %) (1 %)
----- -----
Net loss (19 %) (8 %)
===== =====
</TABLE>
REVENUES
Total revenues increased 90% to $8.7 million from $4.6 million for the quarters
ended September 30, 1999 and 1998, respectively.
License Revenue
Revenues from licenses increased 86% to $6.1 million from $3.3 million for the
quarters ended September 30, 1999 and 1998, respectively. Increased sales of
licenses for Pivotal Relationship and related products contributed $1.8 million
of this increase and sales of the new Pivotal eRelationship products contributed
approximately $1.0 million.
We recognize revenue in accordance with the provisions of the American Institute
of Certified Public Accountants Statement of Position 97-2, "Software Revenue
Recognition", which we adopted effective for the year ended June 30, 1998. We
recognize product license revenues on delivery of our products if:
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o persuasive evidence of an arrangement exists,
o the fee is fixed and determinable,
o we can objectively allocate the total fee among all elements of the
arrangement, and
o the collection of the license fee is probable.
During the quarter ended September 30, 1999, we began to offer licensing
arrangements in which our customers may purchase licenses and, for a fixed or
indefinite term, pay for the licenses with periodic payments rather than a
lump sum payment. We recognize revenues from these arrangements as the periodic
payments become due, provided all other conditions for revenue recognition are
met.
We enter into reseller and sub-licensing arrangements that provide a fee payable
to us based on a percentage of list price. We recognize revenue only on the fees
payable to us, net of any amount payable to the reseller by the customer.
Revenues from licenses represented 70% and 72% of total revenues for the
quarters ended September 30, 1999 and 1998, respectively. Revenues from licenses
have decreased as a percentage of total revenues due to the increase in our
revenues from services and maintenance relative to licenses.
No single customer accounted for 10% of our revenues for the quarters ended
September 30, 1999 or 1998. North American license revenues accounted for 75%
and 81% of total license revenues in the quarters ended September 30, 1999 and
1998, respectively. Canadian license revenues accounted for 9% and 6%,
respectively, of our total license revenues in the quarters ended September 30,
1999 and 1998.
Services
Revenues from services and maintenance increased 100% to $2.6 million from $1.3
million for the quarters ended September 30, 1999 and 1998, respectively. This
resulted from an increase of $900,000 in revenues from technical support and
maintenance contracts, which entitle the customer to new versions of the product
and to technical support and maintenance services, and an increase of $400,000
in revenues from implementation, consulting and education service engagements.
We typically sell first-year maintenance with the related software license.
Revenue related to such maintenance is over the term of the maintenance
contract, typically 12 months. In addition to increasing our customer base,
revenues relating to technical support and maintenance also have increased due
to the renewal of technical support and maintenance contracts upon expiration of
the first year maintenance arrangement.
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.
Revenues from services and maintenance represented 30% and 28% of total revenues
for the quarters ended September 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 relying on
members of the Pivotal
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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 160% to $1.7 million from $635,000 for the
quarters ended September 30, 1999 and 1998, respectively.
Licenses
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 licenses increased 289% to $284,000 from $73,000 for the
quarters ended September 30, 1999 and 1998, respectively. The increase is due
primarily to increased costs for third-party technology integrated with our
software. Cost of revenues from licenses as a percentage of revenues from
licenses was 5% and 2% for the quarters ended September 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.
Services and Maintenance
Cost of revenues from services and maintenance consists of personnel and other
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 services and maintenance increased 143% to $1.4 million
from $562,000 for the quarters ended September 30, 1999 and 1998, respectively.
Cost of revenues from services and maintenance as a percentage of revenues from
services and maintenance was 53% and 44% for the quarters ended September 30,
1999 and 1998, respectively. We expect that cost of revenues from services and
maintenance may continue to 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 and occupancy and marketing expenditures related to
direct mail, online marketing, trade shows, advertising and promotion.
Sales and marketing expenses increased 64% to $5.7 million from $3.5 million for
the quarters ended September 30, 1999 and 1998, respectively. Sales and
marketing expenses decreased as a percentage of total revenues to 66% from 76%
for the same periods. This decrease resulted from the improved productivity of
our sales and
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marketing organizations. 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,
product managers, technical writers and outside contractors used to augment the
research and development efforts. To date we have not capitalized any
development costs, and we do not expect to capitalize these costs in the future.
Research and development expenses increased 94% to $1.6 million from $808,000
for the quarters ended September 30, 1999 and 1998, respectively. Research and
development expenses was 18% of total revenues for both periods. 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 30% to $707,000 from $543,000 for
the quarters ended September 30, 1999 and 1998, respectively. General and
administrative expenses decreased as a percentage of total revenues to 8% from
12% for the same periods. The increase in general and administrative expenses
was due to hiring additional personnel, and the implementation of internal
financial and administrative systems. 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 $51,000 in
compensation expense in the quarter ended September 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
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 increased to $357,000
from $107,000 for the quarters ended September 30, 1999 and 1998, respectively.
This increase is primarily due to interest earned from short-term investments of
cash and cash equivalents generated by our initial public offering. We have not
had significant interest expense, as we have not borrowed. The balance of
$357,000 for the quarter ended September 30, 1999 is expressed net of a foreign
exchange loss of approximately $8,000 attributable to our unhedged portion of
Canadian and United Kingdom expenditures. The balance of $107,000 for the
quarter ended September 30, 1998 is expressed net of foreign exchange gain of
$93,000 attributable to our unhedged Canadian and United Kingdom expenditures.
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Income Taxes
The provision for income taxes was $75,000 and $60,000 for the quarters ended
September 30, 1999 and 1998, respectively which was attributable to our
operations in the United Stated and the United Kingdom. As a result of net
operating losses and the availability of loss carry forwards in Canada, we have
not incurred significant Canadian income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, we had $51.7 million in cash and cash equivalents and
$49.3 million in working capital. During the quarter ended September 30, 1999,
we successfully concluded our initial public offering, generating $43.1 million
net of expenses and brokers' commissions.
The Company's cash and cash equivalents increased to $51.7 million as of
September 30, 1999 from $9.3 million as of June 30, 1999. The Company's working
capital increased to $49.3 million at September 30, 1999 from $7.3 million at
June 30, 1999. This increase was primarily attributable to the issuance of
common shares from our initial public offering and increases in accounts payable
and deferred revenue partially offset by increases in accounts receivable and
prepaid expenses and the purchase of property and equipment.
We generated positive cash from operating activities for the quarter ended
September 30, 1999 of $76,000, as a result of obtaining improved payment terms
from our principal suppliers and up front payments for maintenance support from
our customers. Cash provided by operating activities was $76,000 and $147,000
for the quarters ended September 30, 1999 and 1998, respectively. Although we
generated cash from operating activities for the quarter ended September 30,
1999, we do not expect to generate cash from operations for the year ending June
30, 2000.
Capital expenditures made during the quarters ended September 30, 1999 and 1998
totaled $871,000 and $289,000, respectively, 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 quarters ended September 30,
1999 and 1998 were $43.2 million and $1,000, respectively. Net cash provided by
financing activities resulted from sales of equity securities. In addition to
the $43.1 million raised by our initial public offering, $66,000 was raised by
the sale of equities under employee share option plans during the quarter ended
September 30, 1999.
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 assets, including our inventory,
equipment and accounts receivable and the shares of our subsidiaries. At
September 30, 1999, no amounts were outstanding under the operating facility or
the term loan facility.
We believe that the total amount of cash and cash equivalents, with the
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.
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RECENT ACCOUNTING PRONOUNCEMENTS
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. The Statement will
require the recognition of all derivatives on the Company's consolidated balance
sheet at fair value. The Financial Accounting Standards Board has subsequently
delayed implementation of the Standard for the financial years beginning after
June 15, 2000. The Company expects to adopt the new Statement effective January
1, 2001. The impact on the Company's financial statements is not expected to be
material.
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
our 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 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
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<PAGE> 17
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 electronic business 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.
o We plan to purchase and pre-configure two back-up servers to be installed
if our present servers fail.
o 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.
o Members of our internal research and development staff will be on alert to
supplement the efforts of our information technology staff.
o 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.
o We have identified replacement products for important third-party products
we depend on, in case they fail and cannot be quickly fixed.
o 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
15
<PAGE> 18
systems Year 2000 ready will not have a material adverse effect on our business,
operating results and financial condition.
PART 1 - ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to foreign currency fluctuations through our operations in Canada
and the United Kingdom. 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 or two quarters. We do
not enter into forward exchange contracts or any derivative financial
instruments for trading purposes.
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 contracts in
earnings in the current period. As of September 30, 1999, we had outstanding
forward exchange contracts to purchase Canadian dollars totalling US$3.3 million
or Cdn.$5.0 million, all of which mature prior to December 31, 1999.
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.
We maintain cash and cash equivalents of various issuers, types, and maturity
dates with various banks and investment banking institutions. Although to date
we have not done so, we may in the future hold investments beyond 120 days, and
the market value of these investments on any day during the investment term may
vary as a result of market interest rate fluctuations. We do not hedge this
exposure because short-term fluctuations in interest rates would not likely have
a material impact on interest earnings.
We are exposed to financial market risks, including changes in interest rates.
We typically do not attempt to reduce or eliminate our market exposures on our
investment securities because the majority of our investments are short-term. We
do not have any derivative instruments other than the above listed foreign
exchange forward contracts. The fair value of our investment portfolio or
related income would not be significantly impacted by a 100 basis point increase
or decrease in interest rates due mainly to the short-term nature of the major
portion of our investment portfolio.
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PART 2: OTHER INFORMATION
PART 2 - ITEM 1
LEGAL PROCEEDINGS
We are not currently party to any material pending legal proceedings.
PART 2 - ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 4, Pivotal's registration statement on Form F-1, Registration No.
333-82871, became effective. The offering date was August 5, 1999. The offering
has terminated as a result of all of the shares offered being sold. The managing
underwriters were Merrill Lynch & Co., Bear, Stearns & Co. Inc. and Dain
Rauscher Wessels. The offering consisted of 3,975,000 common shares of Pivotal,
which includes 475,000 common shares pursuant to the subsequent exercise of the
underwriter's over allotment option on August 19, 1999. The aggregate price of
the shares offered and sold was $47.7 million. Proceeds to Pivotal, after
accounting for $3.3 million in underwriting discounts and commissions and $1.3
million in other expenses, were $43.1 million. Pivotal generated interest income
of approximately $365,000 during the three months ended September 30, 1999.
The net proceeds of $43.1 million have been invested in investment-grade,
interest bearing, short-term instruments. Except for the payment of offering
expenses, none of the net proceeds were used during the three months ended
September 30, 1999.
None of the net offering proceeds were paid, and none of the initial public
offering expenses related to payments, directly or indirectly to directors,
officers or general partners of Pivotal or their associates, persons owning 10%
or more of any class of securities or affiliates of Pivotal.
PART 2 - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
99 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statements for Forwarding Looking Statements
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
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<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 5, 1999
PIVOTAL CORPORATION
/s/ Norman B. Francis
----------------------------------
Norman B. Francis
President, Chief Executive Officer
and Director
/s/ Vincent D. Mifsud
----------------------------------
Vincent D. Mifsud
Chief Financial Officer and Vice
President, Operations
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Pivotal Corporation's quarterly report on Form 10-Q for the three months
ended September 30, 1999 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 51,710
<SECURITIES> 0
<RECEIVABLES> 9,642
<ALLOWANCES> (434)
<INVENTORY> 0
<CURRENT-ASSETS> 62,411
<PP&E> 3,923
<DEPRECIATION> (335)
<TOTAL-ASSETS> 65,999
<CURRENT-LIABILITIES> 13,158
<BONDS> 0
0
0
<COMMON> 61,318
<OTHER-SE> (8,477)
<TOTAL-LIABILITY-AND-EQUITY> 65,999
<SALES> 6,097
<TOTAL-REVENUES> 8,675
<CGS> 1,652
<TOTAL-COSTS> 7,991
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (611)
<INCOME-TAX> (75)
<INCOME-CONTINUING> (686)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (686)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
<PAGE> 1
EXHIBIT 99
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 - SAFE HARBOR FOR
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe-harbor for
forward-looking statements made by public companies. This safe-harbor protects a
company from securities law liability in connection with forward-looking
statements if the company complies with the requirements of the safe-harbor. As
a public company, we have relied and will continue to rely on the protection of
the safe harbor in connection with our written and oral forward-looking
statements.
When evaluating our business, you should consider:
o all of the information in this quarterly report on Form 10-Q;
o the risk factors described in our Rule 424(b) prospectus filed with the
Securities and Exchange Commission on August 5, 1999; and
o the risk factors described below.
RISK FACTORS
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy or completeness of
forward-looking statements. You should consider our forward-looking statements
in light of the following risk factors and other information in this quarterly
report. If any of the risks described below occurs, our business, results of
operation and financial condition could differ from those projected in our
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of the quarterly report. You should
not place undue reliance on forward-looking statements.
FACTORS RELATING TO OUR BUSINESS AND THE MARKET FOR ELECTRONIC BUSINESS
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:
o market acceptance of our products;
o 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;
o 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;
o our ability to successfully expand our sales force and marketing programs;
o our ability to successfully expand our international operations;
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<PAGE> 2
o the introduction or enhancement of our products or our competitors'
products;
o changes in our or our competitors' pricing policies;
o our ability to develop, introduce and market new products on a timely
basis; and
o 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 LICENSE REVENUES TO FLUCTUATE
AND IN RECENT YEARS OUR LICENSE 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 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, we believe these factors have caused license revenues for our
quarter ending September 30, 1999 to be less than license 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 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 electronic business
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:
o no history of profitable operations;
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<PAGE> 3
o uncertain market acceptance of our products;
o our reliance on a limited number of products;
o the risks that competition, technological change or evolving customer
preferences could adversely affect sales of our products;
o the need to expand our sales and support capabilities;
o our reliance on third parties to market, install, and support our products;
o our dependence on a limited number of key personnel, including our
co-founders; and
o 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 electronic business 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 quarter ended September 30, 1999, we had a net loss of approximately
$686,000, and at September 30, 1999, we had an accumulated deficit of
approximately $8.1 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
electronic business relationship management software market and the electronic
commerce software market.
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.
3
<PAGE> 4
WE DEPEND UPON 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 electronic business relationship management software is still
emerging and continued growth in demand for and acceptance of electronic
business relationship management products remains uncertain. Even if the market
for electronic business 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 electronic
business 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
electronic business 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 electronic business 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 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 electronic business 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.
We have announced our PivotalHost program whereby we will provide customers
access to our software applications on a monthly subscription basis over the
Internet through an application service provider. We do not know whether this
will prove to be a successful business model or if it will result in any
material revenue for the Company. If a majority of our new customers purchase
our products through the PivotalHost program, we
4
<PAGE> 5
may experience a significant change in our revenue recognition due to the
recognition of license revenue over the extended life of the contract rather
than revenue recognition at the date of purchase.
OUR SUCCESS WILL DEPEND UPON 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 83% of our revenues from licences for the
quarter ended September 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.
THE SUCCESS OF PIVOTAL ERELATIONSHIP WILL DEPEND UPON 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:
o concerns about security of transactions conducted over the Internet;
o concerns about privacy and the use of data collected and stored
recording interactions over the Internet;
o the possibility that federal, state, local or foreign governments will
adopt laws or regulations limiting the use of the Internet or the use of
information collected from communications or transactions over the
Internet; and
o the possibility that governments will seek to tax Internet commerce.
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 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.
5
<PAGE> 6
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, AND OUR PIVOTALHOST PROGRAM WILL RELY ON THIRD-PARTY APPLICATION
SERVICE PROVIDERS.
We do not have the internal implementation and customization capability to
support our current level of sales of licenses. Accordingly, we have established
and relied on our international network of independent companies we call the
Pivotal Alliance. Members of the Pivotal Alliance market and sell our 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 30% of our revenues for the quarters ended September
30, 1999 and 1998, respectively 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 electronic business 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.
The success of our PivotalHost program will depend on the commitment and
performance of third-party application service providers to successfully
implement and market services that incorporate our solutions. Likewise, the
success of our participation in the hosting program announced by Microsoft and
Cisco will depend on their continued commitment to the program and our
participation in it, and their success in implementing and marketing their
hosting program.
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.
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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:
o unexpected changes in regulatory requirements;
o export restrictions, tariffs and other trade barriers;
o changes in local tax rates or rulings by local tax authorities;
o challenges in staffing and managing foreign operations, differing
technology standards, employment laws and practices in foreign
countries;
o less favorable intellectual property laws;
o longer accounts receivable payment cycles and difficulties in
collecting payments;
o political and economic instability; and
o fluctuations in currency exchange rates and the imposition of currency
exchange controls.
Any of these factors could have a material adverse effect on our business,
financial condition or results of operations.
Our international expansion 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 OR UNITED KINGDOM POUND STERLING 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
also are investing in our international operations resulting in increased future
operating expenses in United Kingdom pound sterling. We are exposed to
fluctuations in the exchange rates between the United States dollar and the
Canadian dollar and the United States dollar and the United Kingdom pound
sterling through our operations in Canada and United Kingdom, respectively. 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.
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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.
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
70 on June 30, 1997 to 309 on September 30, 1999. 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. 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 BUSINESS 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 electronic business
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 electronic business
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.
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OUR PLAN TO EXPAND OUR SERVICE CAPABILITY COULD ADVERSELY AFFECT GROSS PROFIT
MARGINS AND OPERATING RESULTS,
Revenues from services and maintenance have lower gross margins than revenues
from licenses, therefore an increase in the percentage of revenues generated
from services and maintenance as compared to revenues from licenses will lower
our overall gross margins. In addition, an increase in the cost of revenues from
services and maintenance as a percentage of revenues from services and
maintenance could have a negative impact on overall gross margins.
Although margins related to revenues from services and maintenance are lower
than margins related to revenues from licenses, our services organization
currently generates gross profits, and we are seeking to expand our service
capability and our revenues from services and maintenance.
Revenues from services and maintenance depend in part on renewals of technical
support contracts by our customers, some of which may not 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 electronic business 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.
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To be successful we must continue to enhance our current product line and
develop new applications and features. For example, we have announced our
PivotalHost program of delivering electronic business relationship management
solutions through application service providers on a monthly subscription basis.
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.
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 electronic business
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.
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.
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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 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:
o persuasive evidence of an arrangement exists,
o the fee is fixed and determinable,
o we can objectively allocate the total fee among all elements of
the arrangement, and
o collection of the license fee is probable.
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 share
compensation or for any acquisition we may pursue or other aspects of our
business, in a manner that could adversely affect our reported financial
results.
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