<PAGE> 1
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, 2000
[ ] 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 NOVEMBER 2, 2000: 22,559,128
<PAGE> 2
PIVOTAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Financial Statements 1
Condensed Consolidated Balance Sheets as of September 30, 2000 and
June 30, 2000 1
Condensed Consolidated Statements of Operations for the Three Months
Ended September 30, 2000 and 1999 2
Condensed Consolidated Statements of Shareholders' Equity for the
Three Months ended September 30, 2000 3
Condensed Consolidated Statements of Cash flows for the Three Months
Ended September 30, 2000 and 1999 4
Notes to the Condensed 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 19
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 20
ITEM 2 Changes in Securities and Use of Proceeds 20
ITEM 3 Defaults Upon Senior Securities 20
ITEM 4 Submission of Matters to a Vote of Security Holders 20
ITEM 5 Other Information 21
ITEM 6 Exhibits and Reports on Form 8-K 21
Signatures 22
</TABLE>
<PAGE> 3
PART I - ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 13,915 $ 4,734
Short-term investments 22,247 30,788
Accounts receivable 17,622 16,764
Prepaid expenses 1,931 1,859
-------- --------
Total current assets 55,715 54,145
Property and equipment, net 7,720 7,231
Goodwill, intangibles and other assets, net 55,978 60,569
-------- --------
Total assets $119,413 $121,945
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 16,919 $ 16,877
Deferred revenue 10,155 8,971
-------- --------
Total current liabilities 27,074 25,848
-------- --------
Shareholders' equity:
Preferred shares, undesignated, no par value; authorized shares --
20,000 at September 30, 2000 and June 30, 2000; no shares issued and
outstanding -- --
Common shares, no par value; authorized shares -- 200,000 at
September 30, 2000 and June 30, 2000, respectively; issued and
outstanding shares -- 22,499 and 22,057 at September 30, 2000 and
June 30, 2000, respectively 106,744 105,076
Additional paid-in capital 7,002 7,002
Deferred share-based compensation (165) (193)
Accumulated deficit (21,242) (15,788)
-------- --------
Total shareholders' equity 92,339 96,097
-------- --------
Total liabilities and shareholders' equity $119,413 $121,945
======== ========
</TABLE>
See accompanying notes.
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<PAGE> 4
PIVOTAL CORPORATION
CONDENSED 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,
------------------
2000 1999
--------- ------
<S> <C> <C>
REVENUES:
Licenses $13,768 $6,097
Services and maintenance 7,290 2,578
------- ------
Total revenues 21,058 8,675
------- ------
COST OF REVENUES:
Licenses 866 284
Services and maintenance 3,870 1,368
------- ------
Total cost of revenues 4,736 1,652
------- ------
Gross profit 16,322 7,023
------- ------
OPERATING EXPENSES:
Sales and marketing 11,498 5,715
Research and development 3,917 1,569
General and administrative 1,776 707
Amortization of goodwill 4,995 --
------- ------
Total operating expenses 22,186 7,991
------- ------
Loss from operations (5,864) (968)
Interest and other income 343 357
------- ------
Loss before income taxes (5,521) (611)
Income tax recovery (expense) 67 (75)
------- ------
Net loss $(5,454) $ (686)
======= ======
LOSS PER SHARE:
Basic and diluted $ (0.24) $(0.05)
Pro forma basic and diluted $(0.04)
WEIGHTED AVERAGE NUMBER OF SHARES USED TO CALCULATE LOSS PER SHARE:
Basic and diluted 22,375 13,693
Pro forma basic and diluted 18,380
</TABLE>
See accompanying notes.
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<PAGE> 5
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Shares Additional Deferred Total
---------------- Paid-in Share-Based Shareholders'
Shares Amount Capital Compensation (Deficit) Equity
------ -------- ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 2000 22,057 $105,076 $7,002 $(193) $(15,788) $96,097
Issuance of common shares on
exercise of stock options 414 1,101 1,101
Issuance of common shares related
to Employee Stock Purchase Plan 28 567 567
Amortization of share-based
compensation 28 28
Net loss (5,454) (5,454)
------ -------- ------ ----- -------- -------
Balance September 30, 2000 22,499 $106,744 $7,002 $(165) $(21,242) $92,339
====== ======== ====== ===== ======== =======
</TABLE>
See accompanying notes.
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<PAGE> 6
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED SATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------------
2000 1999
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period $(5,454) $ (686)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of goodwill 4,995 --
Depreciation 880 335
Non-cash share-based compensation expense 28 51
Change in operating assets and liabilities:
Accounts receivable (858) (904)
Prepaid expenses (72) (464)
Accounts payable and accrued liabilities 42 1,255
Deferred revenue 1,184 489
------- -------
Net cash provided by operating activities 745 76
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,368) (871)
Proceeds from sales and maturities of short-term
investments 8,541 --
Other assets (405) --
------- -------
Net cash provided by (used in) investing activities 6,768 (871)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares 1,668 43,167
------- -------
Net cash provided by financing activities 1,668 43,167
------- -------
Net increase in cash and cash equivalents 9,181 42,372
Cash and cash equivalents, beginning of period 4,734 9,338
------- -------
Cash and cash equivalents, end of period $13,915 $51,710
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
Cash paid for income taxes $ 12 $ 179
======= =======
</TABLE>
See accompanying notes.
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<PAGE> 7
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements have been prepared in conformity
with United States generally accepted accounting principles ("United States
GAAP") 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 United States GAAP 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
the audited consolidated financial statements included in Pivotal's Annual
Report on Form 10-K for the year ended June 30, 2000. The 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. ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $1,128 and
$740 at September 30, 2000 and June 30, 2000, respectively.
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities were as follows:
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
------------ --------
<S> <C> <C>
Accounts payable $10,004 $ 9,369
Accrued compensation 2,633 3,020
Accrued acquisition costs 320 1,229
Other accrued liabilities 3,962 3,259
------- -------
$16,919 $16,877
======= =======
</TABLE>
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PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS;
ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
4. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------
2000 1999
------- ------
<S> <C> <C>
Net loss (A) $(5,454) $ (686)
------- ------
Weighted average number of common shares outstanding (B) 22,375 13,693
Pro forma adjustment for convertible preferred shares -- 4,687
------- ------
Pro forma basic and diluted weighted average number of shares (C) 22,375 18,380
======= ======
Loss per share:
Basic and diluted (A/B) $ (0.24) $(0.05)
Pro forma basic and diluted (A/C) $(0.04)
</TABLE>
Pro forma loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding and the weighted average redeemable
convertible preferred shares and Class A convertible preferred shares
outstanding as if such shares were converted into common shares and had been
outstanding since July 1, 1998.
5. SEGMENTED INFORMATION
The Company operates in one business segment; the development, marketing,
support and implementation of our demand chain network solutions.
The Company licenses and markets its solutions internationally. The following
table presents a summary of revenues by geographical region.
<TABLE>
<CAPTION>
Three months ended
September 30,
-----------------------
2000 1999
------- -------
<S> <C> <C>
United States $14,772 $ 5,760
Canada 2,435 781
International 3,851 2,134
------- -------
$21,058 $ 8,675
======= =======
</TABLE>
The Company attributes revenue among the geographical areas based on the
location of the customers involved.
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<PAGE> 9
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS;
ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
AMOUNTS)
(UNAUDITED)
During the three months ended September 30, 2000 and 1999, no single customer
accounted for 10% or more of total revenue.
6. RECENT ACCOUNTING PRONOUNCEMENTS
In December, 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") and amended it in March 2000. Pivotal is currently reviewing the
provisions of SAB 101 and has not fully assessed the impact of its adoption.
While SAB 101 does not supercede the software industry specific revenue
recognition guidance, which Pivotal believes it is in compliance with, the SEC
Staff has recently informally indicated its views that SAB 101 may change
current interpretations of software revenue recognition requirements. Such SEC
interpretations could result in companies recording a cumulative effect of a
change in accounting principle. Pivotal is required to adopt SAB 101 no later
than the fourth quarter of fiscal 2001.
7. SUBSEQUENT EVENTS
The Company announced definitive agreements to acquire certain of the assets of
Ionysys Technology Corporation and the shares of Project One Business
Technologies Inc. for a total purchase price of approximately $1.0 million and
$1.3 million, respectively. The consideration for the purchase of assets from
Ionysys was paid in cash and the consideration for the purchase of the shares of
Project One was paid in common shares. The agreement for the acquisition of
Project One Business Technologies Inc. also provides for additional
consideration to a maximum of approximately 95,000 common shares to be paid
based on achievement of certain product development and operating targets over
the next 3 years. These acquisitions closed subsequent to the quarter ending
September 30, 2000 and will be accounted for as purchases.
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<PAGE> 10
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investors should read the following in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included in Part I - 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 Annual Report on Form 10-K for the fiscal year
ended June 30, 2000.
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 99.1 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 report. You should not place
undue reliance on forward-looking statements.
OVERVIEW
Pivotal Corporation's XML-based, demand chain network solutions enable large and
medium-sized businesses worldwide to increase, serve and manage their customers.
We refer to our solutions as demand chain network solutions because they
automate and manage marketing, selling and servicing processes over the Internet
by integrating customer relationship management, electronic selling, electronic
commerce and wireless technologies. Our demand chain solutions are designed to
complement and integrate with a business' supply chain, therefore enabling
businesses to improve efficiency and increase revenues.
Pivotal solutions are sold in 35 countries and are available in English, French,
German, Spanish, Portuguese, Swedish, Japanese and Chinese. Pivotal's worldwide
customer base includes more than 1,000 organizations in traditional, commercial,
public market sectors and in the new digital economy and includes companies such
as ING Barings LLC, KPMG, Intrawest Corporation, USFilter, NEC, Ericsson,
Emerson Electric, Nissan Motor (Denmark), Digital Insight, Headhunter.net,
Clarus Corporation, insLogic, Qiagen, Capitalthinking, Heller Financial,
Panasonic SA, Toshiba Information Systems Corporation, National Air Traffic
Services, London,
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<PAGE> 11
Eprise Corporation, Bombardier Aerospace, Grantham, Mayo, Van
Otterloo & Company L.L.C., Hitachi Telecom (USA) Inc., Groove Networks, Kikkoman
Corporation, Trader.com, Southern Company, Deloitte & Touche and Principal
Financial Group. We market and sell our solutions through a direct sales force
as well as through third-party solution providers.
Pivotal is listed on NASDAQ under the symbol "PVTL" and The Toronto Stock
Exchange under the symbol "PVT". Our home page on the Internet can be found at
www.pivotal.com. Information contained on our Web site does not constitute part
of this report.
The terms "Pivotal," "our company" and "we" in this filing refer to Pivotal
Corporation, a British Columbia company, and all of Pivotal Corporation's wholly
owned subsidiaries including Pivotal Corporation, incorporated in Washington
State, Pivotal Corporation Limited, incorporated in the United Kingdom, Pivotal
Corporation France S.A., incorporated in France, Exactium Ltd., incorporated in
Israel, Exactium, Inc., incorporated in Delaware State, Pivotal Technologies
Corporation Limited, incorporated in the Republic of Ireland, Pivotal
Corporation (N.I.) Limited, incorporated in Northern Ireland, Pivotal GmbH,
incorporated in Germany, Digital Conversations Inc., incorporated in British
Columbia and Pivotal Corporation Australia Pty. Ltd., incorporated in Australia,
collectively.
Pivotal Relationship, Pivotal eRelationship, Pivotal eRelationship 2000, Pivotal
eRelationship 2000 Intrahub, Pivotal eRelationship 2000 CustomerHub, Pivotal
eRelationship 2000 PartnerHub, Pivotal ePower 2000, Pivotal eSelling 2000,
PivotalWeb .NET, PivotalHost, Pivotal Anywhere, Pivotal Intelligence and Pivotal
Interaction Center are trademarks and/or registered trademarks of Pivotal
Corporation.
SOURCE OF REVENUE AND REVENUE RECOGNITION POLICY
We derive our revenues from the sale of software and services. We recognize
license revenues on delivery of our solutions if:
o there is persuasive evidence of an arrangement,
o the fee is fixed or determinable,
o there is vendor specific objective evidence supporting allocating the total
fee among all elements of a multiple-element arrangement, and
o the collection of the license fee is probable.
Multiple-element arrangements could consist of software licenses, upgrades,
enhancements, maintenance and consulting services. Under some license
arrangements, with either a fixed or indefinite term, our customers agree to pay
for the license with periodic payments extending beyond one year. We recognize
revenues from these arrangements as the periodic payments become due, provided
all other conditions for revenue recognition are met.
We enter into reseller and sub-licensing arrangements that provide a fee payable
to us based on a percentage of list price. We recognize revenue only on the fees
payable to us, net of any amount payable to the reseller by the customer.
We typically sell first year maintenance with the related software license.
Revenue related to maintenance is recognized over the term of the maintenance
contract, typically one year.
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<PAGE> 12
Revenues relating to technical support and maintenance have increased due to our
increasing customer base and the renewal of technical support and maintenance
contracts upon expiration of first year maintenance arrangements.
We recognize revenues from consulting, implementation services, and education as
these services are performed. We derive revenue from these services primarily on
a time-and-materials basis under a separate service arrangement with the
customer. More than 90% of the implementation services provided to our customers
in connection with installations of our solutions are provided by third-party
consulting and implementation service providers. These third-party service
providers contract directly with the customer.
Our cost of license revenues primarily consists of costs relating to the
packaging and distribution of solutions and related documentation and license
fees due to third parties for integrated technology. Our cost of services
revenues includes salaries and related expenses for our implementation,
consulting support and education organizations and an allocation of facilities,
communications and depreciation expenses. Our operating expenses are classified
into three general categories: sales and marketing, research and development and
general and administrative. We classify all charges to these operating expense
categories based on the nature of the expenditures. We allocate the costs for
overhead and facilities to each of the functional areas based on their
headcount.
Software development costs incurred prior to the establishment of technological
feasibility are included in research and development costs as incurred. Since
license revenues from our solutions are not recognized until after technological
feasibility has been established, software development costs are not generally
expensed in the same period in which license revenues for the developed
solutions are recognized.
RESULTS OF OPERATIONS
The following table presents selected financial data, derived from our unaudited
condensed consolidated statements of operations, as a percentage of total
revenues for the periods indicated. The operating results for the three months
ended September 30, 2000 and 1999, respectively, are not necessarily indicative
of the results that may be expected for the full fiscal year or any future
period.
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<PAGE> 13
<TABLE>
<CAPTION>
Three months ended
September 30,
--------------------
2000 1999
---- ----
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
REVENUES:
License 65% 70%
Services and maintenance 35% 30%
---- ----
Total revenues 100% 100%
---- ----
COST OF REVENUES:
License 4% 3%
Services and maintenance 18% 16%
---- ----
Total cost of revenues 22% 19%
---- ----
Gross profit 78% 81%
---- ----
OPERATING EXPENSES:
Sales and marketing 55% 66%
Research and development 19% 18%
General and administrative 8% 8%
Amortization of goodwill 24% --
---- ----
Total operating expenses 106% 92%
---- ----
Loss from operations (28%) (11%)
Interest and other income 2% 4%
---- ----
Loss before income taxes (26%) (7%)
Income tax provision -- 1%
---- ----
Net loss (26%) (8%)
==== ====
</TABLE>
REVENUES
Total revenues increased 143% to $21.1 million from $8.7 million for the
quarters ended September 30, 2000 and 1999, respectively.
LICENSES
Revenues from licenses increased 126% to $13.8 million from $6.1 million for the
quarters ended September 30, 2000 and 1999, respectively.
Our revenues from licenses increased due to sales to new customers and to
follow-on sales to existing customers. These increases were attributable to
increased market acceptance of our solutions, increased sales as a result of our
expansion of our direct and indirect channels of distribution and our marketing
organization. We believe that the availability of our Pivotal demand chain
network solution suite has contributed to the increase in revenue from licenses,
as
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<PAGE> 14
this has extended the overall functionality of our solutions by permitting
organizations to collaborate with customers and partners over the Internet.
Revenues from licenses represented 65% and 70% of total revenues for the
quarters ended September 30, 2000 and 1999, respectively. No single customer
accounted for 10% or more of our revenues for the quarters ended September 30,
2000 and 1999. North American license revenues accounted for 76% of total
license revenues in the quarters ended September 30, 2000 and 1999,
respectively.
SERVICES AND MAINTENANCE
Revenues from services and maintenance increased 183% to $7.3 million from $2.6
million for the quarters ended September 30, 2000 and 1999, respectively. This
resulted from an increase of $1.7 million in revenues from technical support and
maintenance contracts, which entitle the customer to new versions of the
solutions and to technical support and maintenance services, and an increase of
$3.0 million in revenues from implementation, education and consulting service
engagements.
Our revenues from services and maintenance represented 35% and 30% of total
revenues for the quarters ended September 30, 2000 and 1999, respectively. We
believe that revenues from services and maintenance will continue to increase as
a percentage of total revenues over the quarter ended September 30, 1999, 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 third parties to provide a majority of
implementation services to our customers rather than providing those services
directly.
COST OF REVENUES
Total cost of revenues increased 187% to $4.7 million from $1.7 million for the
quarters ended September 30, 2000 and 1999, respectively.
LICENSES
Cost of revenues from licenses consists of costs relating to the packaging and
distribution of solutions, related documentation and fees paid for incorporation
of third-party products into our solutions.
Cost of revenues from licenses increased to $866,000 from $284,000 for the
quarters ended September 30, 2000 and 1999, respectively. The increase is due
primarily to increased costs for third-party technology integrated with our
solutions. Cost of revenues from licenses as a percentage of revenues from
licenses was 6% and 5% for the quarters ended September 30, 2000 and 1999,
respectively. We expect that cost of licenses as a percentage of revenue from
licenses will continue to increase because we expect to integrate additional
software applications licensed from third parties into our solutions.
SERVICES AND MAINTENANCE
Cost of revenues from services and maintenance consists of personnel and other
expenses relating to the cost of providing maintenance and customer support,
education and consulting services.
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<PAGE> 15
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 and consulting services.
Support and maintenance services involve the delivery of software upgrades,
which the customers download and install themselves, and customer support.
Education and consulting services generally require more involvement by our
employees, resulting in higher compensation, travel and similar expenses.
Cost of revenues from services and maintenance increased 183% to $3.9 million
from $1.4 million for the quarters ended September 30, 2000 and 1999,
respectively. Cost of revenues from services and maintenance as a percentage of
revenues from services and maintenance was 53% for the same periods.
We expect that cost of revenues from services and maintenance will 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 expand our consulting services. This will 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 for direct sales offices and marketing
expenditures related to direct mail, online marketing, trade shows, advertising
and promotion.
Sales and marketing expenses increased 101% to $11.5 million from $5.7 million
for the quarters ended September 30, 2000 and 1999, respectively. The increase
in dollar amounts reflects the expansion of our international sales capability
which required an increase in the number of sales and marketing professionals.
Sales and marketing expenses decreased as a percentage of total revenues to 55%
from 66% for the quarters ended September 30, 2000 and 1999, respectively. This
decrease of sales and marketing expenses as a percentage of total revenues
resulted from the improved productivity of our sales and marketing personnel and
programs. We expect that sales and marketing expenses will continue to increase
in future periods as we continue to expand our North American and international
sales and marketing efforts to expand our market position and increase sales of
our solutions.
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<PAGE> 16
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.
Research and development expenses increased 150% to $3.9 million from $1.6
million for the quarters ended September 30, 2000 and 1999, respectively.
Research and development expenses were 19% and 18% of total revenues for the
quarters ended September 30, 2000 and 1999, respectively. 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 151% to $1.8 million from $707,000
for the quarters ended September 30, 2000 and 1999, respectively. General and
administrative expenses were 8% of total revenues 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 increase our administrative capability in
international markets.
AMORTIZATION OF GOODWILL
Amortization of goodwill was $5.0 million in the quarter ended September 30,
2000 related to goodwill of approximately $58.1 million arising from the
acquisitions of Transitif, Exactium and Simba during the year ended June 30,
2000. We are amortizing goodwill from these acquisitions over a period of three
years. There was no amortization of goodwill in the quarter ended September 30,
1999. In addition to the acquisitions of certain of the assets of Ionysys and
the shares of Project One, we anticipate acquiring other companies or assets
which could result in further significant goodwill amortization or other charges
and this could materially impact our operating results.
SHARE-BASED 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.
We will allocate the expense among operating expense categories based on the
primary activity of the employee that holds the option. We recognized $28,000
and $51,000 in compensation expense in the quarters ended September 30, 2000 and
1999, respectively. We currently expect to recognize $113,000, $59,000 and
$22,000 in the years ending June 30, 2001, 2002 and 2003, respectively.
INTEREST AND OTHER INCOME
Interest and other income consists of earnings on cash and cash equivalents and
short term investments net of interest expense, foreign exchange gains and
losses, and gains and losses on sale of property and equipment. Interest and
other income was $343,000 and $357,000 for the
-14-
<PAGE> 17
quarters ended September 30, 2000 and 1999, respectively. The quarter ended
September 30, 2000 include foreign exchange losses of $119,000. The other
components of interest and other income were not material for the periods
presented.
INCOME TAXES
During the quarter ended September 30, 2000, we recovered $67,000 of prior taxes
paid compared to a provision for income taxes of $75,000 for the quarter ended
September 30 1999. These income tax amounts were attributable to our operations
in the United States, the United Kingdom and France and which were offset by
$127,000 related to Canadian research and development tax incentives received.
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly results of operations both
in absolute dollars and on percentage of revenue basis for each of our last
eight quarters. This data has been derived from unaudited consolidated financial
statements that have been prepared on the same basis as the annual audited
consolidated financial statements and, in our opinion, included all normal
recurring adjustments necessary for the fair presentation of such information.
These unaudited quarterly results should be read in conjunction with our annual
audited consolidated financial statements.
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------------------------------------------------------------
Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31, Dec. 31,
2000 2000 2000 1999 1999 1999 1999 1998
------- ------- ------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Licenses $13,768 $13,136 $10,125 $ 8,026 $6,097 $6,214 $5,006 $4,323
Services and maintenance 7,290 5,049 4,412 3,516 2,578 2,109 1,717 1,390
------- ------- ------- ------- ------ ------ ------ ------
Total revenues 21,058 18,185 14,537 11,542 8,675 8,323 6,723 5,713
------- ------- ------- ------- ------ ------ ------ ------
Cost of revenues:
Licenses 866 812 635 410 284 98 268 97
Services and maintenance 3,870 2,671 2,295 1,813 1,368 1,105 822 589
------- ------- ------- ------- ------ ------ ------ ------
Total cost of revenues 4,736 3,483 2,930 2,223 1,652 1,203 1,090 686
------- ------- ------- ------- ------ ------ ------ ------
Gross profit 16,322 14,702 11,607 9,319 7,023 7,120 5,633 5,027
------- ------- ------- ------- ------ ------ ------ ------
Operating expenses:
Sales and marketing 11,498 10,319 8,214 6,917 5,715 5,005 4,404 3,933
Research and development 3,917 2,803 2,409 2,125 1,569 1,800 1,184 1,166
General and administrative 1,776 1,318 1,197 968 707 845 566 512
Amortization of goodwill 4,995 1,280 97 32 -- -- -- --
In-process research and -- 6,979 -- -- -- -- -- --
development and other
charges
------- ------- ------- ------- ------ ------ ------ ------
Total operating expenses 22,186 22,699 11,917 10,042 7,991 7,650 6,154 5,611
------- ------- ------- ------- ------ ------ ------ ------
Loss from operations (5,864) (7,997) (310) (723) (968) (530) (521) (584)
Interest and other income 343 478 673 685 357 (69) (63) 1
(loss)
------- ------- ------- ------- ------ ------ ------ ------
Income (loss) before taxes (5,521) (7,519) 363 (38) (611) (599) (584) (583)
Income taxes (67) 217 139 126 75 60 63 60
------- ------- ------- ------- ------ ------ ------ ------
Net income (loss) $(5,454) $(7,736) $ 224 $ (164) $ (686) $ (659) $ (647) $ (643)
======= ======= ======= ======= ====== ====== ====== ======
</TABLE>
-15-
<PAGE> 18
<TABLE>
<CAPTION>
Three months ended
--------------------------------------------------------------------------------------------------
Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31, Dec. 31,
2000 2000 2000 1999 1999 1999 1999 1998
-------- ------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Licenses 65% 72% 70% 70% 70% 75% 74% 76%
Services and maintenance 35% 28% 30% 30% 30% 25% 26% 24%
--- --- --- --- --- --- --- ---
Total revenues 100% 100% 100% 100% 100% 100% 100% 100%
--- --- --- --- --- --- --- ---
COST OF REVENUES:
Licenses 4% 4% 4% 3% 3% 1% 4% 2%
Services and maintenance 18% 15% 16% 16% 16% 13% 12% 10%
--- --- --- --- --- --- --- ---
Total cost of revenues 22% 19% 20% 19% 19% 14% 16% 12%
--- --- --- --- --- --- --- ---
Gross profit 78% 81% 80% 81% 81% 86% 84% 88%
--- --- --- --- --- --- --- ---
OPERATING EXPENSES:
Sales and marketing 55% 57% 56% 60% 66% 60% 66% 69%
Research and development 19% 15% 17% 19% 18% 22% 17% 20%
General and 8% 7% 8% 8% 8% 10% 8% 9%
administrative
Amortization of goodwill 24% 7% 1% -- -- -- -- --
In-process research and -- 39% -- -- -- -- -- --
development and other
charges
--- --- --- --- --- --- --- ---
Total operating expenses 106% 125% 82% 87% 92% 92% 91% 98%
--- --- --- --- --- --- --- ---
Income (loss) from operation (28)% (44)% (2)% (6)% (11)% (6)% (7)% (10)%
Interest and other income (loss) 2% 3% 5% 6% 4% (1)% (1)% --
--- --- --- --- --- --- --- ---
Income (loss) before taxes (26)% (41)% 3% -- (7)% (7)% (8)% (10%)
Income taxes - 1% 1% 1% 1% 1% 1% 1%
--- --- --- --- --- --- --- ---
Net income (loss) (26)% (42)% 2% (1)% (8)% (8)% (9)% (11%)
=== === === === === === === ===
</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 license revenues in the quarter ended September 30.
We incurred operating losses as we increased the level of investment in all
facets of our business. Our quarterly operating results have fluctuated
significantly in the past, and will continue to fluctuate in the future, as a
result of a number of factors, many of which are outside 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 our
quarter-to-quarter comparisons of our operating results are not necessarily
meaningful. Investors should not rely on the results of one quarter as an
indication of future performance.
-16-
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had $13.9 million in cash and cash equivalents, $22.2
in short term investments and $28.6 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.
Our cash and cash equivalents and short-term investments increased to $36.2
million as of September 30, 2000 from $35.5 million as of June 30, 2000. Our
working capital increased to $28.6 million at September 30, 2000 from $28.3
million at June 30, 2000.
We generated cash from operating activities of $745,000 and $76,000 for the
three months ended September 30, 2000 and 1999, respectively.
Net cash provided by investing activities was $6.8 million for the three months
ended September 30, 2000 compared to a use of cash of $871,000 in the same
period in 1999. During the quarter ended September 30, 2000, we received
proceeds of $8.5 million from the sale and maturity of short-term investments.
Capital expenditures totalled $1.4 million and $871,000 for the three months
ended September 30, 2000 and 1999, respectively. These capital expenditures
related primarily to the acquisition of computer software and equipment as well
as furniture and fixtures as a result of our growing employee base.
Net cash provided by financing activities was $1.7 million and $43.2 million for
the three months ended September 30, 2000 and 1999, respectively. Net cash
provided by financing activities resulted from sales of equity securities.
Our principal source of liquidity at September 30, 2000 was our cash, cash
equivalents and short-term investments of $36.2 million. We also have credit
facilities with a Canadian chartered bank, which include an operating facility
of US$10.0 million bearing interest at the bank's prime rate and a term loan
facility of US$5.0 million bearing interest at the bank's prime rate to be used
for various capital expenditures. The credit facilities are secured by all of
our assets, including our equipment and accounts receivable and the shares of
our subsidiaries. At September 30, 2000, no amounts were outstanding under the
operating facility or the term loan facility.
We believe that the total amount of cash and cash equivalents and short term
investments, along with the commercial credit facilities, will be sufficient to
meet our anticipated cash needs for working capital or other purposes at least
through the year ending June 30, 2001. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" and
amended it in March 2000. We are currently reviewing the provisions of SAB 101
and have not fully assessed the impact of its adoption. While SAB 101 does not
supercede the software industry specific revenue recognition guidance, which we
believe it is in compliance with, the SEC Staff has recently informally
indicated its views that SAB 101 may change current interpretations of software
revenue
-17-
<PAGE> 20
recognition requirements. Such SEC interpretations could result in our recording
a cumulative effect of a change in accounting principle. We are required to
adopt SAB 101 no later than the fourth quarter of fiscal 2001.
YEAR 2000 ISSUES
We believe that the current versions of our internally developed solutions, as
well as our management and information systems, are Year 2000 compliant. When
the century changed, we experienced no disruption of our business operations and
no failures as a result of Year 2000 compliance issues or otherwise. The costs
we incurred in connection with remediating our systems during 1999 were
immaterial. At this time, we are not aware of any material defects in our
solutions, our internal systems, or the solutions and services of third parties
on which we rely, resulting from Year 2000 issues. Nevertheless, some Year 2000
problems may not appear until after January 1, 2000. As a result, we may still
face claims for undiscovered Year 2000 errors in our own solutions or for Year
2000 issues arising from third-party solutions that we integrate into our
solutions or with which our solutions and systems exchange data. In addition, if
our suppliers or distributors encounter Year 2000 problems, our ability to
deliver our solutions and services could be disrupted.
-18-
<PAGE> 21
PART I- ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates
and foreign currencies.
INTEREST RATE RISK
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. The fair value of our investment
portfolio or related income would not be significantly impacted by either a 100
basis point increase or decrease in interest rates due primarily to the
short-term nature of the major portion of our investment portfolio. All of the
potential changes noted above are based on sensitivity analysis performed on our
balances as of September 30, 2000.
FOREIGN CURRENCY RISK
We are exposed to foreign currency exchange rate fluctuations. In the normal
course of business, we employ established policies and procedures to manage
these risks including the use of forward contracts. There have been no material
changes in our foreign exchange risk management strategy to September 30, 2000,
therefore our foreign currency exchange rate risk remains substantially
unchanged from the description in our Annual Report on Form 10-K for the year
ended June 30, 2000. Based on our outstanding foreign exchange contracts at
September 30, 2000, an increase or decrease in exchange rates between U.S.
dollars and Canadian dollars of five percent on a base of 1.5 Canadian dollars
to U.S. dollars would not significantly impact our operating results.
-19-
<PAGE> 22
PART II: OTHER INFORMATION
PART II - ITEM 1
LEGAL PROCEEDINGS
We are not currently party to any material pending legal proceedings.
PART II - ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
PART II - ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
PART II - ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 25, 2000, we held our annual general meeting of shareholders. The
following matters were considered and voted upon at the annual general meeting:
The first matter voted upon at the meeting was the election of directors. Norman
B. Francis, Keith R. Wales, Jeremy A. Jaech, Robert J. Louis, Douglas J.
MacKenzie and Donald A. Mattrick were nominated for election as directors of
Pivotal to hold office until the close of the next annual general meeting or
until their successors are duly elected or appointed. The votes cast and
withheld for such nominees were as follows:
<TABLE>
<CAPTION>
Name For Withheld
---- --- --------
<S> <C> <C>
Norman B. Francis 15,988,227 2,289
Keith R. Wales 15,988,227 2,289
Jeremy A. Jaech 15,988,227 2,289
Robert J. Louis 15,988,201 2,315
Douglas J. MacKenzie 15,988,201 2,315
Donald A. Mattrick 15,988,201 2,315
</TABLE>
The second matter voted upon at the meeting was an amendment to the Incentive
Stock Option Plan to increase the maximum number of Common Shares reserved for
issuance under the Incentive Stock Option Plan by 1,500,000 Common Shares from
5,076,186 to 6,576,186. There were 12,608,292 votes cast for the amendment and
3,382,224 votes cast against the amendment.
-20-
<PAGE> 23
The third matter voted upon at the meeting was the appointment of Deloitte &
Touche LLP, Chartered Accountants, of Vancouver, British Columbia, as the
auditors of Pivotal to hold office until the close of the next annual general
meeting or until a successor is appointed. There were 15,988,496 votes cast for
the appointment and 2,020 votes withheld.
PART II - ITEM 5
OTHER INFORMATION
None.
PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
99.1 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forwarding-Looking Statements
(b) Reports on Form 8-K
On July 11, 2000, we filed a Form 8-K reporting the acquisition of Simba
Technologies Inc.
On August 16, 2000, we filed an amendment to the Form 8-K reporting the
acquisition of Exactium Ltd. The amendment reported the financial
statements of Exactium and the unaudited pro forma condensed combined
financial statements of Pivotal.
On September 11, 2000, we filed an amendment to the Form 8-K reporting the
acquisition of Simba Technologies Inc. The amendment reported the financial
statements of Simba Technologies and the unaudited pro forma condensed
combined financial statements of Pivotal.
-21-
<PAGE> 24
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 8, 2000
PIVOTAL CORPORATION
/s/ Norman B. Francis
---------------------
Norman B. Francis
President, Chief Executive Officer
and Director
/s/ Vincent D. Mifsud
---------------------
Vincent D. Mifsud
Executive Vice President and
Chief Financial Officer
-22-
<PAGE> 25
EXHIBIT 99.1
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 Pivotal 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;
o the risk factors described in our annual report on Form 10-K for the year
ended June 30, 2000; 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 DEMAND CHAIN NETWORK
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 solutions;
o the length and variability of the sales cycle for our solutions, which
typically ranges between two and six months from our initial contact with a
potential customer to the signing of a license agreement;
-23-
<PAGE> 26
o the timing of customer orders, which can be affected by customer order
deferrals in anticipation of new solution introductions, solution
enhancements and customer budgeting and purchasing cycles;
o our ability to successfully expand our sales force and marketing programs;
o our ability to successfully expand our international operations;
o the introduction or enhancement of our solutions or our competitors'
solutions;
o changes in our or our competitors' pricing policies;
o our ability to develop, introduce and market new solutions on a timely
basis; and
o general economic conditions, which may affect our customers' capital
investment levels in management information systems.
Our solution revenues are not predictable with any significant degree of
certainty and future solution 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 could predict results of operations in
future periods based on results of operations in past periods.
Even though our revenues are difficult to predict, we base our expense levels in
part on future revenue projections. Many of our expenses are fixed, and we
cannot quickly reduce spending if revenues are lower than expected. This could
result in significantly lower income or greater loss than we anticipate for any
given period.
WE 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 solution 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. Other than in our current fiscal year, we have
historically recognized more license revenues in the fourth quarter of our
fiscal year and recognized less license revenues in the subsequent first
quarter. We believe that these fluctuations are caused in part by customer
buying patterns and the efforts of our direct sales force to meet or exceed
fiscal year-end quotas. In addition, our sales in Europe are generally lower
during the summer months than during other periods. We expect that these
seasonal trends are likely to continue in the future. If revenues for a quarter
ending September 30 are lower than the revenues for the prior quarter, it may be
hard to determine whether the reason for the reduction in revenues involves
seasonal trends or other factors adversely affecting our business.
-24-
<PAGE> 27
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 demand chain network solutions. We
commercially released the initial versions of our solutions on the following
dates:
o Pivotal Relationship - April, 1996.
o Pivotal eRelationship - February, 1999.
o Pivotal Anywhere - October, 1999.
o Pivotal eRelationship 2000 - February, 2000.
o Pivotal eSelling - June, 2000.
o Pivotal ePower (originally a component of eRelationship) - February, 2000.
We have a limited operating history and we face many of the risks and
uncertainties encountered by early-stage companies in rapidly evolving markets.
These risks and uncertainties include:
o no history of profitable operations;
o uncertain market acceptance of our solutions;
o our reliance on a limited number of solutions;
o the risks that competition, technological change or evolving customer
preferences could adversely affect sales of our solutions;
o the need to expand our sales and support capabilities;
o our reliance on third parties to market, install, and support our
solutions;
o our dependence on a limited number of key personnel, including our
co-founders; and
o the risk that our management will not be able to effectively manage growth
or acquisitions we have undertaken or may undertake in the future.
The new and evolving nature of the demand chain network solutions 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. We
expect to incur losses for the
-25-
<PAGE> 28
fiscal year ending June 30, 2001 and as at September 30, 2000, we had an
accumulated deficit of approximately $21.2 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
be certain that our revenues will increase. Our business strategies may not be
successful and we may not be profitable in any future period.
THE MARKET FOR OUR SOLUTIONS IS HIGHLY COMPETITIVE.
The market for our software is intensely competitive, fragmented and rapidly
changing. We face competition from companies in two distinct markets; the demand
chain network solutions market and the electronic commerce software market.
In addition, as we develop new solutions, particularly applications focused on
electronic commerce or specific industries, we may begin competing with
companies with whom we have not previously competed. It is also possible that
new competitors will enter the market or that our competitors will form
alliances that may enable them to rapidly increase their market share.
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 UPON MICROSOFT AND THE CONTINUED ADOPTION AND PERFORMANCE OF THE
MICROSOFT .NET PLATFORM.
We have designed our solutions to operate on the Microsoft .NET platform,
including Windows .NET and .NET Enterprise Servers. Microsoft .NET is a new
platform initiative of Microsoft announced in June, 2000. We have spent
considerable resources developing and testing the compatibility of our solutions
for Microsoft .NET. The performance of our solutions with Windows .NET and the
.NET Enterprise Servers has limited experience in the marketplace. As a result,
we market our solutions exclusively to customers who have developed their
computing systems around this platform.
Our future financial performance will depend on the continued growth and
successful adoption of Microsoft .NET -- including, Windows .NET and the .NET
Enterprise Servers. Microsoft .NET faces competition, particularly from
computing platforms such as Unix and the Java 2 Platform, Enterprise Edition
(J2EE), and databases from companies such as Oracle. Acceptance of Microsoft
.NET may not continue to increase in the future. The market for software
applications that run on these platforms has in the past been significantly
affected by the timing of new solution releases, competitive operating systems
and enhancements to competing computing platforms. If the number of businesses
that adopt Microsoft Windows .NET fails to grow or grows more slowly than we
currently expect, or if Microsoft delays the release of new or enhanced
solutions, our revenues from Pivotal demand chain network solutions could be
adversely affected.
The performance of our solutions depends, to some extent, on the technical
capabilities of the Microsoft .NET platform. If this platform does not meet the
technical demands of our solutions, the performance or scalability of our
solutions could be limited and, as a result, our revenues from
-26-
<PAGE> 29
Pivotal demand chain network solutions could be adversely affected. It is also
possible that Microsoft Corporation may decide to introduce solutions or
services that compete with ours.
Broad antitrust actions initiated by federal and state regulatory authorities
have resulted in a verdict against Microsoft. The government has proposed that,
as a result of the verdict, Microsoft should be divided into two companies.
Microsoft has appealed the verdict to the U.S. Court of Appeals for the District
of Columbia. Any outcome to these actions that weakens the competitive position
of Microsoft .NET solutions could adversely affect the market for our solutions.
THE MARKET FOR 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 demand chain network solutions is still emerging and continued
growth demand for and acceptance of demand chain network solutions remains
uncertain. Even if the market for demand chain network solutions grows,
businesses may purchase our competitors' products or develop their own. We
believe that many of our potential customers are not fully aware of the benefits
of demand chain network solutions and, as a result, these solutions may never
achieve full market acceptance.
The development of our Internet-based demand chain network solutions for demand
chain management and our plan to integrate additional features presents
additional challenges and uncertainties. We are uncertain how businesses will
use the Internet as a means of communication and commerce and whether a
significant market will develop for Internet-based demand chain network
solutions such as those developed by Pivotal. The use of the Internet is
evolving rapidly, and many companies are developing new products and services
that use the Internet. We do not know what forms of products and services may
emerge as alternatives to our existing solutions or to any future Internet-based
demand chain network solutions we may introduce. We have spent, and will
continue to spend, considerable resources educating potential customers about
our solutions and demand chain management software solutions. However, even with
these educational efforts, market acceptance of our solutions may not increase.
If the markets for our solutions do not grow or grow more slowly than we
currently anticipate, our revenues may not grow and may even decline.
We commenced our PivotalHost program in October 1999, whereby we provide
customers with access to our software applications on a monthly subscription
basis over the Internet through an application service provider. Since the
inception of the PivotalHost program, a majority of our new customers have
continued to purchase perpetual licenses rather than subscribing to the
PivotalHost program. We do not know if this will prove to be a successful
business model in the future. If it proves to be a successful business model in
the future, we 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 on delivery of the solution.
We commenced our PivotalWeb .NET in October, 1999 (formerly known as the Pivotal
business-to-business (B2B) Syndicate program). Under this program, we use the
Internet to furnish our customers with information or services provided by the
PivotalWeb .NET members. We do not know whether this will prove to be a
successful business model or if it will result in any material revenue for
Pivotal.
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OUR SUCCESS WILL DEPEND UPON THE SUCCESS OF OUR SOLUTIONS.
We anticipate that a majority of our revenues and growth in the foreseeable
future will come from sales of our integrated solution suite, consisting of
Pivotal ePower, Pivotal eRelationship, Pivotal eSelling, Pivotal Anywhere and
PivotalWeb .NET licenses and related services. Accordingly, failure of our
integrated solution suite to gain increased market acceptance and compete
successfully would adversely affect our business, results of operations and
financial condition. Our future financial performance will depend on our ability
to succeed in the continued sale of our integrated solution suite and related
services as well as the development of new versions and enhancements of these
solutions.
THE SUCCESS OF OUR SOLUTIONS WILL DEPEND UPON THE CONTINUED USE AND EXPANSION OF
THE INTERNET.
Increased sales of our solutions and any future Internet-based applications and
electronic commerce features we integrate with our current solutions, will
depend upon the expansion of the Internet as a leading platform for commerce and
communication. If the Internet does not continue to become a widespread
communications medium and commercial marketplace, the demand for our solutions
could be significantly reduced and our solutions and any future Internet-based
and electronic commerce features may not be commercially successful. The
Internet infrastructure may not be able to support the demands placed on it by
continued growth. The Internet could lose its viability due to delays in the
development or adoption of new equipment, standards and protocols to handle
increased levels of Internet activity, security, reliability, cost, ease of use,
accessibility and quality of service.
Other concerns that could inhibit the growth of the Internet and its use by
business as a medium for communication and commerce include:
o concerns about security of transactions conducted over the Internet;
o concerns about privacy and the use of data collected and stored recording
interactions over the Internet;
o the possibility that federal, state, local or foreign governments will
adopt laws or regulations limiting the use of the Internet or the use of
information collected from communications or transactions over the
Internet; and
o the possibility that governments will seek to tax Internet commerce.
WE DEPEND ON THIRD-PARTY WIRELESS SERVICE PROVIDERS FOR THE SUCCESSFUL
IMPLEMENTATION OF OUR PIVOTAL ANYWHERE SOLUTION.
Our Pivotal Anywhere solution provides a wireless platform that allows our other
solutions to be accessed wirelessly. We depend on third-party providers of
wireless services for the successful implementation of Pivotal Anywhere. Because
Pivotal Anywhere relies on wireless services developed and maintained by third
parties, we depend on these third parties' abilities to deliver and support
reliable wireless services. The wireless industry is new and rapidly developing
and involves many risks, including:
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o extensive government regulation in licensing, construction, operation, sale
and interconnection arrangements of wireless telecommunications systems
which may prevent our third-party providers from successfully expanding
their wireless services;
o rapid expansion of the wireless services infrastructure which may result in
flaws in the infrastructure; and
o concerns over the radio frequency emissions or other health and safety
risks which may discourage use of wireless services.
OUR FUTURE REVENUE GROWTH COULD BE IMPAIRED IF WE ARE UNABLE TO EXPAND OUR
DIRECT SALES AND SUPPORT INFRASTRUCTURE.
Our future revenue growth will depend in large part on our ability to
successfully expand our direct sales force and our customer support capability.
We may not be able to successfully manage the expansion of these functions or to
recruit and train additional direct sales, consulting and customer support
personnel. There is presently a shortage of qualified personnel to fill these
positions. If we are unable to hire and retain additional highly skilled direct
sales personnel we may not be able to increase our license revenue to the extent
necessary to achieve profitability. If we are unable to hire highly trained
consulting and customer support personnel we may be unable to meet customer
demands. We are not likely to be able to increase our revenues as we plan if we
fail to expand our direct sales force or our consulting and customer support
staff. Even if we are successful in expanding our direct sales force and
customer support capability, the expansion may not result in revenue growth.
WE RELY ON OUR PIVOTAL ALLIANCE NETWORK OF INDEPENDENT COMPANIES TO SELL,
INSTALL AND SERVICE OUR SOLUTIONS AND TO PROVIDE SPECIALIZED SOFTWARE FOR USE
WITH THEM AND OUR PIVOTALHOST PROGRAM RELIES ON THIRD-PARTY APPLICATION SERVICE
PROVIDERS.
We do not have the internal implementation and customization capability to
support our current level of sales of licenses. Accordingly, we have established
and relied on our international network of independent companies we call the
Pivotal Alliance. Members of the Pivotal Alliance market and sell our solutions,
provide implementation and customization services, provide technical support and
maintenance on a continuing basis and provide us with software applications that
we can bundle with our solutions to address specific industry and customer
requirements. Approximately 18% and 30% of our revenues for the three months
ended September 30, 2000 and 1999, 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 solutions. If we fail to maintain our
existing Pivotal Alliance relationships, or to establish new relationships, or
if existing or new members of the Pivotal Alliance do not perform to our
expectations, our ability to sell, install and service our solutions may suffer.
There is an industry trend toward consolidation of systems integrators that
implement, customize and maintain software solutions. Some of the systems
integrators in the Pivotal Alliance have engaged in discussions concerning
business consolidations. We are uncertain as to the effect that any
consolidation may have on our relationships with members of the Pivotal
Alliance.
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The success of our PivotalHost program will depend on the commitment and
performance of third-party application service providers to successfully
implement and market services that incorporate our solutions.
THE LOSS OF OUR CO-FOUNDERS OR OTHER KEY PERSONNEL OR OUR FAILURE TO ATTRACT AND
RETAIN ADDITIONAL PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends largely upon the continued service of our executive officers
and other key management, sales and marketing and technical personnel. The loss
of the services of one or more of our executive officers or other key employees
could have a material adverse effect on our business, results of operations and
financial condition. In particular, we rely on our co-founders, Norman Francis,
President, Chief Executive Officer and director, and Keith Wales, our Chief
Technical Officer and director. We do not have employment agreements with
Messrs. Francis and Wales and, therefore, Messrs. Francis and Wales could
terminate their employment with us at any time without penalty. We do not
maintain key man insurance on the lives of Messrs. Francis and 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 such that our operating
expenses could be materially increased.
WE FACE RISKS FROM THE EXPANSION OF OUR INTERNATIONAL OPERATIONS.
We intend to substantially expand our operations outside the United States and
Canada. We began by acquiring Transitif S.A. in France (now called Pivotal
Corporation France S.A.) and opening offices in the Republic of Ireland, the
United Kingdom, Japan and Australia. We expect to continue this expansion of our
international operations. 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.
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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
solutions. We may not be able to sustain or increase international revenues from
licenses or from consulting and customer support.
In some foreign countries we rely on selected solution providers to translate
our software into local languages, adapt it to local business practices and
complete installations in local markets. We are highly dependent on the ability
and integrity of these solution providers, and if any of them should fail to
properly translate, adapt or install our software, our reputation could be
damaged and we could be subjected to liability. If any of these solution
providers should fail to adequately secure our software against unauthorized
copying, our proprietary software could be compromised.
POLITICAL UNREST MAY ADVERSELY AFFECT THE OPERATION OF OUR EUROPEAN CUSTOMER
SUPPORT CENTER LOCATED IN NORTHERN IRELAND.
We have 15 employees located in our Belfast, Northern Ireland customer support
center. This center provides customer support primarily to all of our customers
in Europe and provides back-up support for other customers around the world.
Northern Ireland has historically experienced periods of religious, civil and
political unrest. Northern Ireland may experience further unrest which could
disrupt our ability to provide customer support and have material adverse effect
on our results of operations and financial condition.
FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND RISKS ASSOCIATED WITH OUR HEDGING
POLICIES 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.
Accordingly, we are exposed to fluctuations in the exchange rates between the
United States dollar and the Canadian dollar. 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
two quarters. 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.
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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We also invest in our international operations which will likely result in
increased future operating expenses in United Kingdom pounds sterling, French
francs, Euros, German marks, Japanese yen, Australian dollars and New Zealand
dollars. Our exposure to exchange fluctuations in foreign currencies is minimal
to date. Accordingly, our current hedging practice does not cover any foreign
exchange risk related to these operations.
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
270 on June 30, 1999 to 526 on June 30, 2000. As of September 30, 2000 we had
573 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. Any failure by us to properly
manage our growth or these systems and procedural transitions could impair our
ability to efficiently manage our business, to maintain and expand important
relationships with members of the Pivotal Alliance and other third parties and
to attract and service customers. It could also cause us to incur higher
operating costs and delays in the execution of our business plan or in the
reporting or tracking of our financial results.
THE INTEGRATION OF TRANSITIF, EXACTIUM, SIMBA, PROJECT ONE AND ANY FUTURE
ACQUISITIONS MAY BE DIFFICULT AND DISRUPTIVE.
We are currently in the process of integrating the Transitif, Exactium, Simba
and Project One businesses with our business and we are expending significant
financial resources in this effort. The integration of these four companies is
subject to risks commonly encountered in acquisitions, including, among others,
risk of loss of key personnel, difficulties associated with assimilating ongoing
businesses and the ability of our sales force and consultants to integrate. We
will also need to integrate the solutions of Exactium, Simba and Project One
into our solution offering. We may not successfully overcome these risks or any
other problems that may be encountered in connection with the acquisition of
Transitif, Exactium, Simba or Project One. Accordingly, it is uncertain whether
we will receive the benefits we anticipate from these acquisitions and we may
not realize value from these acquisition comparable to the resources we have
invested in them.
Amortization of intangible assets resulting from acquisitions will adversely
affect our reported income. In connection with the acquisitions of Exactium,
Simba and Transitif, we allocated an aggregate of $58.1 million of the purchase
prices to intangible assets that we are amortizing over a period of three years
on a straight line basis. During the year ending June 30, 2001, we expect
amortization expense related to these intangible assets to be approximately
$20.0 million. Future acquisitions may result in the creation of significant
additional intangible assets and related amortization expense.
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As part of our business strategy, we may seek to grow by making additional
acquisitions. We may not effectively select acquisition candidates, negotiate or
finance acquisitions or integrate the acquired businesses and their personnel or
acquired products or technologies into our business. We cannot be certain that
we can complete any acquisition we pursue on favorable terms, or that any
acquisition will ultimately benefit our business.
OUR 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 demand chain network
solution is discretionary, involves a significant commitment of its resources
and is influenced by its budget cycles. To successfully sell licenses for our
solutions, we typically must educate our potential customers regarding the use
and benefits of demand chain network solutions in general and our solutions in
particular, which can require significant time and resources. Consequently, the
period between initial contact and the purchase of licenses for our solutions is
often long and subject to delays associated with the lengthy budgeting, approval
and competitive evaluation processes that typically accompany significant
capital expenditures. We frequently must invest substantial resources to develop
a relationship with a potential customer and educate its personnel about our
solutions and services with no guarantee that our efforts will be rewarded with
a sale. Our sales cycles are lengthy and variable, 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.
OUR PLAN TO EXPAND OUR SERVICE CAPABILITY COULD ADVERSELY AFFECT GROSS PROFIT
MARGINS AND OPERATING RESULTS.
Revenues from services and maintenance have lower gross margins than revenues
from licenses. Therefore, an increase in the percentage of revenues generated
from services and maintenance as compared to revenues from licenses will lower
our overall gross margins. In addition, an increase in the cost of revenues from
services and maintenance as a percentage of revenues from services and
maintenance could have a negative impact on overall gross margins.
Although margins related to revenues from services and maintenance are lower
than margins related to revenues from licenses, our services organization
currently generates gross profits, and we are seeking to expand our service
capability and our revenues from services and maintenance.
Revenues from services and maintenance depend in part on renewals of technical
support contracts by our customers, some of which may not be renewed. Our
ability to increase revenues from services and maintenance will depend in large
part on our ability to increase the scale of our services organization,
including our ability to successfully recruit and train a sufficient number of
qualified services personnel. We may not be able to do so.
To meet our expansion goals, we expect to hire additional services personnel. If
demand for our services organization does not increase in proportion to the
number of additional personnel we hire, gross profits could fall, or we may
incur losses from our services activities. In addition, the costs of delivering
services could increase and any material increase in these costs could reduce or
eliminate the profitability of our services activities.
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WE RELY ON SOFTWARE LICENSED TO US BY THIRD PARTIES FOR FEATURES WE INCLUDE IN
OUR SOLUTIONS.
We incorporate into our solutions, software that is licensed to us by
third-party software developers including Microsoft SQL Server 2000, Microsoft
SQL Server 7.0, Sheridan Calendar Control, InstallShield 3, Seagate Crystal
Reports, E.piphany E.4, and Interactive Intelligence Enterprise Interaction
Center. We are seeking to further increase the capabilities of our solutions by
licensing additional applications from third parties. A significant interruption
in the availability of any of this licensed software could adversely affect our
sales, unless and until we can replace this software with other software that
performs similar functions. Because our solutions incorporate software developed
and maintained by third parties, we depend on these third parties' abilities to
deliver and support reliable products, enhance their current products, develop
new products on a timely and cost-effective basis, and respond to emerging
industry standards and other technological changes. If third-party software
offered now or in the future in conjunction with our solutions becomes obsolete
or incompatible with future versions of our solutions, we may not be able to
continue to offer some of the features we presently include in our solutions
unless we can license alternative software or develop the features ourselves.
WE MUST CONTINUE TO DEVELOP ENHANCEMENTS TO OUR SOLUTIONS AND NEW APPLICATIONS
AND FEATURES THAT RESPOND TO THE EVOLVING NEEDS OF OUR CUSTOMERS, RAPID
TECHNOLOGICAL CHANGE AND ADVANCES INTRODUCED BY OUR COMPETITORS.
The software market in which we compete is characterized by rapid change due to
changing customer needs, rapid technological changes and advances introduced by
competitors. Existing products become obsolete and unmarketable when products
using new technologies are introduced and new industry standards emerge. New
technologies could change the way demand chain network solutions are sold or
delivered. As a result, the life cycles of our solutions are difficult to
estimate. We also may need to modify our solutions when third parties change
software we integrate into our solutions. To be successful we must continue to
enhance our current solutions and develop new applications and features.
We may not be able to successfully develop or license the applications necessary
to offer these or other features, or to integrate these applications with our
existing solutions. We have delayed enhancements and new solution release dates
several times in the past and may not be able to introduce new solutions,
solution enhancements, new applications or features successfully or in a timely
manner in the future. If we delay release of our new solutions or solution
enhancements or new applications or features or if they fail to achieve market
acceptance when released, we may not be able to keep up with the latest
developments in the market and our revenues may fall. We may not be able to
respond effectively to customer needs, technological changes or advances
introduced by our competitors, and our solutions could become obsolete.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS.
Our success depends in part on our ability to protect our proprietary software
and our other proprietary rights from copying, infringement or use by
unauthorized parties. To protect our proprietary rights we rely primarily on a
combination of copyright, trade secret and trademark laws, confidentiality
agreements with employees and third parties, and protective contractual
provisions such as those contained in license agreements with consultants,
vendors and customers, although we have not signed these types of agreements in
every case. Despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our solutions
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and obtain and use information that we regard as proprietary. Other parties may
breach confidentiality agreements and other protective contracts we have entered
into. We may not become aware of, or have adequate remedies in the event of,
these types of breaches or unauthorized activities.
CLAIMS BY OTHER COMPANIES THAT OUR SOLUTIONS INFRINGE THEIR COPYRIGHTS OR
PATENTS COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR SOLUTIONS AND INCREASE
OUR COSTS.
If any of our solutions violates third-party proprietary rights, including
copyrights and patents, we may be required to reengineer our solutions or obtain
licenses from third parties to continue offering our solutions without
substantial reengineering. Although some of our current and potential
competitors have sought patent protection for similar demand chain network
solutions, we have not sought patent protection for our solutions. If a patent
has been issued or is issued in the future to a third-party that prevents us
from using technology included in our solutions, we would need to obtain a
license or re-engineer our solution to function without infringing the patent.
Any efforts to re-engineer our solutions or obtain licenses from third parties
may not be successful and, in any case, could substantially increase our costs,
force us to interrupt sales or delay solution releases.
OUR SOLUTIONS AND PRODUCTS WE RELY ON MAY SUFFER FROM DEFECTS OR ERRORS.
Software solutions as complex as ours may contain errors or defects, especially
when first introduced or when new versions are released. We have had to delay
commercial release of some versions of our solutions until software problems
were corrected, and in some cases have provided solution enhancements to correct
errors in released solutions. Our new solutions and solution enhancements or new
applications or features may not be free from errors after commercial shipments
have begun. Any errors that are discovered after commercial release could result
in loss of revenues or delay in market acceptance, diversion of development
resources, damage to our reputation, increased service and warranty costs and
liability claims.
Our end-user licenses contain provisions that limit our exposure to product
liability claims, but these provisions may not be enforceable in all
jurisdictions. In some cases, we have been required to waive these contractual
limitations. Further, we may be exposed to product liability claims in
international jurisdictions where our solution provider has supplied our
solutions and negotiated the license without our involvement. A successful
product liability claim could result in material liability and damage to our
reputation.
In addition, products we rely on, such as Microsoft platform products, may
contain defects or errors. Our solutions rely on these products to operate
properly. Therefore, any defects in these products could adversely affect the
operation of and market for our solutions, reduce our revenues, increase our
costs and damage our reputation.
IF OUR CUSTOMERS' SYSTEM SECURITY IS BREACHED, OUR BUSINESS AND REPUTATION COULD
SUFFER.
A fundamental requirement for online communications is the secure transmission
of confidential information over the Internet. Users of our solutions transmit
their and their customers' confidential information over the Internet. In our
license agreements with our customers, we disclaim responsibility for the
security of confidential data and have contractual indemnities for
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any damages claimed against us. However, if unauthorized third parties are
successful in obtaining confidential information from users of our solutions,
our reputation and business may be damaged and, if our contractual disclaimers
and indemnities are not enforceable, we may be subjected to liability.
CHANGES IN ACCOUNTING STANDARDS AND IN THE WAY WE CHARGE FOR LICENSES COULD
AFFECT OUR FUTURE OPERATING RESULTS.
We recognize revenues from the sale of software licenses on delivery of our
solutions if:
o persuasive evidence of an arrangement exists,
o the fee is fixed and determinable,
o we can objectively allocate the total fee among all elements of the
arrangement, and
o collection of the license fee is probable.
Under certain license arrangements, with either a fixed or indefinite term, our
customers agree to pay for the license with periodic payments extending beyond
one year. We recognize revenues from these arrangements as the periodic payments
become due, provided all other conditions for revenue recognition are met. If
these arrangements become popular with our customers, we may have lower revenues
in the short term than we would otherwise, because revenues for licenses sold
under these arrangements will be recognized over time rather than upon delivery
of our solution.
We recognize maintenance revenues ratably over the contract term, typically one
year, and recognize revenues for consulting, education and implementation and
customization services as the services are performed.
Administrative agencies responsible for setting accounting standards, including
the Securities and Exchange Commission and the Financial Accounting Standards
Board, are also reviewing the accounting standards related to business
combinations and stock-based compensation.
Any changes to these accounting standards or any other accounting standards or
the way these standards are interpreted or applied could require us to change
the manner in which we recognize revenue or the way we account for share
compensation or for any acquisition we may pursue or other aspects of our
business, in a manner that could adversely affect our reported financial
results.
OUR SHARE PRICE MAY CONTINUE TO BE VOLATILE.
Our share price has fluctuated substantially since our initial public offering
in August, 1999. The trading price of our common shares is subject to
significant fluctuations in response to variations in quarterly operating
results, the gain or loss of significant orders, changes in revenues and
earnings estimates by securities analysts, announcements of technological
innovations or new solutions by us or our competitors, general conditions in the
software and computer industries and other events or factors. In addition, the
stock market in general has experienced extreme price and volume fluctuations
that have affected the market price for many companies in industries similar or
related to ours and have been unrelated to the operating performance of these
companies.
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These market fluctuations have adversely affected and may continue to adversely
affect the market price of our common shares.
CERTAIN STOCKHOLDERS MAY BE ABLE TO EXERCISE CONTROL OVER MATTERS REQUIRING
STOCKHOLDER APPROVAL.
Our current officers, directors and entities affiliated with us together
beneficially owned a significant portion of the outstanding common shares of
Pivotal as of September 30, 2000. While these shareholders do not hold a
majority of our outstanding common shares, they will be able to exercise
significant influence over matters requiring shareholder approval, including the
election of directors and the approval of mergers, consolidations and sales of
our assets. This may prevent or discourage tender offers for our common shares.
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