<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
Form 10-Q
<TABLE>
<S> <C> <C>
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 000-26867
</TABLE>
PIVOTAL CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
BRITISH COLUMBIA, CANADA NOT APPLICABLE
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
</TABLE>
300 - 224 WEST ESPLANADE, NORTH VANCOUVER, BRITISH COLUMBIA, CANADA, V7M 3M6
(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 JANUARY 26, 2000: 20,103,873
- --------------------------------------------------------------------------------
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<PAGE> 2
PIVOTAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
COMPANY OVERVIEW
PART 1 FINANCIAL INFORMATION
ITEM 1 Consolidated Financial Statements........................... 2
Consolidated Balance Sheets as of December 31, 1999 and
June 30, 1999.......................................... 2
Consolidated Statements of Operations for the Three and
Six Months Ended December 31, 1999 and 1998............ 3
Consolidated Statements of Shareholders' Equity (Deficit)
for the Six Months Ended December 31, 1999............. 4
Consolidated Statements of Cash flows for the Six Months
Ended December 31, 1999 and 1998....................... 5
Notes to the Consolidated Financial Statements............ 6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
ITEM 3 Quantitative and Qualitative Disclosures About Market
Risk...................................................... 17
PART 2 OTHER INFORMATION
ITEM 1 Legal Proceedings........................................... 19
ITEM 2 Changes in Securities and Use of Proceeds................... 19
ITEM 6 Exhibits and Reports on Form 8-K............................ 19
Signatures.................................................. 20
</TABLE>
<PAGE> 3
COMPANY OVERVIEW
Pivotal Corporation is a leading provider of electronic business
relationship management (eBRM) Internet solutions. Our electronic marketing,
sales, commerce and service solutions enable an organization to increase
revenues by allowing customers, business partners and employees to interact and
collaborate over the Internet, resulting in personalized, one-to-one
relationships. Our scalable, standards-based architecture, which is available as
a hosted or licensed solution, is designed to meet the needs of
business-to-business organizations. Our customers range from emerging companies
in the new digital economy to traditional businesses that are seeking to
integrate the opportunities presented by the Internet into their business model.
We have been recognized for our performance and industry leading technology
which has led to numerous awards, such as, Microsoft's 1999 Industry Solution
Awards for "Best Integrated Customer Relationship Management" and "Best Internet
Solution for Customer Self Service". We were also included in the "Top 100
Technology Companies" named in Upside Magazine's Hot 100 Companies, and named
"IT innovators" for 1999 by Information Week Magazine.
Our worldwide customer base comprises more than 700 organizations and
100,000 users in traditional commercial and public market sectors and the new
digital economy and include companies such as KPMG, CornerDrugstore.com,
Ericsson, Medpool.com, HarperCollins Publishing, Deutsche Bank, Trader.com,
Southern Company, Lucent Technologies, NEC, Deloitte & Touche, Principal
Financial Group and Red Cross Australia.
On October 12, 1999, we announced PivotalHost, an Internet hosting program
for our technology. PivotalHost is a program whereby we will provide customers
access to our applications on a monthly subscription basis over the Internet
through an application service provider. On October 26, 1999, Microsoft
Corporation and Cisco Systems Inc. also announced their plans to develop a
hosting program which, through an alliance of application service providers,
will provide customers with access to a variety of different applications which
will address a company's entire business needs. Microsoft and Cisco announced
that we were their initial choice of vendors to provide the electronic business
relationship management solution portion of this program.
The terms "Pivotal," "our company" and "we" in this filing refer to Pivotal
Corporation, a British Columbia company, Pivotal Corporation, its wholly owned
subsidiary incorporated in Washington, Pivotal Corporation Limited, its wholly
owned subsidiary incorporated in the United Kingdom, and Transitif S.A., its
wholly owned subsidiary incorporated in France, collectively.
Pivotal Relationship, Pivotal eRelationship, Pivotal eRelationship
Intrahub, Pivotal eRelationship CustomerHub, Pivotal eRelationship PartnerHub,
PivotalHost and Pivotal B2B Syndicate are trademarks and/or registered
trademarks of Pivotal Corporation. All other trademarks or service marks
appearing in this report are trademarks or service marks of the companies that
use them.
<PAGE> 4
PART I -- ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
PIVOTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
------------ --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $50,732 $ 9,338
Accounts receivable....................................... 10,139 8,304
Prepaid expenses.......................................... 2,512 1,029
------- -------
Total current assets................................... 63,383 18,671
Property and equipment, net................................. 5,009 3,051
Other assets................................................ 1,137 --
------- -------
Total assets................................................ $69,529 $21,722
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities.................. $ 9,970 $ 6,329
Note payable.............................................. 574 --
Deferred revenue.......................................... 6,231 5,085
------- -------
Total current liabilities.............................. 16,775 11,414
------- -------
Redeemable convertible preferred shares, authorized, issued
and outstanding shares -- none at December 31, 1999 and
9,946 at June 30, 1999.................................... -- 17,500
------- -------
Shareholders' equity (deficit):
Preferred shares, undesignated, no par value; authorized
shares -- 20,000 at December 31, 1999 and June 30,
1999; no shares issued and outstanding................. -- --
Class A convertible preferred shares, no par value;
authorized, issued and outstanding shares -- none at
December 31, 1999 and 2,000 at June 30, 1999........... -- 83
Common shares, no par value; authorized shares -- 200,000
at December 31, 1999 and June 30, 1999; issued and
outstanding shares -- 20,030 and 3,454 at December 31,
1999 and June 30, 1999, respectively................... 61,335 563
Class B common shares, Cdn.$0.03 per share par value;
authorized shares -- none at December 31, 1999 and 600
at June 30, 1999; issued and outstanding shares -- none
and 477 at December 31, 1999 and June 30, 1999,
respectively........................................... -- 4
Deferred share-based compensation......................... (305) (416)
Accumulated deficit....................................... (8,276) (7,426)
------- -------
Total shareholders' equity (deficit)........................ 52,754 (7,192)
------- -------
Total liabilities and shareholders' equity (deficit)........ $69,529 $21,722
======= =======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Licenses.......................................... $ 8,026 $ 4,323 $14,123 $ 7,599
Services and maintenance.......................... 3,516 1,390 6,094 2,682
------- ------- ------- -------
Total revenues................................. 11,542 5,713 20,217 10,281
------- ------- ------- -------
COST OF REVENUES:
Licenses.......................................... 410 97 694 170
Services and maintenance.......................... 1,813 589 3,181 1,151
------- ------- ------- -------
Total cost of revenues......................... 2,223 686 3,875 1,321
------- ------- ------- -------
Gross profit........................................ 9,319 5,027 16,342 8,960
------- ------- ------- -------
OPERATING EXPENSES:
Sales and marketing............................... 6,917 3,933 12,632 7,421
Research and development.......................... 2,125 1,166 3,694 1,974
General and administrative........................ 968 512 1,675 1,055
Amortization of goodwill.......................... 32 -- 32 --
------- ------- ------- -------
Total operating expenses....................... 10,042 5,611 18,033 10,450
------- ------- ------- -------
Loss from operations................................ (723) (584) (1,691) (1,490)
Interest and other income........................... 685 1 1,042 108
------- ------- ------- -------
Loss before income taxes............................ (38) (583) (649) (1,382)
Income taxes........................................ 126 60 201 120
------- ------- ------- -------
Net loss............................................ $ (164) $ (643) $ (850) $(1,502)
======= ======= ======= =======
LOSS PER SHARE:
Basic and diluted................................. $ (0.01) $ (0.17) $ (0.05) $ (0.39)
Pro forma basic and diluted....................... $ (0.01) $ (0.04) $ (0.04) $ (0.10)
WEIGHTED AVERAGE NUMBER OF SHARES USED TO CALCULATE
LOSS PER SHARE:
Basic and diluted................................. 20,025 3,859 16,859 3,859
Pro forma basic and diluted....................... 20,025 14,623 19,202 14,623
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
CONVERTIBLE CLASS B TOTAL
PREFERRED SHARES COMMON SHARES COMMON SHARES DEFERRED SHAREHOLDERS'
----------------- ---------------- --------------- SHARE-BASED EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT COMPENSATION (DEFICIT) (DEFICIT)
------- ------- ------ ------- ------ ------ ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance June 30, 1999....... 2,000 $ 83 3,454 $ 563 477 $ 4 $(416) $(7,426) $(7,192)
Conversion of class B common
to common shares.......... 477 4 (477) (4) --
Conversion of class A
preferred into common
shares.................... (2,000) (83) 2,000 83 --
Conversion of redeemable
convertible preferred
shares into common
shares.................... 10,052 17,501 17,501
Issuance of common shares on
exercise of stock
options................... 62 66 66
Issuance of common shares on
initial public offering,
net of offering costs..... 3,975 43,101 43,101
Amortization of share-based
compensation.............. 51 51
Net loss.................... (686) (686)
------ ---- ------ ------- ---- ---- ----- ------- -------
Balance September 30,
1999...................... -- -- 20,020 61,318 -- -- (365) (8,112) 52,841
Issuance of common shares on
exercise of stock
options................... 10 17 17
Amortization of share based
compensation.............. 60 60
Net loss.................... (164) (164)
------ ---- ------ ------- ---- ---- ----- ------- -------
Balance December 31, 1999... -- $ -- 20,030 $61,335 -- $ -- $(305) $(8,276) $52,754
====== ==== ====== ======= ==== ==== ===== ======= =======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period................................... $ (850) $(1,502)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation........................................... 793 406
Non-cash share based compensation expense.............. 111 --
Change in operating assets and liabilities:
Accounts receivable.................................... (1,029) 1,515
Prepaid expenses....................................... (1,234) 258
Accounts payable and accrued liabilities............... 2,993 746
Deferred revenue....................................... 744 (149)
------- -------
Net cash provided by operating activities................. 1,528 1,274
------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment........................ (2,664) (648)
Acquisition of Transitif S.A.............................. (654) --
------- -------
Net cash used in investing activities..................... (3,318) (648)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares................... 43,184 3
------- -------
Net cash provided by financing activities................. 43,184 3
------- -------
Net increase in cash and cash equivalents................. 41,394 629
Cash and cash equivalents, beginning of period............ 9,338 1,202
------- -------
Cash and cash equivalents, end of period.................. $50,732 $ 1,831
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
Cash paid for income taxes................................ $ 306 $ 197
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of note payable on acquisition of Transitif
S.A.................................................... $ 574 $ --
Conversion of preferred shares into common shares......... 17,583 --
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 8
PIVOTAL CORPORATION
NOTES TO 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 generally accepted accounting principles for interim financial
information and with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed, or omitted, pursuant to the rules and
regulations of the Securities and Exchange Commission. In our opinion, the
statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction with
our audited consolidated financial statements for the year ended June 30, 1999,
included in our prospectus, dated August 4, 1999, filed with the Securities and
Exchange Commission in connection with our initial public offering and our
interim consolidated financial statements for the three months ended September
30, 1999 included in our Form 10-Q filed with the Securities and Exchange
Commission on November 5, 1999. Our results of operations for any interim period
are not necessarily indicative of the results of operations for any other
interim period or for a full fiscal year.
2. ACQUISITION
Effective December 3, 1999, Pivotal acquired Transitif S.A., a French
corporation that distributes electronic business relationship management
solutions. Transitif S.A. deploys Pivotal solutions through its network of
systems integrators throughout France.
A summary of the purchase price for the acquisition is as follows (in
thousands):
<TABLE>
<S> <C>
Cash........................................................ $ 534
Note payable, due January 5, 2000........................... 574
Direct acquisition costs.................................... 120
------
$1,228
======
</TABLE>
Additional consideration for the purchase is payable by Pivotal based on
the net after-tax earnings of Transitif S.A. and license revenues received by
Transitif S.A. from the future sale of licenses for Pivotal products. All
earn-out payments will be recorded as additional purchase price when
determinable and Pivotal may elect to pay up to fifty percent of the additional
purchase price in Pivotal common shares.
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the results of operations of Transitif S.A. have been included
in Pivotal's consolidated financial statements from the date of acquisition.
The purchase price was allocated to the assets acquired and liabilities
assumed based on their respective fair values on the date of acquisition as
follows:
<TABLE>
<S> <C>
Assets acquired............................................. $1,108
Liabilities assumed......................................... (1,050)
Goodwill.................................................... 1,170
------
$1,228
======
</TABLE>
The goodwill is being amortized over three years, the estimated useful
life.
6
<PAGE> 9
PIVOTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
The pro forma effect of combining Transitif S.A. with Pivotal's operations
for the year ended June 30, 1999 and prior to the acquisition for the six months
ended December 31, 1999 is not reported separately because it is not considered
to be material.
3. ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $534
and $334 at December 31, 1999 and June 30, 1999, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The principal components of accounts payable and accrued liabilities were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
------------ --------
<S> <C> <C>
Accounts payable............................................ $6,519 $3,054
Accrued compensation........................................ 2,609 2,368
Accrued liabilities......................................... 842 907
------ ------
$9,970 $6,329
====== ======
</TABLE>
5. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss
per share (all amounts in thousands, except loss per share information):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net loss (A)........................................ (164) (643) (850) (1,502)
------- ------- ------- -------
Weighted average number of common shares (B)........ 20,025 3,859 16,859 3,859
Pro forma adjustment for redeemable convertible
preferred shares.................................. -- 10,764 2,343 10,764
------- ------- ------- -------
Pro forma basic and diluted weighted average shares
(D)............................................... 20,025 14,623 19,202 14,623
======= ======= ======= =======
Loss per share:
Basic and diluted (A/B)........................... $ (0.01) $ (0.17) $ (0.05) $ (0.39)
======= ======= ======= =======
Pro forma basic and diluted (A/D)................. $ (0.01) $ (0.04) $ (0.04) $ (0.10)
======= ======= ======= =======
</TABLE>
Pro forma earnings per share are computed by dividing net loss by the
weighted average number of common shares outstanding and the weighted average
redeemable convertible preferred shares and Class A convertible preferred shares
outstanding as if such shares were converted into common shares and had been
outstanding since July 1, 1998.
7
<PAGE> 10
PIVOTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
6. SEGMENTED INFORMATION
The Company operates in one business segment; the development, marketing,
supporting and implementation of our electronic business relationship management
solutions.
The Company licenses and markets its products internationally. The
following table presents a summary of revenues by geographical region.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------- ------------------
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
United States........................................ $ 7,028 $4,343 $12,788 $ 7,769
Canada............................................... 1,434 185 2,215 459
International........................................ 3,080 1,185 5,214 2,053
------- ------ ------- -------
$11,542 $5,713 $20,217 $10,281
======= ====== ======= =======
</TABLE>
The Company attributes revenue among the geographical areas based on the
location of the customers involved.
During the three months ended December 31, 1999 and 1998, no single
customer accounted for 10% or more of total revenue. During the six months ended
December 31, 1999 and 1998, no single customer accounted for 10% or more of
total revenue.
8
<PAGE> 11
PART 1 -- ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Investors should read the following in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part 1 -- Item 1
of this Quarterly Report, and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Financial Conditions
and Results of Operations in our Form F-1 dated August 4, 1999.
FORWARD LOOKING STATEMENTS
Statements in this filing about our future results, levels of activity,
performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in our forward-looking statements.
These factors include, among others, those described in connection with the
forward-looking statements, and the factors listed in Exhibit 99.1 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 filing. You should not place
undue reliance on forward-looking statements.
OVERVIEW
Pivotal Corporation is a leading provider of electronic business
relationship management (eBRM) Internet solutions. Our electronic marketing,
sales, commerce and service solutions enable an organization to increase
revenues by allowing customers, business partners and employees to interact and
collaborate over the Internet, resulting in personalized, one-to-one
relationships. Our scalable, standards-based architecture, which is available as
a hosted or licensed solution, is designed to meet the needs of
business-to-business organizations. Our customers range from emerging companies
in the new digital economy to traditional businesses that are seeking to
integrate the opportunities presented by the Internet into their business model.
We have been recognized for our performance and industry leading technology
which has led to numerous awards, such as, Microsoft's 1999 Industry Solution
Awards for "Best Integrated Customer Relationship Management" and "Best Internet
Solution for Customer Self Service". We were also included in the "Top 100
Technology Companies" named in Upside Magazine's Hot 100 Companies, and named
"IT innovators" for 1999 by Information Week Magazine.
Our worldwide customer base comprises more than 700 organizations and
100,000 users in traditional commercial and public market sectors and the new
digital economy and include companies such as KPMG, CornerDrugstore.com,
Ericsson, Medpool.com, HarperCollins Publishing, Deutsche Bank, Trader.com,
Southern Company, Lucent Technologies, NEC, Deloitte & Touche, Principal
Financial Group and Red Cross Australia.
On October 12, 1999, we announced PivotalHost, an Internet hosting program
for our technology. PivotalHost is a program whereby we will provide customers
access to our applications on a monthly subscription basis over the Internet
through an application service provider. On October 26, 1999, Microsoft
Corporation and Cisco Systems Inc. also announced their plans to develop a
hosting program which, through an alliance of application service providers,
will provide customers with access to a variety of different applications which
will address a company's entire business needs. Microsoft and Cisco announced
that we
9
<PAGE> 12
were their initial choice of vendors to provide the electronic business
relationship management solution portion of this program.
The terms "Pivotal," "our company" and "we" in this filing refer to Pivotal
Corporation, a British Columbia company, Pivotal Corporation, its wholly owned
subsidiary incorporated in Washington, Pivotal Corporation Limited, its wholly
owned subsidiary incorporated in the United Kingdom, and Transitif S.A., its
wholly owned subsidiary incorporated in France, collectively.
Pivotal Relationship, Pivotal eRelationship, Pivotal eRelationship
Intrahub, Pivotal eRelationship CustomerHub, Pivotal eRelationship PartnerHub,
PivotalHost and Pivotal B2B Syndicate are trademarks and/or registered
trademarks of Pivotal Corporation. All other trademarks or service marks
appearing in this report are trademarks or service marks of the companies that
use them.
PIVOTAL'S RESULTS OF OPERATIONS
The following table presents selected financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated. The operating results for the three months and six months
ended December 31, 1999 and 1998 are not necessarily indicative of the results
that may be expected for the full fiscal year or any future period.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
REVENUES:
License................................................ 70% 76% 70% 74%
Services and maintenance............................... 30% 24% 30% 26%
---- ---- ---- ----
Total revenues....................................... 100% 100% 100% 100%
---- ---- ---- ----
COST OF REVENUES:
License................................................ 3% 2% 3% 2%
Services and maintenance............................... 16% 10% 16% 11%
---- ---- ---- ----
Total revenues....................................... 19% 12% 19% 13%
---- ---- ---- ----
Gross profit.............................................. 81% 88% 81% 87%
---- ---- ---- ----
OPERATING EXPENSES:
Sales and marketing.................................... 60% 69% 63% 72%
Research and development............................... 19% 20% 18% 19%
General and administrative............................. 8% 9% 8% 10%
Amortization of goodwill............................... 0% 0% 0% 0%
---- ---- ---- ----
Total operating expenses............................. 87% 98% 89% 101%
---- ---- ---- ----
Loss from operations...................................... (6%) (10%) (8%) (14%)
Interest and other income................................. 6% 0% 5% 1%
---- ---- ---- ----
Loss before income taxes.................................. 0% (10%) (3%) (13%)
Income tax provision...................................... (1%) (1%) (1%) (1%)
---- ---- ---- ----
Net Loss.................................................. (1%) (11%) (4%) (14%)
==== ==== ==== ====
</TABLE>
10
<PAGE> 13
REVENUES
Total revenues increased 102% to $11.5 million from $5.7 million for the
quarters ended December 31, 1999 and 1998, respectively. Total revenues for the
six month period ended December 31, 1999 were $20.2 million compared with $10.3
million for the six month period ended December 31, 1998 representing an
increase of 97%.
LICENSES
Revenues from licenses increased 86% to $8.0 million from $4.3 million for
the quarters ended December 31, 1999 and 1998, respectively. Revenues from
licenses increased 86% to $14.1 million from $7.6 million for the six months
ended December 31, 1999 and 1998, respectively.
We believe that the availability of our Pivotal eRelationship product has
contributed to significant increases in revenue from licenses, as this has
extended the overall functionality of our products by permitting organizations
to collaborate more effectively with customers and partners over the Internet.
We recognize revenue in accordance with the provisions of the American
Institute of Certified Public Accountants Statement of Position 97-2, "Software
Revenue Recognition", which we adopted effective for the year ended June 30,
1998. We derive our revenues from the sale of Internet products and services. We
recognize product license revenues on delivery of our products if:
- persuasive evidence of an arrangement exists,
- the fee is fixed and determinable,
- we can objectively allocate the total fee among all elements of the
arrangement, and
- the collection of the license fee is probable.
Under certain license arrangements, with either a fixed or indefinite term,
our customers agree to pay for the license with periodic payment 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.
Revenues from licenses represented 70% and 76% of total revenues for the
quarters ended December 31, 1999 and 1998, respectively. During the six months
ended December 31, 1999 and 1998, respectively, revenues from licenses
represented 70% and 74% of total revenues. Revenues from licenses have decreased
as a percentage of total revenues due to the increase in our revenues from
services and maintenance.
No single customer accounted for 10% of our revenues for the quarters ended
December 31, 1999 and 1998 or for the six months ended December 31, 1999 and
1998. North American license revenues accounted for 73% and 79% of total license
revenues in the quarters ended December 31, 1999 and 1998, respectively. During
the six months ended December 31, 1999 and 1998, respectively, North American
license revenues accounted for 74% and 80% of total license revenues.
SERVICES AND MAINTENANCE
Revenues from services and maintenance increased 153% to $3.5 million from
$1.4 million for the quarters ended December 31, 1999 and 1998, respectively.
This resulted from an increase of $1.0 million in revenues from technical
support and maintenance contracts, which entitle the customer to new versions of
the product and to technical support and maintenance services, and an increase
of $1.1 million in revenues from implementation, education and consulting
service engagements.
During the six months ended December 31, 1999 and 1998, respectively,
revenues from services and maintenance increased 127% to $6.1 million from $2.7
million. This resulted from an increase of $1.9 million
11
<PAGE> 14
in revenues from technical support and maintenance contracts and an increase of
$1.5 million in revenues from implementation, education and consulting service
engagements.
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 12 months. In addition to increasing our customer base,
revenues relating to technical support and maintenance also have increased due
to the renewal of technical support and maintenance contracts upon expiration of
the first year maintenance arrangement.
We recognize revenues from consulting, education and implementation and
customization services as these services are performed. These services are
charged primarily on a time-and-materials basis under a separate service
arrangement with the customer. Over 95% of the implementation and customization
services in connection with installations of our software products are provided
by independent companies that are members of the Pivotal Alliance but which
contract directly with the customer. We do not recognize revenue from services
provided by members of the Pivotal Alliance.
Revenues from services and maintenance represented 30% and 24% of total
revenues for the quarters ended December 31, 1999 and 1998, respectively, and
30% and 26% for the six months ended December 31, 1999 and 1998, respectively.
We believe that revenues from services and maintenance may continue to increase
as a percentage of total revenues, due to the increase in the number of
technical support and maintenance contracts as our customer base grows. We
intend to expand consulting services targeted at helping customers understand
more about matters such as effective one-to-one marketing and using the Internet
to increase revenues and improve customer service. We plan to continue relying
on members of the Pivotal Alliance to provide the great majority of
implementation and customization services to our customers, rather than
providing those services directly.
COST OF REVENUES
Total cost of revenues increased 224% to $2.2 million from $686,000 for the
quarters ended December 31, 1999 and 1998, respectively. For the six months
ended December 31, 1999 and 1998, respectively, total cost of revenues increased
193% to $3.9 million from $1.3 million.
LICENSES
Cost of revenues from licenses consists of costs relating to the
manufacturing, packaging and distribution of products and related documentation,
and fees paid for incorporation of third-party software products.
Cost of revenues from licenses increased to $410,000 from $97,000 for the
quarters ended December 31, 1999 and 1998, respectively. For the six months
ended December 31, 1999 and 1998, respectively, cost of revenues from licenses
increased to $694,000 from $170,000. The increases are due primarily to
increased costs for third-party technology integrated with our products. Cost of
revenues from licenses as a percentage of revenues from licenses was 5% and 2%
for the quarters ended December 31, 1999 and 1998, respectively. For the six
months ended December 31, 1999 and 1998 respectively, cost of revenues from
licenses as a percentage of revenues from licenses was 5% and 2%. We expect that
cost of licenses as a percentage of revenue from licenses will increase because
we expect to integrate additional software applications licensed from third
parties into our products.
SERVICES AND MAINTENANCE
Cost of revenues from services and maintenance consists of personnel and
other expenses relating to the cost of providing customer support, education and
professional services. Cost of revenues from services and maintenance will vary
depending on the mix of services we provide between support and maintenance,
education, implementation and consulting services. Gross profit margins are
higher for support and maintenance services than they are for education,
implementation and consulting services. Support and maintenance services
principally involve the delivery of software upgrades which the customers
download and
12
<PAGE> 15
install themselves. Education, implementation and customization services
generally require more involvement by our employees, resulting in higher
compensation, travel and similar expenses.
Cost of revenues from services and maintenance increased 208% to $1.8
million from $589,000 for the quarters ended December 31, 1999 and 1998,
respectively. For the six months ended December 31, 1999 and 1998, respectively,
cost of revenues from services and maintenance increased 176% to $3.2 million
from $1.2 million. Cost of revenues from services and maintenance as a
percentage of revenues from services and maintenance was 52% and 42% for the
quarters ended December 31, 1999 and 1998, respectively. For the six months
ended December 31, 1999 and 1998, respectively, cost of revenues from services
and maintenance as a percentage of revenues from services and maintenance was
52% and 43%.
We expect that cost of revenues from services and maintenance may continue
to increase as a percent of revenues from services and maintenance as we expand
our service capabilities in international markets to support planned expansion
of our international business and as we seek to expand our consulting services.
This may occur because we will be incurring expenses to hire and train employees
before we will be earning revenue for their services, and because we may not
generate enough demand for our services to use all the capacity we add.
OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, commissions,
bonuses and benefits earned by sales and marketing personnel, direct
expenditures such as travel, communication and occupancy and marketing
expenditures related to direct mail, online marketing, trade shows, advertising
and promotion.
Sales and marketing expenses increased 76% to $6.9 million from $3.9
million for the quarters ended December 31, 1999 and 1998, respectively. Sales
and marketing expenses decreased as a percentage of total revenues to 60% from
69% for the same periods. For the six months ended December 31, 1999 and 1998,
respectively, sales and marketing expenses increased 70% to $12.6 million from
$7.4 million. Sales and marketing expenses decreased as a percentage of total
revenues to 63% from 72% for the same periods. This decrease resulted from the
improved productivity of our sales and marketing personnel and programs. We
expect that sales and marketing expenses will continue to increase as we
continue to expand our North American and international sales and marketing
efforts.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries, benefits
and equipment for software engineers, quality assurance personnel, program
managers, product managers, technical writers and outside contractors used to
augment the research and development efforts.
Research and development expenses increased 82% to $2.1 million from $1.2
million for the quarters ended December 31, 1999 and 1998, respectively.
Research and development expenses were 19% and 20% of total revenues for the
same periods. For the six months ended December 31, 1999 and 1998, respectively,
research and development expenses increased 87% to $3.7 million from $2.0
million. Research and development expenses were 18% and 19% of total revenues
for the same periods. We expect to continue to significantly increase research
and development expenditures with a particular emphasis on Internet-related
development projects.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries, benefits
and related costs for executive, finance, administrative, human resources and
information services personnel. General and administrative expenses also include
legal and other professional fees.
General and administrative expenses increased 89% to $968,000 from $512,000
for the quarters ended December 31, 1999 and 1998, respectively. General and
administrative expenses decreased as a percentage of
13
<PAGE> 16
total revenues to 8% from 9% for the same periods. For the six months ended
December 31, 1999 and 1998, respectively, general and administrative expenses
increased 59% to $1.7 million from $1.1 million. General and administrative
expenses decreased as a percentage of total revenues to 8% from 10% for the same
periods. The increase in general and administrative expenses was due to hiring
additional personnel, and the implementation of internal financial and
administrative systems. We expect general and administrative expenses will
increase as we continue to expand the business and begin to increase our
administrative capability in international markets.
AMORTIZATION OF GOODWILL
Amortization of goodwill was $32,000 in the quarter ended December 31, 1999
related to goodwill of approximately $1.2 million arising from the acquisition
of Transitif S.A. There was no amortization of goodwill in the quarter ended
December 31, 1998 or six months ended December 31, 1998.
SHARE COMPENSATION
We recorded deferred compensation expenses of $473,000 during the year
ended June 30, 1999 in connection with grants of employee share purchase options
with exercise prices lower than the deemed fair market value of our common
shares. We are amortizing this amount over the four-year period in which the
options vest, and we will allocate the expense among operating expense
categories based on the primary activity of the employee that holds the option.
We recognized $60,000 in compensation expense in the quarter ended December 31,
1999 and $111,000 in the six months ended December 31, 1999. We currently expect
to recognize $216,000, $113,000, $59,000 and $28,000 in the years ending June
30, 2000, 2001, 2002 and 2003, respectively.
INTEREST AND OTHER INCOME
Interest and other income consists of earnings on cash and cash equivalents
net of interest expense, foreign exchange gains and losses, and gains and losses
on sale of property and equipment. Interest and other income increased to
$685,000 from $1,000 for the quarters ended December 31, 1999 and 1998,
respectively. For the six months ended December 31, 1999 and 1998, respectively,
interest and other income increased to $1.0 million from $108,000. These
increases are primarily due to interest earned from short-term investments of
cash and cash equivalents generated by our initial public offering. The other
components of interest and other income were minor for the periods presented.
INCOME TAXES
The provision for income taxes was $126,000 and $60,000 for the quarters
ended December 31, 1999 and 1998, respectively. For the six months ended
December 31, 1999 and 1998, respectively, the provision for income taxes was
$201,000 and $120,000. These income taxes were attributable to our operations in
the United States, the United Kingdom and France. As a result of net operating
losses and the availability of loss carry forwards in Canada, we have not
incurred significant Canadian income taxes.
14
<PAGE> 17
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
consolidated financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Licenses......................... $3,033 $4,103 $3,276 $4,323 $5,006 $6,214 $6,097 $8,026
Services and maintenance......... 897 1,025 1,292 1,390 1,717 2,109 2,578 3,516
------ ------ ------ ------ ------ ------ ------ ------
Total revenues................. 3,930 5,128 4,568 5,713 6,723 8,323 8,675 11,542
------ ------ ------ ------ ------ ------ ------ ------
COST OF REVENUES:
Licenses......................... 109 128 73 97 268 98 284 410
Services and maintenance......... 361 442 562 589 822 1,105 1,368 1,813
------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues......... 470 570 635 686 1,090 1,203 1,652 2,223
------ ------ ------ ------ ------ ------ ------ ------
Gross profit....................... 3,460 4,558 3,933 5,027 5,633 7,120 7,023 9,319
------ ------ ------ ------ ------ ------ ------ ------
OPERATING EXPENSES:
Sales and marketing.............. 2,428 3,122 3,488 3,933 4,404 5,005 5,715 6,917
Research and development......... 517 635 808 1,166 1,184 1,800 1,569 2,125
General and administrative....... 432 445 543 512 566 845 707 968
Amortization of goodwill......... -- -- -- -- -- -- -- 32
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses....... 3,377 4,202 4,839 5,611 6,154 7,650 7,991 10,042
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from operations...... 83 356 (906) (584) (521) (530) (968) (723)
Interest and other income (loss)... 40 17 107 1 (63) (69) 357 685
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before taxes......... 123 373 (799) (583) (584) (599) (611) (38)
Income taxes....................... 1 1 60 60 63 60 75 126
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).................. $ 122 $ 372 $ (859) $ (643) $ (647) $ (659) $ (686) $ (164)
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Licenses......................... 77% 80% 72% 76% 74% 75% 70% 70%
Services and maintenance......... 23% 20% 28% 24% 26% 25% 30% 30%
---- ---- ---- ---- ---- ---- ---- ----
Total revenues................. 100% 100% 100% 100% 100% 100% 100% 100%
---- ---- ---- ---- ---- ---- ---- ----
COST OF REVENUES:
Licenses......................... 3% 2% 2% 2% 4% 1% 3% 3%
Services and maintenance......... 9% 9% 12% 10% 12% 13% 16% 16%
---- ---- ---- ---- ---- ---- ---- ----
Total cost of revenues......... 12% 11% 14% 12% 16% 14% 19% 19%
---- ---- ---- ---- ---- ---- ---- ----
Gross profit....................... 88% 89% 86% 88% 84% 86% 81% 81%
---- ---- ---- ---- ---- ---- ---- ----
OPERATING EXPENSES:
Sales and marketing.............. 62% 61% 76% 69% 66% 60% 66% 60%
Research and development......... 13% 12% 18% 20% 17% 22% 18% 19%
General and administrative....... 11% 9% 12% 9% 8% 10% 8% 8%
Amortization of goodwill......... -- -- -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ---- ----
Total operating expenses....... 86% 82% 106% 98% 91% 92% 92% 87%
---- ---- ---- ---- ---- ---- ---- ----
Income (loss) from operations...... 2% 7% (20%) (10%) (7%) (6%) (11%) (6%)
Interest and other income (loss)... 1% -- 2% -- (1%) (1%) 4% 6%
---- ---- ---- ---- ---- ---- ---- ----
Income (loss) before taxes......... 3% 7% (18%) (10%) (8%) (7%) (7%) 0%
Income taxes....................... -- -- 1% 1% 1% 1% 1% 1%
---- ---- ---- ---- ---- ---- ---- ----
Net income (loss).................. 3% 7% (19%) (11%) (9%) (8%) (8%) (1%)
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
15
<PAGE> 18
We have typically experienced an increase in revenues during our fourth
fiscal quarter ended June 30, which we believe is primarily related to sales
compensation policies and annual objectives. In addition, a pattern of reduced
buying by European customers during July and August has resulted in lower
European revenues in the quarter ending September 30, and our revenues for the
quarters ended September 30 have been lower than revenues for the previous
quarter ended June 30.
Over the past four quarters, we have incurred operating losses as we
increased the level of investment in all facets of our business.
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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had $50.7 million in cash and cash equivalents and
$46.6 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 increased to $50.7 million as of December 31,
1999 from $9.3 million as of June 30, 1999. Our working capital increased to
$46.6 million at December 31, 1999 from $7.3 million at June 30, 1999. This
increase was primarily attributable to the issuance of common shares from our
initial public offering and increases in accounts payable and deferred revenue
partially offset by increases in accounts receivable and prepaid expenses, the
acquisition of Transitif S.A. and the purchase of property and equipment.
We generated positive cash from operating activities for the six months
ended December 31, 1999 and 1998, respectively, of $1.5 million and $1.3 million
as a result of obtaining improved payment terms from our principal suppliers and
up front payments for maintenance support from our customers. Although we
generated cash from operating activities for the six months ended December 31,
1999, we do not expect to generate cash from operations for the year ending June
30, 2000.
Capital expenditures made during the six months ended December 31, 1999 and
1998, respectively, totaled $2.7 million and $648,000, and related primarily to
the acquisition of computer software and equipment as well as furniture and
fixtures as a result of our growing employee base. During the quarter ended
December 31, 1999 we acquired Transitif S.A., a French distributor of electronic
business relationship management solutions and paid $654,000 cash relating to
this acquisition.
Net cash provided by financing activities for the six months ended December
31, 1999 and 1998, was $43.2 million and $3,000, respectively. Net cash provided
by financing activities resulted from sales of equity securities. In addition to
the $43.1 million raised from our initial public offering, we received $83,000
on exercise of stock options during the six months ended December 31, 1999.
We have credit facilities with a Canadian chartered bank, which include an
operating facility of US$10.0 million bearing interest at the bank's US prime
rate and a term loan facility of US$5.0 million bearing interest at the bank's
US prime rate to be used for various capital expenditures. The credit facilities
are secured by all of our assets, including our inventory, equipment and
accounts receivable and the shares of our subsidiaries. At December 31, 1999, no
amounts were outstanding under the operating facility or the term loan facility.
16
<PAGE> 19
We believe that the total amount of cash and cash equivalents, with the
commercial credit facilities, will be sufficient to meet our anticipated cash
needs for working capital and capital expenditure requirements at least through
the year ending June 30, 2000. Thereafter, depending on the development of our
business, we may need to raise additional cash for working capital or other
expenses. We also may encounter opportunities for acquisitions or other business
initiatives that require significant cash commitments, or unanticipated problems
or expenses that could result in a requirement for additional cash before that
time. If we need to raise additional cash, financing may not be available to us
on favorable terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement will
require the recognition of all derivatives on our consolidated balance sheet at
fair value. The Financial Accounting Standards Board has subsequently delayed
implementation of the Standard for the financial years beginning after June 15,
2000. We expect to adopt the new Statement effective January 1, 2001. The impact
on our financial statements is not expected to be material.
YEAR 2000 ISSUES
Even though the date is now past January 1, 2000 and we have not
experienced any immediate adverse impact from the transition to the Year 2000,
we cannot provide assurance that our suppliers and customers have not been
affected in a manner that is not yet apparent. In addition, certain computer
programs that were date sensitive to the Year 2000 may not process the Year 2000
as a leap year and any negative consequential effects remain unknown. As a
result, we will continue to monitor our Year 2000 compliance and the Year 2000
compliance of our suppliers and customers.
PART 1 -- ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to foreign currency fluctuations through our operations in
Canada, the United Kingdom and France. Substantially all of our revenues and
corresponding receivables are in United States dollars. However, a majority of
our research and development expenses, customer support costs and administrative
expenses are in Canadian dollars. As part of our hedging policy implemented
during the quarter ended March 31, 1999, we identify our future Canadian
currency requirements related to payroll costs, capital expenditures and
operating lease commitments, and purchase forward exchange contracts to cover
our currency needs at the beginning of an operational period, generally one or
two quarters. We do not enter into forward exchange contracts or any derivative
financial instruments for trading purposes.
Under our current hedging policy, we identify our forward contracts related
to operating lease commitments and commitments for capital expenditures as
hedges of firm, identifiable Canadian currency commitments. We recognize the
gains and losses on these contracts when the related lease commitment is paid or
the capital expenditure is made. We recognize gains and losses on other
contracts in earnings in the current period. As of December 31, 1999, we had
outstanding forward exchange contracts to purchase Canadian dollars totaling
US$8.2 million or Cdn.$12.0 million, all of which mature prior to June 30, 2000.
While we expect to continue to use our current method of hedging our
foreign currency risk in the future, we may change our hedging methodology. If
our currency requirements differ materially from our hedged position during
periods of currency volatility, or if we do not continue to hedge our Canadian
currency commitments, we could experience unanticipated currency gains or
losses.
We assume the risk relating to the creditworthiness of our counterparties
when we engage in hedging transactions. We mitigate this risk by dealing only
with substantial commercial banks we believe to be creditworthy. We do not
believe that the credit risk associated with these transactions is material.
We maintain cash and cash equivalents of various issuers, types, and
maturity dates with various banks and investment banking institutions. Although
to date we have not done so, we may in the future hold
17
<PAGE> 20
investments beyond 120 days, and the market value of these investments on any
day during the investment term may vary as a result of market interest rate
fluctuations. We do not hedge this exposure because short-term fluctuations in
interest rates would not likely have a material impact on interest earnings.
We are exposed to financial market risks, including changes in interest
rates. We typically do not attempt to reduce or eliminate our market exposures
on our investment securities because the majority of our investments are
short-term. We do not have any derivative instruments other than the above
listed foreign exchange forward contracts. The fair value of our investment
portfolio or related income would not be significantly impacted by a 100 basis
point increase or decrease in interest rates due mainly to the short-term nature
of the major portion of our investment portfolio.
18
<PAGE> 21
PART 2: OTHER INFORMATION
PART 2 -- ITEM 1
LEGAL PROCEEDINGS
We are not currently party to any material pending legal proceedings.
PART 2 -- ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS
On August 4, Pivotal's registration statement on Form F-1, Registration No.
333-82871, became effective. The offering date was August 5, 1999. The offering
has terminated as a result of all of the shares offered being sold. The managing
underwriters were Merrill Lynch & Co., Bear, Stearns & Co. Inc. and Dain
Rauscher Wessels. The offering consisted of 3,975,000 common shares of Pivotal,
which includes 475,000 common shares offered pursuant to the subsequent exercise
of the underwriter's over allotment option on August 19, 1999. The aggregate
price of the shares offered and sold was $47.7 million. Proceeds to Pivotal,
after accounting for $3.3 million in underwriting discounts and commissions and
$1.3 million in other expenses, were $43.1 million. Pivotal generated interest
income of approximately $685,000 and $365,000 during the three months ended
December 31, 1999 and September 30, 1999, respectively.
The net proceeds of $43.1 million have been invested in investment-grade,
interest bearing, short-term instruments. Except for the payment of offering
expenses, none of the net proceeds were used during the six months ended
December 31, 1999.
None of the net offering proceeds were paid, and none of the initial public
offering expenses related to payments, directly or indirectly to directors,
officers or general partners of Pivotal or their associates, persons owning 10%
or more of any class of securities or affiliates of Pivotal.
SALES OF UNREGISTERED SECURITIES
During the three months ended December 31, 1999 and the six months ended
December 31, 1999, respectively, we sold 10,000 and 72,000 common shares
pursuant to the exercise of stock options issued under our Incentive Stock
Option Plan for aggregate proceeds of $17,000 and $83,000. The options, and
shares issued upon exercise of the options, were issued pursuant to the
exemption from registration provided by Rule 701 under the Securities Act of
1933.
PART 2 -- ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
10.1 Share Purchase Agreement by and between Pivotal Corporation
and Pierre Marcel, Marc Bahda, Bernard Wach and other
shareholders of Transitif S.A., dated December 3, 1999
(incorporated by reference from Exhibit 2.1 of the
Registrant's report on Form 8-K dated January 25, 2000).
27.1 Financial Data Schedule
99.1 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statements Forwarding Looking Statements
</TABLE>
(b) Reports on Form 8-K
On January 25, 2000, we filed a report on Form 8-K regarding the
acquisition of French-based Transitif S.A.
19
<PAGE> 22
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: February 4, 2000
PIVOTAL CORPORATION
/s/ NORMAN B. FRANCIS
--------------------------------------
Norman B. Francis
President, Chief Executive Officer and
Director
/s/ VINCENT D. MIFSUD
--------------------------------------
Vincent D. Mifsud
Chief Financial Officer and
Vice President, Operations
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Pivotal
Corporation quarterly report on Form 10-Q for the three and six months ended
December 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-2000
<PERIOD-START> OCT-01-1999 JUL-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 50,732 50,732
<SECURITIES> 0 0
<RECEIVABLES> 10,673 10,673
<ALLOWANCES> (534) (534)
<INVENTORY> 0 0
<CURRENT-ASSETS> 63,383 63,383
<PP&E> 5,009 5,009
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 69,529 69,529
<CURRENT-LIABILITIES> 16,775 16,775
<BONDS> 0 0
0 0
0 0
<COMMON> 61,335 61,335
<OTHER-SE> (8,581) (8,581)
<TOTAL-LIABILITY-AND-EQUITY> 69,529 69,529
<SALES> 8,026 14,123
<TOTAL-REVENUES> 11,542 20,217
<CGS> 2,223 3,875
<TOTAL-COSTS> 10,042 18,033
<OTHER-EXPENSES> 685 1,042
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (38) (649)
<INCOME-TAX> 126 201
<INCOME-CONTINUING> (164) (850)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (164) (850)
<EPS-BASIC> (0.01) (0.05)
<EPS-DILUTED> (0.01) (0.04)
</TABLE>
<PAGE> 1
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 the company complies with the requirements of the
safe harbor. As a public company, we have relied and will continue to rely on
the protection of the safe harbor in connection with our written and oral
forward-looking statements.
When evaluating our business, you should consider:
- all of the information in this quarterly report on Form 10-Q;
- the risk factors described in our Rule 424(b) prospectus filed with the
Securities and Exchange Commission on August 5, 1999; and
- the risk factors described below.
RISK FACTORS
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy or completeness of
forward-looking statements. You should consider our forward-looking statements
in light of the following risk factors and other information in this quarterly
report. If any of the risks described below occurs, our business, results of
operation and financial condition could differ from those projected in our
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of the quarterly report. You should
not place undue reliance on forward-looking statements.
FACTORS RELATING TO OUR BUSINESS AND THE MARKET FOR ELECTRONIC BUSINESS
RELATIONSHIP MANAGEMENT SOLUTIONS MAKE OUR FUTURE OPERATING RESULTS UNCERTAIN,
AND MAY CAUSE THEM TO FLUCTUATE FROM PERIOD TO PERIOD.
Our operating results have varied in the past, and we expect that they may
continue to fluctuate in the future. In addition, our operating results may not
follow any past trends. Some of the factors that could affect the amount and
timing of our revenues from software licenses and related expenses and cause our
operating results to fluctuate include:
- market acceptance of our products;
- the length and variability of the sales cycle for our products, which
typically ranges between two and six months from our initial contact
with a potential customer to the signing of a license agreement;
- the timing of customer orders, which can be affected by customer order
deferrals in anticipation of new product introductions, product
enhancements, and customer budgeting and purchasing cycles;
- our ability to successfully expand our sales force and marketing
programs;
- our ability to successfully expand our international operations;
- the introduction or enhancement of our products or our competitors'
products;
- changes in our or our competitors' pricing policies;
- our ability to develop, introduce and market new products on a timely
basis; and
- general economic conditions, which may affect our customers' capital
investment levels in management information systems.
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Our product revenues are not predictable with any significant degree of
certainty and future product revenues may differ from historical patterns.
Historically, we have recognized a substantial portion of our revenues in the
last month of a quarter. If customers cancel or delay orders, it can have a
material adverse impact on our revenues and results of operations from quarter
to quarter. Because our results of operations may fluctuate from quarter to
quarter, you should not assume that you 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 product license revenues. In recent years, we have experienced
relatively greater revenues from licenses in the fourth quarter of our fiscal
year, which ends June 30th, than in each of the first three quarters,
particularly the first quarter. We have historically recognized more license
revenues in the fourth quarter of our fiscal year and recognized less license
revenues in the subsequent first quarter. We believe that these fluctuations are
caused in part by customer buying patterns and the efforts of our direct sales
force to meet or exceed fiscal year-end quotas. In addition, our sales in Europe
are generally lower during the summer months than during other periods. We
expect that these seasonal trends are likely to continue in the future. If
revenues for a quarter ending September 30 are lower than the revenues for the
prior quarter, it may be hard to determine whether the reason for the reduction
in revenues involves seasonal trends or other factors adversely affecting our
business.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT HOW OUR BUSINESS
WILL DEVELOP AND FUTURE OPERATING RESULTS.
We commenced operations in January 1991. We initially focused on the
development of application software for pen computers. In September 1994, we
changed our focus to research and development of electronic business
relationship management software. We commercially released the initial version
of our principal product, Pivotal Relationship, in April 1996. We commercially
released the initial version of Pivotal eRelationship in February 1999. We have
a limited operating history, and we face many of the risks and uncertainties
encountered by early-stage companies in rapidly evolving markets.
These risks and uncertainties include:
- no history of profitable operations;
- uncertain market acceptance of our products;
- our reliance on a limited number of products;
- the risks that competition, technological change or evolving customer
preferences could adversely affect sales of our products;
- the need to expand our sales and support capabilities;
- our reliance on third parties to market, install, and support our
products;
- our dependence on a limited number of key personnel, including our
co-founders; and
- the risk that our management will not be able to effectively manage
growth or any acquisition we may undertake.
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The new and evolving nature of the electronic business relationship
management market increases these risks and uncertainties. Our limited operating
history makes it difficult to predict how our business will develop and our
future operating results.
WE HAVE A HISTORY OF LOSSES, WE MAY INCUR LOSSES IN THE FUTURE AND OUR LOSSES
MAY INCREASE BECAUSE OF OUR PLAN TO INCREASE OPERATING EXPENSES.
We have incurred net losses in each fiscal year since inception, except for
the year ended June 30, 1998, in which we had net income of approximately
$4,000. In the quarter ended December 31, 1999, we had a net loss of
approximately $164,000 and at December 31, 1999, we had an accumulated deficit
of approximately $8.3 million. We have increased our operating expenses in
recent periods and plan further increases in the future. Our planned increases
in operating expenses may result in larger losses in future periods. As a
result, we will need to generate significantly greater revenues than we have to
date to achieve and maintain profitability. We cannot assure you that our
revenues will increase. Our business strategies may not be successful, and we
may not be profitable in any future period.
THE MARKET FOR OUR PRODUCTS IS HIGHLY COMPETITIVE.
The market for our software is intensely competitive, fragmented and
rapidly changing. We face competition from companies in two distinct markets,
the electronic business relationship management software market and the
electronic commerce software market.
It is also possible that Microsoft Corporation may decide to introduce
products that compete with ours.
In addition, as we develop new products, particularly applications focused
on electronic commerce or specific industries, we may begin competing with
companies with whom we have not previously competed. It is also possible that
new competitors will enter the market or that our competitors will form
alliances that may enable them to rapidly increase their market share.
Some of our actual and potential competitors are larger, better established
companies and have greater technical, financial and marketing resources.
Increased competition may result in price reductions, lower gross margins or
loss of our market share, any of which could materially adversely affect our
business, financial condition and operating results.
WE DEPEND UPON MICROSOFT AND THE CONTINUED ADOPTION AND PERFORMANCE OF THE
MICROSOFT WINDOWS NT AND MICROSOFT BACKOFFICE PLATFORMS.
We have designed our products to operate on the Microsoft Windows NT and
Microsoft BackOffice platforms. As a result, we market our products exclusively
to customers who have developed their computing systems around these platforms.
Our future financial performance will depend on continued growth in the number
of businesses that successfully adopt the Microsoft Windows NT and Microsoft
BackOffice computing platforms. The Microsoft Windows NT and Microsoft
BackOffice computing platforms face increasing competition, particularly from
platforms such as Unix and Linux, databases from companies such as Oracle and
Internet server software from companies such as Netscape. Acceptance of the
Microsoft Windows NT and Microsoft BackOffice platforms may not continue to
increase in the future. The market for software applications that run on these
platforms has in the past been significantly affected by the timing of new
product releases, competitive operating systems and enhancements to competing
computing platforms. If the number of businesses that adopt Microsoft Windows NT
and Microsoft BackOffice fails to grow or grows more slowly than we currently
expect, or if Microsoft delays the release of new or enhanced products, our
revenues from Pivotal eRelationship could be adversely affected.
The performance of our products depends, to some extent, on the technical
capabilities of the Microsoft Windows NT and Microsoft BackOffice platforms. If
these platforms do not meet the technical demands of our products, the
performance or scalability of our products could be limited and, as a result,
our revenues from Pivotal eRelationship could be adversely affected.
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The Windows 2000 operating system is a new product of Microsoft scheduled
for release in February 2000. We have spent considerable resources testing the
compatibility of our product with the Windows 2000 operating system. The
performance of our products with the Windows 2000 operating system has not been
tested in the marketplace. If our product is not compatible with Windows 2000,
our revenues from Pivotal eRelationship could be adversely affected.
Broad antitrust actions initiated by federal and state regulatory
authorities are pending against Microsoft. Any outcome to these actions that
weakens the competitive position of Microsoft Windows or BackOffice products
would adversely affect the market for our products.
THE MARKET FOR OUR SOLUTIONS IS NEW AND HIGHLY UNCERTAIN AND OUR PLAN TO FOCUS
ON INTERNET-BASED APPLICATIONS AND INTEGRATE ELECTRONIC COMMERCE FEATURES ADDS
TO THIS UNCERTAINTY.
The market for electronic business relationship management software is
still emerging and continued growth in demand for and acceptance of electronic
business relationship management products remains uncertain. Even if the market
for electronic business relationship management software grows, businesses may
purchase our competitors' products or develop their own. We believe that many of
our potential customers are not fully aware of the benefits of electronic
business relationship management solutions, and as a result, these solutions may
never achieve full market acceptance.
The development of our Internet-based Pivotal eRelationship applications
for electronic business relationship management and our plan to integrate
additional electronic commerce features with Pivotal eRelationship present
additional challenges and uncertainties. We are uncertain how businesses will
use the Internet as a means of communication and commerce and whether a
significant market will develop for Internet-based electronic business
relationship management applications such as Pivotal eRelationship. The use of
the Internet is evolving rapidly, and many companies are developing new products
and services that use the Internet. We do not know what forms of products and
services may emerge as alternatives to our existing products or to any future
Internet-based or electronic commerce features and services we may introduce. We
have spent, and will continue to spend, considerable resources educating
potential customers about our products and electronic business relationship
management software solutions in general. However, even with these educational
efforts, market acceptance of our products may not increase. If the markets for
our products do not grow or grow more slowly than we currently anticipate, our
revenues may not grow and may even decline.
We have announced our PivotalHost program whereby we will provide customers
access to our software applications on a monthly subscription basis over the
Internet through an application service provider. We do not know whether this
will prove to be a successful business model or if it will result in any
material revenue for us. If a majority of our new customers purchase our
products through the PivotalHost program, 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 at the date of
purchase.
We have also announced our Pivotal business-to-business (B2B) Syndicate
program. Under this program, we intend to use the Internet to furnish our
customers with information or services provided by the B2B Syndicate 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.
OUR SUCCESS WILL DEPEND UPON THE SUCCESS OF OUR INTEGRATED PRODUCT SUITE.
We anticipate that virtually all of our revenues and growth in the
foreseeable future will come from sales of our integrated product suite,
consisting of Pivotal eRelationship Intrahub, eRelationship CustomerHub and
eRelationship Partnerhub product licenses and related services. Accordingly,
failure of our integrated product 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 product suite and
related services, as well as the development of new versions and enhancements of
the product.
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THE SUCCESS OF PIVOTAL ERELATIONSHIP WILL DEPEND UPON THE CONTINUED USE AND
EXPANSION OF THE INTERNET.
Increased sales of Pivotal eRelationship, and any future Internet-based
applications and electronic commerce features we integrate with it, will depend
upon the expansion of the Internet as a leading platform for commerce and
communication. If the Internet does not continue to become a widespread
communications medium and commercial marketplace, the demand for Pivotal
eRelationship could be significantly reduced, and Pivotal eRelationship and any
future Internet-based and electronic commerce features may not be commercially
successful. The Internet infrastructure may not be able to support the demands
placed on it by continued growth. The Internet could lose its viability due to
delays in the development or adoption of new equipment, standards and protocols
to handle increased levels of Internet activity, security, reliability, cost,
ease of use, accessibility and quality of service.
Other concerns that could inhibit the growth of the Internet and its use by
business as a medium for communication and commerce include:
- concerns about security of transactions conducted over the Internet;
- concerns about privacy and the use of data collected and stored
recording interactions over the Internet;
- the possibility that federal, state, local or foreign governments will
adopt laws or regulations limiting the use of the Internet or the use of
information collected from communications or transactions over the
Internet; and
- the possibility that governments will seek to tax Internet commerce.
OUR FUTURE REVENUE GROWTH COULD BE IMPAIRED IF WE ARE UNABLE TO EXPAND OUR
DIRECT SALES AND SUPPORT INFRASTRUCTURE.
Our future revenue growth will depend in large part on our ability to
successfully expand our direct sales force and our customer support capability.
We may not be able to successfully manage the expansion of these functions or to
recruit and train additional direct sales, consulting and customer support
personnel. There is presently a shortage of qualified personnel to fill these
positions. If we are unable to hire and retain additional highly skilled direct
sales personnel, we may not be able to increase our license revenue to the
extent necessary to achieve profitability. If we are unable to hire highly
trained consulting and customer support personnel we may be unable to meet
customer demands. We are not likely to be able to increase our revenues as we
plan if we fail to expand our direct sales force or our consulting and customer
support staff. Even if we are successful in expanding our direct sales force and
customer support capability, the expansion may not result in revenue growth.
WE RELY ON OUR PIVOTAL ALLIANCE NETWORK OF INDEPENDENT COMPANIES TO SELL,
INSTALL AND SERVICE OUR PRODUCTS AND TO PROVIDE SPECIALIZED SOFTWARE FOR USE
WITH THEM, AND OUR PIVOTALHOST PROGRAM WILL RELY ON THIRD-PARTY APPLICATION
SERVICE PROVIDERS.
We do not have the internal implementation and customization capability to
support our current level of sales of licenses. Accordingly, we have established
and relied on our international network of independent companies we call the
Pivotal Alliance. Members of the Pivotal Alliance market and sell our products,
provide implementation and customization services, provide technical support and
maintenance on a continuing basis and provide us with software applications that
we can bundle with our solutions to address specific industry and customer
requirements. Approximately 35% and 34% of our revenues for the six months ended
December 31, 1999 and 1998, respectively were from sales made through
third-party resellers. Almost all of our customers retain members of the Pivotal
Alliance to install and customize our products. If we fail to maintain our
existing Pivotal Alliance relationships, or to establish new relationships, or
if existing or new members of the Pivotal Alliance do not perform to our
expectations, our ability to sell, install and service our products may suffer.
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There is an industry trend toward consolidation of systems integrators that
implement, customize and maintain software solutions. Some of the systems
integrators in the Pivotal Alliance have engaged in discussions concerning
business consolidations. We are uncertain as to the effect that any
consolidation may have on our relationships with members of the Pivotal
Alliance.
Enterprise 360 is a consortium founded in 1998 to integrate and promote our
products as part of a turnkey electronic business relationship management
solution. The terms of our relationship with the members of the consortium have
not been formalized and are subject to change, and any of the members may
withdraw at any time. We have not generated a significant amount of revenues
through this relationship and do not know whether it will be successful.
The success of our PivotalHost program will depend on the commitment and
performance of third-party application service providers to successfully
implement and market services that incorporate our solutions. Likewise, the
success of our participation in the hosting program announced by Microsoft and
Cisco will depend on their continued commitment to the program and our
participation in it, and their success in implementing and marketing their
hosting program.
THE LOSS OF OUR CO-FOUNDERS OR OTHER KEY PERSONNEL OR OUR FAILURE TO ATTRACT AND
RETAIN ADDITIONAL PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends largely upon the continued service of our executive
officers and other key management, sales and marketing and technical personnel.
The loss of the services of one or more of our executive officers or other key
employees could have a material adverse effect on our business, results of
operations and financial condition. In particular, we rely on our co-founders,
Norman Francis, President, Chief Executive Officer and director, and Keith
Wales, our Chief Technical Officer, Vice-President, Research and Development and
director. Messrs. Francis and Wales do not have employment agreements and,
therefore, could terminate their employment with us at any time without penalty.
We have key man insurance on the lives of Messrs. Francis and Wales in the
amount of Cdn.$1,000,000 each. However, this insurance would not sufficiently
compensate us for the loss of services of either Mr. Francis or Mr. Wales.
Our future success also depends on our ability to attract and retain highly
qualified personnel. The competition for qualified personnel in the computer
software and Internet markets is intense, and we may be unable to attract or
retain highly qualified personnel in the future. In addition, due to intense
competition for qualified employees, it may be necessary for us to increase the
level of compensation paid to existing and new employees to the degree that our
operating expenses could be materially increased.
WE FACE RISKS FROM THE EXPANSION OF OUR INTERNATIONAL OPERATIONS.
We intend to substantially expand our operations outside the United States
and Canada. We have acquired Transitif S.A. in France and increased our number
of European based employees. International operations are subject to numerous
inherent potential risks, including:
- unexpected changes in regulatory requirements;
- export restrictions, tariffs and other trade barriers;
- changes in local tax rates or rulings by local tax authorities;
- challenges in staffing and managing foreign operations, differing
technology standards, employment laws and practices in foreign
countries;
- less favorable intellectual property laws;
- longer accounts receivable payment cycles and difficulties in collecting
payments;
- political and economic instability; and
- fluctuations in currency exchange rates and the imposition of currency
exchange controls.
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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
products. We may not be able to sustain or increase international revenues from
licenses or from consulting and customer support.
In some foreign countries we rely on selected solution providers to
translate our software into local languages, adapt it to local business
practices and complete installations in local markets. We are highly dependent
on the ability and integrity of these solution providers, and if any of them
should fail to properly translate, adapt or install our software, our reputation
could be damaged and we could be subjected to liability. If any of these
solution providers should fail to adequately secure our software against
unauthorized copying, our proprietary software could be compromised.
FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE UNITED STATES DOLLAR AND THE CANADIAN
DOLLAR, UNITED KINGDOM POUND STERLING OR FRENCH FRANC MAY AFFECT OUR OPERATING
RESULTS.
Substantially all of our revenues and corresponding receivables are in
United States dollars. However, a majority of our research and development
expenses, customer support costs and administrative expenses are in Canadian
dollars. We also are investing in our international operations resulting in
increased future operating expenses in United Kingdom pound sterling and French
franc. We are exposed to fluctuations in the exchange rates between the United
States dollar and the Canadian dollar, the United States dollar and the United
Kingdom pound sterling and the United States dollar and the French franc through
our operations in Canada, United Kingdom and France respectively. In the quarter
ended March 31, 1999, we adopted a hedging policy intended to reduce the effects
of these fluctuations on our results of operations. As part of our hedging
policy, we identify our future Canadian currency requirements related to payroll
costs, capital expenditures and operating lease commitments, and purchase
forward exchange contracts at the beginning of an operational period to cover
these currency needs. The operational period for our contracts is generally
limited to one quarter. If our actual currency requirements differ materially
from our hedged position during periods of currency volatility, or if we do not
continue to hedge our Canadian currency commitments, we could experience
unanticipated currency gains or losses.
Our hedging policy subjects us to risks relating to the creditworthiness of
the commercial banks that we contract with in our hedging transactions. If one
of these banks cannot honor its obligations, we may suffer a loss.
The purpose of our hedging policy is to reduce the effect of exchange rate
fluctuations on our results of operations. Therefore, while our hedging policy
reduces our exposure to losses resulting from unfavorable changes in currency
exchange rates, it also reduces or eliminates our ability to profit from
favorable changes in currency exchange rates.
WE HAVE EXPERIENCED RAPID GROWTH WHICH HAS PLACED A STRAIN ON OUR RESOURCES, AND
ANY FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD CAUSE OUR BUSINESS TO SUFFER.
We have been expanding our operations rapidly and intend to continue this
expansion for the foreseeable future. The number of our employees increased from
70 on June 30, 1997 to 347 on December 31, 1999. This expansion has placed, and
is expected to continue to place, a significant strain on our managerial,
operational and financial resources as we integrate and manage new employees,
more locations and more customer, supplier and other business relationships. In
the past we have decided to, and in the future we may need to, improve or
replace our existing operational and customer service systems, procedures and
controls. Any failure by us to properly manage our growth or these systems and
procedural transitions could impair our ability to efficiently manage our
business, to maintain and expand important relationships with members of the
Pivotal
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Alliance and other third parties and to attract and service customers, and could
cause us to incur higher operating costs and delays in the execution of our
business plan or in the reporting or tracking of our financial results.
THE INTEGRATION OF TRANSITIF S.A. AND ANY FUTURE ACQUISITIONS MAY BE DIFFICULT
AND DISRUPTIVE.
In early December 1999, we acquired Transitif S.A., a French corporation
that distributes electronic business relationship management solutions. We are
currently in the process of integrating the Transitif S.A. business with our
business. This integration is subject to risks commonly encountered in making
acquisitions, including, among others, risk of loss of key personnel,
difficulties associated with assimilating ongoing business and the ability of
our sales force and consultants to integrate. We may not successfully overcome
these risks or any other problems encountered in connection with the acquisition
of Transitif S.A. As part of our business strategy, we may seek to grow by
making additional acquisitions.
We may not effectively select acquisition candidates or negotiate or
finance acquisitions or integrate the acquired businesses and their personnel or
acquired products or technologies into our business. We cannot assure you that
we can complete any acquisition we pursue on favorable terms, or that any
acquisition 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 an electronic business
relationship management system is discretionary, involves a significant
commitment of its resources and is influenced by its budget cycles. To
successfully sell licenses for our products, we typically must educate our
potential customers regarding the use and benefits of electronic business
relationship management software in general and our solutions in particular,
which can require significant time and resources. Consequently, the period
between initial contact and the purchase of licenses for our products is often
long and subject to delays associated with the lengthy budgeting, approval and
competitive evaluation processes that typically accompany significant capital
expenditures. We frequently must invest substantial resources to develop a
relationship with a potential customer and educate its personnel about our
products and services with no guarantee that our efforts will be rewarded with a
sale. Our sales cycles are lengthy and variable, typically ranging between two
and six months from our initial contact with a potential customer to the signing
of a license agreement, although sales sometimes require substantially more
time. Sales delays could cause our operating results to vary widely.
OUR PLAN TO EXPAND OUR SERVICE CAPABILITY COULD ADVERSELY AFFECT GROSS PROFIT
MARGINS AND OPERATING RESULTS.
Revenues from services and maintenance have lower gross margins than
revenues from licenses; therefore an increase in the percentage of revenues
generated from services and maintenance as compared to revenues from licenses
will lower our overall gross margins. In addition, an increase in the cost of
revenues from services and maintenance as a percentage of revenues from services
and maintenance could have a negative impact on overall gross margins.
Although margins related to revenues from services and maintenance are
lower than margins related to revenues from licenses, our services organization
currently generates gross profits, and we are seeking to expand our service
capability and our revenues from services and maintenance.
Revenues from services and maintenance depend in part on renewals of
technical support contracts by our customers, some of which may not renew their
technical support contracts. Our ability to increase revenues from services and
maintenance will depend in large part on our ability to increase the scale of
our services organization, including our ability to successfully recruit and
train a sufficient number of qualified services personnel. We may not be able to
do so.
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To meet our expansion goals, we expect to hire additional services
personnel. If demand for our services organization does not increase in
proportion to the number of additional personnel we hire, gross profits could
fall, or we may incur losses from our services activities. In addition, the
costs of delivering services could increase and any material increase in these
costs could reduce or eliminate the profitability of our services activities.
WE RELY ON SOFTWARE LICENSED TO US BY THIRD PARTIES FOR FEATURES WE INCLUDE IN
OUR PRODUCTS.
We incorporate into our products software that is licensed to us by
third-party software developers including Microsoft's SQL Server 7.0, Sheridan
Calendar Control, InstallShield 3 and Seagate Crystal Reports. We are seeking to
further increase the capabilities of our products by licensing additional
applications from third parties. A significant interruption in the availability
of any of this licensed software could adversely affect our sales, unless and
until we can replace this software with other software that performs similar
functions. Because our products incorporate software developed and maintained by
third parties, we depend on these third parties' abilities to deliver and
support reliable products, enhance their current products, develop new products
on a timely and cost-effective basis, and respond to emerging industry standards
and other technological changes. If third-party software offered now or in the
future in conjunction with our products becomes obsolete or incompatible with
future versions of our products, we may not be able to continue to offer some of
the features we presently include in our products unless we can license
alternative software or develop the features ourselves.
WE MUST CONTINUE TO DEVELOP ENHANCEMENTS TO OUR PRODUCTS AND NEW APPLICATIONS
AND FEATURES THAT RESPOND TO THE EVOLVING NEEDS OF OUR CUSTOMERS, RAPID
TECHNOLOGICAL CHANGE AND ADVANCES INTRODUCED BY OUR COMPETITORS.
The software market in which we compete is characterized by rapid change
due to changing customer needs, rapid technological changes and advances
introduced by competitors. Existing products become obsolete and unmarketable
when products using new technologies are introduced and new industry standards
emerge. New technologies could change the way electronic business relationship
management products are sold or delivered. As a result, the life cycles of our
products are difficult to estimate. We also may need to modify our products when
third parties change software we integrate into our products.
To be successful we must continue to enhance our current product line and
develop new applications and features. For example, we have announced our
PivotalHost program of delivering electronic business relationship management
solutions through application service providers on a monthly subscription basis.
We may not be able to successfully develop or license the applications
necessary to offer these or other features, or to integrate these applications
with our existing products. We have delayed enhancements and new product release
dates several times in the past and may not be able to introduce new products,
product enhancements, new applications or features successfully or in a timely
manner in the future. If we delay release of our new products or product
enhancements or new applications or features or if they fail to achieve market
acceptance when released, we may not be able to keep up with the latest
developments in the market and our revenues may fall. We may not be able to
respond effectively to customer needs, technological changes or advances
introduced by our competitors, and our products could become obsolete.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS.
Our success depends in part on our ability to protect our proprietary
software and our other proprietary rights from copying, infringement or use by
unauthorized parties. To protect our proprietary rights we rely primarily on a
combination of copyright, trade secret and trademark laws, confidentiality
agreements with employees and third parties, and protective contractual
provisions such as those contained in license agreements with consultants,
vendors and customers, although we have not signed these types of agreements in
every case. Despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of
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our products and obtain and use information that we regard as proprietary. Other
parties may breach confidentiality agreements and other protective contracts we
have entered into. We may not become aware of, or have adequate remedies in the
event of, these types of breaches or unauthorized activities.
CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS INFRINGE THEIR COPYRIGHTS OR PATENTS
COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND INCREASE OUR COSTS.
If any of our products violates third-party proprietary rights, including
copyrights and patents, we may be required to reengineer our products or obtain
licenses from third parties to continue offering our products without
substantial reengineering. Although some of our current and potential
competitors have sought patent protection for similar electronic business
relationship management systems, we have not sought patent protection for our
solutions. If a patent has been issued or is issued in the future to a third
party that prevents us from using technology included in our products, we would
need to obtain a license or re-engineer our product to function without
infringing the patent. Any efforts to re-engineer our products or obtain
licenses from third parties may not be successful and, in any case, could
substantially increase our costs, or force us to interrupt product sales or
delay product releases.
OUR PRODUCTS AND PRODUCTS WE RELY ON MAY SUFFER FROM DEFECTS OR ERRORS.
Software products as complex as ours may contain errors or defects,
especially when first introduced or when new versions are released. We have had
to delay commercial release of some versions of our products until software
problems were corrected, and in some cases have provided product enhancements to
correct errors in released products. Our new products and product enhancements
or new applications or features may not be free from errors after commercial
shipments have begun. Any errors that are discovered after commercial release
could result in loss of revenues or delay in market acceptance, diversion of
development resources, damage to our reputation, increased service and warranty
costs and liability claims.
Our end-user licenses contain provisions that limit our exposure to product
liability claims, but these provisions may not be enforceable in all
jurisdictions. In some cases, we have been required to waive these contractual
limitations. Further, we may be exposed to product liability claims in
international jurisdictions where our solution provider has supplied our
products and negotiated the license without our involvement. A successful
product liability claim could result in material liability and damage to our
reputation.
In addition, products we rely on, such as Microsoft platform products, may
contain defects or errors. Our products rely on these products to operate
properly. Therefore, any defects in these products could adversely affect the
operation of and market for our products, reduce our revenues, increase our
costs and damage our reputation.
IF OUR CUSTOMERS' SYSTEM SECURITY IS BREACHED, OUR BUSINESS AND REPUTATION COULD
SUFFER.
A fundamental requirement for online communications is the secure
transmission of confidential information over the Internet. Users of our
products transmit their and their customers' confidential information over the
Internet. In our license agreements with our customers, we disclaim
responsibility for the security of confidential data and have contractual
indemnities for any damages claimed against us. However, if unauthorized third
parties are successful in obtaining confidential information from users of our
products, our reputation and business may be damaged and, if our contractual
disclaimers and indemnities are not enforceable, we may be subjected to
liability.
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CHANGES IN ACCOUNTING STANDARDS AND IN THE WAY WE CHARGE FOR LICENSES COULD
AFFECT OUR FUTURE OPERATING RESULTS.
We recognize revenues from the sale of software product licenses on
delivery of our products if:
- persuasive evidence of an arrangement exists,
- the fee is fixed and determinable,
- we can objectively allocate the total fee among all elements of the
arrangement, and
- collection of the license fee is probable.
Under certain license arrangements, with either a fixed or indefinite term,
our customers agree to pay for the license with periodic payment 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 product.
We recognize maintenance revenues ratably over the contract term, typically
one year, and recognize revenues for consulting, education and implementation
and customization services as the services are performed.
Statement of Position 97-2, "Software Revenue Recognition," was issued in
October 1997 by the American Institute of Certified Public Accountants and
amended by Statement of Position 98-4. We adopted Statement of Position 97-2
effective January 1, 1998. The American Institute of Certified Public
Accountants has also issued Statement of Position 98-9, which is effective for
us for transactions entered into beginning January 1, 2000. However, full
implementation guidelines for this standard have not yet been issued. Once
available, these implementation guidelines could lead to unanticipated changes
in our current revenue accounting practices.
Accounting standard setters, including the Securities and Exchange
Commission and the Financial Accounting Standards Board, are also reviewing the
accounting standards related to business combinations and stock-based
compensation.
Any changes to these accounting standards or any other accounting standards
or the way these standards are interpreted or applied could require us to change
the manner in which we recognize revenue or the way we account for share
compensation or for any acquisition we may pursue or other aspects of our
business, in a manner that could adversely affect our reported financial
results.
APPROXIMATELY 16 MILLION COMMON SHARES BECAME AVAILABLE FOR SALE ON JANUARY 31,
2000 AND SALES OF THESE SHARES MAY DEPRESS OUR SHARE PRICE.
Holders of approximately 16 million of our common shares agreed with the
underwriters of our initial public offering, not to sell any of their shares
until 180 days from the date of the initial public offering. This agreement
expired January 31, 2000 and sale of those shares may depress our share price.
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