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EXHIBIT 13.1
[PIVOTAL LOGO]
2000 Annual Report
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[INSIDE COVER]
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Accelerating Demand Chain Networks(TM)
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Quarterly Revenue Growth - Global
(FY Ends June 30)
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Contents
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<TABLE>
<S> <C>
4-6 Message to our shareholders
7 Selected Financial Highlights
8-9 Corporate Profile
10-11 Pivotal Solutions
12-13 Focus on Microsoft Corporation
14-15 Focus on Financial
16-17 Focus on Hospitality
18-19 Focus on Manufacturing
20-21 Focus on High Tech
22-23 Focus on Healthcare
24-25 Focus on Consulting & Services
26-27 Pivotal People
28-43 Management's Discussion & Analysis
44-63 2000 Financial Statements
45 Independent Auditors' Report
46 Consolidated Balance Sheets
47 Consolidated Statements of Operations
48 Consolidated Statements of Shareholders' Equity (Deficit)
49 Consolidated Statements of Cash Flows
50-63 Notes to the Consolidated Financial Statements
64-65 Corporate Information
</TABLE>
(C) 2000 Pivotal Corporation. All rights reserved. Pivotal, Pivotal
eRelationship, Pivotal eSelling, PivotalWeb .NET, Pivotal ePower, Pivotal
Interaction Engine, Pivotal Intelligence Engine, Pivotal Anywhere and
PivotalHost are trademarks and/or registered trademarks of Pivotal Corporation.
Microsoft, Microsoft .NET, Windows, Windows 2000, Windows NT, and BackOffice are
trademarks and/or registered trademarks of Microsoft Corporation in the United
States and/or other countries. All other trade names mentioned are trademarks
and/or registered trademarks of their respective owners.
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Norm Francis, President & CEO, Co-Founder
"Pivotal is dedicated to delivering innovative demand chain network solutions
that leverage the Internet to help power today's fastest, smartest companies."
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To our shareholders,
Fiscal year 2000 was a year of expansion and acceleration for Pivotal. Our
business accelerated its financial growth, launched many new products, expanded
our customers to more than 1,000, formed new and solidified existing business
partner relationships and expanded employees to over 550. This enabled us to
make rapid strides in our pursuit of global success. During this expansion
Pivotal continued to deliver consistent financial performance. Annual revenues
rose 109 percent to $52.9 million, our quarter over quarter growth increased in
every quarter and we achieved operating profitability in the fourth quarter. We
are proud of the fact that our business outside North America grew to be 28% of
total revenue and have now deployed our solutions in 35 countries around the
world.
PRODUCTS AND SOLUTIONS
Our comprehensive demand chain network solution enables enterprises around the
world to make, serve, and manage customers with unparalleled speed and
efficiency over the Internet. Pivotal's demand chain network solution includes
the award-winning Pivotal eRelationship(TM) 2000 CRM application; Pivotal
eSelling(TM) 2000, an intelligent Internet selling solution for complex products
and services; and Pivotal ePower(TM) 2000, a robust Internet architecture. Our
solutions are built for the Internet, optimized for Microsoft server
technologies, and are fully customizable to achieve the eBusiness goals of a
wide variety of enterprises -- including hosted and wireless capabilities to
provide all constituents, channels, devices and processes access to the same
network. By effectively managing interactions with customers, partners and
employees over the Internet with Pivotal solutions, enterprises around the world
can increase revenue and improve customer service.
"Our customers look to Pivotal to successfully integrate the power of the
Internet into their businesses. With award-winning solutions, a strong Microsoft
partnership, and proven results, we are capitalizing on the trend towards
Internet-based demand chain networks."
Norm Francis,
President & CEO,
Pivotal Corporation
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Message to our Shareholders CONTINUED
CUSTOMERS AND PARTNERSHIPS
In fiscal year 2000, our customer base grew to over 1,000 enterprises spanning a
diverse range of industries including healthcare, finance, technology,
manufacturing, and services. Today, our customers represent some of the
smartest, fastest companies in the world. A key part of our fiscal year 2000
success can be attributed to our partnering strategy. At Pivotal, we
continuously look for new opportunities and alliances while focusing on
expanding our existing relationships with our most important partners. During
fiscal year 2000, we further solidified our partnership with Microsoft allowing
us to maximize the power of the Internet to develop leading-edge solutions. As a
testament to our product leadership and partnership, Microsoft Chairman Bill
Gates demonstrated our solution as part of his keynote address at the launch of
Windows 2000. In addition, our Pivotal ePower 2000 Internet platform holds the
world record for scalability on Microsoft Windows 2000. Our partnering strategy
has also resulted in a diverse range of best-in-class technology and service
relationships. We recently integrated technology from E.piphany, Inc. and
Interactive Intelligence Inc., bringing enhanced decision-making and interactive
management to our solution. Partnering efforts have also expanded our product
footprint into wireless communications to provide universal access to Pivotal
solutions anywhere, anytime. In fiscal year 2000, we also continued to
strengthen our service relationships with a variety of companies, improving our
ability to make customer deployments some of the most rapid and efficient in the
global market.
ACQUISITIONS AND GLOBAL EXPANSION
Our acquisition strategy has enabled us to expand our product, our global
presence and our solution. In fiscal year 2000, we acquired Exactium Ltd., an
Atlanta-based company that provides intelligent eSelling solutions, and Simba
Technologies Inc., a leading provider of enhanced eMarketing solutions. With
these advanced technologies, the Pivotal solution now powers complete,
end-to-end demand chain networks that accelerate business over the Internet. In
December 1999 we acquired Transitif S.A., a leading French eBusiness solution
provider which strengthens our European operations. To further help enable rapid
international growth we also established an eBusiness Center of Excellence in
Northern Ireland. In North America, we opened new offices in Washington, Denver,
and Minneapolis, and expanded our Chicago operation to include a world-class
services and education facility. We opened new offices in Tokyo, Japan and
Sydney, Australia giving us over 25 offices worldwide. Pivotal products and
services are now available in 35 countries across the globe. With this
international presence we believe we are ideally positioned to strengthen our
leadership in both traditionally strong markets and emerging, high-growth
regions.
LOOKING FORWARD
In closing, I want to thank the people who have contributed so much to Pivotal's
success. Our customers who have invested in our vision and our solutions,
reaching and exceeding their eBusiness goals with a level of innovation and
drive that constantly inspires our company. Our dedicated, focused team of
entrepreneurial employees and business partners who have consistently delivered
superior products and services to help our customers improve the way they do
business. Finally, our corporate, institutional, and private investors who have
encouraged us with their continued support and belief in our company. With this
community of customers, employees, partners and investors dedicated to Pivotal's
continued success, we are moving forward into fiscal year 2001 with enthusiasm
and optimism.
Sincerely,
/s/ NORM FRANCIS
Norm Francis
President and CEO
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Selected Financial Highlights
Increasing
International
Revenues
(FY Ends June 30)
[GRAPH]
Annual Revenue
Growth and Mix
(FY Ends June 30)
[GRAPH]
Quarterly Revenue
Growth and Mix
(FY Ends June 30)
[GRAPH]
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Corporate Profile
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Corporate Profile
ACCELERATING DEMAND CHAIN NETWORKS(TM)
This is the era in which making, serving and managing customers is the key to
any business. To stay competitive, it is critical for companies to respond
rapidly and effectively to their customers. Pivotal enables large and
medium-sized businesses worldwide to help meet this challenge--to increase
revenue and market value by managing Internet demand chain networks. Our
XML-based Internet solutions exploit leading-edge technologies to power smarter,
faster companies, enabling enterprises to move their demand chains to the
Internet for more effective marketing, direct and channel sales, customer
service, field service, order processing, shipping and billing, and partner
relationships. By leveraging the Internet, companies can get new products to
market faster, respond to feedback rapidly and establish profitable,
personalized marketing, sales and service relationships. The power of our
solution is measurable: accelerate demand chain networks and gain the enhanced
ability to build customer satisfaction, productivity and increase revenue.
Pivotal and Microsoft collaborate on product development, marketing, and sales
initiatives to enable technology advancement and product leadership for our more
than 1,000 joint customers. Pivotal's Global Business Partner Alliance program
continues to generate leading-edge innovation and customer value. One of our
most expansive partnering initiatives, PivotalWeb.NET, is a diverse group of
companies that gives our customers access to value-added Internet content,
applications and services to increase productivity and profitability. We have
also expanded our product footprint with industry-leading technology partners
such as E.piphany, Inc. resulting in one of the most comprehensive, scalable
demand chain solutions in the world.
PIVOTAL CUSTOMERS
Enterprises spanning digital and traditional economies look to Pivotal for a
competitive edge. Today, over 1,000 customers in 35 countries have invested in
the Pivotal solution. In the last year, Pivotal won two prestigious Microsoft
Industry Solutions Awards for technology excellence, and the "Gold
Best-in-Class" award at the First Annual Users Choice Awards. Recently, the
company was named an "eBusiness Winner" by Upside Magazine, and "Company of the
Year" by the British Columbia Technology Industry Awards. Pivotal eRelationship
2000, our flagship product, was also named one of the "Top 15 Software for 2000"
by Information Systems Marketing Inc.
Pivotal Statistics (FY 2000)
- $52.9 million in revenue
- Over 1,000 customers
- Over 550 employees
- 25 offices worldwide
- Business presence in 35 countries
- Comprehensive eBusiness solution
with hosted and wireless options
- Trading symbols:
NASDAQ: PVTL, TSE: PVT
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MARKET OPPORTUNITY. AMR Research estimates that worldwide customer relationship
management license revenues will grow at a compound annual rate of 58% for the
five-year period from 1997 to 2002 to approximately $7.5 billion by 2002.
International Data Corporation estimates that the Internet commerce software
applications market will grow at a compound annual rate of 97% for the five-year
period from 1998 to 2003 to approximately $13.2 billion by 2003.
[PIVOTAL LOGO]
PIVOTAL SOLUTIONS
SERVICES. Pivotal Professional Services is meeting the demand for world-class
services by providing the complete skill set and resource set to deploy a
solution unique to each customer's needs. From global technical support,
maintenance, education, implementation, and customization to business
consulting, Pivotal Professional Services is helping accelerate customer
success.
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Pivotal Solutions
Pivotal is a leading provider of demand chain network eBusiness application
solutions. Demand chain network solutions enable businesses to increase revenue
by more effectively managing their interactions with customers and partners over
the Internet. They give today's enterprise the infrastructure to network every
participant, process, device, and channel in the demand chain to make business
move fast. Pivotal's eBusiness offering includes award-winning, Internet-based
applications Pivotal eRelationship 2000 and Pivotal eSelling 2000 as well as our
Internet platform solution--Pivotal ePower 2000. These solutions are supported
by an array of options, including hosted and wireless solutions, as well as our
Professional Service Team and Global Alliance Network.
PIVOTAL ePOWER(TM) 2000
The XML-based platform for developing and deploying Pivotal demand chain network
solutions. Designed for interoperability and optimized for the Microsoft .NET
platform, Pivotal ePower 2000 includes the high performance engines and robust
tools to build and deploy enterprise-scale eBusiness solutions.
PIVOTAL eRELATIONSHIP(TM) 2000
Bring all points of the demand chain cost-effectively to the enterprise with
Pivotal's award-winning front office customer relationship management solution.
Gives a unified view of customers throughout the relationship lifecycle from
making to managing to serving them.
PIVOTAL eRELATIONSHIP INTRAHUB(TM)
Pivotal eRelationship IntraHub gives front office employees and
executives the ability to manage interactions, transactions and knowledge
with customers and partners in personalized, one-to-one eRelationships.
PIVOTAL eRELATIONSHIP CUSTOMERHUB(TM)
Pivotal eRelationship CustomerHub gives customers a secure eCommerce and
self-service channel to interact with front office sales, marketing and
service employees.
PIVOTAL eRELATIONSHIP PARTNERHUB(TM)
Pivotal eRelationship PartnerHub gives authenticated selling and service
partners a Web site workspace in which to collaborate with front office
employees on marketing campaigns, sales programs, and customer service
activities.
PIVOTAL eSELLING(TM) 2000
Sell sophisticated products and services more effectively over the Internet.
Provides guided and advisory services for configuring, pricing, and buying
online, meeting customers' growing demand for fast, personalized, 24x7 service.
PIVOTALWEB .NET(TM)
A delivery system for business-critical information and services from a
best-of-breed community of online service providers to bring powerful Internet
resources directly to Pivotal eRelationship 2000 users according to their roles
and needs.
PIVOTALHOST(TM)
A hosted solution gives easy, affordable access to Pivotal solutions through
Application Service Providers.
PIVOTAL ANYWHERE(TM)
Pivotal Anywhere supports the latest industry standards connecting wireless
users -- whether customers, partners, or employees -- to the demand chain
network for immediate and personalized interactions anywhere, anytime.
OPTIONS
Pivotal Interaction Engine(TM)
Pivotal Interaction Engine powers unified message processing, queuing and
distribution, universal inbox, and live communication over the Internet.
Pivotal Intelligence Engine(TM)
Powers Web-based experience/behavior modeling and analysis with data mining and
decision support tools.
"Companies around the world are creating XML-based demand chain networks that
enable them to make, serve, and manage customers with speed and efficiency."
Bob Runge
Chief Marketing Officer
Pivotal Corporation
[PICTURE]
"Pivotal greatly values each and every customer and recognizes that our success
depends on our ability to work with them to deliver innovative demand chain
solutions."
[PICTURE]
Glenn Hasen
Executive Vice President
Global Field Operations
Pivotal Corporation
"Pivotal has exploited the advantages the Microsoft platform has to offer --
including world-class scalability, reliability and cost-effectiveness."
[PICTURE]
Keith Wales
Chief Technical Officer
Pivotal Corporation
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SOLUTION. By developing solutions exclusively for Microsoft technology,
Pivotal's solutions are optimized for increased performance, functionality,
deployability and lower total cost of ownership.
[MICROSOFT LOGO]
TEAMWORK. A global Windows 2000 launch partner, Pivotal's commitment to
Microsoft spans every major Microsoft .NET initiative. Pivotal has won five
Microsoft Industry Solution Awards, the most ever awarded to a single company.
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Microsoft Corporation
Microsoft and Pivotal have redefined how the world's most innovative companies
do business. Over 1,000 joint customers have the opportunity of accelerated
profitability by improving the speed at which they drive and process business
transactions. By deploying demand chain networks to enable information and
knowledge sharing, companies can build online communities of lasting
relationships. By working closely with Microsoft, our demand chain network
solutions capitalize on the power of the XML standard to unify all information,
processes, people, touchpoints, devices and transactions critical to managing
customers. The result -- Pivotal customers can get new products to market
faster, react to market feedback more quickly, and interact with precision and
intelligence at each point of contact and in every aspect of business. Pivotal
is an eBusiness solutions provider that demonstrates proven customer success and
a strong connection with Microsoft. As this relationship has grown and expanded,
Pivotal has achieved leading-edge innovation and performance.We enhance the
success of our joint customers with reliability, leadership and vision.
"Pivotal has had a very close relationship with Microsoft for many years. The
combination of Pivotal and Microsoft .NET delivers exceptional eBusiness
functionality, services and solutions."
Charles Stevens,
Vice President Enterprise and Partner Group,
Microsoft Corporation
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SOLUTION. Founded in 1919, Heller Financial is a worldwide commercial finance
company with almost $20 billion in assets. Heller is developing tools and Web
environments to work closer with their customers and partners in the data
intense environment of commercial lending and leasing.
[HELLER FINANCIAL LOGO]
TEAMWORK. "Pivotal is paving the way for bricks-and-mortar companies in the
financial sector to join the digital economy. With Pivotal, Heller will forge
stronger relationships with customers and leverage the Internet through an
innovative strategy and industry-leading technology."
Frederick E. Wolfert
President & Chief Operating Officer
Heller Financial Inc.
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FINANCE
To stay competitive, financial institutions provide a wide array of
comprehensive products and services. Companies that strive to reach the pinnacle
of success realize that it takes more than a solid suite of products and
services. To appeal to today's Internet-savvy and highly knowledgeable market,
Pivotal's demand chain network solutions provide the ability to offer online
buying and service experiences. The result is the ability to establish and
maintain profitable, long-term relationships with business and consumer markets
by capitalizing on information captured during each customer interaction.
Pivotal finance customers can effectively cross-sell and up-sell additional
products and services by offering targeted financial expertise, from precise
account coordination to visionary business consulting, with personalized
customer service. Pivotal is helping today's innovative finance companies by
enabling them to take the right steps towards improving customer retention,
loyalty, and ultimately revenue.
Finance Customers
- Allied Capital Corporation
- China Nationalities International Trust & Investment Corporation
- Dain Rauscher Wessels
- Deutsche Bank
- Goldman, Sachs & Co.
- Harley-Davidson Financial Services
- Heller Financial Inc.
- ING Barings
- The Principal Financial Group
- 1st Global, Inc.
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SOLUTION. Intrawest Corporation has built a family of millions of customers and
over 16,000 employees at resort villages around the world. With explosive growth
on the horizon, Intrawest realized it was crucial to connect this vast family
with intelligence and speed. Intrawest will bring their guest-centric philosophy
to life across all touchpoints, heightening operational efficiency and
revolutionizing the resort experience for their customers.
[INTRAWEST LOGO]
TEAMWORK. "Personally engaging our guests over the Internet and in our resorts
allows Intrawest to provide a level of service that is unmatched in our
industry. This initiative catapults us to new levels of customer service, with
the ability to precisely match the right guests with the right services."
Dr. Matthew Dunn,
Senior Vice President and
Chief Information Officer
Intrawest Corporation
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HOSPITALITY
The hospitality industry is the quintessential demand-side business, where
customer experience is the product. Business value is distilled to customer need
and how to deliver on it. Today's innovative hospitality companies know that
without a 100% customer-driven product or service, there is no chance of
survival in the Internet economy. Hospitality enterprises need infrastructure
and applications, where customer input is captured and service and product
delivery are coordinated across multiple channels. Customer intelligence is the
fuel that feeds competitive advantage. Once described as "moving at Internet
speed in the real world", Intrawest Corporation is one of the world's largest
resort developer/operators. Intrawest selected Pivotal to compound its real
world speed with a massive jump into the Internet-enabled business economy.
Intrawest is using Pivotal to develop an enterprise-wide understanding of guests
to deliver enhanced world-class marketing, sales and service.
HOSPITALITY CUSTOMERS
- Delta Hotels Limited
- Fairmont Hotels & Resorts
- Flag Choice Hotels
- Intrawest Corporation
- Marriott International
- Parc Asterix
- Plus Relocation Services, Inc.
- Uniglobe Travel
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SOLUTION. In 1902, 30 independent gypsum companies in the United States formed
to create USG Corporation. Today, annual sales top $3 billion, employees number
13,800 worldwide, and the company is a highly celebrated member of the Fortune
500. For that kind of stability and growth to continue in the new economy, USG
needed a solution that was very robust. USG chose Pivotal.
[USG LOGO]
TEAMWORK. USG has gained the ability to identify and act on market opportunities
faster and to integrate their customer and employee communications.
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MANUFACTURING
Today's innovative manufacturing companies are no longer limited to traditional
sales channels because of the complexities of their products, which often have
extensive features, options and complex pricing structures. Our demand chain
solutions enable customers to quickly and effectively manage the issues they
face to succeed in the Internet economy such as the need for mass customization,
marketing and selling to meet the increasing demand for access to complex
products over the Internet. Pivotal manufacturing customers can recreate highly
interactive sales processes online, sell sophisticated products and services
over the Internet, and meet their customers' growing demands for fast,
convenient, 24x7 service. They also establish opportunity management systems to
control raw material and product inventory, product quality, and timely service
response to ensure customer orders are correct and customer loyalty is secured.
Manufacturing Customers
- Kimberly-Clark Corporation
- Little Tykes
- Nissan Motor Co. Ltd.
- Novartis
- Novo Nordisk
- Siemens Corporation
- US Filter
- USG Corporation
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SOLUTION. Headhunter.net is an online recruiting Web site featuring over 250,000
job postings representing more than 10,000 employers. Headhunter.net chose
Pivotal's demand chain network to enhance online brand loyalty and brand
customer interaction by delivering personalized support, sophisticated customer
interaction and collaborative communication.
[HEADHUNTER.NET LOGO]
TEAMWORK. "Our goal is to use Pivotal to gain a detailed understanding of our
customer experiences and provide personalized interactions, translating into
accelerated revenue growth, market leadership and operational efficiencies."
Jay Myer
Senior Vice President
Corporate Sales and Marketing
Headhunter.net
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HIGH TECH
In the explosive high tech market, there is intense pressure to outperform the
competition to keep and grow the customer base. Change is constant and
relentless and there is increased pressure for companies to grow and retain
customer relationships. Pivotal's demand chain network solutions enable high
tech businesses to network participants, channels, devices, and processes in
their demand chain to accelerate the way their company does business to help
meet this challenge. Pivotal's solution provides high tech companies with the
tools they need to help keep their customers and prospects loyal, such as
personalized one-to-one Web marketing and eCommerce, intelligent self-service,
and easy-to-access personalized interactions. Now they can be prepared to
attract and retain a new generation of customers and decrease costs by providing
a more efficient and unique interactive style of customer service and online
buying experience.
High Tech Customers
- Agilent Technologies
- Alliance Data Systems
- Bottomline Technologies, Inc.
- CornerDrugstore.com
- E.piphany, Inc.
- GE Industrial Systems
- Headhunter.net
- Hewlett-Packard
- Intershop Communications
- Research in Motion Limited
- Trader.com
- Wind2 Software, Inc.
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SOLUTION. Dedicated to accelerating deployment of Web-based physician offices
and medical management solutions worldwide, iMcKesson, InterQual Products uses a
Pivotal solution to streamline fulfillment, accelerate process automation, and
provide real-time information to their remote sales and account management team.
With Pivotal as an integral part of their internal processes, iMcKesson
InterQual Products has increased sales by 50%.
[iMcKESSON LOGO]
TEAMWORK. "Speaking intelligently to prospects shows that we know how the
changing healthcare landscape affects them. With the information in our Pivotal
system, even a temporary employee could instantly access the entire history of
the relationship we have with a prospect. That's an incredibly valuable asset."
Chandra Lothian,
Application Analyst,
iMcKesson, InterQual Products
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HEALTHCARE
For healthcare enterprises, the speed of change is accelerating. In an
increasingly competitive market, healthcare enterprises are seeking ways to
increase efficiency and improve effectiveness. Pivotal's solution provides
personalized, interactive 24x7 customer self-service that serves customers while
offering them a network of information, and instant, selling opportunities.
Customers can receive services that intelligently address their unique
situations. Fast, Web-based collaboration between partners streamlines every
step of every process, resulting in superior customer service at a lower cost
per transaction. Customer needs can be anticipated and new information provided
as it becomes available allowing new opportunities to be acted on--fast.
Healthcare Customers
- Australian Red Cross
- CardioResponse, Inc.
- iMcKesson, Interqual Products
- Keystone Health Plan Central
- Premera Blue Cross
- NovaMed Eyecare, Inc.
- Occupational Health Clinics for Ontario Workers Inc.
- Syncor International Corporation
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SOLUTION. The Pivotal solution will enable KPMG Consulting's client service
managers to collaborate over the Internet on consulting projects, sales
opportunities and marketing initiatives, allowing users to share ideas anytime,
anywhere. By consolidating all client information, interactions, and
transactions into a single, unified system, KPMG Consulting will sharpen its
customer focus to increase revenue.
[KPMG CONSULTING LOGO]
TEAMWORK. "Our global implementation of the Pivotal solution is at the heart of
our own e-Business strategy. Pivotal will enable our employees around the world
to more effectively manage our sales, marketing, and client relationship
processes."
Ross Curtis
Executive Vice President Worldwide Sales
KPMG Consulting LLC
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CONSULTING & SERVICES
At the heart of any services enterprise is the customer. The Internet has
created incredible opportunities and challenges for servicing customers. Pivotal
solutions help consulting and service enterprises realize the depth of their
assets in customer knowledge and the ability to deliver personalized services
over the Internet. Pivotal demand chain network solutions can also be the center
of any leading services provider's infrastructure for the internetworking of
vastly distributed consulting professionals, partners, implementation partners
and knowledge providers. Our consulting and services customers excel at helping
businesses leverage the Internet and engineer the way they do business, while
putting these new Internet business and technology practices at the heart of
their own internal business strategy.
Consulting & Services Customers
- Cambridge Energy Research Associates
- Deloitte Touche Tohmatsu International
- The Dwyer Group
- Hellmuth, Obata & Kassabaum, Inc. (HOK)
- KPMG
- Mercer Management Consulting, Inc.
- The Patricia Seybold Group, Inc.
- United Business Media
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GLOBAL PERSPECTIVE. A key part of our success is our ability to have a global
perspective and consider global implications. We exhibit creativity and
innovation, and challenge the status quo to find new ways of doing things. As a
result, our people are not satisfied with average achievement and instead demand
the extraordinary results that are mandatory to compete in today's Internet
economy. This helps us maximize our customers' success and ultimately our
shareholders' value.
[PIVOTAL LOGO]
TEAMWORK. Pivotal has always been about relationships. Our solutions help
companies to build networks of people engaged in business. In order to lead in
this market we have always focused our efforts on building a team of committed
and dedicated members -- a team of over 550 staff who bring innovation and
tireless energy to our company. Together, we are speed-of-thought builders--of
customers, of technology and of lasting momentum.
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PIVOTAL PEOPLE
In the technology business, accepting change is vital to survival. And embracing
change is vital to thrive. Our financial success reflects our team's ability to
adapt to change with speed and agility, to learn new technology and to
understand changing customer demands. From the day of our inception, engaging
people who demonstrate extraordinary drive and energy has been our vision. As a
result, we have created a Pivotal culture and work ethic that reflects our
customer successes. This year, we built stronger relationships by bringing
together our global community of customers, partners and team members. By living
the philosophy of connectivity and a united focus, we have created a working
environment that generates responsiveness and innovation on a daily basis.
"Pivotal's ability to embrace the accelerating opportunities of today's Internet
economy is made possible by our people. Pivotal's staff understand the need to
change and adapt, to be flexible and always think big to deliver extraordinary
results."
Heather Claridge
Vice President, Human Resources
Pivotal Corporation
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MANAGEMENT'S DISCUSSION & ANALYSIS
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OVERVIEW
Fiscal year 2000 was an eventful year for Pivotal Corporation. Every facet of
the company grew -- our products and solutions, our employee and customer base,
and our revenues. This past year was our first as a public company. We completed
our Initial Public Offering on NASDAQ on August 5, 1999. Analysts and investors
alike have responded to us favorably and this led to our decision to list on the
Toronto Stock Exchange on August 17, 2000. We more than doubled our global
employee base during fiscal year 2000. This growth in staff meant additional
facilities were required to support our increased global presence. While we
started fiscal year 2000 with 12 offices, we ended the year with over 25 offices
around the world. An exciting addition was the new Pivotal eBusiness Center of
Excellence in Northern Ireland which services our customers and partners in
Europe, the Middle East and Africa. This growth was partly due to the three
corporate acquisitions that were completed in fiscal year 2000. As a result of
these acquisitions, we were able to expand not only our employee base but also
our global presence and to expand our demand chain network solution. Aside from
the acquisition of technology, our research and development team released a
variety of new solutions and programs. In particular, we launched Pivotal
eRelationship 2000, Pivotal eSelling 2000, Pivotal ePower 2000, Pivotal
Interaction Engine and Pivotal Intelligence Engine. We also established the
PivotalWeb .NET and PivotalHost programs. Finally, we introduced Pivotal
Anywhere,
"Pivotal's first year as a public company was a success. Pivotal accelerated
revenue growth each quarter in fiscal year 2000 with net revenue growth of 109%
for the year. We've more than doubled our global staff and increased our
presence in North America, Europe and Asia Pacific. We were extremely pleased
with our performance on all fronts during fiscal 2000."
Vincent Mifsud
Executive Vice-President & CFO
Pivotal Corporation
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MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
our first wireless solution for the demand chain. Pivotal Corporation takes
pride in its commitment to and its track record of constantly growing and
improving our demand chain network solutions. Our relationship with Microsoft
became stronger over the past year as well. We were featured at the Microsoft
Windows 2000 launch and won two Microsoft Industry Solutions Awards for
Technology Excellence. Our customer base grew to over 1,000 customers. Pivotal's
net revenues in the fourth quarter of fiscal 2000 increased 118 percent to $18.2
million compared to $8.3 million in the fourth quarter of fiscal 1999. Net
revenues for the year ended June 30, 2000 increased 109 percent to $52.9 million
compared to $25.3 million for the year ended June 30, 1999. In summary, we were
extremely pleased by our performance in our first year as a public company.
CORPORATE DESCRIPTION
The terms "Pivotal," "our company" and "we" in this report refer to Pivotal
Corporation, a British Columbia company and all of Pivotal Corporation's
wholly-owned subsidiaries including Pivotal Corporation, incorporated in
Washington State, Pivotal Corporation Limited, incorporated in the United
Kingdom, Pivotal Corporation France S.A., incorporated in France, Exactium Ltd.,
incorporated in Israel, Exactium Inc., incorporated in Delaware State, Pivotal
Technologies Corporation Limited, incorporated in the Republic of Ireland,
Pivotal Corporation (N.I.) Limited, incorporated in Northern Ireland, Pivotal
GmbH, incorporated in Germany, Digital Conversations Inc., incorporated in
British Columbia, and Pivotal Corporation Australia Pty. Ltd., incorporated in
Australia.
PERFORMANCE GRAPH
The following graph shows a comparison of cumulative total shareholder return
for Pivotal, the S&P 500 Index and the Application Software Index (as reported
by Microsoft MoneyCentral Investor). The graph shows the value of $100 invested
on August 5, 1999 in our common stock, the S&P 500 Index and the Application
Software Index.
Comparison of Cumulative Total Return Among Pivotal Corporation, S&P 500 Index
and the Application Software Index
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
Aug. 5, 1999 Aug. 4, 2000
------------ ------------
<S> <C> <C>
PVTL Index $ 100.00 $ 275.52
S&P 500 Index $ 100.00 $ 129.15
Application Software Index $ 100.00 $ 111.36
</TABLE>
(as reported by Microsoft MoneyCentral Investor)
30
<PAGE> 34
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
RECENT ACQUISITIONS
During the year ended June 30, 2000, we expanded our portfolio of solutions and
distribution capabilities by completing the acquisitions described below. These
acquisitions were accounted for using the purchase method of accounting.
Accordingly, the results of operations of each acquired company are included in
our consolidated statement of income since the acquisition date and the related
assets acquired and liabilities assumed were recorded based upon their
respective fair values at the date of acquisition.
TRANSITIF S.A.
Effective December 3, 1999, Pivotal acquired Transitif S.A. (now Pivotal
Corporation France S.A.), a French corporation that distributes demand chain
network solutions. Transitif deploys Pivotal solutions through its network of
systems integrators throughout France. We paid cash of $1.3 million including
acquisition-related expenditures of $120,000. Additional consideration is
payable if the net after-tax earnings of Transitif and license revenues received
by Transitif from the future sale of licenses for Pivotal solutions exceed
certain targets to June 2002. No payments related to additional consideration
were required to be made for the period ended June 30, 2000.
EXACTIUM LTD.
On June 2, 2000, Pivotal acquired Exactium Ltd., an Israeli company based in
Atlanta, Georgia that provides electronic selling solutions for Internet and
Microsoft standards. We paid a total purchase price of $45.1 million.
Significant components of the purchase price include the issuance of common
shares and options to purchase common shares with a fair value of $32 million
and cash of $13.1 million from working capital (including a shareholder loan
repayment of $5.4 million and acquisition related expenditures of $775,000). The
amount allocated to in-process research and development of $2.8 million was
expensed on the acquisition date. Our valuation employed the SEC's guidelines
regarding acceptable methodologies for valuing in-process research and
development.
SIMBA TECHNOLOGIES INC.
On June 26, 2000, Pivotal acquired Simba Technologies Inc. (now Digital
Conversations Inc.), a Vancouver, British Columbia company that provides digital
solutions to aggregate and analyze all Internet customer interactions such as
eMail messages, Web chat sessions and Web site surfing into an integrated
conversation for Microsoft standards. We paid a total purchase price of $17.6
million consisting of common shares and options to purchase common shares with a
fair value of $17.1 million and acquisition-related expenditures of $455,000.
The purchased in-process research and development of $1.9 million was expensed
at the time of the acquisition.
SOURCE OF REVENUE AND REVENUE RECOGNITION POLICY
We derive our revenues from the sale of software and services. We recognize
product license revenues on delivery of our solutions if:
- there is persuasive evidence of an arrangement;
- the fee is fixed or determinable;
- there is vendor-specific objective evidence supporting allocating the total
fee among all elements of a multiple-element arrangement; and
- the collection of the license fee is probable.
Multiple-element arrangements could consist of software licenses, upgrades,
enhancements, maintenance and consulting services. Under some license
arrangements, with either a fixed or indefinite term, our customers agree to pay
for the license with periodic payments extending beyond one year. We recognize
revenues from these arrangements as the periodic payments become due, provided
all other conditions for revenue recognition are met. We enter into reseller and
sub-licensing arrangements that provide a fee payable to us based on a
percentage of list price. We recognize revenue only on the fees payable to us,
net of any amount payable to the reseller by the customer. We typically sell
first year maintenance with the related software license.
31
<PAGE> 35
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
Revenue related to maintenance is recognized over the term of the maintenance
contract, typically one year. Revenues relating to technical support and
maintenance have increased due to our increasing customer base and the renewal
of technical support and maintenance contracts upon expiration of first year
maintenance arrangements. We recognize revenues from consulting, implementation
services, and education as these services are performed. We derive revenue from
these services primarily on a time-and-materials basis under a separate service
arrangement with the customer. More than 90% of the implementation services
provided to our customers in connection with installations of our solutions are
provided by third-party consulting and implementation service providers. These
third-party service providers contract directly with the customer. Our cost of
license revenues primarily consists of costs relating to the packaging and
distribution of solutions and related documentation and license fees due to
third parties for integrated technology. Our cost of services revenues includes
salaries and related expenses for our implementation, consulting support and
education organizations and an allocation of facilities, communications and
depreciation expenses. Our operating expenses are classified into three general
categories: sales and marketing, research and development and general and
administrative. We classify all charges to these operating expense categories
based on the nature of the expenditures. We allocate the costs for overhead and
facilities to each of the functional areas based on their headcount. Software
development costs incurred prior to the establishment of technological
feasibility are included in research and development costs as incurred. Since
license revenues from our solutions are not recognized until after technological
feasibility has been established, software development costs are not generally
expensed in the same period in which license revenues for the developed
solutions are recognized.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data for the three years
ended June 30, 2000 expressed as a percentage of total revenues:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Licenses 71% 74% 80%
Services and maintenance 29% 26% 20%
-------------------------------------------------------------------------------------------------------
Total revenues 100% 100% 100%
-------------------------------------------------------------------------------------------------------
COST OF REVENUES:
Licenses 4% 2% 3%
Services and maintenance 15% 12% 9%
-------------------------------------------------------------------------------------------------------
Total cost of revenues 19% 14% 12%
-------------------------------------------------------------------------------------------------------
Gross profit 81% 86% 88%
-------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 59% 66% 65%
Research and development 17% 20% 13%
General and administrative 8% 10% 11%
Amortization of goodwill 3% -- --
In-process research and
development and other charges 13% -- --
-------------------------------------------------------------------------------------------------------
Total operating expenses 100% 96% 89%
-------------------------------------------------------------------------------------------------------
Loss from operations (19%) (10%) (1%)
Interest and other income (loss) 4% -- 1%
-------------------------------------------------------------------------------------------------------
Loss before income taxes (15%) (10%) --
Income taxes 1% 1% --
-------------------------------------------------------------------------------------------------------
Net loss (16%) (11%) --
=======================================================================================================
</TABLE>
32
<PAGE> 36
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
YEARS ENDED JUNE 30, 2000 AND 1999
REVENUES
Total revenues increased 109% to $52.9 million for the year ended June 30, 2000
from $25.3 million for the year ended June 30, 1999.
LICENSES
Revenues from licenses increased 99% to $37.4 million for the year ended June
30, 2000 from $18.8 million for the year ended June 30, 1999. Our revenues from
licenses increased due to sales to new customers and follow-on sales to existing
customers. These increases were attributable to increased market acceptance of
our solutions, increased sales as a result of our expansion of our direct and
indirect channels of distribution and our marketing organization. We believe
that the availability of our Pivotal eRelationship 2000 product suite and
Pivotal eSelling 2000 product has contributed to the increase in revenue from
licenses, as this has extended the overall functionality of our solutions by
permitting organizations to collaborate with customers and partners over the
Internet. Revenues from licenses represented 71% and 74% of total revenues for
the years ended June 30, 2000 and 1999, respectively. No single customer
accounted for 10% or more of our revenues for the years ended June 30, 2000 and
1999. North American license revenues accounted for 72% and 80% of total license
revenues in the years ended June 30, 2000 and 1999, respectively.
SERVICES AND MAINTENANCE
Revenues from services and maintenance increased 139% to $15.6 million for the
year ended June 30, 2000 from $6.5 million for the year ended June 30, 1999.
This resulted from an increase of $4.6 million in revenues from technical
support and maintenance contracts, which entitles the customer to new versions
of the product and to technical support and maintenance services and an increase
of $4.5 million in revenues from implementation, education and consulting
service engagements. Our revenues from services and maintenance represented 29%
and 26% of total revenues for the years ended June 30, 2000 and 1999,
respectively. We believe that revenues from services and maintenance will
continue to increase as a percentage of total revenues, due to an increase in
the number of technical support and maintenance contracts we expect to obtain as
our customer base grows. We intend to expand consulting services targeted at
helping customers understand more about matters such as effective one-to-one
marketing and using the Internet to increase revenues and improve customer
service. We plan to continue relying on third parties to provide a majority of
implementation services to our customers, rather than providing those services
directly.
COST OF REVENUES
Total cost of revenues increased 185% to $10.3 million for the year ended June
30, 2000 from $3.6 million for the year ended June 30, 1999.
LICENSES
Cost of revenues from licenses consists of costs relating to the packaging and
distribution of solutions, related documentation and fees paid for incorporation
of third-party solutions into our solutions. Cost of revenues from licenses
increased to $2.1 million for the year ended June 30, 2000 from $536,000 for the
year ended June 30, 1999. The increase is due primarily to increased costs for
third-party technology integrated with our solutions. Cost of revenues from
licenses as a percentage of revenues from licenses was 6% and 3% for the years
ended June 30, 2000 and 1999, respectively. We expect that the 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
solutions.
SERVICES AND MAINTENANCE
Cost of revenues from services and maintenance consists of personnel and other
expenses relating to the cost of providing maintenance and customer
33
<PAGE> 37
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
support, education and consulting 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 and consulting services. Support and maintenance services
involve the delivery of software upgrades, which the customers download and
install themselves and customer support. Education and consulting services
generally require more involvement by our employees, resulting in higher
compensation, travel and similar expenses. Cost of revenues from services and
maintenance increased 165% to $8.1 million for the year ended June 30, 2000 from
$3.1 million for the year ended June 30, 1999. The increase in dollar amount
resulted from the hiring of consulting, customer support and educating personnel
to support our growing customer base. Cost of revenues from services and
maintenance as a percentage of revenues from services and maintenance was 52%
and 47% for the years ended June 30, 2000 and 1999, respectively. We expect that
cost of revenues from services and maintenance will 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 expand our consulting services. This will occur
because we will be incurring expenses to hire and train employees before we will
be earning revenue for their services and because we may not generate enough
demand for our services to use all the capacity we add.
OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, commissions, bonuses
and benefits earned by sales and marketing personnel, direct expenditures such
as travel, communication and occupancy for direct sales offices and marketing
expenditures related to direct mail, online marketing, trade shows, advertising
and promotion. Sales and marketing expenses increased 85% to $31.2 million for
the year ended June 30, 2000 from $16.8 million for the year ended June 30,
1999. The increase in dollar amounts reflects the expansion of our international
sales capability which required an increase in the number of sales and marketing
professionals. Sales and marketing expenses decreased as a percentage of total
revenues to 59% in the year ended June 30, 2000 from 66% in the year ended June
30, 1999. This decrease of sales and marketing expenses as a percentage of total
revenues resulted from the improved productivity of our sales and marketing
personnel and programs. We expect that sales and marketing expenses will
continue to increase in future periods as we continue to expand our North
American and international sales and marketing efforts to expand our market
position and increase sales of our solutions.
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
80% to $8.9 million for the year ended June 30, 2000 from $5.0 million for the
year ended June 30, 1999. The increase was due to the increase in the number of
research and development employees. Research and development expenses were 17%
and 20% of total revenues for the years ended June 30, 2000 and 1999,
respectively. This decrease in the percentage of research and development
expenditures compared to total revenues resulted from the higher growth rate of
revenues in the year ended June 30, 2000 compared to the growth rate of research
and development expenditures. 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
34
<PAGE> 38
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
include legal and other professional fees. General and administrative expenses
increased 70% to $4.2 million for the year ended June 30, 2000 from $2.5 million
for the year ended June 30, 1999. General and administrative expenses were 8%
and 10% of total revenues, respectively, for the same periods. The increase in
general and administrative expenses was due to hiring additional personnel and
the implementation of internal financial and administrative systems. 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.
IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER CHARGES
During the year ended June 30, 2000, we recorded in-process research and
development charges of $4.7 million related to the acquisitions of Exactium and
Simba. These amounts were expensed as the underlying projects had not reached
technical feasibility, had no alternative future uses and successful development
was uncertain. We also recorded a write-down of $2.3 million of other Pivotal
assets which were made redundant as a result of the acquisitions of Exactium and
Simba.
EXACTIUM LTD.
On June 2, 2000, Pivotal completed the purchase of Exactium and recorded a
charge to income of $2.8 million, or $0.15 per share, for in-process research
and development. Purchased in-process research and development was related to
the completion of Exactium's electronic selling technology and its integration
into Pivotal's solutions. At the time of acquisition, a prototype of Exactium's
product existed and was being used in limited trials. This prototype was not
stable or sufficiently developed to be scaleable on an enterprise-wide basis. We
estimated that Exactium's product was approximately 80% complete as of the
acquisition date. There was a considerable amount of uncertainty related to
increasing the product's scalability for deployment on an enterprise-wide basis,
improving the stability of the application and identifying and fixing bugs. In
the opinion of management, the acquired in-process research and development had
not yet reached technological feasibility and had no alternative future uses.
Accordingly, we recorded a charge of $2.8 million in the fourth quarter of
fiscal year 2000 related to the acquired in-process research and development.
Our valuation of in-process research and development was based upon the
forecasted operating cash flows from the technology acquired, giving effect to
the stage of completion at the acquisition date. These forecasted cash flows
were then discounted at a rate commensurate with the risk involved in completing
the acquired in-process technology. The forecasted cash flows assumed inclusion
of the product developed from acquired technology into the existing Pivotal
product suite. The purchased in-process research and development expense related
to completion of Exactium's eSelling 2000 product. This product was completed in
late June 2000. We estimated that revenues related to the sale of solutions
incorporating Exactium's technology would commence in the year ending June 30,
2001 and would increase thereafter. Revenue increases were based upon the
historical growth rate of software sales for the demand chain network market.
The estimated operating costs as a percentage of estimated revenue were based
upon Pivotal's normal operating margin. Operating cash flows were reduced by an
expected effective tax rate of 40%. Net cash flows were discounted to their
present value at the acquisition date using an appropriate after-tax
risk-adjusted discount rate reflecting the risk of unproven but partially
developed software products.
SIMBA TECHNOLOGIES INC.
On June 26, 2000, Pivotal completed its purchase of Simba. We recorded a charge
to income of $1.9 million for in-process research and development or $0.10 per
share. At the time of the acquisition, Simba did not have a first-generation
product. There were a considerable number of uncertainties as to completion of
the product. In the opinion of management, the acquired in-process research and
development had not yet reached technological feasibility and had no alternative
future uses. Accordingly, we recorded a charge of $1.9 million in the fourth
quarter of fiscal 2000 related to the acquired in-process research and
development. Our valuation of the acquired research and
35
<PAGE> 39
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
development was based upon the present value of forecasted operating cash flows
from the technology acquired, giving effect to the stage of completion at the
acquisition date. These forecasted cash flows were then discounted at a rate
commensurate with the risk involved in completing the acquired technology. The
forecasted cash flows assumed inclusion of the product developed from acquired
technology into the existing Pivotal product suite. Our valuation of acquired
research and development was prepared using the income approach and contemplated
that sales of solutions incorporating Simba's technology would commence in late
2000 and increase thereafter. Revenue increases were based upon the historical
growth rate of software sales for the electronic marketing market and for
Pivotal. Operating costs as a percentage of revenue were estimated based upon
our normal operating margin. Operating cash flows were reduced by an expected
effective tax rate of 40%. Net cash flows were discounted to their present value
at the acquisition date using an appropriate after-tax risk-adjusted discount
rate reflecting the risk of unproven but partially developed solutions. Failure
to achieve the expected levels of revenues and net income from the Exactium and
Simba products will negatively impact the return on investment expected at the
time the acquisitions were completed and may potentially result in impairment of
other assets related to the acquisitions.
AMORTIZATION OF GOODWILL
Amortization of goodwill was $1.4 million in the year ended June 30, 2000
related to goodwill arising from the acquisitions of Transitif and Exactium.
There was no amortization of goodwill in the year ended June 30, 1999. We expect
amortization of goodwill to increase in future periods due to the amortization
of goodwill related to the acquisition of Simba and as a result of a full year's
amortization being taken on the goodwill arising from the acquisitions of
Transitif and Exactium. In addition, we anticipate acquiring other companies or
assets in the future which could result in significant goodwill amortization
charges and this could materially impact our operating results.
SHARE-BASED COMPENSATION
We recorded deferred compensation expenses of $473,000 during the year ended
June 30, 1999 in connection with grants of employee share purchase options with
exercise prices lower than the deemed fair market value of our common shares. We
are amortizing this amount over the four-year period in which the options vest.
We will allocate the expense among operating expense categories based on the
primary activity of the employee that holds the option. We recognized $223,000
and $57,000 in compensation expense in the years ended June 30, 2000 and 1999,
respectively. We currently expect to recognize $113,000, $58,000 and $22,000 in
the years ending June 30, 2001, 2002 and 2003, respectively.
INTEREST AND OTHER INCOME (LOSS)
Interest and other income (loss) consist of earnings on cash, cash equivalents
and short-term investments, net of interest expense, foreign exchange gains and
losses and gains and losses on sale of property and equipment. Interest and
other income (loss) increased to income of $2.2 million for the year ended June
30, 2000 from a loss of $24,000 for the year ended June 30, 1999. These
increases are primarily due to interest earned from cash, cash equivalents and
short-term investments generated by our initial public offering. Interest and
other income for the year ended June 30, 2000 included foreign exchange losses
of $168,000 compared to losses of $191,000 for the year ended June 30, 1999. The
other components of interest and other income were not material for the periods
presented.
INCOME TAXES
Income taxes increased to $557,000 for the year ended June 30, 2000 from
$243,000 for the year ended June 30, 1999. These taxes related to the United
States and the United Kingdom. As a result of net operating losses and the
availability of loss carry forwards in Canada, we have not incurred significant
Canadian income taxes.
36
<PAGE> 40
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
YEARS ENDED JUNE 30, 1999 AND 1998
REVENUES
Total revenues increased 78% to $25.3 million for the year ended June 30, 1999
from $14.2 million for the year ended June 30, 1998.
LICENSES
Revenues from licenses increased 66% to $18.8 million for the year ended June
30, 1999 from $11.3 million for the year ended June 30, 1998. Increased sales of
licenses for Pivotal Relationship and related solutions contributed $6.9 million
of this increase and sales of Pivotal eRelationship solutions contributed
approximately $600,000. Revenues from licenses decreased to 74% from 80% as a
percentage of total revenues for the years ended June 30, 1999 and 1998,
respectively. No single customer accounted for 10% or more of our revenues for
the years ended June 30, 1999 and 1998. North American license revenues
accounted for 80% and 90% of total license revenues in the years ended June 30,
1999 and 1998, respectively.
SERVICES AND MAINTENANCE
Revenues from services and maintenance increased 125% to $6.5 million for the
year ended June 30, 1999 from $2.9 million for the year ended June 30, 1998.
This resulted from an increase of $2.8 million in revenues from technical
support and maintenance contracts, which entitle the customer to new versions of
the product and to technical support and maintenance services, and an increase
of $800,000 in revenues from implementation, education and consulting service
engagements. Our revenues from services and maintenance represented 26% and 20%
of total revenues for the years ended June 30, 1999 and 1998, respectively.
COST OF REVENUES
Total cost of revenues increased 115% to $3.6 million for the year ended June
30, 1999 from $1.7 million for the year ended June 30, 1998.
LICENSES
Cost of revenues from licenses increased to $536,000 for the year ended June 30,
1999 from $401,000 for the year ended June 30, 1998. Cost of revenues from
licenses as a percentage of revenues from licenses was 3% and 4% for the years
ended June 30, 1999 and 1998, respectively.
SERVICES AND MAINTENANCE
Cost of revenues from services and maintenance increased 140% to $3.1 million
for the year ended June 30, 1999 from $1.3 million for the year ended June 30,
1998. The increase in dollar amount resulted from the hiring of consulting,
customer support and educating personnel to support our growing customer base.
Cost of revenues from services and maintenance as a percentage of revenues from
services and maintenance was 47% and 44% for the years ended June 30, 1999 and
1998, respectively.
OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing expenses increased 82% to $16.8 million for the year ended
June 30, 1999 from $9.2 million for the year ended June 30, 1998. Sales and
marketing expenses increased as a percentage of total revenues to 66% for the
year ended June 30, 1999 from 65% for the year ended June 30, 1998. This
increase resulted primarily from expanding our North America and international
sales and marketing organizations.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 160% to $5.0 million for the year
ended June 30, 1999 from $1.9 million for the year ended June 30, 1998. The
increases were due to increases in the number of research and development
employees. Research and development expenses increased to 20% from 13% as a
percentage of total revenues for the years ended June 30, 1999 and 1998,
respectively.
37
<PAGE> 41
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 63% to $2.5 million for the year
ended June 30, 1999 from $1.5 million for the year ended June 30, 1998. General
and administrative expenses declined to 10% from 11% as a percentage of total
revenues for the same respective periods.
INTEREST AND OTHER INCOME (LOSS)
Interest and other income (loss) declined to a loss of $24,000 for the year
ended June 30, 1999 from income of $136,000 for the year ended June 30, 1998.
This decline occurred because our interest income was offset by $191,000 in
foreign exchange losses and a $52,000 loss on disposal of property and
equipment. We have not had significant interest expense, as we have not borrowed
any funds.
INCOME TAXES
Income taxes increased to $243,000 for the year ended June 30, 1999 from $10,000
for the year ended June 30, 1998. As a result of net operating losses and the
availability of loss carry forwards in Canada, we have not incurred significant
Canadian income taxes.
QUARTERLY RESULTS OF OPERATIONS
The following tables present our unaudited quarterly results of operations both
in absolute dollars and on percentage of revenue basis for each of our last
eight quarters. This data has been derived from unaudited consolidated financial
statements that have been prepared on the same basis as the annual audited
consolidated financial statements and, in our opinion, include all normal
recurring adjustments necessary for the fair presentation of such information.
These unaudited quarterly results should be read in conjunction with our
consolidated financial statements.
38
<PAGE> 42
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1999 1999 1999 1999 2000 2000
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Licenses $ 3,276 $ 4,323 $ 5,006 $ 6,214 $ 6,097 $ 8,026 $ 10,125 $ 13,136
Services and maintenance 1,292 1,390 1,717 2,109 2,578 3,516 4,412 5,049
---------------------------------------------------------------------------------------------------------------------------
Total revenues 4,568 5,713 6,723 8,323 8,675 11,542 14,537 18,185
---------------------------------------------------------------------------------------------------------------------------
COST OF REVENUES:
Licenses 73 97 268 98 284 410 635 812
Services and maintenance 562 589 822 1,105 1,368 1,813 2,295 2,671
---------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 635 686 1,090 1,203 1,652 2,223 2,930 3,483
---------------------------------------------------------------------------------------------------------------------------
Gross profit 3,933 5,027 5,633 7,120 7,023 9,319 11,607 14,702
---------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 3,488 3,933 4,404 5,005 5,715 6,917 8,214 10,319
Research and development 808 1,166 1,184 1,800 1,569 2,125 2,409 2,803
General and administrative 543 512 566 845 707 968 1,197 1,318
Amortization of goodwill -- -- -- -- -- 32 97 1,280
In-process research and
development and other charges -- -- -- -- -- -- -- 6,979
---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,839 5,611 6,154 7,650 7,991 10,042 11,917 22,699
---------------------------------------------------------------------------------------------------------------------------
Loss from operations (906) (584) (521) (530) (968) (723) (310) (7,997)
Interest and other income (loss) 107 1 (63) (69) 357 685 673 478
---------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (799) (583) (584) (599) (611) (38) 363 (7,519)
Income taxes 60 60 63 60 75 126 139 217
---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (859) $ (643) $ (647) $ (659) $ (686) $ (164) $ 224 $ (7,736)
===========================================================================================================================
</TABLE>
39
<PAGE> 43
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
<TABLE>
<CAPTION>
Three months ended
------------------------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30,
1998 1998 1999 1999 1999 1999 2000 2000
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Licenses 72% 76% 74% 75% 70% 70% 70% 72%
Services and maintenance 28% 24% 26% 25% 30% 30% 30% 28%
------------------------------------------------------------------------------------------------------------------------------
Total revenues 100% 100% 100% 100% 100% 100% 100% 100%
------------------------------------------------------------------------------------------------------------------------------
COST OF REVENUES:
Licenses 2% 2% 4% 1% 3% 3% 4% 4%
Services and maintenance 12% 10% 12% 13% 16% 16% 16% 15%
------------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 14% 12% 16% 14% 19% 19% 20% 19%
------------------------------------------------------------------------------------------------------------------------------
Gross profit 86% 88% 84% 86% 81% 81% 80% 81%
------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 76% 69% 66% 60% 66% 60% 56% 57%
Research and development 18% 20% 17% 22% 18% 19% 17% 15%
General and administrative 12% 9% 8% 10% 8% 8% 8% 7%
Amortization of goodwill -- -- -- -- -- -- 1% 7%
In-process research and
development and other charges -- -- -- -- -- -- -- 39%
------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 106% 98% 91% 92% 92% 87% 82% 125%
------------------------------------------------------------------------------------------------------------------------------
Loss from operations (20%) (10%) (7%) (6%) (11%) (6%) (2%) (44%)
Interest and other income (loss) 2% -- (1%) (1%) 4% 6% 5% 3%
------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (18%) (10%) (8%) (7%) (7%) -- 3% (41%)
Income taxes 1% 1% 1% 1% 1% 1% 1% 1%
------------------------------------------------------------------------------------------------------------------------------
Net income (loss) (19%) (11%) (9%) (8%) (8%) (1%) 2% (42%)
==============================================================================================================================
</TABLE>
40
<PAGE> 44
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
We have typically experienced an increase in revenues during our fourth fiscal
quarter ended June 30 which we believe is primarily related to sales
compensation policies and annual objectives. In addition, a pattern of reduced
buying by European customers during July and August has resulted in lower
European license revenues in the quarter ended September 30 and our license
revenues for the quarters ended September 30 have been lower than license
revenues for the previous quarter ended June 30. We incurred operating losses as
we increased the level of investment in all facets of our business. Our
quarterly operating results have fluctuated significantly in the past and will
continue to fluctuate in the future as a result of a number of factors, many of
which are outside of our control. As a result of our limited operating history
and recent acquisitions, we cannot forecast operating expenses based on
historical results. Accordingly, we base our anticipated level of expense in
part on future revenue projections. Most of our expenses are fixed in the
short-term and we may not be able to quickly reduce spending if revenues are
lower than we have projected. Our ability to forecast our quarterly revenues
accurately is limited given our limited operating history, length of the sales
cycle of our solutions and other uncertainties in our business. If revenues in a
particular quarter do not meet projections, our net losses in a given quarter
would be greater than expected. As a result, we believe that our
quarter-to-quarter comparisons of our operating results are not necessarily
meaningful. Investors should not rely on the results of one quarter as an
indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had $4.7 million in cash and cash equivalents, $30.8
million in short-term investments and $28.3 million in working capital. During
the quarter ended September 30, 1999, we successfully concluded our initial
public offering, generating $43.1 million cash proceeds net of expenses and
brokers' commissions. Our cash, cash equivalents and short-term investments
increased to a total of $35.5 million as of June 30, 2000 from $9.3 million as
of June 30, 1999. Our working capital increased to $28.3 million at June 30,
2000 from $7.3 million at June 30, 1999. We generated cash from operating
activities of $4.9 million and $2.5 million for the years ended June 30, 2000
and 1999, respectively, as a result of obtaining improved payment terms from our
principal suppliers and up front payments for maintenance support from our
customers. Cash used in operating activities in the year ended June 30, 1998 was
$1.1 million. Net cash used in investing activities was $54.3 million, $2.4
million and $1.6 million for the years ended June 30, 2000, 1999, 1998,
respectively. Capital expenditures totaled $6.1 million, $2.4 million and $1.7
million for the years ended June 30, 2000, 1999 and 1998, respectively. These
capital expenditures related primarily to the acquisition of computer software
and equipment as well as furniture and fixtures as a result of our growing
employee base. During the year ended June 30, 2000, we used $14.5 million (net
of cash acquired) on the acquisitions of Transitif, Exactium and Simba. During
the year ended June 30, 2000, we purchased short-term investments of $30.8
million and other assets of $2.9 million. Net cash provided by financing
activities was $44.8 million, $8.0 million and $74,000 for the years ended June
30, 2000, 1999 and 1998, respectively. Net cash provided by financing activities
resulted from sales of equity securities. For the year ended June 30, 2000, we
raised $43.1 million from our initial public offering and we received $1.7
million on exercise of stock options. Our principal source of liquidity at June
30, 2000 was our cash, cash equivalents and short-term investments of $35.5
million. We also have credit facilities with a Canadian chartered bank, which
include an operating facility of US$10.0 million bearing interest at the bank's
prime rate and a term loan facility of US$5.0 million bearing interest at the
bank's prime rate to be used for various capital expenditures. The credit
facilities are secured by all of our assets, including our equipment and
accounts receivable and the shares of our subsidiaries. At June 30, 2000, no
amounts were outstanding under the operating facility or the term loan facility.
We believe that the total amount of cash, cash equivalents and short-term
investments, along with the credit facilities, will be sufficient to meet our
anticipated cash needs for working capital or other purposes at least through
the year ending June 30, 2001. Thereafter, depending on the development of our
business, we may need to raise additional cash for working capital or other
expenses. We also may encounter opportunities for acquisitions or other
41
<PAGE> 45
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
business initiatives that require significant cash commitments, or unanticipated
problems or expenses that could result in a requirement for additional cash
before that time. If we need to raise additional cash, financing may not be
available to us on favorable terms or at all.
FOREIGN EXCHANGE AND HEDGING ACTIVITIES
We are exposed to foreign currency fluctuations through our operations in
Canada. Substantially all of our revenues and corresponding receivables are in
United States dollars. However, a majority of our research and development
expenses, customer support costs and administrative expenses are in Canadian
dollars. As part of our hedging policy implemented during 1999, we identify our
future Canadian currency requirements related to payroll costs, capital
expenditures and operating lease commitments, and purchase forward exchange
contracts to cover our currency needs at the beginning of an operational period,
generally one quarter. We do not enter into forward exchange contracts or any
derivative financial instruments for trading purposes. Prior to the year ended
June 30, 1999, we did not engage in hedging transactions and our gains and
losses on foreign currency transactions were not significant. Under our current
hedging policy, we identify our forward contracts related to operating lease
commitments and commitments for capital expenditures as hedges of firm,
identifiable Canadian currency commitments. We recognize the gains and losses on
these contracts when the related lease commitment is paid or the capital
expenditure is made. We recognize gains and losses on other forward contracts in
earnings in the current period. As of June 30, 2000, we had outstanding currency
forward exchange contracts of $5.5 million which will be held to maturity and
relate to operating expenses. As of June 30, 1999, we had no outstanding
currency forward exchange contracts because forward contracts generally mature
at the end of a quarterly period. During the quarter ended June 30, 2000 and
1999, we recorded a foreign exchange loss of $168,000 and $122,000,
respectively, from the unhedged portion of our foreign currency exposure as the
Canadian dollar strengthened substantially during the quarter. While we expect
to continue to use our current method of hedging our foreign currency risk in
the future, we may change our hedging methodology. If our currency requirements
differ materially from our hedged position during periods of currency
volatility, or if we do not continue to hedge our Canadian currency commitments,
we could experience unanticipated currency gains or losses. We assume the risk
relating to the creditworthiness of our counterparties when we engage in hedging
transactions. We mitigate this risk by dealing only with substantial commercial
banks we believe to be creditworthy. We do not believe that the credit risk
associated with these transactions is material.
AUDIT COMMITTEE
We have established an Audit Committee of the Board of Directors, the charter of
which is to oversee the activities of management and Pivotal's external auditors
as they relate to the financial reporting process. In the year ended June 30,
2000, the Audit Committee was comprised of Robin Louis, Doug Mackenzie and Roger
Siboni. Roger Siboni resigned in April 2000. In particular, the Audit
Committee's role includes ensuring that management properly develops and adheres
to a sound system of internal controls, and that our external auditors, through
their own review, assess the effectiveness of those controls and management's
adherence to them. In fulfilling their responsibilities, the Audit Committee
conducted regular, quarterly meetings with Pivotal's external auditors. In these
meetings, the Audit Committee discussed with management and our external
auditors the quality and acceptability of accounting principles and significant
transactions or issues encountered during the period. In addition, the Audit
Committee met with Pivotal's external auditors independent of management to
provide for independent and confidential assessment of management and the
internal controls as they relate to the quality and reliability of our financial
statements. Subsequent to year end, we adopted an Audit Committee Charter as
required by the Nasdaq Stock Exchange, Inc. ("Nasdaq") in compliance with the
Nasdaq's Marketplace Rules. Pivotal is committed to supporting this process and
the Audit Committee in fulfilling their role of ensuring the integrity of our
internal controls and financial reporting.
42
<PAGE> 46
MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITIONS.
YEAR 2000 ISSUES
We believe that the current versions of our internally developed solutions, as
well as our management and information systems, are Year 2000 compliant. When
the century changed, we experienced no disruption of our business operations and
no product failures as a result of Year 2000 compliance issues or otherwise. The
costs we incurred in connection with remediating our systems during 1999 were
immaterial. At this time, we are not aware of any material defects resulting
from Year 2000 issues, either with our solutions, our internal systems, or the
solutions and services of third parties on which we rely. Nevertheless, some
Year 2000 problems may not appear until after January 1, 2000. As a result, we
may still face claims for undiscovered Year 2000 errors in our own solutions or
for Year 2000 issues arising from third-party solutions that we integrate into
our solutions or with which our solutions and systems exchange data. In
addition, if our suppliers or distributors encounter Year 2000 problems, our
ability to deliver our solutions and services could be disrupted.
FORWARD LOOKING STATEMENTS
Statements in this annual report about our future results, levels of activity,
performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in our forward-looking statements.
These factors include, among others, those listed under "Risk Factors" or
described elsewhere in this annual report. In some cases, you can identify
forward-looking statements by our use of words such as "may," "will," "should,"
"could," "expects," "plans," "intends," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative or other variations of
these words, or other comparable words or phrases. Although we believe that the
expectations reflected in our forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or achievements
or other future events. Moreover, neither we nor anyone else assumes
responsibility for the accuracy and completeness of forward-looking statements.
We are under no duty to update any of our forward-looking statements after the
date of this report. You should not place undue reliance on forward-looking
statements.
RISK FACTORS
- Factors relating to our business and the market for demand chain network
solutions make our future operating results uncertain and may cause them to
fluctuate from period to period.
- 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.
- Our limited operating history makes it difficult to predict 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.
- The market for our solutions is highly competitive.
- We depend upon Microsoft and the continued adoption and performance of the
Microsoft Windows 2000 and Microsoft Backoffice platforms.
- The market for our solutions is new and highly uncertain and our plan to
focus on Internet-based applications and to integrate electronic commerce
features adds to this uncertainty.
- The success of our solutions will depend upon the continued use and
expansion of the Internet.
- We depend on third-party wireless service providers for the successful
implementation of our Pivotal Anywhere solution.
- Our future revenue growth could be impaired if we are unable to expand our
direct sales and support infrastructure.
- We rely on our Pivotal Alliance network of independent companies to sell,
install and service our solutions and to provide specialized software for
use with them and our PivotalHost Program relies on third-party application
service providers.
- The loss of our co-founders or other key personnel or our failure to
attract and retain additional personnel could adversely affect our
business.
- We face risks from the expansion of our international operations.
- Political unrest may adversely affect the operation of our European
customer support center located in Northern Ireland.
- Fluctuations in currency exchange rates and risks associated with our
hedging policies may affect our operating results.
- 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.
- The integration of Transitif, Exactium, Simba and any future acquisitions
may be difficult and disruptive.
- Our sales cycle is long and 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.
- We rely on software licensed to us by third parties for features we include
in our solutions.
- We must continue to develop enhancements to our solutions and new
applications and features that respond to the evolving needs of our
customers, rapid technological change and advances introduced by our
competitors.
- We may be unable to adequately protect our proprietary rights.
- Claims by other companies that our solutions infringe their copyrights or
patents could adversely affect our ability to sell our solutions and
increase our costs.
- Our software solutions may suffer from defects or errors.
- If our customers' systems' security is breached, our business and
reputation could suffer.
- Changes in accounting standards and in the way we charge for licenses could
affect our future operating results.
- Our share price may continue to be volatile.
- Certain shareholders may be able to exercise control over matters requiring
shareholder approval.
43
<PAGE> 47
2000
Financial
Statements
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Pivotal Corporation
We have audited the accompanying consolidated balance sheets of Pivotal
Corporation as of June 30, 2000 and 1999 and the related consolidated statements
of operations, shareholders' equity (deficit) and cash flows for each of the
three years in the period ended June 30, 2000. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with United States generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pivotal
Corporation as of June 30, 2000 and 1999 and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 2000 in
conformity with United States generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Vancouver, Canada
July 13, 2000
45
<PAGE> 49
PIVOTAL CORPORATION
CONSOLIDATED BALANCE SHEETS (Expressed in United States dollars; all amounts in
thousands except par value data)
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------------------------------------------------------------
2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,734 $ 9,338
Short term investments 30,788 --
Accounts receivable 16,764 8,304
Prepaid expenses 1,859 1,029
---------------------------------------------------------------------------------------------------------------------------
Total current assets 54,145 18,671
Property and equipment, net 7,231 3,051
Goodwill, intangibles and other assets, net 60,569 --
---------------------------------------------------------------------------------------------------------------------------
Total assets $ 121,945 $ 21,722
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 16,877 $ 6,329
Deferred revenue 8,971 5,085
---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 25,848 11,414
---------------------------------------------------------------------------------------------------------------------------
Redeemable convertible preferred shares,
authorized, issued and outstanding shares - none at
June 30, 2000 and 9,946 at June 30, 1999 -- 17,500
Shareholders' equity (deficit):
Preferred shares, undesignated, no par value, authorized shares - 20,000 at
June 30, 2000 and June 30, 1999; no shares issued and outstanding -- --
Class A convertible preferred shares, no par value, authorized, issued
and outstanding shares - none in 2000 and 2,000 in 1999 -- 83
Common shares, no par value, authorized shares - 200,000 at June 30, 2000
and June 30, 1999, respectively; issued and outstanding shares -
22,057 and 3,454 at June 30, 2000 and June 30, 1999, respectively 105,076 563
Class B common shares, Cdn.$0.03 par value, authorized shares - none and
600 in 2000 and 1999, respectively; issued and outstanding shares - none
and 477 in 2000 and 1999, respectively -- 4
Additional paid-in capital 7,002 --
Deferred share-based compensation (193) (416)
Accumulated deficit (15,788) (7,426)
---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) 96,097 (7,192)
---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) $ 121,945 $ 21,722
===========================================================================================================================
</TABLE>
See accompanying notes
46
<PAGE> 50
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Expressed in United States dollars; all
amounts in thousands except amounts per share)
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Licenses $ 37,384 $ 18,819 $ 11,311
Services and maintenance 15,555 6,508 2,898
--------------------------------------------------------------------------------------------------------------------
Total revenues 52,939 25,327 14,209
--------------------------------------------------------------------------------------------------------------------
COST OF REVENUES:
Licenses 2,141 536 401
Services and maintenance 8,147 3,078 1,281
--------------------------------------------------------------------------------------------------------------------
Total cost of revenues 10,288 3,614 1,682
--------------------------------------------------------------------------------------------------------------------
Gross profit 42,651 21,713 12,527
--------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 31,165 16,830 9,226
Research and development 8,906 4,958 1,910
General and administrative 4,190 2,466 1,513
Amortization of goodwill 1,409 -- --
In process research and development and other charges 6,979 -- --
--------------------------------------------------------------------------------------------------------------------
Total operating expenses 52,649 24,254 12,649
--------------------------------------------------------------------------------------------------------------------
Loss from operations (9,998) (2,541) (122)
Interest and other income (loss) 2,193 (24) 136
--------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (7,805) (2,565) 14
Income taxes 557 243 10
--------------------------------------------------------------------------------------------------------------------
Net income (loss) for the year $ (8,362) $ (2,808) $ 4
====================================================================================================================
Earnings (loss) per share:
Basic $ (0.45) $ (0.72) $-
Diluted $ (0.45) $ (0.72) $-
Pro forma basic and diluted $ (0.39) $ (0.18) $-
Weighted average number of shares used to calculate
earnings (loss) per share:
Basic 18,643 3,888 3,720
Diluted 18,643 3,888 14,927
Pro forma basic 21,339 15,940
</TABLE>
See accompanying notes
47
<PAGE> 51
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(Expressed in United States dollars; all amounts in thousands)
<TABLE>
<CAPTION>
Total
Class A Convertible Additional Class B Common Deferred Shareholders'
Preferred Shares Common Shares Paid-in Shares Share-based Equity
Shares Amount Shares Amount Capital Shares Amount Compensation (Deficit) (Deficit)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1997 2,000 $83 3,430 $ 6 $ -- $-- $-- $ (4,622) $ (4,533)
Issuance of common shares on
exercise of stock options -- -- 423 74 -- -- -- -- -- 74
Net income -- -- -- -- -- -- -- -- 4 4
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 2,000 83 3,853 80 -- -- -- -- (4,618) (4,455)
Conversion of common shares on
exercise of stock options -- -- 78 14 -- -- -- -- -- 14
Conversion of common shares into
Class B common shares -- -- (477) (4) -- 477 4 -- -- --
Deferred share-based
compensation -- -- -- 473 -- -- -- (473) -- --
Amortization of share-based
compensation -- -- -- -- -- -- -- 57 -- 57
Net loss -- -- -- -- -- -- -- -- (2,808) (2,808)
------------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1999 2,000 83 3,454 563 -- 477 4 (416) (7,426) (7,192)
Conversion of Class B common
shares into common shares -- -- 477 4 -- (477) (4) -- -- --
Conversion of Class A preferred
shares into common shares 2,000) (83) 2,000 83 -- -- -- -- -- --
Conversion of redeemable
convertible preferred shares
into common shares -- -- 10,052 17,500 -- -- -- -- -- 17,500
Issuance of common shares
on exercise of stock options -- -- 375 995 -- -- -- -- -- 995
Issuance of common shares
on initial public offering,
net of offering costs -- -- 3,975 43,101 -- -- -- -- -- 43,101
Issuance of common shares
related to Employee Stock
Purchase Plan -- -- 69 707 -- -- -- -- -- 707
Acquisitions -- -- 1,655 42,123 7,002 -- -- -- -- 49,125
Amortization of share-based
compensation -- -- -- -- -- -- -- 223 -- 223
Net loss -- -- -- -- -- -- -- -- (8,362) (8,362)
------------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2000 -- $-- 22,057 $ 105,076 $7,002 -- $-- $ (193) $ (15,788) $ 96,097
====================================================================================================================================
</TABLE>
See accompanying notes
48
<PAGE> 52
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars; all amounts in thousands)
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) for the period $ (8,362) $ (2,808) $ 4
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Amortization of goodwill 1,409 -- --
Depreciation 2,215 1,017 410
In-process research and development and other charges 6,979 -- --
Loss on disposal of property and equipment -- 52 55
Non-cash share-based compensation expense 223 57 --
Change in operating assets and liabilities 2,469 4,196 (1,596)
--------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 4,933 2,514 (1,127)
--------------------------------------------------------------------------------------------------------------------------------
Cash flows for investing activities:
Purchase of property and equipment (6,110) (2,392) (1,666)
Acquisitions (net of cash acquired) (14,520) -- --
Purchase of short-term investments (30,788) -- --
Other assets (2,921) -- 23
--------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (54,339) (2,392) (1,643)
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from initial public offering of common shares 43,101 -- --
Proceeds from issuance of common shares 1,701 14 74
Proceeds from issuance of redeemable convertible preferred shares -- 8,000 --
--------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 44,802 8,014 74
--------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (4,604) 8,136 (2,696)
Cash and cash equivalents, beginning of period 9,338 1,202 3,898
--------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 4,734 $ 9,338 $ 1,202
================================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURE
Income taxes paid (recovered) $ 324 $ 137 $ (12)
SUPPLEMENTAL NON-CASH INVESTING DISCLOSURE
Acquisitions of Exactium and Simba $ 49,125 $- $-
SUPPLEMENTAL NON-CASH FINANCING DISCLOSURE
Issuance of common shares and options on acquisitions $ 49,125 $- $-
Conversion of preferred shares into common shares $ 17,583 $- $-
</TABLE>
See accompanying notes
49
<PAGE> 53
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Pivotal Corporation enables large and medium-sized businesses worldwide to make,
serve, and manage customers efficiently and intelligently by providing demand
chain networks based on Microsoft standards. Pivotal helps companies manage
collaborative relationships between customers, business partners, and employees;
guide intelligent commerce transactions across multiple channels; and seamlessly
integrate the demand chain with the supply chain. Pivotal's software solutions
include Pivotal eRelationship, developed to manage the eBusiness relationships,
Pivotal eSelling, designed to sell complex products over the Internet, and
Pivotal ePower, an integrated Internet application platform that is built on
best-in-class resources.
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United States
("U.S. GAAP") and include the accounts of Pivotal and its wholly owned
subsidiaries. All intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenues and expenses during
the reporting periods. Estimates are used for, but not limited to, the
accounting for doubtful accounts, depreciation and amortization, taxes and
contingencies. Actual results may differ from those estimates.
REVENUE RECOGNITION
Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), was issued
in October 1997 by the American Institute of Certified Public Accountants
("AICPA") and was amended by Statement of Position 98-4 (SOP 98-4). Pivotal
adopted SOP 97-2 effective for Pivotal's year ended June 30, 1998. Additionally,
the AICPA issued SOP 98-9, which provides certain amendments to SOP 97-2, which
is effective for transactions entered into beginning July 1, 1999. Pivotal
adopted SOP 98-9 in the first quarter of fiscal year 2000 and its adoption had
no material impact on Pivotal's operating results or financial position. Pivotal
generates revenues through two sources: (1) software license revenues and (2)
services and maintenance revenues. Software license revenues are normally
generated from licensing the perpetual right to use Pivotal's products directly
to end-users and indirectly through resellers and, to a lesser extent, through
third-party products Pivotal distributes. Pivotal recognizes as revenue only the
fee payable from the reseller, net of any discount. Service revenues are
generated from consulting services, education and maintenance. Revenues from
software license agreements are recognized upon delivery of software if
persuasive evidence of an arrangement exists, collection is probable, the fee is
fixed or determinable, and vendor-specific objective evidence exists to allocate
the total fee to elements of the arrangement. Vendor-specific objective evidence
is typically based on the price charged when an element is sold separately, or,
in the case of an element not yet sold separately, the price established by
authorized management, if it is probable that the price, once established, will
not change before market introduction. Elements included in multiple element
arrangements could consist of software products, upgrades, enhancements,
customer support services, or consulting services. If an acceptance period is
required, revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. Pivotal's agreements with its customers and
resellers do not contain product return rights. Revenues for license
arrangements with payment term extending beyond one year are recognized
periodically as payments become due, provided all other conditions for revenue
recognition are met. Maintenance revenues
50
<PAGE> 54
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
are recognized ratably over the term of the contract, typically one year.
Consulting revenues are primarily related to implementation services performed
on a time-and-materials basis under separate service arrangements related to the
installation and use of Pivotal's software products. Revenues from consulting
and education services are recognized as services are performed. If a
transaction includes both license and service elements, license fee revenues are
recognized separately on shipment of the software, provided services do not
include significant customization or modification of the base product, and the
payment terms for licenses are not subject to acceptance criteria. In cases
where license fee payments are contingent on acceptance of services, Pivotal
defers recognition of revenues from both the license and the service elements
until the acceptance criteria are met.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid short-term investments with original
maturities at the date of acquisition of 90 days or less and are recorded at
cost.
SHORT-TERM INVESTMENTS
Short term investments consist of money market instruments with maturities of
less than one year. As at June 30, 2000, Pivotal's short-term investments
consisted solely of held-to-maturity investments and their carrying value was
substantially the same as their market value.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 2000 and 1999, Pivotal had the following financial instruments: cash
and cash equivalents, short-term investments, accounts receivable, accounts
payable and accrued liabilities, and at June 30, 1999, redeemable convertible
preferred shares. The carrying value of cash and cash equivalents, short-term
investments, accounts receivable and accounts payable and accrued liabilities
approximates their fair value based on their liquidity or based on their
short-term nature. At June 30, 1999, due to the uncertainty surrounding the
actual date that the redeemable convertible preferred shares would be redeemed,
it was not practical to determine the fair value of this financial instrument.
DERIVATIVE FINANCIAL INSTRUMENTS
Pivotal's use of derivative financial instruments is limited to short-term
foreign currency forward exchange contracts ("forward contracts") used to manage
exposure related to certain Canadian currency transactions. Pivotal does not
enter into derivative financial instruments for trading purposes. Pivotal
identifies future Canadian currency commitments and enters into forward
contracts to hedge exposure to fluctuations in the Canadian dollar. Gains and
losses on forward contracts that are designated and effective hedges of firm
foreign currency commitments are recognized when the related transaction is
recognized. Gains and losses not meeting the criteria for hedge accounting are
recognized in income in the current period. As at June 30, 2000, Pivotal had
outstanding forward contracts to purchase Canadian dollars for US$5.5 million.
The unrealized loss on these contracts at June 30, 2000 was $79. As of June 30,
1999, Pivotal had no outstanding forward contracts.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation of property and equipment is provided using the following
rates and methods:
<TABLE>
<S> <C>
Computer software 2 year straight line
--------------------------------------------------------------------------------
Computer hardware and equipment 30% declining balance or 3 year straight line
--------------------------------------------------------------------------------
Furniture and fixtures 20% declining balance
--------------------------------------------------------------------------------
</TABLE>
Leasehold improvements are amortized using the straight-line method over three
to five years.
GOODWILL, INTANGIBLES AND OTHER ASSETS
Goodwill, core technology and other intangible assets are carried at cost less
accumulated amortization and are being amortized on a straight-line basis over
the economic lives of the respective assets, generally three years.
51
<PAGE> 55
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
IMPAIRMENT OF LONG-LIVED ASSETS
Pivotal makes periodic reviews for the impairment of long-lived assets including
goodwill and other intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Under
Statement of Financial Accounting Standard ("SFAS") No. 121, an impairment loss
would be recognized when estimates of undiscounted future cash flows expected to
result from the use of an asset and its eventual disposition are less than its
carrying amount. No such impairment losses have been identified by Pivotal for
the years ended June 30, 2000, 1999 and 1998.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which consist primarily of software development
costs, are expensed as incurred. SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed", provides for the
capitalization of certain software development costs after technological
feasibility of the software is established. Under Pivotal's current practice of
developing new products and enhancements, the technological feasibility of the
underlying software is not established until substantially all product
development is complete, including the development of a working model. No such
costs have been capitalized because the impact of capitalizing such costs would
not be material.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Pivotal to a concentration of
credit risk consist principally of cash and cash equivalents, short-term
investments and accounts receivable. Cash and cash equivalents are custodied
with high-quality financial institutions and short term investments are made in
investment grade securities to mitigate exposure to credit risk. Pivotal's
customer base is dispersed across many different geographic areas throughout
North America, Europe and the Asia Pacific and consists of companies in a
variety of industries. Pivotal does not require collateral or other security to
support credit sales, but provides an allowance for bad debts based on
historical experience and specifically identified risks.
FOREIGN CURRENCY TRANSLATION
The functional currency of Pivotal and its subsidiaries is the U.S. dollar.
Assets and liabilities denominated in other than the U.S. dollar are translated
using the exchange rates prevailing at the balance sheet date. Revenues and
expenses are translated using average exchange rates prevailing during the
period. Gains and losses on foreign currency transactions and translation are
recorded in the consolidated statements of operations.
ADVERTISING
Pivotal expenses advertising costs as they are incurred. Advertising expense is
included in sales and marketing expenses and amounted to $924, $538 and $172 in
2000, 1999 and 1998, respectively.
INCOME TAXES
Pivotal accounts for income taxes under the provisions of SFAS No. 109,
"Accounting for Income Taxes". This statement provides for a liability approach
under which deferred income taxes are provided based upon currently enacted tax
laws and rates. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amounts expected to be realized.
SHARE-BASED COMPENSATION
As permitted under SFAS No. 123, Accounting for Stock-Based Compensation,
Pivotal has accounted for employee stock options in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees", and has made the pro forma disclosures required by SFAS No. 123 in
Note 10. Deferred compensation charges arise from those situations where options
are granted at an exercise price lower than the deemed fair value of the
underlying common shares. These amounts are amortized as charges to operations
over the vesting periods of the individual stock options.
52
<PAGE> 56
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities by including other common share equivalents, including stock options
and redeemable convertible preferred shares, in the weighted average number of
common shares outstanding for a period, if dilutive. Pro forma earnings per
share is computed by dividing net income (loss) by the weighted average number
of common shares outstanding and the weighted average redeemable convertible
preferred shares and Class A convertible preferred shares outstanding as if such
shares were converted into common shares and had been outstanding since July 1,
1999. The following table sets forth the computation of basic and diluted, and
pro forma basic and diluted earnings (loss) per share:
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) (A) $ (8,362) $ (2,808) $ 4
================================================================================================
Weighted average number of
common shares outstanding (B) 18,643 3,888 3,720
Dilutive effect of:
Stock options -- -- 444
Convertible preferred shares -- -- 10,763
------------------------------------------------------------------------------------------------
Diluted weighted average number of shares (C) 18,643 3,888 14,927
================================================================================================
Pro forma adjustment for
convertible preferred shares 2,696 12,052
Pro forma basic and diluted weighted
average number of shares (D) 21,339 15,940
------------------------------------------------------------------------------------------------
Earnings (loss) per share
Basic (A/B) $ (0.45) $ (0.72) $-
Diluted (A/C) $ (0.45) $ (0.72) $-
Pro forma basic and diluted (A/D) $ (0.39) $ (0.18)
</TABLE>
COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, establishes standards for the
reporting and display of comprehensive income and its components (revenue,
expenses, gains and losses) in a full set of general-purpose financial
statements. Pivotal adopted SFAS No. 130 in 1999. Pivotal has no comprehensive
income items, other than the net earnings (loss), in any of the periods
presented.
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. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The FASB subsequently issued SFAS No. 137 which delayed the
required effective date for adoption of SFAS No. 133 to fiscal years beginning
after June 15, 2000. Pivotal will adopt SFAS No. 133 as amended by SFAS No. 137
in the first quarter of fiscal year 2001. Pivotal does not expect that adoption
of this standard will have a material effect on its consolidated financial
position or results of operations. In March 2000, the FASB issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation." Pivotal will be required to adopt FIN 44 effective July 1,
2000 with respect to certain provisions applicable to new awards, exchanges of
awards in a business combination, modifications to outstanding awards, and
changes in grantee status that occur on or after that date. FIN 44 addresses
practice issues related to the application of APB Opinion No. 25, "Accounting
for Stock Issued to Employees." Pivotal does not expect the application of FIN
44 to have a material impact on its consolidated financial position or results
of operations. In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") and amended it in March 2000. Pivotal is currently
reviewing the provisions of SAB 101 and has not fully assessed the impact of its
adoption. While SAB 101 does not supercede the software industry specific
revenue recognition guidance, which Pivotal believes it is in compliance with,
the SEC Staff has recently
53
<PAGE> 57
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
informally indicated its views that SAB 101 may change current interpretations
of software revenue recognition requirements. Such SEC interpretations could
result in companies recording a cumulative effect of a change in accounting
principle. Pivotal is required to adopt SAB 101 no later than the fourth quarter
of fiscal 2001.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the current
period presentation.
2. BUSINESS COMBINATIONS
During the year ended June 30, 2000, Pivotal completed the acquisitions
described below which were accounted for under the purchase method of
accounting. Accordingly, the results of operations of each acquisition are
included in the consolidated statement of income since the acquisition date, and
the related assets and liabilities were recorded based upon their respective
fair values at the date of acquisition.
TRANSITIF S.A.
Effective December 3, 1999, Pivotal acquired 100% of Transitif S.A.
("Transitif"), a French corporation that distributes electronic business
relationship management solutions. Transitif deploys Pivotal solutions through
its network of systems integrators throughout France. Pivotal paid an aggregate
cash purchase price of $1,266 including acquisition related expenditures of $120
with additional consideration payable based on the net after-tax earnings of
Transitif and license revenues received by Transitif from the future sale of
licenses for Pivotal products to June 2002. All earn-out payments will be
recorded as additional purchase price when determinable and Pivotal may elect to
pay up to fifty percent of the additional purchase price, if any, in Pivotal
common shares. No earn-out payments were required to be made for the period
ended June 30, 2000.
EXACTIUM LTD.
Effective June 2, 2000, Pivotal acquired 100% of Exactium Ltd. ("Exactium"), an
Israeli company based in Atlanta, Georgia that provides eSelling solutions for
internet and Microsoft standards. Pivotal paid an aggregate purchase price of
$45,140 consisting of 1,225 common shares and stock options, cash of $13,150
including a shareholder loan repayment of $5,402 and acquisition related
expenses of $775.
SIMBA TECHNOLOGIES INC.
On June 26, 2000, Pivotal acquired 100% of Simba Technologies Inc. ("Simba").
Pivotal paid an aggregate purchase price of $17,590 consisting of 837 common
shares and stock options, and acquisition related expenditures of $455. The
total consideration, including acquisition costs, was allocated based on
estimated fair values on the acquisition date as follows:
<TABLE>
<CAPTION>
Transitif Exactium Simba Total
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets acquired
In process research and development -- $ 2,830 $ 1,890 $ 4,720
Core developed technology -- 290 -- 290
Acquired workforce -- 770 560 1,330
Other assets $ 1,146 370 720 2,236
--------------------------------------------------------------------------------------------------------------
1,146 4,260 3,170 8,576
--------------------------------------------------------------------------------------------------------------
Liabilities assumed
Other liabilities (1,050) (926) (683) (2,659)
--------------------------------------------------------------------------------------------------------------
(1,050) (926) (683) (2,659)
--------------------------------------------------------------------------------------------------------------
Net identifiable assets acquired 96 3,334 2,487 5,917
--------------------------------------------------------------------------------------------------------------
Goodwill 1,170 41,806 15,103 58,079
--------------------------------------------------------------------------------------------------------------
Purchase price $ 1,266 $ 45,140 $ 17,590 $ 63,996
==============================================================================================================
Consideration (inclusive of cash received of $351)
Cash 1,266 13,150 455 14,871
Fair value of common shares and
stock options issued -- 31,990 17,135 49,125
--------------------------------------------------------------------------------------------------------------
$ 1,266 $ 45,140 $ 17,590 $ 63,996
==============================================================================================================
</TABLE>
54
<PAGE> 58
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
The fair value of the common shares of Pivotal was determined by taking an
average of the opening and closing trading price of the common shares for a
short period just before and just after the terms of the transaction were agreed
to by the parties and announced to the public. The purchase price was increased
by the estimated fair value of the stock options of Pivotal exchanged for the
Exactium and Simba options outstanding.
PURCHASED IN PROCESS RESEARCH AND DEVELOPMENT
Purchased in process research and development ("IPR&D") charges relate to
acquisitions of companies accounted for under the purchase method in which a
portion of the purchase prices was allocated to acquired in process technology.
During 2000, Pivotal acquired Exactium and Simba and included in the respective
purchase prices was an aggregate amount of purchased IPR&D of $4,720.
Independent valuations were performed to assess and allocate a value to
purchased IPR&D. The value allocated to IPR&D was based upon the forecasted
operating after-tax cash flows from the technology acquired, giving effect to
the stage of completion at the acquisition date. These forecasted cash flows
were then discounted at a rate commensurate with the risk involved in completing
the acquired technology taking into consideration the characteristics and
applications of each product, existing and future markets, and assessments of
the life cycle stage of each product. Based on this analysis, the existing
technology that had reached technological feasibility was capitalized. Existing
technology that had not reached technological feasibility and for which no
future alternative use existed was expensed. Future cash flows were adjusted for
the value contributed by any core technology and development efforts expected to
be completed post acquisition. Research and development costs to bring the
products from the acquired companies to technological feasibility are not
expected to have a material impact on Pivotal's future results of operations or
cash flows. The forecasted data employed in the analysis was based upon both
forecast information maintained by the management of Exactium and Simba, and
Pivotal's estimate of the future potential of the acquired technology. The
inputs used by Pivotal in analysing purchased IPR&D were based upon assumptions
that management believes reasonable but which are inherently uncertain and
unpredictable. These assumptions may be incomplete or inaccurate, and no
assurance can be given that unanticipated events and circumstances will not
occur. Accordingly, actual results may vary from the forecasted results. While
management believes that all of the development projects will be successfully
completed, failure of any of these projects to achieve technological
feasibility, and/or any variance from forecasted results, may result in a
material adverse effect on Pivotal's financial condition and results of
operations.
A description of the purchased IPR&D for each acquisition is set for below.
EXACTIUM
The allocation to IPR&D was related to the Exactium eSelling technology. At the
time of acquisition, a prototype of Exactium's product existed and it was being
used in limited trials. This prototype was not stable or sufficiently developed
to be scalable on an enterprise-wide basis. Forecasted revenues used in the
valuation reflected historical growth rates of software sales for the eBusiness
management market and Pivotal, and contemplated revenues related to the sale of
products incorporating Exactium technology commencing during the summer of 2000
and increasing thereafter. Pivotal estimated that the technology was
approximately 80% complete as of the acquisition date. Net cash flows were
discounted to net present value at the acquisition date using an appropriate tax
adjusted rate reflecting the risk of unproven but partially developed software
products. The Exactium technology was subsequently completed and an eSelling
product released in late June 2000.
SIMBA
The allocation to IPR&D was related to the Simba eMarketing product. At the time
of acquisition, Simba did not have a first-generation product and there were
considerable uncertainties as to completion of the product. The valuation of
acquired IPR&D was prepared using the income approach and contemplated that
revenues related to the sale of products incorporating the Simba technology
would commence in late 2000 and increase thereafter. Revenue increases were
based upon the historical growth rate of software sales for the eMarketing
market and Pivotal. Net after tax cash flows were discounted to
55
<PAGE> 59
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
their present value at the acquisition date using an appropriate after-tax
risk-adjusted discount rate reflecting the risk of unproven but partially
developed software products. Amounts attributable to developed technology,
goodwill and other intangibles will be amortized over their estimated useful
life of three years on a straight-line basis. In addition to the charge for
in-process research and development, Pivotal recorded a write-down of other
assets of Pivotal made redundant as a result of the acquisitions in the amount
of $2,259.
PRO FORMA INFORMATION
The following table presents the unaudited pro forma results of operations for
informational purposes, assuming Pivotal had acquired Exactium and Simba at the
beginning of the 1999 fiscal year.
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------
2000 1999
---------------------------------------------------------------
<S> <C> <C>
Net revenues $ 58,602 $ 30,594
Net loss $(33,943) $(25,905)
Basic and diluted loss per share $ (1.68) $ (4.67)
</TABLE>
The pro forma results of operations give effect to certain adjustments,
including amortization of purchased intangibles and goodwill. Included in the
pro forma net loss for the year ended June 30, 2000 is a $6,979 charge for
in-process research and development and other charges by Pivotal. The
information may not necessarily be indicative of the future combined results of
operations of Pivotal, Exactium and Simba. The pro forma results of operations
have not been presented for the Transitif transaction because the effect of this
acquisition was not considered to be material to Pivotal.
3. ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $740 and
$334 at June 30, 2000 and 1999, respectively.
4. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------
2000 1999
----------------------------------------------------------
<S> <C> <C>
Computer software $ 3,126 $ 476
Computer equipment 3,763 2,317
Furniture and fixtures 2,389 1,169
Leasehold improvements 1,695 626
----------------------------------------------------------
10,973 4,588
Accumulated depreciation (3,742) (1,537)
----------------------------------------------------------
Net book value $ 7,231 $ 3,051
==========================================================
</TABLE>
5. GOODWILL, INTANGIBLES AND OTHER ASSETS
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------
2000 1999
--------------------------------------------------
<S> <C> <C>
Goodwill $ 58,079 $ --
Acquired intangibles 1,620 --
Other assets 2,288 --
--------------------------------------------------
$ 61,987 $ --
Accumulated amortization (1,418) --
--------------------------------------------------
Net book value $ 60,569 $ --
==================================================
</TABLE>
Other assets in the amount of $2,288 consist of prepaid long-term royalties and
long-term investments. Amortization of $1,418 includes the amortization of
goodwill and acquired workforce.
56
<PAGE> 60
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities were as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------
2000 1999
----------------------------------------------------
<S> <C> <C>
Accounts payable $ 9,369 $ 3,054
Accrued compensation 3,020 2,368
Accrued acquisition costs 1,229 --
Other accrued liabilities 3,259 907
----------------------------------------------------
$16,877 $ 6,329
====================================================
</TABLE>
7. LINE OF CREDIT
Pivotal has negotiated a credit facility with a Canadian chartered bank which
includes: a revolving term operating line of $10,000, bearing interest at the
bank's prime rate and a committed term loan of $5,000 bearing interest also at
the bank's prime rate, secured by a charge on all current and future personal
property of Pivotal. As of June 30, 2000 and 1999, no amounts were outstanding
under the credit facility.
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Pivotal leases office facilities under operating leases which generally require
Pivotal to pay a share of operating costs, including property taxes, insurance
and maintenance. Pivotal also leases certain equipment under operating leases.
Future minimum operating lease payments for the years ending June 30 pursuant to
leases outstanding as of June 30, 2000 are due as follows:
<TABLE>
<S> <C>
2001 $ 2,720
2002 2,594
2003 1,672
2004 673
2005 298
-------------------------------------------------------
$ 7,957
=======================================================
</TABLE>
Rent expense totalled approximately $2,237, $1,075 and $496 in the years ended
June 30, 2000, 1999 and 1998, respectively. Certain of these lease obligations
have been secured by irrevocable letters of credit for $0, $50, and $170 at June
30, 2000, 1999 and 1998, respectively.
OTHER LETTERS OF CREDIT
In June 2000, Pivotal entered into a $723 (Cdn. $ 1,070) irrevocable letter of
credit with a Canadian chartered bank. The letter of credit, which expires June
19, 2001, collaterizes Pivotal's obligations to a third party for tenant
improvement costs.
LEGAL PROCEEDINGS
Pivotal is subject to legal proceedings, claims and litigation arising in the
ordinary course of business. Pivotal believes that the ultimate costs to resolve
these matters will not have a material adverse effect on Pivotal's consolidated
financial position, results of operations or cash flows.
57
<PAGE> 61
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
9. REDEEMABLE CONVERTIBLE PREFERRED SHARES
The redeemable convertible preferred shares at June 30, 2000 and 1999 are as
follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------
<S> <C> <C>
Class B, 2,000 shares with par value of Cdn.$1.17 each, redeemable
at $1.00 each, authorized, issued and outstanding in 1999 $ -- $ 2,000
Class D, 2,658 shares with no par value, redeemable
at $0.79 each, authorized, issued and outstanding in 1999 -- 2,100
Class E, 4,000 shares with no par value, redeemable
at $1.35 each, authorized, issued and outstanding in 1999 -- 5,400
Class F, 1,288 shares with no par value, redeemable
at $6.21 each, authorized, issued and outstanding in 1999 -- 8,000
------------------------------------------------------------------------------------------
$ -- $17,500
==========================================================================================
</TABLE>
During the year ended June 30, 1997, Pivotal's shareholders approved an increase
in the authorized capital of Pivotal by authorizing 4,000 Class E preferred
shares which were issued during that year for total proceeds of $5,400. During
the year ended June 30, 1999, Pivotal's shareholders approved an increase in the
authorized capital of Pivotal by authorizing 1,288 Class F preferred shares
which were issued during that year for total proceeds of $8,000. The holders of
each class of preferred shares had the right to one vote for each common share
into which the preferred shares could be converted. All of the redeemable
preferred shares had the right to receive non-cumulative dividends at amounts as
determined by the directors of Pivotal. When dividends were paid on any other
outstanding class of shares of Pivotal, the holders of the Class B, Class D,
Class E and Class F preferred shares were entitled to an amount per share equal
to that paid on the other class of shares, as determined on a basis as if all of
the outstanding redeemable preferred shares had been converted into common
shares. The Class B, Class D, Class E and Class F preferred shares were
redeemable at Pivotal's option with the approval of the holders of 75% of the
outstanding shares of the applicable class, and were retractable at the holder's
option on or after June 30, 2001 at the issue price plus any declared and unpaid
dividends. Each class of redeemable preferred shares was convertible into common
shares at any time at the option of the holder, using the formula of 0.95 to
1.00 for the Class B preferred shares and one-for-one for Class D, Class E and
Class F preferred shares as provided in the Articles of Pivotal. All classes of
preferred shares were to automatically convert into common shares at the
conversion price immediately upon the earlier of: (a) the acquisition of the
assets or the take-over of Pivotal by a third party resulting in payment to all
of the shareholders of Pivotal of not less than $7.50 per common share (adjusted
to reflect subsequent stock dividends, stock splits or recapitalizations)
calculated on the basis that all of the preferred shares had been converted into
common shares and without regard to any liquidation preferences for any class of
shares; and, (b) the consummation of Pivotal's sale of its common shares in a
bona fide, firm commitment underwriting pursuant to a registration statement
under the Securities Act of 1933 of the United States, as amended, at a public
offering price of not less than $7.50 per share (adjusted to reflect subsequent
stock dividends, stock splits or recapitalizations) and $15,000 in the
aggregate, provided that the underwriters in such public offering were
acceptable to the holders of a majority of the outstanding Class B, Class D,
Class E and Class F preferred shares, such acceptance not to be unreasonably
withheld. All of these shares were converted into common shares during the year
ended June 30, 2000.
10. SHAREHOLDERS' EQUITY (DEFICIT)
INITIAL PUBLIC OFFERING
On August 4, 1999, Pivotal's registration statement on Form F-1, Registration
No. 333-92971, became effective. The offering date was August 5, 1999. The
offering was terminated as a result of all of the shares offered being sold. The
managing underwriters were Merrill Lynch & Co., Inc., Bear, Stearns & Co. Inc.
and Dain Rauscher Incorporated. The offering consisted of 3,975 common shares of
Pivotal, which included 475 common shares offered pursuant to the subsequent
exercise of the underwriters' over allotment
58
<PAGE> 62
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
option on August 19, 1999. The aggregate price of the shares offered and sold
was $47.7 million. Proceeds to Pivotal, after $3.3 million in underwriting
discounts and commissions and $1.3 million in other expenses, were $43.1
million. Simultaneous with the closing of the Offering, all outstanding
preferred shares were converted into common shares.
Preferred Shares, Common Shares and Class B Common Shares
On December 1, 1997, Pivotal's shareholders approved an increase in the number
of authorized common shares from 20,000 to 50,000 shares. On December 16, 1998,
Pivotal's shareholders approved the redesignation of common shares without par
value to Class A common shares without par value. Pivotal's shareholders also
approved the increase in authorized capital by creating 600 Class B common
shares with a par value of Cdn.$0.03 each. In December 1998 and January 1999,
Pivotal issued an aggregate of 477 Class B common shares in exchange for 477
Class A common shares. Prior to completion of the initial public offering, all
of the issued and outstanding Class B common shares were exchanged for common
shares on a one-for-one basis. On June 17, 1999, Pivotal's shareholders approved
an increase in the number of authorized Class A common shares from 50,000 to
200,000 and an increase in authorized capital by creating 20,000 unissued
preferred shares without par value. Pivotal's shareholders also approved the
redesignation of Class A common shares, both issued and unissued, to common
shares without par value. The holder of each common share has the right to one
vote per share. The preferred shares could at any time and from time to time be
issued in one or more series and the Board of Directors could determine the
special rights and restrictions of each series including any dividend,
conversion or redemption rights, subject to the approval of at least 75% of the
holders of any outstanding Class A, B, D, E and F preferred shares. The holders
of the Class A preferred shares had the right to one vote for each common share
into which the preferred shares could be converted. The Class A preferred shares
had the same rights to receive dividends as the redeemable preferred shares
discussed in Note 9, and were convertible into common shares on a one-for-one
basis, subject to adjustment under certain circumstances. The Class A preferred
shares were not redeemable or retractable. On June 17, 1999, Pivotal's
shareholders also approved, subject to the conversion of the redeemable
convertible preferred shares, the Class A convertible preferred shares and the
Class B common shares into common shares, the cancellation of the authorized
Class B common share capital and the authorized Class A, B, D, E, and F
preferred share capital.
EMPLOYEE STOCK OPTION PLAN
Under the terms of the 1999 Pivotal Incentive Stock Option Plan, as amended (the
"Plan"), the Board of Directors may grant incentive and non-qualified stock
options to employees, officers, directors, independent consultants and
contractors of Pivotal and its subsidiaries, and of partnerships, joint ventures
and other entities in which Pivotal holds a 50% voting interest including
directors thereof. Generally, Pivotal grants stock options with exercise prices
equal to the quoted market value of the common share on the date of grant, as
determined by the Board of Directors. Options generally vest over a four year
period, but the Board of Directors may provide for different vesting schedules
in particular cases. Options generally expire five years from the date of grant.
On June 17, 1999, the Company's shareholders approved changes to the Plan that
increased the number of shares reserved for issuance pursuant to the Plan by (a)
1,076 common shares plus (b) an automatic increase on the first day of each
fiscal year beginning on July 1, 2001, equal to the lesser of 800 shares or 4%
of the average number of common shares outstanding as used to calculate fully
diluted earnings per share for the preceding year. Pivotal has assumed certain
options granted to former employees of acquired companies (the "Acquired
Options"). The Acquired Options were assumed by Pivotal outside of the Plan, but
all are administered as if issued under the Plan. All of the Acquired Options
have been adjusted to give effect to the conversion under the terms of the
Agreements and Plans of Reorganization between Pivotal and the companies
acquired. The Acquired Options generally become exercisable over a four year
period and generally expire either five or ten years from the date of grant. No
additional options will be granted under any of the acquired companies' plans. A
summary of stock option activity and information concerning currently
outstanding and exercisable options is as follows:
59
<PAGE> 63
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
<TABLE>
<CAPTION>
Options Outstanding
------------------------------------------------------------------------
Weighted
Options Number of Average
Available Common Exercise
for Grant Shares Price
------------------------------------------------------------------------
<S> <C> <C> <C>
(Expressed in
Canadian dollars,
except as noted)
Balances, June 30, 1997 586 337 Cdn.$0.12
------------------------------------------------------------------------
Options authorized 1,000 - -
Options granted (877) 877 0.88
Options exercised - (423) 0.25
Options cancelled 49 (49) 0.26
------------------------------------------------------------------------
Balances, June 30, 1998 758 742 Cdn.$0.94
------------------------------------------------------------------------
Options authorized 2,576 - -
Options granted (866) 866 9.71
Options exercised - (78) 0.28
Options cancelled 75 (75) 3.74
------------------------------------------------------------------------
Balances, June 30, 1999 2,543 1,455 Cdn.$6.07
------------------------------------------------------------------------
Options authorized 408 - -
Options granted (1,837) 1,837 23.12
Options exercised - (376) 2.96
Options cancelled 270 (270) 10.37
------------------------------------------------------------------------
Balances, June 30, 2000 1,384 2,646 US$16.95
========================================================================
</TABLE>
The U.S. dollar equivalents of the weighted average exercise price calculated
using the year end exchange rates were as follows: $4.12, $0.64 and $0.08 as of
June 30, 1999, 1998 and 1997 respectively. The following tables summarize
information concerning outstanding and exercisable options at June 30, 2000:
<TABLE>
<CAPTION>
Options Exercisable
-----------------------------------------------------------------------------------------
Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Exercise Prices Number Contractual Price Number Price
per Share Outstanding Life (in years) per Share Exercisable per Share
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.08 137 1.4 $ 0.08 92 $ 0.08
$ 0.17 13 6.9 0.17 5 0.17
$ 0.57-0.68 187 8.4 0.62 131 0.59
$ 1.70 57 7.7 1.70 27 1.70
$ 5.09-6.42 537 5.3 5.67 119 5.61
$ 10.54-12.88 614 6.3 13.13 53 13.92
$ 16.75-21.25 145 9.2 18.69 8 20.88
$ 25.44-33.13 747 9.8 27.68 - -
$ 40.75-52.06 209 9.6 48.49 4 50.50
-----------------------------------------------------------------------------------------
$ 0.08-52.06 2,646 $ 16.95 439 $ 8.11
=========================================================================================
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN ("ESPP")
On June 17, 1999, Pivotal's shareholders approved the adoption of an ESPP and
authorized the issuance of up to 1,000 common shares under the plan with
amendments as the Board of Directors of Pivotal may deem desirable. Under the
ESPP, a qualified employee may authorize payroll deductions of up to 10% of the
employee's compensation (as defined) to a maximum of $25 to purchase common
stock at 85% of the lower of fair market value at the beginning or end of the
related subscription period.
60
<PAGE> 64
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
COMMON SHARES RESERVED FOR FUTURE ISSUANCE
Pivotal has reserved common shares as of June 30, 2000 as follows:
<TABLE>
<S> <C>
Exercise of stock options 4,030
Employee Stock Purchase Plan 931
-------------------------------------------------------------
4,961
=============================================================
</TABLE>
SHARE-BASED COMPENSATION
Under APB Opinion No. 25, because the exercise price of Pivotal's employee stock
options generally equals the fair value of the underlying stock on the date of
grant, no compensation expense is recognized. Deferred compensation expense of
$473 was recorded during 1999 for those situations where the exercise price of
an option was lower than the deemed fair value for financial reporting purposes
of the underlying common stock. The deferred compensation is being amortized
over the vesting period of the underlying options. Amortization of the deferred
share-based compensation balance of $193 at June 30, 2000 will approximate $113,
$58 and $22 during the fiscal years ending June 30, 2001, 2002 and 2003,
respectively. An alternative method of accounting for stock options is SFAS No.
123, "Accounting for Stock-based Compensation". Under SFAS No. 123, employee
stock options are valued at the grant date using the Black-Scholes valuation
model and the resultant compensation cost is recognized ratably over the vesting
period. Had compensation cost for Pivotal's share option plan been determined
based on the Black-Scholes value at the grant dates for awards as prescribed by
SFAS No. 123, pro forma net income (loss) and net earnings (loss) per share
would have been as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
-------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported $ (8,362) $(2,808) $ 4
SFAS No. 123 pro forma (10,541) (2,849) (2)
Basic and diluted earnings (loss) per share
As reported $ (0.45) $ (0.72) $--
SFAS No. 123 pro forma (0.57) (0.73) --
</TABLE>
Compensation expense recognized in providing pro forma disclosures may not be
representative of the effects on pro forma earnings for future years since SFAS
No. 123 applies only to options granted after 1996. The weighted average
Black-Scholes option pricing model value of options granted under the share
option plan during the years ended June 30, 2000, 1999 and 1998 were US$15.45,
Cdn.$1.92 (US$1.30) and Cdn.$0.21 (US$0.14) per share respectively. The fair
value for these options was estimated at the date of grant using the following
weighted average assumptions:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Assumptions
Volatility factor of expected
market price of the Company's shares 85.0% 0.0% 0.0%
Dividend yield 0.0% 0.0% 0.0%
Weighted average expected
life of stock options (years) 4.0 years 4.0 years 4.0 years
Risk free interest rate 7.0% 5.6% 5.5%
</TABLE>
61
<PAGE> 65
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
11. INCOME TAXES
Details of the income tax provision (recovery) are as follows:
<TABLE>
<CAPTION>
Years ended June 30,
------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C>
Current
Canadian $ -- $ (47) $(132)
Foreign 557 290 120
------------------------------------------------------------------
557 243 (12)
Deferred
Canadian -- -- 22
------------------------------------------------------------------
Income tax provision $ 557 $ 243 $ 10
==================================================================
</TABLE>
The reported income tax provision (recovery) differs from the amount computed by
applying the Canadian basic statutory rate to the income (loss) before income
taxes. The reasons for this difference and the related tax effects are as
follows:
<TABLE>
<CAPTION>
Years Ended June 30,
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Canadian basic statutory tax rate 45% 45% 45%
--------------------------------------------------------------------------------
Expected income tax provision (recovery) $(3,512) $(1,154) $ 6
Foreign tax rate differences (155) (144) (20)
Benefit of losses not tax affected 389 1,484 --
Non-deductible expenses 2,661 56 82
Research and development tax credits (127) (47) (132)
Benefit of temporary differences not recognized 1,301 48 74
--------------------------------------------------------------------------------
$ 557 $ 243 $ 10
================================================================================
</TABLE>
Deferred income taxes result principally from temporary differences in the
recognition of certain revenue and expense items for financial and income tax
reporting purposes. Significant components of Pivotal's deferred tax assets and
liabilities as of June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets
Net operating tax loss carry-forwards $ 4,547 $ 3,129
Research and development expenses 85 87
Book and tax base differences on assets -- 66
Other 80 84
Total deferred income tax assets 4,712 3,366
Valuation allowance for deferred income tax assets (4,547) (3,366)
--------------------------------------------------------------------------------
Net deferred income tax assets 165 --
Deferred income tax liabilities
Book and tax base differences on assets 187 --
--------------------------------------------------------------------------------
Net deferred income tax liabilities
included in accounts payable
and accrued liabilities $ 22 $ --
================================================================================
</TABLE>
Due to the uncertainty surrounding the realization of the deferred income tax
assets in future income tax returns, Pivotal has a 100% valuation allowance
against its deferred income tax assets. The net change in the total valuation
allowance for the years ended June 30, 2000 and 1999 was a provision of $1,346
and $1,542, respectively. As of June 30, 2000, Pivotal has Canadian tax loss
carry-forwards of approximately $7,189 available to reduce future years' income
for tax purposes. These carry-forward losses expire in 2001 to 2007.
62
<PAGE> 66
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
12. CHANGE IN OPERATING ASSETS AND LIABILITIES
The change in operating assets and liabilities is as follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Accounts receivable $(7,511) $(1,188) $(4,971)
Prepaid expenses (545) (323) (570)
Accounts payable and accrued liabilities 7,260 4,370 1,117
Deferred revenue 3,265 1,337 2,828
--------------------------------------------------------------------------------
$ 2,469 $ 4,196 $(1,596)
================================================================================
</TABLE>
13. RELATED PARTY TRANSACTIONS
During the year, Pivotal entered into an agreement to license software from a
company, with whom Pivotal had a former director in common, under which Pivotal
paid $350.
14. SEGMENTED INFORMATION
Pivotal operates in one business segment, the development, marketing, and
supporting of Internet and corporate network-based software applications used
for managing customer and selling partner relationships. Pivotal licenses and
markets its products internationally. The following table presents a summary of
revenues by geographical region.
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $32,591 $18,779 $11,931
Canada 5,574 1,463 903
International 14,774 5,085 1,375
------------------------------------------------------------------------------
$52,939 $25,327 $14,209
==============================================================================
</TABLE>
Pivotal attributes revenue among the geographical areas based on the location of
the customers involved. During 2000, 1999 and 1998, no single customer accounted
for 10% or more of total revenue. The following table presents a summary of
property and equipment by geographic region:
<TABLE>
<CAPTION>
Years ended June 30,
-------------------------------------------------------------
2000 1999
-------------------------------------------------------------
<S> <C> <C>
Property and Equipment
United States $1,395 $ 449
Canada 4,624 2,435
International 1,212 167
-------------------------------------------------------------
$7,231 $3,051
=============================================================
</TABLE>
63
<PAGE> 67
CORPORATE INFORMATION
MANAGEMENT TEAM:
NORMAN B. FRANCIS, President and Chief Executive Officer
KEITH R. WALES, Chief Technical Officer
VINCENT MIFSUD, Executive Vice President and Chief Financial Officer
GLENN HASEN, Executive Vice President, Global Field Operations
ROBERT RUNGE, Chief Marketing Officer
KIRK HERRINGTON, Vice President, Advanced Technology
SAL SANCI, Vice President and General Manager, eRelationship Products Division
ELI BARAK, Vice President and General Manager, eSelling Products Division
HEATHER CLARIDGE, Vice President, Human Resources
CHRISTINE ROGERS, Senior Vice President Professional Services
ANDRE BEAULIEU, General Counsel
MARK INSKIPP, Vice President Europe, Middle East & Africa
MATT DUNCAN, Vice President Corporate and Solutions Marketing
GEORGE REZNIK, Vice President, Finance
DIRECTORS:
NORMAN B. FRANCIS, President and Chief Executive Officer, Pivotal Corporation
KEITH R. WALES, Chief Technical Officer, Pivotal Corporation
JEREMY A. JAECH, Vice President, Microsoft Corporation, Visio Division
ROBERT J. LOUIS, President, Ventures West Management Ltd.
DOUGLAS J. MACKENZIE, General Partner, Kleiner, Perkins Caufield & Byers
DONALD A. MATTRICK, President, Electronic Arts Worldwide Studios
TRANSFER AGENTS:
AMERICAN STOCK TRANSFER & TRUST COMPANY
40 Wall Street, 46th Floor, New York, NY 10005, USA
Tel: (800) 937-5449
CIBC MELLON TRUST COMPANY
1066 West Hastings Street, Suite 1600, V6E 3X1, Canada
Tel: (604) 688-4330
64
<PAGE> 68
CORPORATE OFFICES:
HEAD OFFICE
300-224 West Esplanade, North Vancouver, BC,V7M 3M6
Tel: (604) 988-9982
Fax: (604) 988-0035
USA
Plaza at Yarrow Bay, 10210 NE Points Drive, Building 3, Suite 400,
Kirkland, WA 98033
Tel: (425) 455-4230
Fax: (425) 455-3972
EUROPE
Wilson House, Fenian Street Dublin 2, Ireland
Tel: (353) 1 631-9325
Fax: (353) 1 662-9334
ASIA PACIFIC
Level 11 Park West Building, 6-12-1 Nishi-Shinjuku, Shinjuku, Tokyo 1630023
Tel: 81-3-5325-3018
Fax: 81-3-5325-3131
OTHER OFFICES
Atlanta, Georgia, USA Bethesda, Maryland, USA
San Bruno, California, USA Waite Park, Minnesota, USA
Des Plaines, Illinois, USA Dallas, Texas, USA
Denver, Colorado, USA Florida, USA
Lansing, Kansas, USA Morristown, New Jersey, USA
Kirkland, Washington, USA Toronto, Ontario, Canada
St. Peters, Missouri, USA Belfast, Northern Ireland
North Andover, Massachusetts, USA Schipol Rijk, Netherlands
New York, New York, USA Levallois-Perret, France
Portland, Oregon, USA Walldorf-Heidelberg, Germany
Irvine, California, USA Hemel Hempstead, Herts, England
Mentor, Ohio, USA Sydney, Australia
INDEPENDENT AUDITORS:
DELOITTE & TOUCHE LLP
P.O. Box 49279, Four Bentall Centre, 2100-1055 Dunsmuir, Vancouver, BC,
V7X 1P4, Canada
Tel: (604) 669-4466
Fax: (604) 669-4186
LEGAL COUNSEL:
DIANE S. MALAHER, PIVOTAL CORPORATION
300-224 West Esplanade, North Vancouver, BC, V7M 3M6, Canada
Tel: (604) 988-9982
Fax: (604) 983-6658
DORSEY & WHITNEY LLP
1420 Fifth Avenue, Suite 400, Seattle, WA, 98101, USA
Tel: (206) 903-8800
Fax: (206) 903-8820
BORDEN LADNER GERVAIS LLP
1200-200 Burrard Street, Vancouver, BC, V7X 1T2, Canada
Tel: (604) 687-5744
Fax: (604) 687-1415
EXCHANGES:
NASDAQ
Trading Symbol: PVTL
TSE
Trading Symbol: PVT
INVESTOR RELATIONS:
SOPHIA COUSPOS, PIVOTAL CORPORATION
300-224 West Esplanade, North Vancouver, BC, V7M 3M6, Canada
Tel: (604) 988-9982
Fax: (604) 988-0035
[email protected]
www.pivotal.com
65
<PAGE> 69
[PIVOTAL LOGO]
