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UNITED STATED
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 000-26867
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PIVOTAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
British Columbia, Canada Not Applicable
(State or other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
300-224 West Esplanade
North Vancouver, British Columbia
Canada
(Address of Principal Executive Offices) V7M 3M6
(Zip Code)
(604) 988-9982
(Registrant's Telephone Number,
Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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N/A N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Shares
--------------------------------------------------------------------------------
(Title of Class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS); AND (2) HAS BEEN SUBJECT TO THE
FILING REQUIREMENTS FOR THE PAST 90 DAYS: Yes [X] No [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K: [X]
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The aggregate market value of the voting shares held by non-affiliates of the
registrant, based on the closing sale price of the common shares on September 1,
2000 as reported on the Nasdaq National Market was approximately
U.S.$583,393,858. Common shares held by each current executive officer and
director and by each person who is known by the registrant to own 5% or more of
the outstanding common shares have been excluded from this computation in that
such persons may be deemed to be affiliates of Pivotal. This determination of
affiliate status is not a conclusive determination for other purposes.
As of September 1, 2000, 22,466,823 common shares of the registrant were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NOT APPLICABLE.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I.........................................................................1
ITEM 1. BUSINESS...............................................................1
ITEM 2. PROPERTIES............................................................25
ITEM 3. LEGAL PROCEEDINGS.....................................................25
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS ....................25
PART II.......................................................................25
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS ..............................................................26
ITEM 6. SELECTED FINANCIAL DATA...............................................27
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..........43
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .............44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................63
PART III......................................................................63
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT ................................63
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS ..............................65
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT ......................................................69
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ......................71
PART IV.......................................................................71
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K ..........................................................71
</TABLE>
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PART I
FORWARD-LOOKING STATEMENTS
Statements in this filing about our future results, levels of activity,
performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in our forward-looking statements.
These factors include, among others, those described in connection with the
forward-looking statements, and the factors listed in Item 7 of this report.
In some cases, you can identify forward-looking statements by our use of words
such as "may," "will," "should," "could," "expect," "plan," "intend,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or the
negative or other variations of these words, or other comparable words or
phrases.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy and completeness of
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of this report. You should not place
undue reliance on forward-looking statements.
ITEM 1. BUSINESS
OVERVIEW
Pivotal Corporation's technology solutions enable large and medium-sized
businesses worldwide to increase, serve and manage their customer base. We refer
to our solutions as demand chain network solutions because they automate and
manage marketing, selling and servicing processes over the Internet by
integrating customer relationship management, electronic selling, electronic
commerce and wireless technologies. Our demand chain solutions are designed to
compliment and integrate with a business' supply chain, therefore enabling
businesses to increase efficiency and revenues. Pivotal's scalable, XML-based
demand chain network solutions are designed to meet the needs of businesses
ranging from emerging companies in the new digital economy to traditional
businesses that are seeking to integrate the opportunities presented by the
Internet into their business model.
Pivotal solutions are sold in 35 countries and are available in English, French,
German, Spanish, Portuguese, Swedish, Japanese and Chinese. Pivotal's worldwide
customer base includes more than 1000 organizations in traditional, commercial,
public market sectors and in the new digital economy and includes companies such
as ING Barings LLC, Deutsche Bank, KPMG, Intrawest Corporation, USFilter, NEC,
Ericsson, Emerson Electric, Norsat International, Ford Credit Denmark A/S,
Nissan Motor (Denmark), Fairmont Hotels and Resorts, Amazon.com (Auctions),
Digital Insight, Headhunter.net, Clarus Corporation, insLogic, Qiagen,
Capitalthinking, Software Spectrum, Heller Financial, Uniglobe Travel, InterCon
Security Limited, HarperCollins Publishing, Trader.com, Southern Company,
Deloitte & Touche, and Principal Financial Group. We market and sell our
solutions through a direct sales force as well as through third party solution
providers.
Pivotal is listed on NASDAQ under the symbol "PVTL" and The Toronto Stock
Exchange under the symbol "PVT." Our home page on the Internet can be found at
www.pivotal.com. Information contained on our Web site does not constitute part
of this report.
The terms "Pivotal," "our company" and "we" in this filing refer to Pivotal
Corporation, a British Columbia company and all of Pivotal Corporation's wholly
owned subsidiaries including Pivotal Corporation, incorporated in Washington
State, Pivotal Corporation Limited, incorporated in the United Kingdom, Pivotal
Corporation France S.A., incorporated in France, Exactium Ltd., incorporated in
Israel, Exactium Inc., incorporated in Delaware State, Pivotal Technologies
Corporation Limited, incorporated in the Republic of Ireland, Pivotal
Corporation (N.I.) Limited, incorporated in Northern Ireland, Pivotal GmbH,
incorporated in Germany, Digital Conversations Inc., incorporated in British
Columbia, and Pivotal Corporation Australia Pty. Ltd., incorporated in
Australia.
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Pivotal Relationship, Pivotal eRelationship, Pivotal eRelationship, Pivotal
eRelationship IntraHub, Pivotal eRelationship CustomerHub, Pivotal eRelationship
PartnerHub, Pivotal ePower, Pivotal eSelling, PivotalWeb .NET, PivotalHost,
Pivotal Anywhere, Pivotal Intelligence and Pivotal Interaction Center are
trademarks and/or registered trademarks of Pivotal Corporation.
INDUSTRY BACKGROUND
Businesses have recognized the value of improving their customer focus by
establishing an Internet presence in order to increase revenues. Businesses
began by building websites that contained company information that was used
solely as information sources. In addition, businesses used various software
applications to automate customer relationship functions such as sales,
marketing and customer service. These software applications typically provided a
separate program for each of these internal business functions, did not use the
Internet as a communication tool, suffered from limited functionality and were
difficult to integrate with one another. In recent years, cost-effective
customer relationship management applications have become available that enable
information to be shared across different business functions within the employer
group. In addition, applications that enabled companies to sell and service
their customers on the Internet also began to emerge. Over time, businesses
began to realize the need for unified applications across their entire demand
chain.
Many businesses have benefited from solutions that enable them to sell and
service their customers and business partners over the Internet. In addition,
they have benefited from customer relationship management applications that
automate internal business functions. Many businesses are now seeking solutions
that are fully integrated and address all customer interactions, enable online
collaboration and sharing of information with their customers and business
partners, improve one-to-one relationships with each customer and partner and
facilitate electronic commerce. The Delphi Group estimates that growth in the
business-to-business electronic commerce software market will grow from $5
billion to $40 billion by 2002.
THE IMPACT OF CHANGING TECHNOLOGIES
Recent technological advances are dramatically affecting the marketplace for
electronic business relationship management solutions. These advances include:
- The Internet. The Internet is emerging as a dominant platform for worldwide
interactive communication and commerce, and therefore businesses are seeking
better ways to use the Internet as a platform to conduct their business. As a
result, businesses have begun to invest heavily in technologies that support
and exploit the capabilities of the Internet. International Data Corporation
estimates that the Internet commerce software applications market will grow
at a compound annual rate of 97% for the five-year period from 1998 to 2003
to approximately $13.2 billion by 2003. Businesses that implement electronic
business relationship management solutions may gain further competitive
advantage by exploiting the capabilities of the Internet to allow online
collaboration, electronic commerce and sharing of information with customers
and partners.
- Widespread Adoption of Microsoft Technologies. Microsoft Windows NT,
Microsoft Windows 2000 and Microsoft BackOffice platforms offer businesses
the opportunity to easily develop, deploy and maintain information technology
systems with increased flexibility at a lower cost than was previously
possible. These platforms are also widely used and well understood by
technical personnel. International Data Corporation estimates that the
Microsoft Windows NT installed base will grow at a compound annual rate of
29% for the five-year period from 1997 to 2002 to approximately 5.8 million
users by 2002. Electronic business relationship management solutions that are
compatible with these platforms are likely to benefit from this growth.
- Growth of Wireless Computing. Businesses, customers and partners expect their
employees to be able to share information regardless of their location. The
proliferation of wireless computing devices, such as palm computers,
web-enabled cell phones and improved remote computing has empowered the
mobile professional. As a result, electronic solutions should enable users to
access information from any location and to use their preferred wireless
computing device.
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THE OPPORTUNITY
The businesses Pivotal serves are typically large businesses, divisions of large
businesses and mid-size companies. These businesses need to maintain the same or
higher levels of customer service as their smaller competitors and must respond
quickly to changes in their competitive environment. As a result, many of these
businesses often adopt business models that require close integration and
collaboration with their customers and partners. Until recently, most electronic
business applications designed on the Microsoft platform were designed primarily
to address the needs of the smaller enterprise, were often considered too
unstable, were not appropriately scalable for large enterprises and were
considered not designed for the Internet. Today, Microsoft Windows NT, Microsoft
Windows 2000 and Microsoft BackOffice platforms are considered highly scalable,
Internet based solutions.
Pivotal believes that a significant market opportunity exists for an electronic
business demand chain network solution that is easily customized and quickly
deployed. Many businesses have adopted the Internet, Microsoft Windows NT,
Microsoft Windows 2000 and Microsoft BackOffice platforms. As a result, a new
opportunity also has emerged for an electronic business solution that is
optimized for these platforms. Such a solution must incorporate many of the
benefits enabling businesses to respond quickly to changes to their competitive
environment and to operate more cost-effectively than their smaller competitors.
Pivotal believes that such a solution must:
- support Internet-based collaboration and the sharing of information with
customers and partners;
- support integration and collaboration among sales, marketing and customer
service employees;
- support mobile professionals and their wireless computing devices;
- be usable by a business without significant customization, to enable rapid
deployment at low total cost of ownership;
- provide tools for easy implementation to meet specific needs; and
- be easy to use by all end-users without extensive training.
PIVOTAL SOLUTIONS
Pivotal is a leading provider of electronic business solutions focused on the
demand chain network. These solutions enable businesses to increase revenues by
more effectively managing their interactions with customers and partners over
the Internet. Pivotal's electronic business solutions include award-winning,
Internet-based applications supported by an array of professional services and
Pivotal's global Pivotal Alliance network of third-party distributors. Pivotal's
solutions are designed and optimized exclusively for the Internet, Microsoft
Windows NT, Microsoft Windows 2000 and Microsoft BackOffice platforms. In
December 1999, Pivotal Relationship won Microsoft's Industry Solutions Award for
Best Internet Solution for Customer Self Service and Best Integrated Customer
Relationship Management Solution. On February 17, 2000, Microsoft used Pivotal's
electronic business solution, Pivotal eRelationship 2000, in the worldwide
premiere of Microsoft Windows 2000.
We believe our solutions deliver the following benefits:
- Enables Businesses to Improve Customer Focus and Increase Revenues.
Pivotal's solutions unify sales, marketing and customer service employees
and partners around customer processes and interactions. By maintaining all
customer information in a shared database, Pivotal's applications make it
easy for different users to maximize their contribution to customer
relationship management. Furthermore, Pivotal's applications enable
businesses to better capture customer profiles and build one-to-one customer
relationships. Pivotal believes this improvement in customer focus enables
businesses to increase revenues through better customer loyalty and
retention.
- Improves the Collaboration and Interaction Between Businesses and Their
Customers. Using Pivotal eRelationship CustomerHub, businesses can transform
their static Web site into a collaborative tool used to increase its
customers base,
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service and sell to customers. Prospective customers can obtain information
regarding businesses' products and services over the Internet. Customers can
place online orders, retrieve information on products and services and
directly interact online with sales, marketing and customer service
departments. This direct interaction can result in improved customer service
and generation of leads, as well as lower customer service costs.
- Improves the Collaboration and Interaction Between Businesses and Their
Partners. Pivotal eRelationship PartnerHub enables businesses to improve
their efficiency and selling processes by facilitating interaction and
collaboration with their partners over the Internet. Pivotal's application
maintains a shared database consisting of information related to products,
services, customer contacts and sales opportunities. By enabling partners to
access and update the shared database, Pivotal's solutions simplify the
sharing of information between businesses and their partners so they can
jointly service their customers' needs and concerns.
- Increases the Efficiency of Wireless Mobile Professionals. Mobile
professionals can access Pivotal's solutions remotely across local-area
networks, wide-area networks or over the Internet by using a number of
portable computing devices including laptops, palm computers and web-enabled
cell phones. Mobile professionals also can work offline and transmit and
receive information to automatically update their own files and the shared
corporate database. These capabilities increase the efficiency of mobile
professionals.
- Enables Rapid Implementation and Simple Customization. Businesses can use
Pivotal's solutions without significant customization, which expedites the
implementation process. If they desire, businesses can customize Pivotal's
solutions to reflect their own internal processes without programming by
using Pivotal's graphical, point-and-click tools.
- Yields a Low Total Cost of Ownership. Pivotal's solutions can be
cost-effectively deployed and customized and thus require few resources for
ongoing support, system maintenance and end-user training. Pivotal's
solutions are also relatively easy for end-users to learn, which results in
lower ongoing training costs. In addition, our software applications permit
modifications and upgrades to be transmitted to all users, including mobile
users, thereby reducing the cost of modifying the solutions.
- Scales With the Growing Needs of Pivotal's Customers. Many of Pivotal's
customers require that our solutions support their growing number of
employees, online customers and partners. Our solutions' architecture enables
our customers to expand our solutions as their businesses grow by adding
servers in a number of locations. This capability improves performance and
enables Pivotal's solutions to support larger numbers of concurrent users.
GROWTH STRATEGY
Pivotal's goal is to become a leading global provider of electronic business
solutions which combine customer relationship management and electronic commerce
solutions. The key elements of Pivotal's growth strategy are as follows:
- Extend the Scope of Pivotal's Applications. We intend to continue the
development of our applications to add new functionality, with a particular
emphasis on Internet-based selling, marketing and customer services. We also
intend to provide our customers with business modules designed for specific
industries that will further simplify the deployment and use of applications.
In addition, we plan to offer new versions of our applications that support a
wider variety of international customers and their respective business
practices and languages.
- Expand Pivotal's Worldwide Distribution Capacity. Pivotal currently has a
distribution strategy that includes direct sales personnel and resellers
which enables us to target a wide variety of customers in different
industries and geographical regions. We plan to continue to invest in our
worldwide distribution capacity to increase market share and penetration.
This investment will include expanding our direct sales force, continuing to
expand relationships with existing and new resellers and entering into
bundling arrangements with technology providers to provide complimentary
niche products to our customers.
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- Broaden Pivotal's Network of Strategic Relationships. We plan to continue
broadening our network of strategic relationships, including our Pivotal
Alliance network. The Pivotal Alliance network includes over 50 independent
companies that distribute our products, install the software purchased by our
customers and provide other software to address specific customer needs. This
network has allowed us to focus on our core competencies while taking
advantage of the strengths of Pivotal Alliance members who may have specific
industry expertise or better regional presence and are therefore better able
to address the needs of our customers and provide them with a complete
electronic business solution.
- Continue Focusing on Pivotal's Customers' Success. Pivotal will continue to
focus on providing customer solutions that help our customers achieve
business success. In particular, we plan to maintain a customer-focused
culture by inviting repeat business from existing customers as we make new
features available, and to gain new customers as our existing customers
become independent references for our solutions. We believe that the benefits
of our solutions have helped us to develop a loyal base of customers. Pivotal
intends to continue to focus significant resources on customer success
programs, including a systematic customer surveying process, to improve our
customer-driven product development initiatives and ultimately improve our
solutions.
- Partner with Application Service Providers to Offer Pivotal's Solutions on a
Usage Fee Basis. Pivotal will continue to enter into relationships to provide
an alternative licensing arrangement through third party application service
providers that enables customers to pay a usage fee to access Pivotal's
software on servers operated by the application service providers. This
enables businesses to outsource their electronic business solutions and
related information technology infrastructure through an alternative pricing
model, such as a monthly fee.
PRODUCTS AND PROFESSIONAL SERVICES
Pivotal's electronic business solutions include three primary products with
multiple options all of which are written on top of a highly customizable
electronic business computing platform. The three primary components are Pivotal
eRelationship, Pivotal ePower and Pivotal eSelling. These three products include
many additional optional applications, including Pivotal eRelationship
CustomerHub, Pivotal eRelationship PartnerHub, Pivotal Interaction Center,
Pivotal Intelligence Center, PivotalWeb .NET and Pivotal Toolkit. Pivotal's
products serve the needs of every stakeholder in the customer life cycle,
including employees, customers and partners and improve collaboration and
sharing of information among these stakeholders. Users can access Pivotal's
solutions with convenient portable computing devices. Pivotal's solutions
provide other access options, including local-area network-based, mobile and Web
browser users, as well as a special option that extends customer relationship
management capabilities to all Microsoft Outlook users. Our products are fully
integrated with one another and share a common database.
PIVOTAL PRODUCTS
Pivotal eRelationship. Pivotal eRelationship is a flexible application
for sales, marketing and service employees to manage interactions, transactions,
and knowledge with customers and business partners in personalized, one-to-one
eRelationships. This Web application extends the power of the Internet to sales,
marketing, and customer service departments to enable state-of-the-art
electronic marketing, electronic sales, electronic commerce and electronic
service. By accessing a wide range of capabilities employees can manage customer
and partner interactions, transactions and knowledge to maximize teamwork,
productivity and customer satisfaction. Pivotal eRelationship merges the power
of customer relationship management with electronic business, combining
information from corporate databases with live Internet resources.
Pivotal eRelationship supports the following functional groups and
processes within an organization:
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<TABLE>
<CAPTION>
FUNCTIONAL GROUPS PROCESSES
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<S> <C>
Marketing Marketing employees can build and manage
complex marketing campaigns, tailor
communications and track market, competitor
and customer trends.
Telemarketing Telemarketing employees can qualify leads,
manage opportunities and process orders.
Inside Sales Inside sales employees can efficiently
capture and track prospects, customize sales
processes, manage sales opportunities,
forecast sales and report on performance.
Field and Mobile Sales Field and mobile sales employees have the
same functionality available to them as
inside sales employees and in addition,
can work connected or disconnected to their
corporate network by using multiple portable
computing devices including laptops,
palm computers and Web enabled cell phones.
Order Administration Order administration employees can capture
and track orders in multiple currencies,
track order status and product movement and
report on order history and trends.
Customer Service Customer service employees can
efficiently capture, track and resolve
customer problems and notify, alert, and
coordinate activities with customer
relationship team members.
Management By providing access to valuable information
such as forecasts and product sales
statistics, management can better measure
and predict business performance and more
efficiently manage their operations
</TABLE>
Pivotal eSelling. Pivotal eSelling enables clients to sell complex
products and services over the Internet by providing an interactive buying
experience complete with needs analysis, recommendations, personalization and
advice. The benefits of Pivotal eSelling include: simplifying and shortening
clients' sales cycles for higher revenues and faster growth; increasing customer
satisfaction with personalized, self-guided buying experiences; and broadening
market coverage, thus extending sales reach.
Pivotal ePower. Pivotal ePower 2000 is an XML-based technology platform
that includes the tools, engines and templates required to rapidly deploy and
operate Pivotal's electronic business relationship management solution. This
platform is optimized for use in conjunction with the Microsoft .NET platform,
can be scaled to work in any size of business and is designed to allow all
employees, customers and business partners the ability to access and manipulate
the same information.
OPTIONAL APPLICATIONS
Pivotal eRelationship CustomerHub. Pivotal eRelationship CustomerHub
enables a business to transform a static information web site into a dynamic
collaborative tool used to service and sell to both existing and prospective
customers. Customers can access information about products and services, place
orders and access a shared database of solutions to previous customer requests
without interacting with customer service employees. Customers also can choose
to interact with customer service employees in real-time using online meeting
options. Prospective customers can register on a Web site to request
information, sign-up for marketing programs, submit information regarding
demographic data and specific needs and request an immediate call back from an
online salesperson. Businesses can use this information to prepare a customized
response for each prospect.
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Pivotal eRelationship PartnerHub. Pivotal eRelationship PartnerHub
enables businesses to establish Web sites that allow sales, marketing and
customer service employees to coordinate their activities with partners that
assist in the selling process. Pivotal eRelationship PartnerHub allows a partner
to share information regarding sales opportunities, co-marketing projects and
sales order status, and to order marketing material online. Pivotal
eRelationship PartnerHub also allows partners to share information about
customer service requests and their status. This application also enables
companies to build partner affiliations over the Internet.
Pivotal Intelligence Center. Pivotal Intelligence Center provides
Web-based tools for data mining, data analysis, and marketing campaign
management that help sales, marketing, and customer service professionals
analyze data and extract knowledge and insight which allows for better business
decisions.
Pivotal Interaction Center. Pivotal Interaction Center routes phone
calls, voice-mail, email, faxes, Internet chat, Web callback requests, and
voice-over-Internet calls. This allows organizations to replace traditional
systems made up of a private branch exchange (PBX), interactive voice response
unit (IVR), and automatic call distribution (ACD) using a single application.
Pivotal Toolkit. Pivotal Toolkit helps businesses to easily customize,
administer and adapt their Pivotal products without programming to meet business
specific needs. This option helps to reduce implementation and customization
costs, ongoing administrative burden and the need for employees with advanced
technical skills. Using Pivotal Toolkit's simple graphical, point-and-click user
interface, businesses can modify any aspect of their Pivotal system without
altering source code. Pivotal Toolkit also includes visual scripting tools,
called Pivotal agents, which allow users to create work flow processes that do
not require programming. By simply connecting arrows between objects on the
screen, users can automate and model business processes, develop sales scripts
and create online tutorials to guide other users through complex tasks.
PivotalHost. PivotalHost is an Internet hosting solution for Pivotal's
technology. PivotalHost is a solution whereby Pivotal provides customers access
to Pivotal's applications on a monthly subscription basis over the Internet
through an application service provider. This solution includes Pivotal
software, Microsoft software, server hardware, data center, secure Internet
connectivity from the data center, and information technology staff to
administer and support the customer's solution.
PivotalWeb .NET. PivotalWeb .NET (previously known as the Pivotal B2B
Syndicate) is a solution offered to Pivotal's customers in which multiple,
third-party, best-in-class Web based services and products are made available
through Pivotal to our customers. Instead of the customer having to spend time
and resources to identify, evaluate, engage and integrate such products and
services, we organize and present these products and services to our customers
in a very accessible and convenient way.
Pivotal Anywhere. Pivotal Anywhere enables mobile professionals to
access Pivotal's solutions remotely over the Internet by using a number of
portable computing devices including palm computers and Web-enabled cell phones.
PRODUCT PRICING
Pivotal eRelationship licenses are priced on a "per user" and "per server"
basis, as well as on the number of Internet users. Pivotal eRelationship
licenses include solutions for telemarketing, inside sales, field and mobile
sales, marketing, order administration, customer service and management. Pivotal
Toolkit is licensed on a per-site basis. All Pivotal solutions may be purchased
on a monthly subscription basis or as a one-time fee for perpetual licences.
PRODUCT AWARDS
The following table lists some of the awards Pivotal's products have won:
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<TABLE>
<CAPTION>
SPONSOR DATE AWARD
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<S> <C> <C>
Microsoft July 2000 North American Packaged Application Partner
of the Year
Microsoft February 2000 World Record for Scalability and Performance
Microsoft December 1999 Industry Solution Awards for 1999
- Best Internet Solution for Customer Service
- Best Integrated Customer Relationship
Management
December 1998 Industry Solution Awards for 1998 -- Best
Overall Customer Relationship Management
Solution
December 1997 Industry Solution Awards -- Best Mobile
Sales Solution
May 1997 Solutions Provider Awards -- Best Solution
by a Solution Developer
Upside Magazine February 2000 eBusiness Winner
Information Systems Marketing February 2000 Top 15 CRM Software Award
February 1999 Top 15 CRM Software Award
December 1997 Top 15 CRM Software Award
December 1996 Top 15 CRM Software Award
Open Systems Advisors January 1999 Crossroads 99 A-List Award
Information Week Magazine February 1999 IT Innovators for 1999
British Columbia Technology June 2000 Company of the Year
Industry Association
start Magazine July 2000 Hottest Companies of 2000
Deloitte & Touche September 2000 Fastest Growing Canadian Technology Company
</TABLE>
PROFESSIONAL SERVICES
Pivotal provides customers with access to a combination of services to
successfully implement and effectively maintain an electronic business
relationship management solution.
These services include:
- Technical Support and Maintenance. Pivotal maintains technical support
centers that provide telephone, Internet and email based problem
identification, analysis and resolution to our worldwide customer base.
Various levels of support are available depending on the needs of the
customer. Pivotal's technical support and maintenance services include
upgrades of our software applications.
- Education. Pivotal's education services are designed to educate our customers
and Pivotal Alliance members about the customization, use and administration
of our solutions. Pivotal offers education, training and certification that
helps our customers and selling partners to improve their ability to
implement Pivotal's solutions. Pivotal also offers customized and on-site
training classes to customers with specific needs.
- Implementation Services. Pivotal offers implementation services that include
project management and systems engineering. We provide a standardized
implementation methodology, which we call the rapid productivity methodology,
that enables the efficient implementation of our solutions. Customers can
work with Pivotal directly or retain one of the Pivotal Alliance members to
implement their Pivotal customer relationship management solutions. Members
of the Pivotal Alliance currently provide more than 95% of the implementation
services for our products. See "Strategic Relationships."
- Business Consulting. Pivotal offers business consulting services that are
focused on key customer relationship management trends such as the impact of
the Internet on customer relationships and the implementation of one-to-one
marketing and business practices. We also assist our customers in measuring
and maximizing return on customer relationship management investments.
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Pivotal's technical support and maintenance services are sold on a per user
basis and renewed annually. Pivotal's education fees are standardized on a per
day rate. Our business consulting services and implementation services are
priced on a time and materials basis. As of June 30, 2000, Pivotal had 122
employees in our Professional Services department.
CUSTOMERS AND MARKETS
We have licensed our applications on a worldwide basis to over 1000 customers
across a wide range of industries. Customers in North America accounted for 90%,
80% and 72% of our revenues in the years ended June 30, 1998, 1999 and 2000,
respectively.
Some of Pivotal's customers, that purchased a minimum of $100,000 of software
licenses from Pivotal prior to June 30, 2000, are set forth in the table below:
<TABLE>
<CAPTION>
CONSULTING INTERNET TECHNOLOGY
---------- -------- ----------
<S> <C> <C>
Deloitte & Touche Trader.com Bottomline Technologies
Diamond Technology Partners WebEx Inslogic Cadence Design Systems
KPMG Medpool.com Hewlett-Packard
Malcom Pirnie Broadcast.com (now Yahoo) Lernout & Hauspie
Peppers and Rogers Group BroadVision Lucent Technologies
Roy F. Weston E.piphany Macola
Icarian Micrografx
FINANCIAL SERVICES Net Wireless
------------------
INTERSHOP Communications Olicom A/S
Heller Financial Active Touch Seagate Software
Allied Capital Siemens Electric
Dain Rauscher Wessels MANUFACTURING Solectron
-------------
Principal Financial Group Sterling Software
Savills General Electric ZD Market Intelligence
USAA Holophane
Kimberly-Clark OTHERS
------
HEALTH CARE M.A. Hanna
-----------
Qiagen Australian New Zealand
Australian Red Cross US Gypsum Direct Line
Blue Cross Blue Shield of Novartis U.S. Naval Reserve
Michigan Recruiting Command
Novamed Eyecare Management OTHER SERVICES The Conference Board
--------------
Novartis Protezione Piante Virginia Economic
Pfizer Animal Health Intrawest Development Partnership
Sun Healthcare Group Addison-Wesley Longman
Syncor International Miller Freeman
Vance Publishing
Waggener Edstrom
UTILITIES
---------
CSW Energy Services
Southern Company Services
</TABLE>
SALES AND MARKETING
We sell our products through a direct sales force and over 50 independent
members of the Pivotal Alliance which resell Pivotal's products. Pivotal's
direct sales force is located in the United States, Canada, the United Kingdom
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and France, and the Pivotal Alliance solution providers are located in North and
South America, Europe, the Middle East and Asia.
Pivotal's marketing efforts are directed at promoting our products and services,
creating market awareness and generating leads. Pivotal's marketing activities
include online business seminars, print and online advertising campaigns and
attendance at industry trade show events and trade conferences. We use the
Internet extensively to communicate with potential customers, existing
customers, partners and others. We also conduct comprehensive public relations
programs that establish and maintain relationships with key trade press,
business press and industry analysts. Pivotal has a customer communications team
targeted at working directly with our customers to obtain feedback and to track
ongoing customer success stories. This team also performs a series of surveys on
each customer to assess the customer's satisfaction with our solutions and to
anticipate any further needs of the customer. As of June 30, 2000, we employed a
total of 204 people on our sales and marketing team.
STRATEGIC RELATIONSHIPS
PIVOTAL ALLIANCE
Pivotal Alliance members help Pivotal market, sell, implement, support and
enhance Pivotal's solutions. Members of the Pivotal Alliance include:
- Solution Providers. Pivotal has arrangements with over 50 third parties that
have been granted the right to market and re-sell our products and to provide
education, implementation and customization services for the solutions sold
by the third party as well as for most of the sales made through Pivotal's
direct sales team. Pivotal refers to these third parties as solution
providers. Solution providers usually address the market needs of a specific
region, permitting us to sell our solutions in markets that might otherwise
be difficult for Pivotal to serve directly. Over 40 of Pivotal's solution
providers are outside the United States and Canada. In some foreign markets,
Pivotal relies on selected solution providers to customize our solutions and
translate our software applications into local languages.
- Systems Integrators. Pivotal has arrangements with over 20 third parties that
have been granted the right to provide implementation, customization and
training services to customers who have purchased solutions through Pivotal's
direct sales team. Pivotal refers to these third parties as systems
integrators. Our systems integrators include worldwide partners such as KPMG
as well as partners focused on specific regional markets.
- Technology Providers. Pivotal has arrangements with over 25 third parties
that supply software applications that can be integrated with our solutions
to address specific industry or customer requirements. Pivotal refers to
these third parties as technology providers. We are developing relationships
with technology providers in a number of product categories including
Internet applications, client/server applications, business productivity,
reporting, finance, mobile office products, communications, sales
configurators, data mining, business information suppliers and vertical
market solutions. The purpose of these relationships is to expand the breadth
of technology and services available to our customers.
Pivotal provides education and training services to members of the Pivotal
Alliance to increase their understanding of Pivotal's solutions. Pivotal is
implementing a certification program that will require members of the Pivotal
Alliance that perform implementation and customization services to meet our
certification standards in the areas of business analysis, systems design,
installation, customization, training and support. Pivotal intends to expand the
Pivotal Alliance and to upgrade the capabilities of its members.
MICROSOFT
Pivotal participates with Microsoft in numerous industry tradeshows, partner
focused events, public relations activities, seminars and presentations. Pivotal
has chosen to align our product development, sales and marketing strategies with
Microsoft. Pivotal's strong relationship with Microsoft, as evidenced by
Pivotal's participation in the launch of Microsoft Windows 2000, has enabled
Pivotal to participate in early product development initiatives with
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them. As a result, Pivotal's products are optimized for Microsoft platforms. We
have won several awards from Microsoft in the following categories: ability to
deliver customer satisfaction and return on investment, scalability, ease of
deployment, integration with other applications, and technical architecture.
TECHNOLOGY
Pivotal's software architecture provides a foundation for the development of new
and innovative products and allows our applications to be easily adaptable, to
operate with other applications and to address the needs of users on multiple
computing devices. This software architecture also allows Pivotal's applications
to be used over the Internet. Pivotal has invested in the following technologies
which serve as a basis for our customer relationship management solutions:
- Microsoft Technology. Pivotal's applications are optimized for the Microsoft
Windows NT, Microsoft Windows 2000 and Microsoft BackOffice platforms. Our
focused development efforts have enabled Pivotal to create solutions that
exploit the capabilities of Microsoft's products, including SQL Server, that
are bundled and licensed with Pivotal's solutions. We also created a direct
link between our products' databases and Microsoft Outlook, that allows our
customers to use the familiar interface of Microsoft Outlook to update their
calendar, tasks and contact information. In addition, Pivotal's solutions use
Microsoft Internet technologies to publish information across the Internet.
- Platform Architecture. Pivotal's applications are structured to be able to
use XML both within the platform architecture and for interfacing to the
applications. This allows Pivotal's professional service staff, partners and
customers the ability to work in the applications in an industry standard
fashion allowing integration with other systems and technologies. This also
allows for a well defined interface between Pivotal's applications thereby
reducing the dependency between such applications. In addition, it allows
Pivotal to more easily integrate other XML capable technologies and products
into our applications and offerings.
- Metadata Repository. Pivotal's software contains a database, called a
metadata repository, that is the blueprint for each application's data
structure, forms, lists, business rules, work flow, queries and reports. The
inclusion of this database allows for rapid adaptability and deployment by
enabling customization to occur without source code modification. A business
can distribute custom application changes throughout its organization in the
normal data synchronization process. Pivotal believes these benefits
differentiate our solution from those of our competitors.
- Pivotal's SyncStream. Pivotal's SyncStream captures any additions,
modifications or deletions to our application and the shared corporate
database and transmits only the net changes to the appropriate users. This
technology eases the deployment of new applications, minimizes the connection
costs associated with the synchronization of data, transmits changes securely
and enables mobile users to receive the correct data when synchronizing.
- Distributed Database Design. Pivotal's solution is designed to support
databases that reside on multiple servers. This design allows data from the
central database to be replicated to servers in different locations and on
mobile remote databases (eg. laptops), and to be updated by Pivotal's
SyncStream. This allows for scalability and configuration flexibility as
customers can upgrade network hardware and software in a modular fashion with
minimal loss of performance and downtime.
- Pivotal's Enterprise Manager. Pivotal's Enterprise Manager provides
centralized configuration management through a graphical user interface. The
Enterprise Manager enables system administrators to audit and apply
configuration changes to the application, manage and test customization
changes off-line and replicate custom data sets for mobile users. From a
single interface, customers can distribute an updated system online across
the entire enterprise without downtime for users.
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RESEARCH AND DEVELOPMENT
Pivotal's research and development department is divided into six teams:
Advanced Technology, Software Development, Documentation, Quality Assurance,
Program Management and Product Management. As of June 30, 2000, there were 126
employees in Pivotal's research and development department. To expand the
capacity of Pivotal's research and development department, where appropriate, we
contract with third-party developers.
Pivotal's software development approach consists of a methodology that provides
guidelines for planning, controlling and implementing projects. Our Advanced
Technology team focuses on tracking and evaluating new technologies with a view
to incorporating the best technologies available into our solutions. Pivotal's
Product Management team gathers and documents market requirements and trends in
a requirements analysis. After the requirements analysis has been reviewed for
feasibility and the proposed project approved by management, a cross-functional
team is established to implement the project. Pivotal's Program Management team
takes responsibility for documenting a detailed product specification. The
Program Management team designs prototypes to assess the risks and business
requirements of a project at this stage. This enables programmers in the
Software Development team to concentrate solely on research and development
activities. Through the later stages of development we perform final testing and
quality assurance. Pivotal's Product Management team is involved at all stages
of development so that market requirements continue to be addressed. The Product
Management team also assists with the introduction of the product by training
our direct sales force and internal professional services staff.
Pivotal places particular emphasis on quality assurance and testing throughout
the development process. We use version control software as well as standard
test tools, scripts and agents developed by Pivotal in order to automate our
testing processes and increase the quality of code we develop.
COMPETITION
The market for Pivotal's software is intensely competitive, fragmented and
rapidly changing. Pivotal faces competition from companies in two distinct
markets, the customer relationship management software market and the electronic
commerce software market.
Competitors in the electronic commerce software market include Internet
relationship management and other electronic commerce software companies such as
Vignette Corporation, Kana Communications Inc., Calico Commerce Inc., Selectica
Inc. and Primus Knowledge Solutions Inc. Competitors in the customer
relationship management software market include vendors such as Siebel Systems,
Inc., Onyx Software Corporation and Clarify, Inc. Pivotal expects competition
from companies like these to continue to increase.
Our competitors in each of these markets may enter the other market as they
develop new products and applications and as demand for products in either
market grows. It is also possible that Microsoft Corporation may decide to
introduce products that compete with those of Pivotal.
In addition, as Pivotal develops new products, particularly applications focused
on electronic commerce or on specific industries, we may begin competing with
companies with whom we have not previously competed. It is also possible that
new competitors will enter the market or that our competitors will form
alliances that may enable them to rapidly increase their market share. Some of
Pivotal's actual and potential competitors are larger, better established
companies that have greater technical, financial and marketing resources.
Increased competition may result in price reductions, lower gross margins or
loss of our market share, any of which could materially adversely affect our
business, financial condition and operating results.
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
Pivotal relies on a combination of copyright, trade secret and trademark laws,
confidentiality procedures, contractual provisions and other similar measures to
protect our proprietary information and technology. Pivotal does not currently
hold any patents nor do we have any patent applications pending. There can be no
assurance that any copyrights or trademarks held by Pivotal will not be
challenged or invalidated.
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As part of Pivotal's confidentiality procedures, we have a policy of entering
into non-disclosure and confidentiality agreements with our employees,
consultants, corporate alliance members, customers and prospective customers.
Pivotal also enters into license agreements with respect to our technology,
documentation and other proprietary information. These licenses are perpetual
and are generally transferable subject to obtaining Pivotal's prior consent.
Despite the efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain the use of Pivotal products or technology
that we consider proprietary and third parties may attempt to develop similar
technology independently. We pursue registration and protection of our
trademarks primarily in the United States, although we do seek protection
elsewhere in selected key markets. Effective protection of intellectual property
rights may be unavailable or limited in some countries. The laws of some
countries do not protect Pivotal's proprietary rights to the same extent as in
the United States and Canada. There can be no assurance that protection of
Pivotal's proprietary rights will be adequate or that our competitors will not
independently develop similar technology.
We anticipate that companies that develop software applications will be subject
to infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. As a result, Pivotal may become involved in these claims. Any of these
claims, with or without merit, could result in costly litigation, divert our
management's time, attention and resources, delay our product shipments or
require us to enter into royalty or license agreements. If a claim of product
infringement against Pivotal is successful, our business and operating results
could be seriously harmed.
EMPLOYEES
As of June 30, 2000 we had a total of 526 employees, excluding independent
contractors and temporary employees. Of this number, 126 people were engaged in
research and development, 204 people were engaged in sales and marketing, 122
people were engaged in professional services and 74 people were engaged in
general administration. No employees are known by us to be represented by a
collective bargaining agreement and we have never experienced a strike or work
stoppage. We consider our employee relations to be good. Our ability to achieve
our financial and operational objectives depends in large part upon our ability
to attract, retain and motivate highly qualified sales, technical and managerial
personnel. There can be no assurance that we will be able to attract and retain
such employees in the future.
RECENT DEVELOPMENTS
EXACTIUM ACQUISITION
Under an agreement dated April 12, 2000, effective June 2, 2000, Pivotal
purchased all of the outstanding shares of Exactium Ltd., an Israeli company
based in Atlanta, Georgia. Exactium is a leading electronic selling software
provider whose Internet products enable companies to sell complex products and
services on their electronic commerce Web sites with intelligent features such
as needs analysis, product and service recommendation, advice on features and
options and configuration of complex orders. The aggregate purchase price under
this agreement was approximately U.S.$45,140,000, less indebtedness owing to
Exactium by the selling shareholders and other closing adjustments. A portion of
the purchase price was satisfied by the issuance of 1,116,955 common shares of
Pivotal. In addition, Pivotal agreed to amendments to Exactium's stock option
plan whereby options to purchase 137,000 common shares of Exactium held by the
selling shareholders became options to purchase 108,424 common shares in the
capital of Pivotal at an exercise price equal to 1.26343 times the exercise
price of the Exactium options that were amended.
Prior to the closing of the acquisition by Pivotal, Exactium was majority-owned
by publicly-held Industrial & Financial Systems AB, a global leader in the
enterprise application marketplace. Concurrent with the transaction, Pivotal and
IFS have established an agreement whereby IFS will distribute Pivotal's
solutions, and Pivotal will provide support services for IFS's customers and
prospects.
Upon completion of the acquisition, Exactium was established as the Pivotal
Intelligent eSelling Product Division and Eli Barak, the CEO of Exactium, was
appointed to the position of vice president and general manager of the product
division.
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SIMBA ACQUISITION
Pivotal entered into an agreement dated May 29, 2000 to purchase all the issued
and outstanding shares of Simba Technologies Inc. which completed on June 26,
2000. Simba is a private developer of electronic marketing analytics solutions
that enable companies to transform multiple Internet activities into a single,
integrated "digital conversation". This enables the collector of the data to
obtain a profile of customer's preferences, needs and behavior trends, allowing
them to anticipate buying patterns and tailor marketing campaigns. The aggregate
purchase price under the terms of the Simba purchase agreement was approximately
U.S.$17,590,000 and satisfied by Pivotal issuing 537,823 common shares of
Pivotal to holders of securities of Simba and by agreeing to amendments to
Simba's stock option plan whereby options to purchase approximately 3,900,000
common shares of Simba held by the selling shareholders became options to
purchase 299,645 common shares in the capital of Pivotal at an exercise price
equal to 13 times the exercise price of the Simba options that were amended.
IMPORTANT FACTORS THAT MAY AFFECT OUR BUSINESS, OUR RESULTS OF OPERATIONS AND
OUR STOCK PRICE
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy or completeness of
forward-looking statements. You should consider our forward-looking statements
in light of the following risk factors and other information in this annual
report. If any of the risks described below occurs, our business, results of
operation and financial condition could differ from those projected in our
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of the annual report. You should not
place undue reliance on forward-looking statements.
FACTORS RELATING TO OUR BUSINESS AND THE MARKET FOR DEMAND CHAIN NETWORK
SOLUTIONS MAKE OUR FUTURE OPERATING RESULTS UNCERTAIN AND MAY CAUSE THEM TO
FLUCTUATE FROM PERIOD TO PERIOD
Our operating results have varied in the past and we expect that they may
continue to fluctuate in the future. In addition, our operating results may not
follow any past trends. Some of the factors that could affect the amount and
timing of our revenues from software licenses and related expenses and cause our
operating results to fluctuate include:
- market acceptance of our solutions;
- the length and variability of the sales cycle for our solutions, which
typically ranges between two and six months from our initial contact with a
potential customer to the signing of a license agreement;
- the timing of customer orders, which can be affected by customer order
deferrals in anticipation of new product introductions, product enhancements
and customer budgeting and purchasing cycles;
- our ability to successfully expand our sales force and marketing programs;
- our ability to successfully expand our international operations;
- the introduction or enhancement of our solutions or our competitors'
solutions;
- changes in our or our competitors' pricing policies;
- our ability to develop, introduce and market new solutions on a timely basis;
and
- general economic conditions, which may affect our customers' capital
investment levels in management information systems.
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<PAGE> 18
Our product revenues are not predictable with any significant degree of
certainty and future product revenues may differ from historical patterns.
Historically, we have recognized a substantial portion of our revenues in the
last month of a quarter. If customers cancel or delay orders, it can have a
material adverse impact on our revenues and results of operations from quarter
to quarter. Because our results of operations may fluctuate from quarter to
quarter, you should not assume that you could predict results of operations in
future periods based on results of operations in past periods.
Even though our revenues are difficult to predict, we base our expected expense
levels in part on future revenue projections. Many of our expenses are fixed and
we cannot quickly reduce spending if revenues are lower than expected. This
could result in significantly lower earnings or greater losses than we
anticipate for any given period.
WE EXPECT SEASONAL TRENDS TO CAUSE OUR QUARTERLY LICENSE REVENUES TO FLUCTUATE
AND IN RECENT YEARS OUR LICENSE REVENUES FOR THE FOURTH QUARTER OF OUR FISCAL
YEAR HAVE EXCEEDED THE REVENUES FOR THE FOLLOWING QUARTER
We have experienced, and expect to continue to experience, seasonality with
respect to product license revenues. In recent years, we have experienced
relatively greater revenues from licenses in the fourth quarter of our fiscal
year, which ends June 30th, than in each of the first three quarters,
particularly the first quarter. We have historically recognized more license
revenues in the fourth quarter of our fiscal year and recognized less license
revenues in the subsequent first quarter. We believe that these fluctuations are
caused in part by customer buying patterns and the efforts of our direct sales
force to meet or exceed fiscal year-end quotas. In addition, our sales in Europe
are generally lower during the summer months than during other periods. We
expect that these seasonal trends are likely to continue in the future. If
revenues for a quarter ending September 30 are lower than the revenues for the
prior quarter, it may be hard to determine whether the reason for the reduction
in revenues involves seasonal trends or other factors adversely affecting our
business.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT HOW OUR BUSINESS
WILL DEVELOP AND FUTURE OPERATING RESULTS
We commenced operations in January 1991. We initially focused on the development
of application software for pen computers. In September 1994, we changed our
focus to research and development of demand chain network solutions. We
commercially released the initial versions of our solutions on the following
dates:
- Pivotal Relationship in April, 1996;
- Pivotal eRelationship in February, 1999;
- Pivotal Anywhere in October, 1999;
- Pivotal eRelationship 2000 in February, 2000;
- Pivotal eSelling 2000 in June, 2000; and
- Pivotal ePower 2000 (originally a component of eRelationship) in June, 2000.
We have a limited operating history and we face many of the risks and
uncertainties encountered by early-stage companies in rapidly evolving markets.
These risks and uncertainties include:
- no history of profitable operations;
- uncertain market acceptance of our solutions;
- our reliance on a limited number of solutions;
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<PAGE> 19
- the risks that competition, technological change or evolving customer
preferences could adversely affect sales of our solutions;
- the need to expand our sales and support capabilities;
- our reliance on third parties to market, install and support our solutions;
- our dependence on a limited number of key personnel, including our
co-founders; and
- the risk that our management will not be able to effectively manage growth or
acquisitions we have undertaken or may undertake in the future.
The new and evolving nature of the demand chain network solutions market
increases these risks and uncertainties. Our limited operating history makes it
difficult to predict how our business will develop and our future operating
results.
WE HAVE A HISTORY OF LOSSES, WE MAY INCUR LOSSES IN THE FUTURE AND OUR LOSSES
MAY INCREASE BECAUSE OF OUR PLAN TO INCREASE OPERATING EXPENSES
We have incurred net losses in each fiscal year since inception, except for the
year ended June 30, 1998, in which we had net income of approximately $4,000. As
at June 30, 2000, we had an accumulated deficit of approximately $15.8 million.
We have increased our operating expenses in recent periods and plan further
increases in the future. Our planned increases in operating expenses may result
in larger losses in future periods. As a result, we will need to generate
significantly greater revenues than we have to date to achieve and maintain
profitability. We cannot assure you that our revenues will increase. Our
business strategies may not be successful and we may not be profitable in any
future period.
THE MARKET FOR OUR SOLUTIONS IS HIGHLY COMPETITIVE
The market for our software is intensely competitive, fragmented and rapidly
changing. We face competition from companies in two distinct markets, the demand
chain network solutions market and the electronic commerce software market.
In addition, as we develop new solutions, particularly applications focused on
electronic commerce or specific industries, we may begin competing with
companies with whom we have not previously competed. It is also possible that
new competitors will enter the market or that our competitors will form
alliances that may enable them to rapidly increase their market share.
Some of our actual and potential competitors are larger, more established
companies and have greater technical, financial and marketing resources.
Increased competition may result in price reductions, lower gross margins or
loss of our market share, any of which could materially adversely affect our
business, financial condition and operating results.
WE DEPEND UPON MICROSOFT AND THE CONTINUED ADOPTION AND PERFORMANCE OF THE
MICROSOFT WINDOWS 2000 AND MICROSOFT BACKOFFICE PLATFORMS
We have designed our solutions to operate on the Microsoft Windows 2000 and
Microsoft BackOffice platforms. The Windows 2000 operating system is a new
product of Microsoft released in February 2000. We have spent considerable
resources testing the compatibility of our product with the Windows 2000
operating system. The performance of our solutions with the Windows 2000
operating system has limited experience in the marketplace. As a result, we
market our solutions exclusively to customers who have developed their computing
systems around these platforms.
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Our future financial performance will depend on continued growth in the number
of businesses that successfully adopt the Microsoft Windows 2000 and Microsoft
BackOffice computing platforms. The Microsoft Windows 2000 and Microsoft
BackOffice computing platforms face increasing competition, particularly from
platforms such as Unix and Linux, databases from companies such as Oracle and
IBM and Internet server software from companies such as Sun Microsystems, Inc.
Acceptance of the Microsoft Windows 2000 and Microsoft BackOffice platforms may
not continue to increase in the future. The market for software applications
that run on these platforms has in the past been significantly affected by the
timing of new product releases, competitive operating systems and enhancements
to competing computing platforms. If the number of businesses that adopt
Microsoft Windows 2000 and Microsoft BackOffice fails to grow or grows more
slowly than we currently expect, or if Microsoft delays the release of new or
enhanced solutions, our revenues from Pivotal eRelationship 2000 could be
adversely affected.
The performance of our solutions depends, to some extent, on the technical
capabilities of the Microsoft Windows 2000 and Microsoft BackOffice platforms.
If these platforms do not meet the technical demands of our solutions, the
performance or scalability of our solutions could be limited and, as a result,
our revenues from Pivotal eRelationship 2000 could be adversely affected. It is
also possible that Microsoft Corporation may decide to introduce solutions or
services that compete with ours.
Broad antitrust actions initiated by federal and state regulatory authorities
have resulted in a verdict against Microsoft. The government has proposed that,
as a result of the verdict, Microsoft should be divided into two companies.
Microsoft has appealed the verdict to the U.S. Court of Appeals for the District
of Columbia. Any outcome to these actions that weakens the competitive position
of Microsoft Windows 2000 or BackOffice solutions could adversely affect the
market for our solutions.
THE MARKET FOR OUR SOLUTIONS IS NEW AND HIGHLY UNCERTAIN AND OUR PLAN TO FOCUS
ON INTERNET-BASED APPLICATIONS AND TO INTEGRATE ELECTRONIC COMMERCE FEATURES
ADDS TO THIS UNCERTAINTY
The market for demand chain network solutions is still emerging and continued
growth in demand for and acceptance of demand chain network solutions remains
uncertain. Even if the market for demand chain network solutions grows,
businesses may purchase our competitors' solutions or develop their own. We
believe that many of our potential customers are not fully aware of the benefits
of demand chain network solutions and, as a result, these solutions may never
achieve full market acceptance.
The development of our Internet-based solutions for demand chain management
presents additional challenges and uncertainties. We are uncertain how
businesses will use the Internet as a means of communication and commerce and
whether a significant market will develop for Internet-based demand chain
network solutions. The use of the Internet is evolving rapidly and many
companies are developing new solutions and services that use the Internet. We do
not know what forms of solutions and services may emerge as alternatives to our
existing solutions or to any future Internet-based or electronic commerce
features and services we may introduce. We have spent and will continue to
spend, considerable resources educating potential customers about our solutions
and demand chain network solutions in general. However, even with these
educational efforts, market acceptance of our solutions may not increase. If the
markets for our solutions do not grow or grow more slowly than we currently
anticipate, our revenues may not grow and may even decline.
We commenced our PivotalHost program in October 1999, whereby we provide
customers access to our software applications on a monthly subscription basis
over the Internet through an application service provider. Since the inception
of the PivotalHost program, a majority of our new customers have continued to
purchase perpetual licenses rather than subscribing to the PivotalHost program.
We do not know if this will prove to be a successful business model in the
future. If it proves to be a successful business model in the future, we may
experience a significant change in our revenue recognition due to the
recognition of license revenue over the extended life of the contract rather
than revenue recognition on delivery of the product.
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We commenced our PivotalWeb .NET in October 1999 (formerly known as the
business-to-business (B2B) Syndicate program). Under this program, we use the
Internet to furnish our customers with information or services provided by the
PivotalWeb .NET members. We do not know if this will continue to be a successful
business model or if it will result in any material revenue for Pivotal.
OUR SUCCESS WILL DEPEND UPON THE SUCCESS OF OUR SOLUTIONS
We anticipate that a majority of our revenues and growth in the foreseeable
future will come from sales of our integrated product suite, consisting of
Pivotal eRelationship 2000, IntraHub, eRelationship 2000 CustomerHub and
eRelationship 2000 PartnerHub product suite licenses and related services.
Accordingly, failure of our integrated product suite to gain increased market
acceptance and to compete successfully would adversely affect our business,
results of operations and financial condition. Our future financial performance
will depend on our ability to succeed in the continued sale of our integrated
product suite and related services, as well as the development of new versions
and enhancements of these products.
THE SUCCESS OF OUR SOLUTIONS WILL DEPEND UPON THE CONTINUED USE AND EXPANSION OF
THE INTERNET
Increased sales of our solutions and any future Internet-based applications and
electronic commerce features we integrate with our current solutions, will
depend upon the expansion of the Internet as a leading platform for commerce and
communication. If the Internet does not continue to become a widespread
communications medium and commercial marketplace, the demand for our solutions
could be significantly reduced and our solutions and any future Internet-based
and electronic commerce features may not be commercially successful. The
Internet infrastructure may not be able to support the demands placed on it by
continued growth. The Internet could lose its viability due to delays in the
development or adoption of new equipment, standards and protocols to handle
increased levels of Internet activity, security, reliability, cost, ease of use,
accessibility and quality of service.
Other concerns that could inhibit the growth of the Internet and its use by
business as a medium for communication and commerce include:
- concerns about security of transactions conducted over the Internet;
- concerns about privacy and the use of data collected and stored recording
interactions over the Internet;
- the possibility that federal, state, local or foreign governments will adopt
laws or regulations limiting the use of the Internet or the use of
information collected from communications or transactions over the Internet;
and
- the possibility that governments will seek to tax Internet commerce.
WE DEPEND ON THIRD-PARTY WIRELESS SERVICE PROVIDERS FOR THE SUCCESSFUL
IMPLEMENTATION OF OUR PIVOTAL ANYWHERE SOLUTION
Our Pivotal Anywhere solution provides a wireless platform that allows our other
solutions to be accessed wirelessly. We depend on third-party providers of
wireless services for the successful implementation of Pivotal Anywhere. Because
Pivotal Anywhere relies on wireless services developed and maintained by third
parties, we depend on these third parties' abilities to deliver and support
reliable wireless services. The wireless industry is new and rapidly developing
and involves many risks, including:
- extensive government regulation in licensing, construction, operation, sale
and interconnection arrangements of wireless telecommunications systems which
may prevent our third-party providers from successfully expanding their
wireless services;
- rapid expansion of the wireless services infrastructure which may result in
flaws in the infrastructure; and
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<PAGE> 22
- concerns over radio frequency emissions or other health and safety risks
which may discourage use of wireless services.
OUR FUTURE REVENUE GROWTH COULD BE IMPAIRED IF WE ARE UNABLE TO EXPAND OUR
DIRECT SALES AND SUPPORT INFRASTRUCTURE
Our future revenue growth will depend in large part on our ability to
successfully expand our direct sales force and our customer support capability.
We may not be able to successfully manage the expansion of these functions or to
recruit and train additional direct sales, consulting and customer support
personnel. There is presently a shortage of qualified personnel to fill these
positions. If we are unable to hire and retain additional highly skilled direct
sales personnel, we may not be able to increase our license revenue to the
extent necessary to achieve profitability. If we are unable to hire highly
trained consulting and customer support personnel we may be unable to meet
customer demands. We are not likely to be able to increase our revenues as we
plan if we fail to expand our direct sales force or our consulting and customer
support staff. Even if we are successful in expanding our direct sales force and
customer support capability, the expansion may not result in revenue growth.
WE RELY ON OUR PIVOTAL ALLIANCE NETWORK OF INDEPENDENT COMPANIES TO SELL,
INSTALL AND SERVICE OUR SOLUTIONS AND TO PROVIDE SPECIALIZED SOFTWARE FOR USE
WITH THEM AND OUR PIVOTAL HOST PROGRAM RELIES ON THIRD-PARTY APPLICATION SERVICE
PROVIDERS
We do not have the internal implementation and customization capability to
support our current level of sales of licenses. Accordingly, we have established
and relied on our international network of independent companies we call the
Pivotal Alliance. Members of the Pivotal Alliance market and sell our solutions,
provide implementation services, provide technical support and maintenance on a
continuing basis and provide us with software applications that we can bundle
with our solutions to address specific industry and customer requirements.
Approximately 24% and 28% of our revenues for the years ended June 30, 2000 and
1999, respectively, were from sales made through third-party resellers. Almost
all of our customers retain members of the Pivotal Alliance to install and
customize our solutions. If we fail to maintain our existing Pivotal Alliance
relationships, or to establish new relationships, or if existing or new members
of the Pivotal Alliance do not perform to our expectations, our ability to sell,
install and service our solutions may suffer.
There is an industry trend toward consolidation of systems integrators that
implement, customize and maintain solutions. Some of the systems integrators in
the Pivotal Alliance have engaged in discussions concerning business
consolidations. We are uncertain as to the effect that any consolidation may
have on our relationships with members of the Pivotal Alliance.
The success of our PivotalHost program will depend on the commitment and
performance of third-party application service providers to successfully
implement and market services that incorporate our solutions.
THE LOSS OF OUR CO-FOUNDERS OR OTHER KEY PERSONNEL OR OUR FAILURE TO ATTRACT AND
RETAIN ADDITIONAL PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS
Our success depends largely upon the continued service of our executive officers
and other key management, sales and marketing and technical personnel. The loss
of the services of one or more of our executive officers or other key employees
could have a material adverse effect on our business, results of operations and
financial condition. In particular, we rely on our co-founders, Norman Francis,
President, Chief Executive Officer and director and Keith Wales, our Chief
Technical Officer and director. We do not have employment agreements with
Messrs. Francis and Wales and, therefore, Messrs. Francis and Wales could
terminate their employment with us at any time without penalty. Nor do we
maintain key man life insurance on the lives of Messrs. Francis and Wales.
Our future success also depends on our ability to attract and retain highly
qualified personnel. The competition for qualified personnel in the computer
software and Internet markets is intense and we may be unable to attract or
retain highly qualified personnel in the future. In addition, due to intense
competition for qualified employees, it may be necessary for us to increase the
level of compensation paid to existing and new employees to the degree that our
operating expenses could be materially increased.
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<PAGE> 23
WE FACE RISKS FROM THE EXPANSION OF OUR INTERNATIONAL OPERATIONS
We intend to substantially expand our operations outside the United States and
Canada. We began by acquiring Transitif in France and opening offices in the
Republic of Ireland, the United Kingdom, the Netherlands, Germany, Japan,
Australia and New Zealand. We expect to continue this expansion of our
international operations. International operations are subject to numerous
inherent potential risks, including:
- unexpected changes in regulatory requirements;
- export restrictions, tariffs and other trade barriers;
- changes in local tax rates or rulings by local tax authorities;
- challenges in staffing and managing foreign operations, differing technology
standards, employment laws and practices in foreign countries;
- less favorable intellectual property laws;
- longer accounts receivable payment cycles and difficulties in collecting
payments;
- political and economic instability; and
- fluctuations in currency exchange rates and the imposition of currency
exchange controls.
Any of these factors could have a material adverse effect on our business,
financial condition or results of operations.
Our international expansion will require significant management attention and
financial resources. We will have to significantly enhance our direct and
indirect international sales channels and our support and services capabilities.
We may not be able to maintain or increase international market demand for our
solutions. We may not be able to sustain or increase international revenues from
licenses or from consulting and customer support.
In some foreign countries we rely on selected solution providers to translate
our software into local languages, adapt it to local business practices and
complete installations in local markets. We are highly dependent on the ability
and integrity of these solution providers and if any of them should fail to
properly translate, adapt or install our software, our reputation could be
damaged and we could be subjected to liability. If any of these solution
providers should fail to adequately secure our software against unauthorized
copying, our proprietary software could be compromised.
POLITICAL UNREST MAY ADVERSELY AFFECT THE OPERATION OF OUR EUROPEAN CUSTOMER
SUPPORT CENTER LOCATED IN NORTHERN IRELAND
We have 15 employees located in our Belfast, Northern Ireland customer support
center. This center provides customer support primarily to all of our customers
in Europe and provides back-up support for other customers around the world.
Northern Ireland has historically experienced periods of religious, civil and
political unrest. Northern Ireland may experience further unrest which could
disrupt our ability to provide customer support to our customers and have a
material adverse effect on our results of operations and financial condition.
FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND RISKS ASSOCIATED WITH OUR HEDGING
POLICIES MAY AFFECT OUR OPERATING RESULTS
Substantially all of our revenues and corresponding receivables are in United
States dollars. However, a majority of our research and development expenses,
customer support costs and administrative expenses are in Canadian dollars. In
the quarter ended March 31, 1999, we adopted a hedging policy intended to reduce
the effects of foreign exchange fluctuations on our results of operations. As
part of our hedging policy, we identify our future Canadian currency
requirements related to payroll costs, capital expenditures and operating lease
commitments and purchase forward
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<PAGE> 24
exchange contracts at the beginning of an operational period to cover these
currency needs. The operational period for our contracts is generally limited to
two quarters. If our actual currency requirements differ materially from our
hedged position during periods of currency volatility, or if we do not continue
to hedge our Canadian currency commitments, we could experience unanticipated
currency gains or losses.
Our hedging policy subjects us to risks relating to the creditworthiness of the
commercial banks that we contract with in our hedging transactions. If one of
these banks cannot honor its obligations, we may suffer a loss.
We also invest in our international operations which will likely result in
increased future operating expenses in United Kingdom pound sterling, French
franc, Euro, German mark, Japanese yen, Australian dollars and New Zealand
dollars. We are exposed to fluctuations in the exchange rates between the United
States dollar and these currencies. Our exposure to exchange fluctuations in
these foreign currencies has been minimal to date. Accordingly, our current
hedging practice does not cover any foreign exchange risk related to these
operations.
The purpose of our hedging policy is to reduce the effect of exchange rate
fluctuations on our results of operations. Therefore, while our hedging policy
reduces our exposure to losses resulting from unfavorable changes in currency
exchange rates, it also reduces or eliminates our ability to profit from
favorable changes in currency exchange rates.
WE HAVE EXPERIENCED RAPID GROWTH WHICH HAS PLACED A STRAIN ON OUR RESOURCES AND
ANY FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD CAUSE OUR BUSINESS TO SUFFER
We have been expanding our operations rapidly and intend to continue this
expansion for the foreseeable future. The number of our employees increased from
151 on June 30, 1998 to 270 on June 30, 1999. As of June 30, 2000 we had 526
employees, 76 of which were added through acquisitions in the last quarter of
2000. This expansion has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources as we
integrate and manage new employees, more locations and more customers, supplier
and other business relationships. In the past we have decided to and in the
future we may need to improve or replace our existing operational and customer
service systems, procedures and controls. Any failure by us to properly manage
our growth of these systems and procedural transitions could impair our ability
to efficiently manage our business, to maintain and expand important
relationships with members of the Pivotal Alliance and other third parties and
to attract and service customers which could cause us to incur higher operating
costs and delays in the execution of our business plan or in the reporting or
tracking of our financial results.
THE INTEGRATION OF TRANSITIF, EXACTIUM, SIMBA AND ANY FUTURE ACQUISITIONS MAY BE
DIFFICULT AND DISRUPTIVE
We are currently in the process of integrating the Transitif, Exactium and Simba
businesses with our business and we are expending significant financial
resources in this effort. The integration of these three companies is subject to
risks commonly encountered in acquisitions, including, among others, risk of
loss of key personnel, difficulties associated with assimilating ongoing
businesses and the ability of our sales force and consultants to integrate. We
will also need to integrate the solutions of Exactium and Simba into our product
offerings. We may not successfully overcome these risks or any other problems
that may be encountered in connection with the acquisitions of Transitif,
Exactium or Simba. Accordingly, it is uncertain whether we will receive the
benefits we anticipate from these acquisitions and we may not realize value from
these acquisitions comparable to the resources we have invested in them.
Amortization of intangible assets resulting from acquisitions will
adversely affect our reported income. In connection with the acquisitions of
Exactium, Simba and Transitif, we allocated an aggregate of $58.1 million of the
purchase prices to intangible assets that we are amortizing over a period of
three years on a straight-line basis. During the year ending June 30, 2001, we
expect amortization expenses related to these intangible assets to be
approximately $20.0 million. Future acquisitions may result in the creation of
significant additional intangible assets and related amortization expense.
As part of our business strategy, we may seek to grow by making additional
acquisitions. We may not effectively select acquisition candidates or negotiate
or finance acquisitions or integrate the acquired businesses and their personnel
or acquired solutions or technologies into our business. We cannot assure you
that we
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<PAGE> 25
can complete any acquisition we pursue on favorable terms, or that any
acquisition will ultimately benefit our business.
OUR SALES CYCLE IS LONG AND SALES DELAYS COULD CAUSE OUR OPERATING RESULTS TO
VARY WIDELY
We believe that an enterprise's decision to purchase a demand chain network
solutions system is discretionary, involves a significant commitment of its
resources and is influenced by its budget cycles. To successfully sell licenses
for our solutions, we typically must educate our potential customers regarding
the use and benefits of demand chain network solutions in general and our
solutions in particular, which can require significant time and resources.
Consequently, the period between initial contact and the purchase of licenses
for our solutions is often long and subject to delays associated with the
lengthy budgeting, approval and competitive evaluation processes that typically
accompany significant capital expenditures. We frequently must invest
substantial resources to develop a relationship with a potential customer and
educate its personnel about our solutions and services with no guarantee that
our efforts will be rewarded with a sale. Our sales cycles are lengthy and
variable, typically ranging between two and six months from our initial contact
with a potential customer to the signing of a license agreement, although sales
sometimes require substantially more time. Sales delays could cause our
operating results to vary widely.
OUR PLAN TO EXPAND OUR SERVICE CAPABILITY COULD ADVERSELY AFFECT GROSS PROFIT
MARGINS AND OPERATING RESULTS
Revenues from services and maintenance have lower gross margins than revenues
from licenses. Therefore, an increase in the percentage of revenues generated
from services and maintenance as compared to revenues from licenses will lower
our overall gross margins. In addition, an increase in the cost of revenues from
services and maintenance as a percentage of revenues from services and
maintenance could have a negative impact on overall gross margins.
Although margins related to revenues from services and maintenance are lower
than margins related to revenues from licenses, our services organization
currently generates gross profits and we are seeking to expand our service
capability and our revenues from services and maintenance.
Revenues from services and maintenance depend in part on renewals of technical
support contracts by our customers. However, there is no certainty that our
customers will renew their technical support contracts. Our ability to increase
revenues from services and maintenance will depend in large part on our ability
to increase the scale of our services organization, including our ability to
successfully recruit and train a sufficient number of qualified services
personnel. We may not be able to do so.
To meet our expansion goals, we expect to hire additional services personnel. If
demand for our services organization does not increase in proportion to the
number of additional personnel we hire, gross profits could fall, or we may
incur losses from our services activities. In addition, the costs of delivering
services could increase and any material increase in these costs could reduce or
eliminate the profitability of our services activities.
WE RELY ON SOFTWARE LICENSED TO US BY THIRD PARTIES FOR FEATURES WE INCLUDE IN
OUR SOLUTIONS
We incorporate into our solutions software that is licensed to us by third-party
software developers including Microsoft SQL Server 7.0, Sheridan Calendar
Control, InstallShield 3, Seagate Crystal Reports, E.piphany E.4 and Interactive
Intelligence Enterprise Interaction Center. We are seeking to further increase
the capabilities of our solutions by licensing additional applications from
third parties. A significant interruption in the availability of any of this
licensed software could adversely affect our sales, unless and until we can
replace this software with other software that performs similar functions.
Because our solutions incorporate software developed and maintained by third
parties, we depend on these third parties' abilities to deliver and support
reliable solutions, enhance their current solutions, develop new solutions on a
timely and cost-effective basis and respond to emerging industry standards and
other technological changes. If third-party software offered now or in the
future in conjunction with our solutions becomes obsolete or incompatible with
future versions of our solutions, we may not be able to continue
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<PAGE> 26
to offer some of the features we presently include in our solutions unless we
can license alternative software or develop the features ourselves.
WE MUST CONTINUE TO DEVELOP ENHANCEMENTS TO OUR SOLUTIONS AND NEW APPLICATIONS
AND FEATURES THAT RESPOND TO EVOLVING NEEDS OF OUR CUSTOMERS. RAPID
TECHNOLOGICAL CHANGE AND ADVANCES INTRODUCED BY OUR COMPETITORS
The software market in which we compete is characterized by rapid change due to
changing customer needs, rapid technological changes and advances introduced by
competitors. Existing solutions become obsolete and unmarketable when solutions
using new technologies are introduced and new industry standards emerge. New
technologies could change the way demand chain network solutions are sold or
delivered. As a result, the life cycles of our solutions are difficult to
estimate. We also may need to modify our solutions when third parties change
software we integrate into our solutions. To be successful we must continue to
enhance our current product line and develop new applications and features.
We may not be able to successfully develop or license the applications necessary
to offer these or other features, or to integrate these applications with our
existing solutions. We have delayed enhancements and new product release dates
several times in the past and may not be able to introduce new solutions,
product enhancements, new applications or features successfully or in a timely
manner in the future. If we delay release of our new solutions or product
enhancements or new applications or features or if they fail to achieve market
acceptance when released, we may not be able to keep up with the latest
developments in the market and our revenues may fall. We may not be able to
respond effectively to customer needs, technological changes or advances
introduced by our competitors and our solutions could become obsolete.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS
Our success depends in part on our ability to protect our proprietary software
and our other proprietary rights from copying, infringement or use by
unauthorized parties. To protect our proprietary rights we rely primarily on a
combination of copyright, trade secret and trademark laws, confidentiality
agreements with employees and third parties and protective contractual
provisions such as those contained in license agreements with consultants,
vendors and customers, although we have not signed these types of agreements in
every case. Despite our efforts to protect our proprietary rights, unauthorized
parties may copy aspects of our solutions and obtain and use information that we
regard as proprietary. Other parties may breach confidentiality agreements and
other protective contracts we have entered into. We may not become aware of, or
have adequate remedies in the event of, these types of breaches or unauthorized
activities.
CLAIMS BY OTHER COMPANIES THAT OUR SOLUTIONS INFRINGE THEIR COPYRIGHTS OR
PATENTS COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR SOLUTIONS AND INCREASE
OUR COSTS
If any of our solutions violates third-party proprietary rights, including
copyrights and patents, we may be required to reengineer our solutions or obtain
licenses from third parties to continue offering our solutions without
substantial reengineering. Although some of our current and potential
competitors have sought patent protection for similar demand chain network
solutions systems, we have not sought patent protection for our solutions. If a
patent has been issued or is issued in the future to a third-party that prevents
us from using technology included in our solutions, we would need to obtain a
license or re-engineer our product to function without infringing the patent.
Any efforts to re-engineer our solutions or obtain licenses from third parties
may not be successful and, in any case, could substantially increase our costs,
force us to interrupt product sales or delay product releases.
OUR SOFTWARE SOLUTIONS MAY SUFFER FROM DEFECTS OR ERRORS
Solutions as complex as ours may contain errors or defects, especially when
first introduced or when new versions are released. We have had to delay
commercial release of some versions of our solutions until software problems
were corrected and in some cases have provided product enhancements to correct
errors in released solutions. Enhancements, new applications and features to our
solutions may not be free from errors after commercial
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<PAGE> 27
shipments have begun. Any errors that are discovered after the commercial
release of enhancements, new applications and features to our solutions could
result in loss of revenues or delay in market acceptance, diversion of
development resources, damage to our reputation, increased service and warranty
costs and liability claims.
Our end-user licenses contain provisions that limit our exposure to product
liability claims, but, these provisions may not be enforceable in all
jurisdictions. In some cases, we have been required to waive these contractual
limitations. Further, we may be exposed to product liability claims in
international jurisdictions where our solution provider has supplied our
solutions and negotiated the license without our involvement. A successful
product liability claim could result in material liability and damage to our
reputation.
In addition, products we rely on, such as Microsoft platform products, may
contain defects or errors. Our solutions rely on these products to operate
properly. Therefore, any defects in these products could adversely affect the
operation of and market for our solutions, reduce our revenues, increase our
costs and damage our reputation.
IF OUR CUSTOMERS SYSTEMS' SECURITY IS BREACHED, OUR BUSINESS AND REPUTATION
COULD SUFFER
A fundamental requirement for online communications is the secure transmission
of confidential information over the Internet. Users of our solutions transmit
their and their customers' confidential information over the Internet. In our
license agreements with our customers, we disclaim responsibility for the
security of confidential data and have contractual disclaimers and indemnities
for any damages claimed against us. However, if unauthorized third parties are
successful in obtaining confidential information from users of our solutions,
our reputation and business may be damaged and, if our contractual disclaimers
and indemnities are not enforceable, we may be subjected to liability.
CHANGES IN ACCOUNTING STANDARDS AND IN THE WAY WE CHARGE FOR LICENSES COULD
AFFECT OUR FUTURE OPERATING RESULTS
We recognize revenues from the sale of software product licenses on delivery of
our solutions if:
- persuasive evidence of an arrangement exists;
- the fee is fixed or determinable;
- vendor specific objective evidence exists to allocate the total fee among all
elements of the arrangement; and
- collection of the license fee is probable.
Under certain license arrangements, with either a fixed or indefinite term, our
customers agree to pay for the license with periodic payments extending beyond
one year. We recognize revenues from these arrangements as the periodic payments
become due, provided all other conditions for revenue recognition are met. If
these arrangements become popular with our customers, we may have lower revenues
in the short-term than we would otherwise, because revenues for licenses sold
under these arrangements will be recognized over time rather than upon delivery
of our product.
We recognize maintenance revenues ratably over the contract term, typically one
year, and recognize revenues for consulting, education and implementation and
customization services as the services are performed.
Administrative agencies responsible for setting accounting standards, including
the Securities and Exchange Commission and the Financial Accounting Standards
Board, are also reviewing the accounting standards related to business
combinations and share-based compensation. Any changes to these accounting
standards, any other accounting standards, or the way these standards are
interpreted or applied could require us to change the manner in which we
recognize revenue, how we account for share compensation, for any future
acquisitions or other aspects of our business, which could adversely affect our
reported financial results.
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<PAGE> 28
OUR SHARE PRICE MAY CONTINUE TO BE VOLATILE
Our share price has fluctuated substantially since our initial public offering
in August 1999. The trading price of our common shares is subject to significant
fluctuations in response to variations in quarterly operating results, the gain
or loss of significant orders, changes in revenues and earnings estimates by
securities analysts, announcements of technological innovations or new solutions
by us or our competitors, general conditions in the software and computer
industries and other events or factors. In addition, the stock market in general
has experienced extreme price and volume fluctuations that have affected the
market price for many companies in industries similar or related to ours and
have been unrelated to the operating performance of these companies. These
market fluctuations have adversely affected and may continue to adversely affect
the market price of our common shares.
CERTAIN SHAREHOLDERS MAY BE ABLE TO EXERCISE CONTROL OVER MATTERS REQUIRING
SHAREHOLDER APPROVAL
Our current officers, directors and entities affiliated with us together
beneficially owned a significant portion of our outstanding common shares as of
June 30, 2000. While these shareholders do not hold a majority of our
outstanding common shares, they will be able to exercise significant influence
over matters requiring shareholder approval, including the election of directors
and the approval of mergers, consolidations and sales of our assets. This may
prevent or discourage tender offers for our common shares.
ITEM 2. PROPERTIES
Our principal administrative, professional services and research and development
facilities are located in North Vancouver, British Columbia, Canada, and consist
of approximately 43,000 square feet of office space in three separate buildings.
Each of the leases for these buildings expires in September 2002. Our principal
sales and marketing facility is located in Kirkland, Washington and consists of
approximately 13,600 square feet of office space held under a lease that expires
in December 2003. We also have a significant sales and training center in Des
Plaines, Illinois that consists of approximately 8,309 square feet of space
under a lease that expires in August 2003.
Our main administrative office for Europe, the Middle East and Africa is located
in Dublin, Ireland held under a lease expiring in August 2001. Our principal
sales and marketing office for Europe, the Middle East and Africa is located in
Hemel Hempstead, England held under a lease that expires in March 2004. Our
European customer support center is located in Belfast, Northern Ireland and
consists of approximately 9,648 square feet of office space under a lease that
expires in April 2010.
As of June 30, 2000, we also leased offices in: Tokyo, Japan; Sydney, Australia;
Heidelberg, Germany; San Bruno and Irvine, California; Dallas, Texas; Denver,
Colorado; Levallois-Perret, France; North Andover, Massachusetts; Morristown,
New Jersey; New York, New York; and Bethesda, Maryland.
ITEM 3. LEGAL PROCEEDINGS
We are not currently party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not Applicable.
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<PAGE> 29
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common shares began trading on the Nasdaq National Market on August 5, 1999
under the symbol PVTL. The table below lists the high and low closing prices per
share of our common shares for each quarterly period during the past fiscal
year, as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
Price Range
of Common Shares
----------------
High Low
------ ------
<S> <C> <C>
Year Ended June 30, 2000
First Quarter (beginning August 5, 1999)................................ $19.69 $12.06
Second Quarter.......................................................... 59.00 18.13
Third Quarter........................................................... 68.56 30.06
Fourth Quarter.......................................................... 45.50 18.78
</TABLE>
Our common shares began trading on The Toronto Stock Exchange on August 17, 2000
under the symbol PVT. On September 22, 2000, the high and low closing prices per
share of our common shares were CDN $83.00 and CDN $74.00, respectively, as
reported on The Toronto Stock Exchange.
HOLDERS
As of September 1, 2000, there were approximately 265 holders of record of our
common shares. This does not include the number of persons whose shares are in
nominee or "street name" accounts through brokers.
DIVIDENDS
We have never declared or paid any cash dividends on our share capital. We
currently intend to retain any future earnings to fund the development and
growth of our business and we do not anticipate paying any cash dividends in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
On June 2, 2000, in connection with the acquisition of Exactium Ltd., we issued
1,116,955 common shares. This transaction was exempt from Securities Act
registration pursuant to the exemption from registration provided by Section
4(2) of the Securities Act.
On June 26, 2000, in connection with the acquisition of Simba Technologies Inc.,
we issued 537,823 common shares. This transaction was exempt from Securities Act
registration pursuant to the exemption from registration provided by Rule 506 of
Regulation D under the Securities Act and the exclusion from registration
provided by Regulation S under the Securities Act.
USE OF PROCEEDS
On August 4, 1999 Pivotal's registration statement on Form F-1, Registration No.
333-82871, became effective. The offering date was August 5, 1999. The offering
has terminated as a result of all of the shares offered being sold. The managing
underwriters were Merrill Lynch & Co., Bear, Stearns & Co. Inc. and Dain
Rauscher Wessels. The
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<PAGE> 30
offering consisted of 3,975,000 common shares of Pivotal, which includes 475,000
common shares offered pursuant to the subsequent exercise of the underwriter's
over allotment option on August 19, 1999. The aggregate price of the shares
offered and sold was $47.7 million. Proceeds to Pivotal, after accounting for
$3.3 million in underwriting discounts and commissions and $1.3 million in other
expenses, were $43.1 million. Pivotal generated interest income of approximately
$2.36 million during the year ended June 30, 2000.
We used $13.1 million of the $43.1 million net proceeds in connection with the
acquisition of Exactium Ltd. The remaining $30 million of the net proceeds
continues to be invested in investment-grade, interest bearing, short-term
instruments.
None of the net offering proceeds were paid, and none of the initial public
offering expenses related to payments, directly or indirectly to directors,
officers or general partners of Pivotal or their associates, persons owning 10%
or more of any class of securities or affiliates of Pivotal.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements and Notes thereto, with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other financial data included elsewhere in this report. The consolidated
statement of operations data for each of the three years ended June 30, 2000,
1999 and 1998 and the consolidated balance sheet data as of June 30, 2000 and
1999 are derived from audited financial statements included elsewhere in this
report. The consolidated statement of operations data for the years ended June
30, 1997 and 1996 and the consolidated balance sheet data as of June 30, 1998,
1997 and 1996 are derived from audited consolidated financial statements not
included in this report.
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------------------------
2000(1) 1999 1998 1997 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Licenses $37,384 $18,819 $11,311 $ 2,916 $ 368
Services and
maintenance 15,555 6,508 2,898 590 31
------- ------- ------- ------- -------
Total revenues 52,939 25,327 14,209 3,506 399
------- ------- ------- ------- -------
COST OF REVENUES:
Licenses 2,141 536 401 121 2
Services and
maintenance 8,147 3,078 1,281 387 -
------- ------- ------- ------- -------
Total cost of revenues 10,288 3,614 1,682 508 2
------- ------- ------- ------- -------
Gross profit 42,651 21,713 12,527 2,998 397
OPERATING EXPENSES:
Sales and marketing 31,165 16,830 9,226 2,646 604
Research and
development 8,906 4,958 1,910 1,163 742
General and
administrative 4,190 2,466 1,513 725 397
Amortization of
goodwill 1,409 - - - -
In-process research and development and
other charges 6,979 - - - -
------- ------- ------- ------- -------
Total operating expenses 52,649 24,254 12,649 4,534 1,743
------- ------- ------- ------- -------
</TABLE>
-27-
<PAGE> 31
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------------------
2000(1) 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Loss from operations (9,998) (2,541) (122) (1,536) (1,346)
Interest and other income 2,193 (24) 136 142 85
-------- -------- -------- -------- --------
Income (loss) before income taxes (7,805) (2,565) 14 (1,394) (1,261)
Income taxes 557 243 10 - -
-------- -------- -------- -------- --------
Net income (loss) for the period $ (8,362) $ (2,808) $ 4 $ (1,394) $ (1,261)
======== ======== ======== ======== ========
Basic and diluted earnings (loss) per share $ (0.45) $ (0.72) $- $ (0.41) $ (0.37)
Pro forma basic and diluted loss per share(2) $ (0.39) $ (0.18)
Shares used to calculate earnings (loss) per share
Basic 18,643 3,888 3,720 3,393 3,372
Diluted 18,643 3,888 14,927 3,393 3,372
Pro forma basic and diluted loss per share(2) 21,339 15,940
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 4,734 $ 9,338 $ 1,202 $ 3,898 $ 706
Working capital 28,297 7,257 3,317 4,417 731
Total assets 121,945 21,722 10,752 6,729 1,114
Long-term obligations -- -- -- -- --
Redeemable convertible preferred shares -- 17,500 9,500 9,500 4,100
Total shareholders' equity (deficit) 96,097 (7,192) (4,455) (4,533) (3,229)
</TABLE>
NOTES:
(1) Results for the year ended June 30, 2000 include a charge for in process
research and development and other charges related to the acquisition of
Exactium and Simba. See note 2 to consolidated financial statements.
(2) See note 1 of notes to consolidated financial statements for calculation of
pro forma earnings (loss) per share.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Pivotal Corporation's technology solutions enable large and medium-sized
businesses worldwide to increase, serve and manage their customer base. We refer
to our solutions as demand chain network solutions because they automate and
manage marketing, selling and servicing processes over the Internet by
integrating customer relationship management, electronic selling, electronic
commerce and wireless technologies. Our demand chain solutions are designed to
compliment and integrate with a business' supply chain, therefore enabling
businesses to increase efficiency and revenues. Pivotal's scalable, XML-based
demand chain network solutions are designed to meet the needs of businesses
ranging from emerging companies in the new digital economy to traditional
businesses that are seeking to integrate the opportunities presented by the
Internet into their business model.
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<PAGE> 32
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.
-30-
<PAGE> 33
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>
-31-
<PAGE> 34
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
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<PAGE> 35
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
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<PAGE> 36
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
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<PAGE> 37
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.
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<PAGE> 38
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.
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<PAGE> 39
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.
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<PAGE> 40
<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>
-38-
<PAGE> 41
<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>
-39-
<PAGE> 42
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
-40-
<PAGE> 43
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 two quarters. 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.
-41-
<PAGE> 44
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.
-42-
<PAGE> 45
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 in 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 two quarters. 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 future 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 quarters 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.
-43-
<PAGE> 46
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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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. Our audit also included the
financial statement schedule listed in the Index at Item 14(a). These
consolidated financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of 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 accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Vancouver, Canada
July 13, 2000
-44-
<PAGE> 47
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
-45-
<PAGE> 48
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
-46-
<PAGE> 49
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
-47-
<PAGE> 50
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
-48-
<PAGE> 51
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
-49-
<PAGE> 52
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.
-50-
<PAGE> 53
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.
-51-
<PAGE> 54
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
-52-
<PAGE> 55
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>
-53-
<PAGE> 56
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
-54-
<PAGE> 57
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.
-55-
<PAGE> 58
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.
-56-
<PAGE> 59
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
-57-
<PAGE> 60
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:
-58-
<PAGE> 61
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.
-59-
<PAGE> 62
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>
-60-
<PAGE> 63
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.
-61-
<PAGE> 64
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>
-62-
<PAGE> 65
Schedule II -- Valuation and Qualifying Accounts
Years ended June 30, 2000, 1999 and 1998
(in thousands)
Allowance for Doubtful Accounts
<TABLE>
<CAPTION>
Balance at Additions Additions
beginning of charged to costs charged to Balance at
Year year and expenses other accounts Write-offs end of Year
<S> <C> <C> <C> <C> <C>
2000 $334 626 -- 220 $740
1999 $ 91 243 -- -- $334
1998 $ 79 88 -- 76 $ 91
</TABLE>
<PAGE> 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The table below provides the names, ages, and positions with Pivotal of our
executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------- -------- ------------------------------------------------------
<S> <C> <C>
Norman B. Francis............ 51 President, Chief Executive Officer and Director
Keith R. Wales............... 55 Chief Technical Officer and Director
Vincent D. Mifsud............ 33 Chief Financial Officer and Executive Vice
President
Glenn S. Hasen............... 40 Executive Vice President, Global Field Operations
Christine E. Rogers.......... 44 Senior Vice President, Professional Services
Robert A. Runge.............. 46 Chief Marketing Officer
Salvatore Sanci.............. 42 Vice President and General Manager, eRelationship
Products Division
Jeremy A. Jaech.............. 45 Director
Robert J. Louis.............. 55 Director
Douglas J. Mackenzie......... 40 Director
Donald A. Mattrick........... 36 Director
</TABLE>
----------
NORMAN B. FRANCIS co-founded Pivotal in 1990 and has served as
President, Chief Executive Officer and a director since December 1990. Mr.
Francis' experience prior to co-founding Pivotal includes co-founding Basic
Software Group Inc., an accounting software company, in 1979. Mr. Francis served
as Basic Software Group's Vice President, Operations until the company was
acquired by Computer Associates International, Inc., a software company, in
1985. Mr. Francis served as Vice President, Micro Products Division of Computer
Associates International Inc. from 1985 to 1990. Mr. Francis holds a bachelor of
science degree in Computer Science from the University of British Columbia,
Canada and is a Chartered Accountant.
KEITH R. WALES co-founded Pivotal in 1990 and has served as a director
since December 1990 and as Chief Technical Officer since May 1999. Mr. Wales
also served as Vice President, Research and Development from December 1990
through July 1999. Mr. Wales' experience prior to co-founding Pivotal includes
co-founding Basic Software Group Inc., an accounting software company, in 1979.
Mr. Wales served as Basic Software Group's Vice President, Research and
Development until the company was acquired by Computer Associates International,
Inc. in 1985. Mr. Wales served as Divisional Vice President, Research and
Development of Computer Associates International, Inc. from 1985 to 1986. Mr.
Wales holds a bachelor of science degree in Mathematics and a master's of
science degree in Computer Science from the University of British Columbia,
Canada.
-63-
<PAGE> 67
VINCENT D. MIFSUD has served as Chief Financial Officer since December
1998 and Executive Vice President since July 2000. Mr. Mifsud also served as
Vice President, Operations from December 1998 to July 2000. Prior to joining
Pivotal, Mr. Mifsud served as Controller, Vice President, Finance and Chief
Financial Officer of Rand Technology, Inc., a software developer and value added
reseller of mechanical design automation tools and services, from May 1993 to
December 1998. Prior to this, Mr. Mifsud worked for three years with Arthur
Andersen LLC in their Enterprise Division. Mr. Mifsud holds a bachelor's degree
in Commerce and Economics from the University of Toronto, Canada and is a
Chartered Accountant.
GLENN S. HASEN has served as Executive Vice President, Global Field
Operation since July 2000. Mr. Hasen also served as Vice President, Worldwide
Sales from October 1996 to July 2000. Prior to joining Pivotal, Mr. Hasen served
as Director of International Sales of Information Builders Inc., a global
software tools and middleware company, from February 1994 to October 1996. In
addition, he served as General Manager of Information Builders Inc., from
January 1990 to February 1994. Mr. Hasen also served as Director of Sales of
Computer Associates International, Inc. from 1985 to 1990. Mr. Hasen holds a
bachelor's degree from the University of Waterloo, Ontario, Canada and a
Certificate in Finance from the Wharton School, University of Pennsylvania.
CHRISTINE E. ROGERS has served as Senior Vice President, Professional
Services, since July 2000. Ms. Rogers also served as Vice President,
Professional Services, North America from April 1999 to July 2000. Ms. Rogers
served as Associate Partner of Andersen Consulting's Customer Relationship
Management practice from September 1998 to April 1999. Ms. Rogers served as
Director of Andersen Consulting's Customer Relationship Management practice from
October 1996 to September 1998. Ms. Rogers served as the Director of Database
Marketing of AT&T Wireless Services from January 1995 to September 1996. Ms.
Rogers served as the Director, Channel Sales of the Tracker Corporation from
July 1994 to December 1994. Ms. Rogers served as Director, National Retail Sales
of Rogers Cantel Mobile Communications Inc., a cable and telecommunications
service provider from November 1987 to June 1994.
ROBERT A. RUNGE has served as Chief Marketing Officer since July 2000.
Mr. Runge also served as Vice President, Worldwide Marketing from September 1997
to July 2000. Before joining Pivotal, Mr. Runge served as Vice President,
Marketing of BroadVision, Inc., an Internet marketing software company, from
September 1995 to September 1997. Mr. Runge served as Director of Product
Marketing of Sybase, a software company, from September 1990 to September 1995.
Prior to that, Mr. Runge served as Director of Education Services of Oracle
Corporation, a software company, from July 1988 to September 1990. Mr. Runge
holds two bachelors' degrees from the University of Illinois, Champagne-Urbana
and a master's degree in Business Administration (Marketing) from the University
of Illinois, Chicago.
SALVATORE SANCI has served as Vice President and General Manager,
eRelationship Products Division since July 2000. Mr. Sanci also served as Vice
President, Research and Development from August 1999 to July 2000. Before
joining Pivotal, Mr. Sanci served as Vice President, Research and Development
for PC DOCS Group International Inc., a software company, from January 1998 to
July 1999, and as a software architect with PC DOCS Group International Inc.
from August 1997 to December 1998. Mr. Sanci served as Vice President, Research
and Development for InContext Corporation, a software company, from July 1991 to
August 1997. Prior to that, Mr. Sanci served as Vice President, Research and
Development for Amberon Inc., a predecessor to InContext Corporation, from July
1987 to June 1991. Mr. Sanci holds a bachelor's degree in Electrical Engineering
and Computer Science from Ryerson Polytechnical Institute.
JEREMY A. JAECH has served as a director since July 1996. Mr. Jaech
currently serves as Vice President, Microsoft Corporation, Visio Division, a
supplier of enterprise-wide business diagramming and technical drawing software
for Microsoft Windows. Prior to Microsoft, Jeremy co-founded Visio Corporation,
which was later sold to Microsoft, in September 1990. Prior to co-founding Visio
Corporation, Mr. Jaech co-founded Aldus Corporation in 1984 and served as Vice
President, Engineering. Aldus Corporation was purchased by Adobe Systems
Incorporation in 1989. Mr. Jaech holds a bachelor's degree in Mathematics and a
master's degree in Computer Science from the University of Washington.
-64-
<PAGE> 68
ROBERT J. LOUIS has served as a director since June 1995. Since March
1999, Mr. Louis has served as President of Ventures West Management Ltd., a
venture capital firm which he joined as an Executive Vice President in January
1991. Mr. Louis earned a bachelor of science degree and a master's degree in
Science from the University of Victoria, British Columbia, Canada and a Ph.D. in
Physics from the University of British Columbia, Canada.
DOUGLAS J. MACKENZIE has served as a director since July 1992. Mr.
Mackenzie has served as a Limited Partner of Kleiner, Perkins, Caufield & Byers,
a venture capital firm specializing in high-tech companies, since June 1989 and
a General Partner since April 1994. Mr. Mackenzie also serves as a director of
Marimba, Inc. and E.piphany, Inc. Mr. Mackenzie holds a bachelor's degree in
Economics and a master's degree in Industrial Engineering from Stanford
University, and a master's degree in Business Administration from Harvard
University.
DONALD A. MATTRICK has served as a director since May 1999. Mr.
Mattrick has served as the President of Electronic Arts Worldwide Studios, a
manufacturer of gaming software, since September 1997. Mr. Mattrick served as
Executive Vice President, North American Studios of Electronic Arts Worldwide
Studios from October 1995 to September 1997 and as Executive Vice President and
General Manager of Electronic Arts Worldwide Studios from 1991 to October 1995.
Mr. Mattrick co-founded Distinctive Software in 1982 and served as its Chairman
and Chief Executive Officer until 1991. Distinctive Software was purchased by
Electronic Arts in 1991. Simon Frasier University awarded Mr. Mattrick an
honorary Doctor of Laws degree in 1999.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS
The following table describes the compensation we paid to, or earned by, our
chief executive officer and our executive officers who earned more than $100,000
during the fiscal year ended June 30, 2000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------ -------------
SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDER OPTIONS
--------------------------- ---- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Norman B. Francis 2000 Cdn.$175,000 Cdn.$78,983 25,000
President and Chief
Executive Officer
Keith R. Wales 2000 Cdn.$150,000 Cdn.$35,931 25,000
Chief Technical Officer
Vincent D. Mifsud 2000 Cdn.$175,000 Cdn.$103,755 20,000
Chief Financial Officer and
Executive Vice President
Glenn S. Hasen 2000 $150,000 $106,513 30,000
Executive Vice President,
Global Field Operations
Robert A. Runge 2000 $160,000 $ 53,665 20,000
Chief Marketing Officer
</TABLE>
-----------------------------
-65-
<PAGE> 69
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding stock option grants to our
chief executive officer and our executive officers who earned more than $100,000
during the fiscal year ended June 30, 2000. The potential realizable value of
the options is calculated based on the assumption that the common shares
appreciate at the annual rate shown, compounded annually, from the date of grant
until the expiration of their term. These numbers are calculated based on
Securities and Exchange Commission requirements and do not reflect our
projection or estimate of future share price growth. Potential realizable values
are computed by:
- multiplying the number of common shares subject to a given option by the
exercise price;
- assuming that the aggregate share value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table for the entire term
of the option; and
- subtracting from that result the aggregate option exercise price.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS ASSUMED ANNUAL RATES OF SHARE
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION FOR OPTION TERM
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------------------
NAME OPTIONS FISCAL YEAR SHARE DATE 5% 10%
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Norman B. Francis 25,000 1.75% $51.25 Jan. 19, 2010 $805,771 $2,041,983
Keith R. Wales 25,000 1.75% $51.25 Jan. 19, 2010 $805,771 $2,041,983
Vincent D. Mifsud 20,000 1.4% $51.25 Jan. 19, 2010 $644,617 $1,633,586
Glenn S. Hasen 30,000 2.1% $21.25 Oct. 13, 2009 $400,920 $1,016,011
Robert A. Runge 20,000 1.4% $21.25 Oct. 13, 2009 $267,280 $ 677,341
</TABLE>
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information regarding the exercise of options to
purchase common shares by our chief executive officer and our executive officers
who earned more than $100,000 during the fiscal year ended June 30, 2000. The
value of unexercised in-the-money options is based on the closing price of our
common shares on the Nasdaq National Market on June 30, 2000 of $23.50, minus
the exercise price per share.
-66-
<PAGE> 70
AGGREGATED OPTIONS EXERCISED DURING 2000 FISCAL YEAR
AND FINANCIAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
-------------------------------------------------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Norman B. Francis -- -- 28,765 44,085 $669,609 $ 435,558
Keith R. Wales -- -- 0 25,000 -- --
Vincent D. Mifsud 40,000 $2,326,950 20,000 120,000 $361,600 $1,808,000
Glenn S. Hasen 57,750 $1,455,100 3,750 82,500 $ 8,438 $ 165,000
Robert A. Runge 25,000 $ 372,132 2,500 55,000 $ 5,625 $ 729,938
</TABLE>
-------------------
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationships exist between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.
-67-
<PAGE> 71
DIRECTOR COMPENSATION
We do not currently pay cash compensation to directors for serving on our board
of directors, but we do reimburse directors for out-of-pocket expenses for
attending board and committee meetings. We do not provide additional
compensation for committee participation or special assignments of the Board of
Directors. Of our directors, only Messrs. Francis and Wales received stock
options for their participation on our board of directors for the year ended
June 30, 2000. Both Messrs. Francis and Wales received options to purchase
25,000 common shares at a price of US$51.25 per share.
EMPLOYMENT CONTRACTS
Pivotal entered into an employment contract with Robert Runge on August 14,
1997. Mr. Runge's current base salary is $160,000, with a potential incentive
compensation of $90,000. Mr. Runge's salary is reviewed annually by the board of
directors' compensation committee. Mr. Runge was also granted options to
purchase common shares in Pivotal and is eligible to receive further grants in
the future.
Pivotal entered into an employment contract with Glenn Hasen on September 24,
1996. Mr. Hasen's current base salary is $150,000, with a potential incentive
compensation of $150,000. Mr. Hasen's salary is reviewed annually by the board
of directors' compensation committee. Mr. Hasen was also granted options to
purchase common shares in Pivotal and is eligible to receive further grants in
the future.
Pivotal entered into an employment contract with Vincent Mifsud on November 16,
1999. Mr. Mifsud's current base salary is Cdn. $175,000, with a potential
incentive compensation of $75,000. Mr. Mifsud's salary is reviewed annually by
the board of directors' compensation committee. Mr. Mifsud was also granted
options to purchase common shares in Pivotal and is eligible to receive further
grants in the future.
REPORT ON EXECUTIVE COMPENSATION BY THE COMPENSATION COMMITTEE
The Compensation Committee of our board of directors currently consists of
Jeremy A. Jaech, Robert J. Louis and Douglas J. Mackenzie. The committee is
responsible for establishing and monitoring our long range plans and programs
for attracting, training, developing and motivating employees. The committee
reviews recommendations for the appointment of persons to senior executive
positions, considers terms of employment, including succession planning and
matters of compensation, and recommends awards under our incentive stock option
plan and the employee share purchase plan.
Our compensation policies and programs are designed to be competitive with
similar customer relationship management companies in the electronic commerce
environment and to recognize and reward executive performance consistent with
the success of our business. These policies and programs are intended to attract
and retain capable and experienced people.
In addition to industry comparables, the Committee considers a variety of
factors when determining both compensation policies and programs and individual
compensation levels. These factors include the long range interests of Pivotal
and its shareholders, overall financial and operating performance of Pivotal and
the committee's assessment of each executive's individual performance and
contribution towards meeting goals and objectives.
The total compensation plan for executive officers is comprised of the following
three components: competitive base salary, annual cash bonuses and stock
options.
Base Salary. In establishing base salaries of all executive officers, the
committee reviews competitive market data for each of the executive positions
and determines placement at an appropriate level in a range. Compensation levels
are typically negotiated with the candidate for the position prior to his or her
final selection as an executive officer. Additionally, a review of the chief
executive officer's performance and a general review of Pivotal's stock price
are considered. The compensation range for executive officers normally moves
annually to reflect external factors such as inflation. The chief executive
officer's base salary was increased from Cdn$120,000 to Cdn$175,000, effective
September 1, 1999. The base salary of the chief executive officer is set at an
amount the committee believes is competitive with salaries paid to executives
of companies of comparable size in similar industries and located within the
local area.
Bonuses. Cash bonuses are used to reward executive officers for meeting specific
performance targets as mutually agreed upon on an annual basis. During the year
ended June 30, 2000, the chief executive officer was awarded a bonus in the
amount of Cdn$78,983. This bonus was paid to the chief executive officer both
for achieving success in completing Pivotal's initial public offering on the
Nasdaq National Market in August 1999 and for his significant contribution to
the strong performance of Pivotal's common shares on the Nasdaq National Market
during the past fiscal year.
Stock Option Grants. Pivotal provides its executive officers and other employees
with long-term incentives through its incentive stock option plan, which is
intended to emphasize management's commitment to growth of Pivotal and the
enhancement of shareholder value. The committee relies on a variety of
subjective factors when granting options, including the responsibilities of the
individual officers and their expected future contribution to Pivotal. In the
year ended June 30, 2000, the chief executive officer was granted options to
purchase 25,000 common shares in the capital stock of Pivotal as an incentive
for his continued commitment to the success of Pivotal and the ongoing
enhancement of shareholder value.
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 shares, the S&P 500 Index and the Application
Software Index.
[PERFORMANCE GRAPH OMITTED]
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
August 5, 1999 August 4, 2000
--------------------------------------------------------------------------
<S> <C> <C>
Pivotal Corporation $100.00 $275.52
--------------------------------------------------------------------------
S&P 500 $100.00 $129.15
--------------------------------------------------------------------------
Application Software Index (as reported by
Microsoft MoneyCentral Investor) $100.00 $111.36
-----------------------------------------------------------------------
</TABLE>
-68-
<PAGE> 72
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table provides information concerning the beneficial ownership of
our common shares as of September 1, 2000:
- our chief executive officer;
- all officers whose annual compensation was more than $100,000 during fiscal
2000;
- each of our directors;
- each shareholder that we know owns more than 5% of our outstanding common
shares; and
- all our directors and executive officers as a group.
The principal address of each of the shareholders below is 224 West Esplanade,
Suite 300, North Vancouver, BC, Canada V7M 3M6, except where another address is
listed.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED SHARES OWNED
-------------------------------------------- ------------------ -----------------
<S> <C> <C>
Norman B. Francis(1)........................ 2,363,850 10.5%
Keith R. Wales(2)........................... 1,125,800 5.0%
Vincent D. Mifsud........................... 140,000 *
Jeremy A. Jaech(3).......................... 115,556 *
Robert J. Louis(4).......................... 2,173,258 9.7%
Douglas J. Mackenzie(5)..................... 2,418,051 10.8%
Donald A. Mattrick(6)....................... 15,000 *
Glenn S. Hasen(7)........................... 246,526 1.1%
Robert A. Runge(8).......................... 256,541 1.1%
Ventures West Capital Limited............... 2,173,258 9.7%
280 -- 1285 West Pender Street
</TABLE>
-69-
<PAGE> 73
<TABLE>
<CAPTION>
<S> <C> <C>
Vancouver, BC V6E 4B1(9)
Kleiner Perkins Caufield & Byers VI(10)........... 2,385,880 10.6%
2750 Sand Hill Road
Menlo Park, CA 94025
Integral Capital Partners II, L.P.(11)............ 1,730,915 7.7%
2750 Sand Hill Road
Menlo Park, CA 94025
All directors and executive officers as a group
(11 persons)(12).................................. 8,925,473 40%
</TABLE>
-----------------
* Less than 1%
(1) Includes: (a) 600,800 shares held of record by The Francis Family Trust, a
family trust for the benefit of Mr. Francis and his three children; (b)
797,143 shares held of record by Boardwalk Ventures Inc., a holding company
owned 50% by Mr. Francis and 50% by his spouse; and (c) 35,121 shares
subject to options exercisable by Mr. Francis within 60 days of September
1, 2000.
(2) Includes 428,572 shares held of record by Daybreak Software Inc., a holding
company owned solely by Mr. Wales, of which Mr. Wales has sole voting
power. Mr. Wales disclaims beneficial ownership of any shares held by his
former spouse, Patricia Wales.
(3) Includes 60,000 shares subject to options exercisable within 60 days of
September 1, 2000.
(4) Includes: (a) 506,720 shares held of record by Bank of Montreal Capital
Corporation which is managed by Ventures West Management TIP Inc., an
entity wholly owned by Ventures West Capital Ltd.; and (b) 1,666,529 shares
held of record by VW B.C. Technology Investment Fund Limited Partnership,
of which Ventures West Management B.C. Ltd. is the general partner.
Ventures West Management B.C. Ltd. is wholly owned by Ventures West Capital
Ltd. Mr. Louis, as President of Ventures West Capital Ltd., a venture
capital firm with controlled subsidiaries which include Ventures West
Management TIP Inc. and Ventures West Management B.C. Ltd., disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest.
(5) Includes 2,385,880 shares held by Kleiner Perkins Caufield & Byers VI, an
entity affiliated with Kleiner Perkins Caufield & Byers of which Mr.
Mackenzie is a limited partner. Mr. Mackenzie disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest.
Brook Byers, L. John Doerr, Vinod Khosla, E. Floyd Kvamme, Joseph Lacob,
Bernie Lacroute and Jim Lally are the General Partners of KPCB VI
Associates, the General Partner of Kleiner Perkins Caufield and Byers VI.
(6) Includes 15,000 shares subject to an option exercisable within 60 days of
September 1, 2000.
(7) Includes 18,750 shares subject to an option exercisable within 60 days of
September 1, 2000. Of the shares held by Mr. Hasen, up to 51,000 shares are
currently subject to repurchase by Pivotal at the option exercise price
paid by Mr. Hasen if Mr. Hasen's employment is terminated.
(8) Includes 12,500 shares subject to an option exercisable within 60 days of
September 1, 2000. Of the shares held by Mr. Runge, up to 93,750 shares are
subject to repurchase by Pivotal at the option exercise price paid by Mr.
Runge if Mr. Runge's employment is terminated.
(9) Includes: (a) 506,729 shares held of record by Bank of Montreal Capital
Corporation which is managed by Ventures West Management TIP Inc., an
entity wholly owned by Ventures West Capital Ltd.; and (b) 1,666,529 shares
held of record by VW B.C. Technology Investment Fund Limited Partnership,
of which Ventures West Management B.C. Ltd. is the general partner.
Ventures West Management B.C. Ltd. is wholly owned by Ventures West Capital
Ltd. Mr. Louis, as President of Ventures West Capital Ltd., a venture
capital firm with controlled subsidiaries which include Ventures West
Management TIP and Ventures West Management B.C. Ltd., disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest.
-70-
<PAGE> 74
(10) Includes 2,385,880 shares held by Kleiner Perkins Caufield & Byers VI, an
entity affiliated with Kleiner Perkins Caufield and Byers of which Mr.
Mackenzie is a limited partner. Mr. Mackenzie disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest.
Brook Byers, L. John Doerr, Vinod Khosla, E. Floyd Kvamme, Joseph Lacob,
Bernie Lacroute and Jim Lally are the General Partners of KPCB VI
Associates, the General Partner of Kleiner Perkins Caufield and Byers VI.
(11) Includes: (a) 1,025,608 shares held of record by Integral Capital Partners
II, L.P.; (b) 324,807 shares held of record by Integral Capital Partners
International II C.V.; (c) 258,440 shares held of record by Integral
Capital Partners IV, L.P.; (d) 1,210 shares held of record by Integral
Capital Partners IV MS Side Fund, L.P.; (e) 119,440 shares held of record
by Integral Capital Partners V, L.P.; and (f) 1,410 shares held of record
by Integral Capital Partners V Side Fund, L.P. Roger McNamee, John Powell
and Pamela Hagenah are the General Partners of Integral Capital Management
II, L.P., the General Partner and Investment General Partner, respectively,
of Integral Capital Partners II, L.P. and Integral Capital Partners
International II C.V., and they are the Managing Directors of Integral
Capital Management IV, LLC, the General Partner of Integral Capital
Partners IV, L.P. Roger McNamee, John Powell, Pamela Hagenah, Glen Kacher
and Neil Strumingher are the Managing Directors of Integral Capital
Partners NBT, LLC, the General Partner of Integral Capital Partners IV MS
Side Fund, L.P. and of Integral Capital Management V, LLC, the General
Partner of Integral Capital Partners V, L.P. and of ICP Management V, LLC,
the General Partner of Integral Capital Partners V Side Fund, L.P.
(12) Includes 173,193 shares subject to options exercisable within 60 days of
September 1, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
1. Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditor's Report.............................. 44
Consolidated Balance Sheets............................... 45
Consolidated Statements of Operations..................... 46
Consolidated Statements of Shareholders' Equity (Deficit). 47
Consolidated Statements of Cash Flows..................... 48
Notes to Consolidated Financial Statements................ 49
</TABLE>
2. Index to Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
(b) Reports on Form 8-K
On July 11, 2000, Pivotal filed a current report on Form 8-K, as amended
by Form 8-K on September 11, 2000, announcing the acquisition of all of the
issued and outstanding shares of Simba Technologies Inc.
-71-
<PAGE> 75
On June 19, 2000, Pivotal filed a current report on Form 8-K, as amended
by Form 8-K/A on August 16, 2000, announcing the acquisition of all of the
issued and outstanding shares of Exactium, Ltd.
On January 25, 2000, Pivotal filed a current report on Form 8-K
announcing the acquisition of all of the issued and outstanding shares of
Transitif S.A.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1* Share Purchase Agreement by and between Pivotal and
Pierre Marcel, Marc Bahda, Bernard Wach and Other
Shareholders of Transitif S.A., dated December 3, 1999
2.2** Stock Purchase Agreement among Pivotal and Industrial &
Financial Systems AB and Eli Barak, Alon Hod and Tony
Topaz Concerning all of the Shares of Exactium Ltd.
dated April 11, 2000
2.3*** Share Purchase Agreement among Pivotal and David
Pritchard, Kirk Herrington, Michael Satterfield, Calvin
Mah, VW B.C. Technology Investment Fund, LP, Venrock
Associates, Venrock Associates II, LP, Working Ventures
Canadian Fund Inc., Bank of Montreal Capital
Corporation, Sussex Capital Inc. and the Other
Shareholders of Simba Technologies Inc. concerning all
of the Shares of Simba Technologies Inc. dated May 29,
2000
3.2+ Memorandum and Articles
4.1+ Specimen of common share certificate
4.2+ Registration Rights (included in Exhibit 10.15)
4.3** Registration Rights Agreement dated June 2, 2000
(included in Exhibit 2.2)
4.4*** Registration Rights Agreement dated June 26, 2000
(included in Exhibit 2.3)
10.1+ Amended and Restated Incentive Stock Option Plan dated
as of January 28, 1999
10.2+ Form of Amended and Restated Incentive Stock Option Plan
effective as of August 10, 1999
10.3+ Employee Share Purchase Plan
10.4+ Lease dated as of July 18, 1997 between Sodican (B.C.)
Inc. and Pivotal for premises located in North
Vancouver, B.C.
10.5+ Lease dated as of May 26, 1998 between Novo Esplanade
Ltd. and Pivotal for premises located in North
Vancouver, B.C.
10.6+ Lease(1) dated as of December 14, 1998 between B.C. Rail
Ltd. and Pivotal for premises located in North
Vancouver, B.C.
10.7+ Lease(2) dated as of December 14, 1998, between B.C.
Rail Ltd. and Pivotal with respect to premises located
in North Vancouver, B.C.
10.8+ Lease dated as of December 11, 1998 between Yarrow Bay
Office III Limited Partnership and Pivotal with respect
to premises located in Kirkland, Washington
10.9+ Lease dated as of March 12, 1999 between Erachange
Limited and Pivotal for premises located in Hemel
Hempstead, Hertfordshire, England
10.10+ Lease dated as of April 19, 1999 between Massachusetts
Mutual Life Insurance Company and Pivotal for premises
located in Des Plaines, Illinois
#10.11+ Letter agreement dated November 21, 1997 between Pivotal
and Robert A. Runge granting an option to purchase
250,000 common shares
</TABLE>
-72-
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
#10.12+ Letter agreement dated November 2, 1997 between Pivotal
and Glenn S. Hasen granting an option to purchase
136,000 common shares
10.13+ Class F Preferred Share Subscription and Purchase
Agreement dated January 15, 1999, with respect to Class
F Preferred Shares
10.14+ Shareholders' Agreement dated January 15, 1999
10.15+ Investors' Rights Agreement dated January 15, 1999
10.16+ Form of Share Purchase Agreement with respect to the
issuance of Class B common shares
10.17+ Form of Share Purchase Agreement with respect to the
issuance of common shares in exchange for Class B common
shares
10.18+ Form of Lock-up Agreement
10.19+ Canadian Imperial Bank of Commerce $2,000,000 Committed
Installment Loan dated March 18, 1998
10.20+ Canadian Imperial Bank of Commerce $3,000,000 Operating
Line of Credit dated March 18, 1998
10.21+ Security Agreement with Canadian Imperial Bank of
Commerce dated for reference April 15, 1998
10.22+ Contract Relative to Special Security under the Bank Act
between Canadian Imperial Bank of Commerce and Pivotal
dated April 30, 1998
10.23+ Canadian Imperial Bank of Commerce Schedule -- Standard
Credit Terms dated March 18, 1998
10.24+ Canadian Imperial Bank of Commerce Schedule -- Standard
Credit Terms dated March 18, 1998
10.25+ Form of Indemnity Agreement between Pivotal and
directors and officers of Pivotal
10.26 Assignment agreement dated July 12, 2000 between
Pivotal and MetaCreations International Limited for
premises located in Dublin, Republic of Ireland;
Sub-Lease dated September 22, 1999 between The H.W.
Wilson Company Inc. and MetaCreations International
Limited for premises located in Dublin, Republic of
Ireland
10.27 Lease dated April 14, 2000 among Deramore Holdings
Limited(1), Pivotal Corporation (NI) Limited (2) and
Pivotal for premises located in Belfast, Northern
Ireland
10.28 Lease dated December 4, 1997 by and between
EOP-Lakeside Office, L.L.C. and Exactium, Inc.
#10.29 Employment Agreement between Vince Mifsud and Pivotal
dated November 10, 1998
10.30++ Exactium Ltd. 1999 Stock Option Plan
10.31+++ Simba Technologies Incentive Stock Option Plan, as
amended
13.1 Annual Report to Shareholders
21.1 Subsidiaries of Pivotal
23.1 Consent of Deloitte & Touche LLP
24.1 Powers of Attorney (included on signature page)
27.1 Financial Data Schedule
99.1 Notice of Meeting and Management Information and Proxy
Circular for the Annual General Meeting to be held on
Wednesday, October 25, 2000
</TABLE>
------------------
-73-
<PAGE> 77
# Indicates management contract.
* Incorporated by reference to Pivotal's Form 8-K filed on January 25, 2000.
** Incorporated by reference to Pivotal's Form 8-K filed on June 19, 2000.
*** Incorporated by reference to Pivotal's Form 8-K filed on July 11, 2000.
+ Incorporated by reference to Pivotal's Registration Statement on Form F-1
(No. 333-82871).
++ Incorporated by reference to Pivotal's Registration Statement on Form S-8
(No. 333-39922).
+++ Incorporated by reference to Pivotal's Registration Statement on Form S-8
(No. 333-42460).
-74-
<PAGE> 78
SIGNATURES
Registrant. Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Vancouver, British Columbia, Canada, on September 28, 2000.
PIVOTAL CORPORATION
(Registrant)
By: /s/ Norman B. Francis
---------------------------------------
Norman B. Francis
(President and Chief Executive Officer)
-75-
<PAGE> 79
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Norman B. Francis and Vincent D. Mifsud, and each
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents of them or their substitute or substitutes, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Pivotal
and in the capacities and on the date(s) indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
President, Chief Executive September 28, 2000
/s/ Norman B. Francis Officer and Director
--------------------------------------
Norman B. Francis
Chief Financial Officer and September 28, 2000
/s/ Vincent D. Mifsud Executive Vice President
--------------------------------------
Vincent D. Mifsud
Chief Technical Officer and September 28, 2000
/s/ Keith R. Wales Director
--------------------------------------
Keith R. Wales
Director September 28, 2000
--------------------------------------
Jeremy A. Jaech
/s/ Douglas J. Mackenzie Director September 28, 2000
--------------------------------------
Douglas J. Mackenzie
/s/ Robert J. Louis Director September 28, 2000
--------------------------------------
Robert J. Louis
/s/ Donald A. Mattrick Director September 28, 2000
--------------------------------------
Donald A. Mattrick
</TABLE>
-76-
<PAGE> 80
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
#10.12+ Letter agreement dated November 2, 1997 between Pivotal
and Glenn S. Hasen granting an option to purchase
136,000 common shares
10.13+ Class F Preferred Share Subscription and Purchase
Agreement dated January 15, 1999, with respect to Class
F Preferred Shares
10.14+ Shareholders' Agreement dated January 15, 1999
10.15+ Investors' Rights Agreement dated January 15, 1999
10.16+ Form of Share Purchase Agreement with respect to the
issuance of Class B common shares
10.17+ Form of Share Purchase Agreement with respect to the
issuance of common shares in exchange for Class B common
shares
10.18+ Form of Lock-up Agreement
10.19+ Canadian Imperial Bank of Commerce $2,000,000 Committed
Installment Loan dated March 18, 1998
10.20+ Canadian Imperial Bank of Commerce $3,000,000 Operating
Line of Credit dated March 18, 1998
10.21+ Security Agreement with Canadian Imperial Bank of
Commerce dated for reference April 15, 1998
10.22+ Contract Relative to Special Security under the Bank Act
between Canadian Imperial Bank of Commerce and Pivotal
dated April 30, 1998
10.23+ Canadian Imperial Bank of Commerce Schedule -- Standard
Credit Terms dated March 18, 1998
10.24+ Canadian Imperial Bank of Commerce Schedule -- Standard
Credit Terms dated March 18, 1998
10.25+ Form of Indemnity Agreement between Pivotal and
directors and officers of Pivotal
10.26 Assignment agreement dated July 12, 2000 between
Pivotal and MetaCreations International Limited for
premises located in Dublin, Republic of Ireland;
Sub-Lease dated September 22, 1999 between The H.W.
Wilson Company Inc. and MetaCreations International
Limited for premises located in Dublin, Republic of
Ireland
10.27 Lease dated April 14, 2000 among Deramore Holdings
Limited(1), Pivotal Corporation (NI) Limited (2) and
Pivotal for premises located in Belfast, Northern
Ireland
10.28 Lease dated December 4, 1997 by and between
EOP-Lakeside Office, L.L.C. and Exaction, Inc.
#10.29 Employment Agreement between Vince Mifsud and Pivotal
dated November 10, 1998
10.30++ Exactium Ltd. 1999 Stock Option Plan
10.31+++ Simba Technologies Incentive Stock Option Plan, as
amended
13.1 Annual Report to Shareholders
21.1 Subsidiaries of Pivotal
23.1 Consent of Deloitte & Touche LLP
24.1 Powers of Attorney (included on signature page)
27.1 Financial Data Schedule
99.1 Notice of Meeting and Management Information and Proxy
Circular for the Annual General Meeting to be held on
Wednesday, October 25, 2000
</TABLE>
<PAGE> 81
# Indicates management contract.
* Incorporated by reference to Pivotal's Form 8-K filed on January 25, 2000.
** Incorporated by reference to Pivotal's Form 8-K filed on June 19, 2000.
*** Incorporated by reference to Pivotal's Form 8-K filed on July 11, 2000.
+ Incorporated by reference to Pivotal's Registration Statement on Form F-1
(No. 333-82871).
++ Incorporated by reference to Pivotal's Registration Statement on Form S-8
(No. 333-39922).
+++ Incorporated by reference to Pivotal's Registration Statement on Form S-8
(No. 333-42460).
