<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Transition Period From to
Commission file number 000-26867
PIVOTAL CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
BRITISH COLUMBIA, CANADA NOT APPLICABLE
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
</TABLE>
300 -- 224 WEST ESPLANADE, NORTH VANCOUVER, BRITISH COLUMBIA, V7M 3M6 CANADA
(Address of principal executive offices)
TELEPHONE (604) 988-9982
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
COMMON SHARES OUTSTANDING AT APRIL 20, 2000: 20,262,468
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
PIVOTAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
COMPANY OVERVIEW.............................................................. 1
PART 1 FINANCIAL INFORMATION
ITEM 1 Consolidated Financial Statements........................... 2
Consolidated Balance Sheets as of March 31, 2000 and June
30, 1999.................................................... 2
Consolidated Statements of Operations for the Three and Nine
Months Ended March 31, 2000 and 1999........................ 3
Consolidated Statements of Shareholders' Equity (Deficit)
for the Nine Months Ended March 31, 2000.................... 4
Consolidated Statements of Cash flows for the Nine Months
Ended March 31, 2000 and 1999............................... 5
Notes to the Consolidated Financial Statements.............. 6
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
ITEM 3 Quantitative and Qualitative Disclosures About Market
Risk........................................................ 18
PART 2 OTHER INFORMATION
ITEM 1 Legal Proceedings........................................... 20
ITEM 2 Changes in Securities and Use of Proceeds................... 20
ITEM 5 Other Information........................................... 20
ITEM 6 Exhibits and Reports on Form 8-K............................ 20
Signatures.................................................. 21
</TABLE>
i
<PAGE> 3
COMPANY OVERVIEW
Pivotal Corporation is a leading provider of Microsoft-based Internet
software and service solutions for electronic business relationship management
(eBRM). Pivotal eRelationship 2000 provides electronic marketing, sales,
commerce and service solutions that enable organizations to increase revenues
and improve customer service. Our solutions allow customers, business partners
and employees to interact and collaborate over the Internet.
With Pivotal eRelationship 2000 the Internet becomes an important channel
to conduct sales, marketing and customer service, resulting in personalized,
one-to-one relationships. Our scalable, Internet and Microsoft standards-based
architecture, which is available as a hosted or licensed solution, is designed
to meet the needs of business-to-business organizations. Our customers range
from emerging companies in the new digital economy to traditional businesses
that are seeking to integrate the opportunities presented by the Internet into
their business models.
In the quarter ended March 31, 2000, we received top honors from both
Upside Magazine and Industry Solution Marketing (ISM), a leading industry
analyst firm. Upside Magazine rated us as an "E-business Winner" in its analysis
of the most promising electronic business companies. ISM also named us to its
"Top 15 Software Selections for 2000" based on an extensive product review
process.
Our worldwide customer base comprises more than 810 organizations and
225,000 users in traditional, digital economy, commercial and public market
sectors and includes companies such as Goldman Sachs, Nissan Motor (Denmark),
Software Spectrum, Heller Financial, Telco Online, Fairmont Hotels and Resorts,
Uniglobe Travel, Pharmasmarket.com, Little Tikes Company, iSalvex.com, HotData,
InterCon Security Limited, USFilter, Global Marine Systems, CJ Dream Soft, INMAR
Technology Solutions, KPMG, CornerDrugstore.com, Ericsson, Medpool.com,
HarperCollins Publishing, Deutsche Bank, Trader.com, Southern Company, Lucent
Technologies, NEC, Deloitte & Touche, Principal Financial Group and Red Cross
Australia.
In the quarter ended March 31, 2000, we accomplished several critical
advancements in our strategy for international expansion and electronic business
leadership. We released Pivotal eRelationship 2000, a highly customizable
electronic business computing platform. Pivotal eRelationship 2000 is the first
and only electronic business relationship management (eBRM) solution to exploit
new features of the Microsoft Windows 2000 operating system to deliver greater
scalability, reliability and performance. Bill Gates selected Pivotal
eRelationship 2000 for the Microsoft Windows 2000 international product launch
keynote demonstration. We also continued our international expansion by opening
offices in the United Kingdom, the Republic of Ireland, Japan and Australia.
In April 2000, we signed an agreement to purchase all of the outstanding
shares of Exactium Ltd., a corporation which provides electronic selling
solutions optimized for Internet and Microsoft standards. Closing of the
acquisition is subject to satisfaction or waiver of a number of conditions as
described in the purchase agreement. The total purchase price is $48 million,
consisting of $11.3 million in cash and $36.7 million in our common shares. We
will account for the acquisition as a purchase.
The terms "Pivotal," "our company" and "we" in this filing refer to Pivotal
Corporation, a British Columbia company, Pivotal Corporation, its wholly-owned
subsidiary incorporated in Washington, Pivotal Corporation Limited, its
wholly-owned subsidiary incorporated in the United Kingdom, and Transitif S.A.,
its wholly-owned subsidiary incorporated in France, collectively.
Pivotal Relationship, Pivotal eRelationship, Pivotal eRelationship 2000,
Pivotal eRelationship 2000 Intrahub, Pivotal eRelationship 2000 CustomerHub,
Pivotal eRelationship 2000 PartnerHub, Pivotal ePower and PivotalHost are
trademarks and/or registered trademarks of Pivotal Corporation.
1
<PAGE> 4
PART 1 -- ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
PIVOTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
----------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,818 $ 9,338
Short term investments.................................... 42,882 --
Accounts receivable....................................... 15,061 8,304
Prepaid expenses.......................................... 3,304 1,029
------- -------
Total current assets................................... 67,065 18,671
Property and equipment, net................................. 5,447 3,051
Other assets................................................ 1,415 --
------- -------
Total assets...................................... $73,927 $21,722
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities.................. $12,095 $ 6,329
Deferred revenue.......................................... 7,678 5,085
------- -------
Total current liabilities.............................. 19,773 11,414
------- -------
Redeemable convertible preferred shares, authorized, issued
and outstanding shares -- none at March 31, 2000 and 9,946
at June 30, 1999.......................................... -- 17,500
------- -------
Shareholders' equity (deficit):
Preferred shares, undesignated, no par value; authorized
shares -- 20,000 at March 31, 2000 and June 30, 1999,
no shares issued and outstanding....................... -- --
Class A convertible preferred shares, no par value;
authorized, issued and outstanding shares -- none at
March 31, 2000 and none at June 30, 1999............... -- 83
Common shares, no par value; authorized shares -- 200,000
at March 31, 2000 and June 30, 1999; issued and
outstanding shares -- 20,239 and 3,454 at March 31,
2000 and June 30, 1999, respectively................... 62,455 563
Class B common shares, Cdn$0.03 per share par value;
authorized shares -- none at March 31, 2000 and 600 at
June 30, 1999; issued and outstanding shares -- none
and 477 at March 31, 2000 and June 30, 1999,
respectively........................................... -- 4
Deferred share-based compensation......................... (249) (416)
Accumulated deficit....................................... (8,052) (7,426)
------- -------
Total shareholders' equity (deficit)........................ 54,154 (7,192)
------- -------
Total liabilities and shareholders' equity (deficit)........ $73,927 $21,722
======= =======
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(EXPRESSED IN UNITED STATES DOLLARS, ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE
DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- ------------------
2000 1999 2000 1999
-------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES:
Licenses........................................... $10,125 $5,006 $24,248 $12,605
Services and maintenance........................... 4,412 1,717 10,506 4,399
------- ------ ------- -------
Total revenues.................................. 14,537 6,723 34,754 17,004
------- ------ ------- -------
COST OF REVENUES:
Licenses........................................... 635 268 1,329 438
Services and maintenance........................... 2,295 822 5,476 1,973
------- ------ ------- -------
Total cost of revenues.......................... 2,930 1,090 6,805 2,411
------- ------ ------- -------
Gross profit......................................... 11,607 5,633 27,949 14,593
------- ------ ------- -------
OPERATING EXPENSES:
Sales and marketing................................ 8,214 4,404 20,846 11,825
Research and development........................... 2,409 1,184 6,103 3,158
General and administrative......................... 1,197 566 2,872 1,621
Amortization of goodwill........................... 97 -- 129 --
------- ------ ------- -------
Total operating expenses........................ 11,917 6,154 29,950 16,604
------- ------ ------- -------
Loss from operations................................. (310) (521) (2,001) (2,011)
Interest and other income (loss)..................... 673 (63) 1,715 45
------- ------ ------- -------
Income (loss) before income taxes.................... 363 (584) (286) (1,966)
Income taxes......................................... 139 63 340 183
------- ------ ------- -------
Net income (loss).................................... $ 224 $ (647) $ (626) $(2,149)
======= ====== ======= =======
EARNINGS (LOSS) PER SHARE:
Basic.............................................. $ 0.01 $(0.17) $ (0.03) $ (0.55)
Diluted............................................ $ 0.01 $(0.17) $ (0.03) $ (0.55)
Pro-forma basic and diluted........................ $(0.04) $ (0.03) $ (0.14)
WEIGHTED AVERAGE NUMBER OF SHARES USED TO CALCULATE
EARNINGS (LOSS) PER SHARE:
Basic.............................................. 20,134 3,888 17,951 3,875
Diluted............................................ 21,470 3,888 17,951 3,875
Pro-forma basic and diluted........................ 15,725 19,513 14,996
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED MARCH 31, 2000
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A
CONVERTIBLE CLASS B
PREFERRED SHARES COMMON SHARES COMMON SHARES DEFERRED
----------------- ---------------- --------------- SHARE-BASED TOTAL SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT COMPENSATION (DEFICIT) EQUITY (DEFICIT)
------- ------- ------ ------- ------ ------ ------------ --------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance June 30,
1999................. 2,000 $ 83 3,454 $ 563 477 $ 4 $(416) $(7,426) $(7,192)
Conversion of class B
common to common
shares............... 477 4 (477) (4) --
Conversion of class A
preferred into common
shares............... (2,000) (83) 2,000 83 --
Conversion of
redeemable
convertible preferred
shares into common
shares............... 10,052 17,501 17,501
Issuance of common
shares on exercise of
stock options........ 62 66 66
Issuance of common
shares on initial
public offering, net
of offering costs.... 3,975 43,101 43,101
Amortization of share-
based compensation... 51 51
Net loss............... (686) (686)
------ ---- ------ ------- ---- --- ----- ------- -------
Balance September 30,
1999................. -- -- 20,020 61,318 -- -- (365) (8,112) 52,841
Issuance of common
shares on exercise of
stock options........ 10 17 17
Amortization of share
based compensation... 60 60
Net loss............... (164) (164)
------ ---- ------ ------- ---- --- ----- ------- -------
Balance December 31,
1999................. -- -- 20,030 61,335 -- -- (305) (8,276) 52,754
Issuance of common
shares on exercise of
stock options........ 209 1,120 1,120
Amortization of share
based compensation... 56 56
Net income............. 224 224
------ ---- ------ ------- ---- --- ----- ------- -------
Balance March 31,
2000................. -- $ -- 20,239 $62,455 -- $-- $(249) $(8,052) $54,154
------ ---- ------ ------- ---- --- ----- ------- -------
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED SATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period................................... $ (626) $(2,149)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 1,595 758
Non-cash share based compensation expense.............. 167 --
Change in operating assets and liabilities:
Accounts receivable.................................... (5,950) 1,173
Prepaid expenses....................................... (2,027) 102
Accounts payable and accrued liabilities............... 5,119 2,467
Deferred revenue....................................... 2,191 (16)
-------- -------
Net cash provided by operating activities................. 469 2,335
-------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment........................ (3,808) (1,368)
Acquisition of Transitif S.A.............................. (1,228) --
Purchase of short term investments........................ (42,882) --
Other assets.............................................. (375) --
-------- -------
Net cash used in investing activities..................... (48,293) (1,368)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares................... 44,304 5
Proceeds from issuance of preference shares............... -- 8,000
-------- -------
Net cash provided by financing activities................. 44,304 8,005
-------- -------
Net increase (decrease) in cash and cash equivalents...... (3,520) 8,972
Cash and cash equivalents, beginning of period............ 9,338 1,202
-------- -------
Cash and cash equivalents, end of period.................. $ 5,818 $10,174
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
Cash paid for income taxes................................ $ 429 $ 209
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of preferred shares into common shares......... $ 17,583 --
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 8
PIVOTAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS;
ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION
The accompanying unaudited financial statements have been prepared in
conformity with United States generally accepted accounting principles ("United
States GAAP") for interim financial information and with the instructions for
Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with United States GAAP have been condensed, or omitted, pursuant to
the rules and regulations of the Securities and Exchange Commission. In our
opinion, the statements include all adjustments necessary (which are of a normal
and recurring nature) for the fair presentation of the results of the interim
periods presented. These financial statements should be read in conjunction with
our audited consolidated financial statements for the year ended June 30, 1999,
included in our prospectus, dated August 4, 1999, filed with the Securities and
Exchange Commission in connection with our initial public offering and our
interim consolidated financial statements for the three month periods ended
September 30, 1999 and December 31, 1999 included in our Forms 10-Q filed with
the Securities and Exchange Commission on November 5, 1999 and February 4, 2000,
respectively. Our results of operations for any interim period are not
necessarily indicative of the results of operations for any other interim period
or for a full fiscal year.
2. ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $559
and $334 at March 31, 2000 and June 30, 1999, respectively.
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The principal components of accounts payable and accrued liabilities were
as follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
--------- --------
<S> <C> <C>
Accounts payable............................................ $ 7,293 $3,054
Accrued compensation........................................ 3,156 2,368
Accrued liabilities......................................... 1,646 907
------- ------
$12,095 $6,329
======= ======
</TABLE>
6
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS;
ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
4. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings (loss) per share (all amounts in thousands, except earnings (loss) per
share information):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income (loss)(A)................................ 224 (647) (626) (2,149)
------- ------- ------- -------
Weighted average number of common shares(B)......... 20,134 3,888 17,951 3,875
Effect of dilutive securities:
Stock options..................................... 1,336
Redeemable convertible preferred stock............
------- ------- ------- -------
Adjusted weighted average shares and assumed
conversions(C).................................... 21,470 3,888 17,951 3,875
Pro Forma adjustment for redeemable convertible
preferred shares.................................. -- 11,837 1,562 11,121
------- ------- ------- -------
Pro Forma basic and diluted weighted average
shares(D)......................................... 21,470 15,725 19,513 14,996
======= ======= ======= =======
Earnings (loss) per share:
Basic(A/B)........................................ $ 0.01 $ (0.17) $ (0.03) $ (0.55)
Diluted(A/C)...................................... $ 0.01 $ (0.17) $ (0.03) $ (0.55)
Pro forma basic and diluted(A/D).................. $ (0.04) $ (0.03) $ (0.14)
</TABLE>
Pro forma loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding and the weighted average redeemable
convertible preferred shares and Class A convertible preferred shares
outstanding as if such shares were converted into common shares and had been
outstanding since July 1, 1998.
5. SEGMENTED INFORMATION
The Company operates in one business segment; the development, marketing,
supporting and implementation of our electronic business relationship management
solutions.
The Company licenses and markets its products internationally. The
following table presents a summary of revenues by geographical region.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- ------------------
2000 1999 2000 1999
-------- ------- ------- -------
<S> <C> <C> <C> <C>
United States........................................ $10,758 $5,580 $23,546 $13,349
Canada............................................... 1,308 269 3,523 728
International........................................ 2,471 874 7,685 2,927
------- ------ ------- -------
$14,537 $6,723 $34,754 $17,004
======= ====== ======= =======
</TABLE>
The Company attributes revenue among the geographical areas based on the
location of the customers involved.
During the three months ended March 31, 2000 and 1999, no single customer
accounted for 10% or more of total revenue. During the nine months ended March
31, 2000 and 1999, no single customer accounted for 10% or more of total
revenue.
7
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(EXPRESSED IN UNITED STATES DOLLARS;
ALL AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
6. ACQUISITIONS
ACQUISITION OF TRANSITIF
Effective December 3, 1999, Pivotal acquired Transitif S.A., a French
corporation that distributes electronic business relationship management
solutions. Transitif S.A. deploys Pivotal solutions through its network of
systems integrators throughout France.
A summary of the purchase price for the acquisition is as follows (in
thousands):
<TABLE>
<S> <C>
Cash........................................................ $1,108
Direct acquisition costs.................................... 120
------
$1,228
======
</TABLE>
Additional consideration for the purchase is payable by Pivotal based on
the net after-tax earnings of Transitif S.A. and license revenues received by
Transitif S.A. from the future sale of licenses for Pivotal products. All
earn-out payments will be recorded as additional purchase price when
determinable and Pivotal may elect to pay up to fifty percent of the additional
purchase price in Pivotal common shares. To date there has been no additional
purchase price payable.
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the results of operations of Transitif S.A. have been included
in Pivotal's consolidated financial statements from the date of acquisition.
The purchase price was allocated to the assets acquired and liabilities
assumed based on their respective fair values on the date of acquisition as
follows:
<TABLE>
<S> <C>
Assets acquired............................................. $1,108
Liabilities assumed......................................... (1,050)
Goodwill.................................................... 1,170
------
$1,228
======
</TABLE>
The goodwill is being amortized over three years, the estimated useful
life.
The pro forma effect of combining Transitif S.A. with Pivotal's operations
for the year ended June 30, 1999 and prior to the acquisition for the nine
months ended March 31, 2000 is not reported separately because it is not
considered to be material.
PENDING ACQUISITION
On April 11, 2000, Pivotal entered into an agreement to purchase all of the
outstanding shares of Exactium Ltd., a corporation that provides electronic
selling solutions optimized for Internet and Microsoft standards. The closing of
the acquisition is subject to satisfaction or waivers of all conditions to the
obligations of the parties as described in the agreement. We cannot assure you
that we will be able to complete the closing of the acquisition.
A summary of the purchase price for the acquisition is as follows (in
millions):
<TABLE>
<S> <C>
Cash........................................................ $11.3
Common shares of Pivotal Corporation........................ 36.7
-----
$48.0
=====
</TABLE>
8
<PAGE> 11
PART 1 -- ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Investors should read the following in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part 1 -- Item 1
of this Quarterly Report, and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Financial Conditions
and Results of Operations in our Form F-1 dated August 4, 1999.
FORWARD-LOOKING STATEMENTS
Statements in this filing about our future results, levels of activity,
performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in our forward-looking statements.
These factors include, among others, those described in connection with the
forward-looking statements, and the factors listed in Exhibit 99.1 to this
report, which is hereby incorporated by reference in this report.
In some cases, you can identify forward-looking statements by our use of
words such as "may," "will," "should," "could," "expect," "plan," "intend,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or the
negative or other variations of these words, or other comparable words or
phrases.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy and completeness of
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of this report. You should not place
undue reliance on forward-looking statements.
OVERVIEW
Pivotal Corporation is a leading provider of Microsoft-based Internet
software and service solutions for electronic business relationship management
(eBRM). Pivotal eRelationship 2000 provides electronic marketing, sales,
commerce and service solutions that enable organizations to increase revenues
and improve customer service. Our solutions allow customers, business partners
and employees to interact and collaborate over the Internet.
With Pivotal eRelationship 2000 the Internet becomes an important channel
to conduct sales, marketing and customer service, resulting in personalized,
one-to-one relationships. Our scalable, Internet and Microsoft standards-based
architecture, which is available as a hosted or licensed solution, is designed
to meet the needs of business-to-business organizations. Our customers range
from emerging companies in the new digital economy to traditional businesses
that are seeking to integrate the opportunities presented by the Internet into
their business models.
In the quarter ended March 31, 2000, we received top honors from both
Upside Magazine and Industry Solution Marketing (ISM), a leading industry
analyst firm. Upside Magazine rated us as an "E-business Winner" in its analysis
of the most promising electronic business companies. ISM also named us to its
"Top 15 Software Selections for 2000" based on an extensive product review
process.
Our worldwide customer base comprises more than 810 organizations and
225,000 users in traditional, digital economy, commercial and public market
sectors and includes companies such as Goldman Sachs, Nissan Motor (Denmark),
Software Spectrum, Heller Financial, Telco Online, Fairmont Hotels and Resorts,
Uniglobe Travel, Pharmasmarket.com, Little Tikes Company, iSalvex.com, HotData,
InterCon Security Limited, USFilter, Global Marine Systems, CJ Dream Soft, INMAR
Technology Solutions, KPMG, CornerDrugstore.com, Ericsson, Medpool.com,
HarperCollins Publishing, Deutsche Bank, Trader.com, Southern Company, Lucent
Technologies, NEC, Deloitte & Touche, Principal Financial Group and Red Cross
Australia.
9
<PAGE> 12
In the quarter ended March 31, 2000, we accomplished several critical
advancements in our strategy for international expansion and electronic business
leadership. We released Pivotal eRelationship 2000, a highly customizable
electronic business computing platform. Pivotal eRelationship 2000 is the first
and only electronic business relationship management (eBRM) solution to exploit
new features of the Microsoft Windows 2000 operating system to deliver greater
scalability, reliability and performance. Bill Gates selected Pivotal
eRelationship 2000 for the Microsoft Windows 2000 international product launch
keynote demonstration. We also continued our international expansion by opening
offices in the United Kingdom, the Republic of Ireland, Japan and Australia.
In April 2000, we signed an agreement to purchase all of the outstanding
shares of Exactium Ltd., a corporation which provides electronic selling
solutions optimized for Internet and Microsoft standards. Closing of the
acquisition is subject to satisfaction or waiver of a number of conditions as
described in the purchase agreement. The total purchase price is $48 million,
consisting of $11.3 million in cash and $36.7 million in our common shares. We
will account for the acquisition as a purchase.
The terms "Pivotal," "our company" and "we" in this filing refer to Pivotal
Corporation, a British Columbia company, Pivotal Corporation, its wholly-owned
subsidiary incorporated in Washington, Pivotal Corporation Limited, its
wholly-owned subsidiary incorporated in the United Kingdom, and Transitif S.A.,
its wholly-owned subsidiary incorporated in France, collectively.
Pivotal Relationship, Pivotal eRelationship, Pivotal eRelationship 2000,
Pivotal eRelationship 2000 Intrahub, Pivotal eRelationship 2000 CustomerHub,
Pivotal eRelationship 2000 PartnerHub, Pivotal ePower and PivotalHost are
trademarks and/or registered trademarks of Pivotal Corporation.
10
<PAGE> 13
PIVOTAL'S RESULTS OF OPERATIONS
The following table presents selected financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated. The operating results for the three months and nine months
ended March 31, 2000 and 1999, respectively, are not necessarily indicative of
the results that may be expected for the full fiscal year or any future period.
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
------------ ------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
REVENUES:
License................................................ 70% 74% 70% 74%
Services and maintenance............................... 30% 26% 30% 26%
---- ---- ---- ----
Total revenues....................................... 100% 100% 100% 100%
---- ---- ---- ----
COST OF REVENUES:
License................................................ 4% 4% 4% 2%
Services and maintenance............................... 16% 12% 16% 12%
---- ---- ---- ----
Total cost of revenues............................... 20% 16% 20% 14%
---- ---- ---- ----
Gross margin.............................................. 80% 84% 80% 86%
---- ---- ---- ----
OPERATING EXPENSES:
Sales and marketing.................................... 56% 66% 60% 70%
Research and development............................... 17% 17% 18% 19%
General and administrative............................. 8% 8% 8% 9%
Amortization of goodwill............................... 1% 0% 0% 0%
---- ---- ---- ----
Total operating expenses............................. 82% 91% 86% 98%
---- ---- ---- ----
Loss from operations...................................... (2%) (7%) (6%) (12%)
Interest and other income (loss).......................... 5% (1%) 5% 0%
---- ---- ---- ----
Income (loss) before income taxes......................... 3% (8%) (1%) (12%)
Income tax provision...................................... 1% 1% 1% 1%
---- ---- ---- ----
Net income (loss)......................................... 2% (9%) (2%) (13%)
==== ==== ==== ====
</TABLE>
REVENUES
Total revenues increased 116% to $14.5 million from $6.7 million for the
quarters ended March 31, 2000 and 1999, respectively. Total revenues for the
nine month period ended March 31, 2000 were $34.7 million compared with $17.0
million for the nine month period ended March 31, 1999, representing an increase
of 104%.
LICENSES
Revenues from licenses increased 102% to $10.1 million from $5.0 million
for the quarters ended March 31, 2000 and 1999, respectively. Revenues from
licenses increased 92% to $24.2 million from $12.6 million for the nine months
ended March 31, 2000 and 1999, respectively.
Our revenues from licenses increased due to sales to new customers and to
follow-on sales to existing customers. We believe that the availability of our
Pivotal eRelationship 2000 product suite has contributed to the increase in
revenue from licenses, as this has extended the overall functionality of our
products by permitting organizations to collaborate more effectively with
customers and partners over the Internet.
11
<PAGE> 14
We derive our revenues from the sale of software and services. We recognize
product license revenues on delivery of our products if:
- persuasive evidence of an arrangement exists,
- the fee is fixed and determinable,
- we can objectively allocate the total fee among all elements of the
arrangement, and
- the collection of the license fee is probable.
Under some license arrangements, with either a fixed or indefinite term,
our customers agree to pay for the license with periodic payment extending
beyond one year. We recognize revenues from these arrangements as the periodic
payments become due, provided all other conditions for revenue recognition are
met.
We enter into reseller and sub-licensing arrangements that provide a fee
payable to us based on a percentage of list price. We recognize revenue only on
the fees payable to us, net of any amount payable to the reseller by the
customer.
Revenues from licenses represented 70% and 74% of total revenues for the
quarters ended March 31, 2000 and 1999, respectively. Revenues from licenses
represented 70% and 74% of total revenues for the nine months ended March 31,
2000 and 1999, respectively.
No single customer accounted for 10% of our revenues for the quarters ended
March 31, 2000 and 1999 or for the nine months ended March 31, 2000 and 1999.
North American license revenues accounted for 73% and 83% of total license
revenues in the quarters ended March 31, 2000 and 1999, respectively. North
American license revenues accounted for 74% and 79% of total license revenues
for the nine months ended March 31, 2000 and 1999, respectively.
SERVICES AND MAINTENANCE
Revenues from services and maintenance increased 157% to $4.4 million from
$1.7 million for the quarters ended March 31, 2000 and 1999, respectively. This
resulted from an increase of $1.2 million in revenues from technical support and
maintenance contracts, which entitle the customer to new versions of the product
and to technical support and maintenance services, and an increase of $1.5
million in revenues from implementation, education and consulting service
engagements.
Revenues from services and maintenance increased 138% to $10.5 million from
$4.4 million for the nine months ended March 31, 2000 and 1999, respectively.
This resulted from an increase of $3.1 million in revenues from technical
support and maintenance contracts and an increase of $3.0 million in revenues
from implementation, education and consulting service engagements.
We typically sell first-year maintenance with the related software license.
Revenue related to maintenance is recognized over the term of the maintenance
contract, typically 12 months. In addition to increasing our customer base,
revenues relating to technical support and maintenance also have increased due
to the renewal of technical support and maintenance contracts upon expiration of
the first year maintenance arrangement.
We recognize revenues from consulting, education and implementation and
customization services as these services are performed. We charge these services
primarily on a time-and-materials basis under a separate service arrangement
with the customer. Over 95% of the implementation and customization services in
connection with installations of our software products are provided by
independent companies that are members of the Pivotal Alliance but which
contract directly with the customer. We do not recognize revenue from services
provided by members of the Pivotal Alliance.
Our revenues from services and maintenance represented 30% and 26% of total
revenues for the quarters ended March 31, 2000 and 1999, respectively, and 30%
and 26% for the nine months ended March 31, 2000 and 1999, respectively. We
believe that revenues from services and maintenance may continue to increase as
a percentage of total revenues, due to the increase in the number of technical
support and maintenance
12
<PAGE> 15
contracts as our customer base grows. We intend to expand consulting services
targeted at helping customers understand more about matters such as effective
one-to-one marketing and using the Internet to increase revenues and improve
customer service. We plan to continue relying on members of the Pivotal Alliance
to provide the great majority of implementation and customization services to
our customers, rather than providing those services directly.
COST OF REVENUES
Total cost of revenues increased 169% to $2.9 million from $1.1 million for
the quarters ended March 31, 2000 and 1999, respectively. Total cost of revenues
increased 182% to $6.8 million from $2.4 million for the nine months ended March
31, 2000 and 1999, respectively.
LICENSES
Cost of revenues from licenses consists of costs relating to the
manufacturing, packaging and distribution of products and related documentation,
and fees paid for incorporation of third-party software products.
Cost of revenues from licenses increased to $635,000 from $268,000 for the
quarters ended March 31, 2000 and 1999, respectively. Cost of revenues from
licenses increased to $1.3 million from $438,000 for the nine months ended March
31, 2000 and 1999, respectively. The increases are due primarily to increased
costs for third-party technology integrated with our products. Cost of revenues
from licenses as a percentage of revenues from licenses was 6% and 5% for the
quarters ended March 31, 2000 and 1999, respectively. Cost of revenues from
licenses as a percentage of revenues from licenses was 5% and 3% for the nine
months ended March 31, 2000 and 1999, respectively. We expect that cost of
licenses as a percentage of revenue from licenses will increase because we
expect to integrate additional software applications licensed from third parties
into our products.
SERVICES AND MAINTENANCE
Cost of revenues from services and maintenance consists of personnel and
other expenses relating to the cost of providing customer support, education and
professional services. Cost of revenues from services and maintenance will vary
depending on the mix of services we provide between support and maintenance,
education, implementation and consulting services. Gross profit margins are
higher for support and maintenance services than they are for education,
implementation and consulting services. Support and maintenance services
principally involve the delivery of software upgrades, which the customers
download and install themselves, and customer support. Education, implementation
and customization services generally require more involvement by our employees,
resulting in higher compensation, travel and similar expenses.
Cost of revenues from services and maintenance increased 179% to $2.3
million from $822,000 for the quarters ended March 31, 2000 and 1999,
respectively. Cost of revenues from services and maintenance increased 178% to
$5.5 million from $2.0 million for the nine months ended March 31, 2000 and
1999, respectively. Cost of revenues from services and maintenance as a
percentage of revenues from services and maintenance was 52% and 48% for the
quarters ended March 31, 2000 and 1999, respectively. Cost of revenues from
services and maintenance as a percentage of revenues from services and
maintenance was 52% and 45% for the nine months ended March 31, 2000 and 1999,
respectively.
We expect that cost of revenues from services and maintenance may continue
to increase as a percent of revenues from services and maintenance as we expand
our service capabilities in international markets to support planned expansion
of our international business and as we seek to expand our consulting services.
This may occur because we will be incurring expenses to hire and train employees
before we will be earning revenue for their services, and because we may not
generate enough demand for our services to use all the capacity we add.
13
<PAGE> 16
OPERATING EXPENSES
SALES AND MARKETING
Sales and marketing expenses consist primarily of salaries, commissions,
bonuses and benefits earned by sales and marketing personnel, direct
expenditures such as travel, communication and occupancy and marketing
expenditures related to direct mail, online marketing, trade shows, advertising
and promotion.
Sales and marketing expenses increased 87% to $8.2 million from $4.4
million for the quarters ended March 31, 2000 and 1999, respectively. Sales and
marketing expenses decreased as a percentage of total revenues to 56% from 66%
for the quarters ended March 31, 2000 and 1999, respectively. Sales and
marketing expenses increased 76% to $20.9 million from $11.8 million for the
nine months ended March 31, 2000 and 1999, respectively. Sales and marketing
expenses decreased as a percentage of total revenues to 60% from 70% for the
nine months ended March 31, 2000 and 1999, respectively. This decrease resulted
from the improved productivity of our sales and marketing personnel and
programs. We expect that sales and marketing expenses will continue to increase
as we continue to expand our North American and international sales and
marketing efforts.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of salaries, benefits
and equipment for software engineers, quality assurance personnel, program
managers, product managers, technical writers and outside contractors used to
augment the research and development efforts.
Research and development expenses increased 103% to $2.4 million from $1.2
million for the quarters ended March 31, 2000 and 1999, respectively. Research
and development expenses were 17% of total revenues for the quarters ended March
31, 2000 and 1999, respectively. Research and development expenses increased 93%
to $6.1 million from $3.2 million for the nine months ended March 31, 2000 and
1999, respectively. Research and development expenses were 18% and 19% of total
revenues for the nine months ended March 31, 2000 and 1999, respectively. We
expect to continue to significantly increase research and development
expenditures with a particular emphasis on Internet-related development
projects.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of salaries, benefits
and related costs for executive, finance, administrative, human resources and
information services personnel. General and administrative expenses also include
legal and other professional fees.
General and administrative expenses increased 111% to $1.2 million from
$566,000 for the quarters ended March 31, 2000 and 1999, respectively. General
and administrative expenses were 8% of total revenues for the same periods.
General and administrative expenses increased 77% to $2.9 million from $1.6
million for the nine months ended March 31, 2000 and 1999, respectively. General
and administrative expenses decreased as a percentage of total revenues to 8%
from 9% for the nine months ended March 31, 2000 and 1999, respectively. The
increase in general and administrative expenses was due to hiring additional
personnel, and the implementation of internal financial and administrative
systems. We expect general and administrative expenses will increase as we
continue to expand the business and begin to increase our administrative
capability in international markets.
AMORTIZATION OF GOODWILL
Amortization of goodwill was $97,000 in the quarter ended March 31, 2000
related to goodwill of approximately $1.2 million arising from the acquisition
of Transitif S.A in December 1999. We are amortizing goodwill from this
acquisition over a period of three years. There was no amortization of goodwill
in the quarter ended March 31, 1999 or nine months ended March 31, 1999. We
expect amortization of goodwill to increase in future periods assuming the
completion of the acquisition of Exactium Ltd.
14
<PAGE> 17
SHARE COMPENSATION
We recorded deferred compensation expenses of $473,000 during the year
ended June 30, 1999 in connection with grants of employee share purchase options
with exercise prices lower than the deemed fair market value of our common
shares. We are amortizing this amount over the four-year period in which the
options vest, and we will allocate the expense among operating expense
categories based on the primary activity of the employee that holds the option.
We recognized $56,000 in compensation expense in the quarter ended March 31,
2000 and $167,000 in the nine months ended March 31, 2000. We currently expect
to recognize $222,000, $113,000, $59,000 and $22,000 in the years ending June
30, 2000, 2001, 2002 and 2003, respectively.
INTEREST AND OTHER INCOME
Interest and other income consists of earnings on cash and cash equivalents
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 increased to $673,000 from a loss of $63,000 for the quarters ended
March 31, 2000 and 1999, respectively. Interest and other income increased to
$1.7 million from $45,000 for the nine months ended March 31, 2000 and 1999,
respectively. These increases are primarily due to interest earned from cash and
cash equivalents and short-term investments generated by our initial public
offering. The quarter ended March 31, 1999 include foreign exchange losses of
$156,000. The other components of interest and other income were minor for the
periods presented.
INCOME TAXES
The provision for income taxes was $139,000 and $63,000 for the quarters
ended March 31, 2000 and 1999, respectively. The provision for income taxes was
$340,000 and $183,000 for the nine months ended March 31, 2000 and 1999,
respectively. These income taxes were attributable to our operations in the
United States, Canada, the United Kingdom and France. As a result of net
operating losses and the availability of loss carry forwards in Canada, we have
not incurred significant Canadian income taxes.
15
<PAGE> 18
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly results of operations
both in absolute dollars and on percentage of revenue basis for each of our last
eight quarters. This data has been derived from unaudited consolidated financial
statements that have been prepared on the same basis as the annual audited
consolidated financial statements and, in our opinion, included all normal
recurring adjustments necessary for the fair presentation of such information.
These unaudited quarterly results should be read in conjunction with our
consolidated financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------
JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Licenses......................... $4,103 $3,276 $4,323 $5,006 $6,214 $6,097 $8,026 $10,125
Services and maintenance......... 1,025 1,292 1,390 1,717 2,109 2,578 3,516 4,412
------ ------ ------ ------ ------ ------ ------ -------
Total revenues................. 5,128 4,568 5,713 6,723 8,323 8,675 11,542 14,537
------ ------ ------ ------ ------ ------ ------ -------
COST OF REVENUES:
Licenses......................... 128 73 97 268 98 284 410 635
Services and maintenance......... 442 562 589 822 1,105 1,368 1,813 2,295
------ ------ ------ ------ ------ ------ ------ -------
Total cost of revenues......... 570 635 686 1,090 1,203 1,652 2,223 2,930
------ ------ ------ ------ ------ ------ ------ -------
Gross profit....................... 4,558 3,933 5,027 5,633 7,120 7,023 9,319 11,607
------ ------ ------ ------ ------ ------ ------ -------
OPERATING EXPENSES:
Sales and marketing.............. 3,122 3,488 3,933 4,404 5,005 5,715 6,917 8,214
Research and development......... 635 808 1,166 1,184 1,800 1,569 2,125 2,409
General and administrative....... 445 543 512 566 845 707 968 1,197
Amortization of goodwill......... -- -- -- -- -- -- 32 97
------ ------ ------ ------ ------ ------ ------ -------
Total operating expenses....... 4,202 4,839 5,611 6,154 7,650 7,991 10,042 11,917
------ ------ ------ ------ ------ ------ ------ -------
Income (loss) from operations...... 356 (906) (584) (521) (530) (968) (723) (310)
Interest and other income (loss)... 17 107 1 (63) (69) 357 685 673
------ ------ ------ ------ ------ ------ ------ -------
Income (loss) before taxes......... 373 (799) (583) (584) (599) (611) (38) 363
Income taxes....................... 1 60 60 63 60 75 126 139
------ ------ ------ ------ ------ ------ ------ -------
Net income (loss).................. $ 372 $ (859) $ (643) $ (647) $ (659) $ (686) $ (164) $ 224
====== ====== ====== ====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------------
JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31,
1998 1998 1998 1999 1999 1999 1999 2000
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Licenses......................... 80% 72% 76% 74% 75% 70% 70% 70%
Services and maintenance......... 20% 28% 24% 26% 25% 30% 30% 30%
---- ---- ---- ---- ---- ---- ---- ----
Total revenues................. 100% 100% 100% 100% 100% 100% 100% 100%
---- ---- ---- ---- ---- ---- ---- ----
COST OF REVENUES:
Licenses......................... 2% 2% 2% 4% 1% 3% 3% 4%
Services and maintenance......... 9% 12% 10% 12% 13% 16% 16% 16%
---- ---- ---- ---- ---- ---- ---- ----
Total cost of revenues......... 11% 14% 12% 16% 14% 19% 19% 20%
---- ---- ---- ---- ---- ---- ---- ----
Gross profit....................... 89% 86% 88% 84% 86% 81% 81% 80%
---- ---- ---- ---- ---- ---- ---- ----
OPERATING EXPENSES:
Sales and marketing.............. 61% 76% 69% 66% 60% 66% 60% 56%
Research and development......... 12% 18% 20% 17% 22% 18% 19% 17%
General and administrative....... 9% 12% 9% 8% 10% 8% 8% 8%
Amortization of goodwill......... -- -- -- -- -- -- -- 1%
---- ---- ---- ---- ---- ---- ---- ----
Total operating expenses....... 82% 106% 98% 91% 92% 92% 87% 82%
---- ---- ---- ---- ---- ---- ---- ----
Income (loss) from operations...... 7% (20%) (10%) (7%) (6%) (11%) (6%) (2%)
Interest and other income (loss)... -- 2% -- (1%) (1%) 4% 6% 5%
---- ---- ---- ---- ---- ---- ---- ----
Income (loss) before taxes......... 7% (18%) (10%) (8%) (7%) (7%) 0% 3%
Income taxes....................... -- 1% 1% 1% 1% 1% 1% 1%
---- ---- ---- ---- ---- ---- ---- ----
Net income (loss).................. 7% (19%) (11%) (9%) (8%) (8%) (1%) 2%
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
16
<PAGE> 19
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 ending 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 our control. As a
result of our limited operating history, we cannot forecast operating expenses
based on historical results. Accordingly, we base our anticipated level of
expense in part on future revenue projections. Most of our expenses are fixed
and in the short term we may not be able to quickly reduce spending if revenues
are lower than we have projected. Our ability to forecast our quarterly revenues
accurately is limited given our limited operating history, length of the sales
cycle of our solutions and other uncertainties in our business. If revenues in a
particular quarter do not meet projections, our net losses in a given quarter
would be greater than expected. As a result, we believe that our
quarter-to-quarter comparisons of our operating results are not necessarily
meaningful. Investors should not rely on the results of one quarter as an
indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had $5.8 million in cash and cash equivalents, $42.9
in short term investments and $47.3 million in working capital. During the
quarter ended September 30, 1999, we successfully concluded our initial public
offering, generating $43.1 million net of expenses and brokers' commissions.
Our cash and cash equivalents and short term investments increased to $48.7
million as of March 31, 2000 from $9.3 million as of June 30, 1999. Our working
capital increased to $47.3 million at March 31, 2000 from $7.3 million at June
30, 1999. This increase was primarily attributable to the issuance of common
shares from our initial public offering and increases in accounts payable and
deferred revenue partially offset by increases in accounts receivable and
prepaid expenses, the acquisition of Transitif S.A. and the purchase of property
and equipment.
We generated cash from operating activities of $469,000 and $2.3 million
for the nine months ended March 31, 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. Although we generated cash
from operating activities for the nine months ended March 31, 2000, we do not
expect to generate cash from operations for the year ending June 30, 2000.
Capital expenditures totaled $3.8 million and $1.4 million for the nine
months ended March 31, 2000 and 1999, respectively. These capital expenditures
related primarily to the acquisition of computer software and equipment as well
as furniture and fixtures as a result of our growing employee base. During the
nine months ended March 31, 2000 we acquired Transitif S.A., a French
distributor of electronic business relationship management solutions and paid
$1.2 million in cash relating to this acquisition.
Net cash provided by financing activities was $44.3 million and $8.0
million for the nine months ended March 31, 2000 and 1999, respectively. Net
cash provided by financing activities resulted from sales of equity securities.
In addition to the $43.1 million raised from our initial public offering, we
received $1.2 million on exercise of stock options during the nine months ended
March 31, 2000. We have credit facilities with a Canadian chartered bank, which
include an operating facility of US$10.0 million bearing interest at the bank's
US prime rate and a term loan facility of US$5.0 million bearing interest at the
bank's US prime rate to be used for various capital expenditures. The credit
facilities are secured by all of our assets, including our equipment and
accounts receivable and the shares of our subsidiaries. At March 31, 2000, no
amounts were outstanding under the operating facility or the term loan facility.
We believe that the total amount of cash and cash equivalents and short
term investments, with the commercial credit facilities, will be sufficient to
meet our anticipated cash needs for working capital and capital expenditure
requirements at least through the year ending June 30, 2000. Thereafter,
depending on the
17
<PAGE> 20
development of our business, we may need to raise additional cash for working
capital or other expenses. We also may encounter opportunities for acquisitions
or other business initiatives that require significant cash commitments, or
unanticipated problems or expenses that could result in a requirement for
additional cash before that time. If we need to raise additional cash, financing
may not be available to us on favorable terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement will
require the recognition of all derivatives on our consolidated balance sheet at
fair value. The Financial Accounting Standards Board has subsequently delayed
implementation of the Standard for the financial years beginning after June 15,
2000. We expect to adopt the new Statement effective January 1, 2001. We do not
expect the impact on our financial statements to be material.
YEAR 2000 ISSUES
We have not experienced any known material adverse impacts on our current
products, internal information systems, and non-information technology systems
(equipment and systems) as a result of the year 2000 issue. Based on the work
done, we have not incurred material costs to address the year 2000 readiness of
our systems (as a result of relatively new information systems) and products.
There can be no assurance that the cost estimates associated with Year 2000 or
leap year date issues will not have a material adverse effect on our results of
operations and financial condition.
PART 1 -- ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of our revenues and corresponding receivables are in
United States dollars. We are exposed to foreign currency fluctuations through
our operations in Canada, the United Kingdom, the Republic of Ireland, France,
Japan and Australia. However, a majority of our research and development
expenses, customer support costs and administrative expenses are in Canadian
dollars. As part of our hedging policy implemented during the quarter ended
March 31, 1999, we identify our future Canadian currency requirements related to
payroll costs, capital expenditures and operating lease commitments, and
purchase forward exchange contracts to cover our currency needs at the beginning
of an operational period, generally one or two quarters. We do not enter into
forward exchange contracts or any derivative financial instruments for trading
purposes.
Under our current hedging policy, we identify our forward contracts related
to operating lease commitments and commitments for capital expenditures as
hedges of firm, identifiable Canadian currency commitments. We recognize the
gains and losses on these contracts when the related lease commitment is paid or
the capital expenditure is made. We recognize gains and losses on other
contracts in earnings in the current period. As of March 31, 2000, we had
outstanding forward exchange contracts to purchase Canadian dollars totaling
US$9.7 million or Cdn$14.1 million, all of which mature prior to September 30,
2000.
While we expect to continue to use our current method of hedging our
foreign currency risk in the future, we may change our hedging methodology. If
our currency requirements differ materially from our hedged position during
periods of currency volatility, or if we do not continue to hedge our Canadian
currency commitments, we could experience unanticipated currency gains or
losses.
We assume the risk relating to the creditworthiness of our counterparties
when we engage in hedging transactions. We mitigate this risk by dealing only
with substantial commercial banks we believe to be creditworthy. We do not
believe that the credit risk associated with these transactions is material.
We maintain cash and cash equivalents and short-term investments of various
issuers, types, and maturity dates with various banks and investment banking
institutions. We currently hold short-term investments with maturities beyond
120 days and the market value of these investments on any day during the
investment term
18
<PAGE> 21
may vary as a result of market interest rate fluctuations. We do not hedge this
exposure because short-term fluctuations in interest rates would not likely have
a material impact on interest earnings.
We are exposed to financial market risks, including changes in interest
rates. We typically do not attempt to reduce or eliminate our market exposures
on our investment securities because the majority of our investments are
short-term. We do not have any derivative instruments other than the above
listed foreign exchange forward contracts. The fair value of our investment
portfolio or related income would not be significantly impacted by a 100 basis
point increase or decrease in interest rates due mainly to the short-term nature
of the major portion of our investment portfolio.
19
<PAGE> 22
PART 2: OTHER INFORMATION
PART 2 -- ITEM 1
LEGAL PROCEEDINGS
We are not currently party to any material pending legal proceedings.
PART 2 -- ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS
On August 4, Pivotal's registration statement on Form F-1, Registration No.
333-82871, became effective. The offering date was August 5, 1999. The offering
has terminated as a result of all of the shares offered being sold. The managing
underwriters were Merrill Lynch & Co., Bear, Stearns & Co. Inc. and Dain
Rauscher Wessels. The offering consisted of 3,975,000 common shares of Pivotal,
which includes 475,000 common shares offered pursuant to the subsequent exercise
of the underwriter's over allotment option on August 19, 1999. The aggregate
price of the shares offered and sold was $47.7 million. Proceeds to Pivotal,
after accounting for $3.3 million in underwriting discounts and commissions and
$1.3 million in other expenses, were $43.1 million. Pivotal generated interest
income of approximately $701,000 and $685,000 during the three months ended
March 31, 2000 and December 31, 1999, respectively.
The net proceeds of $43.1 million have been invested in investment-grade,
interest bearing, short-term instruments. Except for the payment of offering
expenses, none of the net proceeds were used during the nine months ended March
31, 2000.
None of the net offering proceeds were paid, and none of the initial public
offering expenses related to payments, directly or indirectly to directors,
officers or general partners of Pivotal or their associates, persons owning 10%
or more of any class of securities or affiliates of Pivotal.
PART 2 -- ITEM 5
OTHER INFORMATION
On April 7, 2000, Roger S. Siboni resigned from our Board of directors.
PART 2 -- ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<C> <S>
27.1 Financial Data Schedule
99.1 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forwarding-Looking Statements
</TABLE>
(b) Reports on Form 8-K
On January 25, 2000, we filed a report on Form 8-K regarding the acquisition
of French-based Transitif S.A.
20
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 5, 2000
PIVOTAL CORPORATION
/s/ NORMAN B. FRANCIS
--------------------------------------
Norman B. Francis
President, Chief Executive Officer and
Director
/s/ VINCENT D. MIFSUD
--------------------------------------
Vincent D. Mifsud
Chief Financial Officer and
Vice President, Operations
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PIVOTAL
CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-2000 JUN-30-2000
<PERIOD-START> JAN-01-2000 JUL-01-1999
<PERIOD-END> MAR-31-2000 MAR-31-2000
<CASH> 5,818 5,818
<SECURITIES> 42,882 42,882
<RECEIVABLES> 15,620 15,620
<ALLOWANCES> (559) (559)
<INVENTORY> 0 0
<CURRENT-ASSETS> 67,065 67,065
<PP&E> 5,447 5,447
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 73,927 73,927
<CURRENT-LIABILITIES> 19,773 19,773
<BONDS> 0 0
0 0
0 0
<COMMON> 62,455 62,455
<OTHER-SE> (8,301) (8,201)
<TOTAL-LIABILITY-AND-EQUITY> 73,927 73,927
<SALES> 10,125 24,248
<TOTAL-REVENUES> 14,537 34,754
<CGS> 2,930 6,805
<TOTAL-COSTS> 11,917 29,950
<OTHER-EXPENSES> 673 673
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 363 (286)
<INCOME-TAX> 139 340
<INCOME-CONTINUING> 224 (626)
<DISCONTINUED> 224 (626)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 224 (626)
<EPS-BASIC> 0.01 (0.03)
<EPS-DILUTED> 0.01 (0.03)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 -- SAFE HARBOR FOR
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe-harbor
for forward-looking statements made by public companies. This safe-harbor
protects a company from securities law liability in connection with
forward-looking statements if the company complies with the requirements of the
safe-harbor. As a public company, we have relied and will continue to rely on
the protection of the safe harbor in connection with our written and oral
forward-looking statements.
When evaluating our business, you should consider:
- all of the information in this quarterly report on Form 10-Q;
- the risk factors described in our Rule 424(b) prospectus filed with the
Securities and Exchange Commission on August 5, 1999; and
- the risk factors described below.
RISK FACTORS
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy or completeness of
forward-looking statements. You should consider our forward-looking statements
in light of the following risk factors and other information in this quarterly
report. If any of the risks described below occurs, our business, results of
operation and financial condition could differ from those projected in our
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of the quarterly report. You should
not place undue reliance on forward-looking statements.
FACTORS RELATING TO OUR BUSINESS AND THE MARKET FOR ELECTRONIC BUSINESS
RELATIONSHIP MANAGEMENT SOLUTIONS MAKE OUR FUTURE OPERATING RESULTS UNCERTAIN,
AND MAY CAUSE THEM TO FLUCTUATE FROM PERIOD TO PERIOD.
Our operating results have varied in the past, and we expect that they may
continue to fluctuate in the future. In addition, our operating results may not
follow any past trends. Some of the factors that could affect the amount and
timing of our revenues from software licenses and related expenses and cause our
operating results to fluctuate include:
- market acceptance of our products;
- the length and variability of the sales cycle for our products, which
typically ranges between two and six months from our initial contact with
a potential customer to the signing of a license agreement;
- the timing of customer orders, which can be affected by customer order
deferrals in anticipation of new product introductions, product
enhancements, and customer budgeting and purchasing cycles;
- our ability to successfully expand our sales force and marketing
programs;
- our ability to successfully expand our international operations;
- the introduction or enhancement of our products or our competitors'
products;
- changes in our or our competitors' pricing policies;
- our ability to develop, introduce and market new products on a timely
basis; and
- general economic conditions, which may affect our customers' capital
investment levels in management information systems.
23
<PAGE> 2
Our product revenues are not predictable with any significant degree of
certainty and future product revenues may differ from historical patterns.
Historically, we have recognized a substantial portion of our revenues in the
last month of a quarter. If customers cancel or delay orders, it can have a
material adverse impact on our revenues and results of operations from quarter
to quarter. Because our results of operations may fluctuate from quarter to
quarter, you should not assume that you could predict results of operations in
future periods based on results of operations in past periods.
Even though our revenues are difficult to predict, we base our expense
levels in part on future revenue projections. Many of our expenses are fixed,
and we cannot quickly reduce spending if revenues are lower than expected. This
could result in significantly lower income or greater loss than we anticipate
for any given period.
WE EXPECT SEASONAL TRENDS TO CAUSE OUR QUARTERLY LICENSE REVENUES TO FLUCTUATE
AND IN RECENT YEARS OUR LICENSE REVENUES FOR THE FOURTH QUARTER OF OUR FISCAL
YEAR HAVE EXCEEDED THE REVENUES FOR THE FOLLOWING QUARTER.
We have experienced, and expect to continue to experience, seasonality with
respect to product license revenues. In recent years, we have experienced
relatively greater revenues from licenses in the fourth quarter of our fiscal
year, which ends June 30th, than in each of the first three quarters,
particularly the first quarter. We have historically recognized more license
revenues in the fourth quarter of our fiscal year and recognized less license
revenues in the subsequent first quarter. We believe that these fluctuations are
caused in part by customer buying patterns and the efforts of our direct sales
force to meet or exceed fiscal year-end quotas. In addition, our sales in Europe
are generally lower during the summer months than during other periods. We
expect that these seasonal trends are likely to continue in the future. If
revenues for a quarter ending September 30 are lower than the revenues for the
prior quarter, it may be hard to determine whether the reason for the reduction
in revenues involves seasonal trends or other factors adversely affecting our
business.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT HOW OUR BUSINESS
WILL DEVELOP AND FUTURE OPERATING RESULTS.
We commenced operations in January 1991. We initially focused on the
development of application software for pen computers. In September 1994, we
changed our focus to research and development of electronic business
relationship management software. We commercially released the initial version
of our principal product, Pivotal Relationship, in April 1996. We commercially
released the initial version of Pivotal eRelationship in February 1999. We
commercially released Pivotal eRelationship 2000 in February 2000. We have a
limited operating history, and we face many of the risks and uncertainties
encountered by early-stage companies in rapidly evolving markets.
These risks and uncertainties include:
- no history of profitable operations;
- uncertain market acceptance of our products;
- our reliance on a limited number of products;
- the risks that competition, technological change or evolving customer
preferences could adversely affect sales of our products;
- the need to expand our sales and support capabilities;
- our reliance on third parties to market, install, and support our
products;
- our dependence on a limited number of key personnel, including our
co-founders; and
- the risk that our management will not be able to effectively manage
growth or any acquisition we may undertake.
24
<PAGE> 3
The new and evolving nature of the electronic business relationship
management market increases these risks and uncertainties. Our limited operating
history makes it difficult to predict how our business will develop and our
future operating results.
WE HAVE A HISTORY OF LOSSES, WE MAY INCUR LOSSES IN THE FUTURE AND OUR LOSSES
MAY INCREASE BECAUSE OF OUR PLAN TO INCREASE OPERATING EXPENSES.
We have incurred net losses in each fiscal year since inception, except for
the year ended June 30, 1998, in which we had net income of approximately
$4,000. We expect to incur losses for fiscal year ending June 30, 2000 and as at
March 31, 2000, we had an accumulated deficit of approximately $8.1 million. We
have increased our operating expenses in recent periods and plan further
increases in the future. Our planned increases in operating expenses may result
in larger losses in future periods. As a result, we will need to generate
significantly greater revenues than we have to date to achieve and maintain
profitability. We cannot assure you that our revenues will increase. Our
business strategies may not be successful, and we may not be profitable in any
future period.
THE MARKET FOR OUR PRODUCTS IS HIGHLY COMPETITIVE.
The market for our software is intensely competitive, fragmented and
rapidly changing. We face competition from companies in two distinct markets,
the electronic customer relationship management software market and the
electronic commerce software market.
It is also possible that Microsoft Corporation may decide to introduce
products that compete with ours.
In addition, as we develop new products, particularly applications focused
on electronic commerce or specific industries, we may begin competing with
companies with whom we have not previously competed. It is also possible that
new competitors will enter the market or that our competitors will form
alliances that may enable them to rapidly increase their market share.
Some of our actual and potential competitors are larger, better established
companies and have greater technical, financial and marketing resources.
Increased competition may result in price reductions, lower gross margins or
loss of our market share, any of which could materially adversely affect our
business, financial condition and operating results.
WE DEPEND UPON MICROSOFT AND THE CONTINUED ADOPTION AND PERFORMANCE OF THE
MICROSOFT WINDOWS 2000 AND MICROSOFT BACKOFFICE PLATFORMS.
We have designed our products 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 products with the Windows 2000
operating system has limited experience in the marketplace. As a result, we
market our products exclusively to customers who have developed their computing
systems around these platforms.
Our future financial performance will depend on continued growth in the
number of businesses that successfully adopt the Microsoft Windows 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 Internet server software from companies such as Netscape.
Acceptance of the Microsoft Windows 2000 and Microsoft BackOffice computing
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 products, our revenues from Pivotal eRelationship 2000 could
be adversely affected.
25
<PAGE> 4
The performance of our products depends, to some extent, on the technical
capabilities of the Microsoft Windows 2000 and Microsoft BackOffice computing
platforms. If these platforms do not meet the technical demands of our products,
the performance or scalability of our products could be limited and, as a
result, our revenues from Pivotal eRelationship 2000 could be adversely
affected.
Broad antitrust actions initiated by federal and state regulatory
authorities have resulted in a verdict against Microsoft. Based on the verdict,
the government has proposed that Microsoft be divided into two companies. Any
judgement that weakens the competitive position of Microsoft Windows 2000 or
BackOffice products would adversely affect the market for our products.
THE MARKET FOR OUR SOLUTIONS IS NEW AND HIGHLY UNCERTAIN AND OUR PLAN TO FOCUS
ON INTERNET-BASED APPLICATIONS AND INTEGRATE ELECTRONIC COMMERCE FEATURES ADDS
TO THIS UNCERTAINTY.
The market for electronic business relationship management software is
still emerging and continued growth in demand for and acceptance of electronic
business relationship management products remains uncertain. Even if the market
for electronic business relationship management software grows, businesses may
purchase our competitors' products or develop their own. We believe that many of
our potential customers are not fully aware of the benefits of electronic
business relationship management solutions, and as a result, these solutions may
never achieve full market acceptance.
The development of our Internet-based Pivotal eRelationship 2000 solutions
for electronic business relationship management and our plan to integrate
additional electronic commerce features with Pivotal eRelationship 2000 present
additional challenges and uncertainties. We are uncertain how businesses will
use the Internet as a means of communication and commerce and whether a
significant market will develop for Internet-based electronic business
relationship management applications such as Pivotal eRelationship 2000. The use
of the Internet is evolving rapidly, and many companies are developing new
products and services that use the Internet. We do not know what forms of
products and services may emerge as alternatives to our existing products or to
any future Internet-based or electronic commerce features and services we may
introduce. We have spent, and will continue to spend, considerable resources
educating potential customers about our products and electronic business
relationship management software solutions in general. However, even with these
educational efforts, market acceptance of our products may not increase. If the
markets for our products do not grow or grow more slowly than we currently
anticipate, our revenues may not grow and may even decline.
We have commenced our PivotalHost program whereby we provide customers
access to our software applications on a monthly subscription basis over the
Internet through an application service provider. We do not know whether this
will prove to be a successful business model or if it will result in any
material revenue for us. If a majority of our new customers purchase our
products through the PivotalHost program, we may experience a significant change
in our revenue recognition due to the recognition of license revenue over the
extended life of the contract rather than revenue recognition at the date of
purchase.
We have also commenced our Pivotal business-to-business (B2B) Syndicate
program. Under this program, we use the Internet to furnish our customers with
information or services provided by the B2B Syndicate members. We do not know
whether this will prove to be a successful business model or if it will result
in any material revenue for Pivotal.
OUR SUCCESS WILL DEPEND UPON THE SUCCESS OF OUR INTEGRATED PRODUCT SUITE.
We anticipate that virtually all of our revenues and growth in the
foreseeable future will come from sales of our integrated product suite,
consisting of Pivotal eRelationship 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 compete successfully would adversely affect our business,
results of operations and financial condition. Our future financial performance
will depend on our ability to succeed in the continued sale of our integrated
product suite and related services, as well as the development of new versions
and enhancements of the product.
26
<PAGE> 5
THE SUCCESS OF PIVOTAL ERELATIONSHIP 2000 WILL DEPEND UPON THE CONTINUED USE AND
EXPANSION OF THE INTERNET.
Increased sales of Pivotal eRelationship 2000, and any future
Internet-based applications and electronic commerce features we integrate with
it, will depend upon the expansion of the Internet as a leading platform for
commerce and communication. If the Internet does not continue to become a
widespread communications medium and commercial marketplace, the demand for
Pivotal eRelationship 2000 could be significantly reduced, and Pivotal
eRelationship 2000 and any future Internet-based and electronic commerce
features may not be commercially successful. The Internet infrastructure may not
be able to support the demands placed on it by continued growth. The Internet
could lose its viability due to delays in the development or adoption of new
equipment, standards and protocols to handle increased levels of Internet
activity, security, reliability, cost, ease of use, accessibility and quality of
service.
Other concerns that could inhibit the growth of the Internet and its use by
business as a medium for communication and commerce include:
- concerns about security of transactions conducted over the Internet;
- concerns about privacy and the use of data collected and stored recording
interactions over the Internet;
- the possibility that federal, state, local or foreign governments will
adopt laws or regulations limiting the use of the Internet or the use of
information collected from communications or transactions over the
Internet; and
- the possibility that governments will seek to tax Internet commerce.
OUR FUTURE REVENUE GROWTH COULD BE IMPAIRED IF WE ARE UNABLE TO EXPAND OUR
DIRECT SALES AND SUPPORT INFRASTRUCTURE.
Our future revenue growth will depend in large part on our ability to
successfully expand our direct sales force and our customer support capability.
We may not be able to successfully manage the expansion of these functions or to
recruit and train additional direct sales, consulting and customer support
personnel. There is presently a shortage of qualified personnel to fill these
positions. If we are unable to hire and retain additional highly skilled direct
sales personnel, we may not be able to increase our license revenue to the
extent necessary to achieve profitability. If we are unable to hire highly
trained consulting and customer support personnel we may be unable to meet
customer demands. We are not likely to be able to increase our revenues as we
plan if we fail to expand our direct sales force or our consulting and customer
support staff. Even if we are successful in expanding our direct sales force and
customer support capability, the expansion may not result in revenue growth.
WE RELY ON OUR PIVOTAL ALLIANCE NETWORK OF INDEPENDENT COMPANIES TO SELL,
INSTALL AND SERVICE OUR PRODUCTS AND TO PROVIDE SPECIALIZED SOFTWARE FOR USE
WITH THEM, AND OUR PIVOTALHOST PROGRAM WILL RELY ON THIRD-PARTY APPLICATION
SERVICE PROVIDERS.
We do not have the internal implementation and customization capability to
support our current level of sales of licenses. Accordingly, we have established
and relied on our international network of independent companies we call the
Pivotal Alliance. Members of the Pivotal Alliance market and sell our products,
provide implementation and customization services, provide technical support and
maintenance on a continuing basis and provide us with software applications that
we can bundle with our solutions to address specific industry and customer
requirements. Approximately 30% and 28% of our revenues for the nine months
ended March 31, 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 products. If we fail to maintain our
existing Pivotal Alliance relationships, or to establish new relationships, or
if existing or new members of the Pivotal Alliance do not perform to our
expectations, our ability to sell, install and service our products may suffer.
27
<PAGE> 6
There is an industry trend toward consolidation of systems integrators that
implement, customize and maintain software solutions. Some of the systems
integrators in the Pivotal Alliance have engaged in discussions concerning
business consolidations. We are uncertain as to the effect that any
consolidation may have on our relationships with members of the Pivotal
Alliance.
Enterprise 360 is a consortium founded in 1998 to integrate and promote our
products as part of a turnkey electronic business relationship management
solution. The terms of our relationship with the members of the consortium have
not been formalized and are subject to change, and any of the members may
withdraw at any time. We have not generated a significant amount of revenues
through this relationship and do not know whether it will be successful.
The success of our PivotalHost program will depend on the commitment and
performance of third-party application service providers to successfully
implement and market services that incorporate our solutions. Likewise, the
success of our participation in the hosting program announced by Microsoft and
Cisco will depend on their continued commitment to the program and our
participation in it, and their success in implementing and marketing their
hosting program.
THE LOSS OF OUR CO-FOUNDERS OR OTHER KEY PERSONNEL OR OUR FAILURE TO ATTRACT AND
RETAIN ADDITIONAL PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends largely upon the continued service of our executive
officers and other key management, sales and marketing and technical personnel.
The loss of the services of one or more of our executive officers or other key
employees could have a material adverse effect on our business, results of
operations and financial condition. In particular, we rely on our co-founders,
Norman Francis, President, Chief Executive Officer and director, and Keith
Wales, our Chief Technical Officer, Vice-President, Research and Development and
director. Messrs. Francis and Wales do not have employment agreements and,
therefore, could terminate their employment with us at any time without penalty.
We have key man insurance on the lives of Messrs. Francis and Wales in the
amount of Cdn$1,000,000 each. However, this insurance would not sufficiently
compensate us for the loss of services of either Mr. Francis or Mr. Wales.
Our future success also depends on our ability to attract and retain highly
qualified personnel. The competition for qualified personnel in the computer
software and Internet markets is intense, and we may be unable to attract or
retain highly qualified personnel in the future. In addition, due to intense
competition for qualified employees, it may be necessary for us to increase the
level of compensation paid to existing and new employees to the degree that our
operating expenses could be materially increased.
WE FACE RISKS FROM THE EXPANSION OF OUR INTERNATIONAL OPERATIONS.
We intend to substantially expand our operations outside the United States
and Canada. We began by acquiring Transitif S.A. in France and opening offices
in the United Kingdom, the Republic of Ireland, Japan and Australia. 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.
28
<PAGE> 7
Any of these factors could have a material adverse effect on our business,
financial condition or results of operations.
Our international expansion will require significant management attention
and financial resources. We will have to significantly enhance our direct and
indirect international sales channels and our support and services capabilities.
We may not be able to maintain or increase international market demand for our
products. We may not be able to sustain or increase international revenues from
licenses or from consulting and customer support.
In some foreign countries we rely on selected solution providers to
translate our software into local languages, adapt it to local business
practices and complete installations in local markets. We are highly dependent
on the ability and integrity of these solution providers, and if any of them
should fail to properly translate, adapt or install our software, our reputation
could be damaged and we could be subjected to liability. If any of these
solution providers should fail to adequately secure our software against
unauthorized copying, our proprietary software could be compromised.
FLUCTUATIONS IN EXCHANGE RATES BETWEEN THE UNITED STATES DOLLAR AND CANADIAN
DOLLAR, UNITED KINGDOM POUND STERLING, FRENCH FRANC OR EURO 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 these fluctuations on our results of
operations. As part of our hedging policy, we identify our future Canadian
currency requirements related to payroll costs, capital expenditures and
operating lease commitments, and purchase forward exchange contracts at the
beginning of an operational period to cover these currency needs. The
operational period for our contracts is generally limited to two quarters. If
our actual currency requirements differ materially from our hedged position
during periods of currency volatility, or if we do not continue to hedge our
Canadian currency commitments, we could experience unanticipated currency gains
or losses.
Our hedging policy subjects us to risks relating to the creditworthiness of
the commercial banks that we contract with in our hedging transactions. If one
of these banks cannot honor its obligations, we may suffer a loss.
We also are investing in our international operations resulting in
increased future operating expenses in United Kingdom pound sterling, French
franc, Euro, Japanese yen and Australian dollars. We are exposed to fluctuations
in the exchange rates between the United States dollar and the Canadian dollar.
Our exposure to exchange fluctuations in other foreign currencies is minimal to
date. Accordingly, our current hedging practice does not cover any foreign
exchange risk related to these non-North American 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 March 31, 2000 we had 381
employees. This expansion has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources as we
integrate and manage new employees, more locations and more customer, supplier
and other business relationships. In the past we have decided to, and in the
future we may need to, improve or replace our existing operational and customer
service
29
<PAGE> 8
systems, procedures and controls. Any failure by us to properly manage our
growth or these systems and procedural transitions could impair our ability to
efficiently manage our business, to maintain and expand important relationships
with members of the Pivotal Alliance and other third parties and to attract and
service customers, and could cause us to incur higher operating costs and delays
in the execution of our business plan or in the reporting or tracking of our
financial results.
THE INTEGRATION OF TRANSITIF S.A. AND ANY FUTURE ACQUISITIONS MAY BE DIFFICULT
AND DISRUPTIVE.
In early December 1999, we acquired Transitif S.A., a French corporation
that distributes electronic business relationship management solutions. In April
2000, we agreed to acquire Exactium Ltd. a corporation that provides electronic
selling solutions optimized for Internet and Microsoft standards. We are
currently in the process of integrating the Transitif S.A. business with our
business. The integration of these two companies (assuming we complete the
acquisition of Exactium Ltd.) is subject to risks commonly encountered in making
acquisitions, including, among others, risk of loss of key personnel,
difficulties associated with assimilating ongoing business and the ability of
our sales force and consultants to integrate. We will also need to integrate the
products of Exactium Ltd. into our product offering. We may not successfully
overcome these risks or any other problems encountered in connection with the
acquisition of Transitif S.A. or Exactium Ltd. As part of our business strategy,
we may seek to grow by making additional acquisitions.
We may not effectively select acquisition candidates or negotiate or
finance acquisitions or integrate the acquired businesses and their personnel or
acquired products or technologies into our business. We cannot assure you that
we can complete any acquisition we pursue on favorable terms, or that any
acquisition will ultimately benefit our business.
OUR SALES CYCLE IS LONG AND SALES DELAYS COULD CAUSE OUR OPERATING RESULTS TO
VARY WIDELY.
We believe that an enterprise's decision to purchase an electronic business
relationship management system is discretionary, involves a significant
commitment of its resources and is influenced by its budget cycles. To
successfully sell licenses for our products, we typically must educate our
potential customers regarding the use and benefits of electronic business
relationship management software in general and our solutions in particular,
which can require significant time and resources. Consequently, the period
between initial contact and the purchase of licenses for our products is often
long and subject to delays associated with the lengthy budgeting, approval and
competitive evaluation processes that typically accompany significant capital
expenditures. We frequently must invest substantial resources to develop a
relationship with a potential customer and educate its personnel about our
products and services with no guarantee that our efforts will be rewarded with a
sale. Our sales cycles are lengthy and variable, typically ranging between two
and six months from our initial contact with a potential customer to the signing
of a license agreement, although sales sometimes require substantially more
time. Sales delays could cause our operating results to vary widely.
OUR PLAN TO EXPAND OUR SERVICE CAPABILITY COULD ADVERSELY AFFECT GROSS PROFIT
MARGINS AND OPERATING RESULTS.
Revenues from services and maintenance have lower gross margins than
revenues from licenses; therefore an increase in the percentage of revenues
generated from services and maintenance as compared to revenues from licenses
will lower our overall gross margins. In addition, an increase in the cost of
revenues from services and maintenance as a percentage of revenues from services
and maintenance could have a negative impact on overall gross margins.
Although margins related to revenues from services and maintenance are
lower than margins related to revenues from licenses, our services organization
currently generates gross profits, and we are seeking to expand our service
capability and our revenues from services and maintenance.
30
<PAGE> 9
Revenues from services and maintenance depend in part on renewals of
technical support contracts by our customers, some of which may not renew their
technical support contracts. Our ability to increase revenues from services and
maintenance will depend in large part on our ability to increase the scale of
our services organization, including our ability to successfully recruit and
train a sufficient number of qualified services personnel. We may not be able to
do so.
To meet our expansion goals, we expect to hire additional services
personnel. If demand for our services organization does not increase in
proportion to the number of additional personnel we hire, gross profits could
fall, or we may incur losses from our services activities. In addition, the
costs of delivering services could increase and any material increase in these
costs could reduce or eliminate the profitability of our services activities.
WE RELY ON SOFTWARE LICENSED TO US BY THIRD PARTIES FOR FEATURES WE INCLUDE IN
OUR PRODUCTS.
We incorporate into our products software that is licensed to us by
third-party software developers including Microsoft 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 products by licensing additional
applications from third parties. A significant interruption in the availability
of any of this licensed software could adversely affect our sales, unless and
until we can replace this software with other software that performs similar
functions. Because our products incorporate software developed and maintained by
third parties, we depend on these third parties' abilities to deliver and
support reliable products, enhance their current products, develop new products
on a timely and cost-effective basis, and respond to emerging industry standards
and other technological changes. If third-party software offered now or in the
future in conjunction with our products becomes obsolete or incompatible with
future versions of our products, we may not be able to continue to offer some of
the features we presently include in our products unless we can license
alternative software or develop the features ourselves.
WE MUST CONTINUE TO DEVELOP ENHANCEMENTS TO OUR PRODUCTS AND NEW APPLICATIONS
AND FEATURES THAT RESPOND TO THE EVOLVING NEEDS OF OUR CUSTOMERS, RAPID
TECHNOLOGICAL CHANGE AND ADVANCES INTRODUCED BY OUR COMPETITORS.
The software market in which we compete is characterized by rapid change
due to changing customer needs, rapid technological changes and advances
introduced by competitors. Existing products become obsolete and unmarketable
when products using new technologies are introduced and new industry standards
emerge. New technologies could change the way electronic business relationship
management products are sold or delivered. As a result, the life cycles of our
products are difficult to estimate. We also may need to modify our products when
third parties change software we integrate into our products. To be successful
we must continue to enhance our current product line and develop new
applications and features.
We may not be able to successfully develop or license the applications
necessary to offer these or other features, or to integrate these applications
with our existing products. We have delayed enhancements and new product release
dates several times in the past and may not be able to introduce new products,
product enhancements, new applications or features successfully or in a timely
manner in the future. If we delay release of our new products or product
enhancements or new applications or features or if they fail to achieve market
acceptance when released, we may not be able to keep up with the latest
developments in the market and our revenues may fall. We may not be able to
respond effectively to customer needs, technological changes or advances
introduced by our competitors, and our products could become obsolete.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS.
Our success depends in part on our ability to protect our proprietary
software and our other proprietary rights from copying, infringement or use by
unauthorized parties. To protect our proprietary rights we rely primarily on a
combination of copyright, trade secret and trademark laws, confidentiality
agreements with
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employees and third parties, and protective contractual provisions such as those
contained in license agreements with consultants, vendors and customers,
although we have not signed these types of agreements in every case. Despite our
efforts to protect our proprietary rights, unauthorized parties may copy aspects
of our products and obtain and use information that we regard as proprietary.
Other parties may breach confidentiality agreements and other protective
contracts we have entered into. We may not become aware of, or have adequate
remedies in the event of, these types of breaches or unauthorized activities.
CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS INFRINGE THEIR COPYRIGHTS OR PATENTS
COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND INCREASE OUR COSTS.
If any of our products violates third-party proprietary rights, including
copyrights and patents, we may be required to reengineer our products or obtain
licenses from third parties to continue offering our products without
substantial reengineering. Although some of our current and potential
competitors have sought patent protection for similar electronic business
relationship management systems, we have not sought patent protection for our
solutions. If a patent has been issued or is issued in the future to a
third-party that prevents us from using technology included in our products, we
would need to obtain a license or re-engineer our product to function without
infringing the patent. Any efforts to re-engineer our products or obtain
licenses from third parties may not be successful and, in any case, could
substantially increase our costs, or force us to interrupt product sales or
delay product releases.
OUR PRODUCTS AND PRODUCTS WE RELY ON MAY SUFFER FROM DEFECTS OR ERRORS.
Software products as complex as ours may contain errors or defects,
especially when first introduced or when new versions are released. We have had
to delay commercial release of some versions of our products until software
problems were corrected, and in some cases have provided product enhancements to
correct errors in released products. Our new products and product enhancements
or new applications or features may not be free from errors after commercial
shipments have begun. Any errors that are discovered after commercial release
could result in loss of revenues or delay in market acceptance, diversion of
development resources, damage to our reputation, increased service and warranty
costs and liability claims.
Our end-user licenses contain provisions that limit our exposure to product
liability claims, but these provisions may not be enforceable in all
jurisdictions. In some cases, we have been required to waive these contractual
limitations. Further, we may be exposed to product liability claims in
international jurisdictions where our solution provider has supplied our
products and negotiated the license without our involvement. A successful
product liability claim could result in material liability and damage to our
reputation.
In addition, products we rely on, such as Microsoft platform products, may
contain defects or errors. Our products rely on these products to operate
properly. Therefore, any defects in these products could adversely affect the
operation of and market for our products, reduce our revenues, increase our
costs and damage our reputation.
IF OUR CUSTOMERS' SYSTEM SECURITY IS BREACHED, OUR BUSINESS AND REPUTATION COULD
SUFFER.
A fundamental requirement for online communications is the secure
transmission of confidential information over the Internet. Users of our
products transmit their and their customers' confidential information over the
Internet. In our license agreements with our customers, we disclaim
responsibility for the security of confidential data and have contractual
indemnities for any damages claimed against us. However, if unauthorized third
parties are successful in obtaining confidential information from users of our
products, our reputation and business may be damaged and, if our contractual
disclaimers and indemnities are not enforceable, we may be subjected to
liability.
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CHANGES IN ACCOUNTING STANDARDS AND IN THE WAY WE CHARGE FOR LICENSES COULD
AFFECT OUR FUTURE OPERATING RESULTS.
We recognize revenues from the sale of software product licenses on
delivery of our products if:
- persuasive evidence of an arrangement exists,
- the fee is fixed and determinable,
- we can objectively allocate the total fee among all elements of the
arrangement, and
- collection of the license fee is probable.
Under certain license arrangements, with either a fixed or indefinite term,
our customers agree to pay for the license with periodic payment extending
beyond one year. We recognize revenues from these arrangements as the periodic
payments become due, provided all other conditions for revenue recognition are
met. If these arrangements become popular with our customers, we may have lower
revenues in the short term than we would otherwise, because revenues for
licenses sold under these arrangements will be recognized over time rather than
upon delivery of our product.
We recognize maintenance revenues ratably over the contract term, typically
one year, and recognize revenues for consulting, education and implementation
and customization services as the services are performed.
Statement of Position 97-2, "Software Revenue Recognition," was issued in
October 1997 by the American Institute of Certified Public Accountants and
amended by Statement of Position 98-4. We adopted Statement of Position 97-2
effective January 1, 1998. The American Institute of Certified Public
Accountants has also issued Statement of Position 98-9, which is effective for
us for transactions entered into beginning January 1, 2000. However, full
implementation guidelines for this standard have not yet been issued. Once
available, these implementation guidelines could lead to unanticipated changes
in our current revenue accounting practices.
Accounting standard setters, including the Securities and Exchange
Commission and the Financial Accounting Standards Board, are also reviewing the
accounting standards related to business combinations and stock-based
compensation.
Any changes to these accounting standards or any other accounting standards
or the way these standards are interpreted or applied could require us to change
the manner in which we recognize revenue or the way we account for share
compensation or for any acquisition we may pursue or other aspects of our
business, in a manner that could adversely affect our reported financial
results.
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