UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
for the quarterly period ended December 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)
BRITISH COLUMBIA, CANADA Not applicable
---------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
300 - 224 WEST ESPLANADE,
NORTH VANCOUVER, BRITISH COLUMBIA, V7M 3M6
CANADA
(Address of principal executive offices)
Telephone (604) 988-9982
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
COMMON SHARES OUTSTANDING AT FEBRUARY 9, 2001: 23,892,664
PIVOTAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Financial Statements ................................1
Condensed Consolidated Balance Sheets as of December 31, 2000 and ........1
June 30, 2000
Condensed Consolidated Statements of Operations for the Three and Six ....2
Months Ended December 31, 2000 and 1999
Condensed Consolidated Statements of Shareholders' Equity for the Six ....3
Months ended December 31, 2000
Condensed Consolidated Statements of Cash flows for the Six Months .......4
Ended December 31, 2000 and 1999
Notes to the Condensed Consolidated Financial Statements .................5
ITEM 2 Management's Discussion and Analysis of Financial Condition and ...........10
Results of Operations
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk ................22
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings .........................................................24
ITEM 2 Changes in Securities and Use of Proceeds .................................24
ITEM 3 Defaults Upon Senior Securities ...........................................25
ITEM 4 Submission of Matters to a Vote of Security Holders .......................25
ITEM 5 Other Information .........................................................25
ITEM 6 Exhibits and Reports on Form 8-K ..........................................25
Signatures ........................................................................26
PART I - ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars; all amounts in thousands)
December 31, June 30,
2000 2000
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 6,744 $ 4,734
Short term investments 72,307 30,788
Accounts receivable 24,670 16,764
Prepaid expenses 3,121 1,859
------------- -------------
Total current assets 106,842 54,145
Property and equipment, net 8,595 7,231
Goodwill, intangibles and other assets, net 63,124 60,569
------------- -------------
Total assets $ 178,561 $ 121,945
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 22,100 $ 16,877
Deferred revenue 10,425 8,971
------------- -------------
Total current liabilities 32,525 25,848
------------- -------------
Shareholders' equity:
Preferred shares, undesignated, no par value; authorized shares - - -
20,000 at December 31, 2000 and June 30, 2000; no shares issued and
outstanding
Common shares, no par value, authorized shares - 200,000 at
December 31, 2000 and June 30, 2000, respectively; issued and
outstanding shares - 23,799 and 22,057 at December 31, 2000 and June 165,094 105,076
30, 2000, respectively
Additional paid-in capital 7,002 7,002
Deferred share-based compensation (137) (193)
Accumulated deficit (25,923) (15,788)
------------- -------------
Total shareholders' equity 146,036 96,097
------------- -------------
Total liabilities and shareholders' equity $ 178,561 $ 121,945
============= =============
See accompanying notes.
-1-
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in United States dollars, all amounts in thousands
except per share data)
(Unaudited)
Three months ended Six months ended
December 31, December 31,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
REVENUES:
Licenses $ 16,346 $ 8,026 $ 30,114 $ 14,123
Services and maintenance 9,385 3,516 16,675 6,094
------------ ------------ ------------ ------------
Total revenues 25,731 11,542 46,789 20,217
------------ ------------ ------------ ------------
COST OF REVENUES:
Licenses 979 410 1,845 694
Services and maintenance 4,979 1,813 8,849 3,181
------------ ------------ ------------ ------------
Total cost of revenues 5,958 2,223 10,694 3,875
------------ ------------ ------------ ------------
Gross profit 19,773 9,319 36,095 16,342
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 12,914 6,917 24,412 12,632
Research and development 4,509 2,125 8,426 3,694
General and administrative 2,100 968 3,876 1,675
Amortization of goodwill 5,405 32 10,400 32
------------ ------------ ------------ ------------
Total operating expenses 24,928 10,042 47,114 18,033
------------ ------------ ------------- ------------
Loss from operations (5,155) (723) (11,019) (1,691)
Interest and other income 644 685 987 1,042
------------ ------------ ------------ ------------
Loss before income taxes (4,511) (38) (10,032) (649)
Income tax expense (170) (126) (103) (201)
------------ ------------ ------------ ------------
Net loss $ (4,681) $ (164) $ (10,135) $ (850)
============ ============ ============ ============
LOSS PER SHARE:
Basic and diluted (0.20) (0.01) $ (0.45) $ (0.05)
Pro forma basic and diluted $ (0.04)
WEIGHTED AVERAGE NUMBER OF SHARES USED TO CALCULATE
LOSS PER SHARE:
Basic and diluted 23,002 20,025 22,750 16,859
Pro forma basic and diluted 19,202
See accompanying notes.
-2-
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 2000
(Expressed in United States dollars; all amounts in thousands)
(Unaudited)
Additional Deferred Total
Common Shares Paid-in Share-Based Shareholders'
Shares Amount Capital Compensation (Deficit) Equity
----------------------------------------------------------------------------------
Balance June 30, 2000 22,057 $ 105,076 $ 7,002 $ (193) $ (15,788) $ 96,097
Issuance of common shares on
exercise of stock options 414 1,101 1,101
Issuance of common shares related
to Employee Stock Purchase Plan 28 567 567
Amortization of share-based
compensation 28 28
Net loss (5,454) (5,454)
--------- ---------- ---------- ----------- ---------- ------------
Balance September 30, 2000 22,499 $ 106,744 $ 7,002 $ (165) $ (21,242) $ 92,339
Issuance of common shares on
exercise of stock options 47 964 964
Acquisitions 253 6,453 6,453
Issuance of common shares on
secondary offering 1,000 50,933 50,933
Amortization of share-based
compensation 28 28
Net loss (4,681) (4,681)
--------- ---------- ---------- ----------- ---------- ------------
Balance December 31, 2000 23,799 $ 165,094 $ 7,002 $ (137) $ (25,923) $ 146,036
========= ========== ========== =========== =========== ============
See accompanying notes.
-3-
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars; all amounts in thousands)
(Unaudited)
Six months ended
December 31,
-----------------------------
2000 1999
------------ -------------
Cash flows from operating activities:
Net loss for the period $ (10,135) $ (850)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of goodwill 10,400 32
Depreciation 2,050 761
Non-cash share-based compensation expense 56 111
Change in operating assets and liabilities:
Accounts receivable (7,631) (1,029)
Prepaid expenses (1,191) (1,234)
Accounts payable and accrued liabilities 2,112 2,993
Deferred revenue 1,023 744
------------ -------------
Net cash provided by (used in) operating activities (3,316) 1,528
------------ -------------
Cash flows from investing activities:
Purchase of property and equipment (2,979) (2,664)
Acquisitions (net of cash acquired) (3,276) (654)
Purchase of short term investments (41,519) -
Other assets (465) -
------------ -------------
Net cash used in investing activities (48,239) (3,318)
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of common shares 53,565 43,184
------------ -------------
Net cash provided by financing activities 53,565 43,184
------------ -------------
Net increase in cash and cash equivalents 2,010 41,394
Cash and cash equivalents, beginning of period 4,734 9,338
------------ -------------
Cash and cash equivalents, end of period $ 6,744 $ 50,732
============ =============
Supplemental cash flow disclosure:
Income taxes paid (recovered) $ (96) $ 306
============ =============
Supplemental non-cash investing disclosure:
Acquisitions of Project One and Software Spectrum $ 6,453 $ -
============ =============
Issuance of note payable on acquisition of Transitif $ - $ 574
============ =============
Supplemental non-cash financing disclosure:
Issuance of common shares and options on acquisitions $ 6,453 $ -
============ =============
Conversion of preferred shares into common shares $ - $ 17,583
============ =============
See accompanying notes.
-4-
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars; all amounts in thousands)
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements have been prepared pursuant to
the rules and regulations of the United States Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with United States generally
accepted accounting principles, have been condensed, or omitted, pursuant to
such rules and regulations. The interim financial statements are unaudited, but
reflect all adjustments which are, in the opinion of management, necessary for
the fair presentation of the results of the interim periods presented. These
financial statements should be read in conjunction with the audited consolidated
financial statements included in Pivotal's Annual Report on Form 10-K for the
year ended June 30, 2000. The results of operations for the interim period are
not necessarily indicative of the results of operations for a full fiscal year.
Recent Accounting Pronouncements
We adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities," as amended by
SFAS 137 and SFAS 138 as of the beginning of its fiscal year 2001. The Standard
requires the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivatives will either be offset against the
change in fair value of the hedged assets, liabilities or firm commitments
through earnings, or recognized in other comprehensive income until the hedged
item is recognized in earnings. The change in a derivative's fair value related
to the ineffective portion of a hedge, if any, will be immediately recognized in
earnings. The effect of adopting SFAS 133, as amended, did not have a material
effect on our financial position or overall trends in results in operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences of various modifications to
the terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective as of July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. We
adopted FIN 44 in the first quarter of fiscal 2001 and there was no material
effect on our condensed consolidated financial position, results of operations
or cash flows.
In December, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 summarizes certain of the Securities and Exchange Commission's views in
applying generally accepted accounting principles to revenue recognition in
financial statements. In October 2000, the Securities and Exchange Commission
-5-
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars; all amounts in thousands)
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES (Continued)
issued further guidance with respect to adoption of specific issues addressed by
SAB 101. We do not believe the adoption of SAB 101 will have a material effect
on our consolidated financial position or results of operations.
2. BUSINESS COMBINATIONS
During the quarter ended December 31, 2000, Pivotal completed the acquisitions
described below which were accounted for under the purchase method of
accounting. Accordingly, the results of operations of each acquisition are
included in the condensed consolidated statement of operations since the
acquisition date, and the related assets and liabilities were recorded based
upon their respective fair values at the date of acquisition. Pro forma results
of operations have not been presented because the effects of these acquisitions
were not material on either an individual or an aggregate basis.
Ionysys Technology Corporation
On October 16, 2000, Pivotal acquired 100% of Ionysys Technology Corporation
("Ionysys"), a privately held provider of Internet solutions. Pivotal paid an
aggregate cash purchase price of $1,014 including acquisition related
expenditures of $360.
Project One Business Technologies Inc.
On October 31, 2000, Pivotal acquired 100% of Project One Business Technologies
Inc. ("Project One"), a privately held provider of Internet solutions
specifically designed for the health care industry. Pivotal paid an aggregate
purchase price of $1,364 consisting of 19 common shares and stock options and
cash of $460, which includes acquisition related expenditures of $380.
The agreement for the acquisition of Project One also provided for additional
consideration to a maximum of approximately 96 common shares to be paid based on
achieving certain product development and operating targets over the next 3
years. All earn-out payments will be recorded as additional purchase price when
determinable. No earn-out payments were required to be made in connection with
the acquisition of Project One for the quarter ended December 31, 2000.
-6-
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars; all amounts in thousands)
(Unaudited)
2. BUSINESS COMBINATIONS (Continued)
Software Spectrum CRM Inc.
On December 5, 2000, Pivotal acquired 100% of Software Spectrum CRM, Inc.
("Software Spectrum"). Software Spectrum, based in Dallas, Texas, delivers
solutions and consulting expertise in multi-channel contact centers, demand
chain network management and customer relationship management to help
organizations increase revenue and customer satisfaction. Pivotal paid an
aggregate purchase price of $7,474 consisting of 138 common shares and stock
options and cash of $1,925, which includes acquisition related expenditures of
$1,175.
The total consideration paid by Pivotal for each of the three companies
acquired, including acquisition costs, was allocated based on estimated fair
values on the acquisition date as follows:
Ionysys Project Software Total
One Spectrum
---------- ---------- ----------- ----------
Assets acquired $ 86 $ 62 $ 2,697 $ 2,845
---------- ---------- ----------- ----------
Liabilities assumed - (1,008) (2,534) (3,542)
---------- ---------- ----------- ----------
Net identifiable assets (liabilities) assumed 86 (946) 163 (697)
Goodwill and other intangibles 928 2,310 7,311 10,549
---------- ---------- ----------- ----------
Purchase price $ 1,014 $ 1,364 $ 7,474 $ 9,852
---------- ---------- ----------- ----------
Consideration (inclusive of cash received of $123)
Cash 1,014 460 1,925 3,399
Fair value of common shares and
stock options issued - 904 5,549 6,453
---------- ---------- ----------- ----------
$ 1,014 $ 1,364 $ 7,474 $ 9,852
---------- ---------- ----------- ----------
Goodwill is being amortized over the estimated useful life of three years on a
straight-line basis.
The fair value of the common shares of Pivotal issued in connection with the
acquisitions was determined by taking an average of the opening and closing
trading price of the common shares for a short period just before and just after
the acquisition date.
-7-
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars; all amounts in thousands)
(Unaudited)
3. ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $1,427 and
$740 at December 31, 2000 and June 30, 2000, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities were as follows:
December 31, June 30,
2000 2000
------------ ------------
Accounts payable $ 10,850 $ 9,369
Accrued compensation 4,099 3,020
Accrued acquisition costs 1,355 1,229
Other accrued liabilities 5,796 3,259
------------ ------------
$ 22,100 $ 16,877
============ ============
5. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
Three months ended Six months ended
December 31, December 31,
------------------------- ------------------------
2000 1999 2000 1999
------------ --------- ----------- ---------
Net loss (A) $ (4,681) $ (164) $ (10,135) $ (850)
------------ --------- ----------- ---------
Weighted average number of common shares 23,002 20,025 22,750 16,859
outstanding (B)
Pro forma adjustment for redeemable - - - 2,343
------------ --------- ----------- ---------
Pro forma basic and diluted weighted 23,002 20,025 22,750 19,202
average number of shares (C)
============ ========= =========== =========
Loss per share:
Basic and diluted (A/B) $ (0.20) $ (0.01) $ (0.45) $ (0.05)
Pro forma basic and diluted (A/C) $ (0.04)
Pro forma basic and diluted 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.
-8-
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars; all amounts in thousands)
(Unaudited)
5. LOSS PER SHARE (Continued)
and Class A convertible preferred shares outstanding as if such shares were
converted into common shares and had been outstanding since July 1, 1998.
6. EQUITY FINANCING
On November 28, 2000, Pivotal completed an equity financing of one million
common shares at a price of approximately $55 per common share, for gross
proceeds of $55 million. Net proceeds after offering expenses were $50,933.
7. SEGMENTED INFORMATION
Pivotal operates in one business segment; the development, marketing, support
and implementation of Pivotal demand chain network solutions.
Pivotal licenses and markets its solutions internationally. The following table
presents a summary of revenues by geographical region.
Three months ended Six months ended
December 31, December 31,
----------------------------- -----------------------------
2000 1999 2000 1999
-------------- ------------ -------------- ------------
United States $ 16,459 $ 7,028 $ 31,231 $ 12,788
Canada 3,739 1,434 6,174 2,215
International 5,533 3,080 9,384 5,214
-------------- ------------ -------------- ------------
$ 25,731 $ 11,542 $ 46,789 $ 20,217
============== ============ ============== ============
Pivotal attributes revenue among the geographical areas based on the location of
the customers involved.
During the three month and six month periods ended December 31, 2000 and 1999,
no single customer accounted for 10% or more of total revenue.
-9-
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Investors should read the following in conjunction with the unaudited condensed
consolidated financial statements and notes thereto included in Part I - Item 1
of this Quarterly Report, and the audited consolidated financial statements and
notes thereto and Management's Discussion and Analysis of Financial Conditions
and Results of Operations in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2000.
FORWARD-LOOKING STATEMENTS
Statements in this filing about our future results, levels of activity,
performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in our forward-looking statements.
These factors include, among others, those described in connection with the
forward-looking statements, and the factors listed in Exhibit 99.1 to this
report, which is hereby incorporated by reference in this report.
In some cases, you can identify forward-looking statements by our use of words
such as "may," "will," "should," "could," "expect," "plan," "intend,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or the
negative or other variations of these words, or other comparable words or
phrases.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy and completeness of
forward-looking statements. We are under no duty to update any of our
forward-looking statements after the date of this report. You should not place
undue reliance on forward-looking statements.
OVERVIEW
Pivotal Corporation's demand chain network solution suite enables large and
medium-sized businesses worldwide to increase, serve and manage their customers.
We refer to our solutions as demand chain network solutions because they
automate and manage marketing, selling and servicing processes over the Internet
by integrating customer relationship management, electronic selling, electronic
commerce and wireless technologies. Our demand chain network solutions are
designed to complement and integrate with a business' supply chain, therefore
enabling businesses to improve efficiency and increase revenues.
On December 5, 2000, we announced a joint three year multi-million dollar
initiative with Microsoft to develop, market and sell demand chain network
solutions to Global 2000 companies which will result in incremental expenditures
over this period.
Pivotal solutions are sold in 35 countries and are available in English, French,
German, Spanish, Portuguese, Swedish, Japanese and Chinese. Pivotal's worldwide
customer base includes more than 1,000 organizations in traditional, commercial,
public market sectors and in the new digital
-10-
economy and includes companies such as ING Barings LLC, KPMG, Intrawest
Corporation, USFilter, NEC, Ericsson, Emerson Electric, Nissan Motor (Denmark),
Digital Insight, Headhunter.net, Clarus Corporation, insLogic, Qiagen, American
Medical Security Group Inc., Farm Credit Services of America, Panasonic SA,
Atlas Copco Airpower N. V., Toshiba Information Systems Corporation, National
Air Traffic Services, London, Eprise Corporation, Bombardier Aerospace,
Grantham, Mayo, Van Otterloo & Company L.L.C., Hitachi Telecom (USA) Inc.,
Groove Networks, Kikkoman Corporation, Trader.com, Southern Company, Deloitte &
Touche and Principal Financial Group. We market and sell our solutions through a
direct sales force as well as through third-party solution providers.
Pivotal is listed on NASDAQ under the symbol "PVTL" and on the Toronto Stock
Exchange under the symbol "PVT". Our home page on the Internet can be found at
www.pivotal.com. Information contained on our Web site does not constitute part
of this report.
The terms "Pivotal," "our company" and "we" in this filing refer to Pivotal
Corporation, a British Columbia company, and all of Pivotal Corporation's wholly
owned subsidiaries including Pivotal Corporation, incorporated in Washington
State, Pivotal Corporation Limited, incorporated in the United Kingdom, Pivotal
Corporation France S.A., incorporated in France, Exactium Ltd., incorporated in
Israel, Exactium, Inc., incorporated in Delaware State, Pivotal Technologies
Corporation Limited, incorporated in the Republic of Ireland, Pivotal
Corporation (N.I.) Limited, incorporated in Northern Ireland, Pivotal GmbH,
incorporated in Germany, Digital Conversations Inc., incorporated in British
Columbia, Pivotal Corporation Australia Pty. Ltd., incorporated in Australia,
Project One Business Technologies Inc., incorporated in British Columbia, Nihon
Pivotal K.K., incorporated in Japan and Software Spectrum CRM, Inc.,
incorporated in Texas, collectively.
Pivotal Relationship, Pivotal eRelationship, Pivotal eRelationship 2000, Pivotal
eRelationship 2000 Intrahub, Pivotal eRelationship 2000 CustomerHub, Pivotal
eRelationship 2000 PartnerHub, Pivotal ePower 2000, Pivotal eSelling 2000,
PivotalWeb .NET, PivotalHost, Pivotal Anywhere, Pivotal Intelligence, Pivotal
Interaction Center and Pivotal Demand Chain Network are trademarks and/or
registered trademarks of Pivotal Corporation.
SOURCE OF REVENUE AND REVENUE RECOGNITION POLICY
We derive our revenues from the sale of software and services. We recognize
license revenues on delivery of our solutions if:
o there is persuasive evidence of an arrangement,
o the fee is fixed or determinable,
o there is vendor specific objective evidence supporting allocating the
total fee among all elements of a multiple-element arrangement, and
o the collection of the license fee is probable.
Multiple-element arrangements could consist of software licenses, upgrades,
enhancements, maintenance and consulting services. Under some license
arrangements, with either a fixed or indefinite term, our customers agree to pay
for the license with periodic payments extending beyond one year. We recognize
revenues from these arrangements as the periodic payments become due, provided
all other conditions for revenue recognition are met.
-11-
We enter into reseller and sub-licensing arrangements that provide a fee payable
to us based on a percentage of list price. We recognize revenue only on the fees
payable to us, net of any amount payable to the reseller by the customer.
We typically sell first year maintenance with the related software license.
Revenue related to maintenance is recognized over the term of the maintenance
contract, typically one year. Revenues relating to technical support and
maintenance have increased due to our increasing customer base and the renewal
of technical support and maintenance contracts upon expiration of first year
maintenance arrangements.
We recognize revenues from consulting, implementation services, and education as
these services are performed. We derive revenue from these services primarily on
a time-and-materials basis under a separate service arrangement with the
customer. The majority of the implementation services provided to our customers
in connection with installations of our solutions are provided by third-party
consulting and implementation service providers. These third-party service
providers contract directly with the customer.
Our cost of license revenues primarily consists of costs relating to the
packaging and distribution of solutions and related documentation and license
fees due to third parties for integrated technology. Our cost of services
revenues includes salaries and related expenses for our implementation,
consulting support and education organizations and an allocation of facilities,
communications and depreciation expenses. Our operating expenses are classified
into three general categories: sales and marketing, research and development and
general and administrative. We classify all charges to these operating expense
categories based on the nature of the expenditures. We allocate the costs for
overhead and facilities to each of the functional areas based on their
headcount.
Software development costs incurred prior to the establishment of technological
feasibility are included in research and development costs as incurred. Since
license revenues from our solutions are not recognized until after technological
feasibility has been established, software development costs are not generally
expensed in the same period in which license revenues for the developed
solutions are recognized.
RESULTS OF OPERATIONS
The following table presents selected financial data, derived from our unaudited
condensed consolidated statements of operations, as a percentage of total
revenues for the periods indicated. The operating results for the three months
and six months ended December 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.
-12-
Three months ended December 31, Six months ended December 31,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- --------------
CONSOLIDATED STATEMENT OF OPERATIONS
Revenues:
License 64% 70% 64% 70%
Services and maintenance 36% 30% 36% 30%
-------------- -------------- -------------- --------------
Total revenues 100% 100% 100% 100%
-------------- -------------- -------------- --------------
Cost of revenues:
License 4% 3% 4% 3%
Services and maintenance 19% 16% 19% 16%
-------------- -------------- -------------- --------------
Total cost of revenues 23% 19% 23% 19%
-------------- -------------- -------------- --------------
Gross profit 77% 81% 77% 81%
-------------- -------------- -------------- --------------
Operating expenses:
Sales and marketing 50% 60% 52% 63%
Research and development 18% 19% 18% 18%
General and administrative 8% 8% 8% 8%
Amortization of goodwill 21% - 22% -
-------------- -------------- -------------- --------------
Total operating expenses 97% 87% 100% 89%
-------------- -------------- -------------- --------------
Loss from operations (20%) (6%) (23%) (8%)
Interest and other income 3% 6% 2% 5%
-------------- -------------- -------------- --------------
Loss before income taxes (17%) - (21%) (3%)
Income tax provision (1%) (1%) - (1%)
-------------- -------------- -------------- --------------
Net loss (18%) (1%) (21)% (4%)
============== ============== ============== ==============
REVENUES
Total revenues increased 123% to $25.7 million from $11.5 million for the
quarters ended December 31, 2000 and 1999, respectively. Total revenues for the
six month period ended December 31, 2000 were $46.8 million compared with $20.2
million for the six month period ended December 31, 1999 representing an
increase of 131%.
Licenses
Revenues from licenses increased 104% to $16.3 million from $8.0 million for the
quarters ended December 31, 2000 and 1999, respectively. Revenues from licenses
for the six month period ended December 31, 2000 were $30.1 million compared
with $14.1 million for the six month period ended December 31, 1999 representing
an increase of 113%.
-13-
Our revenues from licenses increased due to sales to new customers and to
follow-on sales to existing customers. These increases were attributable to
increased market acceptance of our solutions, increased sales as a result of our
expansion of our direct and indirect channels of distribution and our marketing
organization. We believe that the availability of our Pivotal demand chain
network solution suite has contributed to the increase in revenue from licenses,
as this has extended the overall functionality of our solutions by permitting
organizations to collaborate with customers and partners over the Internet.
Revenues from licenses represented 64% and 70% of total revenues for the
quarters ended December 31, 2000 and 1999, respectively. During the six months
ended December 31, 2000 and 1999, respectively, revenues from licenses also
represented 64% and 70% of total revenues. No single customer accounted for 10%
or more of our revenues for the quarters ended December 31, 2000 and 1999 or for
the six months ended December 31, 2000 and 1999. North American license revenues
accounted for 72% and 73% of total license revenues in the quarters ended
December 31, 2000 and 1999, respectively. During the six months ended December
31, 2000 and 1999, North American license revenues accounted for 74% of total
license revenues for both periods.
Services and Maintenance
Revenues from services and maintenance increased 167% to $9.4 million from $3.5
million for the quarters ended December 31, 2000 and 1999, respectively. This
resulted from an increase of $1.8 million in revenues from technical support and
maintenance contracts, which entitle the customer to new versions of the
solutions and to technical support and maintenance services, and an increase of
$4.1 million in revenues from implementation, education and consulting service
engagements.
During the six months ended December 31, 2000 and 1999, respectively, revenues
from services and maintenance increased 174% to $16.7 million from $6.1 million.
This resulted from an increase of $3.5 million in revenues from technical
support and maintenance contracts, which entitle the customer to new versions of
the solutions and to technical support and maintenance services, and an increase
of $7.1 million in revenues from implementation, education and consulting
service engagements.
Our revenues from services and maintenance represented 36% and 30% of total
revenues for the quarters ended December 31, 2000 and 1999, respectively. During
the six months ended December 31, 2000 and 1999, respectively, revenues from
services and maintenance also represented 36% and 30% of total revenues. We
intend to expand consulting services targeted at helping customers understand
more about matters such as effective one-to-one marketing and using the Internet
to increase revenues and improve customer service. We plan to continue relying
on third parties to provide a majority of implementation services to our
customers rather than providing those services directly.
COST OF REVENUES
Total cost of revenues increased 168% to $6.0 million from $2.2 million for the
quarters ended December 31, 2000 and 1999, respectively. For the six months
ended December 31, 2000 and 1999, respectively, total cost of revenues increased
176% to $10.7 million from $3.9 million.
-14-
Licenses
Cost of revenues from licenses consists of costs relating to the packaging and
distribution of solutions, related documentation and fees paid for incorporation
of third-party products into our solutions.
Cost of revenues from licenses increased to $979,000 from $410,000 for the
quarters ended December 31, 2000 and 1999, respectively. For the six months
ended December 31, 2000 and 1999, respectively, cost of revenues from licenses
increased to $1.9 million from $694,000. The increase is due primarily to
increased costs for third-party technology integrated with our solutions. Cost
of revenues from licenses as a percentage of revenues from licenses was 6% and
5% for the quarters ended December 31, 2000 and 1999, respectively. For the six
months ended December 31, 2000 and 1999, respectively, cost of revenues from
licenses as a percentage of revenues from licenses was also 6% and 5%. We expect
that cost of licenses as a percentage of revenue from licenses will continue to
increase because we expect to integrate additional software applications
licensed from third parties into our solutions.
Services and Maintenance
Cost of revenues from services and maintenance consists of personnel and other
expenses relating to the cost of providing maintenance and customer support,
education and consulting services. Cost of revenues from services and
maintenance will vary depending on the mix of services we provide between
support and maintenance, education, implementation and consulting services.
Gross profit margins are higher for support and maintenance services than they
are for education and consulting services. Support and maintenance services
involve the delivery of software upgrades, which the customers download and
install themselves, and customer support. Education and consulting services
generally require more involvement by our employees, resulting in higher
compensation, travel and similar expenses.
Cost of revenues from services and maintenance increased 175% to $5.0 million
from $1.8 million for the quarters ended December 31, 2000 and 1999,
respectively. For the six months ended December 31, 2000 and 1999, respectively,
cost of revenues from services and maintenance increased 178% to $8.8 million
from $3.2 million. Cost of revenues from services and maintenance as a
percentage of revenues from services and maintenance was 53% and 52% for the
quarters ended December 31, 2000 and 1999, respectively. For the six months
ended December 31, 2000 and 1999, respectively, cost of revenues from services
and maintenance as a percentage of revenues from services and maintenance was
also 53% and 52%.
We expect that cost of revenues from services and maintenance will increase as a
percent of revenues from services and maintenance as we expand our service
capabilities in international markets to support planned expansion of our
international business and as we expand our consulting services. This will occur
because we will be incurring expenses to hire and train employees before we will
be earning revenue for their services, and because we may not generate enough
demand for our services to use all the capacity we add.
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expenses consist primarily of salaries, commissions, bonuses
and benefits earned by sales and marketing personnel, direct expenditures such
as travel, communication and
-15-
occupancy for direct sales offices and marketing expenditures related to direct
mail, online marketing, trade shows, advertising and promotion.
Sales and marketing expenses increased 87% to $12.9 million from $6.9 million
for the quarters ended December 31, 2000 and 1999, respectively. For the six
months ended December 31, 2000 and 1999, respectively, sales and marketing
expenses increased 93% to $24.4 million from $12.6 million. The increase in
dollar amounts reflects the expansion of our international sales capability
which required an increase in the number of sales and marketing professionals.
Sales and marketing expenses decreased as a percentage of total revenues to 50%
from 60% for the quarters ended December 31, 2000 and 1999, respectively. During
the six months ended December 31, 2000 and 1999, respectively, sales and
marketing expenses decreased as a percentage of total revenues to 52% from 63%.
This decrease of sales and marketing expenses as a percentage of total revenues
resulted from the improved productivity of our sales and marketing personnel and
programs. We expect that sales and marketing expenses will continue to increase
in future periods as we continue to expand our North American and international
sales and marketing efforts to expand our market position and increase sales of
our solutions.
Research and Development
Research and development expenses consist primarily of salaries, benefits and
equipment for software engineers, quality assurance personnel, program managers,
product managers, technical writers and outside contractors used to augment the
research and development efforts.
Research and development expenses increased 112% to $4.5 million from $2.1
million for the quarters ended December 31, 2000 and 1999, respectively.
Research and development expenses were 18% and 19% of total revenues for the
quarters ended December 31, 2000 and 1999, respectively. For the six months
ended December 31, 2000 and 1999, respectively, research and development
expenses increased 128% to $8.4 million from $3.7 million. Research and
development expenses were 18% of total revenues for the same periods. We expect
to continue to significantly increase research and development expenditures with
a particular emphasis on Internet-related development projects.
General and Administrative
General and administrative expenses consist primarily of salaries, benefits and
related costs for executive, finance, administrative, human resources and
information services personnel. General and administrative expenses also include
legal and other professional fees.
General and administrative expenses increased 117% to $2.1 million from $968,000
for the quarters ended December 31, 2000 and 1999, respectively. General and
administrative expenses were 8% of total revenues for the same periods. For the
six months ended December 31, 2000 and 1999, respectively, general and
administrative expenses increased 131% to $3.9 million from $1.7 million.
General and administrative expenses were 8% of total revenues for the same
periods. The increase in general and administrative expenses was due to hiring
additional personnel and the implementation of internal financial and
administrative systems. We expect general and administrative expenses will
increase as we continue to expand the business and increase our administrative
capability in international markets.
-16-
Amortization of Goodwill
Amortization of goodwill was $5.4 million in the quarter ended December 31, 2000
and $10.4 million in the six months ended December 31, 2000. This related to
goodwill of approximately $58.2 million arising from the acquisitions of
Transitif, Exactium and Simba during the year ended June 30, 2000 and $12.5
million arising from the acquisitions of Ionysys, Project One and Software
Spectrum during the quarter ended December 31, 2000 . Included in goodwill is
$1.9 million of acquired goodwill from the acquisition of Software Spectrum and
$178,000 in additional consideration paid based on the net after-tax earnings of
Transitif and license revenues received by Transitif from sale of licenses for
Pivotal products. We are amortizing goodwill from these acquisitions over a
period of three years. Amortization of goodwill totaling $32,000 in the quarter
ended December 31, 1999 and totaling $32,000 in the six months ended December
31, 1999, related to goodwill of approximately $1.2 million arising from the
acquisition of Transitif. We anticipate acquiring other companies or assets
which could result in further significant goodwill amortization or other charges
and this could materially impact our operating results.
Share-Based Compensation
We recorded deferred compensation expenses of $473,000 during the year ended
June 30, 1999 in connection with grants of employee share purchase options with
exercise prices lower than the deemed fair market value of our common shares. We
are amortizing this amount over the four-year period in which the options vest.
We will allocate the expense among operating expense categories based on the
primary activity of the employee that holds the option. We recognized $28,000
and $60,000 in compensation expense in the quarters ended December 31, 2000 and
1999, respectively. During the six months ended December 31, 2000 and 1999,
respectively, we recognized $56,000 and $111,000 in compensation expense. We
currently expect to recognize $113,000, $58,000 and $22,000 in the years ending
June 30, 2001, 2002 and 2003, respectively.
Interest and Other Income
Interest and other income consists of earnings on cash and cash equivalents and
short term investments net of interest expense, foreign exchange gains and
losses, and gains and losses on sale of property and equipment. Interest and
other income was $644,000 and $685,000 for the quarters ended December 31, 2000
and 1999, respectively. For the six months ended December 31, 2000 and 1999,
respectively, interest and other income was $987,000 and $1.0 million. The
quarter ended December 31, 2000 included foreign exchange losses of $111,000.
For the six months ended December 31, 2000, foreign exchange loss was $230,000.
The other components of interest and other income were not material for the
periods presented.
Income Taxes
The provision for income taxes was $170,000 and $126,000 for the quarters ended
December 31, 2000 and 1999, respectively. For the six months ended December 31,
2000 and 1999, respectively, the provision for income taxes was $103,000 and
$201,000. These income tax amounts were attributable to our operations in the
United States, the United Kingdom and France and which were offset by $127,000
related to Canadian research and development tax incentives received.
-17-
QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly results of operations both
in absolute dollars and on percentage of revenue basis for each of our last
eight quarters. This data has been derived from unaudited consolidated financial
statements that have been prepared on the same basis as the annual audited
consolidated financial statements and, in our opinion, included all normal
recurring adjustments necessary for the fair presentation of such information.
These unaudited quarterly results should be read in conjunction with our annual
audited consolidated financial statements.
Three months ended
-----------------------------------------------------------------------------------------------------
Dec. 31, Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31,
2000 2000 2000 2000 1999 1999 1999 1999
--------- --------- --------- --------- --------- --------- --------- --------
Revenues:
Licenses $16,346 $13,768 $13,136 $10,125 $ 8,026 $ 6,097 $ 6,214 $ 5
Services and maintenance 9,385 7,290 5,049 4,412 3,516 2,578 2,109 1,717
--------- --------- --------- --------- --------- --------- --------- --------
Total revenues 25,731 21,058 18,185 14,537 11,542 8,675 8,323 6,723
--------- --------- --------- --------- --------- --------- --------- --------
Cost of revenues:
Licenses 979 866 812 635 410 284 98 268
Services and maintenance 4,979 3,870 2,671 2,295 1,813 1,368 1,105 822
--------- --------- --------- --------- --------- --------- --------- --------
Total cost of revenues 5,958 4,736 3,483 2,930 2,223 1,652 1,203 1,090
--------- --------- --------- --------- --------- --------- --------- --------
Gross profit 19,773 16,322 14,702 11,607 9,319 7,023 7,120 5,633
--------- --------- --------- --------- --------- --------- --------- --------
Operating expenses:
Sales and marketing 12,914 11,498 10,319 8,214 6,917 5,715 5,005 4,404
Research and development 4,509 3,917 2,803 2,409 2,125 1,569 1,800 1,184
General and administrative 2,100 1,776 1,318 1,197 968 707 845 566
Amortization of goodwill 5,405 4,995 1,280 97 32 - - -
In-process research and - - 6,979 - - - - -
development and other
charges
--------- --------- --------- --------- --------- --------- --------- --------
Total operating expenses 24,928 22,186 22,699 11,917 10,042 7,991 7,650 6,154
--------- --------- --------- --------- --------- --------- --------- --------
Loss from operations (5,155) (5,864) (7,997) (310) (723) (968) (530) (521)
Interest and other income
(loss) 644 343 478 673 685 357 (69) (63)
--------- --------- --------- --------- --------- --------- --------- --------
Income (loss) before taxes (4,511) (5,521) (7,519) 363 (38) (611) (599) (584)
Income taxes (170) 67 (217) (139) (126) (75) (60) (63)
--------- --------- --------- --------- --------- --------- --------- --------
Net income (loss) $ (4,681) $(5,454) $(7,736) $ 224 $ (164) $ (686) $ (659) $ (647)
========= ========= ========= ========= ========= ========= ========= ========
-18-
Three months ended
-----------------------------------------------------------------------------------------------------
Dec. 31, Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31,
2000 2000 2000 2000 1999 1999 1999 1999
--------- --------- --------- --------- --------- --------- --------- --------
Revenues:
Licenses 64% 65% 72% 70% 70% 70% 75% 74%
Services and maintenance 36% 35% 28% 30% 30% 30% 25% 26%
--------- --------- --------- --------- --------- --------- --------- --------
Total revenues 100% 100% 100% 100% 100% 100% 100% 100%
--------- --------- --------- --------- --------- --------- --------- --------
Cost of revenues:
Licenses 4% 4% 4% 4% 3% 3% 1% 4%
Services and maintenance 19% 18% 15% 16% 16% 16% 13% 12%
--------- --------- --------- --------- --------- --------- --------- --------
Total cost of revenues 23% 22% 19% 20% 19% 19% 14% 16%
--------- --------- --------- --------- --------- --------- --------- --------
Gross profit 77% 78% 81% 80% 81% 81% 86% 84%
--------- --------- --------- --------- --------- --------- --------- --------
Operating expenses:
Sales and marketing 50% 55% 57% 56% 60% 66% 60% 66%
Research and development 18% 19% 15% 17% 19% 18% 22% 17%
General and 8% 8% 7% 8% 8% 8% 10% 8%
administrative
Amortization of goodwill 21% 24% 7% 1% - - - -
In-process research and - - 39% - - - - -
development and other
charges
--------- --------- --------- --------- --------- --------- --------- --------
Total operating 97% 106% 125% 82% 87% 92% 92% 91%
expenses
--------- --------- --------- --------- --------- --------- --------- --------
Loss from operations (20)% (28)% (44)% (2)% (6)% (11)% (6)% (7)%
Interest and other income 3% 2% 3% 5% 6% 4% (1%) (1%)
(loss)
--------- --------- --------- --------- --------- --------- --------- --------
Income (loss) before taxes (17)% (26)% (41)% 3% - (7)% (7)% (8)%
Income taxes (1)% - (1)% (1)% (1)% (1)% (1)% (1)%
--------- --------- --------- --------- --------- --------- --------- --------
Net income (loss) (18)% (26)% (42)% 2% (1)% (8)% (8)% (9)%
========= ========= ========= ========= ========= ========= ========= ========
We have typically experienced an increase in revenues during our fourth fiscal
quarter ended June 30, which we believe is primarily related to sales
compensation policies and annual objectives. In addition, a pattern of reduced
buying by European customers during July and August has resulted in lower
European license revenues in the quarter ended September 30.
We incurred operating losses as we increased the level of investment in all
facets of our business. Our quarterly operating results have fluctuated
significantly in the past, and will continue to fluctuate in the future, as a
result of a number of factors, many of which are outside our control. As a
result of our limited operating history, we cannot forecast operating expenses
based on historical results. Accordingly, we base our anticipated level of
expense in part on future revenue projections. Most of our expenses are fixed
and in the short term we may not be able to quickly reduce spending if revenues
are lower than we have projected. Our ability to forecast our quarterly revenues
accurately is limited given our limited operating history, length of the sales
cycle of our solutions and other uncertainties in our business. If revenues in a
particular quarter do not meet projections, our net losses in a given quarter
would be greater than expected. As a result, we believe that our
quarter-to-quarter comparisons of our operating results are not necessarily
meaningful. Investors should not rely on the results of one quarter as an
indication of future performance.
-19-
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, we had $6.7 million in cash and cash equivalents, $72.3
million in short term investments and $74.3 million in working capital. During
the quarter ended December 31, 2000, we successfully concluded an equity
financing in Canada, generating $50.9 million net of expenses and brokers'
commissions.
Our cash and cash equivalents and short-term investments increased to $79.1
million as of December 31, 2000 from $35.5 million as of June 30, 2000. Our
working capital increased to $74.3 million at December 31, 2000 from $28.3
million at June 30, 2000.
Net cash used in operating activities for the six months ended December 31, 2000
was $3.3 million compared to net cash generated of $1.5 million in the same
period in 1999.
Net cash used in investing activities was $48.2 million and $3.3 million for the
six months ended December 31, 2000 and 1999, respectively. During the six months
ended December 31, 2000, we used $41.5 million for the purchase of short-term
investments. Capital expenditures totalled $3.0 million and $2.7 for the six
months ended December 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 quarter ended December 31, 2000, we used $3.3 million (net of
cash acquired) on the acquisitions of Ionysys, Project One and Software
Spectrum.
Cash provided by financing activities was $53.6 million and $43.2 million for
the six months ended December 31, 2000 and 1999, respectively. Net cash provided
by financing activities resulted from the issuance of common shares.
Our principal source of liquidity at December 31, 2000 was our cash, cash
equivalents and short-term investments of $79.1 million. We also have credit
facilities with a Canadian chartered bank, which include an operating facility
of US$10.0 million bearing interest at the bank's prime rate and a term loan
facility of US$5.0 million bearing interest at the bank's prime rate to be used
for various capital expenditures. The credit facilities are secured by all of
our assets, including our equipment and accounts receivable and the shares of
our subsidiaries. At December 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, along with the commercial credit facilities, will be sufficient to
meet our anticipated cash needs for working capital or other purposes at least
through the year ending June 30, 2001. Thereafter, depending on the development
of our business, we may need to raise additional cash for working capital or
other expenses. We also may encounter opportunities for acquisitions or other
business initiatives that require significant cash commitments, or unanticipated
problems or expenses that could result in a requirement for additional cash
before that time. If we need to raise additional cash, financing may not be
available to us on favorable terms or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 133 ("SFAS
133"), "Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS 137 and SFAS 138 as of the beginning of its fiscal year 2001.
The Standard will require the Company to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of
-20-
the hedge, changes in the fair value of the derivatives will either be offset
against the change in fair value of the hedged assets, liabilities or firm
commitments through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The change in a derivative's fair
value related to the ineffective portion of a hedge, if any, will be immediately
recognized in earnings. The effect of adopting SFAS 133, as amended, did not
have a material effect on the Company's financial position or overall trends in
results in operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequences of various modifications to
the terms of previously fixed stock options or awards, and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 was
effective as of July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occurred after either December 15, 1998 or January 12, 2000. The
Company adopted FIN 44 in the first quarter of fiscal 2001 and there was no
material effect on the Company's condensed consolidated financial position,
results of operations or cash flows.
In December, 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In October 2000, the SEC issued further guidance with respect to adoption of
specific issues addressed by SAB 101. Management does not believe the adoption
of SAB 101 will have a material effect on the Company's consolidated financial
position or results of operations.
-21-
PART I- ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates
and foreign currencies.
Foreign Currency Risk
We have operations in Canada and a number of countries outside of the United
States and therefore we are subject to risks typical of an international
business including, but not limited to differing economic conditions, changes in
political climate, differing tax structures, other regulations and restrictions
and foreign exchange rate volatility. Accordingly, our future results could be
materially adversely affected by changes in these or other factors.
Our sales and corresponding receivables are substantially in U.S. dollars.
Through our operations in Canada and outside North America, we incur the
majority of our research and development, customer support costs and
administrative expenses in Canadian and other local currencies. We are exposed,
in the normal course of business, to foreign currency risks on these
expenditures. We have evaluated our exposure to these risks and have determined
that our only significant foreign currency exposure at this time is to the
Canadian dollar through our operations in Canada. At this time, our exposure to
other currencies is not material.
We use forward contracts to minimize the risks associated with transactions
originating in Canadian dollars. We have not designated these forward contracts
to be hedging instruments, therefore, all gains or losses resulting from the
change in fair value of these contracts have been included in earnings in the
current period.
If we were to designate these types of forward contracts or other derivatives as
hedges in the future and such derivatives satisfy the criteria for hedging
instruments, then depending on the nature of the hedge, changes in the fair
value of the derivatives will be offset against the change in fair value of
assets, liabilities, or firm commitments through earnings (fair value hedges) or
recognized in other comprehensive income until the related hedged item is
recognized in earnings (cash flow hedges). Any change in fair value related to
the ineffective portion of a derivative will be recognized in earnings through
periodic mark to market adjustments.
In addition to the use of foreign exchange forward contracts noted above, from
time to time we may also purchase Canadian dollars in the open market and hold
these funds in order to satisfy forecasted operating needs in Canadian dollars
for the next operating period, which is generally limited to six months or less.
At December 31, 2000, the notional value of our foreign currency forward
contracts totalled the equivalent of U.S. $6.3 million. All foreign currency
forward contracts are carried at fair value and all had maturity dates within 3
months.
Interest Rate Risk
We invest our cash in a variety of short term financial instruments, including
government bonds, commercial paper and money market instruments. Our portfolio
is diversified and consists primarily of investment grade securities to minimize
credit risk. These investments are typically
-22-
denominated in U.S. dollars. Cash balances in foreign currencies are operating
balances and are only invested in demand or short term deposits of the local
operating bank.
Investments in both fixed rate and floating rate interest earning instruments
carry a degree of interest rate risk. Fixed rate securities may have their fair
market value adversely impacted because of a rise in interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income may fall short
of expectations because of changes in interest rates or we may suffer losses in
principal if forced to sell securities which have seen a decline in market value
because of changes in interest rates.
Our investments are made in accordance with an investment policy approved by our
Board of Directors. Under this policy, all short term investments must be made
in investment grade securities with original maturities of less than one year at
the time of acquisition.
We do not attempt to reduce or eliminate our exposure to interest rate risk
through the use of derivative financial instruments due to the short term nature
of the investments. Based on a sensitivity analysis performed on our balances as
of December 31, 2000, the fair value of our short term investment portfolio
would not be significantly impacted by either a 100 basis point increase or
decrease in interest rates.
-23-
PART II: OTHER INFORMATION
PART II - ITEM 1
LEGAL PROCEEDINGS
We are not currently party to any material pending legal proceedings.
PART II - ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On October 31, 2000, Pivotal acquired 100% of Project One Business Technologies
Inc. Pivotal paid an aggregate purchase price of approximately $1.4 million,
consisting of 19,000 common shares and cash of $460,000, which includes
acquisition related expenditures of $380,000. The agreement for the acquisition
of Project One also provided for additional consideration to a maximum of
approximately 96,000 common shares to be paid based on achieving certain product
development and operating targets over the next 3 years. This transaction was
exempt from Securities Act registration pursuant to the exclusion from
registration provided by Regulation S under the Securities Act.
On December 5, 2000, Pivotal acquired 100% of Software Spectrum CRM, Inc.
Pivotal paid an aggregate purchase price of approximately $7.5 million,
consisting of 138,000 common shares and cash of $1.9 million, which includes
acquisition related expenditures of approximately $1.2 million. This transaction
was exempt from Securities Act registration pursuant to the exemption from
registration provided by Rule 506 of Regulation D under the Securities Act.
In November 2000, Pivotal completed an equity financing in Canada of one million
common shares for aggregate proceeds of approximately $55 million. This
transaction was exempt from Securities Act registration pursuant to the
exclusion from registration provided by Regulation S under the Securities Act.
Use of Proceeds
On August 4, 1999, Pivotal's registration statement on Form F-1, Registration
No. 333-82871, became effective. The offering date was August 5, 1999. The
offering has terminated as a result of all of the shares offered being sold. The
managing underwriters were Merrill Lynch & Co., Bear, Stearns & Co. Inc. and
Dain Rauscher Wessels. The offering consisted of 3,975,000 common shares of
Pivotal, which included 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, of which $30
million remained at September 30, 2000. During the three months ended December
31, 2000, we used $3.3 million of the net proceeds in connection with
acquisitions of Ionysys, Project One and Software Spectrum. The remaining $26.7
million
-24-
of the net proceeds continues to be invested in investment-grade, interest
bearing short-term instruments.
None of the net offering proceeds were paid, and none of the initial public
offering expenses related to payments, directly or indirectly to directors,
officers or general partners of Pivotal or their associates, persons owning 10%
or more of any class of securities or affiliates of Pivotal.
PART II - ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
PART II - ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II - ITEM 5
OTHER INFORMATION
None.
PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
99.1 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forwarding-Looking Statements
(b) Reports on Form 8-K
On October 6, 2000, we filed an amendment to the Form 8-K reporting the
acquisition of Simba Technologies Inc. The amendment reported the financial
statements of Simba Technologies and the unaudited pro forma condensed
combined financial statements of Pivotal.
On November 13, 2000, we filed a Form 8-K reporting the US$55,000,000
equity financing.
On November 17, 2000, we filed a Form 8-K reporting the financial
statements for the three months ended September 30, 2000 of Pivotal.
On November 29, 2000, we filed a Form 8-K reporting the closing of the
US$55,000,000 equity financing.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 14, 2001
PIVOTAL CORPORATION
/s/ Norman B. Francis
-------------------------------------
Norman B. Francis
President, Chief Executive Officer
and Director
/s/ Vincent D. Mifsud
-------------------------------------
Vincent D. Mifsud
Chief Operating Officer,
Chief Financial Officer and
Executive Vice President
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