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 March 31, 2001
[ ] 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 MAY 9, 2001: 23,927,782
PIVOTAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS
PAGE
PART I FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements .......................1
Condensed Consolidated Balance Sheets as of March 31, 2001 and
June 30, 2000 .....................................................1
Condensed Consolidated Statements of Operations for the Three and
Nine Months Ended March 31, 2001 and 2000 .........................2
Condensed Consolidated Statements of Shareholders' Equity for the
Nine Months ended March 31, 2001 ..................................3
Condensed Consolidated Statements of Cash flows for the Nine Months
Ended March 31, 2001 and 2000 .....................................4
Notes to the Condensed Consolidated Financial Statements ............5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................10
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 ..................................26
ITEM 4. Submission of Matters to a Vote of Security Holders ..............26
ITEM 5. Other Information ................................................26
ITEM 6. Exhibits and Reports on Form 8-K .................................26
Signatures ................................................................30
i
PART I - FINANCIAL INFORMATION
ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars; all amounts in thousands)
March 31, June 30,
2001 2000
-------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 15,107 $ 4,734
Short term investments 61,065 30,788
Accounts receivable 23,417 16,764
Prepaid expenses 3,694 1,859
-------------- -------------
Total current assets 103,283 54,145
Property and equipment, net 9,998 7,231
Goodwill, intangibles and other assets, net 61,601 60,569
-------------- -------------
Total assets $ 174,882 $ 121,945
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 21,153 $ 16,877
Deferred revenue 11,974 8,971
-------------- -------------
Total current liabilities 33,127 25,848
-------------- -------------
Shareholders' equity:
Preferred shares, undesignated, no par value, authorized shares -
20,000 at March 31, 2001 and June 30, 2000; no shares issued and
outstanding - -
Common shares, no par value, authorized shares - 200,000 at March
31, 2001 and June 30, 2000, respectively; issued and outstanding
shares - 23,872 and 22,057 at March 31, 2001 and June 30, 2000, 166,448 105,076
respectively
Additional paid-in capital 7,002 7,002
Deferred share-based compensation (109) (193)
Accumulated deficit (31,586) (15,788)
-------------- -------------
Total shareholders' equity 141,755 96,097
-------------- -------------
Total liabilities and shareholders' equity $ 174,882 $ 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 Nine months ended
March 31, March 31,
---------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------- ------------
REVENUES:
Licenses $ 16,368 $ 10,125 $ 46,482 $ 24,248
Services and maintenance 10,026 4,412 26,701 10,506
------------ ------------ ------------- ------------
Total revenues 26,394 14,537 73,183 34,754
------------ ------------ ------------- ------------
COST OF REVENUES:
Licenses 1,009 635 2,854 1,329
Services and maintenance 5,346 2,295 14,195 5,476
------------ ------------ ------------- ------------
Total cost of revenues 6,355 2,930 17,049 6,805
------------ ------------ ------------- ------------
Gross profit 20,039 11,607 56,134 27,949
------------ ------------ ------------- ------------
OPERATING EXPENSES:
Sales and marketing 12,689 8,214 37,101 20,846
Research and development 5,096 2,409 13,522 6,103
General and administrative 2,787 1,197 6,663 2,872
Amortization of goodwill 6,068 97 16,468 129
------------ ------------ ------------- ------------
Total operating expenses 26,640 11,917 73,754 29,950
------------ ------------ ------------- ------------
Loss from operations (6,601) (310) (17,620) (2,001)
Interest and other income 994 673 1,981 1,715
------------ ------------ ------------- ------------
Income (loss) before income taxes (5,607) 363 (15,639) (286)
Income taxes 56 139 159 340
------------ ------------ ------------- ------------
Net income (loss) $ (5,663) $ 224 $ (15,798) $ (626)
============ ============ ============= ============
EARNINGS (LOSS) PER SHARE:
Basic and diluted $ (0.24) $ 0.01 $ (0.66) $ (0.03)
Pro forma basic and diluted $ (0.03)
WEIGHTED AVERAGE NUMBER OF SHARES USED TO CALCULATE
EARNINGS (LOSS) PER SHARE:
Basic 23,856 20,134 23,818 17,951
Diluted 23,856 21,470 23,818 17,951
Pro forma basic and diluted 19,513
See accompanying notes.
-2-
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2001
(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
public 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
Issuance of common shares on
exercise of stock options 29 481 481
Issuance of common shares related
to Employee Stock Purchase Plan 44 873 873
Amortization of share-based
compensation 28 28
Net loss (5,663) (5,663)
---------- ----------- ----------- ----------- ------------ -------------
Balance March 31, 2001 23,872 $ 166,448 $ 7,002 $ (109) $ (31,586) $ 141,755
========== =========== =========== =========== ============ =============
See accompanying notes.
-3-
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars; all amounts in thousands)
(Unaudited)
Nine months ended
March 31,
-----------------------------
2001 2000
------------ -------------
Cash flows from operating activities:
Net loss for the period $(15,798) $ (626)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of goodwill 16,468 129
Depreciation 3,248 1,466
Non-cash share-based compensation expense 84 167
Change in operating assets and liabilities:
Accounts receivable (6,378) (5,950)
Prepaid expenses (1,764) (2,027)
Accounts payable and accrued liabilities 516 5,119
Deferred revenue 2,572 2,191
------------ -------------
Net cash provided by (used in) operating activities (1,052) 469
------------ -------------
Cash flows from investing activities:
Purchase of property and equipment (5,477) (3,808)
Acquisitions (net of cash acquired) (5,321) (1,228)
Purchase of short term investments (30,277) (42,882)
Other assets (2,419) (375)
------------ -------------
Net cash used in investing activities (43,494) (48,293)
------------ -------------
Cash flows from financing activities:
Proceeds from issuance of common shares 54,919 44,304
------------ -------------
Net cash provided by financing activities 54,919 44,304
------------ -------------
Net increase (decrease) in cash and cash equivalents 10,373 (3,520)
Cash and cash equivalents, beginning of period 4,734 9,338
------------ -------------
Cash and cash equivalents, end of period $ 15,107 $ 5,818
============ =============
Supplemental cash flow disclosure:
Income taxes paid (recovered) $ (300) $ 429
============ =============
Supplemental non-cash investing disclosure:
Acquisitions of Project One and Software Spectrum $ 6,453 $ -
============ =============
Supplemental non-cash financing disclosure:
Issuance of common shares 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 periods are
not necessarily indicative of the results of operations for a full fiscal year.
Recent Accounting Pronouncements
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
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 our consolidated financial position or results of operations.
2. BUSINESS COMBINATIONS
For the nine months ended March 31, 2001, Pivotal completed acquisitions
including those 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 based in Vancouver,
British Columbia. Pivotal paid an aggregate cash purchase price of $1,014
including acquisition related expenditures of $360.
-5-
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars; all amounts in thousands)
(Unaudited)
2. BUSINESS COMBINATIONS (Continued)
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 based in North Vancouver,
British Columbia. 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 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 since acquisition to the period ended March 31,
2001.
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. 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 companies acquired,
including acquisition costs, was allocated based on estimated fair values on the
acquisition date as follows:
-6-
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars; all amounts in thousands)
(Unaudited)
2. BUSINESS COMBINATIONS (Continued)
Ionysys Project Software Other Total
One Spectrum
----------- ----------- ----------- ----------- -----------
Assets acquired $ 86 $ 62 $ 2,697 $ 103 $ 2,948
----------- ----------- ----------- ----------- -----------
Liabilities assumed - (1,008) (2,534) (413) (3,955)
----------- ----------- ----------- ----------- -----------
Net identifiable assets (liabilities)
assumed 86 (946) 163 (310) (1,007)
Goodwill and other intangibles 928 2,310 7,311 2,606 13,155
----------- ----------- ----------- ----------- -----------
Purchase price $ 1,014 $ 1,364 $ 7,474 $ 2,296 $12,148
----------- ----------- ----------- ----------- -----------
Consideration (inclusive of cash
received of $123)
Cash/note payable 1,014 460 1,925 2,296 5,695
----------- ----------- ----------- ----------- -----------
Fair value of common
shares issued - 904 5,549 - 6,453
----------- ----------- ----------- ----------- -----------
$ 1,014 $ 1,364 $ 7,474 $ 2,296 $12,148
----------- ----------- ----------- ----------- -----------
Included in "Other" are two immaterial acquisitions of assets. 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 dates.
3. ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $2,255 and
$740 at March 31, 2001 and June 30, 2000, respectively.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities were as follows:
March 31, 2001 June 30, 2000
-------------- --------------
Accounts payable $ 9,227 $ 9,369
Accrued compensation 3,834 3,020
Accrued acquisition costs 1,916 1,229
Other accrued liabilities 6,176 3,259
-------------- --------------
$21,153 16,877
============== ==============
-7-
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars; all amounts in thousands)
(Unaudited)
5. EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
Three months ended Nine months ended
March 31, March 31,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income (loss) (A) $ (5,663) $ 224 $ (15,798) $ (626)
----------- ----------- ----------- -----------
Weighted average number of common shares
outstanding (B) 23,856 20,134 23,818 17,951
Effect of dilutive stock options - 1,336 - -
----------- ----------- ----------- -----------
Adjusted weighted average shares (C) 23,856 21,470 23,818 17,951
Pro forma adjustment for redeemable
convertible preferred shares - - - 1,562
----------- ----------- ----------- -----------
Pro forma basic and diluted weighted
average number of shares (D) 23,856 21,470 23,818 19,513
=========== =========== =========== ===========
Earnings (loss) per share:
Basic (A/B) $ (0.24) $ 0.01 $ (0.66) $ (0.03)
Diluted (A/C) $ (0.24) $ 0.01 $ (0.66) $ (0.03)
Pro forma basic and diluted (A/D) $ (0.03)
Pro forma basic and diluted earnings (loss) per share is computed by dividing
net income (loss) by the weighted average number of common shares outstanding
and the weighted average redeemable convertible preferred shares and Class A
convertible preferred shares outstanding as if such shares were converted into
common shares and had been outstanding since July 1, 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 the Pivotal Demand Chain Network solution suite.
-8-
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars; all amounts in thousands)
(Unaudited)
7. SEGMENTED INFORMATION (Continued)
Pivotal licenses and markets its solutions internationally. The following table
presents a summary of revenues by geographical region.
Three months ended Nine months ended
March 31, March 31,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ----------- ------------ ----------
United States $ 16,047 $ 10,758 $ 47,278 $ 23,546
Canada 2,875 1,308 9,048 3,523
International 7,472 2,471 16,857 7,685
------------ ----------- ------------ -----------
$ 26,394 $ 14,537 $ 73,183 $ 34,754
============ =========== ============ ===========
Pivotal attributes revenue among the geographical areas based on the location of
the customers involved.
During the three month and nine month periods ended March 31, 2001 and 2000, no
single customer accounted for 10% or more of total revenue.
-9-
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 Condition
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, achievements or other future events. Moreover, neither we
nor anyone else assumes responsibility for the accuracy and completeness of our
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 our forward-looking statements.
OVERVIEW
Pivotal Corporation enables large and medium-sized businesses worldwide to
increase, make, serve and manage their customers by providing demand chain
management solutions. Demand chain management solutions automate and manage
marketing, selling and servicing processes over the Internet by integrating
customer relationship management, electronic selling, electronic commerce and
wireless technologies. We refer to our demand chain management solutions as the
Pivotal Demand Chain Network solution suite. The Pivotal Demand Chain Network
solution suite is 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 the Pivotal Demand Chain
Network solution suite to Global 2000 companies which will result in incremental
expenditures over this period. Pivotal has executed on the first phase our
business development initiative with Microsoft. We implemented a training
program to educate Microsoft sales professionals about the Pivotal solution and
-10-
engaged Microsoft in co-marketing and co-selling initiatives. Pivotal was also
featured as the premier CRM partner in the Microsoft Business Advantage
road-tour in March-April 2001.
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 1,100 organizations in traditional, commercial,
public market sectors and in the new digital economy and includes companies such
as ActiveState Corp., American Medical Security Group Inc., Atlas Copco Airpower
N.V., Belgacom France, Bombardier Aerospace, CIBC World Markets, Commonfund,
Deloitte & Touche, Digital Insight, Emerson Electric, Eprise Corporation,
Ericsson, Farm Credit Services of America, FLAG Telecom, Grantham, Mayo, Van
Otterloo & Company L.L.C., Haldex Services Corporation, Hitachi Telecom (USA)
Inc., ING Barings LLC, Intrawest Corporation, Kikkoman Corporation, Knosys,
Inc., KPMG, Miller Heiman, Inc., National Air Traffic Services, London, National
City Bank of Minneapolis, NEC, Nissan Motor (Denmark), Panasonic SA, Principal
Financial Group, Qiagen, Southern Company, Toshiba Information Systems
Corporation, Trader.com, USFilter, and 1201 Financial & Insurance Services, Inc.
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 and
Nihon Pivotal K.K., incorporated in Japan, collectively.
Pivotal Relationship, Pivotal eRelationship, Pivotal eRelationship 2000, Pivotal
eRelationship 2000 Intrahub, Pivotal eRelationship 2000 CustomerHub, Pivotal
eRelationship 2000 PartnerHub, Pivotal ePower, Pivotal ePower 2000, Pivotal
eSelling 2000, PivotalWeb .NET, PivotalHost, Pivotal Anywhere, Pivotal
Intelligence, Pivotal Interaction Center, Pivotal Demand Chain Network and
Pivotal Digital Intelligence 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
product license revenues on delivery of our solutions if:
- there is persuasive evidence of an arrangement;
- the fee is fixed or determinable;
- there is vendor-specific objective evidence supporting allocating the total
fee among all elements of a multiple-element arrangement; and
- the collection of the license fee is probable.
-11-
Multiple-element arrangements could consist of software licenses, upgrades,
enhancements, maintenance and consulting services. Under some license
arrangements, with either a fixed or indefinite term, our customers agree to pay
for the license with periodic payments extending beyond one year. We recognize
revenues from these arrangements as the periodic payments become due, provided
all other conditions for revenue recognition are met.
We enter into reseller and sub-licensing arrangements that provide a fee payable
to us based on a percentage of list price. We recognize revenue only on the fees
payable to us, net of any amount payable to the reseller by the customer. From
time to time, we purchase goods or services for internal operations from vendors
at or about the same time we license our software to these organizations. These
transactions are separately negotiated and recorded at terms that we consider to
be arm's length.
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. More than 90% of the implementation services provided to our customers
in connection with installations of our solutions are provided by third-party
consulting and implementation service providers. These third-party service
providers contract directly with the customer.
Our cost of license revenues primarily consists of costs related 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 nine months ended March 31, 2001 and 2000, 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 March 31, Nine months ended March 31,
----------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
Revenues:
Licenses 62% 70% 64% 70%
Services and maintenance 38% 30% 36% 30%
----------- ----------- ----------- -----------
Total revenues 100% 100% 100% 100%
----------- ----------- ----------- -----------
Cost of revenues:
Licenses 4% 4% 4% 4%
Services and maintenance 20% 16% 19% 16%
----------- ----------- ----------- -----------
Total cost of revenues 24% 20% 23% 20%
----------- ----------- ----------- -----------
Gross profit 76% 80% 77% 80%
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing 48% 56% 51% 60%
Research and development 19% 17% 18% 18%
General and administrative 11% 8% 9% 8%
Amortization of goodwill 23% 1% 23% -
----------- ----------- ----------- -----------
Total operating expenses 101% 82% 101% 86%
----------- ----------- ----------- -----------
Loss from operations (25%) (2%) (24%) (6%)
Interest and other income 4% 5% 3% 5%
----------- ----------- ----------- -----------
Income (loss) before income (21%) 3% (21%) (1%)
taxes
Income taxes - 1% - 1%
----------- ----------- ----------- -----------
Net income (loss) (21%) 2% (21%) (2%)
=========== =========== =========== ===========
REVENUES
Total revenues increased 82% to $26.4 million from $14.5 million for the
quarters ended March 31, 2001 and 2000, respectively. Total revenues for the
nine month period ended March 31, 2001 were $73.2 million compared with $34.8
million for the nine month period ended March 31, 2000 representing an increase
of 111%.
Licenses
Revenues from licenses increased 62% to $16.4 million from $10.1 million for the
quarters ended March 31, 2001 and 2000, respectively. Revenues from licenses for
the nine month period ended March 31, 2001 were $46.5 million compared with
$24.2 million for the nine month period ended March 31, 2000 representing an
increase of 92%.
Our revenues from licenses increased due to new customers and to follow-on sales
to existing customers. These increases were attributable to increased market
acceptance of our solutions,
-13-
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 the Pivotal Demand Chain Network solution suite due to increased direct and
indirect distribution channels 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. In recent months, the buying patterns of our potential customers are
different than prior quarters resulting in longer sales cycles and it is
difficult to predict when these deals will close.
Revenues from licenses represented 62% and 70% of total revenues for the
quarters ended March 31, 2001 and 2000, respectively. During the nine months
ended March 31, 2001 and 2000, respectively, revenues from licenses represented
64% and 70% of total revenues. No single customer accounted for 10% or more of
our revenues for the quarters ended March 31, 2001 and 2000 or for the nine
months ended March 31, 2001 and 2000. North American license revenues accounted
for 66% and 73% of total license revenues in the quarters ended March 31, 2001
and 2000, respectively. During the nine months ended March 31, 2001 and 2000,
North American license revenues accounted for 71% and 74% of total license
revenues, respectively.
Services and Maintenance
Revenues from services and maintenance increased 127% to $10.0 million from $4.4
million for the quarters ended March 31, 2001 and 2000, respectively. The
increase was due to an increase of $4.1 million in revenues from implementation,
education and consulting service engagements and an increase of $1.5 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.
During the nine month period ended March 31, 2001 and 2000, revenues from
services and maintenance increased 154% to $26.7 million from $10.5 million,
respectively. The increase was due to an increase of $11.2 million in revenues
from implementation, education and consulting service engagements and an
increase of $5.0 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.
Our revenues from services and maintenance represented 38% and 30% of total
revenues for the quarters ended March 31, 2001 and 2000, respectively. During
the nine months ended March 31, 2001 and 2000, revenues from services and
maintenance represented 36% and 30% of total revenues, respectively. 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 117% to $6.4 million from $2.9 million for the
quarters ended March 31, 2001 and 2000, respectively. For the nine months ended
March 31, 2001 and 2000, total cost of revenues increased 151% to $17.0 million
from $6.8 million, respectively.
-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 59% to $1.0 million from $635,000 for
the quarters ended March 31, 2001 and 2000, respectively. For the nine months
ended March 31, 2001 and 2000, respectively, cost of revenues from licenses
increased 115% to $2.9 million from $1.3 million. These increases are 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% for the quarters ended March 31, 2001 and 2000. For the nine
months ended March 31, 2001 and 2000, cost of revenues from licenses as a
percentage of revenues from licenses was 6% and 5%, respectively. 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 133% to $5.3 million
from $2.3 million for the quarters ended March 31, 2001 and 2000, respectively.
For the nine months ended March 31, 2001 and 2000, cost of revenues from
services and maintenance increased 159% to $14.2 million from $5.5 million,
respectively. Cost of revenues from services and maintenance as a percentage of
revenues from services and maintenance was 53% and 52% for the quarters ended
March 31, 2001 and 2000, respectively. For the nine months ended March 31, 2001
and 2000, cost of revenues from services and maintenance as a percentage of
revenues from services and maintenance was also 53% and 52%, respectively.
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 54% to $12.7 million from $8.2 million
for the quarters ended March 31, 2001 and 2000, respectively. For the nine
months ended March 31, 2001 and 2000, respectively, sales and marketing expenses
increased 78% to $37.1 million from $20.8 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 48% from
56% for the quarters ended March 31, 2001 and 2000, respectively. During the
nine months ended March 31, 2001 and 2000, respectively, sales and marketing
expenses decreased as a percentage of total revenues to 51% from 60%. 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 $5.1 million from $2.4
million for the quarters ended March 31, 2001 and 2000, respectively. Research
and development expenses were 19% and 17% of total revenues for the quarters
ended March 31, 2001 and 2000, respectively. For the nine months ended March 31,
2001 and 2000, research and development expenses increased 122% to $13.5 million
from $6.1 million, respectively. Research and development expenses were 18% of
total revenues for the nine months ended March 31, 2001 and 2000. 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 133% to $2.8 million from $1.2
million for the quarters ended March 31, 2001 and 2000, respectively. General
and administrative expenses were 11% and 8% of total revenues for the quarters
ended March 31, 2001 and 2000, respectively. For the nine months ended March 31,
2001 and 2000, respectively, general and administrative expenses increased 132%
to $6.7 million from $2.9 million. General and administrative expenses were 9%
and 8% of total revenues for the nine months ended March 31, 2001 and 2000,
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 increase our administrative
capability in international markets.
-16-
Amortization of Goodwill
Amortization of goodwill was $6.1 million in the quarter ended March 31, 2001
and $16.5 million in the nine months ended March 31, 2001. This related to
goodwill of approximately $58.1 million arising from the acquisitions of
Transitif, Exactium and Simba during the year ended June 30, 2000 and $15.1
million arising from acquisitions including: Ionysys, Project One and Software
Spectrum during the nine months ended March 31, 2001. Included in goodwill is
$1.9 million of acquired goodwill from the acquisition of Software Spectrum and
$239,000 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 $97,000 in the quarter
ended March 31, 2000 and totaling $129,000 in the nine months ended March 31,
2000, 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 $56,000 in compensation expense in the quarters ended March 31, 2001 and
2000, respectively. During the nine months ended March 31, 2001 and 2000,
respectively, we recognized $84,000 and $167,000 in compensation expense. We
currently expect to recognize $113,000, $58,000 and $22,000 in compensation
expense 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 $994,000 and $673,000 for the quarters ended March 31, 2001 and
2000, respectively. For the nine months ended March 31, 2001 and 2000, interest
and other income was $2.0 million and $1.7 million, respectively. The increases
of $0.3 million during the three month and nine month periods ended March 31,
2001 were due primarily to interest income of $0.3 million and $0.6 million,
respectively, generated on higher cash and cash equivalents and short term
investments on hand. This was a result of the equity financing completed in
November 2000 which generated $50.9 million net of expenses and brokers
commissions. The increase was offset by foreign exchange losses of $39,000 and
$269,000 for the three month and nine month periods ended March 31, 2001,
respectively. The other components of interest and other income were not
material for the periods presented.
Income Taxes
The provision for income taxes was $56,000 and $139,000 for the quarters ended
March 31, 2001 and 2000, respectively. For the nine months ended March 31, 2001
and 2000, respectively, the
-17-
provision for income taxes was $159,000 and $340,000. These income tax amounts
were attributable to our operations in the United States, the United Kingdom and
France and which were offset by $309,000 related to Canadian research and
development tax incentives received.
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 the unaudited condensed
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
-----------------------------------------------------------------------------------------------------
Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30, June 30,
2001 2000 2000 2000 2000 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
Revenues:
Licenses $16,368 $16,346 $13,768 $13,136 $10,125 $ 8,026 $ 6,097 $ 6,214
Services and maintenance 10,026 9,385 7,290 5,049 4,412 3,516 2,578 2,109
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues 26,394 25,731 21,058 18,185 14,537 11,542 8,675 8,323
-------- -------- -------- -------- -------- -------- -------- --------
Cost of revenues:
Licenses 1,009 979 866 812 635 410 284 98
Services and maintenance 5,346 4,979 3,870 2,671 2,295 1,813 1,368 1,105
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues 6,355 5,958 4,736 3,483 2,930 2,223 1,652 1,203
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 20,039 19,773 16,322 14,702 11,607 9,319 7,023 7,120
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing 12,689 12,914 11,498 10,319 8,214 6,917 5,715 5,005
Research and development 5,096 4,509 3,917 2,803 2,409 2,125 1,569 1,800
General and administrative 2,787 2,100 1,776 1,318 1,197 968 707 845
Amortization of goodwill 6,068 5,405 4,995 1,280 97 32 - -
In-process research and
development and other
charges - - - 6,979 - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses 26,640 24,928 22,186 22,699 11,917 10,042 7,991 7,650
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations (6,601) (5,155) (5,864) (7,997) (310) (723) (968) (530)
Interest and other income
(loss) 994 644 343 478 673 685 357 (69)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income (5,607) (4,511) (5,521) (7,519) 363 (38) (611) (599)
taxes
Income tax expense (recovery) 56 170 (67) 217 139 126 75 60
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) $(5,663) $(4,681) $(5,454) $(7,736) $ 224 $ (164) $ (686) $ (659)
======== ======== ======== ======== ======== ======== ======== ========
-18-
Three months ended
-----------------------------------------------------------------------------------------------------
Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30, June 30,
2001 2000 2000 2000 2000 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
Revenues:
Licenses 62% 64% 65% 72% 70% 70% 70% 75%
Services and maintenance 38% 36% 35% 28% 30% 30% 30% 25%
-------- -------- -------- -------- -------- -------- -------- --------
Total revenues 100% 100% 100% 100% 100% 100% 100% 100%
-------- -------- -------- -------- -------- -------- -------- --------
Cost of revenues:
Licenses 4% 4% 4% 4% 4% 3% 3% 1%
Services and maintenance 20% 19% 18% 15% 16% 16% 16% 13%
-------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues 24% 23% 22% 19% 20% 19% 19% 14%
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit 76% 77% 78% 81% 80% 81% 81% 86%
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing 48% 50% 55% 57% 56% 60% 66% 60%
Research and development 19% 18% 19% 15% 17% 19% 18% 22%
General and 11% 8% 8% 7% 8% 8% 8% 10%
administrative
Amortization of goodwill 23% 21% 24% 7% 1% - - -
In-process research and
development and other
charges - - - 39% - - - -
-------- -------- -------- -------- -------- -------- -------- --------
Total operating expenses 101% 97% 106% 125% 82% 87% 92% 92%
-------- -------- -------- -------- -------- -------- -------- --------
Loss from operations (25)% (20)% (28)% (44)% (2)% (6)% (11)% (6)%
Interest and other income (loss) 4% 3% 2% 3% 5% 6% 4% (1%)
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income (21)% (17)% (26)% (41)% 3% - (7)% (7)%
taxes
Income taxes - 1% - 1% 1% 1% 1% 1%
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) (21)% (18)% (26)% (42)% 2% (1)% (8)% (8)%
======== ======== ======== ======== ======== ======== ======== ========
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 loss 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 March 31, 2001, we had $15.1 million in cash and cash equivalents, $61.1
million in short term investments and $70.2 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 $76.2
million as of March 31, 2001 from $35.5 million as of June 30, 2000. Our working
capital increased to $70.2 million at March 31, 2001 from $28.3 million at June
30, 2000. The increase is partly attributable to the equity financing completed
November 28, 2000, which generated $50.9 million, net of expenses and broker
commissions, offset by acquisitions and working capital requirements.
Net cash used in operating activities for the nine months ended March 31, 2001
was $1.1 million compared to net cash generated of $469,000 in the same period
in 2000.
Net cash used in investing activities was $43.5 million and $48.3 million for
the nine months ended March 31, 2001 and 2000, respectively. During the nine
months ended March 31, 2001 and 2000, we used $30.3 million and $42.9 million,
respectively, for the purchase of short-term investments. Capital expenditures
totalled $5.5 million and $3.8 for the nine months ended March 31, 2001 and
2000, 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,
2001, we used $5.3 million (net of cash acquired) on acquisitions including:
Ionysys, Project One and Software Spectrum.
Cash provided by financing activities was $54.9 million and $44.3 million for
the nine months ended March 31, 2001 and 2000, respectively. Net cash provided
by financing activities resulted from the issuance of common shares.
Our principal source of liquidity at March 31, 2001 was our cash, cash
equivalents and short term investments of $76.2 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 March 31, 2001, 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 credit facilities, will be sufficient to meet our
anticipated cash needs for working capital or other purposes at least for the
next twelve months. 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.
-20-
RECENT ACCOUNTING PRONOUNCEMENTS
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 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 our consolidated financial position or results of
operations.
-21-
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 March 31, 2001, the notional value of our foreign currency forward contracts
totalled the equivalent of U.S. $4.5 million. All foreign currency forward
contracts are carried at fair value and all had maturity dates within 3 months
with a weighted average exchange rate of 1.5452 Canadian dollars for each U.S.
dollar.
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 March 31, 2001, 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
ITEM 1. LEGAL PROCEEDINGS
We are subject to pending claims and litigation. Management, after review and
consultation with legal counsel, considers that any liability from the
disposition of such lawsuits would not have a material adverse effect upon the
consolidated financial condition of the Company.
We are currently in arbitration with one of our business partners, following a
breach of contract claim against us. We believe the claim is without merit and
we have made a counter claim. While the results of arbitration and claims cannot
be predicted with certainty, we believe that the final outcome of this matter
will not have a material adverse effect on our business, financial condition,
results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
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 $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 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.
-24-
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Descrition
------ ----------
2.1(1) Share Purchase Agreement by and between Pivotal and Pierre
Marcel, Marc Bahda, Bernard Wach and Other Shareholders of
Transitif S.A., dated December 3, 1999
2.2(2) Stock Purchase Agreement among Pivotal and Industrial &
Financial Systems AB and Eli Barak, Alon Hod and Tony Topaz
Concerning all of the Shares of Exactium Ltd. dated April
11, 2000
2.3(3) Share Purchase Agreement among Pivotal and David Pritchard,
Kirk Herrington, Michael Satterfield, Calvin Mah, VW B.C.
Technology Investment Fund, LP, Venrock Associates, Venrock
Associates II, LP, Working Ventures Canadian Fund Inc., Bank
of Montreal Capital Corporation, Sussex Capital Inc. and the
Other Shareholders of Simba Technologies Inc. concerning all
of the Shares of Simba Technologies Inc. dated May 29, 2000
3.2(4) Memorandum and Articles
4.1(4) Specimen of common share certificate
4.2(4) Registration Rights (included in Exhibit 10.15)
4.3(2) Registration Rights Agreement dated June 2, 2000 (included
in Exhibit 2.2)
4.4(3) Registration Rights Agreement dated June 26, 2000 (included
in Exhibit 2.3)
10.1(4) Amended and Restated Incentive Stock Option Plan dated as of
January 28, 1999
10.2(4) Form of Amended and Restated Incentive Stock Option Plan
effective as of August 10, 1999
10.3(4) Employee Share Purchase Plan
10.4(4) Lease dated as of July 18, 1997 between Sodican (B.C.) Inc.
and Pivotal for premises located in North Vancouver, B.C.
10.5(4) Lease dated as of May 26, 1998 between Novo Esplanade Ltd.
and Pivotal for premises located in North Vancouver, B.C.
-25-
Exhibit
Number Descrition
------ ----------
10.6(4) Lease(1) dated as of December 14, 1998 between B.C. Rail
Ltd. and Pivotal for premises located in North Vancouver,
B.C.
10.7(4) Lease(2) dated as of December 14, 1998, between B.C. Rail
Ltd. and Pivotal with respect to premises located in North
Vancouver, B.C.
10.8(4) Lease dated as of December 11, 1998 between Yarrow Bay
Office III Limited Partnership and Pivotal with respect to
premises located in Kirkland, Washington
10.9(4) Lease dated as of March 12, 1999 between Erachange Limited
and Pivotal for premises located in Hemel Hempstead,
Hertfordshire, England
10.10(4) Lease dated as of April 19, 1999 between Massachusetts
Mutual Life Insurance Company and Pivotal for premises
located in Des Plaines, Illinois
#10.11(4) Letter agreement dated November 21, 1997 between Pivotal and
Robert A. Runge granting an option to purchase 250,000
common shares
10.13(4) Class F Preferred Share Subscription and Purchase Agreement
dated January 15, 1999, with respect to Class F Preferred
Shares
10.14(4) Shareholders' Agreement dated January 15, 1999
10.15(4) Investors' Rights Agreement dated January 15, 1999
10.16(4) Form of Share Purchase Agreement with respect to the
issuance of Class B common shares
10.17(4) Form of Share Purchase Agreement with respect to the
issuance of common shares in exchange for Class B common
shares
10.18(4) Form of Lock-up Agreement
10.19(4) Canadian Imperial Bank of Commerce $2,000,000 Committed
Installment Loan dated March 18, 1998
10.20(4) Canadian Imperial Bank of Commerce $3,000,000 Operating Line
of Credit dated March 18, 1998
10.21(4) Security Agreement with Canadian Imperial Bank of Commerce
dated for reference April 15, 1998
10.22(4) Contract Relative to Special Security under the Bank Act
between Canadian Imperial Bank of Commerce and Pivotal dated
April 30, 1998
10.23(4) Canadian Imperial Bank of Commerce Schedule - Standard
Credit Terms dated March 18, 1998
10.24(4) Canadian Imperial Bank of Commerce Schedule - Standard
Credit Terms dated March 18, 1998
10.25(4) Form of Indemnity Agreement between Pivotal and directors
and officers of Pivotal
10.26(5) Assignment agreement dated July 12, 2000 between Pivotal and
Meta Creations International Limited for premises located in
Dublin, Republic of Ireland; Sub-Lease dated September 22,
1999 between The H.W. Wilson Company Inc. and Meta Creations
International Limited for premises located in Dublin,
Republic of Ireland
10.27(5) Lease dated April 14, 2000 among Deramore Holdings
Limited(1), Pivotal Corporation (NI) Limited (2) and Pivotal
for premises located in Belfast, Northern Ireland
-26-
Exhibit
Number Descrition
------ ----------
10.28(5) Lease dated December 4, 1997 by and between EOP-Lakeside
Office, L.L.C. and Exactium, Inc.
#10.29(5) Employment Agreement between Vince Mifsud and Pivotal dated
November 10, 1998
10.30(6) Exactium Ltd. 1999 Stock Option Plan
10.31(7) Simba Technologies Incentive Stock Option Plan, as amended
99.1 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forwarding-Looking Statements.
---------------------------------
# Indicates management contract.
(1) Incorporated by reference to Pivotal's Form 8-K filed on January 25, 2000.
(2) Incorporated by reference to Pivotal's Form 8-K filed on June 19, 2000.
(3) Incorporated by reference to Pivotal's Form 8-K filed on July 11, 2000.
(4) Incorporated by reference to Pivotal's Registration Statement on Form F-1
(No. 333-82871).
(5) Incorporation by reference to Pivotal's Annual Report on Form 10-K for the
year ended June 30, 2000.
(6) Incorporated by reference to Pivotal's Registration Statement on Form S-8
(No. 333-39922).
(7) Incorporated by reference to Pivotal's Registration Statement on Form S-8
(No. 333-42460).
(b) Reports on Form 8-K
On February 20, 2001, we filed a Form 8-K reporting the financial
statements for the six months ended December 31, 2000 of Pivotal.
On March 2, 2001, we filed a Form 8-K reporting our presentation at the
CIBC World Markets 2001 Institutional Investor Conference.
-27-
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 15, 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
-28-
EXHIBIT INDEX
-------------
Exhibit
Number Descrition
------ ----------
2.1(1) Share Purchase Agreement by and between Pivotal and Pierre
Marcel, Marc Bahda, Bernard Wach and Other Shareholders of
Transitif S.A., dated December 3, 1999
2.2(2) Stock Purchase Agreement among Pivotal and Industrial &
Financial Systems AB and Eli Barak, Alon Hod and Tony Topaz
Concerning all of the Shares of Exactium Ltd. dated April
11, 2000
2.3(3) Share Purchase Agreement among Pivotal and David Pritchard,
Kirk Herrington, Michael Satterfield, Calvin Mah, VW B.C.
Technology Investment Fund, LP, Venrock Associates, Venrock
Associates II, LP, Working Ventures Canadian Fund Inc., Bank
of Montreal Capital Corporation, Sussex Capital Inc. and the
Other Shareholders of Simba Technologies Inc. concerning all
of the Shares of Simba Technologies Inc. dated May 29, 2000
3.2(4) Memorandum and Articles
4.1(4) Specimen of common share certificate
4.2(4) Registration Rights (included in Exhibit 10.15)
4.3(2) Registration Rights Agreement dated June 2, 2000 (included
in Exhibit 2.2)
4.4(3) Registration Rights Agreement dated June 26, 2000 (included
in Exhibit 2.3)
10.1(4) Amended and Restated Incentive Stock Option Plan dated as of
January 28, 1999
10.2(4) Form of Amended and Restated Incentive Stock Option Plan
effective as of August 10, 1999
10.3(4) Employee Share Purchase Plan
10.4(4) Lease dated as of July 18, 1997 between Sodican (B.C.) Inc.
and Pivotal for premises located in North Vancouver, B.C.
10.5(4) Lease dated as of May 26, 1998 between Novo Esplanade Ltd.
and Pivotal for premises located in North Vancouver, B.C.
10.6(4) Lease(1) dated as of December 14, 1998 between B.C. Rail
Ltd. and Pivotal for premises located in North Vancouver,
B.C.
10.7(4) Lease(2) dated as of December 14, 1998, between B.C. Rail
Ltd. and Pivotal with respect to premises located in North
Vancouver, B.C.
10.8(4) Lease dated as of December 11, 1998 between Yarrow Bay
Office III Limited Partnership and Pivotal with respect to
premises located in Kirkland, Washington
10.9(4) Lease dated as of March 12, 1999 between Erachange Limited
and Pivotal for premises located in Hemel Hempstead,
Hertfordshire, England
10.10(4) Lease dated as of April 19, 1999 between Massachusetts
Mutual Life Insurance Company and Pivotal for premises
located in Des Plaines, Illinois
Exhibit
Number Descrition
------ ----------
#10.11(4) Letter agreement dated November 21, 1997 between Pivotal and
Robert A. Runge granting an option to purchase250,000 common
shares
10.13(4) Class F Preferred Share Subscription and Purchase Agreement
dated January 15, 1999, with respect to Class F Preferred
Shares
10.14(4) Shareholders' Agreement dated January 15, 1999
10.15(4) Investors' Rights Agreement dated January 15, 1999
10.16(4) Form of Share Purchase Agreement with respect to the
issuance of Class B common shares
10.17(4) Form of Share Purchase Agreement with respect to the
issuance of common shares in exchange for Class B common
shares
10.18(4) Form of Lock-up Agreement
10.19(4) Canadian Imperial Bank of Commerce $2,000,000 Committed
Installment Loan dated March 18, 1998
10.20(4) Canadian Imperial Bank of Commerce $3,000,000 Operating Line
of Credit dated March 18, 1998
10.21(4) Security Agreement with Canadian Imperial Bank of Commerce
dated for reference April 15, 1998
10.22(4) Contract Relative to Special Security under the Bank Act
between Canadian Imperial Bank of Commerce and Pivotal dated
April 30, 1998
10.23(4) Canadian Imperial Bank of Commerce Schedule - Standard
Credit Terms dated March 18, 1998
10.24(4) Canadian Imperial Bank of Commerce Schedule - Standard
Credit Terms dated March 18, 1998
10.25(4) Form of Indemnity Agreement between Pivotal and directors
and officers of Pivotal
10.26(5) Assignment agreement dated July 12, 2000 between Pivotal and
Meta Creations International Limited for premises located in
Dublin, Republic of Ireland; Sub-Lease dated September 22,
1999 between The H.W. Wilson Company Inc. and Meta Creations
International Limited for premises located in Dublin,
Republic of Ireland
10.27(5) Lease dated April 14, 2000 among Deramore Holdings
Limited(1), Pivotal Corporation (NI) Limited (2) and Pivotal
for premises located in Belfast, Northern Ireland
10.28(5) Lease dated December 4, 1997 by and between EOP-Lakeside
Office, L.L.C. and Exactium, Inc.
#10.29(5) Employment Agreement between Vince Mifsud and Pivotal dated
November 10, 1998
10.30(6) Exactium Ltd. 1999 Stock Option Plan
10.31(7) Simba Technologies Incentive Stock Option Plan, as amended
Exhibit
Number Descrition
------ ----------
99.1 Private Securities Litigation Reform Act of 1995 Safe Harbor
Compliance Statement for Forwarding-Looking Statements.
---------------------------------
# Indicates management contract.
(1) Incorporated by reference to Pivotal's Form 8-K filed on January 25, 2000.
(2) Incorporated by reference to Pivotal's Form 8-K filed on June 19, 2000.
(3) Incorporated by reference to Pivotal's Form 8-K filed on July 11, 2000.
(4) Incorporated by reference to Pivotal's Registration Statement on Form F-1
(No. 333-82871).
(5) Incorporation by reference to Pivotal's Annual Report on Form 10-K
for the year ended June 30, 2000.
(6) Incorporated by reference to Pivotal's Registration Statement on Form S-8
(No. 333-39922).
(7) Incorporated by reference to Pivotal's Registration Statement on Form S-8
(No. 333-42460).