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 September 30, 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 NOVEMBER 13, 2001: 24,003,548
PIVOTAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS .......................1
Condensed Consolidated Balance Sheets as of
September 30, 2001 and June 30, 2001 ..............................1
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2001 and 2000 ....................2
Condensed Consolidated Statements of Shareholders' Equity
for the Three Months ended September 30, 2001 .....................3
Condensed Consolidated Statements of Cash flows for the
Three Months Ended September 30, 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 ............................8
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ...................................................19
PART II OTHER INFORMATION ...................................................21
ITEM 1 LEGAL PROCEEDINGS ...............................................21
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS .......................21
ITEM 3 DEFAULTS UPON SENIOR SECURITIES .................................21
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............21
ITEM 5 OTHER INFORMATION ...............................................21
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K ................................21
SIGNATURES ...................................................................25
i
PART I - ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
September 30, June 30,
2001 2001
------------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 9,449 $ 13,247
Short-term investments 48,419 55,468
Accounts receivable 15,381 26,610
Prepaid expenses 4,295 2,691
------------- -------------
Total current assets 77,544 98,016
Property and equipment, net 8,104 9,183
Goodwill, intangibles and other assets, net 55,662 61,244
------------- -------------
Total assets $ 141,310 $ 168,443
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 23,029 $ 25,324
Deferred revenue 11,669 13,810
Current portion of obligations under capital leases and long term debt 423 516
------------- -------------
Total current liabilities 35,121 39,650
Non-current portion of obligations under capital leases and long-term debt 396 592
------------- -------------
Total liabilities 35,517 40,242
------------- -------------
Shareholders' equity:
Preferred shares, undesignated, no par value; authorized shares - 20,000 - -
at September 30, 2001 and June 30, 2001; no shares issued and outstanding
Common shares, no par value; authorized shares - 200,000 at September 30, 177,352 176,728
2001 and June 30, 2001, respectively; issued and outstanding shares -
23,996 and 23,933 at September 30, 2001 and June 30, 2001, respectively
Deferred share-based compensation (67) (81)
Accumulated other comprehensive loss (662) (203)
Accumulated deficit (70,830) (48,243)
------------- -------------
Total shareholders' equity 105,793 128,201
------------- -------------
Total liabilities and shareholders' equity $ 141,310 $ 168,443
============= =============
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
September 30,
2001 2000
---------- ----------
REVENUES:
Licenses $ 6,053 $ 13,768
Services and maintenance 9,969 7,290
---------- ----------
Total revenues 16,022 21,058
---------- ----------
COST OF REVENUES:
Licenses 492 866
Services and maintenance 5,860 3,870
---------- ----------
Total cost of revenues 6,352 4,736
---------- ----------
Gross profit 9,670 16,322
---------- ----------
OPERATING EXPENSES:
Sales and marketing 13,404 11,498
Research and development 4,947 3,917
General and administrative 7,131 1,776
Amortization of goodwill 6,839 4,995
---------- ----------
Total operating expenses 32,321 22,186
---------- ----------
Loss from operations (22,651) (5,864)
Interest and other income 218 343
---------- ----------
Loss before income taxes (22,433) (5,521)
Income tax (expense) recovery (154) 67
---------- ----------
Net loss $ (22,587) $ (5,454)
========== ==========
Loss per share:
Basic and diluted $ (0.94) $ (0.24)
Weighted average number of shares used to calculate loss per share:
Basic and diluted 23,988 22,375
See accompanying notes.
2
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
Common Shares and Accumulated
Additional Paid-In Deferred Other Total
Capital Share-Based Comprehensive Accumulated Shareholders'
Shares Amount Compensation Loss (Deficit) Equity
------ ------ ------------ ------------- ----------- ---------
Balance June 30, 2001 23,933 $176,728 $ (81) $ (203) $ (48,243) $ 128,201
Net loss - - - - (22,587) (22,587)
Change in net unrealized loss on - - - (459) - (459)
available-for-sale
investment ------------
Comprehensive loss (23,046)
investment ------------
Issuance of common shares on 13 34 - - - 34
exercise of stock options
Issuance of common shares 50 590 - - - 590
related to Employee Stock
Purchase Plan
Amortization of share-based - - 14 - - 14
compensation
------------------------------------------------------------------------------------------
Balance September 30, 2001 23,996 $177,352 $ (67) $ (662) $ (70,830) $ 105,793
==========================================================================================
See accompanying notes.
3
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(EXPRESSED IN UNITED SATES DOLLARS; ALL AMOUNTS IN THOUSANDS)
(UNAUDITED)
Three months ended
September 30,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss for the period $ (22,587) $ (5,454)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Amortization of goodwill 6,839 4,995
Depreciation 1,038 880
Non-cash share-based compensation expense 14 28
Change in operating assets and liabilities:
Accounts receivable 11,229 (858)
Prepaid expenses (1,604) (72)
Accounts payable and accrued liabilities (2,295) 42
Deferred revenue (2,141) 1,184
------------ ------------
Net cash (used in) provided by operating activities (9,507) 745
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (248) (1,368)
Proceeds on disposal of property and equipment 289 -
Proceeds from sales and maturities of short-term investments 7,049 8,541
Other assets (1,716) (405)
------------ ------------
Net cash provided by investing activities 5,374 6,768
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common shares 624 1,668
Repayment of obligations under capital lease (289) -
------------ ------------
Net cash provided by financing activities 335 1,668
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,798) 9,181
Cash and cash equivalents, beginning of period 13,247 4,734
------------ ------------
Cash and cash equivalents, end of period $ 9,449 $ 13,915
============ ============
See accompanying notes.
4
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS
EXCEPT PER SHARE DATA)
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and footnote disclosures normally included in
financial statements normally included in annual financial statements prepared
in accordance with United States generally accepted accounting principles have
been condensed, or omitted, pursuant to such rules and regulations. In Pivotal's
opinion, these financial statements include all adjustments necessary (which are
of a normal and recurring nature) for the fair presentation of the results of
the interim periods presented. These financial statements should be read in
conjunction with the audited consolidated financial statements included in
Pivotal's Annual Report on Form 10-K for the year ended June 30, 2001. The
results of operations for any interim period are not necessarily indicative of
the results of operations for any other interim period or for a full fiscal
year.
2. ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $4,404 and
$2,260 at September 30, 2001 and June 30, 2001, respectively.
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities were as follows:
September 30, 2001 June 30, 2001
------------------ -------------
Accounts payable $10,862 $12,721
Accrued compensation 3,242 3,867
Accrued acquisition costs 4,053 5,227
Other accrued liabilities 4,872 3,509
----- -----
$23,029 $25,324
======= =======
4. LOSS PER SHARE
The following table sets forth the computation of basic and diluted loss per
share:
Three months ended
September 30,
2001 2000
-------- --------
Net loss (A) $(22,587) $(5,454)
Weighted average number of common shares outstanding (B) 23,988 22,375
Loss per share:
Basic and diluted (A/B) $ (0.94) $(0.24)
5
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS
EXCEPT PER SHARE DATA)
(UNAUDITED)
5. COMPREHENSIVE LOSS
The components of comprehensive loss, net of tax, are as follows:
Three months ended
September 30,
2001 2000
---------- ----------
Net loss $(22,587) $(5,454)
Other comprehensive loss:
Change in net unrealized loss on available-for-sale investment (459) -
---------- ----------
$(23,046) $(5,454)
========== ==========
6. SEGMENTED INFORMATION
Pivotal operates in one business segment, the development, marketing, and
supporting of Internet and corporate network-based software applications used
for managing customer and selling partner relationships.
Pivotal licenses and markets its products internationally. The following table
presents a summary of revenues by geographical region:
Three months ended
September 30,
2001 2000
-------- --------
United States $8,465 $14,772
Canada 1,306 2,435
International 6,251 3,851
-------- --------
$16,022 $21,058
======== ========
Pivotal attributes revenue among the geographical areas based on the location of
the customers involved.
During the three months ended September 30, 2001 and 2000, no single customer
accounted for 10% or more of total revenue.
6
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(EXPRESSED IN UNITED STATES DOLLARS; ALL AMOUNTS IN THOUSANDS
EXCEPT PER SHARE DATA)
(UNAUDITED)
7. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No.1 41 addresses the initial recognition and measurement of
intangible assets acquired in a business combination and SFAS No. 142 addresses
the initial recognition and measurement of intangible assets acquired outside of
a business combination whether acquired individually or with a group of other
assets. These standards require all future business combinations to be accounted
for using the purchase method of accounting. Goodwill will no longer be
amortized but instead will be subject to impairment tests at least annually.
Pivotal is required to adopt SFAS No. 141 and 142 on a prospective basis as of
July 1, 2002. Pivotal is currently evaluating the impact that the adoption of
these pronouncements may have on its financial position and results of
operations. Prior to any charges for impairment which may be recorded in the
three quarters ending June 30, 2002, adoption of these pronouncements will have
the effect of eliminating quarterly goodwill amortization of $6.8 million.
Unamortized goodwill was $55.7 million as of September 30, 2001.
The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," in August 2001. SFAS No. 144, which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of, supercedes SFAS No. 121 and is effective
for fiscal years beginning after December 15, 2001. Therefore Pivotal will be
required to adopt SFAS No. 144 as of July 1, 2002. The adoption of SFAS No. 144
is not expected to have a material impact on the Company's financial statements.
8. SUBSEQUENT EVENTS
On October 25, 2001, Pivotal announced that it is restructuring its organization
around core business processes to improve cost efficiencies, productivity, and
the delivery of customer results. The restructuring program includes a reduction
in the number of employees by 22 percent from 675 to 525, consolidation of
excess facilities, and restructuring of certain business functions. Pivotal is
currently estimating the restructuring and other charges to be recorded in the
quarter ended December 31, 2001 including employee severances, excess facility
costs and related asset impairment charges.
Due to the decline in current business conditions, Pivotal is currently
assessing the future revenue potential and estimated costs associated with
businesses acquired in 2001 and 2000 to determine if the goodwill and purchased
intangible assets is impaired. If the impairment analysis indicates that the
carrying value will not be fully recovered through estimated undiscounted
operating cash flows, Pivotal will record an impairment charge measured by the
amount that the carrying amount exceeds the fair market value of these assets.
7
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, 2001.
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 described under the heading
"Important factors that may affect our business, our results of operations and
our stock price" 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
acquire, serve and manage their customers by providing customer relationship
management and electronic business solutions. Customer relationship management
and electronic business solutions automate and manage marketing, selling and
servicing processes over the Internet. We refer to our solutions as the Pivotal
Customer Relationship Management and eBusiness solution suite. The Customer
Relationship Management and eBusiness solution suite is designed to complement
and integrate with a business' supply chain, therefore enabling businesses to
improve efficiency and increase revenues.
On August 14, 2001, we announced the worldwide availability of the Pivotal
ePower Lifecycle Engine - Oracle Edition. In the past, we have focused solely on
Microsoft database platforms. With this new development, our solution can now be
implemented using Microsoft and/or Oracle based platforms and technologies. We
believe this will open up a new set of business opportunities to us as we will
now have access to businesses using an Oracle platform. With our new
Oracle-based solution, we will seek to broaden our market by directly targeting
Oracle-based companies and by expanding our relationships with third party
distributors and systems integrators that have Oracle-based practices.
On October 25, 2001 we announced our corporate restructuring initiatives which
included a workforce reduction of 150 employees, representing 22% of our total
workforce worldwide, consolidation of excess facilities and restructuring of
certain business functions. We expect the total cost of our restructuring
initiatives to be $10.5 million, which will be recorded in the quarter ending
December 31, 2001. We believe that this new headcount enables us to align with
both the current demand in the market for customer relationship management and
electronic business solutions as well as the anticipated growth within that same
market. We have also restructured our sales process. This process now allows
some customers to conduct formalized evaluations of our solutions prior to
making their decision to purchase. Although this may extend the length of some
sales cycles, we believe this will result in an advantage over our competitors
as our customers will experience more security in the buying process.
8
Due to the decline of market conditions and our restructuring initiatives
announced October 25, 2001, we are reviewing the valuation of goodwill and
purchased intangibles on our balance sheet and may record a charge for an
impairment in value in the quarter ending December 31, 2001.
Our solutions are sold in 35 countries and are available in English, French,
German and Spanish from Pivotal directly and Portuguese, Swedish, Japanese,
Chinese and Hebrew from members of our third-party resellers, the Pivotal
Alliance. More than 1300 companies around the world use Pivotal software and
services including: ABN AMRO Securities LLC, Atlas Copco Airpower N.V., Belgacom
France, Bombardier Aerospace, Centex Homes, Citizens Gas, CIBC World Markets,
Commonfund, Compuware Corporation Japan, Deloitte & Touche, Emerson Electric,
Farm Credit Services of America, FLAG Telecom, Grantham, Mayo, Van Otterloo &
Company L.L.C., Haldex Services Corporation, Harper Collins Publishers, Heller
Financial, Hitachi Telecom (USA) Inc., Intrawest Corporation, Kikkoman
Corporation, KPMG, National Air Traffic Services, London, NEC, Novartis Animal
Health Inc., Novozymes North America, Inc., Panasonic SA, Premera Blue Cross,
Principal Financial Group, Inc., Qiagen, Royal Bank of Canada, Southern Company,
Toshiba Information Systems Corporation, Vivendi, and Ziff Davis Media Inc. We
market and sell our solutions through a direct sales force as well as through
third-party solution providers.
Our common shares are listed on NASDAQ under the symbol "PVTL" and on the
Toronto Stock Exchange under the symbol "PVT". Our head office is located at 300
- 224 West Esplanade, North Vancouver, British Columbia, Canada V7M 3M6, and our
telephone number is (604) 988-9982. Our home page on the Internet can be found
at www.pivotal.com. Information contained on our website does not constitute
part of this report.
Pivotal Corporation was incorporated in British Columbia, Canada in 1990 under
the name Pen Magic Software Corporation, and changed its name to Pen Magic
Software Inc. in 1991, to Pivotal Software Inc. in 1995 and to Pivotal
Corporation in 1999. 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 Inform, Inc.,
incorporated in Ontario.
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, PivotalHost, Pivotal Anywhere, Pivotal ePower Intelligence
Engine, Pivotal Sales & Marketing Intelligence, Pivotal ePower Interaction
Engine, PivotalLink for Customer Interaction Center, Pivotal SyncStream, Pivotal
Demand Chain Management, Pivotal Digital Intelligence, Pivotal Instant Action,
Pivotal Commerce, Pivotal PartnerHub, Pivotal CustomerHub, Pivotal eSelling,
Pivotal Service, Pivotal Marketing, Pivotal ePower Lifecycle Engine - Oracle
Edition and Miller Heiman for eRelationship Sales are trademarks and/or
registered trademarks of Pivotal Corporation. All other company names, product
names, marks, logos, and symbols referenced are the trademarks and/or registered
trademarks of their respective owners.
9
SOURCE OF REVENUE AND REVENUE RECOGNITION POLICY
We derive our revenues from the sale of licenses and services and maintenance to
end-users, value added resellers and application service providers and, to a
lesser extent, through distribution of third party products. We recognize
license revenues on delivery to the customer of our solutions if:
- there is persuasive evidence of an arrangement;
- the fee is fixed or determinable;
- there is vendor-specific objective evidence supporting allocating the
total fee among all elements of a multiple-element arrangement; and
- the collection of the license fee is probable.
Multiple-element arrangements could consist of software licenses, upgrades,
enhancements, maintenance and consulting services. Under some license
arrangements, with either a fixed or indefinite term, our customers agree to pay
for the license with periodic payments extending beyond one year. We recognize
revenues from these arrangements as the periodic payments become due, provided
all other conditions for revenue recognition are met.
We enter into reseller and sub-licensing arrangements that provide a fee payable
to us based on a percentage of list price. We recognize revenue only on the fees
payable to us, net of any amount payable to the reseller by the customer.
We typically sell first year maintenance with the related software license.
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 related to media, the
packaging and distribution of solutions, the related documentation and other
production costs, and royalty 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.
Our customers include a number of our suppliers. On occasion, we have purchased
goods or services for our operations from these vendors at or about the same
time we have licensed our software to these organizations. These transactions
are negotiated separately and recorded at terms we consider to be arms-length.
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
ended September 30, 2001 and 2000, respectively, are not necessarily indicative
of the results that may be expected for the full fiscal year or any future
period.
10
Three months ended
September 30,
2001 2000
-------- --------
CONSOLIDATED STATEMENT OF OPERATIONS
REVENUES:
Licenses 38% 65%
Services and maintenance 62% 35%
-------- --------
Total revenues 100% 100%
-------- --------
COST OF REVENUES:
Licenses 3% 4%
Services and maintenance 37% 18%
-------- --------
Total cost of revenues 40% 22%
-------- --------
Gross profit 60% 78%
-------- --------
OPERATING EXPENSES:
Sales and marketing 84% 55%
Research and development 31% 19%
General and administrative 44% 8%
Amortization of goodwill 42% 24%
-------- --------
Total operating expenses 201% 106%
-------- --------
Loss from operations (141)% (28)%
Interest and other income 1% 2%
-------- --------
Loss before income taxes (140)% (26)%
Income tax (expense) recovery (1)% -
-------- --------
Net loss (141)% (26)%
========= ========
REVENUES
Total revenues decreased 24% to $16.0 million from $21.1 million for the
quarters ended September 30, 2001 and 2000, respectively.
The market for our solutions and related services is unpredictable. We are
experiencing signs of weakness due to the current economic slowdown in the
market and the related reluctance of companies to acquire significant software
systems at this time. These market conditions may continue to deteriorate. The
severity and duration of any further deterioration may compel us to consider
further reductions in our workforce to realign with those new market conditions,
on either a regional or global scale, or both. This reduction could adversely
impact our ability to develop, deliver and/or service our existing and new
products, as well as our ability to attract, maintain and service our customers.
Licenses
Revenues from licenses decreased 56% to $6.1 million from $13.8 million for the
quarters ended September 30, 2001 and 2000, respectively.
Our revenues from licenses decreased as a result of a slowdown in our European
operations during the course of the quarter, a further general weakening of the
U.S. economy and difficulty experienced in closing sales in North America during
the final weeks of the quarter following the acts of terrorism in the United
States on September 11, 2001.
Revenues from licenses represented 38% and 65% of total revenues for the
quarters ended September 30, 2001 and 2000, respectively. No single customer
accounted for 10% or more of our revenues for the quarters ended September 30,
2001 and 2000. North American license revenues accounted for 61% and 82% of
total license revenues in the quarters ended September 30, 2001 and 2000,
respectively.
11
Our customers include a number of suppliers. On occasion, we have purchased
goods or services for our operations from vendors on or about the same time as
we have licensed our software to these organizations. These transactions are
separately negotiated and recorded at amounts and terms we consider to be at
arm's-length. During the three months ended September 30, 2001, we recognized
approximately $1.2 million of software license revenue from transactions with
vendors where we purchased goods or services from those vendors at or about the
same time as the software license transactions.
Services and Maintenance
Revenues from services and maintenance increased 37% to $10 million from $7.3
million for the quarters ended September 30, 2001 and 2000, respectively. This
resulted from an increase of $0.7 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
$2.0 million in revenues from implementation, education and consulting service
engagements.
Our revenues from services and maintenance represented 62% and 35% of total
revenues for the quarters ended September 30, 2001 and 2000, respectively. We
believe that future revenues from services and maintenance will continue to
increase as a percentage of total revenues over the quarter ended September 30,
2001, due to the increase in the number of technical support and maintenance
contracts as our customer base grows. We intend to expand consulting services
targeted at helping customers understand more about matters such as effective
one-to-one marketing and using the Internet to increase revenues and improve
customer service. We plan to continue relying on 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 34% to $6.4 million from $4.7 million for the
quarters ended September 30, 2001 and 2000, respectively.
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 decreased to $0.5 million from $0.9 million for
the quarters ended September 30, 2001 and 2000, respectively. The decrease is
due primarily to the decline in license revenues compared to prior quarters.
Cost of revenues from licenses as a percentage of revenues from licenses was 8%
and 6% for the quarters ended September 30, 2001 and 2000, respectively. The
cost of licenses as a percentage of license revenue remains similar to prior
quarters and will fluctuate quarter to quarter depending on sales mix and costs
of third-party technology integrated with 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.
12
Cost of revenues from services and maintenance increased 51% to $5.9 million
from $3.9 million for the quarters ended September 30, 2001 and 2000,
respectively. Cost of revenues from services and maintenance as a percentage of
revenues from services and maintenance was 59% and 53% for the quarters ended
September 30, 2001 and 2000, 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 occupancy for direct sales offices and marketing
expenditures related to direct mail, online marketing, trade shows, advertising
and promotion.
Sales and marketing expenses increased 17% to $13.4 million from $11.5 million
for the quarters ended September 30, 2001 and 2000, respectively. 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 increased as a percentage of total revenues to 84%
from 55% for the quarters ended September 30, 2001 and 2000, respectively. This
increase of sales and marketing expenses as a percentage of total revenues
resulted from lower revenue this quarter. We expect that sales and marketing
expenses will decrease as a percentage of total revenues as a result of our
restructuring initiatives announced October 25, 2001.
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 26% to $4.9 million from $3.9
million for the quarters ended September 30, 2001 and 2000, respectively.
Research and development expenses were 31% and 19% of total revenues for the
quarters ended September 30, 2001 and 2000, respectively. We expect to continue
to keep research and development expenditures at the same percentage of revenues
as we expand our Customer Relationship Management and eBusiness solution suite.
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 302% to $7.1 million from $1.8 for
the quarters ended September 30, 2001 and 2000, respectively. General and
administrative expenses were 44% and 8% of total revenues for the quarters ended
September 30, 2001 and 2000, respectively. In the quarter ended September 30,
2001, general and administrative expenses include approximately $1.9 million for
vacated premises, employee severances and other restructuring and approximately
$1.9 million for an additional allowance for doubtful accounts. During the
quarter ended September 30, 2001, we continued to experience delays in payments
from certain customers due to the weak North American economy. The balance of
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 decrease as a
percentage of total revenues as a result of our restructuring initiatives
announced October 25, 2001.
13
Amortization of Goodwill
Amortization of goodwill was $6.8 million in the quarter ended September 30,
2001, compared to 5.0 million for the quarter ended September 30, 2000. The
increase resulted from additional goodwill amortization on business acquired
during the year ended June 30, 2001.
Due to a decline in market conditions and our restructuring initiatives
announced October 25, 2001, we are reviewing the valuation of goodwill and
purchased intangible assets on our balance sheet and may record a charge for an
impairment in value in the quarter ending December 31, 2001.
Share-Based Compensation
We recorded deferred compensation expenses of $14,000 during the quarter ended
September 30, 2001 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 $14,000 and $28,000 in compensation expense in the quarters ended
September 30, 2001 and 2000, respectively. We currently expect to recognize
$58,000 and $23,000 in the years ending June 30, 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 $218,000 and $343,000 for the quarters ended September 30, 2001
and 2000, respectively. The total other income of $218,000 for the quarter ended
September 30, 2001 includes a foreign exchange loss of $263,000 compared to
$343,000 for the quarter ended September 30, 2000 including a foreign exchange
loss of $119,000. The other components of interest and other income were not
material for the periods presented.
Income Taxes
The provision for income taxes was $154,000 for the quarter ended September 30,
2001 compared to a recovery of $67,000 of prior taxes paid for the quarter ended
September 30, 2000. These income tax amounts were all attributable to our
operations in the United States and the United Kingdom.
14
QUARTERLY RESULTS OF OPERATIONS
The following tables present our unaudited quarterly results of operations both
in absolute dollars and on percentage of revenue basis for each of our last
eight quarters. This data has been derived from unaudited consolidated financial
statements that have been prepared on the same basis as the annual audited
consolidated financial statements and, in our opinion, 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
Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30, June 30, Mar. 31, Dec. 31,
2001 2001 2001 2000 2000 2000 2000 1999
-----------------------------------------------------------------------------------------------
Revenues:
Licenses $ 6,053 $ 12,028 $16,368 $16,346 $13,768 $13,136 $10,125 $ 8,026
Services and maintenance 9,969 10,079 10,026 9,385 7,290 5,049 4,412 3,516
--------------------------------- ----------- ------------ ----------- ----------- ------------ ----------- ----------- -----------
Total revenues 16,022 22,107 26,394 25,731 21,058 18,185 14,537 11,542
--------------------------------- ----------- ------------ ----------- ----------- ------------ ----------- ----------- -----------
Cost of revenues:
Licenses 492 946 1,009 979 866 812 635 410
Services and maintenance 5,860 5,971(1) 5,346 4,979 3,870 2,671 2,295 1,813
--------------------------------- ----------- ------------ ----------- ----------- ------------ ----------- ----------- -----------
Total cost of revenues 6,352 6,917 6,355 5,958 4,736 3,483 2,930 2,223
--------------------------------- ----------- ------------ ----------- ----------- ------------ ----------- ----------- -----------
Gross profit 9,670 15,190 20,039 19,773 16,322 14,702 11,607 9,319
--------------------------------- ----------- ------------ ----------- ----------- ------------ ----------- ----------- -----------
Operating expenses:
Sales and marketing 13,404 14,129(2) 12,689 12,914 11,498 10,319 8,214 6,917
Research and development 4,947 5,228 5,096 4,509 3,917 2,803 2,409 2,125
General and administrative 7,131(4) 6,904(3) 2,787 2,100 1,776 1,318 1,197 968
Amortization of goodwill 6,839 6,594 6,068 5,405 4,995 1,280 97 32
In-process research and
development and other
charges - - - - - 6,979 - -
--------------------------------- ----------- ------------ ----------- ----------- ------------ ----------- ----------- -----------
Total operating expenses 32,321 32,855 26,640 24,928 22,186 22,699 11,917 10,042
--------------------------------- ----------- ------------ ----------- ----------- ------------ ----------- ----------- -----------
Loss from operations (22,651) (17,665) (6,601) (5,155) (5,864) (7,997) (310) (723)
Interest and other income 218 1,352 994 644 343 478 673 685
--------------------------------- ----------- ------------ ----------- ----------- ------------ ----------- ----------- -----------
(Loss) income before income (22,433) (16,313) (5,607) (4,511) (5,521) (7,519) 363 (38)
taxes
Income tax expense (recovery) 154 344 56 170 (67) 217 139 126
--------------------------------- ----------- ------------ ----------- ----------- ------------ ----------- ----------- -----------
Net (loss) income $(22,587) $(16,657) $(5,663) $4,681 $5,454 $(7,736) $ 224 $ (164)
================================= =========== ============ =========== =========== ============ =========== =========== ===========
(1) Cost of revenues for services and maintenance increased during the fourth
quarter as a result of increased numbers of technical support and
maintenance contracts we obtained as our customer base grew.
(2) During the fourth quarter ended June 30, 2001, we increased program
spending which caused sales and marketing costs to increase as a percentage
of revenue.
(3) Includes $3.6 million for non-recurring charges relating to the impairment
of long-lived assets and an additional provision for doubtful accounts.
(4) Includes $1.9 million for vacated premises, employee severance and other
restructuring changes and approximately 1.9 million for an additional
allowance for doubtful accounts receivable.
15
Three months ended
--------------------------------------------------------------------------------------------------
Sep. 30, June 30, Mar. 31, Dec. 31, Sep. 30 June 30, Mar. 31, Dec. 31,
2001 2001 2001 2000 2000 2000 2000 1999
--------------------------------------------------------------------------------------------------
REVENUES:
Licenses 38% 54% 62% 64% 65% 72% 70% 70%
Services and maintenance 62% 46% 38% 36% 35% 28% 30% 30%
------------------------------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- ------------
Total revenues 100% 100% 100% 100% 100% 100% 100% 100%
------------------------------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- ------------
COST OF REVENUES:
Licenses 3% 4% 4% 4% 4% 4% 4% 3%
Services and maintenance 37% 27%(1) 20% 19% 18% 15% 16% 16%
------------------------------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- ------------
Total cost of revenues 40% 31% 24% 23% 22% 19% 20% 19%
------------------------------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- ------------
Gross profit 60% 69% 76% 77% 78% 81% 80% 81%
------------------------------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- ------------
OPERATING EXPENSES:
Sales and marketing 84% 64%(2) 48% 50% 55% 57% 56% 60%
Research and development 31% 24% 19% 18% 19% 15% 17% 19%
General and administrative 44%(4) 31%(3) 11% 8% 8% 7% 8% 8%
Amortization of goodwill 42% 30% 23% 21% 24% 7% 1% -
In-process research and
development and other
charges - - - - - 39% - -
------------------------------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- ------------
Total operating expenses 201% 149% 101% 97% 106% 125% 82% 87%
------------------------------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- ------------
Loss from operations (141)% (80)% (25)% (20)% (28)% (44)% (2)% (6)%
Interest and other income 1% 6% 4% 3% 2% 3% 5% 6%
------------------------------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- ------------
(Loss) income before income (140)% (74)% 21% (17)% (26)% (41)% 3% -
taxes
Income tax expense (recovery) 1% 1% - 1% - 1% 1% 1%
------------------------------- ------------ ----------- ----------- ----------- ------------ ----------- ----------- ------------
Net (loss) income (141)% (75)% (21)% (18)% (26)% (42)% 2% (1)%
=============================== ============ =========== =========== =========== ============ =========== =========== ============
(1) Cost of revenues for services and maintenance increased during the fourth
quarter as a result of increased numbers of technical support and
maintenance contracts we obtained as our customer base grew.
(2) During the fourth quarter ended June 30, 2001, we increased program
spending which caused sales and marketing costs to increase as a percentage
of revenue.
(3) Includes $3.6 million for non-recurring charges relating to the impairment
of long-lived assets and an additional provision for doubtful accounts.
(4) Includes $1.9 million for vacated premises, employee severance and other
restructuring charges and approximately 1.9 million for an additional
allowance for doubtful accounts receivable.
We believe the decrease in revenue in the quarters ended June 30, 2001 and
September 30, 2001 as compared to prior quarters was due to the current economic
slowdown and related reluctance of companies to acquire significant software and
systems at this time. In addition, a traditional pattern of reduced buying by
European customers during the months of July and August has again resulted in
lower European license revenue for the quarter ended September 30, 2001.
We incurred operating losses as we increased the level of investment in all
facets of our business. Our quarterly operating results have fluctuated
significantly in the past and will continue to fluctuate in the future as a
result of a number of factors, many of which are outside of our control. As a
result of our limited operating history and recent acquisitions, we
16
cannot forecast operating expenses based on historical results. Accordingly, we
base our anticipated level of expense in part on future revenue projections.
Most of our expenses are fixed in the short-term and we may not be able to
quickly reduce spending if revenues are lower than we have projected. Our
ability to forecast our quarterly revenues accurately is limited given our
limited operating history, length of the sales cycle of our solutions and other
uncertainties in our business. If revenues in a particular quarter do not meet
projections, our net losses in a given quarter would be greater than expected.
As a result, we believe that our quarter-to-quarter comparisons of our operating
results are not necessarily meaningful. Investors should not rely on the results
of one quarter as an indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, we had $9.5 million in cash and cash equivalents, $48.4
million in short-term investments and $42.4 million in working capital. Our cash
and cash equivalents and short-term investments decreased to $57.9 million at
September 30, 2001 from $68.7 million at June 30, 2001. Our working capital
decreased to $42.4 million at September 30, 2001 from $58.4 million at June
30,2001.
We used cash from operating activities of $9.5 million and generated $0.7
million for the three months ended September 30, 2001 and 2000, respectively.
Net cash provided by investing activities was $5.4 million for the three months
ended September 30, 2001 compared to $6.8 million in the same period in 2000.
During the quarter ended September 30, 2001, we received proceeds of $7.0
million from the sale and maturity of short-term investments. Net capital
expenditures were $0.2 million for the three months ended September 30, 2001 and
$1.4 million for the three months ended September 30, 2000.
Net cash provided by financing activities was $0.3 million and $1.7 million for
the three months ended September 30, 2001 and 2000, respectively. Net cash
provided by financing activities resulted primarily from sales of equity
securities.
Our principal source of liquidity at September 30, 2001 was our cash and cash
equivalents and short-term investments of $57.9 million. We have a credit
facility with a Canadian chartered bank which includes a revolving term
operating line of $2.0 million (Cdn. $3.0 Million), bearing interest at the
bank's prime rate plus 1% per year, secured by a charge on all our current and
future personal property. As of June 30, 2001 and 2000, no amounts were
outstanding under the credit facility. During the quarter ended June 30, 2001,
we entered into an irrevocable letter of credit with a Canadian chartered bank
for $2.5 million (Cdn. $3.8 million). The letter of credit, which expires July
3, 2002, collaterizes our obligations to a third party for tenant improvement
costs.
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 through
the year ending June 30, 2002. 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.
17
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No.1 41 addresses the initial recognition and measurement of
intangible assets acquired in a business combination and SFAS No. 142 addresses
the initial recognition and measurement of intangible assets acquired outside of
a business combination whether acquired individually or with a group of other
assets. These standards require all future business combinations to be accounted
for using the purchase method of accounting. Goodwill will no longer be
amortized but instead will be subject to impairment tests at least annually.
We are required to adopt SFAS No. 141 and 142 on a prospective basis as of July
1, 2002. We are currently evaluating the impact that the adoption of these
pronouncements may have on its financial position and results of operations.
Prior to any charges for impairment which may be recorded in the three quarters
ending June 30, 2002, adoption of these pronouncements will have the effect of
eliminating quarterly goodwill amortization of $6.8 million. Unamortized
goodwill was $55.7 million as of September 30, 2001.
The FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," in August 2001. SFAS No. 144, which addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of, supercedes SFAS No. 121 and is effective
for fiscal years beginning after December 15, 2001. Therefore we will be
required to adopt SFAS No. 144 as of July 1, 2002. The adoption of SFAS No. 144
is not expected to have a material impact on our financial statements.
18
PART I - ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including fluctuations in foreign
exchange rates and interest rates.
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 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 that 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 September 30, 2001, the fair value of our short-term investment portfolio
would not be significantly impacted by a shift in the yield curve of plus or
minus 50, 100 or 150 basis points.
OTHER INVESTMENTS
Included in other assets are certain investments in public and private
companies. Our investment in a public company is considered available for sale
and is subject to considerable market price volatility and is additionally risky
due to resale restrictions. Consequently, the investment is recorded on the
balance sheet at fair value with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income. We may lose some
or all of our investment in those shares. Our investments in privately held
companies are carried at cost. These investments are inherently risky, as they
typically are comprised of investments in companies that are still in start-up
or development stages. The market for their product or technologies that they
have under development is typically in the early stages, and may never
materialize. We could lose our entire investment in these companies or may incur
an impairment charge if we determine that the value of these assets has been
impaired.
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
19
foreign currency exposure at this time is to the Canadian dollar through our
operations in Canada. At this time, we do not believe our exposure to other
currencies is 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 has 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 recognized inearnings (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 September 30, 2001, we had no outstanding currency forward exchange
contracts, because forward contracts generally mature at the end of a quarterly
period. During the quarter ended September 30, 2001, we recorded a foreign
exchange loss of $263,000 compared to a foreign exchange gain of $68,000 for the
year ended June 30, 2001. We use sensitivity analysis to measure our foreign
exchange risk. As at September 30, 2001, a ten percent change in the exchange
rate would not have a material effect on our business, results of operations,
and financial condition.
20
PART II: OTHER INFORMATION
PART II - ITEM 1
LEGAL PROCEEDINGS
We have recently settled a matter that was in arbitration with one of our
business partners related to a breach of contract claim. The matter was settled
with no material adverse effect on our business, financial condition, results of
operations or cash flows.
As of the date hereof, there is no material litigation pending against us. From
time to time, we are a party to litigation and claims incident to the ordinary
course of business. While the results of litigation and claims cannot be
predicted with certainty, we believe that the final outcome of such matters will
not have a material adverse effect on our business, financial condition, results
of operations and cash flows.
PART II - ITEM 2
CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
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
Norm Francis resigned his position as Chief Executive Officer on August 28, 2001
but remains as Chairman of our Board of Directors. Vince Mifsud resigned his
position as our Chief Operating Officer, Chief Financial Officer and Executive
Vice President on September 30, 2001. On August 28, 2001 we appointed Bo Manning
as our new Chief Executive Officer and on October 1 ,2001, we appointed Divesh
Sisodraker as our new Chief Financial Officer.
PART II - ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
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
21
EXHIBIT NO. DESCRIPTION
----------- -----------
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)
4.5 Specimen of common share certificate as of August 17, 2000
10.1(4) Employee Share Purchase Plan
10.2(4) Lease dated as of July 18, 1997 between Sodican (B.C.) Inc.
and Pivotal for premises located in North Vancouver, B.C.
10.3(4) Lease dated as of May 26, 1998 between Novo Esplanade Ltd.
and Pivotal for premises located in North Vancouver, B.C.
10.4(4) Lease(1) dated as of December 14, 1998 between B.C. Rail
Ltd. and Pivotal for premises located in North Vancouver,
B.C.
10.5(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.
10.6(4) Lease dated as of December 11, 1998 between The Plaza at
Yarrow Bay Inc. (previously Yarrow Bay Office III Limited
Partnership) and Pivotal with respect to premises located in
Kirkland, Washington
#10.7(4) Letter agreement dated November 21, 1997 between Pivotal and
Robert A. Runge granting an option to purchase 250,000
common shares
10.8(4) Canadian Imperial Bank of Commerce Cdn$2,000,000 Committed
Installment Loan dated March 18, 1998
22
EXHIBIT NO. DESCRIPTION
----------- -----------
10.9(4) Canadian Imperial Bank of Commerce Cdn$3,000,000 Operating
Line of Credit dated March 18, 1998
10.10(4) Security Agreement with Canadian Imperial Bank of Commerce
dated for reference April 15, 1998
10.11(4) Contract Relative to Special Security under the Bank Act
between Canadian Imperial Bank of Commerce and Pivotal dated
April 30, 1998
10.12(4) Canadian Imperial Bank of Commerce Schedule - Standard
Credit Terms dated March 18, 1998
10.13(4) Canadian Imperial Bank of Commerce Schedule - Standard
Credit Terms dated March 18, 1998
10.14(4) Form of Indemnity Agreement between Pivotal and directors
and officers of Pivotal
10.15(4) Investors' Rights Agreement dated January 15, 1999
10.16(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
10.17(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
10.19(6) Exactium Ltd. 1999 Stock Option Plan
10.20(7) Simba Technologies Incentive Stock Option Plan, as amended
10.21(8) Amended and Restated Incentive Stock Option Plan
10.22(8) Restated Offer to Lease dated July 28, 2000 between CB
Richard Ellis Limited and Pivotal with respect to premises
located in Vancouver, B.C.
10.23(8) First Amendment to Restated Offer to Lease dated October 16,
2000 between PCI Properties Corp. and Pivotal with respect
to premises located in Vancouver, B.C.
10.24(8) Second Amendment to Restated Offer to Lease dated May 18,
2001 between PCI Properties Corp. and Pivotal with respect
to premises located in Vancouver, B.C.
10.25(8) Lease dated June 3, 1996 between Yonge Wellington Property
Limited and Simba Technologies Incorporated with respect to
premises located in Vancouver, B.C.
23
EXHIBIT NO. DESCRIPTION
----------- -----------
10.26(8) Sublease dated January 1, 1999 between Brewster Transport
Company Limited and Simba Technologies Incorporated with
respect to premises located in Vancouver, B.C.
10.27(8) Lease dated September 1, 2000 between Landgem Office I, Ltd.
(previously Dallas Office Portfolio L.P.) and Software
Spectrum CRM, Inc. for premises located in Dallas, Texas
10.28(8) Lease dated December 19, 2000 between 485 Properties, LLC
and Pivotal for premises located in Atlanta, Georgia
10.29 (8) Lease dated as of November 24, 2000 between Scholl Consumer
Products Limited and Pivotal for premises located in Luton,
England
#10.30(8) Employment Agreement between Kirk Herrington and Pivotal
dated June 7, 2000
#10.31(8) Employment Agreement between Kent Roger (Bo) Manning and
Pivotal dated August 22, 2001
10.32(8) Amendment No.1 dated June 19, 2001 to the Canadian Imperial
Bank of Commerce Cdn$3,000,000 Operating Line of Credit
dated March 18, 1998
10.33(8) Amendment No.2 dated July 3, 2001 to the Canadian Imperial
Bank of Commerce Cdn$3,000,000 Operating Line of Credit
dated March 18, 1998
21.1(8) Subsidiaries of Pivotal
99.1(8) Notice of Meeting and Management Information and Proxy
Circular for the Annual General Meeting to be held on
Thursday, November 15, 2001
99.2 Risk Factors
------------------
# 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) Incorporated 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).
(8) Incorporated by reference to Pivotal's Annual Report on form 10-K for the
year ended June 30,2001
(b) Reports on Form 8-K
Not applicable
24
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: November 14, 2001
PIVOTAL CORPORATION
/s/ Divesh Sisodraker
---------------------------------------
Divesh Sisodraker
Chief Financial Officer
25
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
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)
4.5 Specimen of common share certificate as of August 17, 2000
10.1(4) Employee Share Purchase Plan
10.2(4) Lease dated as of July 18, 1997 between Sodican (B.C.) Inc.
and Pivotal for premises located in North Vancouver, B.C.
10.3(4) Lease dated as of May 26, 1998 between Novo Esplanade Ltd.
and Pivotal for premises located in North Vancouver, B.C.
10.4(4) Lease(1) dated as of December 14, 1998 between B.C. Rail
Ltd. and Pivotal for premises located in North Vancouver,
B.C.
10.5(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.
10.6(4) Lease dated as of December 11, 1998 between The Plaza at
Yarrow Bay Inc. (previously Yarrow Bay Office III Limited
Partnership) and Pivotal with respect to premises located in
Kirkland, Washington
#10.7(4) Letter agreement dated November 21, 1997 between Pivotal and
Robert A. Runge granting an option to purchase 250,000
common shares
10.8(4) Canadian Imperial Bank of Commerce Cdn$2,000,000 Committed
Installment Loan dated March 18, 1998
10.9(4) Canadian Imperial Bank of Commerce Cdn$3,000,000 Operating
Line of Credit dated March 18, 1998
10.10(4) Security Agreement with Canadian Imperial Bank of Commerce
dated for reference April 15, 1998
10.11(4) Contract Relative to Special Security under the Bank Act
between Canadian Imperial Bank of Commerce and Pivotal dated
April 30, 1998
10.12(4) Canadian Imperial Bank of Commerce Schedule - Standard
Credit Terms dated March 18, 1998
EXHIBIT NO. DESCRIPTION
----------- -----------
10.13(4) Canadian Imperial Bank of Commerce Schedule - Standard
Credit Terms dated March 18, 1998
10.14(4) Form of Indemnity Agreement between Pivotal and directors
and officers of Pivotal
10.15(4) Investors' Rights Agreement dated January 15, 1999
10.16(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
10.17(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
10.19(6) Exactium Ltd. 1999 Stock Option Plan
10.20(7) Simba Technologies Incentive Stock Option Plan, as amended
10.21(8) Amended and Restated Incentive Stock Option Plan
10.22(8) Restated Offer to Lease dated July 28, 2000 between CB
Richard Ellis Limited and Pivotal with respect to premises
located in Vancouver, B.C.
10.23(8) First Amendment to Restated Offer to Lease dated October 16,
2000 between PCI Properties Corp. and Pivotal with respect
to premises located in Vancouver, B.C.
10.24(8) Second Amendment to Restated Offer to Lease dated May 18,
2001 between PCI Properties Corp. and Pivotal with respect
to premises located in Vancouver, B.C.
10.25(8) Lease dated June 3, 1996 between Yonge Wellington Property
Limited and Simba Technologies Incorporated with respect to
premises located in Vancouver, B.C.
10.26(8) Sublease dated January 1, 1999 between Brewster Transport
Company Limited and Simba Technologies Incorporated with
respect to premises located in Vancouver, B.C.
10.27(8) Lease dated September 1, 2000 between Landgem Office I, Ltd.
(previously Dallas Office Portfolio L.P.) and Software
Spectrum CRM, Inc. for premises located in Dallas, Texas
10.28(8) Lease dated December 19, 2000 between 485 Properties, LLC
and Pivotal for premises located in Atlanta, Georgia
10.29 (8) Lease dated as of November 24, 2000 between Scholl Consumer
Products Limited and Pivotal for premises located in Luton,
England
#10.30(8) Employment Agreement between Kirk Herrington and Pivotal
dated June 7, 2000
#10.31(8) Employment Agreement between Kent Roger (Bo) Manning and
Pivotal dated August 22, 2001
10.32(8) Amendment No.1 dated June 19, 2001 to the Canadian Imperial
Bank of Commerce Cdn$3,000,000 Operating Line of Credit
dated March 18, 1998
10.33(8) Amendment No.2 dated July 3, 2001 to the Canadian Imperial
Bank of Commerce Cdn$3,000,000 Operating Line of Credit
dated March 18, 1998
21.1(8) Subsidiaries of Pivotal
99.1(8) Notice of Meeting and Management Information and Proxy
Circular for the Annual General Meeting to be held on
Thursday, November 15, 2001
99.2 Risk Factors
------------------
# 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) Incorporated 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).
(8) Incorporated by reference to Pivotal's Annual Report on form 10-K for the
year ended June 30,2001