UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ____ to ____
Commission File Number 000-26867
PIVOTAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
British Columbia, Canada 98-0366456
(State or other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
300-224 West Esplanade
North Vancouver, British Columbia
Canada
V7M 3M6
(Address of Principal Executive Offices, Including Zip Code)
(604) 988-9982
(Registrant's Telephone Number,
Including Area Code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Shares
--------------------------------------------------------------------------------
(Title of Class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS); AND (2) HAS BEEN SUBJECT TO THE
FILING REQUIREMENTS FOR THE PAST 90 DAYS: Yes [X] No [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K: [X]
The aggregate market value of the voting shares held by non-affiliates of the
Registrant, based on the closing sale price of the common shares on August 1,
2002 as reported on the Nasdaq National Market was approximately
U.S.$48,040,474. Common shares held by each current executive officer and
director and by each person who is known by the Registrant to own 5% or more of
the outstanding common shares have been excluded from this computation in that
such persons may be deemed to be affiliates of the Registrant. This
determination of affiliate status is not a conclusive determination for other
purposes.
As of August 1, 2002, 24,164,209 common shares of the Registrant were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Not Applicable.
TABLE OF CONTENTS
PART I 1
ITEM 1. BUSINESS..........................................................1
ITEM 2. PROPERTIES........................................................29
ITEM 3. LEGAL PROCEEDINGS.................................................30
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.................30
PART II 30
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...............................................30
ITEM 6. SELECTED FINANCIAL DATA...........................................33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION..........................................35
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..........................................82
PART III 82
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT..........................82
ITEM 11. EXECUTIVE COMPENSATION............................................85
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....88
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................89
PART IV 90
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...90
i
FORWARD-LOOKING STATEMENTS
Statements in this filing about our future results, levels of activity,
performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in our forward-looking statements.
These factors include, among others, those described in connection with the
forward-looking statements, and the factors described under the heading
"Important factors that may affect our business, our results of operations and
our share price" in Item 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.
PART I
ITEM 1. BUSINESS
OVERVIEW
Pivotal Corporation offers Customer Relationship Management (CRM) software that
enables mid-sized enterprises worldwide to acquire, serve and manage their
customers. Pivotal's target customers are companies and business units in the
revenue range of $100 million to $3 billion. Customer Relationship Management
products and services automate and manage marketing, selling and servicing
processes. We refer to our software as the Pivotal CRM Suite. The Pivotal CRM
Suite is designed to complement and integrate with a business' supply chain,
therefore enabling businesses to improve efficiency and increase revenue.
Our products are used in 44 countries and are available in English, French,
German, Spanish, Portuguese, Japanese, Chinese and Hebrew. More than 1,500
companies around the world use Pivotal, including: CIBC, Centex Homes,
HarperCollins Publishers, Hitachi Telecom Inc., Premera Blue Cross, Royal Bank
of Canada, Southern Company and Vivendi. We market and sell our products through
a direct sales force as well as through third-party solution providers.
Our common shares are listed on the Nasdaq National Market 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 then 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 the State of Washington; 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 the State of Delaware; Pivotal Technologies Corporation Limited,
incorporated in the Republic of Ireland; Pivotal Corporation (N.I.) Limited,
incorporated in Northern Ireland; Pivotal GmbH, incorporated in Germany; Pivotal
Corporation Australia Pty. Ltd., incorporated in Australia; Project One Business
Technologies Inc., amalgamated in British Columbia, Canada; Nihon Pivotal K.K.,
incorporated in Japan; and 1254590 Ontario Limited (formerly Inform, Inc.),
incorporated in Ontario, Canada.
Pivotal CRM Suite, Pivotal Sales, Pivotal Sales - Miller Heiman Edition, Pivotal
Wireless for Sales, Pivotal Sales Analytics, Pivotal Marketing, Pivotal
eMarketing, Pivotal Marketing Analytics, Pivotal Service, Pivotal Contact
Center, Pivotal eService, Pivotal Wireless for Service, Pivotal Service
Analytics, Pivotal eSales, Pivotal Configurator, Pivotal Advisor, Pivotal
Quoter, Pivotal Catalog, Pivotal ePartner, Pivotal Partner Management, Pivotal
Partner Analytics, Pivotal Integration Engine, Pivotal Lifecycle Engine, Pivotal
Syncstream, Pivotal Intellisync, Pivotal Interactive Selling Engine, Pivotal
Analytics Engine, Pivotal Intelligent Internet Architecture
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and Pivotal Wireless 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.
On January 24, 2002, we announced the availability of our advanced integration
product - Pivotal Integration Engine, a technology that will be embedded in our
products and has been designed to cost-effectively integrate and synchronize our
Customer Relationship Management software with back-office and legacy systems.
INDUSTRY BACKGROUND
In the mid-1980's, businesses began to implement contact management software to
track prospects, customers and customer data. Since then, departmental software
products have been developed to track data related to servicing customers on the
demand side of the business. Some examples of departmental software products
include: sales force automation software, which provides prospect and customer
data to sales staff; customer service software which provides customer service
request and history to customer service representatives; and marketing
automation software to provide campaign, prospect and customer data to marketing
staff to generate more demand for products and services. In the 1990s,
cross-departmental Customer Relationship Management systems began to emerge that
brought departmental data assets together into centralized customer and prospect
data repositories while allowing these demand side departments to input their
own specific information, providing the company with a unified view of the
customer and prospect. Today, Customer Relationship Management has become a
business strategy that seeks to optimize profitability, revenue and customer
satisfaction by organizing around customer segments, fostering customer
satisfying behaviors and implementing customer-centric processes.
With the appearance of the Internet in the 1990s as a ubiquitous communication
network, companies began to provide support over the Internet for field and
remote staff who needed access to departmental data assets. As other
communication channels have continued to evolve, such as fax, email and wireless
communications, businesses have looked for Customer Relationship Management
systems that can provide an integrated "real-time" view of customer information
across all of these communication channels. In addition, businesses have
recognized that the Internet is more than simply a network for allowing their
own remote staff to access centralized data repositories, with the Internet
providing a backbone for businesses to change the way they interact with
business partners and customers.
We believe that the Internet and other communication technologies such as
wireless technologies have created a fundamental change in the way many
companies conduct business. Today, the Internet goes beyond simple
communication. It provides a means for prospects and customers to interact with
businesses, and businesses to interact with all their stakeholders, including
employees, customers, partners and suppliers in "real-time" across global and
corporate boundaries. As a result, there has been a demand for enterprise-wide
software products that support stakeholders' needs to communicate and
collaborate with businesses across departments and communication channels.
Today's demand-side and enterprise-wide eBusiness products support this business
need. These software products automate and manage the people and processes
related to customer management in order to increase revenues and decrease costs.
These enterprise-wide products tie into companies' supply chain management and
enterprise resource planning applications to increase productivity, decrease
costs, and increase revenues.
The Impact of Changing Technologies
Developments in technology have dramatically affected the marketplace for
Customer Relationship Management products. These developments include:
o The Internet. With the emergence of the Internet as a dominant
platform for global interactive communication, coordination and
commerce, businesses are seeking better ways to use the Internet as a
platform to conduct their business. As a result, businesses are
investing in technologies that support and exploit the capabilities of
the Internet. Emerging new technology standards based on eXtensible
Markup Language (XML) and Web services are being embraced by
enterprises seeking to integrate internal systems and provide
collaboration with partners and suppliers in a drive to reduce costs,
increase revenues, increase market intelligence and improve customer
satisfaction. Increasingly, these new technologies are also
supplanting non-Internet native architectures, such as client server
computing.
o Widespread Adoption of Microsoft Technologies. Microsoft Windows NT,
Microsoft Windows 2000 and Microsoft .NET platforms offer businesses
the opportunity to develop, deploy and maintain information technology
systems with
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increased flexibility on a cost-effective basis. These platforms are
also widely used and well understood by technical personnel. With the
recent addition of Microsoft Commerce Server 2000, Share Point Server
2001 and BizTalk Server, Microsoft is delivering a rich and
cost-effective application development platform to support the
requirement for integration, application customization and
flexibility, and document exchange.
o Growth of Wireless Computing. The proliferation of wireless computing
devices, such as hand-held computers, Internet-enabled cell phones and
improved remote computing has empowered the mobile professional. These
electronic products enable users to access information from almost any
location using their preferred wireless computing device.
o Availability of Intelligence Systems. Intelligence systems include
customer profiling technologies that enable software to respond to or
anticipate user needs with less input from the user through analysis
of profiles or actual website visitor behavior. These include guided
selling technologies to help users make purchases on the Internet,
even for very complex products and services. With these
customer-profiling technologies, the customer's buying experience is
personalized and targeted to fulfill its specific needs.
THE OPPORTUNITY
The customers we serve are typically mid-sized enterprises and divisions of
large businesses. Many of these businesses are responding to pressures to
implement cross-departmental or enterprise-wide business models that put the
customer at the center of their business in order to increase revenues, margins
and customer loyalty.
We believe that the mid-enterprise market is underserved, and represents a
significant opportunity for our enterprise-wide, customer relationship
management suite and professional services. We also believe that Pivotal is
strongly positioned to deliver meaningful results to mid-sized enterprises. We
believe our unique approach, product architecture and proven rapid business
implementation methods mean Pivotal products can be more easily customized, more
quickly integrated with current systems and business processes, and more rapidly
deployed to provide increases in revenues, margins and customer loyalty faster
and more cost-effectively than either shrink-wrap or large enterprise Customer
Relationship Management products.
We believe that our products are closely aligned with the needs of mid-sized
enterprises, offering a sensible set of commonly needed features that can be
rapidly customized to match changing business goals and processes. Built on an
Intelligent Internet Architecture, Pivotal CRM Suite incorporates many of the
technology components at the core of mid-sized enterprises today, including the
Internet, Oracle, Microsoft Windows NT, Microsoft Windows 2000, Microsoft
BackOffice, Microsoft .NET server platforms and Oracle databases.
Our services are designed to implement Customer Relationship Management in an
innovative and highly pragmatic manner that sets, tracks and delivers achievable
business results. Pivotal's proven services approach allows mid-sized
enterprises to implement and evolve their Customer Relationship Management
systems iteratively over time, ensuring each goal is met, and all customer,
partner and employee needs are addressed. We believe that our partners are best
suited to address the mid-enterprise market. While platform partners Intel and
Microsoft constitute the underlying architecture in most mid-sized enterprises,
our worldwide network of Customer Relationship Management strategists, product
experts and certified Pivotal partners understand the needs of the
mid-enterprise, and ensure achievable business results are delivered rapidly and
professionally.
We believe that our business style mirrors the way that the mid-enterprise
market wants to do business: straightforward, respectful and responsive. Our
marketing, selling and servicing initiatives are tailored to the pragmatic
business style of mid-sized enterprises, establishing a collaborative
relationship contracts. As a result, we believe that the cost of Pivotal's
products and services are more predictable than our competitors, addressing a
principal concern of mid-sized enterprises.
PIVOTAL PRODUCTS
Our suite includes applications for sales force automation, marketing
automation, service automation, contact center management, partner relationship
management and electronic commerce. These products enable companies to increase
revenues and decrease costs by increasing efficiency within the sales, marketing
and service activities that ultimately increase customer acquisition and
loyalty. To achieve this, our products connect employees, partners and customers
into one unified business network. Our products include award-winning,
Internet-based applications supported by an array of professional services and
our global Pivotal Partner Program network of third-party distributors. Our
products are designed and optimized for the Internet, Microsoft, Intel and
Oracle platforms.
We believe our products:
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o Enable Businesses to Increase Revenues, Margins and Customer Loyalty.
Our products unify sales, marketing and customer service employees and
partners around customer processes and interactions. By maintaining
all customer information in a shared database, our products make it
easy for different users to maximize their contribution to customer
relationship management by better capturing customer profiles and
building one-to-one customer relationships. We believe this
improvement in customer focus enables businesses to increase revenues
through improving customer loyalty, which increases both customer
retention and customer net value. Our customers also realize decreased
costs by streamlining processes and interactions between employees,
partners and customers, through more effective and more targeted
marketing, sales and service campaigns, the reduction of inefficient
communications, and the increased effectiveness of targeted
communications efforts.
o Improve the Collaboration and Interaction Between Businesses and Their
Customers. Using Pivotal products, businesses can transform their
static websites into collaborative tools used to increase their
customer bases, and to service and sell to existing customers.
Prospective customers can obtain information regarding businesses'
products and services over the Internet. Customers can place orders
and retrieve information on products and services over the Internet
and directly interact online with sales, marketing and customer
service departments. This direct interaction can result in improved
customer service and generation of leads, as well as lower customer
service costs.
o Improve the Collaboration and Interaction Between Businesses and Their
Partners. Pivotal products enable businesses to improve their
efficiency and selling processes by facilitating interaction and
collaboration with their partners over the Internet. Our application
maintains a shared database consisting of customers' information
related to products, services, customer contacts and sales
opportunities. By enabling their partners to access and update the
shared database, our products simplify the sharing of information
between businesses and their partners so they can jointly service
their customers' needs and concerns.
o Enable Rapid Implementation and Simple Customization. Businesses can
use our products without significant customization, thereby expediting
the implementation process. If they so desire, businesses can easily
customize our products to reflect their own internal processes using
the industry-standard, business programming language of Microsoft
Visual Basic. In addition, businesses can choose one of our products
for a particular industry vertical or micro-vertical - products
already optimized and configured for such industries as financial
services and healthcare, as well as specific segments within
industries, including Retail Banking, Investment Banking, Healthcare
Insurance and Real Estate/Construction. These industry-specific
products allow businesses to immediately gain business benefits as we
have already done the industry-specific customizations.
o Yield a Low Total Cost of Ownership. Our products can be
cost-effectively deployed and customized and thus require few
resources for ongoing support, system maintenance and end-user
training. Our products are also relatively easy for end-users to
learn, which results in lower ongoing training costs. In addition, our
software applications permit modifications and upgrades to be
transmitted to all users, including mobile users, thereby reducing the
cost of customization and administration.
o Scale With the Growing Needs of Pivotal's Customers. Many of our
customers require that our products support their growing number of
employees, online customers and partners. Our underlying architecture
enables our customers to expand our products as their businesses grow
by adding servers in a number of locations. This capability improves
performance and enables our products to support larger numbers of
concurrent users.
o Increase the Efficiency of Mobile Professionals. Mobile professionals
can access our products remotely across local-area networks, wide-area
networks or over the Internet by using a number of portable computing
devices including laptops, hand-held computers and Internet-enabled
cell phones. Mobile professionals also can work disconnected, logging
on to transmit and receive information that automatically updates
their own files and the shared corporate database. These capabilities
increase the efficiency of mobile professionals.
BUSINESS STRATEGY
Our goal is to continue our efforts to maintain and increase our position as a
leading global provider of Customer Relationship Management systems in the
mid-market. The key elements of our growth strategy are as follows:
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o Extend Application and Product Scope. We intend to continue the
development of our applications to add new functions, such as
additional contact center and web-enabled service functionality. We
also intend to continue to develop industry products for specific
industry segments ("micro-verticals") that will further simplify the
deployment and use of our applications. In addition, we plan to offer
new versions of our applications that support a wider variety of
international customers and their respective business practices and
languages.
o Deepen Collaboration and Interaction Between Pivotal and Our
Customers. We will continue to focus on providing customer products
that help our customers achieve business success. In particular, we
plan to maintain a customer-focused culture by inviting repeat
business from existing customers as we make new features available,
and to gain new customers as our existing customers become independent
references for our products. We believe that the benefits of our
products have helped us to develop a loyal base of customers.
o Continue Expansion of Our Worldwide Distribution Capacity. We
currently have a distribution strategy that includes direct sales
personnel and resellers which enables us to target a wide variety of
customers in different industries and geographical regions. Our
current plans call for continued investment in our worldwide
distribution capacity to increase market share and penetration. This
investment will include continuing to expand relationships with
existing and new resellers and entering into bundling arrangements
with technology providers to provide complementary niche products to
our customers.
o Deepen Collaboration and Interaction with Members of the Pivotal
Partner Program. We plan to continue strengthening our network of
strategic relationships, including our Pivotal Partner Program
network. The Pivotal Partner Program network includes independent
companies that distribute our products, install the software purchased
by our customers and provide other software or related services to
address specific customer needs. This network has allowed us to focus
on our core competencies while taking advantage of the strengths of
Pivotal Partner Program members who may have specific industry
expertise or better regional presence, which enables them to better
address the needs of our customers and provide them with a complete
electronic business product.
o Extend Relationships with Application Service Providers to Deliver Our
Products on a Usage Fee Basis. We will continue to expand our
relationships with application service providers to provide an
alternative licensing arrangement through these third-party
application service providers that enables customers to pay a usage
fee to access our software on servers operated by the application
service providers. This enables businesses to outsource their
electronic business products and related information technology
infrastructure through an alternative pricing model, such as a monthly
fee.
PRODUCTS AND PROFESSIONAL SERVICES
Pivotal CRM Suite consists of five product suites that help companies control
the sales, marketing, service and partner processes core to their businesses.
These suites are: Pivotal Sales, Pivotal Marketing, Pivotal Service, Pivotal
Interactive Selling and Pivotal Partner Management. In addition, we also market
industry vertical products.
These product suites are comprised of our core applications including Pivotal
Sales, Pivotal Sales - Miller Heiman Edition, Pivotal Wireless for Sales,
Pivotal Sales Analytics, Pivotal Marketing, Pivotal eMarketing, Pivotal
Marketing Analytics, Pivotal Service, Pivotal Contact Center, Pivotal eService,
Pivotal Wireless for Service, Pivotal Service Analytics, Pivotal eSales, Pivotal
Configurator, Pivotal Advisor, Pivotal Quoter, Pivotal Catalog, Pivotal
ePartner, Pivotal Partner Management, and Pivotal Partner Analytics. These core
applications and other leading technology options provide an integrated,
collaborative network that helps to manage information, transactions, and
interactions for every stakeholder in the customer lifecycle.
On January 24, 2002, Pivotal released its advanced integration product called
Integration Engine, which is designed to cost-effectively integrate and
synchronize Pivotal's software with back-office and legacy systems of our
customers.
PIVOTAL PRODUCT SUITES
Our five product suites are comprised of a variety of core applications.
The Pivotal Sales Suite
Pivotal Sales provides critical customer information, opportunity management
tools, and "best practices" sales methodologies for the enterprise sales force.
The core capabilities of the Pivotal Sales product suite include:
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o Quote and Proposal Management
o Consolidated Revenue Forecast
o Territory Management
o Opportunity Management
o Team-Selling Enablement
o Best Practices Enablement
o Multi-Channel Sales Integration
o Real-Time Product Configuration
o Expense Management
o Sales Efficiency Tools
o Campaign Management
o Web-based Collaborative Services
o Up/Cross-Selling Automation
o Competitive and Industry Intelligence
Core Applications of the Pivotal Sales Suite
Pivotal Sales enables global sales organizations to sell collaboratively across
multiple regions, currencies and channels. With Pivotal Sales, organizations can
share information across sales teams, accurately forecast their business, manage
pipelines, automatically generate quotes and proposals, and easily configure
products and services that meet specific customer needs.
Pivotal Sales -- Miller Heiman Edition is an option for the Pivotal Sales
application based on the three most popular disciplines -- Strategic Selling,
Conceptual Selling, and Large Account Management -- as taught by Miller Heiman,
a leader in sales methodologies.
Pivotal Wireless for Sales enables mobile employees real-time read and write
access to critical customer data. Using wireless, hand held devices such as
web-enabled cell phones, personal digital assistants (PDAs) and two-way pagers,
mobile employees can make informed, timely decisions that result in immediate
response to opportunities and increased sales while in the field.
Pivotal Sales Analytics is an analytics package that provides sales
professionals with a Web-based tool for data mining and forecast analysis. With
the ability to analyze sales history, order history, market trends, among other
things at their fingertips, sales managers can accurately forecast across all
channels, analyze sales performance by region, identify trends in sales cycle,
and extract the knowledge and insight to drive better business decisions.
The Pivotal Marketing Suite
Pivotal Marketing gives enterprises the information and processes they need to
analyze their customers' lifecycles, identify diverse opportunities, and
maximize the most profitable relationships. Core capabilities of the Pivotal
Marketing product suite include:
o Campaign Management
o Lead Capturing and Tracking
o Centralized Data Repository
o Forecasting: Campaign Impact, Market Shifts and Customer Perception
o Customer Profiling
o Event Management
o ROI Calculation and Analysis
o Best Practices
o Data Mining
o Customer Analysis
o Direct Mail Campaign Management
o Collaborative Action Plans
Core Applications of the Pivotal Marketing Suite
Pivotal Marketing delivers a closed-loop marketing product that includes
campaign design, collaborative marketing action plans, campaign execution and
lead tracking across multiple channels (phone, direct mail, Internet and email)
for direct and partner channels.
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With Pivotal Marketing, marketing professionals maximize profitability through
one-to-one marketing strategies that deliver optimal customer acquisition,
retention, cross-selling and up-selling results.
Pivotal eMarketing extends the power of our Pivotal Marketing product to the
Internet. Pivotal eMarketing allows companies to take advantage of the
cost-effectiveness of internet-based marketing through online marketing
research, lead capturing and tracking, collateral distribution and management,
and email campaign management. Seamless integration with Pivotal Marketing
ensures that organizations can provide a consistent and personalized marketing
experience.
Pivotal Marketing Analytics is an analytics package that provides marketing
professionals with a Web-based tool for data mining and data analysis. With the
ability to analyze such things as customer profiles, purchasing history, product
preferences and market trends at their fingertips, marketing managers can better
understand their customer buying preferences, product profitability, campaign
effectiveness and have the knowledge and insight to more effectively target
prospects and drive better business decisions.
The Pivotal Service Suite
Pivotal Service provides customer service professionals with a robust solution
to efficiently capture, track, manage, escalate, and resolve customer service or
support requests. Core capabilities of the Pivotal Service product suite
include:
o Integrated Communication Platform
o Multi-Channel Interactions
o End-to-End Reporting
o Service Request Management
o Online Request Tracking and Escalation
o Service-to-Order Integration
o Personalized, 24x7 Self-Service
o Online FAQ
o IVR Self-Service
o Knowledge Base Management
o Sales/Marketing Integration
o Market-Driven Product Enhancement
o Time and Activity Management
o Productivity and Performance Monitoring and Reporting
Core Application of the Pivotal Service Suite
Pivotal Service is an Internet-based customer service application for employees
that enables companies to build customer loyalty, increase revenues and optimize
call center performance. Pivotal Service automates the capture, management and
resolution of customer service and support requests across multiple channels. It
integrates with sales and marketing functions to provide service professionals
with the tools and information they need to deliver personalized service for
improved customer satisfaction.
Pivotal Contact Center transforms Pivotal's customer's call center into a next
generation contact center that supports multiple channels of customer
interactions, including voice, email, text chat, Internet collaboration, and
fax. By managing customer interactions across all channels, service
organizations have the tools and information they need to cost-effectively
deliver excellence in customer service.
Pivotal eService helps organizations to reduce the cost of service by extending
service request management to the Internet. Pivotal eService supports inbound
email management and provides a comprehensive, self-service Website for
customers to quickly resolve their own problems through an online knowledge base
and frequently-asked-questions section (FAQ), and the ability to create and
review incidents, escalate to service experts, or register products for future
service.
Pivotal Wireless for Service enables mobile employees real-time read and write
access to critical customer data using wireless, hand held devices such as
Web-enabled cell phones, personal digital assistants (PDAs) and two-way pagers.
Based on the Pivotal Intelligent Internet Architecture, Pivotal Wireless for
Service offers a highly flexible product easily tailored to Pivotal's customer's
service employee needs, to increase productivity, immediate response to
incidents, service level agreements, increased customer satisfaction and up-sell
opportunities anytime in the field.
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Pivotal Service Analytics provides service professionals with data analysis.
With the ability to analyze customer service request data over various channels,
service managers can better understand their customers' preferences, resource
utilization, service activity and performance and have the knowledge and insight
to more effectively ensure customer satisfaction.
The Pivotal Interactive Selling Suite
Pivotal Interactive Selling is a comprehensive product suite that enables
companies to deliver a personalized online buying or selling experience for
customers and sales professionals. Pivotal Interactive Selling simplifies the
buying and selling experience of sophisticated products and services with
interactive needs analysis and intelligent guided-selling services.
Through Pivotal Interactive Selling, organizations increase sales effectiveness
across all channels via comprehensive needs analysis, product cataloging, fixed
and dynamic pricing, and configuration capabilities. Pivotal Interactive Selling
has the following core features:
o Data Repository: Product, Pricing, Sales Data
o Dynamic Proposals, Quotes, Reports, Orders
o Browser-Based Authoring Environment
o Catalog Management
o Configuration Management
o Guided Product, Pricing, Service Configuration
o Web-Based Product and Configuration Management
o Site Management
o Multi-Currency, Language
o Single Source Shipping and Tracking
o Quote and Proposal Management
o Multi-Channel Sales Management
o Integration with Supply Chain Management and Enterprise Resource
Planning Systems
Core Applications of the Pivotal Interactive Selling Suite
Pivotal eSales enables organizations to leverage the Internet as a
cost-effective selling channel. With Pivotal eSales, organizations can leverage
interactive selling integration to offer a rich and personalized online buying
experience. Customers have access to detailed product catalogs and product
information and guided needs assessment support to help configure complex
orders.
Pivotal Configurator creates modeling of products, services, or processes using
data, rules, constraints, relationships, and options. Pivotal Configurator
provides a comprehensive product that ensures complex orders and quotes are
accurate, complete, and valid. It enforces business rules while delivering
context-based messages that facilitate up-selling and cross-selling, leading to
higher value orders. Used internally to improve sales productivity and order
accuracy, or externally via a company's Website to help guide buyers through
product selection and customization, Pivotal Configurator allows customers,
employees and partners to configure products to meet customer's needs.
Pivotal eAdvisor is designed to help customers select and purchase products and
services via multiple channels. Pivotal eAdvisor helps companies to explore and
understand the unique needs of each customer and advise on the specific
recommendations that will meet those needs.
Pivotal Quoter manages the ability to automatically generate quotations and
proposals.
Pivotal Catalog manages the database and publishing of product or product
offerings, their pricing and attributes, as well as the necessary sales
encyclopedia of applicable product information.
The Pivotal Partner Management Suite
Pivotal Partner Management empowers companies to more effectively manage their
partner relationships. Pivotal Partner Management helps Pivotal's customers'
partners to become collaborative members of that customer's extended business
team to generate sales, deliver customer value, and keep customers satisfied
while reducing the costs associated with managing those
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partners. Pivotal Partner Management creates a collaborative inter-company
framework to exchange knowledge, manage relationships, and synchronize
transactions over marketing, sales, service, and commerce processes.
The complete Pivotal Partner Management application suite consists of three
components Pivotal ePartner, Partner Management, and Pivotal Partner Analytics.
Core features include:
o Partner Lifecycle Management
o Recruitment Management
o Partner Profiling
o Closed-loop Lead Management
o Sales Tools and Literature Fulfillment
o 24x7 Order Entry and Tracking
o Best Practice Action Plans
o Opportunity Management and Forecasting
o Marketing Management
o Knowledge Base Access
o Alliance Management
o Partner Performance Reporting and Analytics
o Personalized, Role-based Security
Core Applications of the Pivotal Partner Management Suite
Pivotal ePartner is a browser-based product that extends marketing, sales,
service and ordering capabilities to Pivotal's customers' business partners,
enabling them to become effective members of the customers' extended enterprise
to generate sales and deliver customer value. In addition, the Pivotal ePartner
ensures that partners are kept up-to-date by providing easy access to product
information, training, sales tools, transaction data, and performance analysis
reports.
Pivotal Partner Management is a comprehensive internal tool used to help manage
and enable partner relationships and operations. Pivotal Partner Management
enables organizations to collaboratively sell, service and market to end
customers, and measure and reward the partner community.
Pivotal Partner Analytics is an analytics package that provides channel managers
with an Internet-based tool for data mining and data analysis. With detailed
information on the performance and profitability of the partner network by
individual partner or segment, or regions, channel managers have the knowledge
and insight they need to make better business decisions.
Pivotal Industry Specific Products We provide industry vertical products aimed
at the financial services, healthcare insurance and real estate/construction
markets.
o The Pivotal CRM Suite for Investment Banking provides a web-integrated
template that facilitates the creation of a collaborative framework to
manage clients, exchange research and close transactions. We believe
that by using this product, the corporate finance, trading and
research groups engaged in investment banking become a more effective,
collaborative team, better able to identify hot leads, deliver
targeted research and close the most profitable revenue opportunities.
The advantages may include faster return on investment, increased
revenues and increased customer satisfaction. Pivotal CRM Suite for
Investment Banking delivers commonly needed, investment
banking-specific features, providing investment banks with the ability
to quickly customize, integrate and deploy a product that matches
their individual business processes.
o The Pivotal CRM Suite for Healthcare Insurance is designed to link
health insurance company employees with independent agents, employer
groups and members in a collaborative sales, marketing and service
environment. With this offering, healthcare insurance companies can
bolster sales and marketing, agency relations, underwriting, and
operations, with cross-enterprise collaboration. Using the offering,
healthcare insurers and agents can quickly respond to business
requests and inquiries in real-time, reduce administrative costs, and
increase premium revenues.
o The Pivotal CRM Suite for Real Estate/Construction provides a
web-integrated template that facilitates the creation of a
collaborative framework to manage clients, exchange research and close
transactions. The sales agents, marketers and
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management teams that drive homebuilders become a more effective,
collaborative team, better able to track leads, manage the sales
process and involve customers in the pre- and post-sales cycle. The
advantages may include increased revenues, enhanced customer
satisfaction and decreased operating costs. Pivotal CRM Suite for Real
Estate/Construction delivers commonly needed, homebuilding-specific
features, allowing homebuilders to support their individual business
processes in a customized fashion.
PRODUCT PRICING
We typically license our products on a "per processor" or "named user" basis. We
license our applications on a "flat fee" basis. All our products may be licensed
on a monthly subscription basis or as a one-time fee for perpetual licenses.
PRODUCT AWARDS
The following table lists some of the awards our company and/or products have
won:
SPONSOR DATE AWARD
------- ---- -----
Profit 100 June 2002 Ranked #2 in Profit 100 Canada's Fastest Growing Companies
Microsoft June 2002 Microsoft .Net Server Innovation Award
- Most Innovative CRM-integrated Contact Center
Implementation
Information Systems Marketing February 2002 Top 15 CRM Software Award
Deloitte & Touche November 2001 Canadian Technology Fast 50
Deloitte & Touche November 2001 Technology Fast 500
Profit 100 June 2001 Ranked #2 in Profit 100 Canada's Fastest Growing Companies
Aberdeen Group April 2001 Aberdeen List of Top Ten Significant CRM Applications for
2000
Information Systems Marketing February 2001 Top 15 CRM Software Award
Microsoft December 2000 Industry Solution Awards for 2000
- Best Integrated Customer Relationship Management/eBusiness
Solution
Deloitte & Touche November 2000 Technology Fast 500
Deloitte & Touche September 2000 Fastest Growing Canadian Technology Company
start Magazine July 2000 Hottest Companies of 2000
Microsoft July 2000 North American Packaged Application Partner of the Year
British Columbia Technology Industry June 2000 Company of the Year
Association
Information Systems Marketing February 2000 Top 15 CRM Software Award
Upside Magazine February 2000 eBusiness Winner
Microsoft February 2000 World Record for Scalability and Performance
Microsoft December 1999 Industry Solution Awards for 1999
- Best Internet Solution for Customer Service
- Best Integrated Customer Relationship Management
Information Week Magazine February 1999 IT Innovators for 1999
Information Systems Marketing February 1999 Top 15 CRM Software Award
Open Systems Advisors January 1999 Crossroads 99 A-List Award
Microsoft December 1998 Industry Solution Awards for 1998 - Best Overall Customer
Relationship Management Solution
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Information Systems Marketing December 1997 Top 15 CRM Software Award
Microsoft December 1997 Industry Solution Awards -- Best Mobile Sales Solution
Microsoft May 1997 Solutions Provider Awards -- Best Solution by a Solution
Developer
Information Systems Marketing December 1996 Top 15 CRM Software Award
PROFESSIONAL SERVICES
We provide customers with access to a combination of services to successfully
implement and effectively maintain a Customer Relationship Management and
electronic business product.
These services include:
- Business Consulting. The Pivotal Rapid Business Impact Group ensures
that our clients are positioned properly to identify, measure and
achieve business results from their Customer Relationship Management
initiative by delivering on the Pivotal Results Program. According to
analysts, more than half of Customer Relationship Management
initiatives will fail to meet measurable benefit objectives or
positively affect return on investment due to a lack of business
processes for conducting ongoing measurements. Pivotal Rapid Business
Impact Group increases the chances of Customer Relationship Management
success by working with companies to identify measurable business
objectives and provide a sensible path to reach them.
- Technical Consulting. Pivotal Technical Consulting Services Group is
dedicated to successful implementation. By working closely with client
companies to understand their business needs, this team helps to
design and deploy Customer Relationship Management systems that fits
their business objectives. The Technical Consulting Group delivers
practical expertise in project management, business analysis and
technology. This team helps companies to become self-sufficient,
sharing knowledge and transferring skills that become valuable
internal assets in the long term. Furthermore, it directly leverages
the resources of Pivotal Research and Development and Global Support
Services to increase customer satisfaction.
- Integration Services. Pivotal Integration Services Group specializes
in the smooth, efficient and cost-effective integration of Customer
Relationship Management across multiple existing systems. In recent
years, many businesses have deployed disparate systems to support
their sales, marketing and service processes of the front office, and
the accounting, manufacturing, human resources, and order processing
functions of the back office. This creates a silo effect where
valuable information is locked in separate databases and available
only in separate document formats, which use different business
processes, workflows, and communication protocols. The Pivotal
Integration Services Group provides the technology expertise necessary
to remove these silos and unify multiple systems.
- Education. Pivotal Education Services Group ensures that client
companies effectively adopt and use their Customer Relationship
Management system, delivering customized training that fits to
business needs. The result is twofold: everyday users that are
confident and knowledgeable, plus trained in-house "Customer
Relationship Management champions" that lead each company to fully
adopt, develop, administer and use the system effectively. Pivotal
Education Services has the flexibility to meet unique training
requirements, and the bandwidth to rapidly and conveniently train
large numbers of employees. Furthermore, companies choose the
education format that they feel works best for their business.
- Global Support. Pivotal Global Support Services Group protects client
companies against downtime by resolving technical issues. Companies
gain practical expertise via telephone, Web and email. In addition, a
self-serve knowledgebase points customers to the right problem
resolution. From incident management to complete documentation,
Pivotal Global Support delivers insight and practical expertise. This
team delivers cost-effective, prompt and convenient guidance for each
client company.
- Technical Account Managers. Pivotal Technical Account Managers are
tasked with: ensuring the technical success of Pivotal deployments.
They are technology advisors, working with companies to ensure
business fit over the long-term. With a comprehensive knowledge of
current and future Pivotal technologies, Technical Account Managers
help companies to efficiently invest in Customer Relationship
Management.
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Substantially all of our business consulting services and integration services
are priced on a time and materials basis and occasionally we enter into fixed
contract arrangements for implementations. Our education fees are standardized
on a per day rate. Our global support and maintenance services are sold on a per
license basis and renewed annually.
CUSTOMERS AND MARKETS
We have licensed our applications on a worldwide basis to more than 1,500
customers across a wide range of industries. Customers in North America
accounted for 53%, 67%, and 72% of our total revenues in the years ended June
30, 2002, 2001, and 2000, respectively. Customers in Canada accounted for 4%,
12%, and 11% of our total revenues in the years ended June 30, 2002, 2001 and
2000, respectively. Customers in the U.S. accounted for 49%, 55%, and 61% of
total revenues in these years. Customers in Europe, Middle East and Africa
accounted for 37%, 25% and 21% of our total revenues in the years ended June 30,
2002, 2001 and 2000, respectively. Customers in Asia Pacific and Latin America
accounted for 10%, 8% and 7% of total revenues in the years ended June 30, 2002,
2001 and 2000, respectively.
We have property and equipment in various geographic regions. Property and
equipment in the United States accounted for 23%, 16% and 22% of total property
and equipment at June 30, 2002, 2001 and 2000, respectively. Property and
equipment in Canada accounted for 46%, 65% and 64% of total property and
equipment at June 30, 2002, 2001 and 2000, respectively. Property and equipment
held outside the U.S. and Canada accounted for 31%, 19% and 14% of total
property and equipment at June 30, 2002, 2001 and 2000, respectively.
No single customer accounted for 10% or more of our consolidated revenues during
the years ended June 30, 2002, June 30, 2001 or June 30, 2000. Some of our
customers that purchased a minimum of US$100,000 of software licenses from us
prior to June 30, 2002, are set forth in the table below:
CONSULTING MANUFACTURING TECHNOLOGY
---------- ------------- ----------
Burntsand Inc. Foss Electric A/S Captivate Network, Inc.
KPMG SA IMI Norgren Limited Compaq Computer Corporation
KPMG Consulting AG James Hardie Industries Limited ProClarity Corporation
KPMG Peat Marwick LLP Newport Corporation Allen Systems Group, Inc.
Net-Commerce Siemens SAS Crystal Decisions Corporation
The Wynford Group Teknion Corporation Software Spectrum Inc.
Sapient Corporation Toshiba Corporation VERITAS Software Corporation
Wilo GmbH Somera Communications
FINANCIAL SERVICES Atlas Copco
------------------ Simkar Corporation
BoE Bank Limited Centex Homes RETAIL
CIBC World Markets ------
The Common Fund for Nonprofit TELECOMMUNICATIONS
Organizations ------------------ Wickes Building Supply Supplies Limited
Dresdner RCM Global Investors (UK) Ltd Warehouse Stationery
Farm Credit Services Alcatel e-Business Distribution GmbH
Grantham, Mayo, Van Otterloo & Co. LLC Belgacom France
The Principal Financial Group FLAG Telecom Ltd.
Raymond James Ltd Hitachi Telecom (USA), Inc.
The Bankers Bank
Bank Enteniel
OTHER SERVICES
--------------
HEALTH CARE Miller Heiman, Inc.
----------- Metropolitan Nashville Government and
Marriott International (Senior Living Intrawest Corporation
Services) Televerde
McKesson Corporation Total Information Systems (DAC Services)
NDC Health Information Services Metropolitan Nashville Government and
Mental Health Cooperative Inc. Davidson County
Kronos
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SALES AND MARKETING
We sell our products through a direct sales force and over 50 independent
members of the Pivotal Partner Program that resell our products. Our direct
sales force is located in the United States, Canada, the United Kingdom, France,
Germany, Australia, New Zealand, and Japan. Members of the Pivotal Partner
Program are located worldwide in North and South America, Europe, the Middle
East and Asia. The Pivotal Partner Program is comprised of consulting and
technology companies, progressive product development organizations, market
leaders, and regional consulting and sales firms that meet our criteria for
inclusion.
Our marketing efforts are directed at promoting our products and services,
creating market awareness and generating leads. Our marketing activities include
Internet business seminars, print and Internet advertising campaigns and
attendance at industry trade show events and trade conferences. We use the
Internet extensively to communicate with potential customers, existing
customers, partners and others. We also conduct comprehensive public relations
programs that establish and maintain relationships with key trade press,
business press and industry analysts. We have a customer communications team
targeted at working directly with our customers to obtain feedback and to track
ongoing customer success stories. This team also performs a series of surveys on
each customer to assess the customer's satisfaction with our products and to
anticipate any further needs of the customer.
STRATEGIC RELATIONSHIPS
Our partner strategy within Pivotal is focused on driving revenue from our
relationships - both for Pivotal and the partner organizations that are our
valued partners. Our partner strategy includes the deployment of a partner
program designed to:
(a) better serve our customers;
(b) broaden our product offering; and
(c) extend our market reach.
Pivotal's Partner Program is a comprehensive program to promote and retain
professional experts in all facets of the Customer Relationship Management
market. The Pivotal Partner Program is designed to meet the above objectives
through three separate programs focused on Consulting Alliances, Solutions
Alliances, and Market Alliances. As a result, we are able to provide companies
around the world with a comprehensive set of advanced technologies and services
for leveraging leading edge technology and best practices in their related
fields. During 2002, we launched these new programs and in the process clarified
our overall partner strategy. To that end, we also reduced the number of
partners in the Pivotal Partner Program by 50% to ensure that the relationships
are profitable and successful for both parties. We now believe we have the right
partners for our corporate strategy.
Partner Programs
Our Partner Program comprises the following three categories: Consulting
Alliances, Solution Alliances, and Market Alliances.
Consulting Alliances. Our Consulting Alliances are highly skilled services-based
organizations that implement enterprise level Pivotal products. These system
integrators typically operate in multiple geographic locations, and have
experience in working with Global 2000 companies. Consulting Alliances provide
their expertise to our customers including overall strategy, business process
design and analysis, application integration and training, return on investment
analysis and vertical market expertise. There are three levels of partners in
the Consulting Alliance Partner community: Peak; Premier; and Regional.
Solution Alliances. To further extend Pivotal's breadth of product and
technology offerings, Pivotal has developed the Solutions Alliance Partner
Program. Pivotal has established relationships with industry leaders in
technology, intelligence, applications and business services. Pivotal and these
partners develop, market, sell and deliver comprehensive Customer Relationship
Management solutions. There are three types of partner within the Solution
Alliance Partner community: Platform, Product, and PivotalHost. The Product
alliance partner community is further broken down into three categories of
partners: Original Equipment Manufacturer, Peak and Base. We also offer an
Application Service Provider solution specific to the Pivotal products provided
as a component of the PivotalHost partnership.
Market Alliances. Market Alliances provide additional market presence for both
the partner and Pivotal. This program is diverse in nature and allows numerous
types of companies to join forces with Pivotal to gain market share. Our Market
Alliance partnerships are focused on ways to increase brand awareness and drive
Pivotal products into new and existing customers through higher visibility in
the market. There are two levels of Market Alliance Partners: Peak and Base,
which each have varying responsibilities and commitments.
-13-
KEY RELATIONSHIPS
MICROSOFT
Pivotal maintains a strong product development and business partnership with
Microsoft as measured by Pivotal's business growth on the Microsoft platform.
Pivotal has been recognized by Microsoft in the past, winning four Microsoft
Industry Solution awards, and today remains one of Microsoft's top three SQL
license revenue generators, as well as a major reseller of .Net servers. Our
relationship spans sales, marketing and customer support, and includes:
- Technology Sharing - Pivotal is a recognized leader in exploiting and
adopting Microsoft's .Net initiative, and is highly involved in .Net
advanced product development. In return, Pivotal helps drive the
adoption of advanced Microsoft technologies in the marketplace,
providing credible, real-world deployments that Microsoft can leverage
to support their marketing campaigns.
- Competitive Selling - Pivotal leverages support from Microsoft's
specialized competitive sales teams and consulting services to help
win deals in the marketplace. In return, Pivotal helps Microsoft
realize its goals by selling into companies that traditionally support
IBM, Sun or Oracle products and services.
- Premier Support for Developers - In August 1997, Pivotal joined the
Premier Support for Developers pilot program and has played a key role
in helping to evolve it. Pivotal holds a two-year board position on
Premier Support's exclusive Customer Council to make recommendations
on enhancing and improving Microsoft Premier Support.
- International Partnership - Pivotal has a worldwide alliance with
Microsoft, including Microsoft's offices in Japan, Malaysia,
Singapore, Australia, Taiwan, Hong Kong, China, India, South America,
Germany, France and the UK.
While we believe that there will not be significant overlap with the present
market for our products, we may in future be faced with direct competition from
Microsoft, as it has announced its intention to launch a competing product in
the mid-market for Customer Relationship Management products. See "Risk
Factors."
INTEL
Pivotal and Intel have a global alliance that spans marketing, sales and
technology, and assists customers in overcoming information technology
challenges by delivering support, platform and communication expertise, in
addition to advanced technology access. Intel supports Pivotal's commitment to
delivering business results/impact from Customer Relationship Management, by
providing mid-sized enterprises with high-performance, fully optimized, rapidly
deployable Customer Relationship Management that offers exceptionally low total
cost of ownership.
- Advanced Technology - Intel extends Pivotal's products with access to
advanced technology, such as innovative telephony products for call
centers. In return, Pivotal increases Intel revenues through sales of
Intel server processors, computer telephony and by supporting Intel
architecture.
- Advanced Architecture - Intel validates Pivotal's technology
architecture and platform, primarily through testing and knowledge
transfer in the areas of extensibility, reliability, scalability and
availability. In return, Pivotal helps drive the adoption of advanced
Intel technologies in the marketplace. In fact, Pivotal is a major
Intel independent software vendor in the growing Customer Relationship
Management market, with the majority of Pivotal's over 1400 customers
running their business on Intel architecture.
- Broad Technology Reach - Customers benefit from the wider technology
expertise that Intel can bring in areas such as network
infrastructure. In return, Pivotal helps Intel realize their goals by
selling into companies that traditionally support Sun products and
services.
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CAP GEMINI ERNST & YOUNG
In May 2001, we signed a strategic alliance agreement with Cap Gemini Ernst &
Young, one of the largest management and information technology consulting firms
in the world. Cap Gemini Ernst &Young is a Pivotal worldwide partner that has
been recognized in the industry as both a Customer Relationship Management
thought leader and a leader in providing Customer Relationship Management
services. With a strong understanding of industry-specific best practices and
extensive breadth and depth of industry experience, Cap Gemini Ernst &Young is
Pivotal's global partner of choice.
While Pivotal leverages Cap Gemini Ernst &Young's global resource base and brand
recognition to extend our reach to a worldwide audience, Pivotal provides Cap
Gemini Ernst &Young with further access to the underserved and growing mid-size
enterprise market for Customer Relationship Management. Customers gain the
choice of engaging a reliable, experienced worldwide consultant that can
leverage Microsoft's Accelerated Development Centers to reduce delivery time and
integration risk.
As part of our strategic alliance agreement with Cap Gemini Ernst & Young, we
committed to utilize a minimum amount of Cap Gemini Ernst & Young services
during fiscal 2001 and 2002. Following our corporate restructuring, we
re-focused our business activities so that we are no longer utilizing the Cap
Gemini Ernst & Young services in the manner originally contemplated. As a
result, we incurred a restructuring charge on our fiscal 2002 financial
statements for the remaining contractual obligation.
TECHNOLOGY
Our software architecture provides a foundation for the development of new and
innovative products and allows our products to be easily adaptable, to operate
with other applications and to address the needs of users on multiple computing
devices. This software architecture also allows our products to be used over the
Internet. We have invested in the following technologies which serve as a basis
for our Customer Relationship Management products and services:
- Microsoft Technology. Our products are optimized for the Microsoft
Windows NT, Microsoft Windows 2000 and Microsoft BackOffice platforms.
Our focused development efforts have enabled us to create products
that exploit the capabilities of Microsoft's products, including SQL
Server, that are bundled and licensed with our products. We also
created a direct link between our products' databases and Microsoft
Outlook that allows our customers to use the familiar interface of
Microsoft Outlook to update their calendar, tasks and contact
information. In addition, our products use Microsoft Internet
technologies to publish information across the Internet.
- Intelligent Internet Architecture. Our products are based on such open
Internet standards such as eXtensible Markup Language (XML) and Simple
Object Access Protocol (SOAP), directly incorporating Internet
technologies within our platform architecture, and allowing our
customers to communicate securely using Internet protocols both within
and beyond the enterprise. Our products are also structured to support
multiple network environments and user access methods, such as
wireless devices and electronic mail. This allows our customers the
flexibility to implement a product for their specific environment in
an industry standard fashion, and facilitates integration with other
systems and technologies.
- Internet Commerce Platform. Pivotal Interactive Selling Suite, an
electronic sales channel for delivering a personalized, one-to-one
buying experience, implements an object-oriented database to store
complex product and selling relationships, with a scalable middle tier
supporting both declarative and procedural rule definition, rendered
via eXtensible Markup Language (XML) as a Web commerce application. We
believe that this is a powerful and cost-effective architecture and
data representation for selling complex products and managing the
rules associated with this process.
- Metadata Repository. Our software stores data in two separate
databases: the metadata database, (which contains data structure,
forms, lists, business rules and workflow), and the customer data
database. By separating the data from the metadata, the Pivotal
application can be rapidly and easily customized using graphical tools
- there is no need for source code modifications - to meet changing
organizational needs with no disruption to the rest of the system or
end users. In addition, a business can distribute custom application
changes throughout its organization in the normal data synchronization
process. We believe these benefits differentiate our product from
those of our competitors.
- Pivotal SyncStream. Our SyncStream technology captures any additions,
modifications or deletions to our application and the shared corporate
database and transmits only the net changes to the appropriate users.
This technology eases the deployment of new applications, minimizes
the connection costs associated with the synchronization of data,
transmits changes securely and enables mobile users to receive the
correct data when synchronizing.
-15-
- Distributed Database Design. Our technology is designed to support
various databases that reside on multiple servers, including both
Microsoft SQL Server and Oracle 8i. Due to our distributed database
design, data from the central database can be replicated to servers in
different locations and on various mobile remote databases (eg.
laptops), and can be updated by our SyncStream. This allows for
scalability and configuration flexibility as customers can upgrade
network hardware and software in a modular fashion with minimal loss
of performance and downtime.
- Pivotal Enterprise Manager. Our Enterprise Manager provides
centralized configuration management through a graphical user
interface. The Enterprise Manager enables system administrators to
audit and apply configuration changes to the application, manage and
test customization changes off-line and replicate custom data sets for
mobile users. From a single interface, customers can distribute an
updated system online across the entire enterprise without downtime
for users.
RESEARCH AND DEVELOPMENT
Our research and development department is divided into six functional areas:
Advanced Technology; Software Development; Documentation; Quality Assurance;
Program Management; and Product Management. As of June 30, 2002, there were 121
employees in our research and development department. Where appropriate, we
contract with third-party developers to expand the capacity of our research and
development department.
For the years ended June 30, 2002, 2001 and 2000, we spent approximately $17.0
million, $18.8 million and $8.9 million, respectively, on research and
development.
Our software development approach consists of a methodology that provides
guidelines for planning, controlling and implementing projects. Our advanced
technology team focuses on tracking and evaluating new technologies with a view
to incorporating the best technologies available into our products. Our product
management team gathers and documents market requirements and trends in a
requirements analysis. After the requirements analysis has been reviewed for
feasibility and the proposed project approved by management, a product team is
established to implement the project. Our program management team takes
responsibility for documenting a detailed product specification. The software
development team may build prototypes to assess the risks and business
requirements of a project and then concentrates on research and development
activities. Through the later stages of development we perform final testing and
quality assurance. Our program and product management teams are involved at all
stages of development so that market requirements continue to be addressed. The
program and product management teams also assist with the introduction of the
product by training our direct sales force and internal professional services
staff.
We place particular emphasis on quality assurance and testing throughout the
development process. We use version control software as well as standard test
tools, scripts and agents developed by us in order to automate our testing
processes and increase the quality of code we develop.
COMPETITION
The market for our software is intensely competitive and rapidly changing.
Competition for any given customer may involve competition as to price, features
and other factors specific to the needs of that customer. We face competition
from companies in the Customer Relationship Management software market and in
the overall enterprise business application market. Some competitors include
Siebel Systems Inc., Oracle Corporation, SAP AG, Onyx Corporation and
PeopleSoft, Inc.
Other competitors may enter the market by developing or acquiring new products
and applications.
Microsoft has entered the Customer Relationship Management market with their
Microsoft Customer Relationship Management product, which is designed for small
and mid-sized businesses. Microsoft has indicated that it will directly compete
in the Customer Relationship Management market for mid-sized enterprises. If
Microsoft becomes our competitor, it may harm or end our co-marketing and
co-selling initiatives with Microsoft. Such competition with Microsoft could
likely have a material adverse affect on our business, market share, financial
condition and results of operations.
In addition, as we develop new products, particularly applications focused on
electronic commerce or on specific industry segments, we may begin competing
with companies with whom we have not previously competed. It is also possible
that new competitors will enter the market or that our competitors will form
alliances that may enable them to rapidly increase their market share. Some of
our actual and potential competitors are larger, better established companies
that have greater technical, financial and marketing resources. Increased
competition may result in price reductions, lower gross margins or loss of our
market share, any of which could materially adversely affect our business,
financial condition and operating results.
-16-
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
We rely on a combination of copyright, trade secret and trademark laws,
confidentiality procedures, contractual provisions and other similar measures to
protect our proprietary information and technology. We do not currently hold any
patents nor do we have any patent applications pending. There can be no
assurance that any copyrights or trademarks held by us will not be challenged or
determined to be invalid.
As part of our confidentiality procedures, we have a policy of entering into
non-disclosure and confidentiality agreements with our employees, consultants,
corporate alliance members, customers and prospective customers. We also enter
into license agreements with respect to our technology, documentation and other
proprietary information. These licenses are perpetual and are generally
transferable subject to obtaining our prior consent. Despite the efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or
otherwise obtain the use of our products or technology that we consider
proprietary and third parties may attempt to develop similar technology
independently. We pursue registration and protection of our trademarks primarily
in the United States, although we do seek protection elsewhere in selected key
markets. Effective protection of intellectual property rights may be unavailable
or limited in some countries. The laws of some countries do not protect our
proprietary rights to the same extent as in the United States and Canada. There
can be no assurance that protection of our proprietary rights will be adequate
or that our competitors will not independently develop similar technology.
We anticipate that companies that develop software applications will be subject
to infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. As a result, we may become involved in these claims. Any of these
claims, with or without merit, could result in costly litigation, divert our
management's time, attention and resources, delay our product shipments or
require us to enter into royalty or license agreements. If a claim of product
infringement against us is successful, our business and operating results could
be seriously harmed.
EMPLOYEES
As of June 30, 2002 we had a total of 521 employees, excluding independent
contractors and temporary employees. Of this number, 121 people were engaged in
research and development, 165 people were engaged in sales and marketing, 149
people were engaged in professional services and 86 people were engaged in
general administration. No employees are known by us to be represented by a
collective bargaining agreement and we have never experienced a strike or work
stoppage. We consider our employee relations to be good. Our ability to achieve
our financial and operational objectives depends in large part upon our ability
to attract, retain and motivate highly qualified sales, technical and managerial
personnel. There can be no assurance that we will be able to attract and retain
such employees in the future.
IMPORTANT FACTORS THAT MAY AFFECT OUR BUSINESS, OUR RESULTS OF OPERATIONS AND
OUR SHARE PRICE.
Holders of our common shares are subject to the risks and uncertainties inherent
in our business. You should consider the following factors, as well as other
information set forth in this report, in connection with any investment in our
common shares. If any of the risks described below occurs, our business, results
of operations and financial condition could be adversely affected. In such
cases, the price of our common shares could decline, and you could lose all or
part of your investment.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. Moreover, neither
we nor anyone else assumes responsibility for the accuracy or completeness of
forward-looking statements. You should consider our forward-looking statements
in light of the following risk factors and other information in this report. If
any of the risks described below occurs, our business, results of operations and
financial condition could differ from those projected in our forward-looking
statements. We are under no duty to update any of our forward-looking statements
after the date of this report. You should not place undue reliance on
forward-looking statements.
FACTORS RELATING TO OUR BUSINESS AND THE MARKET FOR CUSTOMER RELATIONSHIP
MANAGEMENT AND ELECTRONIC BUSINESS PRODUCTS MAKE OUR TOTAL REVENUE AND FUTURE
OPERATING RESULTS UNCERTAIN AND MAY CAUSE THEM TO FLUCTUATE FROM PERIOD TO
PERIOD.
Our operating results have varied in the past, and we expect that they may
continue to fluctuate in the future. In addition, our operating results may not
follow any past trends. Some of the factors that could affect the amount and
timing of our revenues from software licenses and related expenses and cause our
operating results to fluctuate include:
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o general economic conditions, which may affect our customers' capital
investment levels in management information systems;
o changes in the economy and foreign currency exchange rates;
o market acceptance of our products;
o the length and variability of the sales cycle for our products, which
typically ranges between two and eight months from our initial contact
with a potential customer to the signing of a license agreement;
o the size and timing of customer orders, which can be affected by
customer order deferrals in anticipation of new product introductions,
product enhancements, and customer budgeting and purchasing cycles;
o our ability to successfully expand our sales force and marketing
programs;
o increases in the cost of software and professional services;
o our ability to successfully expand our international operations;
o the introduction or enhancement of our products or our competitors'
products;
o changes in our or our competitors' pricing policies;
o activities of and acquisitions by competitors;
o our ability to develop, introduce and market new products on a timely
basis and control our costs; and
o customer satisfaction and our reputation relating to our products and
services.
One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our net revenue and
operating results to fluctuate significantly. Based upon the preceding factors,
we may experience a shortfall in revenue or earnings or otherwise fail to meet
public market expectations, which could materially and adversely affect our
business, financial condition, results of operations and the market price of our
common shares.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE DUE TO SEASONAL TRENDS AND
VARIATIONS IN THE FISCAL OR QUARTERLY CYCLES OF OUR CUSTOMERS.
Our total revenue and operating results may vary significantly from quarter to
quarter. The main factors that may affect these fluctuations are: o seasonal
variations in operating results;
o variations in the fiscal or quarterly cycles of our customers;
o the discretionary nature of our customers' purchase and budget cycles;
o the size and complexity of our license transactions;
o the potential delays in recognizing revenue from license transactions;
and
o the timing of new product releases.
We have experienced, and expect to continue to experience, seasonality with
respect to product license revenues. Except for the year ended June 30, 2001, we
have historically recognized more license revenues in the fourth quarter of our
fiscal year and recognized less license revenues in the subsequent first
quarter. We believe that these fluctuations are caused in part by customer
buying patterns and the efforts of our direct sales force to meet or exceed
fiscal year-end quotas. In addition, our sales in Europe are generally lower
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during the summer months than during other periods. We expect that these
seasonal trends are likely to continue in the future. If revenues for one
quarter are lower than the revenues for the prior quarter, it may be hard to
determine whether the reason for the reduction in revenues involves seasonal
trends or other factors adversely affecting our business.
Our product revenues are not predictable with any significant degree of
certainty and future product revenues may differ from historical patterns. If
customers cancel or delay orders, it can have a material adverse impact on our
revenues and results of operations from quarter to quarter. Because our results
of operations may fluctuate from quarter to quarter, you should not assume that
you could predict results of operations in future periods based on results of
operations in past periods.
Even though our revenues are difficult to predict, we base our expense levels in
part on future revenue projections. Many of our expenses are fixed, and we
cannot quickly reduce spending if revenues are lower than expected. This could
result in significantly lower income or greater loss than we anticipate for any
given period. We will react accordingly to minimize any impact.
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO PREDICT HOW OUR BUSINESS
WILL DEVELOP AND FUTURE OPERATING RESULTS.
We commenced operations in January 1991. We initially focused on the development
of application software for pen computers. In September 1994, we changed our
focus to research and development of customer relationship management and
electronic business products.
We have a limited operating history and we face many of the risks and
uncertainties encountered by early-stage companies in rapidly evolving markets.
These risks and uncertainties include, but are not limited to:
o no history of profitable operations except for the quarters ended
March 30, 1998 and June 30, 1998;
o uncertain market acceptance of our products;
o our reliance on a limited number of products;
o the risks that competition, technological change or evolving customer
preferences could adversely affect sales of our products;
o our reliance on third parties to market, install, and support our
products;
o our dependence on a limited number of key personnel;
o our dependence on the adoption and success of the Microsoft .NET
platform;
o the risk that our management will not be able to effectively react to
and manage the changes to Pivotal resulting from the rapidly evolving
market;
o the risk that our management will not be able to identify or
effectively manage acquisitions we have undertaken or may undertake in
the future; and
o a general economic downturn and stock market declines affecting
technology companies.
The new and evolving nature of the customer relationship management and
electronic business market increases these risks and uncertainties. Our limited
operating history makes it difficult to predict how our business will develop
and our future operating results.
WE HAVE A HISTORY OF LOSSES, WE MAY INCUR LOSSES IN THE FUTURE AND OUR LOSSES
MAY INCREASE IF PROJECTED REVENUES ARE NOT ACHIEVED TO SUPPORT THE LEVEL OF
OPERATING EXPENSES.
We have incurred net losses in each fiscal year since inception, except for the
year ended June 30, 1998, in which we had net income of approximately $4,000. As
at June 30, 2002, we had an accumulated deficit of approximately $144 million.
We have decreased our operating expenses in recent periods and initiated
restructuring plans during the twelve months ended June 30, 2002 which we
anticipate will result in a quarterly operating cost structure of approximately
$20.5 million for the quarter ended September 30, 2002. We will continue to
examine the level of operating expenses based on projected revenues. Any planned
increases in operating
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expenses may result in larger losses in future periods if projected revenues are
not achieved. As a result, we will need to generate significantly greater
revenues than we have to date to achieve and maintain profitability. We cannot
be certain that our revenues will increase. Our business strategies may not be
successful and we may not be profitable in any future period.
WE HAVE EXPERIENCED RAPID GROWTH WHICH HAS PLACED A STRAIN ON OUR RESOURCES IN
THE PAST AND HAVE RECENTLY IMPLEMENTED RESTRUCTURING INITIATIVES TO REDUCE OUR
WORKFORCE, FACILITIES AND BUSINESS FUNCTIONS. ANY FAILURE TO EFFECTIVELY MANAGE
THE RAPID CHANGE IN SIZE OF OUR COMPANY COULD CAUSE OUR BUSINESS TO SUFFER.
In the past, we expanded our operations rapidly. The number of our employees
increased from 526 on June 30, 2000 to 714 on June 30, 2001. This expansion
placed a significant strain on our managerial, operational and financial
resources as we integrated and managed new employees, more locations,
acquisitions, more customers, suppliers and other business relationships. In
July 2001 and October 2001, we reduced our workforce to approximately 675 and
525 employees, respectively. During the year ended June 30, 2002, we initiated
corporate restructuring activities, which included a workforce reduction of
employees, representing approximately 26% of our total workforce worldwide,
consolidation of excess facilities and restructuring of certain business
functions. There have been and may continue to be substantial costs associated
with the workforce reduction related to severance and other employee-related
costs, as well as material charges for reduction of excess facilities, and our
restructuring plan may yield unanticipated consequences, such as attrition
beyond our planned reduction in workforce. This workforce reduction has placed
an increased burden on our administrative, operational and financial resources
and has resulted in increased responsibilities for each of our management
personnel. As a result, our ability to respond to unexpected challenges may be
impaired and we may be unable to take advantage of new opportunities. In
addition, many of the employees who were terminated possessed specific knowledge
or expertise, and that knowledge or expertise may prove to have been important
to our operations. In that case, their absence may create significant
difficulties. Further, the reduction in workforce may reduce employee morale and
may create concern among potential and existing employees about job security at
Pivotal, which may lead to difficulty in hiring and increased turnover in our
current workforce, and divert management's attention. In addition, this
headcount reduction may subject us to the risk of litigation, which could result
in substantial costs to Pivotal and could divert management's time and attention
away from business operations. Any failure by us to properly manage this rapid
change in workforce, facilities and business functions could impair our ability
to efficiently manage our business to maintain and develop important
relationships with members of the Pivotal Partner Program and other third
parties and to attract and service customers. It could also cause us to incur
higher operating costs and delays in the execution of our business plan or in
the reporting or tracking of our financial results.
OUR FUTURE REVENUE GROWTH COULD BE IMPAIRED IF WE ARE UNABLE TO EFFECTIVELY
STAFF AND MANAGE OUR DIRECT SALES AND SUPPORT INFRASTRUCTURE.
Our future revenue growth will depend in large part on our ability to
successfully manage our direct sales force, sales processes and sales support
infrastructure and our customer support capability. We may not be able to
recruit and train experienced direct sales, consulting and customer support
personnel. If we are unable to hire and retain highly skilled direct sales
personnel we may not be able to increase our license revenue to the extent
necessary to achieve profitability. If we are unable to hire highly trained
consulting and customer support personnel we may be unable to meet customer
demands.
ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR REVENUE GROWTH AND ABILITY TO
FORECAST REVENUE
Our revenue growth and potential for profitability depend on the overall demand
for customer relationship management software and services. Because our sales
are primarily to corporate customers, we are also affected by general economic
and business conditions. A softening of demand for computer software caused by
the weakened economy, both domestic and international, has affected our sales
and may result in decreased revenues and growth rates. As a result of the
economic downturn, we have also experienced and may continue to experience
difficulties in collecting outstanding receivables from our customers. In
addition, the terrorist attacks on the United States in 2001, and the armed
conflict that has followed, have added or exacerbated economic, political and
other uncertainties, which could adversely affect our sales and thus our revenue
growth.
Our sales force monitors the status of proposals, such as the date when they
estimate that a transaction will close and the potential dollar amount of such
sale. We aggregate these estimates regularly in order to generate a sales
forecast and then evaluate our forecast against actual results at various times
to look for trends in our business. While this analysis provides us with
information about our potential customers and the associated revenues for
budgeting and planning purposes, these estimates may not consistently correlate
to revenues in a particular quarter or over a longer period of time. In
particular, as a result of the economic slowdown, we believe that a
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number of our potential customers may delay or cancel their purchases of our
software, consulting services or customer support services or may elect to
develop their own customer relationship management product. A variation in the
conversion of the sales proposals into contracts could adversely affect our
business and operating results. In addition, because a substantial portion of
our sales are completed at the end of the quarter, and often in the last weeks
or days of a quarter, we may be unable to adjust our cost structure in response
to a variation in the conversion of the sales proposals into contracts in a
timely manner, which could adversely affect our business and operating results.
WE DEPEND UPON MICROSOFT AND THE CONTINUED ADOPTION AND PERFORMANCE OF THE
MICROSOFT .NET PLATFORM.
We have designed our products to operate on the Microsoft .NET platform,
including Windows .NET and .NET Enterprise Servers. Microsoft .NET is a new
platform initiative of Microsoft announced in June 2000. We have spent
considerable resources developing and testing the compatibility of our products
for Microsoft .NET. As a result, with the exception of our Oracle product, we
market our products exclusively to customers who have developed their computing
systems around this platform. However, the performance of our products with
Windows .NET and the .NET Enterprise Servers has limited experience in the
marketplace
Our future financial performance will depend on the continued growth and
successful adoption of Microsoft .NET including Windows .NET and the .NET
Enterprise Servers. Microsoft .NET faces competition, particularly from
computing platforms such as Unix and the Java 2 Platform, Enterprise Edition
(J2EE), and databases from companies such as Oracle. Acceptance of Microsoft
..NET may not continue to increase in the future. The market for software
applications that run on these platforms has in the past been significantly
affected by the timing of new product releases, competitive operating systems
and enhancements to competing computing platforms. If the number of businesses
that adopt Microsoft Windows .NET fails to grow or grows more slowly than we
currently expect, or if Microsoft delays the release of new or enhanced
products, our revenues from the Pivotal CRM Suite could be adversely affected.
The performance of our products depends, to some extent, on the technical
capabilities of the Microsoft .NET platform. If this platform does not meet the
technical demands of our products, the performance or scalability of our
products could be limited and, as a result, our revenues from the Pivotal CRM
Suite could be adversely affected.
In 2001, we launched a global business development initiative with Microsoft
aimed at leading the emerging customer relationship management and electronic
business market. The success of this initiative will depend on the ability of
Pivotal and Microsoft to jointly market and sell to Global 2000 companies the
Pivotal CRM Suite combined with Microsoft .NET Enterprise Servers. However,
Microsoft's intention to deliver a product called Microsoft(R) Customer
Relationship Management that may directly compete with our products would likely
adversely affect our global business initiative with Microsoft and might result
in a termination of such relationship.
In addition, Microsoft has been faced with significant legal issues. Broad
antitrust actions initiated by federal and state regulatory authorities resulted
in a verdict against Microsoft in the U.S. District Court for the District of
Columbia. The U.S. District Court adopted the government's proposed remedy and
held that Microsoft should be divided into two companies. Microsoft appealed
this verdict to the U.S. Court of Appeals for the District of Columbia. The U.S.
Court of Appeals affirmed the U.S. District Court's findings of antitrust
violations, but overturned the ruling that Microsoft should be divided into two
companies. The U.S. Court of Appeals also removed the judge presiding over this
matter in the U.S. District Court and remanded to the U.S. District Court the
determination as to what remedies should be pursued against Microsoft. Microsoft
appealed this finding of a violation of antitrust laws to the U.S. Supreme
Court, but this appeal was denied.
In November 2001, the Justice Department and Microsoft entered into a settlement
agreement that would avoid breaking-up Microsoft as a remedy to the case. Only
nine of the 18 states involved in the antitrust actions against Microsoft,
however, agreed to be a party to such a settlement. Before the settlement can
become effective, the U.S. District Court must permit a public comment period
and, thereafter, the U.S. District Court must certify that the settlement
between the parties serves the public interest. The deadline for comments
regarding the settlement ended on January 28, 2002, and the U.S. District Court
ordered the Justice Department to summarize the comments for the U.S. District
Court and publish them all in the Federal Register within 30 days. The Justice
Department released a summary of the comments on February 27, 2002. Upon
reviewing the comments, the Justice Department and Microsoft agreed to certain
modifications to clarify aspects of the proposed settlement. The proposed
settlement contains certain prohibitions on the actions the U.S. Court of
Appeals determined were acts of monopoly maintenance, precludes other practices
that Microsoft might engage to impede threats and imposes affirmative
obligations on Microsoft, which the Justice Department believes create favorable
conditions under which competing products can be developed and deployed. The
proposed settlement was submitted to the U.S. District Court for approval on
February 27, 2002, and a decision has not yet been rendered by the U.S. District
Court.
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European Union regulators are currently investigating whether Microsoft has
violated European antitrust laws. Any outcome to these actions that weakens the
competitive position of Microsoft .NET products could adversely affect the
market for our products.
THE MARKET FOR OUR PRODUCTS IS HIGHLY COMPETITIVE AND COULD INCLUDE COMPETITION
FROM MICROSOFT.
The market for our software is intensely competitive and rapidly changing. The
past year has been one of vendor consolidation. Today, the direct competitors
are fewer in number as companies are looking for business technology products
that deliver rapid results. We face competition from companies in the Customer
Relationship Management software market and in the overall enterprise business
application market. Some of our actual and potential competitors are larger,
better-established companies and have greater technical, financial and marketing
resources. Increased competition may result in price reductions, lower gross
margins or loss of our market share, any of which could materially adversely
affect our business, financial condition and operating results. Some competitors
include Siebel Systems Inc., Oracle Corporation, SAP AG, Onyx Corporation and
PeopleSoft, Inc.
In addition, on February 26, 2002, Microsoft announced that later in 2002 it
intends to deliver a product called Microsoft(R) Customer Relationship
Management (CRM) which, according to Microsoft at that time, would be
specifically designed for the needs of small and medium-sized business
customers. We believed at that time that the target market for the Microsoft
Customer Relationship Management product was different from our target market.
However, on July 11, 2002 Microsoft further explained its overall Customer
Relationship Management business strategy and indicated that its Customer
Relationship Management product could eventually be targeted to the mid-market
of the Customer Relationship Management software market; therefore, while we
believe that there will not be significant overlap with the present market for
our products, our products could be faced with direct competition from
Microsoft, which could have a material adverse effect on our revenues and
results of operations.
In addition, as we develop new products, particularly applications focused on
electronic commerce or specific industries, we may begin competing with
companies with whom we have not previously competed. It is also possible that
new competitors will enter the market or that our competitors will form
alliances that may enable them to rapidly increase their market share.
THE MARKET FOR PIVOTAL EPOWER LIFECYCLE ENGINE - ORACLE EDITION IS UNKNOWN.
On August 14, 2001, we announced the availability of and began selling our
Pivotal ePower Lifecycle Engine - Oracle Edition whereby our product can now be
implemented using Oracle-based platforms and technologies. We do not know
whether it will result in any material revenue for us.
THE SUCCESS OF OUR STRATEGIC ALLIANCE WITH CAP GEMINI ERNST & YOUNG IS UNKNOWN.
We entered into a strategic alliance agreement with Cap Gemini Ernst & Young in
May 2001 whereby we jointly market and sell the Pivotal CRM Suite. As part of
our strategic alliance agreement with Cap Gemini Ernst & Young, we committed to
utilize a minimum amount of Cap Gemini Ernst & Young services during fiscal 2001
and 2002. Following our corporate restructuring, we re-focused our business
activities so that we are no longer utilizing the Cap Gemini Ernst & Young
services in the manner originally contemplated. As a result, we incurred a
restructuring charge on our fiscal 2002 financial statements for the remaining
contractual obligation. We do not know if this will prove to be a successful
relationship in the future or if it will result in any material revenue for
Pivotal.
THE MARKET FOR OUR PRODUCTS IS NEW AND HIGHLY UNCERTAIN AND OUR PLAN TO FOCUS ON
INTERNET-BASED APPLICATIONS AND INTEGRATE ELECTRONIC COMMERCE FEATURES ADDS TO
THIS UNCERTAINTY.
The market for customer relationship management and electronic business products
is still emerging and continued growth demand for and acceptance of the Pivotal
CRM Suite remains uncertain. Even if the market for customer relationship
management electronic business products grows, businesses may purchase our
competitors' products or develop their own. We believe that many of our
potential customers are not fully aware of the benefits of the Pivotal CRM Suite
and, as a result, these products and services may never achieve full market
acceptance.
The development of our Internet-based Pivotal CRM Suite for customer
relationship management and electronic business and our plan to integrate
additional features presents additional challenges and uncertainties. We are
uncertain how businesses will use the Internet as a means of communication and
commerce and whether a significant market will develop for Internet-based
customer relationship
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management and electronic business products such as those developed by us. The
use of the Internet is evolving rapidly and many companies are developing new
products and services that use the Internet. We do not know what forms of
products and services may emerge as alternatives to our existing products or to
any future Internet-based customer relationship management and electronic
business products we may introduce. We have spent, and will continue to spend,
considerable resources educating potential customers about our products and
Customer Relationship Management and electronic business software products.
However, even with these educational efforts, market acceptance of our products
may not increase. If the markets for our products do not grow or grow more
slowly than we currently anticipate, our revenues may not grow and may even
decline.
OUR SALES CYCLE IS UNPREDICTABLE AND THE AVERAGE SIZE OF OUR LICENSING
TRANSACTIONS VARIES WIDELY FROM QUARTER TO QUARTER, WHICH COULD HARM OUR
OPERATING RESULTS.
We believe that an enterprise's decision to purchase a customer relationship
management and electronic business product is discretionary, involves a
significant commitment of its resources and is influenced by its budget cycles.
To successfully sell licenses for our products, we typically must educate our
potential customers regarding the use and benefits of customer relationship
management and electronic business products in general and our products in
particular. This education process can require significant time and resources.
Consequently, the period between initial contact and the purchase of licenses
for our products is often long and subject to delays associated with the lengthy
budgeting, approval and competitive evaluation processes that typically
accompany significant capital expenditures.
This sales cycle is variable and subject to significant uncertainty. We have
restructured our sales process to allow some potential customers an evaluation
period during which they may evaluate our software products at no charge prior
to any decision to purchase. We believe that the new evaluation period may
further lengthen our sales cycle. We frequently must invest substantial
resources to develop a relationship with a potential customer and educate its
personnel about our products and services with no guarantee that our efforts
will be rewarded with a sale.
We may encounter reduction in our customers' project sizes, deferral of
purchasing and lack of an urgency to purchase and the overall unpredictability
of customer decision-making. In addition, we may continue to see reductions in
the size of customer orders in the final stages of negotiations as a result of
reduction in the customer's project size. The increase in sales cycle and
varying transaction sizes could harm our operating results.
OUR SUCCESS WILL DEPEND UPON THE SUCCESS OF OUR PRODUCTS.
We anticipate that a majority of our revenues and growth in the foreseeable
future will come from license and service related to sales of our integrated
product suites and standalone products, primarily consisting of Pivotal Sales
Suite, Pivotal Marketing Suite, Pivotal Service Suite, Pivotal Interactive
Selling Suite, and Pivotal Partner Management Suite, as well as industry
specific products. Accordingly, failure of our integrated product suites and
products to gain increased market acceptance and compete successfully would
adversely affect our business, results of operations and financial condition.
Our future financial performance will depend on our ability to succeed in the
continued sale of our integrated product suites, products and related services,
as well as the development of new versions and enhancements of these products.
THE SUCCESS OF OUR PRODUCTS WILL DEPEND UPON THE CONTINUED USE AND EXPANSION OF
THE INTERNET.
Increased sales of our products and any future Internet-based applications and
electronic commerce features we integrate with our current products, will depend
upon the expansion of the Internet as a leading platform for commerce and
communication. If the Internet does not continue to become a widespread
communications medium and commercial marketplace, the demand for our products
could be significantly reduced and our products and any future Internet-based
and electronic commerce features may not be commercially successful. The
Internet infrastructure may not be able to support the demands placed on it by
continued growth. The Internet could lose its viability due to delays in the
development or adoption of new equipment, standards and protocols to handle
increased levels of Internet activity, security, reliability, cost, ease of use,
accessibility and quality of service.
Other concerns that could inhibit the growth of the Internet and its use by
business as a medium for communication and commerce include:
o concerns about security of transactions conducted over the Internet;
o concerns about privacy and the use of data collected and stored
recording interactions over the Internet;
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o the possibility that federal, state, local or foreign governments will
adopt laws or regulations limiting the use of the Internet or the use
of information collected from communications or transactions over the
Internet; and
o the possibility that governments will seek to tax Internet commerce.
WE DEPEND ON THIRD-PARTY WIRELESS SERVICE PROVIDERS FOR THE SUCCESSFUL
IMPLEMENTATION OF OUR PIVOTAL WIRELESS PRODUCT.
Our Pivotal Wireless product provides a wireless platform that allows our other
products to be accessed wirelessly. We depend on third-party providers of
wireless services for the successful implementation of Pivotal Wireless. Because
Pivotal Wireless relies on wireless services developed and maintained by third
parties, we depend on these third parties' abilities to deliver and support
reliable wireless services. The wireless industry is new and rapidly developing
and involves many risks, including:
o extensive government regulation in licensing, construction, operation,
sale and interconnection arrangements of wireless telecommunications
systems which may prevent third-party providers from successfully
expanding their wireless services;
o rapid expansion of the wireless services infrastructure which may
result in flaws in the infrastructure;
o concerns over the radio frequency emissions or other health and safety
risks that may discourage use of wireless services; and
o possible disruptions in service related to the consolidation or
removal of participants in the wireless market.
WE RELY ON OUR PIVOTAL PARTNER PROGRAM NETWORK OF INDEPENDENT COMPANIES TO SELL,
INSTALL AND SERVICE OUR PRODUCTS AND TO PROVIDE SPECIALIZED SOFTWARE FOR USE
WITH THEM AND OUR PIVOTALHOST PROGRAM RELIES ON THIRD-PARTY APPLICATION SERVICE
PROVIDERS.
We do not have the internal implementation and customization capability to
support our current level of sales of licenses. Accordingly, we have established
and rely on our international network of independent companies we call the
Pivotal Partner Program. Members of the Pivotal Partner Program market and sell
our products, provide implementation, customization and education services,
provide technical support and maintenance on a continuing basis and provide us
with software applications that we can bundle with our products to address
specific industry and customer requirements. Approximately 19% and 20% of our
license revenues for the years ended June 30, 2002 and 2001, respectively were
from sales made through third-party resellers. The majority of our customers
retain members of the Pivotal Partner Program to install and customize our
products. If we fail to maintain our existing Pivotal Partner Program
relationships, or to establish new relationships, or if existing or new members
of the Pivotal Partner Program do not perform to our expectations, our ability
to sell, install and service our products may suffer.
There is an industry trend toward consolidation of systems integrators that
implement, customize and maintain software products. Some of the systems
integrators in the Pivotal Partner Program have engaged in discussions
concerning business consolidations. We are uncertain as to the effect that any
consolidation may have on our relationships with members of the Pivotal Partner
Program.
The success of our PivotalHost program will depend on the commitment and
performance of third-party application service providers to successfully
implement and market services that incorporate our products.
THE LOSS OF KEY PERSONNEL OR OUR FAILURE TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends largely upon the continued service of our executive officers
and other key management, sales and marketing and technical personnel. The loss
of the services of one or more of our executive officers or other key employees
could have a material adverse effect on our business, results of operations and
financial condition. In particular, we rely on Bo Manning, our President, Chief
Executive Officer and director and Divesh Sisodraker, our Chief Financial
Officer. We do not maintain key person insurance on the lives of Messrs. Manning
or Sisodraker.
Our future success also depends on our ability to attract and retain highly
qualified personnel. The competition for qualified personnel in the computer
software and Internet markets is intense, and we may be unable to attract or
retain highly qualified personnel. Due to
-24-
competition for qualified employees, it may be necessary for us to increase the
level of compensation paid to existing and new employees such that our operating
expenses could be materially increased. The price of our common shares has
declined significantly in the past year. Many of our key employees hold options
to purchase common shares with exercise prices significantly greater than the
current market price of the common shares. Accordingly, our current share option
program may be of limited value in retaining and motivating employees.
WE FACE RISKS FROM THE EXPANSION OF OUR INTERNATIONAL OPERATIONS.
We have permanent offices in the United States, Canada, Ireland, England, Japan,
Australia, New Zealand, Germany and France. We are constantly reviewing our
international sales and operations to determine if offices are required in these
and other countries. International operations are subject to numerous inherent
potential risks, including:
o unexpected changes in regulatory requirements;
o export restrictions, tariffs and other trade barriers;
o changes in local tax rates or rulings by local tax authorities;
o challenges in staffing and managing foreign operations, including
differing technology standards, employment laws and practices in
foreign countries;
o less favorable intellectual property laws;
o longer accounts receivable payment cycles and difficulties in
collecting payments;
o political and economic instability; and
o fluctuations in currency exchange rates and the imposition of currency
exchange controls.
Any of these factors could have a material adverse effect on our business,
financial condition or results of operations. Our international operations have
and will continue to require significant management attention and financial
resources. We have had to significantly enhance our direct and indirect
international sales channels and our support and services capabilities. We may
not be able to maintain or increase international market demand for our
products. We may not be able to sustain or increase international revenues from
licenses or from consulting and customer support.
In some foreign countries we rely on selected solution providers to translate
our software into local languages, adapt it to local business practices and
complete installations in local markets. We are highly dependent on the ability
and integrity of these solution providers, and if any of them fail to properly
translate, adapt or install our software, our reputation could be damaged and we
could be subjected to liability. If any of these solution providers fail to
adequately secure our software against unauthorized copying, our proprietary
software could be compromised.
FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND RISKS ASSOCIATED WITH OUR RISK
MANAGEMENT POLICIES MAY AFFECT OUR OPERATING RESULTS.
For information regarding our exposure to exchange rate risk, see Part I, Item
7A "Quantitative and Qualitative Disclosures About Market Risk" contained in
this Report.
FLUCTUATIONS IN THE MARKET VALUE OF OUR SHORT-TERM INVESTMENTS AND IN INTEREST
RATES MAY AFFECT OUR OPERATING RESULTS.
For additional information regarding the sensitivity of and risks associated
with the market value of short-term investments and interest rates, see Part I,
Item 7A "Quantitative and Qualitative Disclosures About Market Risk" contained
in this Report.
-25-
WE MAY BE UNABLE TO OBTAIN THE FUNDING NECESSARY TO SUPPORT THE EXPANSION OF OUR
BUSINESS, AND ANY FUNDING WE DO OBTAIN COULD DILUTE OUR SHAREHOLDERS' OWNERSHIP
INTEREST IN PIVOTAL.
Our past revenues have been and our future revenues may continue to be
insufficient to support the expenses of our operations and the expansion of our
business. We may therefore need additional equity or debt capital to finance our
operations. If we are unable to generate sufficient cash flow from operations or
to obtain funds through additional debt or equity financing, we may have to
reduce some or all of our development and sales and marketing efforts and limit
the expansion of our business.
We believe our existing cash and cash equivalents will be sufficient to meet our
capital requirements for at least the next eighteen 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.
Therefore, we may seek additional funds through public or private debt or equity
financing or from other sources to fund our operations and pursue our growth
strategy. We have no commitment for additional financing, and we may experience
difficulty in obtaining funding on favorable terms, if at all. Any financing we
obtain may contain covenants that restrict our freedom to operate our business
or may require us to issue securities that have rights, preferences or
privileges senior to our common shares and may dilute your ownership interest in
Pivotal.
THE MARKET FOR OUR PRODUCTS AND THE CURRENT ECONOMIC CONDITIONS ARE UNCERTAIN
AND MAY CAUSE OUR BUSINESS TO SUFFER.
The market for our products and related services is unpredictable. We continue
to experience signs of weakness due to the current fluctuations in the economy
and the related reluctance of companies to acquire significant software systems
at this time. These market conditions may continue to deteriorate causing
further changes to the buying behaviour of our customers which would result in
our inability to meet our projected financial results. 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.
THE INTEGRATION OF FUTURE ACQUISITIONS MAY BE DIFFICULT AND DISRUPTIVE.
We anticipate that we may acquire other companies in the future. Acquisitions
and the integration of new companies take significant financial and management
resources and are subject to risks commonly encountered in acquisitions,
including, among others, risk of loss of key personnel, difficulties associated
with assimilating ongoing businesses and the ability of our sales force and
consultants to become educated on new products and services. We will also need
to integrate the products of acquired companies into our product offering. We
may not successfully overcome these risks or any other problems that may be
encountered in connection with future acquisitions.
Accordingly, it is uncertain whether we will receive the benefits we anticipate
from these acquisitions and we may not realize value from these acquisitions
comparable to the resources we invest in them.
As part of our business strategy, we regularly review acquisition opportunities
and we may seek to grow by making additional acquisitions. We may not
effectively select acquisition candidates, negotiate or finance acquisitions or
integrate the acquired businesses and their personnel or acquired products or
technologies into our business. We cannot be certain that we can complete any
acquisition we pursue on favorable terms, or that any acquisition will
ultimately benefit our business.
OUR PLAN TO EXPAND OUR SERVICE CAPABILITY COULD ADVERSELY AFFECT GROSS PROFIT
MARGINS AND OPERATING RESULTS.
Revenues from services and maintenance have lower gross margins than revenues
from licenses. Therefore, an increase in the percentage of revenues generated
from services and maintenance as compared to revenues from licenses will lower
our overall gross margins. In addition, an increase in the cost of revenues from
services and maintenance as a percentage of revenues from services and
maintenance could have a negative impact on overall gross margins.
-26-
Although margins related to revenues from services and maintenance are lower
than margins related to revenues from licenses, our services organization
currently generates gross profits, and we are seeking to expand our service
capability and our revenues from services and maintenance.
Revenues from services and maintenance depend in part on renewals of technical
support contracts by our customers, some of which may not be renewed. Our
ability to increase revenues from services and maintenance will depend in large
part on our ability to increase the scale of our services organization,
including our ability to successfully recruit and train a sufficient number of
qualified services personnel. We may not be able to do so.
If demand for our services organization does not increase, gross profits could
fall, or we may incur losses from our services activities. The costs of
delivering services could increase and any material increase in these costs
could reduce or eliminate the profitability of our services activities.
WE RELY ON SOFTWARE LICENSED TO US BY THIRD PARTIES FOR FEATURES WE INCLUDE IN
OUR PRODUCTS.
We incorporate into our products software that is licensed to us by third-party
software developers. This includes Microsoft SQL Server 2000, Microsoft SQL
Server 7.0, Sheridan Calendar Control, InstallShield 3, Crystal Reports,
Interactive Intelligence Enterprise Interaction Center and Intel CT Connect. We
are seeking to further increase the capabilities of our products by licensing
additional applications from third parties. A significant interruption in the
availability of any of this licensed software could adversely affect our sales,
unless and until we can replace this software with other software that performs
similar functions. Because our products incorporate software developed and
maintained by third parties, we depend on these third parties' abilities to
deliver and support reliable products, enhance their current products, develop
new products on a timely and cost-effective basis, and respond to emerging
industry standards and other technological changes. If third-party software
offered now or in the future in conjunction with our products becomes obsolete
or incompatible with future versions of our products, we may not be able to
continue to offer some of the features we presently include in our products
unless we can license alternative software or develop the features ourselves.
WE MAY BE UNABLE TO CONTINUE TO DEVELOP ENHANCEMENTS TO OUR PRODUCTS AND NEW
APPLICATIONS AND FEATURES THAT RESPOND TO THE EVOLVING NEEDS OF OUR CUSTOMERS,
RAPID TECHNOLOGICAL CHANGES AND ADVANCES INTRODUCED BY OUR COMPETITORS.
The software market in which we compete is characterized by rapid change due to
changing customer needs, rapid technological changes and advances introduced by
competitors. Existing products become obsolete and unmarketable when products
using new technologies are introduced and new industry standards emerge. New
technologies could change the way customer relationship management and
electronic business products are sold or delivered. As a result, the life cycles
of our products are difficult to estimate. We also may need to modify our
products when third parties change software we integrate into our products. To
be successful we must continue to enhance our current products and develop new
applications and features.
We may not be able to successfully develop or license the applications necessary
to offer these or other features, or to integrate these applications with our
existing products. We have delayed enhancements and new product release dates
several times in the past and may not be able to introduce new products, product
enhancements, new applications or features successfully or in a timely manner in
the future. If we delay release of our new products or product enhancements or
new applications or features or if they fail to achieve market acceptance when
released, we may not be able to keep up with the latest developments in the
market and our revenues may fall. We may not be able to respond effectively to
customer needs, technological changes or advances introduced by our competitors,
and our products could become obsolete.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS.
Our success depends in part on our ability to protect our proprietary software
and our other proprietary rights from copying, infringement or use by
unauthorized parties. To protect our proprietary rights we rely primarily on a
combination of copyright, trade secret and trademark laws, confidentiality
agreements with employees and third parties, and protective contractual
provisions such as those contained in license agreements with consultants,
vendors and customers. Despite our efforts to protect our proprietary rights,
unauthorized parties may copy aspects of our product and obtain and use
information that we regard as proprietary. Other parties may breach
confidentiality agreements and other protective contracts we have entered into.
We may not become aware of, or have adequate remedies in the event of, these
types of breaches or unauthorized activities.
-27-
CLAIMS BY OTHER COMPANIES THAT OUR PRODUCTS INFRINGE THEIR COPYRIGHTS OR PATENTS
COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND INCREASE OUR COSTS.
If any of our products violates third-party proprietary rights, including
copyrights and patents, we may be required to re-engineer our products or obtain
licenses from third parties to continue offering our products without
substantial re-engineering. Although some of our current and potential
competitors have sought patent protection for similar customer relationship
management and electronic business products, we have not sought patent
protection for our products. If a patent has been issued or is issued in the
future to a third-party that prevents us from using technology included in our
products, we would need to obtain a license or re-engineer our product to
function without infringing the patent. Any efforts to re-engineer our products
or obtain licenses from third parties may not be successful and, in any case,
could substantially increase our costs, force us to interrupt sales or delay
product releases.
OUR PRODUCTS, AND PRODUCTS WE RELY ON, MAY SUFFER FROM DEFECTS OR ERRORS.
Software products as complex as ours may contain errors or defects, especially
when first introduced or when new versions are released. We have had to delay
commercial release of some versions of our products until software problems were
corrected, and in some cases have provided product enhancements to correct
errors in released products. Our new products and product enhancements or new
applications or features may not be free from errors after commercial shipments
have begun. Any errors that are discovered after commercial release could result
in loss of revenues or delay in market acceptance, diversion of development
resources, damage to our reputation, increased service and warranty costs and
liability claims.
Our end-user licenses contain provisions that limit our exposure to product
liability claims, but these provisions may not be enforceable in all
jurisdictions. In some cases, we have been required to waive these contractual
limitations. Further, we may be exposed to product liability claims in
international jurisdictions where our solution provider has supplied our
products and negotiated the license without our involvement. A successful
product liability claim could result in material liability and damage to our
reputation.
In addition, products we rely on, such as Microsoft platform products, may
contain defects or errors. Our products rely on these products to operate
properly. Therefore, any defects in these products could adversely affect the
operation of and market for our products, reduce our revenues, increase our
costs and damage our reputation.
IF OUR CUSTOMERS' SYSTEM SECURITY IS BREACHED, OUR BUSINESS AND REPUTATION COULD
SUFFER.
A fundamental requirement for online communications is the secure transmission
of confidential information over the Internet. Users of our products transmit
their and their customers' confidential information over the Internet. In our
license agreements with our customers, we disclaim responsibility for the
security of confidential data and have contractual indemnities for any damages
claimed against us. However, if unauthorized third parties are successful in
obtaining confidential information from users of our products, our reputation
and business may be damaged and, if our contractual disclaimers and indemnities
are not enforceable, we may be subjected to liability.
CHANGES IN ACCOUNTING STANDARDS AND IN THE WAY WE CHARGE FOR LICENSES COULD
AFFECT OUR FUTURE OPERATING RESULTS.
We recognize revenues from the sale of software licenses on delivery of our
products if:
o persuasive evidence of an arrangement exists,
o the fee is fixed and determinable,
o we can objectively allocate the total fee among all elements of the
arrangement, and
o collection of the license fee is probable.
Under some license arrangements, with either a fixed or indefinite term, our
customers agree to pay for the license with periodic payments extending beyond
our standard payment terms. We recognize revenues from these arrangements as the
periodic payments become due, provided all other conditions for revenue
recognition are met. We have not entered into many of these arrangements;
-28-
however, if they become popular with our customers, we may have lower revenues
in the short-term than we would otherwise, because revenues for licenses sold
under these arrangements will be recognized over time rather than upon delivery
of our product.
We recognize maintenance revenues ratably over the contract term, typically one
year, and recognize revenues for consulting, education and implementation and
customization services as the services are performed.
Administrative agencies responsible for setting accounting standards, including
the United States Securities and Exchange Commission and the Financial
Accounting Standards Board, are also reviewing the accounting standards related
to stock-based compensation. Any changes to these accounting standards or any
other accounting standards or the way these standards are interpreted or applied
could require us to change the way we recognize revenue, account for share
compensation, or other aspects of our business which could adversely affect our
reported financial results.
OUR SHARE PRICE MAY CONTINUE TO BE VOLATILE.
Our share price has fluctuated substantially since our initial public offering
in August 1999. The trading price of our common shares is subject to significant
fluctuations in response to variations in quarterly operating results, the gain
or loss of significant orders, changes in revenues and earnings estimates by
securities analysts, announcements of technological innovations or new products
by us or our competitors, general conditions in the software and computer
industries and other events or factors. In addition, the stock market in general
has experienced extreme price and volume fluctuations that have affected the
market price for many companies in industries similar or related to ours and
these fluctuations have been unrelated to the operating performance of these
companies. These market fluctuations have adversely affected and may continue to
adversely affect the market price of our common shares. During the calendar year
2002, several high-profile scandals and controversies regarding allegedly
improper methods of accounting by certain public companies and their auditors
have arisen. These scandals and controversies could have the effect of
depressing the capital markets generally and the price of our common shares
could be adversely affected as a part of an overall trend to divestiture of
holdings in shares in favor of other types of non-share investments that may be
seen as more secure.
CERTAIN SHAREHOLDERS MAY BE ABLE TO EXERCISE CONTROL OVER MATTERS REQUIRING
SHAREHOLDER APPROVAL.
Our current officers, directors and entities affiliated with us together
beneficially owned a significant portion of our outstanding common shares as of
June 30, 2002. While these shareholders do not hold a majority of our
outstanding common shares, they will be able to exercise significant influence
over matters requiring shareholder approval, including the election of directors
and the approval of mergers, consolidations and sales of our assets. This may
prevent or discourage tender offers for our common shares.
ITEM 2. PROPERTIES
Our principal administrative, professional services and education facilities are
located in North Vancouver, British Columbia, Canada, and our research and
development campus is located in Vancouver, British Columbia, Canada and
together consist of approximately 80,000 square feet of office space in three
separate buildings. The leases for the buildings in North Vancouver expire in
October 2002. We intend to consolidate these offices to one newly constructed
facility in Vancouver, British Columbia with a scheduled completion in the fall
of 2002. Pursuant to an offer to lease this facility, our obligation to occupy
the premises and commence paying rent does not arise until construction of the
building is complete. Once construction is finished, the building will consist
of approximately 130,000 square feet of office space under a lease that expires
in August 2017. Our principal marketing facility is located in Kirkland,
Washington and consists of approximately 13,600 square feet of office space held
under a lease that expires in December 2003. We also have a significant research
and development facility in Atlanta, Georgia that consists of approximately
26,708 square feet of office space under a lease that expires on April 2006. We
also have a significant professional services facility in Dallas, Texas that
consists of 7,877 square feet of space under a lease that expires in October
2002. We also have a research and development and professional services facility
in Toronto, Ontario that consists of 13,993 square feet of space under a lease
that expires in July 2005.
Our main administrative office for Europe, the Middle East and Africa is located
in Dublin, Ireland held under a lease expiring in May 2007. Our principal sales
and marketing office for Europe, the Middle East and Africa is located in Luton,
England held under a lease that expires in November 2005.
As of June 30, 2002, we also leased offices in: Tokyo, Japan; Sydney, Australia;
Auckland, New Zealand; Mainz, Germany; High Point, North Carolina; Des Plaines,
Illinois; San Bruno and Irvine, California; Dallas, Texas; Denver, Colorado; Rue
Lauriston, France; Paris, France; Newton, Massachusetts; Morristown, New Jersey;
New York, New York; Calverton, Maryland; St. Paul, Minnesota and Toronto,
Ontario.
-29-
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof, there is no material litigation pending against us.
However, as of June 2002, we have initiated proceedings against Interpath
Communications in the United States District Court for the Western District of
Washington, in the context of a contractual dispute, for general and unspecified
damages, and in response to which Interpath Communications has filed a
counterclaim against us. We believe any counterclaim of Interpath Communications
to be without merit and we will vigorously defend any counterclaim made against
us, as well as continue to pursue the litigation we have initiated against them.
Within the last fiscal year, we also settled a dispute with FourthChannel Inc.
in commercial arbitration in the amount of $1.42 million. From time to time, we
are a party to litigation and claims incident to the ordinary course of
business. While the results of litigation and claims cannot be predicted with
certainty, we believe that the final outcome of such matters will not have a
material adverse effect on our business, financial condition, results of
operations and cash flows.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Our common shares began trading on the Nasdaq National Market on August 5, 1999
under the symbol PVTL. The table below lists the high and low closing prices per
share of our common shares for each quarterly period during the past two fiscal
years, as reported on the Nasdaq National Market.
Price Range Price Range
of Common Shares of Common Shares
for Year Ended for Year Ended
June 30, 2002 June 30, 2001
------------- -------------
High Low High Low
---- --- ---- ---
First Quarter...................................$ 18.20 $ 4.17 $ 59.38 $ 23.44
Second Quarter..................................$ 6.15 $ 2.70 $ 70.23 $ 31.00
Third Quarter...................................$ 6.54 $ 4.83 $ 35.56 $ 10.31
Fourth Quarter..................................$ 5.68 $ 3.13 $ 25.10 $ 9.44
Our common shares began trading on the Toronto Stock Exchange on August 17, 2000
under the symbol PVT. The table below lists the high and low closing prices per
share of our common shares for each quarterly period during the past two fiscal
years, as reported on the Toronto Stock Exchange.
Price Range Price Range
of Common Shares of Common Shares
for Year Ended for Year Ended
June 30, 2002 June 30, 2001
------------- -------------
High Low High Low
---- --- ---- ---
First Quarter...................................Cdn$ 22.40 Cdn$ 6.62 Cdn$ 88.25 Cdn$ 54.75
Second Quarter..................................Cdn$ 9.75 Cdn$ 4.32 Cdn$ 105.00 Cdn$ 48.00
Third Quarter...................................Cdn$ 10.39 Cdn$ 7.46 Cdn$ 54.00 Cdn$ 16.20
Fourth Quarter..................................Cdn$ 8.95 Cdn$ 4.75 Cdn$ 38.46 Cdn$ 14.70
SHAREHOLDERS
As of August 1, 2002, there were approximately 396 registered holders of our
common shares. This does not include the number of persons whose shares are in
nominee or "street name" accounts through brokers.
-30-
DIVIDENDS
We have never declared or paid any cash dividends on our share capital. We
currently intend to retain any future earnings to fund the development and
growth of our business and we do not anticipate paying any cash dividends in the
foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Not applicable
USE OF PROCEEDS
On August 4, 1999, our 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 of our common shares,
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 us, after
$3.3 million in underwriting discounts and commissions and $1.3 million in other
expenses, were $43.1 million. During the year ended June 30, 2000, we used $14.5
million of the net proceeds in connection with acquisitions of Exactium, Simba
and Transitif. During the year ended June 30, 2001, we used $5.7 million of the
net proceeds in connection with acquisitions of Ionysys, Project One, Software
Spectrum and Inform. The remaining $22.9 million of the net proceeds was used
for working capital.
None of the net offering proceeds were paid, and none of the initial public
offering expenses related to payments, directly or indirectly, to our directors,
officers or general partners or their associates, persons owning 10% or more of
any class of securities or our affiliates.
Exchange Controls
There are no government laws, decrees or regulations in Canada which restrict
the export or import of capital or which affect the remittance of dividends,
interest or other payments to non-resident holders of our common shares. Any
remittances of dividends to United States residents and to other non-residents
are, however, subject to withholding tax. See "Taxation" below.
Taxation
Canadian Federal Income Taxation
We consider that the following summary fairly describes in general the principal
Canadian federal income tax consequences applicable to a holder of our common
shares who at all material times deals at arm's length with us, who holds all
common shares as capital property, who is resident in the United States, who is
not a resident of Canada and who does not use or hold, and is not deemed to use
or hold, his common shares of Pivotal in connection with carrying on a business
in Canada (a "non-resident holder"). It is assumed that the common shares will
at all material times be listed on a stock exchange that is prescribed for
purposes of the Income Tax Act (Canada) (the "ITA") and regulations thereunder.
The Canadian federal income tax consequences applicable to holders of our common
shares will not change if we are deemed inactive by The Toronto Stock Exchange.
Investors should however be aware that the Canadian federal income tax
consequences applicable to holders of our common shares will change if we cease
to be listed on a prescribed stock exchange like The Toronto Stock Exchange.
Accordingly, holders and prospective holders of our common shares should consult
with their own tax advisors with respect to the income tax consequences of them
purchasing, owing and disposing of our common shares should we cease to be
listed on a prescribed stock exchange.
This summary is based upon the current provisions of the ITA, the regulations
thereunder, the Canada-United States Tax Convention as amended by the Protocols
thereto (the "Treaty") as at the date of the registration statement and the
currently publicly announced administrative and assessing policies of the Canada
Customs and Revenue Agency (the "CCRA"). This summary does not take into account
Canadian provincial income tax consequences. This description is not exhaustive
of all possible Canadian federal income tax consequences and does not take into
account or anticipate any changes in law, whether by legislative, governmental
or judicial action. This summary does, however, take into account all specific
proposals to amend the ITA and regulations thereunder, publicly announced by the
Government of Canada to the date hereof.
This summary does not address potential tax effects relevant to us or those tax
considerations that depend upon circumstances specific to each investor.
Accordingly, holders and prospective holders of our common shares should consult
with their own tax advisors with respect to the income tax consequences to them
of purchasing, owning and disposing of our common shares.
-31-
Dividends
The ITA provides that dividends and other distributions deemed to be dividends
paid or deemed to be paid by a Canadian resident corporation (such as Pivotal)
to a non-resident of Canada shall be subject to a non-resident withholding tax
equal to 25% of the gross amount of the dividend of deemed dividend. Provisions
in the ITA relating to dividend and deemed dividend payments to and gains
realized by non-residents of Canada, who are residents of the United States, are
subject to the Treaty. The Treaty may reduce the withholding tax rate on
dividends as discussed below.
Article X of the Treaty as amended by the US-Canada Protocol ratified on
November 9, 1995 provides a 5% withholding tax on gross dividends or deemed
dividends paid to a United States corporation which beneficially owns at least
10% of our voting stock paying the dividend. In cases where dividends or deemed
dividends are paid to a United States resident (other than a corporation) or a
United States corporation which beneficially owns less than 10% of our voting
stock, a withholding tax of 15% is imposed on the gross amount of the dividend
or deemed dividend paid. We will be required to withhold any such tax from the
dividend and remit the tax directly to CCRA for the account of the investor.
The reduction in withholding tax from 25%, pursuant to the Treaty, will not be
available:
(a) if the shares in respect of which the dividends are paid formed part of the
business property or were otherwise effectively connected with a permanent
establishment or fixed base that the holder has or had in Canada within the
12 months preceding the disposition, or
(b) the holder is a U.S. LLC which is not subject to tax in the U.S.
The Treaty generally exempts from Canadian income tax dividends paid to a
religious, scientific, literary, educational or charitable organization or to an
organization exclusively administering a pension, retirement or employee benefit
fund or plan, if the organization is resident in the U.S. and is exempt from
income tax under the laws of the U.S.
Capital Gains
A non-resident holder is not subject to tax under the ITA in respect of a
capital gain realized upon the disposition of our share unless the share
represents "taxable Canadian property" to the holder thereof. Our Common shares
will be considered taxable Canadian property to a non-resident holder only if:
(a) the non-resident holder;
(b) persons with whom the non-resident holder did not deal at arm's length; or
(c) the non-resident holder and persons with whom he did not deal at arm's
length,
owned not less than 25% of our issued shares of any class or series at any time
during the five year period preceding the disposition. In the case of a
non-resident holder to whom our shares represent taxable Canadian property and
who is resident in the United States, no Canadian taxes will generally be
payable on a capital gain realized on such shares by reason of the Treaty
unless:
(a) the value of such shares is derived principally from real property
(including resource property) situated in Canada,
(b) the holder was resident in Canada for 120 months during any period of
20 consecutive years preceding, and at any time during the 10 years
immediately preceding, the disposition and the shares were owned by
him when he ceased to be a resident of Canada,
(c) they formed part of the business property or were otherwise
effectively connected with a permanent establishment or fixed base
that the holder has or had in Canada within the 12 months preceding
the disposition, or
(d) the holder is a U.S. LLC which is not subject to tax in the U.S.
-32-
If subject to Canadian tax on such a disposition, the taxpayer's capital gain
(or capital loss) from a disposition is the amount by which the taxpayer's
proceeds of disposition exceed (or are exceeded by) the aggregate of the
taxpayer's adjusted cost base of the shares and reasonable expenses of
disposition. For Canadian income tax purposes, the "taxable capital gain" is
equal to one-half of the capital gain.
ALL PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF PURCHASING OUR COMMON SHARES.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction
with the Consolidated Financial Statements and Notes thereto, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report. The consolidated statement of
operations data for each of the three years ended June 30, 2002, 2001 and 2000
and the consolidated balance sheet data as of June 30, 2002 and 2001 are derived
from audited financial statements included elsewhere in this report. The
consolidated statement of operations data for the years ended June 30, 1999 and
1998 and the consolidated balance sheet data as of June 30, 2000, 1999 and 1998
are derived from audited consolidated financial statements not included in this
report.
YEARS ENDED JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
--------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
License $29,282 $ 58,510 $ 37,384 $ 18,819 $ 11,311
Services and maintenance 40,334 37,644 16,169 6,852 3,147
------ -------- -------- -------- --------
Total revenues 69,616 96,154 53,553 25,671 14,458
------ -------- -------- -------- --------
Cost of Revenues:
License 1,956 3,800 2,141 536 401
Services and maintenance 22,331 21,030 8,761 3,422 1,530
------ -------- -------- -------- --------
Total cost of revenues 24,287 24,830 10,902 3,958 1,931
------ -------- -------- -------- --------
Gross profit 45,329 71,324 42,651 21,713 12,527
Operating Expenses:
Sales and marketing 41,417 51,230 31,165 16,830 9,226
Research and development 16,963 18,750 8,906 4,958 1,910
General and administrative (1) 12,820 13,567 4,190 2,466 1,513
Restructuring and other charges (2) 53,576 -- -- -- --
Amortization of goodwill 16,157 23,062 1,409 -- --
In-process research and development and
other charges -- -- 6,979 -- --
------- -------- -------- -------- --------
Total operating expenses 140,933 106,609 52,649 24,254 12,649
------- -------- -------- -------- --------
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YEARS ENDED JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------------------
2002 2001 2000 1999 1998
----------- ----------- ----------- --------------- ---------------
Loss from operations (95,604) (35,285) (9,998) (2,541) (122)
--------- --------- --------- ------------- -------------
Other income (expenses)
Interest and other income 1,289 3,333 2,193 (24) 136
Impairment of investments (1,244) -- -- -- --
--------- -------- -------- ------------ ------------
45 3,333 2,193 (24) 136
-------- -------- -------- ------------- ------------
Income (loss) before income taxes (95,559) (31,952) (7,805) (2,565) 14
Income taxes 386 503 557 243 10
-------- -------- -------- -------- --------
Net income (loss) for the period $(95,945) $(32,455) $ (8,362) $ (2,808) $ 4
========= ======== ======== ======== ========
Basic and diluted earnings (loss) per share $ (3.99) $ (1.40) $ (0.45) $ (0.72) $ --
Pro forma basic and diluted loss per share (1) $ -- $ -- $ (0.39) $ (0.18) $ --
Shares used to calculate earnings (loss) per
share
Basic 24,039 23,173 18,643 3,888 3,720
Diluted 24,039 23,173 18,643 3,888 14,927
Pro forma basic and diluted loss per share -- -- 21,339 15,940 --
(3)
AS OF JUNE 30,
(IN THOUSANDS)
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- ------------ ------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 20,322 $ 13,247 $ 4,734 $ 9,338 $ 1,202
Working capital 23,572 58,366 28,297 7,257 3,317
Total assets 68,645 168,443 121,945 21,722 10,752
Long-term obligations 3,505 592 -- -- --
Redeemable convertible preferred shares -- -- -- 17,500 9,500
Total shareholders' equity (deficit) 33,783 128,201 96,097 (7,192) (4,455)
NOTES:
(1) General and administrative expense for the year ended June 30, 2001
includes $1.8 million for asset impairments and deferred stock compensation
charges.
(2) Restructuring costs and other charges for the year ended June 30, 2002
includes $3.8 million for workforce reduction, $5.3 million for contract
settlement and other costs, $11.5 million for excess facilities and asset
impairments and $33.0 million for the impairment of goodwill and other
purchased intangible assets.
(3) See note 1 of notes to consolidated financial statements for an explanation
of the method used to calculate basic and diluted per share amounts. The
2000 and 1999 amounts are calculated on a pro forma basis.
-34-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
Pivotal Corporation offers Customer Relationship Management (CRM) software that
enables mid-sized enterprises worldwide to acquire, serve and manage their
customers. Pivotal's target customers are companies and business units in the
revenue range of $100 million to $3 billion. Customer Relationship Management
products and services automate and manage marketing, selling and servicing
processes. We refer to our software as the Pivotal CRM Suite. The Pivotal CRM
Suite is designed to complement and integrate with a business' supply chain,
therefore enabling businesses to improve efficiency and increase revenue.
Our products are used in 44 countries and are available in English, French,
German, Spanish, Portuguese, Japanese, Chinese and Hebrew. More than 1,500
companies globally use Pivotal. We market and sell our products through a direct
sales force as well as through third-party solution providers.
Our common shares are listed on the Nasdaq National Market 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We believe that there are several accounting policies that are important to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and the more significant areas involving
management's judgments and estimates. These critical accounting policies and
estimates relate to revenue recognition and the provision for doubtful accounts
receivable. These policies, and our procedures related to these policies, are
described in detail below. In addition, please refer to Note 1 to the
accompanying consolidated financial statements for further discussion of our
accounting policies.
Sources of Revenue and Revenue Recognition Policy
We derive our revenues from the sale of licenses and services and maintenance.
License and maintenance revenues are normally generated from licensing our
products with end-users, value added resellers and application service providers
and, to a lesser extent, through distribution of third party products. Service
revenues are generated from consulting services and education services sold to
end-users.
We recognize license revenues on delivery of our solutions to the customer when
all of the following conditions have been satisfied:
o there is persuasive evidence of an arrangement (we consider a
non-cancelable agreement signed by us and the customer to be
persuasive evidence of an arrangement);
o the fee is fixed or determinable (we consider the fee to be fixed or
determinable if the fee is not subject to refund or adjustment and if
we have not granted extended payment terms to the customer); and
o the collection of the license fee is probable (we consider collection
to be probable if our internal credit analysis indicates that the
customer will be able to pay amounts as they become due under the
arrangement).
Revenues for multiple-element arrangements, which could consist of software
licenses, upgrades, enhancements, maintenance and consulting services, are
allocated among the component elements based upon the relative fair value of
each element. The fair value of each element is determined by the price charged
by us when that element is sold separately, or, in the case of an element not
yet sold separately, by the price established by authorized management, if it is
probable that the price, once established, will not change before market
introduction.
We enter into reseller and sub-licensing arrangements that provide a fee payable
to us based on a percentage of list prices. We recognize revenue only on the net
fee payable to us from the reseller upon sell-through to the end customer by the
reseller.
We typically sell first year maintenance with the related software license.
Revenue related to maintenance is recognized evenly 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 revenue 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. In circumstances where we enter into fixed-price service contracts,
revenue is recognized on a percentage-of-completion basis, which is measured
based upon actual person-hours performed. Much of the implementation services
provided to our customers in connection with installations
-35-
of our solutions are provided by third-party consulting and implementation
service providers. These third-party service providers ordinarily contract
directly with the customer.
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.
On January 1, 2002, we adopted Topic No. D-103. Topic D-103 requires that
certain out-of-pocket expenses re-billed to customers be recorded as revenue
versus an offset to the related expense. Prior to the adoption of Topic D-103,
we recorded re-billed out-of-pocket expenses as an offset to the related
expense. Comparative financial statements for prior periods have been conformed
to the current year presentation. This change had no effect on operating income
or net income for any period presented.
Provision for Doubtful Accounts Receivable
We initially record our provision for doubtful accounts based on historical
experience of write-offs and then adjust this provision at the end of each
reporting period based on a detailed assessment of our accounts receivable and
allowance for doubtful accounts. In estimating the provision for doubtful
accounts, we consider the age of the accounts receivable, our historical
write-offs, the credit worthiness of the customers, the economic conditions of
the customer's industry, and general economic conditions, among other factors.
Should any of these factors change, the estimates made by us will also change,
which could impact the level of our future provision for doubtful accounts.
Specifically, if the financial condition of our customers were to deteriorate,
affecting their ability to make payments, additional provisions for doubtful
accounts may be required. During the fourth quarter of fiscal 2001 and
throughout fiscal 2002, we experienced delays in payments from certain customers
resulting from a deterioration of financial conditions affecting these customers
due to the weak North American economy and capital markets. As a result, we
recorded significant changes in our bad debts reserve. During the twelve month
periods ended June 30, 2002, 2001 and 2000, we recorded provisions for doubtful
debts of $5.5 million, $3.3 million and $0.6 million, respectively.
Restructuring and Other Charges
Pivotal has recorded restructuring charges associated with workforce reduction,
consolidation of excess facilities, contract settlements and asset impairments.
These charges are based on management's best estimate at the time of the
restructuring, and are updated on a quarterly basis based on actual experience.
During the year ended June 30, 2002, these charges totaled $53.6 million of
which $20.6 million related to restructuring activities, and $33.0 million
related to the impairment of goodwill and other purchased intangible assets.
Total cash charges were $11.8 million, of which $6.4 million had been paid prior
to June 30, 2002 with the remaining $5.4 million represented in accrued
liabilities as at June 30, 2002. The current portion of this amount is $2.3
million, with the balance of $3.1 million representing the non-current portion.
Impairment of Long-Lived Assets
Long-lived assets and certain identifiable intangible assets to be held and used
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. Measurement of
an impairment loss for long-lived assets and certain identifiable intangible
assets that management expects to hold and use are based on the fair value of
the asset. Long-lived assets and certain identifiable intangible assets to be
disposed of are reported at the lower of carrying amount or fair value less
costs to sell. In the years ended June 30, 2002 and June 30, 2001, Pivotal
recorded impairment losses of $38.8 million and $0.9 million related to
long-lived assets having carrying values in excess of the cash flows expected to
result from their disposal. The charge for fiscal 2002 included $5.8 million
related to impairments of capital assets and $33.0 million related to the
impairment of goodwill and other purchased intangible assets. No such impairment
loss had been identified by Pivotal for the year ended June 30, 2000.
Investments in Public and Non-Public Companies
At June 30, 2002 and June 30, 2001, we held investments in publicly traded
companies in which we held less than 20% of the voting rights and over which we
did not exercise significant influence. The investments are included in
goodwill, intangibles and other assets and are recorded at fair value, which is
determined based on quoted market prices, with net unrealized gains and losses
included in accumulated other comprehensive loss. If we determine that an
investment has an other than temporary decline in fair value, an impairment
charge is included in other income and expenses and previously recorded
mark-to-market adjustments that were recorded in other comprehensive income are
reversed. During the year ended June 30, 2002, we recorded a writedown of $848
related to other than temporary declines in the value of its investments in
public companies.
We also held certain investments in non-publicly traded companies in which we
held less than 20% of the voting rights and in which we do not exercise
significant influence. These investments are included in goodwill and other
assets and are accounted for on a cost basis. Under the cost method of
accounting, investments in private companies are carried at cost and are
adjusted only for other-than-temporary declines in fair value, distributions of
earnings and additional investments. We periodically evaluate whether the
-36-
declines in fair value of our investments are other-than-temporary. This
evaluation consists of a review of qualitative and quantitative factors by
members of senior management, including a review of the investee's financial
condition, results of operations, operating trends and other financial ratios.
We further consider the implied value from any recent rounds of financing
completed by the investee, as well as market prices of comparable public
companies. During the year ended June 30, 2002, we recorded a charge of $375
related to impairment in the value of investments in non-public companies.
RECENT ACQUISITIONS
During the year ended June 30, 2000, we completed the acquisitions of Transitif,
S.A., Exactium Ltd. and Simba Technologies Inc. During the year ended June 30,
2001, we completed acquisitions of Ionysys Technology Corporation, Project One
Business Technologies Inc., Software Spectrum CRM, Inc. and Inform, Inc. These
acquisitions were accounted for under the purchase method of accounting.
Accordingly, the results of operations of each acquisition are included in our
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. During the year ended June 30, 2002, we did not
complete any acquisitions.
RESULTS OF OPERATIONS
The following table sets forth the consolidated statement of operations data for
each of the years in the three years ended June 30, 2002 expressed as a
percentage of total revenues:
-37-
Year ended June 30,
-----------------------------------------------
2002 2001 2000
----------------------------------------------------------------------------------------------------
Revenues:
License 42% 61% 70%
Services and maintenance 58% 39% 30%
Total revenues 100% 100% 100%
Cost of Revenues:
License 3% 4% 4%
Services and maintenance 32% 22% 16%
----------------------------------------------------------------------------------------------------
Total cost of revenues 35% 26% 20%
----------------------------------------------------------------------------------------------------
Gross profit 65% 74% 80%
----------------------------------------------------------------------------------------------------
Operating expenses:
Sales and marketing 59% 54% 59%
Research and development 24% 20% 17%
General and administrative 18% 14% 8%
Restructuring and other charges 77% - -
Amortization of goodwill 23% 24% 3%
In-process research and development and -
other charges - 13%
----------------------------------------------------------------------------------------------------
Total operating expenses 201% 112% 100%
----------------------------------------------------------------------------------------------------
Loss from operations (136%) (38%) (20%)
Other income (expenses):
Interest and other income 2% 4% 4%
Impairment of investments (2%) - -
----------------------------------------------------------------------------------------------------
0% 4% 4%
Loss before income taxes (136%) (34%) (16%)
Income taxes 1% 1% 1%
----------------------------------------------------------------------------------------------------
Net loss (137%) (35%) (17%)
====================================================================================================
YEARS ENDED JUNE 30, 2002 AND 2001
REVENUES
Total revenues decreased 28% to $69.6 million for the year ended June 30, 2002
from $96.2 million for the year ended June 30, 2001.
License
Revenues from licenses decreased 50% to $29.3 million for the year ended June
30, 2002 from $58.5 million for the year ended June 30, 2001.
Our revenues from licenses decreased as a result of the recent economic slowdown
in the latter half of 2001 through 2002. This change in economic conditions has
had a direct impact on the buying patterns of our potential customers, as
evidenced through reduced corporate capital budgets and longer sales cycles. Our
license revenue growth depends on the overall demand for customer relationship
management solutions. The overall demand for our software depends in large part
on the general economic and business conditions.
Revenues from licenses represented 42% and 61% of total revenues for the years
ended June 30, 2002 and 2001, respectively. License revenues decreased as a
percentage of total revenues primarily due to the fact that license revenues are
more immediately impacted by
-38-
changes in economic conditions, whereas service revenues are derived from longer
term projects and also include maintenance revenues that tend to be recurring in
nature. North American license revenues accounted for 53% and 67% of total
license revenues in the years ended June 30, 2002 and 2001, respectively.
International license revenues increased as a percentage of total revenues as
demand for our products increased as we expanded our European and other
international operations combined with a weakening U.S. economy. No single
customer accounted for 10% or more of our revenues for the years ended June 30,
2002 and 2001.
License revenues are difficult to forecast and will be significantly influenced
by the overall global economy and corporate spending trends.
Services and Maintenance
Revenues from services and maintenance increased 7% to $40.3 million for the
year ended June 30, 2002 from $37.6 million for the year ended June 30, 2001.
This resulted from an increase of $2.7 million in revenues recognized from
technical support and maintenance contracts, which entitle customers to new
versions of our products and technical support and maintenance services and a
decrease of $0.03 million in revenues from implementation, education and
consulting service engagements.
Our revenues from services and maintenance represented 58% and 39% of total
revenues for the years ended June 30, 2002 and 2001, respectively. We believe
that revenues from services and maintenance will decrease over time as a
percentage of total revenues, since we believe that license revenues will grow
faster than services revenues in the near to medium term. 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
Our cost of license revenues primarily consists of production, packaging and
distribution of solutions and related documentation, as well as 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 maintenance, and education organizations and an allocation of
facilities, communications and depreciation expenses.
Total cost of revenues decreased 2% to $24.3 million for the year ended June 30,
2002 from $24.8 million for the year ended June 30, 2001.
License
Cost of revenues from licenses consists of costs relating to the packaging and
distribution of solutions, related documentation and other production costs and
royalty fees paid for incorporation of third-party solutions into our solutions.
Cost of revenues from licenses decreased 49% to $2.0 million for the year ended
June 30, 2002 from $3.8 million for the year ended June 30, 2001. The decrease
is due primarily to a 50% decrease in license sales. Cost of revenues from
licenses as a percentage of revenues from licenses was 7% for the year ended
June 30, 2002 and 6% for the year ended June 30, 2001. We expect that the cost
of licenses as a percentage of revenue from licenses will remain at
approximately the same levels as in prior periods.
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 our 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 6% to $22.3 million for
the year ended June 30, 2002 from $21.0 million for the year ended June 30,
2001. The increase in dollar amount resulted from a higher average number of
consulting, customer support and education personnel during the year. Cost of
revenues from services and maintenance as a percentage of revenues from services
and maintenance was 55% and 56% for the years ended June 30, 2002 and 2001,
respectively.
We expect that cost of revenues from services and maintenance will range from
45% to 55% of revenues from services and maintenance.
-39-
OPERATING 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, depreciation and facilities to
each of the functional areas based on their proportional headcount.
In response to the weakening global economy, and the resulting impact on license
revenues, we implemented a restructuring program in the fall of fiscal 2002 in
order to bring costs in line with revised revenue forecasts. This restructuring
initiative resulted in significantly reduced operating costs in the second half
of the year, as compared to the first half. While we expect to continue to
closely monitor expenditures and to continue cost control initiatives, we expect
that operating expenses in the second half of fiscal 2002 are indicative of
those to be expected in the first part of fiscal 2003.
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 decreased 19% to $41.4 million for the year ended
June 30, 2002 from $51.2 million for the year ended June 30, 2001. The decrease
in dollar amounts is the result of a reduction in sales and marketing employees
from 250 to 165 and a 27% decrease in marketing program expenditures following
the implementation of our restructuring plans. Commissions decreased 32% due to
lower sales. Sales and marketing expenses increased as a percentage of total
revenues to 59% in the year ended June 30, 2002 from 54% in the year ended June
30, 2001. This increase of sales and marketing expenses as a percentage of total
revenues resulted from lower revenues for the year ended June 30, 2002.
We expect that sales and marketing expenditures, as a percentage of total
revenues, will decrease in fiscal 2003, as compared to fiscal 2002.
Research and Development
Research and development expenses include costs associated with new products,
enhancements of existing products and quality assurance activities and 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.
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. There are no software development costs capitalized on
our balance sheet.
Research and development expenses decreased 10% to $17.0 million for the year
ended June 30, 2002 from $18.8 million for the year ended June 30, 2001. The
decrease is the result of a reduction in employees and contract labor following
the implementation of our restructuring plans. Research and development expenses
were 24% and 20% of total revenues for the years ended June 30, 2002 and 2001,
respectively. We believe that R&D activities are imperative to our strategic
plans. We may increase the level of R&D expenditures, in absolute dollars, in
order to expand our product line and ensure that our products remain competitive
in the marketplace.
General and Administrative
General and administrative expenses consist primarily of salaries and occupancy
costs for executive, finance, and administrative personnel. General and
administrative expenses also include legal and other professional fees and bad
debt expense.
General and administrative expenses decreased 6.0% to $12.8 million for the year
ended June 30, 2002 from $13.6 million for the year ended June 30, 2001. General
and administrative expenses were 18% and 14% of total revenues, respectively,
for the same periods. The decrease is a result of a reduction in general
administration employees from 94 to 86 offset by an increase in bad debts
expense. The total bad debt expense was $5.5 million and $3.3 million for the
years ended June 30, 2002 and 2001. The increase in bad debt expense was due to
the fact that we experienced a delay in payments from certain customers
resulting from a weakening in the global economy in the final quarter of fiscal
2001 and throughout fiscal 2002. We have recently tightened our credit policies
and procedures, however unanticipated charges may be incurred in future periods
if economic conditions or the credit quality of individual customers further
deteriorate.
Over the next year we expect general and administrative expenses to decrease as
a percentage of revenues as compared to fiscal 2002.
-40-
Restructuring Costs and Other Charges
In light of the significant downturn in the North American and global economies
and the related impact on corporate capital spending, we implemented
restructuring plans in the second quarter of fiscal 2002 in order to streamline
our operations and align our cost structure with revised revenue expectations.
We adjusted our restructuring plan during the year to reflect the continued
deterioration in the industry and economic environment.
In connection with our restructuring plans, we recorded charges of $53.6 million
related to both restructuring activities and write-downs of intangible assets.
These charges included costs of $20.6 million associated with workforce
reductions, consolidation of excess facilities, contract settlements and
tangible asset impairments. These charges also included $33.0 million related to
the impairment of previously recorded goodwill and other purchased intangible
assets.
Employee severance and related benefit costs for approximately 200 terminated
employees totaled approximately $3.8 million. The workforce reduction was
primarily in the United States, Canada and the United Kingdom and extended
across all geographical segments and business units. As at June 30, 2002, we had
made cash payments to terminated employees of $3.5 million. The remaining
obligations will be paid in the first half of fiscal 2003.
We incurred non-cash charges of $5.8 million related to asset impairments for
certain capital assets that were either abandoned during the year or for which
the resulting estimated future reduced cash flows were insufficient to cover the
carrying amounts of the related assets. The impairment of these assets was
directly related the restructuring initiatives implemented during the year.
Charges of $5.7 million were incurred for remaining lease commitments, net of
expected sublease income, and other costs related to facilities made redundant
as a result of the workforce reduction and the discontinuance of previous
expansion plans. Redundant facilities included certain corporate facilities,
sales offices and research and development centers in North America and Europe.
As at June 30, 2002, we had paid $1.3 million associated with these charges, and
the remaining obligations, which are comprised of future lease commitments, will
be paid over the respective lease terms through to June 2007. The charges may be
increased in future periods if further consolidations are required or if
sublease income is less than expected.
We recorded charges of $5.3 million for contract settlement costs including
penalties expected to be incurred due to our withdrawal from certain purchase
and partner contracts and for various unrecoverable prepaid expenses related to
future services forfeited as a direct result of the restructuring. The cash
portion of these charges totaled $2.4 million, of which $1.7 million was paid
prior to June 30, 2002. The remaining cash portion will be paid in fiscal 2003.
If additional contracts are cancelled in future periods, or if additional
unforeseen costs are incurred in respect of current contracts, this charge may
increase.
As part of our review of financial results during the year ended June 30, 2002,
we performed an impairment assessment of identifiable intangible assets and
goodwill recorded in connection with our past acquisitions. The impairment
assessment was performed due to changes in overall economic conditions that have
negatively impacted our revenues and forecasted revenue growth rates. As a
result, we recorded an impairment charge of $33.0 million to reduce goodwill
associated with acquisitions and other purchased intangibles to its estimated
fair value. This impairment charge was primarily associated with the
acquisitions of Exactium Ltd. and Digital Conversations Inc. (formerly Simba
Technologies Inc.), Software Spectrum CRM, Inc. and Project One Business
Technologies Inc.
To determine the impairment loss for goodwill, we determined the fair value of
our recorded intangible asests using a business enterprise methodology that
included a terminal value assigned to the related entities. This value was then
compared to the carrying value, and if less, the difference represented the
impairment to be recorded. The assumptions supporting the estimated future cash
flows, including the estimated terminal values, reflect management's best
estimates. It is possible that the estimates and assumptions used under this
assessment may change in the short term, resulting in the need to further write
down the goodwill and other long-lived assets. In addition, it is possible that
we may have additional reductions in goodwill in future periods.
Our potential for future profitability depends on our ability to align costs and
expenses to expected revenues. If general economic and business conditions
continue to soften, or if the demand for our products or customer relationship
management products and services
-41-
in general is less than we forecast, or if we are unable to maintain costs and
expenses within our targeted range, we may incur additional restructuring
charges in subsequent periods.
Amortization of Goodwill
Amortization of goodwill was $16.2 million in the year ended June 30, 2002 and
$23.1 million in the year ended June 30, 2001. The decrease resulted from a
$33.0 million charge recorded in the quarter ended December 31, 2001 for the
impairment of goodwill and other purchased intangible assets. Amortization of
goodwill for the year ended June 30, 2002 is comprised of amortization for
additions to goodwill for acquisitions which totaled $15.1 million and $58.1
million for fiscal 2001 and 2000, respectively.
Included in goodwill is $2.1 million in additional consideration, of which
$200,000 was paid during the year ended June 30, 2002, in connection with earn
out amounts due to former principals of Project One.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and SFAS
No.142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses the
initial recognition and measurement of goodwill and other 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 adopted SFAS No. 141
as of July 1, 2001, although it has not had a material effect on our financial
position, results of operations and cash flows. We are required to adopt SFAS
No. 142 on a prospective basis as of July 1, 2002. We will complete an initial
goodwill impairment assessment in 2003 to determine if a transition impairment
charge should be recognized under SFAS No. 142.
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 investments. Interest and other income was $1.3
million and $3.3 million for the years ended June 30, 2002 and 2001,
respectively. The decrease of $2.0 million during the year ended June 30, 2002
was due primarily to our lower average cash and cash equivalents and short-term
investments balances held during the year, combined with lower interest rates
earned on invested cash balances. Interest and other income for the year ended
June 30, 2002 included foreign exchange gains of $154,000 compared to gains of
$65,000 for the year ended June 30, 2001. The other components of interest and
other income were not material for the periods presented.
IMPAIRMENT OF INVESTMENTS
During the fiscal year ended June 30, 2002, we incurred a charge of $1.2 million
related to an other than temporary impairment in the value of our investments in
a private company and a public company. Similar charges were not incurred in
fiscal 2001.
INCOME TAXES
The provision for income taxes was $386,000 and $503,000 for the years ended
June 30, 2002 and 2001, respectively. These income tax amounts were attributable
to our operations in the United States, the United Kingdom and France. The
provisions for taxes for the year ended June 30, 2001 was offset by $470,000
related to Canadian research and development tax incentives received during the
years ended June 30, 2001.
YEARS ENDED JUNE 30, 2001 AND 2000
REVENUES
Total revenues increased 80% to $96.2 million for the year ended June 30, 2001
from $53.6 million for the year ended June 30, 2000.
Licenses
Revenues from licenses increased 57% to $58.5 million for the year ended June
30, 2001 from $37.4 million for the year ended June 30, 2000.
Our revenues from licenses increased due to sale of licenses to new customers
and to follow-on sales to existing customers. These increases were attributable
to increased market acceptance of our solutions and increased sales as a result
of our expansion of our direct and indirect channels of distribution both in
North America and internationally. In addition, we believe that the availability
of
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new features added to the Pivotal CRM Suite has increased revenues as this has
extended the overall functionality of our solutions by permitting organizations
to collaborate with customers and partners over the Internet.
Revenues from licenses represented 61% and 70% of total revenues for the years
ended June 30, 2001 and 2000, respectively. License revenues decreased as a
percentage of total revenues primarily due to growth in our professional
services business to meet the demand for implementation of our products. North
American license revenues accounted for 67% and 72% of total license revenues in
the years ended June 30, 2001 and 2000, respectively. International license
revenues increased as a percentage of total revenues as demand for our products
increased as we expanded our European and other international operations
combined with a weakening U.S. economy. In late fiscal 2001 and during fiscal
2002, the buying patters of our potential customers changed as a result of
deteriorating economic conditions in the U.S. and internationally, resulting in
a sharp decrease in license revenues in the fourth quarter of fiscal 2001. No
single customer accounted for 10% or more of our revenues for the years ended
June 30, 2001 and 2000.
Services and Maintenance
Revenues from services and maintenance increased 133% to $37.6 million for the
year ended June 30, 2001 from $16.2 million for the year ended June 30, 2000.
This resulted from an increase of $9.9 million in revenues from technical
support and maintenance contracts, which entitles the customer to new versions
of the product and to technical support and maintenance services and an increase
of $11.4 million in revenues from implementation, education and consulting
service engagements.
Our revenues from services and maintenance represented 39% and 30% of total
revenues for the years ended June 30, 2001 and 2000, respectively.
COST OF REVENUES
Total cost of revenues increased 128% to $24.8 million for the year ended June
30, 2001 from $10.9 million for the year ended June 30, 2000.
Licenses
Cost of revenues from licenses increased 77% to $3.8 million for the year ended
June 30, 2001 from $2.1 million for the year ended June 30, 2000. The increase
is due primarily to increased costs for third-party technology integrated with
our solutions. Cost of revenues from licenses as a percentage of revenues from
licenses was 6% for each of the years ended June 30, 2001 and 2000.
Services and Maintenance
Cost of revenues from services and maintenance increased 140% to $21 million for
the year ended June 30, 2001 from $8.8 million for the year ended June 30, 2000.
The increase in dollar amount resulted from the hiring of consulting, customer
support and education personnel to support our growing customer base. Cost of
revenues from services and maintenance as a percentage of revenues from services
and maintenance was 56% and 54% for the years ended June 30, 2001 and 2000,
respectively.
OPERATING EXPENSES
Sales and Marketing
Sales and marketing expenses increased 64% to $51.2 million for the year ended
June 30, 2001 from $31.2 million for the year ended June 30, 2000. The increase
in dollar amounts reflects the expansion of our international sales capacity,
which required an increase in the number of sales and marketing professionals.
Sales and marketing expenses decreased as a percentage of total revenues to 54%
in the year ended June 30, 2001 from 59% in the year ended June 30, 2000. 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.
Research and Development
Research and development expenses increased 111% to $18.8 million for the year
ended June 30, 2001 from $8.9 million for the year ended June 30, 2000. The
increase was due to the increase in the number of research and development
employees. Research and development expenses were 20% and 17% of total revenues
for the years ended June 30, 2001 and 2000, respectively.
General and Administrative
General and administrative expenses increased 224% to $13.6 million for the year
ended June 30, 2001 from $4.2 million for the year ended June 30, 2000. General
and administrative expenses were 14% and 8% of total revenues, respectively, for
the same periods. The increase of $9.4 million in general and administrative
expenses included $4.2 million of additional charges which related to the
impairment of long-lived assets and an additional provision for doubtful
accounts. The remaining $5.2 million increase in the general
-43-
and administrative expenses during the year ended June 30, 2001 relates to the
hiring of additional personnel and the implementation of internal financial and
administrative systems.
The impairment of long-lived assets of $0.9 million relates to assets which we
will no longer be using as we are currently re-configuring our business systems.
The total bad debt expense was $3.3 million for the year ended June 30, 2001
which included an additional provision for doubtful accounts of $1.7 million
during the fourth quarter ended June 30, 2001. This additional provision was
made because we are experiencing delay in payments from certain customers due to
a weakening in the North American economy.
Amortization of Goodwill
Amortization of goodwill was $23.1 million in the year ended June 30, 2001. This
amount is comprised of a full year of amortization and a partial year of
amortization for additions to goodwill for acquisitions which totaled $15.1
million and $58.1 million for fiscal 2001 and 2000 respectively. Included in
goodwill is $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 our products. Amortization of goodwill totaling $1.4 million in the
year ended June 30, 2000, related to goodwill of arising from the acquisitions
of Transitif and Exactium.
INTEREST AND OTHER INCOME
Interest and other income consists of earnings on cash and cash equivalents and
short term investments net of interest expense and foreign exchange gains and
losses. Interest and other income was $3.3 million and $2.2 million for the
years ended June 30, 2001 and 2000, respectively. The increase of $1.1 million
during the year ended June 30, 2001 was due primarily to our higher cash and
cash equivalents and short-term investments. This was a result of the equity
financing completed in November 2000, which generated $51.8 million net of
expenses and brokers commissions. Interest and other income for the year ended
June 30, 2001 included foreign exchange gains of $65,000 compared to losses of
$168,000 for the year ended June 30, 2000. The other components of interest and
other income were not material for the periods presented.
INCOME TAXES
The provision for income taxes was $503,000 and $557,000 for the years ended
June 30, 2001 and 2000, respectively. These income tax amounts were attributable
to our operations in the United States, the United Kingdom and France and were
offset by $470,000 and $127,000 related to Canadian research and development tax
incentives received during the years ended June 30, 2001 and 2000 respectively.
QUARTERLY RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2002 AND 2001
The following tables present our unaudited quarterly results of operations both
in absolute dollars and on percentage of revenue basis for each of our last
eight quarters. This data has been derived from unaudited consolidated financial
statements that have been prepared on the same basis as the annual audited
consolidated financial statements and, in our opinion, include all normal
recurring adjustments necessary for the fair presentation of such information.
These unaudited quarterly results should be read in conjunction with our annual
consolidated financial statements.
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Three months ended
-------------------------------------------------------------------------------------------------------------------------------
(all amounts in thousands) June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
2002 2002 2001 2001 2001 2001 2000 2000
-------------------------------------------------------------------------------------------------------------------------------
REVENUES:
License $ 8,849 $ 7,510 $ 6,870 $ 6,053 $ 12,028 $ 16,368 $ 16,346 $ 13,768
Services and maintenance 10,223 10,206 9,828 10,077 10,216 10,271 9,705 7,452
-------------------------------------------------------------------------------------------------------------------------------
Total revenues 19,072 17,716 16,698 16,130 22,244 26,639 26,051 21,220
-------------------------------------------------------------------------------------------------------------------------------
COST OF REVENUES:
License 522 385 557 492 946 1,009 979 866
Services and maintenance 5,443 5,025 5,895 5,968 6,108 5,591 5,299 4,032
-------------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 5,965 5,410 6,452 6,460 7,054 6,600 6,278 4,898
-------------------------------------------------------------------------------------------------------------------------------
Gross profit 13,107 12,306 10,246 9,670 15,190 20,039 19,773 16,322
-------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 8,803 8,734 10,476 13,404 14,129 12,689 12,914 11,498
Research and development 3,720 3,636 4,660 4,947 5,228 5,096 4,509 3,917
General and administrative 2,774 2,060 2,780 5,206 6,904 2,787 2,100 1,776
Restructuring costs and 2,147 -- 49,504 1,925 -- -- -- --
other charges
Amortization of goodwill 1,594 1,593 6,131 6,839 6,594 6,068 5,405 4,995
-------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 19,038 16,023 73,551 32,321 32,855 26,640 24,928 22,186
-------------------------------------------------------------------------------------------------------------------------------
Loss from operations (5,931) (3,717) (63,305) (22,651) (17,665) (6,601) (5,155) (5,864)
Other income (expenses)
Interest and other income 245 345 481 218 1,352 994 644 343
Impairment of investments (1,244) -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
(999) 345 481 218 1,352 994 644 343
-------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (6,930) (3,372) (62,824) (22,433) (16,313) (5,607) (4,511) (5,521)
Income tax expense (recovery) 60 (8) 180 154 344 56 170 (67)
-------------------------------------------------------------------------------------------------------------------------------
Net loss $ (6,990) $ (3,364) $(63,004) $(22,587) $(16,657) $ (5,663) $ (4,681) $ (5,454)
===============================================================================================================================
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Three months ended
-------------------------------------------------------------------------------------------------------------------------------
(all amounts in thousands) June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30,
2002 2002 2001 2001 2001 2001 2000 2000
-------------------------------------------------------------------------------------------------------------------------------
REVENUES:
License 46% 42% 41% 38% 54% 62% 63% 65%
Services and maintenance 54% 58% 59% 62% 46% 38% 37% 35%
-------------------------------------------------------------------------------------------------------------------------------
Total revenues 100% 100% 100% 100% 100% 100% 100% 100%
-------------------------------------------------------------------------------------------------------------------------------
COST OF REVENUES:
License 3% 2% 3% 3% 4% 4% 4% 4%
Services and maintenance 28% 29% 36% 37% 28% 21% 20% 19%
-------------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 31% 31% 39% 40% 32% 25% 24% 23%
-------------------------------------------------------------------------------------------------------------------------------
Gross profit 69% 69% 61% 60% 68% 75% 76% 77%
-------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Sales and marketing 46% 49% 63% 83% 63% 48% 50% 54%
Research and development 20% 21% 28% 31% 23% 19% 17% 18%
General and administrative 15% 12% 17% 32% 31% 10% 8% 8%
Restructuring costs and other 11% - 296% 12%
charges
Amortization of goodwill 8% 8% 36% 42% 30% 23% 21% 25%
-------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 100% 90% 440% 200% 147% 100% 96% 105%
-------------------------------------------------------------------------------------------------------------------------------
Loss from operations (31%) (21%) (379%) (140%) (79%) (25%) (20%) (28%)
Other income (expenses)
Interest and other income 1% 2% 3% 1% 6% 4% 3% 2%
Impairment of investments (6%) - - - - - - -
----------------------------------------------------------------------------------------------
(5%) 2% 3% 1% 6% 4% 3% 2%
----------------------------------------------------------------------------------------------
Loss before income taxes (36%) (19%) (376%) (139%) (73%) (21%) (17%) (26%)
Income taxes 1% - 1% 1% 2% - 1% -
-------------------------------------------------------------------------------------------------------------------------------
Net Loss (37%) (19%) (377%) (140%) (75%) (21%) (18%) (26%)
===================================================================================================================================
-46-
For the year ended June 30, 2002 we experienced an increase in revenues during
our second, third, and fourth fiscal quarters, which we believe was primarily
related to increased license sales to new customers, follow on license sales to
existing customers, and an increased number of technical support and maintenance
contracts due to a growth in our customer base. We believe the decrease in
revenue in the quarters ended June 30, 2001 and September 30, 2001 were due to
the economic slowdown and related reluctance of companies to acquire significant
software and systems during this time. In addition, a pattern of reduced buying
by European customers during July and August has resulted in lower European
license revenues in the quarters ended September 30.
The decrease in operating expenses, excluding restructuring costs and other
charges, beginning in the quarter ended December 31, 2001 is a result of a
reduction in employees and marketing program expenditures following the
implementation of our restructuring plans as well as increased operating
efficiencies and decreased commissions due to lower sales. These costs are
expected to remain approximately the same in the first quarter of fiscal 2003.
We will continue to examine the level of sales and marketing costs based on
revenue projections.
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, recent acquisitions and restructuring, we cannot forecast operating
expenses based on historical results. Accordingly, we base our anticipated level
of expense in part on future revenue projections. Most of our expenses are fixed
in the short-term and we may not be able to quickly reduce spending if revenues
are lower than we have projected. Our ability to forecast our quarterly revenues
accurately is limited given our limited operating history, length of the sales
cycle of our solutions and other uncertainties in our business. If revenues in a
particular quarter do not meet projections, our net losses in a given quarter
would be greater than expected. As a result, we believe that our
quarter-to-quarter comparisons of our operating results are not necessarily
meaningful. Investors should not rely on the results of one quarter as an
indication of future performance.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, we had $20.3 million in cash and cash equivalents, $21.0
million in short-term investments and $23.6 million in total working capital.
Our cash and cash equivalents and short-term investments decreased to $41.3
million as of June 30, 2002 from $68.7 million as of June 30, 2001. Our working
capital decreased to $23.6 million at June 30, 2002 from $58.4 million at June
30, 2001.
Net cash used in operating activities for the year ended June 30, 2002 was $24.3
million compared to net cash used of $4.2 million in the same period in 2001.
This increase was primarily due to the higher net loss incurred during the year
ended June 30, 2002, which included $11.8 million of cash related restructuring
charges.
Net cash provided by investing activities was $30.8 million during the year
ended June 30, 2002 and net cash used in investing activities was $43.5 million
for the year ended June 30, 2001. During the year ended June 30, 2002 we
received proceeds of $34.5 million from the sale and maturity of short-term
investments and proceeds of $1.3 million from the sale and leaseback of assets,
whereas during the year ended June 30, 2001 we used $24.7 million for net
purchases of short-term investments. Capital expenditures totalled $1.2 million
and $6.8 million for the years ended June 30, 2002 and 2001, respectively.
Long-term investments and other assets totaled $3.8 million and $6.3 million for
the years ended June 30, 2002 and 2001, respectively. During the year ended June
30, 2002, there were no acquisitions. During the year ended June 30, 2001, we
used $5.7 million (net of cash acquired) on acquisitions including Ionysys,
Project One, Software Spectrum, and Inform.
Cash provided by financing activities was $0.6 million and $56.2 million for the
years ended June 30, 2002 and 2001, respectively. Net cash provided by financing
activities for the year ended June 30, 2001 resulted primarily from the issuance
of common shares.
As of June 30, 2002, our future fixed commitments for cash payments primarily
related to obligations under non-cancelable operating and capital leases. We
lease facilities under non-cancelable operating leases expiring between 2002 and
2012 and certain equipment under non-cancelable operating and capital leases
expiring between 2002 and 2004. Future minimum lease payments and other future
fixed commitments for the years ending June 30 are as follows:
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Years ending June 30,
(thousands)
Total 2003 2004 2005 2006 2007 2008 - 2012
-------- -------- -------- -------- -------- -------- -----------
Capital leases and long term debt $ 775 341 411 23 - - -
Restructuring liabilities 5,378 2,296 973 923 684 502 -
Operating leases (excluding amounts
charged to restructuring) 38,505 7,129 5,607 4,075 3,569 2,889 15,236
Licencing commitments 1,000 1,000 - - - - -
-------- -------- -------- -------- -------- -------- -----------
Total cash obligations $ 45,658 10,766 6,991 5,021 4,253 3,391 15,236
Our principal source of liquidity at June 30, 2002 was our cash, cash
equivalents and short-term investments of $41.3 million. We have a credit
agreement with a Canadian chartered bank, which includes a revolving letter of
credit facility of $5.0 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, 2002 and 2001, letters of credit totaling $4.0 million
and $2.5 million, respectively, were outstanding to secure facilities and
equipment lease obligations.
Our accounts receivable at June 30, 2002, were 53 days of sales outstanding,
which is below our target range of 75 to 85 days. Days of sales outstanding
decreased because of our improved collection procedures, a more even
distribution of sales during the fourth quarter, and the additional provision
for doubtful accounts.
We expect to incur capital expenditures of $3 to $4 million in the first half of
fiscal 2003, largely due to our move to new Vancouver head office facilities, as
well as various upgrades to our computer systems infrastructure.
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 18 months. Thereafter, depending on the development of our business, we may
need to raise additional cash for working capital or other expenses. In the
interim, however, lower than anticipated revenues, higher than anticipated
expenses, or opportunities for acquisitions or other business initiatives that
require significant cash commitments, or other unanticipated problems or
expenses that could result in a requirement for additional cash before that
time. If we need to raise additional cash, financing may not be available to us
on favorable terms, or at all.
Recent Accounting Pronouncements
In 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.141 addresses the initial recognition and measurement of
intangible assets acquired in a business combination and SFAS No. 142 addresses
the subsequent 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 adopted SFAS No. 141 as of July 1, 2001. We are required to adopt SFAS No.
142 on a prospective basis as of July 1, 2002. The adoption of SFAS No. 141 did
not have a material effect on our financial position, results of operations and
cash flows in 2003 and subsequent years. Commencing July 1, 2002, we will no
longer amortize goodwill pursuant to SFAS No. 142. Goodwill amortization for the
year ended June 30, 2002 was $16,157. Unamortized goodwill as of June 30, 2002
was $7,632. We will complete an initial goodwill impairment assessment in fiscal
2003 to determine if a transition impairment charge should be recognized under
SFAS No. 142.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." Although retaining many of the fundamental recognition and
measurement provisions of SFAS 121, the new rules significantly change
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the criteria that would have to be met to classify an asset as held-for-sale.
The statement also supersedes certain provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," and will require expected future operating
losses from discontinued operations to be displayed in discontinued operations
in the period(s) in which the losses are incurred rather than as of the
measurement date, as presently required. As required by SFAS No. 144, we will
adopt this new statement on July 1, 2002. We are evaluating this statement but
do not expect that it will have a material impact on our financial position,
results of operations, or cash flows.
On January 1, 2002, we adopted Topic D-103, which requires that certain
out-of-pocket expenses re-billed to customers be recorded as revenue versus an
offset to the related expense. Prior to the adoption of Topic D-103, we recorded
billed out-of-pocket expenses as an offset to the related expense. Comparative
financial statements for prior periods have been conformed to the current year
presentation. This change had no effect on operating income or net income for
any period presented.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs associated with exit and disposal activities, including restructuring
activities. SFAS No. 146 also addresses recognition of certain costs related to
terminating a contract that is not a capital lease, costs to consolidate
facilities or relocate employees, and termination benefits provided to employees
that are involuntarily terminated under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The impact of our
financial position and results of operations from adopting SFAS No. 146 has not
been determined.
AUDIT COMMITTEE
Pivotal has an Audit Committee of the Board of Directors, the charter of which
is to oversee the activities of management and our external auditors as they
relate to the financial reporting process. Currently, the Audit Committee is
comprised of Robin Louis, Jeremy Jaech, Steven Gordon and Howard Gwin. In
particular, the Audit Committee's role includes ensuring that management
properly develops and adheres to a sound system of internal controls, and that
our external auditors, through their own review, assess the effectiveness of
those controls and management's adherence to them.
In fulfilling their responsibilities, the Audit Committee conducted regular,
quarterly meetings with our external auditors. In these meetings, the Audit
Committee discussed with management and our external auditors the quality and
acceptability of accounting policies and significant transactions or issues
encountered during the period. In addition, the Audit Committee met with our
external auditors independent of management to provide for independent and
confidential assessment of management and the internal controls as they relate
to the quality and reliability of our financial statements. In the year ended
June 30, 2001, we adopted an Audit Committee Charter as required by the Nasdaq
Stock Exchange, Inc. in compliance with the Nasdaq Stock Exchange, Inc.'s
Marketplace Rules. We are committed to supporting this process and the Audit
Committee in fulfilling their role of ensuring the integrity of our internal
controls and financial reporting.
ITEM 7A. 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.
-49-
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 June 30, 2002, the fair value of our short-term investment portfolio would
not be materially 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 two public companies are considered available for
sale and are subject to considerable market price volatility and are
additionally risky due to resale restrictions. The investments are recorded on
the balance sheet at market 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. We typically do not attempt to reduce
or eliminate our market exposure on these securities. A 10% adverse change in
the equity price would result in an approximate $90,000 decrease in the fair
value of our marketable equity securities as of June 30, 2002. During the year
ended June 30, 2002, we recorded a writedown of $0.8 million related to an other
than temporary decline in the value of investments in public companies. Our
investments in privately held companies are carried at cost less writedowns
related to other than temporary declines. 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. During the year ended June 30, 2002, we recorded
a charge of $0.4 million related to an impairment in the value of investments in
non-public companies.
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, we do not
believe our exposure to other currencies is material.
On occasion, 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 recognized in 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.
If our actual currency requirement in the period forecasted differs materially
from the notional amount of our forward contracts and/or the amount of Canadian
dollars purchased in the open market during a period of currency volatility or
if we do not continue to manage our exposure to foreign currency through forward
contracts or other means, we could experience unanticipated foreign currency
gains or losses.
-50-
Our foreign currency risk management policy subjects us to risks relating to the
creditworthiness of the commercial banks with which we enter into forward
contracts. If one of these banks cannot honor its obligations, we may suffer a
loss. We also invest in our international operations which will likely result in
increased future operating expenses denominated in United Kingdom and Irish
pounds, French francs, euros, German marks, Japanese yen, Australian dollars and
New Zealand dollars. Our exposure to exchange fluctuations in foreign currencies
has not been material to date and accordingly, our current foreign currency risk
management practices do not cover foreign exchange risks related to these other
currencies. In the future, our exposure to foreign currency risks from these
other foreign currencies may increase and if not managed appropriately, we could
experience unanticipated foreign currency gains and losses.
The purpose of our foreign currency risk management policy is to reduce the
effect of exchange rate fluctuation on our results of operations. Therefore,
while our foreign currency risk management policy may reduce our exposure to
losses resulting from unfavorable changes in currency exchange rates, it also
reduces or eliminates our ability to profit from favorable changes in currency
exchange rates.
At June 30, 2002 and June 30, 2001, we had no outstanding currency forward
exchange contracts. During the year ended June 30, 2002, we recorded a foreign
exchange gain of $154,000 compared to a gain of $65,000 during the year ended
June 30, 2001.
-51-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Pivotal Corporation
We have audited the accompanying consolidated balance sheets of Pivotal
Corporation as of June 30, 2002 and 2001 and the related consolidated statements
of operations, shareholders' equity and cash flows for each of the three years
in the period ended June 30, 2002. Our audit also included the financial
statement schedule listed in the Index at Item 14(a). These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pivotal
Corporation as of June 30, 2002 and 2001 and the results of its operations and
its cash flows for each of the three years in the period ended June 30, 2002 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/s/ Deloitte & Touche LLP
Vancouver, Canada
July 19, 2002
-52-
PIVOTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars; all amounts in thousands)
June 30,
----------------------------
2002 2001
----------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 20,322 $ 13,247
Short-term investments 20,961 55,468
Accounts receivable 11,100 25,645
Prepaid expenses and other 2,546 3,656
----------------------------
Total current assets 54,929 98,016
Property and equipment, net 4,201 9,183
Goodwill, intangibles and other assets, net 9,515 61,244
----------------------------
Total assets $68,645 $168,443
============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 16,414 $ 25,324
Current portion of accrued restructuring costs 2,296 -
Deferred revenue 12,327 13,810
Current portion of obligations under capital leases and
long-term debt 320 516
----------------------------
Total current liabilities 31,357 39,650
Non-current portion of accrued restructuring costs 3,082 -
Non-current portion of obligations under capital leases
and long-term debt 423 592
----------------------------
Total liabilities 34,862 40,242
Commitments and contingencies (Note 10)
Shareholders' equity:
Preferred shares, undesignated, no par value, authorized
shares - 20,000 at June 30, 2002 and June 30, 2001; no
shares issued and outstanding - -
Common shares and additional paid-in capital, no par value,
authorized shares - 200,000 at June 30, 2002 and
June 30, 2001; issued and outstanding shares - 24,096 and
23,933 June 30, 2002 and June 30, 2001, respectively 178,084 176,728
Deferred share-based compensation (23) (81)
Accumulated other comprehensive loss (90) (203)
Accumulated deficit (144,188) (48,243)
----------------------------
Total shareholders' equity 33,783 128,201
----------------------------
Total liabilities and shareholders' equity $ 68,645 $168,443
============================
See accompanying Notes to the Consolidated Financial Statements.
-53-
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in United States dollars;
all amounts in thousands except per share data)
Years ended June 30,
------------------------------------
2002 2001 2000
------------------------------------
Revenues:
License $ 29,282 $ 58,510 $37,384
Services and maintenance 40,334 37,644 16,169
------------------------------------
Total revenues 69,616 96,154 53,553
------------------------------------
Cost of revenues:
License 1,956 3,800 2,141
Services and maintenance 22,331 21,030 8,761
------------------------------------
Total cost of revenues 24,287 24,830 10,902
------------------------------------
Gross profit 45,329 71,324 42,651
------------------------------------
Operating expenses:
Sales and marketing 41,417 51,230 31,165
Research and development 16,963 18,750 8,906
General and administrative 12,820 13,567 4,190
Restructuring costs and other charges 53,576 - -
Amortization of goodwill 16,157 23,062 1,409
In process research and development and other charges - - 6,979
------------------------------------
Total operating expenses 140,933 106,609 52,649
------------------------------------
Loss from operations (95,604) (35,285) (9,998)
Other income (expenses)
Interest and other income 1,289 3,333 2,193
Impairment of investments (1,244) - -
------------------------------------
45 3,333 2,193
------------------------------------
Loss before income taxes (95,559) (31,952) (7,805)
Income taxes 386 503 557
------------------------------------
Net loss for the year (95,945) $(32,455) $(8,362)
====================================
Loss per share
Basic and diluted $ (3.99) $ (1.40) $ (0.45)
Pro forma basic and diluted - - $ (0.39)
Weighted average number of shares used to
calculate loss per share:
Basic and diluted 24,039 23,173 18,643
Pro forma basic and diluted - - 21,339
See accompanying Notes to the Consolidated Financial Statements.
-54-
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Expressed in United States dollars; all amounts in thousands)
Common Shares
and
Class A Additional
Convertible Paid-in Class B Accumulated
Preferred Shares Capital Common Shares Deferred Other Total
-------------- ---------------- ------------- Share-based Comprehensive Accumulated Shareholders'
Shares Amount Shares Amount Shares Amount Compensation Loss Deficit Equity (Deficit)
------ ------ ------ -------- ------ ------ ------------ ------------- ----------- ---------------
Balance, June 30,
1999 2,000 83 3,454 563 477 4 (416) - (7,426) (7,192)
Net loss for the
year - - - - - - - - (8,362) (8,362)
Conversion of
Class B common
shares into common
shares - - 477 4 (477) (4) - - - -
Conversion of
Class A
preferred shares
into common shares (2,000) (83) 2,000 83 - - - - - -
Conversion of
redeemable convertible
preferred shares
into common shares - - 10,052 17,500 - - - - - 17,500
Issuance of common
shares on exercise
of stock options - - 375 995 - - - - - 995
Issuance of common
shares on initial
public offering,
net of offering costs - - 3,975 43,101 - - - - - 43,101
Issuance of common
shares related to
Employee Stock
Purchase Plan - - 69 707 - - - - - 707
Acquisitions - - 1,655 49,125 - - - - - 49,125
Amortization of
share-based
compensation - - - - - - 223 - - 223
------ ------ ------ -------- ------ ------ ------------ ------------- ----------- --------------
Balance, June 30, 2000 - - 22,057 112,078 - - (193) - (15,788) 96,097
Net loss for the year - - - - - - - - (32,455) (32,455)
Unrealized loss on
available-for-sale
investment - - - - - - - (203) - (203)
---------
Comprehensive loss (32,658)
---------
Tax benefit from employee
stock option plans - - - 876 - - - - - 876
Issuance of common shares
on exercise of
stock options - - 506 3,109 - - - - - 3,109
Issuance of common shares
related to Employee
Stock
Purchase Plan - - 72 1,440 - - - - - 1,440
Acquisitions - - 298 7,404 - - - - - 7,404
Amortization of
share-based
compensation - - - - - - 112 - - 112
Compensation related to
stock options - - - 65 - - - - - 65
Issuance of common shares
on equity financing,
net of offering costs - - 1,000 51,756 - - - - - 51,756
------ ------ ------ -------- ------ ------ ------------ ------------- ----------- --------------
Balance, June 30, 2001 - - 23,933 176,728 - - (81) (203) (48,243) 128,201
Net loss for the year - - - - - - - - (95,945) (95,945)
Unrealized gain on
available-for-sale
investment - - - - - - - 113 - 113
--------------
Comprehensive loss (95,832)
--------------
Tax benefit from employee
stock option plans - - - 378 - - - - - 378
Issuance of common shares
on exercise of
stock options - - 51 76 - - - - - 76
Issuance of common shares
related to Employee
Stock Purchase Plan - - 112 902 - - - - - 902
Amortization of
share-based
compensation - - - - - - 58 - - 58
------ ------ ------ -------- ------ ------ ------------ ------------- ----------- --------------
Balance, June 30, 2002 - $ - 24,096 $178,084 - $ - $(23) $ (90) $(144,188) $33,783
====== ====== ====== ======== ====== ====== ============ ============= =========== ==============
See accompanying Notes to the Consolidated Financial Statements.
-55-
PIVOTAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in United States dollars; all amounts in thousands)
Years ended June 30,
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net loss for the year $(95,945) $(32,455) $(8,362)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Amortization of goodwill 16,157 23,062 1,409
Depreciation 4,145 4,556 2,215
Non-cash restructuring costs 8,758 - -
In process research and development and other charges - - 6,979
Tax benefit from employee stock option plans 378 876 -
Impairment of goodwill and other purchased intangible assets 32,987 948 -
Loss on disposal of other assets 1,244 - -
Amortization of deferred share-based compensation 58 112 223
Non-cash share-based compensation expense - 65 -
Change in operating assets and liabilities 7,896 (1,368) 2,469
------------ ------------ ------------
Net cash (used in) provided by operating activities (24,322) (4,204) 4,933
------------ ------------ ------------
Cash flows from investing activities:
Purchases, sales and maturities of short-term investments, net 34,507 (24,680) (30,788)
Purchase of property and equipment (1,211) (6,833) (6,110)
Proceeds from sale and leaseback of assets 1,277 - -
Purchase of long-term investments and other assets (3,789) (6,276) (2,921)
Acquisitions (net of cash acquired) - (5,682) (14,520)
------------ ------------ ------------
Net cash provided by (used in) investing activities 30,784 (43,471) (54,339)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from equity financing - 51,756 -
Net proceeds from initial public offering of common shares - - 43,101
Proceeds from issuance of common shares 978 4,550 1,701
Repayment of obligations under capital lease (365) (118) -
------------ ------------ ------------
Net cash provided by financing activities 613 56,188 44,802
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 7,075 8,513 (4,604)
Cash and cash equivalents, beginning of period 13,247 4,734 9,338
------------ ------------ ------------
Cash and cash equivalents, end of period $ 20,322 $13,247 $ 4,734
============ ============ ============
Supplemental cash flow disclosure:
Income taxes (recovered) paid $316 $ (132) $ 324
============ ============ ============
Interest paid $23 $ 10 $ 1
============ ============ ============
Supplemental non-cash investing disclosure:
Issuance of common shares and options on acquisitions $- $ 7,404 $49,125
============ ============ ============
Supplemental non-cash financing disclosure:
Issuance of common shares and options on acquisitions $- $ 7,404 $49,125
============ ============ ============
Conversion of preferred shares into common shares $- $ - $17,583
============ ============ ============
See accompanying Notes to the Consolidated Financial Statements.
-56-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Pivotal Corporation and its partners provide software, services and support
that enables medium-sized businesses and divisions of large businesses
worldwide to make, serve, and manage customers efficiently and
intelligently by providing customer relationship management software and
business consulting services. Pivotal helps companies manage collaborative
relationships between customers, business partners, and employees, and
guides intelligent commerce transactions across multiple channels.
PRINCIPLES OF CONSOLIDATION
These consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP) and include the accounts of Pivotal and its
wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with accounting standards for
software companies including Statement of Position No. 97-2 (SOP 97-2),
Software Revenue Recognition, as amended by SOP 98-4, 98-9, and related
interpretations including Technical Practice Aids.
Pivotal generates revenues through two sources: (1) license revenues and
(2) services and maintenance revenues. License revenues are normally
generated from licensing with end-users, value-added resellers (VARs) and
application service providers and, to a lesser extent, through distribution
of third party products. When software licenses are sold indirectly to
end-users through VARs, Pivotal recognizes as revenue only the net fee
payable from the reseller upon sell-through to the end-customer by the
reseller. Service revenues are generated from consulting services,
education services and maintenance.
Revenues from software license agreements are recognized upon delivery of
software if persuasive evidence of an arrangement exists, collection is
probable, the fee is fixed or determinable, and vendor-specific objective
evidence exists to allocate the total fee to elements of the arrangement.
Vendor-specific objective evidence is typically based on the price charged
when an element is sold separately, or, in the case of an element not yet
sold separately, the price established by authorized management, if it is
probable that the price, once established, will not change before market
introduction. Elements included in multiple element arrangements could
consist of software products, upgrades, enhancements, customer support
services, or consulting services. If an acceptance period is required,
revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. Pivotal's agreements with its
customers and resellers do not contain product return rights. If the fee is
not fixed or determinable due to the existence of extended payment terms,
revenue is recognized periodically as payments become due, provided all
other conditions for revenue recognition are met. Pivotal's customers
include a number of suppliers. On occasion, Pivotal has purchased goods or
services for Pivotal's operations from vendors at or about the same time
Pivotal has licensed its software to these organizations. These
transactions are separately negotiated and recorded at amounts and terms
Pivotal considers to be at arm's-length.
Maintenance revenues are recognized ratably over the term of the contract,
typically one year. Consulting revenues are primarily related to
implementation services performed on a time-and-materials basis under
separate service arrangements related to the installation and use of
Pivotal's software products. Revenues from consulting and education
services are recognized as services are performed. If a transaction
includes both license and service elements, license fee revenues are
recognized separately on shipment of the software, provided that the above
criteria are met, payment of the license fee is not dependent on the
performance of services, the services are not essential to the
functionality of the product and the payment terms for licenses are not
subject to acceptance criteria. In cases where license fee payments are
contingent on acceptance of services, Pivotal defers recognition of
revenues from both the license and the service elements until the
acceptance criteria are met.
-57-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
COST OF REVENUES
Cost of license revenues consists primarily of media, product packaging and
shipping, documentation and other production costs, and third party
royalties. Cost of services and maintenance revenues consists primarily of
salaries, benefits and allocated overhead costs related to consulting,
training and global services personnel, including the cost of services
provided by third-party consultants engaged by Pivotal.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Estimates are used for,
but not limited to, the accounting for doubtful accounts, depreciation and
amortization, income taxes, restructuring liabilities and contingencies.
Actual results may differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid short-term investments with
original maturities at the date of acquisition of 90 days or less and are
recorded at cost.
SHORT-TERM INVESTMENTS
Under Financial Accounting Standard ("SFAS") No. 115, Accounting for
Certain Investments in Debt and Equity Securities, management classifies
investments as available-for-sale or held-to-maturity at the time of
purchase and re-evaluates such designation as of each balance sheet date.
Investments classified as held-to-maturity securities are stated at
amortized cost with corresponding premiums or discounts amortized against
interest income over the life of the investment.
Marketable equity and debt securities not classified as held-to-maturity
are classified as available-for-sale and reported at fair value. Unrealized
gains and losses on these investments, net of any related tax effect, are
included in equity as a separate component of shareholders' equity.
Short-term investments consist of money market instruments with maturities
of less than one year. As at June 30, 2002, Pivotal's short-term
investments consisted solely of held-to-maturity investments and their
carrying value was substantially the same as their market value.
INVESTMENTS IN PUBLIC COMPANIES
At June 30, 2002 and June 30, 2001, Pivotal held investments in publicly
traded companies in which it has less than 20% of the voting rights and
over which it did not exercise significant influence. The investments are
included in goodwill, intangibles and other assets and are recorded at fair
value, which is determined based on quoted market prices, with net
unrealized gains and losses included in accumulated other comprehensive
loss. If management determines that an investment has an other than
temporary decline in fair value, an impairment charge is included in other
income and expenses. During the year ended June 30, 2002, Pivotal recorded
a writedown of $848 related to other than temporary declines in the value
of its investments in public companies.
-58-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INVESTMENTS IN NON-PUBLIC COMPANIES
Pivotal has certain investments in non-publicly traded companies in which
it has less than 20% of the voting rights and in which it does not exercise
significant influence. These investments are included in goodwill and other
assets and are accounted for on a cost basis. Under the cost method of
accounting, investments in private companies are carried at cost and are
adjusted only for other-than-temporary declines in fair value,
distributions of earnings and additional investments. The Company
periodically evaluates whether the declines in fair value of its
investments are other-than-temporary. This evaluation consists of a review
of qualitative and quantitative factors by members of senior management,
including a review of the investee's financial condition, results of
operations, operating trends and other financial ratios. The company
further considers the implied value from any recent rounds of financing
completed by the investee, as well as market prices of comparable public
companies. During the year ended June 30, 2002, Pivotal recorded a charge
of $375 related to impairment in the value of investments in non-public
companies.
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 2002 and 2001, Pivotal has the following financial instruments:
cash and cash equivalents, short-term investments, accounts receivable,
investments in public and non-public companies, accounts payable and
accrued liabilities, and long term debt. The carrying value of cash and
cash equivalents, short-term investments, accounts receivable and accounts
payable, and accrued liabilities approximates their fair value based on
their liquidity or based on their short-term nature.
The fair values of investments in publicly traded companies are determined
using quoted market prices for those securities. The fair values of
investments in non-publicly traded companies are not readily determinable.
The fair value of Pivotal's obligations under capital leases and long-term
debt at June 30, 2002 and 2001 approximated their carrying value. The fair
value of the non-current portion of restructuring liabilities is not
readily determined.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation.
Depreciation of property and equipment is provided using the following
rates and methods:
Computer software 2 year straight line
Computer hardware and equipment 30% declining balance or 3 year
straight-line
Furniture and fixtures 20% declining balance
Leasehold improvements are amortized using the straight-line method over
the lesser of the term of the lease, which is typically three to five
years, or the useful life of the related improvement.
GOODWILL, INTANGIBLES AND OTHER ASSETS
Goodwill, core technology and other intangible assets are carried at cost
less accumulated amortization and are being amortized on a straight-line
basis over the economic lives of the respective assets, generally three
years.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangible assets to be held and
used are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Determination of recoverability is based on an estimate of
undiscounted future cash flows resulting from the use of the asset and its
eventual disposition. Measurement of an impairment loss for long-lived
assets and certain identifiable intangible assets that management expects
to hold and use are based on the fair value of the asset. Long-lived assets
and certain identifiable intangible assets to be disposed of are reported
at the lower of carrying amount or fair value less costs to sell. In the
years ended June 30, 2002 and June 20, 2001, Pivotal recorded impairment
losses of $38,833 and $948, respectively, related to long-lived assets
having carrying values in excess of the cash flows expected to result from
their disposal. No such impairment loss had been identified by Pivotal for
the year ended June 30, 2000.
-59-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
RESEARCH AND DEVELOPMENT COSTS
Research and development costs, which consist primarily of software
development costs, are expensed as incurred. SFAS No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,
provides for the capitalization of certain software development costs after
technological feasibility of the software is established. Under Pivotal's
current practice of developing new products and enhancements, the
technological feasibility of the underlying software is not established
until substantially all product development is complete, including the
development of a working model. No such costs have been capitalized because
the impact of capitalizing such costs would not be material.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Pivotal to a concentration
of credit risk consist principally of cash and cash equivalents, short-term
investments and accounts receivable. Cash and cash equivalents are
custodied with high-quality financial institutions and short-term
investments are made in investment grade securities to mitigate exposure to
credit risk. Pivotal's customer base is dispersed across many different
geographic areas throughout North America, Europe, the Asia Pacific, and
Latin America and consists of companies in a variety of industries. Pivotal
performs ongoing credit evaluations of its customers and does not require
collateral or other security to support credit sales. Pivotal provides an
allowance for bad debts based on historical experience and specifically
identified risks. During the years ended June 30, 2002, 2001 and 2000, no
single customer accounted for more than 10% of revenues.
DERIVATIVE FINANCIAL INSTRUMENTS
Pivotal's use of derivative financial instruments is limited to short-term
foreign currency forward exchange contracts also referred to as forward
contracts, used from time to time to manage exposure related to certain
Canadian currency transactions. Pivotal does not enter into derivative
financial instruments for trading purposes. Pivotal identifies future
Canadian currency commitments and occasionally enters into forward
contracts to hedge exposure to fluctuations in the Canadian dollar. Gains
and losses on forward contracts that are designated and effective as hedges
of firm foreign currency commitments are recognized when the related
transaction is recognized. Gains and losses not meeting the criteria for
hedge accounting are recognized in operations in the current period.
As of June 30, 2002 and June 30, 2001, Pivotal had no outstanding forward
contracts.
FOREIGN CURRENCY TRANSLATION
The functional currency of Pivotal and its subsidiaries is the U.S. dollar.
Monetary assets and liabilities denominated in other than the U.S. dollar
are translated using the exchange rates prevailing at the balance sheet
date, and non-monetary assets are translated using the historical exchange
rate at the time the asset was acquired. Revenues and expenses are
translated using average exchange rates prevailing during the period. Gains
and losses on foreign currency transactions and translation are recorded in
the consolidated statements of operations.
ADVERTISING
Pivotal expenses advertising costs as they are incurred. Advertising
expense is included in sales and marketing expenses and amounted to $1,157,
$1,305, and $924 in the years ended June 30, 2002, 2001, and 2000,
respectively.
INCOME TAXES
Pivotal accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes. This statement provides for a liability
approach under which deferred income taxes are provided based upon
currently enacted tax laws and rates. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amounts expected to be
realized.
-60-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SHARE-BASED COMPENSATION
As permitted under SFAS No. 123, Accounting for Stock-Based Compensation,
Pivotal has accounted for employee stock options in accordance with
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and has made the pro forma disclosures required by
SFAS No. 123 in Note 11.
Deferred compensation charges arise from those situations where options are
granted at an exercise price lower than the deemed fair value of the
underlying common shares. These amounts are amortized as charges to
operations over the vesting periods of the individual stock options.
LOSS PER COMMON SHARE
Basic loss per share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share amounts reflect the potential
dilution by including other common share equivalents, including stock
options and redeemable convertible preferred shares, in the weighted
average number of common shares outstanding for a period, if dilutive.
Pro forma loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding and the weighted average
redeemable convertible preferred shares and Class A convertible preferred
shares outstanding as if such shares were converted into common shares and
had been outstanding at the beginning of the fiscal year. No convertible
preferred shares were outstanding during the years ended June 30, 2002 and
June 30, 2001.
Pivotal had a net loss for all periods presented herein, therefore none of
the stock options outstanding during each of the periods presented were
included in the computation of diluted loss per share as they were
antidilutive.
The following table sets forth the computation of basic and diluted, and
pro forma basic and diluted loss per share:
Years ended June 30,
----------------------------------------
2002 2001 2000
----------------------------------------
Net loss(A) $(95,945) $(32,455) $(8,362)
========================================
Weighted average number of
common shares outstanding(B) 24,039 23,173 18,643
----------------------------------------
Pro forma adjustment for convertible
preferred shares - - 2,696
---------------------------------------
Pro forma basic and diluted weighted
average number of shares(C) - - 21,339
========================================
Loss per share
Basic and diluted (A/B) $ (3.99) $ (1.40) $ (0.45)
Pro forma basic and diluted (A/C) - - $ (0.39)
-61-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.141 addresses the initial recognition and
measurement of intangible assets acquired in a business combination and
SFAS No. 142 addresses the subsequent 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 adopted SFAS No. 141 as of July 1, 2001 and is required to adopt
SFAS No. 142 on a prospective basis as of July 1, 2002. The adoption of
SFAS No. 141 did not have a material effect on Pivotal's financial
position, results of operations and cash flows in fiscal 2002. Commencing
July 1, 2002, Pivotal will no longer amortize goodwill pursuant to SFAS No.
142. Goodwill amortization for the year ended June 30, 2002 was $16,157.
Unamortized goodwill as of June 30, 2002 was $7,632. Pivotal will complete
an initial goodwill impairment assessment in the first six months of fiscal
2003 to determine if a transition impairment charge should be recognized
under SFAS No. 142.
In October 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statements supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Although retaining many of the
fundamental recognition and measurement provisions of SFAS 121, the new
rules significantly change the criteria that would have to be met to
classify an asset as held-for-sale. The statements also supersedes certain
provisions of Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," and will require expected future operating losses from
discontinued operations to be displayed in discontinued operations in the
period(s) in which the losses are incurred rather than as of the
measurement date, as presently required. As required by SFAS No. 144,
Pivotal will adopt this new statement on July 1, 2002. Pivotal is
evaluating this statement but does not expect that it will have a material
impact on its financial position, results of operations, or cash flows.
On January 1, 2002, Pivotal adopted Topic D-103, which requires that
certain out-of-pocket expenses billed to customers be recorded as revenue
versus an offset to the related expense. Prior to the adoption of Topic
D-103, Pivotal recorded billed out-of-pocket expenses as an offset to the
related expense. Comparative financial statements for prior periods have
been conformed to the current year presentation. This change had no effect
on operating income or net income for any period presented.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
addresses significant issues regarding the recognition, measurement, and
reporting of costs associated with exit and disposal activities, including
restructuring activities. SFAS No. 146 also addresses recognition of
certain costs related to terminating a contract that is not a capital
lease, costs to consolidate facilities or relocate employees, and
termination benefits provided to employees that are involuntarily
terminated under the terms of a one-time benefit arrangement that is not an
ongoing benefit arrangement or an individual deferred-compensation
contract. SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. The impact of Pivotal's financial
position or results of operations from adopting SFAS No. 146 has not been
determined.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the
current period presentation.
2. BUSINESS COMBINATIONS
During the years ended June 30, 2001 and 2000, Pivotal completed the
acquisitions described below which were accounted for using the purchase
method of accounting. Pivotal did not complete any acquisitions during the
year ended June 30, 2002. The results of operations of each acquisition
were included in the 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.
-62-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
2. BUSINESS COMBINATIONS (Continued)
FISCAL 2001
Ionysys Technology Corporation
On October 16, 2000, Pivotal acquired 100% of Ionysys Technology
Corporation, a privately held company providing consulting and
implementation services related to Internet solutions based in Vancouver,
British Columbia. Pivotal paid an aggregate cash purchase price of $1,014
including acquisition related expenditures of $360.
Project One Business Technologies Inc.
On October 31, 2000, Pivotal acquired 100% of Project One Business
Technologies Inc., a privately held company providing consulting and
implementation services 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 cash of $460,
which includes acquisition related expenditures of $380.
The agreement for the acquisition of Project One also provided for
additional consideration to a maximum of approximately 96 common shares to
be paid based on achieving certain targets over the subsequent three years.
At June 30, 2002 Pivotal had paid $200 and accrued $1,923 related to
expected additional consideration to be paid to the former owners of
Project One. All share consideration will be recorded as additional
purchase price when issued. No additional shares had been issued in
connection with the acquisition of Project One during the periods ended
June 30, 2002 and June 30, 2001.
Software Spectrum CRM, Inc.
On December 5, 2000, Pivotal acquired 100% of Software Spectrum CRM, Inc.
Software Spectrum, based in Dallas, Texas, delivers solutions and
consulting expertise in multi-channel contact centers and customer
relationship management to help organizations increase revenue and customer
satisfaction. Pivotal paid an aggregate purchase price of $7,474 consisting
of 138 common shares and cash of $1,925, which includes acquisition related
expenditures of $1,175.
Inform Inc.
On June 22, 2001, Pivotal acquired 100% of Inform Inc., a company located
in Toronto, Ontario, which specializes in implementation services for the
financial services industry. Pivotal paid an aggregate purchase price of
$1,310 consisting of 45 common shares and cash of $359, which includes
acquisition related expenditures of $266.
-63-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
2. BUSINESS COMBINATIONS (Continued)
Other
Other acquisitions consist of asset acquisitions of implementation services
businesses during the year ended June 30, 2001.
The total consideration, including acquisition costs, was allocated based
on estimated fair values on the acquisition date as follows:
Project Software
Ionysys One Spectrum Inform Other Total
--------- --------- ---------- --------- --------- ---------
Tangible assets acquired $ 86 $ 62 $ 2,697 $ 1,374 $103 $ 4,322
Liabilities assumed - (1,008) (2,534) (2,022) (413) (5,977)
--------- --------- ---------- --------- --------- ---------
Net identifiable assets (liabilities)
acquired 86 (946) 163 (648) (310) (1,655)
Goodwill and other intangibles 928 2,310 7,311 1,958 2,606 15,113
--------- --------- ---------- --------- --------- ---------
Purchase price $ 1,014 $ 1,364 $ 7,474 $ 1,310 $2,296 $13,458
========= ========= ========= ========= ========= =========
Consideration (inclusive of cash
received of $372)
Cash $1,014 $460 $ 1,925 $ 359 $2,296 $ 6,054
Fair value of common shares
issued - 904 5,549 951 - 7,404
--------- --------- ---------- --------- --------- ---------
$1,014 $1,364 $ 7,474 $ 1,310 $2,296 $13,458
========= ========= ========== ========= ========= =========
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 terms of the transaction were agreed to by the parties
and announced to the public or the closing price on the acquisition dates.
-64-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
2. BUSINESS COMBINATIONS (Continued)
Pro forma information
Unaudited pro forma results of operations assuming Pivotal had acquired
Ionysys, Project One, Software Spectrum, Inform and Other at the beginning
of the 2001 fiscal year have not been presented because the effects of
these acquisitions were not material on either an individual or aggregate
basis.
FISCAL 2000
Transitif S.A.
Effective December 3, 1999, Pivotal acquired 100% of Transitif S.A., a
French corporation that distributed customer relationship management
solutions. Transitif deploys Pivotal solutions through its network of
systems integrators throughout France. Pivotal paid an aggregate cash
purchase price of $1,266, including acquisition related expenditures of
$120 with additional consideration payable based on the net after-tax
earnings of Transitif and license revenues received by Transitif from the
future sale of licenses for Pivotal products to June 2002. All earn-out
payments will be recorded as additional purchase price when determinable
and Pivotal may elect to pay up to fifty percent of the additional purchase
price, if any, in Pivotal common shares. During the years ended June 30,
2002 and 2001, Pivotal had paid $nil and $239, and accrued $44 and $nil,
respectively, related to expected additional consideration to be paid to
the former owners of Transitif S.A.
Exactium Ltd.
Effective June 2, 2000, Pivotal acquired 100% of Exactium Ltd., an Israeli
company based in Atlanta, Georgia that provides e-selling solutions for
internet and Microsoft standards. Pivotal paid an aggregate purchase price
of $45,140 consisting of 1,225 common shares and stock options, cash of
$13,150 including a shareholder loan repayment of $5,402 and acquisition
related expenditures of $775.
Simba Digital Technologies Inc.
On June 26, 2000, Pivotal acquired 100% of Simba Digital Technologies Inc.
Pivotal paid an aggregate purchase price of $17,590 consisting of 837
common shares and stock options, and acquisition related expenditures of
$455.
-65-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
2. BUSINESS COMBINATIONS (Continued)
The total consideration, including acquisition costs, was allocated based
on estimated fair values on the acquisition date as follows:
Transitif Exactium Simba Total
---------- -------- ---------- ---------
Assets acquired
In process research and development $ - $ 2,830 $ 1,890 $ 4,720
Core developed technology - 290 - 290
Acquired workforce - 770 560 1,330
Other assets 1,146 370 720 2,236
---------- -------- ---------- ---------
1,146 4,260 3,170 8,576
Liabilities assumed (1,050) (926) (683) (2,659)
---------- -------- ---------- ---------
Net identifiable assets acquired 96 3,334 2,487 5,917
Goodwill 1,170 41,806 15,103 58,079
---------- -------- ---------- ---------
Purchase price $ 1,266 $45,140 $17,590 $63,996
========== ======== ========== =========
Consideration (inclusive of cash received
of $351)
Cash $ 1,266 $13,150 $ 455 $14,871
Fair value of common shares and
stock options issued - 31,990 17,135 49,125
---------- -------- ---------- ---------
$ 1,266 $45,140 $17,590 $63,996
========== ======== ========== =========
The fair value of the common shares of Pivotal issued in conjunction 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 terms of the transaction were agreed to by the parties
and announced to the public. The purchase price was increased by the
estimated fair value of the stock options of Pivotal exchanged for the
Exactium and Simba options outstanding.
Purchased in process research and development
Purchased in process research and development charges relate to
acquisitions of companies accounted for under the purchase method in which
a portion of the purchase price was allocated to acquired in process
technology. During the year ended June 30, 2000, Pivotal acquired Exactium
and Simba and included in the purchase price was an aggregate amount of
purchased in process research and development of $4,720.
-66-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
2. BUSINESS COMBINATIONS (Continued)
Purchased in process research and development (continued)
Independent valuations were performed to assess and allocate a value to
purchased in process research and development. The value allocated to in
process research and development was based upon the forecasted operating
after-tax cash flows from the technology acquired, giving effect to the
stage of completion at the acquisition date. These forecasted cash flows
were then discounted at a rate commensurate with the risk involved in
completing the acquired technology taking into consideration the
characteristics and applications of each product, existing and future
markets, and assessments of the life cycle stage of each product. Based on
this analysis, the existing technology that had reached technological
feasibility was capitalized. Existing technology, that had not reached
technological feasibility and for which no future alternative use existed,
was expensed. Future cash flows were adjusted for the value contributed by
any core technology and development efforts expected to be completed post
acquisition. Research and development costs to bring the products from the
acquired companies to technological feasibility are not expected to have a
material impact on Pivotal's future results of operations or cash flows.
The forecasted data employed in the analysis was based upon both forecast
information maintained by the management of Exactium and Simba, and
Pivotal's estimate of the future potential of the acquired technology. The
inputs used by Pivotal in analyzing purchased in process research and
development were based upon assumptions that management believes reasonable
but which are inherently uncertain and unpredictable. These assumptions may
be incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur. Accordingly, actual
results may vary from the forecasted results. While management believes
that all of the development projects will be successfully completed,
failure of any of these projects to achieve technological feasibility,
and/or any variance from forecasted results, may result in a material
adverse effect on Pivotal's financial condition and results of operations.
A description of the purchased in process research and development for each
acquisition is set forth below.
Exactium
The allocation to in process research and development was related to the
Exactium eSelling technology. At the time of acquisition, a prototype of
Exactium's product existed and it was being used in limited trials. This
prototype was not stable or sufficiently developed to be scalable on an
enterprise-wide basis. Forecasted revenues used in the valuation reflected
historical growth rates of software sales for the eBusiness management
market and Pivotal, and contemplated revenues related to the sale of
products incorporating Exactium technology commencing during the summer of
2000 and increasing thereafter. Pivotal estimated that the technology was
approximately 80% complete as of the acquisition date. Net cash flows were
discounted to net present value at the acquisition date using an
appropriate tax adjusted rate reflecting the risk of unproven but partially
developed software products. The Exactium technology was subsequently
completed and the eSelling product was released in late June 2000.
Simba
The allocation to in process research and development was related to the
Simba electronic marketing product. At the time of acquisition, Simba did
not have a first-generation product and there were considerable
uncertainties as to completion of the product. The valuation of acquired in
process research and development was prepared using the income approach and
contemplated that revenues related to the sale of products incorporating
the Simba technology would commence in late 2000 and increase thereafter.
Revenue increases were based upon the historical growth rate of software
sales for the electronic marketing market and Pivotal. Net after tax cash
flows were discounted to their present value at the acquisition date using
an appropriate after-tax risk-adjusted discount rate reflecting the risk of
unproven but partially developed software products. During the year ended
June 30, 2002, Pivotal ceased sales, marketing and development of the
acquired Simba technology.
In addition to the charge for in-process research and development, Pivotal
recorded a write-down of other assets of Pivotal made redundant as a result
of the acquisitions in the amount of $2,259.
-67-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
2. BUSINESS COMBINATIONS (Continued)
Pro forma information
The following table presents the unaudited pro forma results of operations
for informational purposes assuming Pivotal had acquired Exactium and Simba
at the beginning of the 2000 fiscal year.
June 30,
-------------
2000
-------------
Net revenues $ 58,602
Net loss $(33,943)
Basic and diluted loss per share $ (1.68)
The pro forma results of operations give effect to certain adjustments
including amortization of purchased intangibles and goodwill. Included in
the pro forma net loss for the year ended June 30, 2000 is a $6,979 charge
for in-process research and development and other charges by Pivotal. The
information may not necessarily be indicative of the future combined
results of operations of Pivotal, Exactium and Simba. The pro forma results
of operations have not been presented for the Transitif transaction because
the effect of this acquisition was not considered to be material to
Pivotal.
3. RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS
RESTRUCTURING CHARGES
During the year ended June 30, 2002, in light of the significant downturn
in the North American and global economies, and the related impact on
corporate capital spending, management approved restructuring plans to
align Pivotal's cost structure with management's revised revenue
expectations. In connection with these plans, Pivotal recorded charges of
$53,576 related to both restructuring activities and intangible asset
writedowns. These charges included restructuring costs of $20,589
associated with workforce reduction, consolidation of excess facilities,
contract settlements and tangible asset impairments. In addition, Pivotal
recorded a charge of $32,987 related to the impairment of previously
recorded goodwill and other purchased intangible assets. Pivotal may incur
additional restructuring charges in subsequent periods. Adjustments to the
restructuring reserves will be made in future periods, if necessary, based
upon actual events and circumstances at the time.
The major components of the restructuring reserve at June 30, 2002 are as
follows:
-68-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
3. RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS (Continued)
Severance Excess Contract Impairment of Total
and Facilities/Asset Settlement Goodwill And Other
Benefits Impairments Costs/Other Purchased
Intangible Assets
---------- ------------- ----------- ----------------- ----------
Restructuring charges $ 3,751 $ 11,503 $ 5,335 $ 32,987 $ 53,576
Cash payments (3,456) (1,326) (1,671) (6,453)
Non-cash portion - (5,846) (2,912) (32,987) (41,745)
---------- ------------- ----------- ----------------- ----------
Reserve balances, June 30, 2002 $ 295 $ 4,331 $ 752 - $ 5,378
Less current portion $ 295 $ 1,249 $ 752 - $ 2,296
---------- ------------- ----------- ----------------- ----------
Non-current portion - $ 3,082 - - $ 3,082
The nature of the charges summarized above is as follows:
SEVERANCE AND BENEFITS
During the year ended June 30, 2002, Pivotal recorded charges of
approximately $3,751 related to severance and related benefits to
approximately 200 terminated employees. The workforce reduction was
primarily in the United States, Canada and the United Kingdom and extended
across all geographical segments.
EXCESS FACILITIES/ASSET IMPAIRMENTS
During year ended June 30, 2002, Pivotal recorded charges of approximately
$11,503 related to the consolidation of facilities and impairment of
certain assets. These charges included $5,846 of asset impairments for
certain capital assets that were either abandoned during the year or for
which the resulting estimated future reduced cash flows were insufficient
to cover the carrying amounts of the related assets. The remainder of the
charges related to the consolidation of facilities and represent remaining
lease commitments, net of expected sublease income, and other costs related
to the closure of certain corporate facilities, sales offices and research
and development centers for activities that have been exited or
restructured. The remaining lease commitments will be paid over the
respective lease terms through to June 2007. The estimated costs to exit
the facilities, including expected sublease revenues, are based on
available commercial rates and an estimate of the time required to sublet
the facilities. The charge may be increased in future periods if further
consolidations are required or if sublease income is less than expected.
CONTRACT SETTLEMENT COSTS/OTHER
During the year ended June 30, 2002, Pivotal recorded charges of $5,335 for
contract settlement costs including penalties expected to be incurred due
to Pivotal's withdrawal from certain purchase and partner contracts and for
various unrecoverable prepaid expenses related to future services forfeited
as a direct result of the restructuring. If additional contracts are
cancelled in future periods, or if additional unforeseen costs are incurred
in respect of current contracts, this charge may increase.
IMPAIRMENT OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
Pivotal periodically assesses the impairment of long-lived assets,
including identifiable intangibles, in accordance with the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". Based on quantitative and qualitative
measures, Pivotal assesses the need to record impairment losses on
long-lived assets used in operations when impairment indicators are
present.
To determine other than temporary impairment for identifiable intangibles,
the sum of the undiscounted cash flows is compared to the current carrying
value. If the undiscounted cash flows are greater than or equal to the
current carrying value the asset is deemed not to be impaired. If the
undiscounted cash flows are less than the current carrying value then the
asset is deemed impaired. A discounted cash flow analysis is then prepared
and the difference between the carrying value and the discounted cash flows
represents the charge taken in accordance with SFAS No. 121.
-69-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
3. RESTRUCTURING CHARGES AND ASSET IMPAIRMENTS (Continued)
IMPAIRMENT OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS (CONTINUED)
To determine the impairment loss for goodwill, Pivotal determined the fair
value using a business enterprise methodology that includes a terminal
value assigned to the entity. This value is then compared to the carrying
value, and if less, the difference represents the impairment to be
recorded. The assumptions supporting the estimated future cash flows,
including the estimated terminal values, reflect management's best
estimates. It is possible that the estimates and assumptions used under
this assessment may change in the short term, resulting in the need to
further write down the goodwill and other long-lived assets. In addition,
it is possible that Pivotal may have additional reductions in goodwill in
future periods.
As part of Pivotal's review of financial results during the year ended June
30, 2002, management performed an impairment assessment of identifiable
intangible assets and goodwill recorded in connection with its past
acquisitions. The impairment assessment was performed due to changes in
overall economic conditions that have negatively impacted Pivotal's
revenues and forecasted revenue growth rate. As a result, an impairment
charge of $32,987 was recorded in the year ended June 30, 2002 to reduce
goodwill associated with acquisitions and other purchased intangibles to
their estimated fair values. This impairment charge was primarily
associated with the acquisitions of Exactium Ltd. and Digital Conversations
Inc. (formerly Simba Technologies Inc.), Software Spectrum CRM, Inc. and
Project One Business Technologies Inc.
PROVISION FOR DOUBTFUL ACCOUNTS RECEIVABLE
During the fourth quarter of fiscal 2001 and throughout fiscal 2002,
Pivotal experienced delays in payments from certain customers resulting
from a deterioration of financial conditions affecting these customers due
to the weakened North American economy and capital markets. As a result,
Pivotal recorded provisions for doubtful accounts of $5.5 million in the
year ended June 30, 2002 and $3.3 million in the year ended June 30, 2001.
These provisions for doubtful accounts are included in general and
administrative expenses in the Consolidated Statements of Operations.
4. ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of $1,704
and $2,260 at June 30, 2002 and 2001, respectively.
5. PROPERTY AND EQUIPMENT
June 30,
-------------------------
2002 2001
---------- ----------
Computer software and equipment $8,113 $11,619
Furniture and fixtures 2,786 2,944
Leasehold improvements 2,087 2,054
---------- ----------
12,986 16,617
Accumulated depreciation (8,785) (7,434)
---------- ----------
Net book value $4,201 $9,183
========== ==========
-70-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
6. GOODWILL, INTANGIBLES AND OTHER ASSETS
June 30,
-------------------------
2002 2001
---------- ----------
Goodwill $77,772 $75,408
Acquired intangibles 1,620 1,620
Other assets 6,300 8,391
---------- ----------
85,692 85,419
Impairment charge (35,845) --
Accumulated amortization (40,332) (24,175)
---------- ----------
Net book value $ 9,515 $61,244
========== ==========
Other assets in the amount of $6,300 consist of prepaid long-term royalties
and long-term investments. Amortization of $40,332 includes the
amortization of goodwill and acquired intangibles.
7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The components of accounts payable and accrued liabilities were as follows:
June 30,
-------------------------
2002 2001
---------- ----------
Accounts payable $ 9,084 $12,721
Accrued compensation 3,287 3,867
Accrued acquisition costs 2,044 5,227
Other accrued liabilities 1,999 3,509
---------- ----------
$16,414 $25,324
========== ==========
8. BANK CREDIT FACILITY
Pivotal has a credit agreement with a Canadian chartered bank. The
agreement includes a $5,000 revolving letter of credit facility and a $500
foreign exchange facility. The facilities are secured by a charge on all
current and future personal property. As of June 30, 2002, letters of
credit totaling $4,000, principally to secure facilities and equipment
lease obligations, were outstanding under the letter of credit facility,
and no amounts were outstanding under the foreign exchange facility.
-71-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
9. OBLIGATIONS UNDER CAPITAL LEASES AND LONG-TERM DEBT
Obligations under capital leases and long-term debt were as follows:
June 30,
---------------------------
2002 2001
---------- ----------
Obligation under capital lease with an interest rate of 5% $ 500 $ 625
Obligation under capital lease with an interest rate of 18% 173 -
Note payable, non-interest bearing, unsecured - 365
Other obligations 70 118
---------- ----------
743 1,108
Less: Current portion (320) (516)
---------- ----------
$ 423 $ 592
========== ==========
As of June 30, 2002, future annual minimum lease payments for capital
leases were $775, including $32 of imputed interest. As of June 30, 2002,
the net book value of capital assets under capital lease was $87 (June 30,
2002: $nil).
10. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
Pivotal leases office facilities under operating leases which generally
require Pivotal to pay a share of operating costs, including property
taxes, insurance and maintenance. Pivotal also leases certain equipment
under operating leases.
Future minimum operating lease payments, inclusive of accrued restructuring
costs, for the years ending June 30 pursuant to leases outstanding as of
June 30, 2002 are as follows:
2003 $8,067
2004 6,368
2005 4,794
2006 4,124
2007 3,269
Thereafter 15,236
-------------
$41,858
=============
Rent expense totaled approximately $5,708, $4,755, and $2,237 in the years
ended June 30, 2002, 2001 and 2000, respectively.
SALE AND LEASEBACK
During the year ended June 30, 2002, the Company completed the sale and
leaseback of certain computer hardware and software to an unrelated third
party for cash proceeds of $1,277. Upon execution of the sale and leaseback
transactions, property costs of $3,619 and accumulated depreciation of
$2,342 were removed from the Company's books resulting in no net gain or
loss. Future operating lease obligations under the associated lease
agreements, which are included in the lease obligation figures above, are
as follows: $708 in 2003, $569 in 2004, and $25 in 2005.
LICENSING COMMITMENTS
Pivotal has entered into various agreements that allow the Company to
incorporate licensed technology into its products. Under these agreements,
Pivotal pays royalty fees that are based on a predetermined fee per license
sold. Pivotal recognizes royalty costs as cost of license revenues as
associated products are licensed. Royalty costs totaled $1,672, $1,992, and
$1,498 in the years ended June 30, 2002, 2001 and 2000, respectfully. As at
June 30, 2002, future commitments under these royalty arrangements are
anticipated to be approximately $1,000.
-72-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
10. COMMITMENTS AND CONTINGENCIES (Continued)
PURCHASE COMMITMENTS
During the normal course of business, Pivotal enters into agreements with
certain supply partners in order to achieve favorable pricing or other
terms. As of June 30, 2002, the Company is committed to purchase
approximately $873 under these purchase commitments.
LEGAL PROCEEDINGS
Pivotal is currently in litigation with one of its business partners
related to a breach of contract claim against the Company. While the
results of the litigation and claims cannot be predicted with certainty,
the Company believes that the final outcome of this matter will not have a
material adverse effect on Pivotal's business, financial condition, results
of operations or cash flows.
11. SHAREHOLDERS' EQUITY
INITIAL PUBLIC OFFERING
On August 4, 1999, Pivotal's registration statement on Form F-1,
Registration No. 333-92971, became effective. The offering date was August
5, 1999. The offering was terminated as a result of all of the shares
offered being sold. The managing underwriters were Merrill Lynch & Co.,
Bear, Stearns & Co. Inc. and Dain Rauscher Incorporated. The offering
consisted of 3,975 common shares of Pivotal, which included 475 common
shares offered pursuant to the subsequent exercise of the underwriters'
over allotment option on August 19, 1999. The aggregate price of the shares
offered and sold was $47.7 million. Proceeds to Pivotal, after $3.3 million
in underwriting discounts and commissions and $1.3 million in other
expenses, were $43.1 million. Simultaneous with the closing of the
Offering, all outstanding preferred shares were converted into common
shares.
EQUITY FINANCING
On November 21, 2000, Pivotal completed an equity financing in Canada of
one million common shares for aggregate proceeds of approximately $55
million. Proceeds to Pivotal were $51.8 million, after $2.2 million in
underwriting discounts and commissions and $1.0 million in other expenses.
This transaction was exempt from Securities Act registration pursuant to
the exclusion from registration provided by Regulation S under the
Securities Act.
PREFERRED SHARES AND COMMON SHARES
The holder of each common share has the right to one vote per share. The
preferred shares can at any time and from time to time be issued in one or
more series and the Board of Directors can determine the special rights and
restrictions of each series including any dividend, conversion or
redemption rights. During the year ended June 30, 2000, all issued and
outstanding preferred shares and redeemable convertible preferred shares
were converted into common shares.
EMPLOYEE STOCK OPTION PLAN
Under the terms of the 1999 Pivotal Incentive Stock Option Plan, as amended
(the "Plan"), the Board of Directors may grant incentive and non-qualified
stock options to employees, officers, directors, independent consultants
and contractors of Pivotal and subsidiaries, partnerships, and joint
ventures including directors thereof. Generally, Pivotal grants stock
options with exercise prices equal to the quoted market value of the common
shares on the date of grant, as determined by the Board of Directors.
Options generally vest over a four-year period, but the Board of Directors
may provide for different vesting schedules in particular cases. Options
generally expire ten years from the date of grant.
-73-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
11. SHAREHOLDERS' EQUITY (Continued)
EMPLOYEE STOCK OPTION PLAN (CONTINUED)
On October 25, 2000, Pivotal's shareholders approved an amendment to the
Plan that increased the maximum number of common shares reserved for
issuance under the Plan by 1,500 common shares to 6,576 in order to ensure
sufficient options are available to permit the Company to maintain its
policy of granting options to employees.
On November 15, 2001, Pivotal's shareholders approved changes to the Plan
that increase the number of shares reserved for issuance pursuant to the
Plan by (a) 1,000 common shares from 7,376 to 8,376 plus (b) amended the
automatic increase on the first day of each fiscal year to equal 4% of the
average number of common shares outstanding as used to calculate diluted
earnings per share for the preceding year.
Pivotal has assumed certain options granted to former employees of acquired
companies (the "Acquired Options"). The Acquired Options were assumed by
Pivotal outside of the Plan, but all are administered as if issued under
the Plan. All of the Acquired Options have been adjusted to give effect to
the conversion under the terms of the Agreements and Plans of
Reorganization between Pivotal and the companies acquired. The Acquired
Options generally become exercisable over a four year period and generally
expire either five or ten years from the date of grant. No additional
options will be granted under any of the acquired companies' plans.
A summary of stock option activity and information concerning currently
outstanding and exercisable options is as follows:
Options Outstanding
-------------------------------
Options Number of Weighted
Available Common Average
for Grant Shares Exercise Price
(Expressed in US$,
except where
indicated)
---------- ---------- -----------------
Balances, June 30, 1999 2,543 1,455 Cdn$ 6.07
---------- ---------- -----------------
Options authorized 408 - -
Options granted (1,837) 1,837 23.12
Options exercised - (375) 2.96
Options cancelled 270 (270) 10.37
---------- ---------- -----------------
Balances, June 30, 2000 1,384 2,647 $16.95
---------- ---------- -----------------
Options authorized 1,500 - -
Options granted (2,341) 2,341 26.34
Options exercised - (506) 6.14
Options cancelled (net) 724 (811) 25.80
---------- ---------- -----------------
Balances, June 30, 2001 1,267 3,671 $22.87
---------- ---------- -----------------
Options authorized 1,800 - -
Options granted (4,196) 4,196 5.55
Options exercised - (51) 1.46
Options cancelled (net) 2,117 (2,030) 20.24
---------- ---------- -----------------
Balances, June 30, 2002 988 5,786 $11.42
========== ========== =================
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PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
11. SHAREHOLDERS' EQUITY (Continued)
EMPLOYEE STOCK OPTION PLAN (CONTINUED)
The following tables summarize information concerning outstanding and
exercisable options at June 30, 2002:
Options Exercisable
------------------------------
Weighted Weighted
Average Average Average
Remaining Exercise Exercise
Exercise Prices Number Contractual Price Number Price
per Share Outstanding Life (in years) per Share Exercisable per Share
----------------- -------------- --------------- ------------ --------------- ------------
$0.00 - $5.85 2,928 8.9 $ 4.27 488 $ 3.01
$5.85 - $11.70 1,514 9.0 8.05 309 8.39
$11.70 - $17.55 242 7.6 12.52 105 12.70
$17.55 - $23.40 6 7.3 19.82 4 19.83
$23.40 - $29.25 445 8.0 25.16 203 25.29
$29.25 - $35.10 143 7.6 31.48 63 31.53
$35.10 - $40.95 198 8.3 36.17 74 36.22
$40.95 - $46.80 139 7.0 43.14 68 42.98
$46.80 - $52.65 87 7.6 51.08 43 51.15
$52.65 - $58.50 84 8.3 58.50 32 58.50
----------------- -------------- --------------- ------------ --------------- ------------
$0.00 - $58.50 5,786 8.7 $ 11.42 1,389 $ 16.02
================= ============== =============== ============ =============== ============
EMPLOYEE STOCK PURCHASE PLAN
On June 17, 1999, Pivotal's shareholders approved the adoption of an
employee stock purchase plan and authorized the issuance of up to 1,000
common shares under the plan with amendments as the Board of Directors of
Pivotal may deem desirable. Under the employee stock purchase plan, a
qualified employee may authorize payroll deductions of up to 10% of the
employee's compensation (as defined) to a maximum of $25 to purchase common
stock at 85% of the lower of fair market value at the beginning or end of
the related subscription period.
COMMON SHARES RESERVED FOR FUTURE ISSUANCE
Pivotal has reserved common shares as of June 30, 2002 as follows:
Exercise of stock options 6,774
Employee Stock Purchase Plan 746
--------------
7,520
==============
-75-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
11. SHAREHOLDERS' EQUITY (Continued)
EMPLOYEE STOCK OPTION PLAN (CONTINUED)
Under APB Opinion No. 25, because the exercise price of Pivotal's employee
stock options generally equals the fair value of the underlying stock on
the date of grant, no compensation expense is recognized. Deferred
compensation expense of $473 was recorded during 1999 for those situations
where the exercise price of an option was lower than the deemed fair value
for financial reporting purposes of the underlying common stock. The
deferred compensation is being amortized over the vesting period of the
underlying options. Amortization of the deferred share-based compensation
balance of $23 at June 30, 2002 will be completed during year ending June
30, 2003.
An alternative method of accounting for stock options is SFAS No. 123,
Accounting for Stock-Based Compensation. Under SFAS No. 123, employee stock
options are valued at the grant date using the Black-Scholes valuation
model and the resultant compensation cost is recognized ratably over the
vesting period. Had compensation cost for Pivotal's share option plan been
determined based on the Black-Scholes value at the grant dates for awards
as prescribed by SFAS No. 123, the pro forma net loss and basic and diluted
loss per share would have been as follows:
Years Ended June 30,
---------------------------------------------
2002 2001 2000
------------ ------------ -----------
Net loss
As reported $ (95,945) $(32,455) $ (8,362)
SFAS No. 123 pro forma (118,622) (48,901) (10,541)
Basic and diluted loss per share
As reported $ (3.99) $ (1.40) $ (0.45)
SFAS No. 123 pro forma $ (4.93) (2.11) (0.57)
Compensation expense recognized in providing pro forma disclosures may not
be representative of the effects on pro forma earnings for future years
since SFAS No. 123 applies only to options granted after 1996.
The weighted average Black-Scholes option pricing model value of options
granted under the share option plan during the years ended June 30, 2002,
2001 and 2000 were U.S.$4.35, U.S.$20.76 and U.S.$15.45 per share,
respectively. The fair value for these options was estimated at the date of
grant using the following weighted average assumptions:
Years Ended June 30,
------------------------------------------
2002 2001 2000
------------ ----------- ------------
Assumptions
Volatility factor of expected
market price of Pivotal's shares 118.4% 121.2% 85.0%
Dividend yield 0.0% 0.0% 0.0%
Weighted average expected
life of stock options (years) 4.0 years 4.0 years 4.0 years
Risk free interest rate 4.4% 5.0% 7.0%
-76-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
12. INCOME TAXES
Details of the income tax provision (recovery) were as follows:
Years ended June 30,
---------------------------------------
2002 2001 2000
---------- ---------- ----------
Current
Canadian $44 $(547) $-
Foreign 342 1,050 557
---------- ---------- ----------
386 503 557
Deferred
Canadian - - -
---------- ---------- ----------
Income tax provision $386 $503 $557
========== ========== ==========
The reported income tax provision differs from the amount computed by
applying the Canadian basic statutory rate to the loss before income taxes.
The reasons for this difference and the related tax effects are as follows:
Years ended June 30,
---------------------------------------
2002 2001 2000
---------- ---------- ----------
Canadian basic statutory tax rate 42% 45% 45%
---------- ---------- ----------
Expected income tax recovery $ (40,135) $(14,378) $(3,512)
Foreign tax rate differences (92) (137) (155)
Goodwill amortization and other non-deductible expenses 21,767 10,087 2,661
Research and development tax credits - (470) (127)
Benefit of losses not tax affected 14,833 3,407 389
Benefit of temporary differences not recognized 5,464 1,994 1,301
---------- ---------- ----------
$ 386 $ 503 $ 557
========== ========== ==========
-77-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
12. INCOME TAXES (Continued)
Deferred income taxes result principally from temporary differences in the
recognition of certain revenue and expense items for financial and income
tax reporting purposes. Significant components of Pivotal's deferred tax
assets and liabilities as of June 30, 2002 and 2001 are as follows:
2002 2001
----------- -----------
Deferred income tax assets
Net operating tax loss carry-forwards $ 14,870 $ 6,158
Research and development expenses 424 220
Book and tax base differences on assets 3,423 2,388
Other 81 87
----------- -----------
Total deferred income tax assets 18,798 8,853
Valuation allowance for deferred income tax assets (18,798) (8,853)
----------- -----------
Net deferred income tax assets - -
Deferred income tax liabilities
Book and tax base differences on assets - -
----------- -----------
Net deferred income tax liabilities included in accounts
payable and accrued liabilities $ - $ -
=========== ===========
Due to the uncertainty surrounding the realization of the deferred income
tax assets in future income tax returns, Pivotal has a 100% valuation
allowance against its deferred income tax assets. The net change in the
total valuation allowance for the years ended June 30, 2002 and 2001 was a
provision of $(9,945) and $(4,284), respectively.
As of June 30, 2002, Pivotal has tax loss carry-forwards of approximately
$35,404 available to reduce future years' income for tax purposes. These
carry-forward losses expire at various dates between 2004 to 2009.
13. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss consisted of the following:
Years ended June 30,
-----------------------------------------------
2002 2001 2000
---------- ---------- -----------
Unrealized loss on
available-for-sale securities $ (90) $ (203) $ -
========== ========== ===========
-78-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
14. CHANGE IN OPERATING ASSETS AND LIABILITIES
The change in operating assets and liabilities was as follows:
June 30,
-------------------------------------------
2002 2001 2000
---------- ---------- ----------
Accounts receivable $ 14,261 $(9,156) $(7,511)
Prepaid expenses (1,410) (761) (545)
Accounts payable and accrued liabilities (8,910) 4,141 7,260
Accrued restructuring costs 5,438 - -
Deferred revenue (1,483) 4,408 3,265
---------- ---------- ----------
$ 7,896 $(1,368) $ 2,469
========== ========== ==========
15. RELATED PARTY TRANSACTIONS
During the year ended June 30, 2000, Pivotal entered into an agreement to
license software from a company with a former director in common under
which Pivotal paid $350.
During the year ended June 30, 2001, Pivotal loaned $250 to Vincent Mifsud,
the previous Chief Operating Officer, Chief Financial Officer and Executive
Vice President of Pivotal. This loan was made while Mr. Mifsud was still an
officer of Pivotal, and was non-interest bearing, and was secured by shares
of a private company. During the year ended June 30, 2002, Mr. Mifsud left
the employment of Pivotal and the shares being held as security were
subsequently sold and the proceeds of the sale, $250, were paid to Pivotal
as repayment in full of the loan balance.
During the year ended June 30, 2001, Pivotal loaned Cdn.$124 to Andre J.
Beaulieu, General Counsel and Assistant Secretary of Pivotal. This loan is
non-interest bearing, unsecured and pursuant to an agreement dated May 29,
2002, Cdn.$17 of the loan has been repaid and the outstanding balance of
the loan will be repaid through future incentive bonuses payable to Mr.
Beaulieu.
On October 1, 2001, Pivotal entered into a consulting agreement with
Christopher Lochhead. Mr. Lochhead was appointed to Pivotal's Board of
Directors on November 27, 2001. Pursuant to the consulting agreement,
Pivotal agreed to pay Mr. Lochhead $12 per month in exchange for Mr.
Lochhead providing a pre-determined number of monthly consulting hours. Mr.
Lochhead may charge an additional fee if the pre-determined number of
monthly consulting hours is exceeded. During the year ended June 30, 2002,
Pivotal paid Mr. Lochhead a total of $211 pursuant to the agreement.
-79-
PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in United States dollars;
all amounts in thousands except amounts per share)
16. SEGMENTED INFORMATION
Pivotal develops, markets, sells and supports Internet and corporate
network-based software applications used for managing customer and selling
partner relationships in one business segment.
Pivotal licenses and markets its products internationally. Pivotal
attributes revenue among the geographical areas based on the location of
the customers involved. The following table presents a summary of revenues
by geographical region:
Years ended June 30,
---------------------------------------
2002 2001 2000
---------- ----------- ----------
North America $36,722 $64,170 $38,507
Europe, Middle East, Africa 25,818 23,661 11,373
Asia Pacific, Latin America 7,076 8,323 3,673
---------- ----------- ----------
$69,616 $96,154 $53,553
========== =========== ==========
The following table presents a summary of property and equipment by
geographic region:
June 30,
--------------------------
2002 2001
----------- ----------
Property and equipment
North America $2,877 $7,420
Europe, Middle East, Africa 1,324 1,763
Asia Pacific, Latin America - -
----------- ----------
$4,201 $9,183
=========== ==========
-80-
Schedule II -- Valuation and Qualifying Accounts Years ended June 30, 2002, 2001
and 2000 (in thousands) Allowance for Doubtful Accounts
Balance at Additions Additions
beginning of charged to costs charged to Balance at
Year year and expenses other accounts Write-offs end of Year
---- ---- ------------ -------------- ---------- -----------
2002 $2,260 5,510 -- 6,066 $1,704
2001 $ 740 3,312 -- 1,792 $2,260
2000 $ 334 626 -- 220 $ 740
-81-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The table below provides the names, ages, and positions with Pivotal of our
executive officers and directors:
NAME AGE POSITION
---- --- --------
Kent Roger (Bo) Manning.............. 44 President, Chief Executive Officer and a Director
Norman B. Francis.................... 53 Chairman of the Board of Directors
Keith R. Wales....................... 57 Director
Divesh Sisodraker.................... 33 Chief Financial Officer
Robert Douglas....................... 39 Executive Vice President, North American Sales and
Operations
Joseph Dworak........................ 37 Senior Vice President, North American Services
Heather Claridge..................... 41 Chief People Officer
John O'Hara.......................... 44 Executive Vice President, EMEA
James R. Warden...................... 59 Senior Vice President, Asia Pacific and Latin
America Sales
Jesper Anderson...................... 39 Executive Vice President, Products
Cathie Frazzini...................... 35 Senior Vice President, Alliances
Jeremy A. Jaech...................... 47 Director
Robert J. Louis...................... 57 Director
Steven M. Gordon..................... 43 Director
Christopher Lochhead................. 34 Director
Howard Gwin.......................... 44 Director
------------------
KENT ROGER (BO) MANNING has served as President, Chief Executive Officer
and a director since August 2001. Prior to joining Pivotal, Mr. Manning served
as co-founder and Chief Executive Officer of Roundarch, a Customer Relationship
Management solutions joint venture between Deloitte Consulting, BroadVision, and
WPP Group (holding company for Ogilvy & Mather, Young & Rubicam Inc. and J.
Walter Thompson), from January 2000 to August 2001. Mr. Manning served as Global
CRM Co-Practice Leader, for Deloitte Consulting, from June 1995 to December
1999. Mr. Manning also served as a Consultant to Deloitte Consulting from April
1987 to May 1995. Prior to that, Mr. Manning served as National Sales Manager of
Infopro from November 1984 to August 1987. Mr. Manning holds a Bachelor of Arts
degree from the University of Michigan in Economics and received his Masters of
Management in 1987, from the Kellogg School of Management at Northwestern
University.
NORMAN B. FRANCIS co-founded Pivotal in 1990 and has served a director
since December 1990 and as President and Chief Executive Officer from December
1990 to August 2001. Mr. Francis' experience prior to co-founding Pivotal
includes co-founding Basic Software Group Inc., an accounting software company,
in 1979. Mr. Francis served as Basic Software Group's Vice President, Operations
until the company was acquired by Computer Associates International, Inc., a
software company, in 1985. Mr. Francis served as Vice President, Micro Products
Division of Computer Associates International Inc. from 1985 to 1990. Mr.
Francis
-82-
is also a director of CREO Inc. Mr. Francis holds a Bachelor of Science
degree in Computer Science from the University of British Columbia, Canada and
is a Chartered Accountant.
KEITH R. WALES co-founded Pivotal in 1990 and has served as a director
since December 1990 and as Executive Vice President, Corporate Projects from
January 2001 to May 2002. Mr. Wales also served as Chief Technical Officer from
July 1999 through December 2000 and as Vice President, Research and Development
from December 1990 through July 1999. Mr. Wales' experience prior to co-founding
Pivotal includes co-founding Basic Software Group Inc., an accounting software
company, in 1979. Mr. Wales served as Basic Software Group's Vice President,
Research and Development until the company was acquired by Computer Associates
International, Inc. in 1985. Mr. Wales served as Divisional Vice President,
Research and Development of Computer Associates International, Inc. from 1985 to
1986. Mr. Wales holds a Bachelor of Science degree in Mathematics and a master's
of science degree in Computer Science from the University of British Columbia,
Canada.
DIVESH SISODRAKER has served as Chief Financial Officer since October 2001.
Mr. Sisodraker also served as Vice President, Corporate Development from
December 2000 through September 2001 and as Director, Business Development from
January 2000 through December 2000. Prior to joining Pivotal, Mr. Sisodraker
served as Director, Finance and Treasurer of A.L.I. Technologies Inc. from
September 1998 to December 1999. Prior to joining A.L.I Technologies Inc., Mr.
Sisodraker held roles as an Investment Analyst with HSBC Capel Asia Limited and
West Shore Ventures Limited from September 1995 to February 1998. Prior to this,
Mr. Sisodraker worked as a Specialist/Senior Accountant with KPMG Chartered
Accountants from January 1991 to September 1995. Mr. Sisodraker holds a Bachelor
of Business Administration degree, Honours, from Simon Fraser University of
Burnaby, British Columbia and is a Chartered Accountant.
ROBERT DOUGLAS has served as Executive Vice President, North American Sales
and Operation since October 2001. Prior to joining Pivotal, Mr. Douglas served
as Vice President and General Manager of Siebel Systems Canada, Ltd. from August
1998 to October 2001. Prior to Siebel, Mr. Douglas served as Vice President,
Central Canada of Oracle Corporation Canada Inc. from May 1997 to August 1998
and as Regional Manager from July 1995 to May 1997. Mr. Douglas is also a
director of MKS, Inc. Mr. Douglas holds a bachelors' degree in Business from
McMaster University of Hamilton, Ontario.
JOSEPH H. DWORAK has served as Senior Vice President, North American
Services and Support since October 2001. Prior to joining Pivotal, Mr. Dworak
served as Senior Vice President, Global Proficiency Leader of Eloyalty
Corporation from January 2001 to October 2001. Prior to Eloyalty, Mr. Dworak
served as a Partner with Deloitte Consulting, leading a major portion of their
Customer Relationship Management practice, from June 1994 to December 2000.
Prior to that, Mr. Dworak worked in a variety of technical and managerial roles
with FMC Corporation from January 1987 to May 1994. Mr. Dworak holds a Bachelor
of Science degree in Computer Science and Computational Mathematics from
Northern Illinois University and received his Masters of Business Administration
degree, graduating Summa Cum Ladue, from Southern Methodist University's Cox
School of Business.
HEATHER E. CLARIDGE has served as Chief People Officer since October 2001,
Vice President, Human Resources from July 2000 to October 2001 and Director,
Human Resources from November 1998 to July 2000. Prior to joining Pivotal
Corporation, Ms. Claridge served as Division Human Resources Manager for
Motorola Inc's Wireless Data Division from January 1996 to November 1998,
Manager Human Resources from July 1991 to January 1996 and Human Resources
Specialist from November 1988 to July 1991. Prior to Motorola, Ms. Claridge was
the Program Coordinator, Corporate Health and Wellness Programs for Telus
(formally British Columbia Telephone Company) from September 1984 to November
1988. Ms. Claridge holds a Master of Arts degree in Organizational Design and
Effectiveness from the Fielding Institute, Santa Barbara, CA, and a Bachelor's
degree in Physical Education from the University of British Columbia, Canada.
JOHN EDWARD O'HARA has served as Executive Vice President, Europe, Middle
East & Africa assuming full profit & loss responsibility for the region since
June 2001. Prior to joining Pivotal, Mr. O'Hara served as Managing Director UK
and North Europe for Lotus Development Corporation, a wholly owned subsidiary of
IBM, from January 2000 to June 2001, which focused on e-business and
e-collaboration solutions (software licenses and services) for the enterprise
market. While with Lotus Corporation, Mr. O'Hara also served as EMEA Sales and
Strategy Director from January 1998 to December 1999 and as Director of Global
Account Sales from March 1996 to December 1997. In addition to his experiences
at Lotus, both before and after the acquisition of Lotus by IBM Corporation in
1996, Mr. O'Hara served as General Manager UK for "Electronic Software
Publishing (ESP) Limited" a company specializing in representing and
republishing software, in Europe, on behalf of predominantly US-based
organizations trying to establish a presence in the European market. Mr. O'Hara
has also worked for Procter & Gamble, Citibank Corporation and Beecham Group
(now Glaxo SmithKline) in the early part of his career. Mr O'Hara holds a
Bachelor of Science degree from the University of Wales Institute of Science &
Technology (UWIST) and a Master of Science degree in Computer Science from the
University of Manchester.
JAMES R. WARDEN has served as the Senior Vice President of Asia Pacific and
Latin America Sales since April 2001, and Vice President of Asia Pacific Sales
from May 1999. Prior to joining Pivotal, Mr. Warden was the Vice President Baan
Front Office Systems, Asia Pacific from August 1997 to May 1999 and Vice
President International Aurum Software from January 1997 to August
-83-
1997, which was acquired by Baan. Mr. Warden also served as the Director of
Sales and Operations Asia Pacific and Latin America for Continuus Software from
August 1994 to January 1997. Prior to Continuus, Mr. Warden was the Vice
President of Sales for Softool Corporation from September 1993 to August 1994.
Mr. Warden was the Director of Latin American Sales and Operations for Unify
Corporation from June 1986 to September 1993. Mr. Warden attended Fullerton
College and majored in Industrial Electronics and Marketing.
JESPER ANDERSON has served as Executive Vice President of Products since
April 2002. Prior to joining Pivotal, Mr. Andersen served as Vice President of
CRM Online Services at Oracle Corporation from August 1999 to March 2002. Mr.
Andersen also served as a Senior Director of Development for Service Products in
the Customer Relationship Management division at Oracle Corporation from May
1998 to July 1999. Prior to that, Mr. Andersen served as Development Director
for Computer Resources International, Inc., the US subsidiary of a Danish
Software Company from May 1996 to April 1998, and also as Sales Account Manager
from October 1994 to April 1996. Prior to that Mr. Andersen served as a Software
Developer and later as a Chief Architect and Software Development Manager at
Computer Resources International A/S in Copenhagen, Denmark from September 1989
to January 1994. Mr. Andersen holds a Master's Degree in Computer Science from
Aalborg University, Denmark in 1986.
CATHIE FRAZZINI has served as Senior Vice President, Global Alliances since
August 2001. Prior to joining Pivotal, Ms. Frazzini served as Senior Director,
Worldwide Strategic Alliances, as Director, Worldwide Consulting Alliances, as
Senior Manager, Sales Channel Operations, as Senior Manager, Strategic
Alliances, as Manager, Worldwide Employee and Partner Training, as Senior
Technical Trainer and as Technical Consultant for J.D. Edwards and Company from
February 1991 to August 2001. Prior to J.D. Edwards, Ms. Frazzini served as End
User Support Specialist of Silgan Container Corporation from March 1989 to
February 1991 and as Cost Accounting Analyst for Tri-Valley Growers from June
1988 to March 1989. Ms. Frazzini holds a Bachelor of Science degree in Computer
Science from University of the Pacific, Stockton, California and a Master of
Arts degree in Instructional Technology from University of Colorado, Denver,
Colorado.
JEREMY A. JAECH has served as a director since July 1996. Mr. Jaech
currently serves as Managing Member, Poseidon Ventures LLC. Prior to Poseidon
Ventures, Mr. Jaech served as Vice President for the Business Tools Division at
Microsoft Corporation. Prior to Microsoft, Mr. Jaech co-founded Visio
Corporation in September 1990, a supplier of enterprise-wide business
diagramming and technical drawing software for Microsoft Windows, which was
later sold to Microsoft. Prior to co-founding Visio Corporation, Mr. Jaech
co-founded Aldus Corporation in 1984 and served as Vice President, Engineering.
Aldus Corporation was purchased by Adobe Systems Incorporation in 1989. Mr.
Jaech is also a director of Real Networks, Inc. Mr. Jaech holds a bachelor's
degree in Mathematics and a master's degree in Computer Science from the
University of Washington.
ROBERT J. LOUIS has served as a director since June 1995. Since March 1999,
Mr. Louis has served as President of Ventures West Management Ltd., a venture
capital firm which he joined as an Executive Vice President in January 1991. Mr.
Louis earned a Bachelor of Science degree and a Master's of Science degree from
the University of Victoria, British Columbia, Canada and a Doctorate in Physics
from the University of British Columbia, Canada.
STEVEN M. GORDON has served as a director since November 2000. Mr. Gordon
currently serves as Executive Vice President Administration and Chief Financial
Officer to Casey Foundation. Prior to Casey Foundation, Mr. Gordon served as
Strategic Advisor to Wavelink Corporation from March 2001 to September 2001, as
Vice President of Microsoft Corporation from January 2000 to August 2000, as
Senior Vice President and Chief Financial Officer of Visio Corporation from
February 1997 to January 2000, as Vice President and Chief Financial Officer of
Data I/O Corporation from October 1993 to February 1997, as Vice President,
Finance of Data I/O Corporation from May 1992 to October 1993 and as Corporate
Controller of Data I/O Corporation from April 1989 to May 1992. Mr. Gordon holds
a Bachelor of Arts degree from Washington State University.
CHRISTOPHER LOCHHEAD has served as a director since November 2001. Mr.
Lochhead co-founded Lochhead Corporation in January 2002, a management
consulting firm and has served as its Chief Executive Officer since January
2002. Prior to Lochhead Corporation, Mr. Lochhead served as a part-time advisor,
board member and management consultant from January 2001 to January 2002. Prior
to this, Mr. Lochhead served as the Chief Marketing Officer of Scient Corp., an
internet consulting firm from April 1998 to December 2000, as Executive Vice
President of Vantive Corp., a customer relationship management software firm
from June 1996 to April 1998, as President and Chief Executive Officer for
Always an Adventure International from December 1993 to June 1996, as Director,
Canada of Platinum Software Corp. from September 1991 to December 1993, as
Director Sales and Marketing of BMS Corp. from December 1990 to September 1991,
as Director Sales of Access Experts from February 1990 to December 1990 and as
co-founder and partner of Roger Pierce & Associates from December 1987 to
January 1990.
HOWARD GWIN has served as a director since May 2002. Mr. Gwin is currently
an executive management consultant, advising chief executive officers in the
technology industry. Prior to being an executive management consultant, Mr. Gwin
served as a Consultant at Solect Technology Group, a provider of billing,
customer care and service management software from May 2000 to December 2000 and
as President and Chief Executive Officer of Solect from February 2000 to April
2000. Prior to Solect, Mr. Gwin served as Executive Vice President, Worldwide
Operations at Peoplesoft, Inc. from February 1999 to January 2000, as Senior
Vice
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President, International from January 1998 to January 1999, as Vice President,
Europe from May 1996 to December 1997 and as Vice President, Canada from
September 1994 to May 1996. Prior to Peoplesoft, Mr. Gwin served as General
Manager of Strategic Operations of Xerox Corporation from October 1992 to August
1994. Mr. Gwin holds a Bachelor of Business Administration degree from Simon
Fraser University, of Burnaby, British Columbia.
ITEM 11. EXECUTIVE COMPENSATION
The following table describes the compensation we paid to, or that was earned
by, our chief executive officer and our four most highly compensated executive
officers during the fiscal year ended June 30, 2002.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------------------------------------------------------------------------------------
OTHER ALL AWARDS PAYOUTS
NAME AND PRINCIPAL YEAR SALARY BONUS ANNUAL OTHER
POSITION COMPEN- COMPEN-
SATION SATION
-----------------------------------------
RESTRICTED SECURITIES LTIP
STOCK AWARDS UNDERLYING PAYOUTS
OPTIONS
--------------------------------------------------------------------------------------------------------------------------
Norman B. Francis 2002 -- -- -- -- -- 15,000 --
Former President and 2001 US$115,011* US$12,940* -- -- -- 25,000 --
Chief Executive
Officer (1)
2000 US$118,949* US$53,708* -- -- -- 25,000 --
--------------------------------------------------------------------------------------------------------------------------
Kent Roger (Bo) 2002 US$298,145* US$118,161* -- -- -- 1,000,000 --
Manning
President and Chief
Executive Officer(2)
--------------------------------------------------------------------------------------------------------------------------
John O'Hara 2002 US$202,049** US$64,994** US$17,319(4)** US$14,432** -- 125,000 --
Executive Vice 2001 US$4,219** -- --
President, EMEA(3)
--------------------------------------------------------------------------------------------------------------------------
Robert Douglas 2002 US$170,236* US$88,496* -- -- -- 300,000 --
Executive Vice
President, North
American Sales and
Operations (5)
--------------------------------------------------------------------------------------------------------------------------
Joseph H. Dworak 2002 US$190,737 US$78,385 -- -- -- 125,000 --
Senior Vice
President,
North American
Services (6)
--------------------------------------------------------------------------------------------------------------------------
James R. Warden 2002 US$170,000 US$135,405 -- -- -- 70,000 --
Senior Vice 2001 US$133,750 US$54,580 -- -- -- 10,000 --
President, Asia
Pacific and Latin
America
2000 US106,250 US$127,713 -- -- -- 10,000 --
-------------------------------------------------------------------------------------------------------------------------
* Compensation originally denominated in Canadian dollars has been converted
using the average exchange rate during the year being 1.5686, 1.5216 and
1.4706 for the years ended June 30, 2002, 2001 and 2000, respectively.
** Compensation originally denominated in British pounds has been converted
using the average exchange rate during the year being 1.44321.
(1) Mr. Francis resigned as President and Chief Executive Officer on August 27,
2001. Mr. Francis did not draw a salary in fiscal 2002.
(2) Mr. Manning was appointed President and Chief Executive Officer on August
27, 2001.
(3) Mr. O'Hara commenced employment on June 25, 2001.
(4) Represents Mr. O'Hara's car allowance.
(5) Mr. Douglas' salary is from October 23, 2001 to June 30, 2002.
(6) Mr. Dworak's salary is from October 23, 2001 to June 30, 2002.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information regarding stock option grants to our
chief executive officer and our named executive officers during the fiscal year
ended June 30, 2002. The potential realizable value of the options is calculated
based on the assumption that
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the common shares appreciate at the annual rate shown, compounded annually, from
the date of grant until the expiration of their term. These numbers are
calculated based on Securities and Exchange Commission requirements and do not
reflect our projection or estimate of future share price growth. Potential
realizable values are computed by:
o multiplying the number of common shares subject to a given option by
the exercise price;
o assuming that the aggregate share value derived from that calculation
compounds at the annual 5% or 10% rate shown in the table for the
entire term of the option; and
o subtracting from that result the aggregate option exercise price.
INDIVIDUAL GRANTS
-------------------------------------------------------------
% OF TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF SHARE
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR OPTION TERM
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION ----------------------------------------
NAME OPTIONS FISCAL YEAR SHARE DATE 5% 10%
------------------ --------------- ---------------- ------------- ------------- ---------------------- -----------------
Kent Roger (Bo) Manning 500,000 11.92% $7.93 Aug. 27, 2011 $2,493,567 $6,319,189
250,000 5.96% $3.03 Nov. 1, 2011 $476,388 $1,207,260
250,000 5.96% $6.35 Feb. 1, 2012 $998,370 $2,530,066
Norman B. Francis 15,000 0.36% $3.829 Nov.16, 2011 $36,120 $91,537
John O'Hara 50,000 1.19% $10.25 Jul. 27, 2011 $322,308 $816,713
75,000 1.79% $3.91 Oct. 26, 2011 $184,423 $467,365
Robert Douglas 300,000 7.15% $3.91 Oct. 26, 2011 $737,693 $1,869,460
Joseph Dworak 125,000 2.98% $3.91 Oct. 26, 2011 $307,372 $778,942
James R. Warden 20,000 0.48% $10.25 July 27, 2011 $128,923 $326,717
50,000 1.19% $3.91 Oct. 26, 2011 $122,949 $311,577
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table provides information regarding the exercise of options to
purchase common shares by our Named Executive Officers during the fiscal year
ended June 30, 2002. The value of unexercised in-the-money options is based on
the closing price of our common shares on the Nasdaq National Market on July 2,
2002 of $3.75, minus the exercise price per share.
AGGREGATED OPTIONS EXERCISED DURING 2002 FISCAL YEAR
AND FINANCIAL YEAR-END OPTION VALUES
------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END
-------------------------- ---------------
SHARES ACQUIRED VALUE
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------ -------------------------------- ----------------------------------- ----------------- ----------------
Kent Roger (Bo) Manning 0 0 199,700 800,300 $22,500 $157,500
Norman B. Francis 0 0 69,725 43,125 $0 $0
John O'Hara 0 0 9,375 115,625 $0 $0
Robert Douglas 0 0 50,000 250,000 $0 $0
Joseph Dworak 0 0 0 125,000 $0 $0
James Warden 0 0 18,000 78,750 $0 $0
------------------------
DIRECTOR COMPENSATION
We do not currently pay cash compensation to directors for serving on our board
of directors, but we do reimburse directors for out-of-pocket expenses for
attending board and committee meetings. We do not provide additional
compensation for committee participation or special assignments of the board of
directors. Of our directors, Messrs. Manning, Francis, Wales, Jaech, Gordon,
Lochhead and Gwin received stock options for their participation on our board of
directors for the year ended June 30, 2002. Mr. Manning received options to
purchase 500,000 common shares at a price of $7.93 per share, options to
purchase 250,000 common shares at a price of $3.03 per share and options to
purchase 250,000 common shares at a price of $6.35 per share. Messrs. Francis,
Wales, Jaech and Gordon received options to purchase 15,000 common shares at a
price of $3.829 per share. Mr. Lochhead received options to purchase 40,000
common shares at a price of $4.150 per share. Mr. Gwin received options to
purchase 40,000 common shares at a price of $4.93 per share.
EMPLOYMENT CONTRACTS
We entered into an employment contract with Kent Roger (Bo) Manning on August
22, 2001. Mr. Manning's current base salary is US$350,000 with a potential
incentive compensation of US$300,000. Mr. Manning's salary is reviewed annually
by the Compensation Committee of the board of directors. Mr. Manning was also
granted 1,000,000 options to purchase common shares and is eligible to receive
further grants in the future.
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We entered into an employment contract with John O'Hara on June 5, 2001. Mr.
O'Hara's current base salary is US$202,049 with a potential incentive
compensation of US$144,321. Mr. O'Hara's salary is reviewed annually by the
Compensation Committee. Mr. O'Hara was also granted 50,000 options to purchase
common shares in Pivotal and is eligible to receive further grants in the
future. Unde3r the terms of Mr. O'Hara's employment contract, should Pivotal
choose to terminate Mr. O'Hara's employment within the first two years, Pivotal
would have to pay certain amounts by way of severance which could exceed
US$100,000.
We entered into an employment contract with Robert Douglas on October 21, 2001
Mr. Douglas' current base salary is US$250,000 with a potential incentive
compensation of US$175,000. Mr. Douglas' salary is reviewed annually by the
Compensation Committee. Mr. Douglas was also granted 300,000 options to purchase
common shares in Pivotal and is eligible to receive further grants in the
future.
We entered into an employment contract with Joseph Dworak on October 19, 2001.
Mr. Dworak's current base salary is US$275,000 with a potential incentive
compensation of US$125,000. Mr. Dworak's salary is reviewed annually by the
Compensation Committee. Mr. Dworak was also granted 125,000 options to purchase
common shares in Pivotal and is eligible to receive further grants in the
future.
We entered into an employment contract with James Warden on May 18, 1999. Mr.
Warden's current base salary is US$170,000 with a potential incentive
compensation of US$220,000. Mr. Warden's salary is reviewed annually by the
Compensation Committee. Pursuant to the employment contract entered in by Mr.
Warden in May 1999, Mr. Warden was granted 10,000 options. Subsequent to
entering into this agreement, Mr. Warden has received and is eligible to receive
further grants in the future at the discretion of our board of directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationships exist between our board of directors or
compensation committee and the board of directors or compensation committee of
any other company, nor has any interlocking relationship existed in the past.
The Compensation Committee of the board of directors currently consists of
Jeremy A. Jaech, Robert J. Louis and Howard Gwin. None of Mr. Jaech, Mr. Louis
or Mr. Gwin is or was an employee or officer of Pivotal or its subsidiaries.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information concerning the beneficial ownership of
our common shares as of August 1, 2002:
o our current chief executive officer and our former chief executive
officer;
o our four most highly compensated executive officers;
o each of our directors;
o each shareholder that we are aware beneficially owns more than 5% of
our outstanding common shares based upon statements filed with the
Securities and Exchange Commission pursuant to sections 13(d) or 13(g)
of the Securities and Exchange Act of 1934, as amended; and
o all our directors and executive officers as a group.
The principal address of each of the individuals identified below is 224 West
Esplanade, Suite 300, North Vancouver, BC, Canada V7M 3M6, except where another
address is listed.
NUMBER OF SHARES PERCENT OF COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED SHARES OWNED
------------------------------------------------- ------------------------- ------------------
Kent Roger (Bo) Manning (1)...................... 258,779 1.07%
Norman B. Francis (2)............................ 2,042,575 8.45%
Keith R. Wales (3)............................... 953,925 3.95%
Jeremy A. Jaech (4).............................. 75,000 *
Robert J. Louis (5).............................. 1,559,458 6.45%
Steven M. Gordon (6)............................. 15,000 *
Christopher Lochhead............................. 4,000 *
Howard Gwin...................................... 0 *
John O'Hara (7) ................................. 22,009 *
Robert Douglas (8) .............................. 50,000 *
Joseph H. Dworak................................. 3,921 *
James R. Warden (9) ............................. 25,499 *
Ventures West Capital Limited (10)............... 1,559,458 6.45%
280 -- 1285 West Pender Street
Vancouver, BC V6E 4B1
All directors and executive officers as a group
(17 persons) (11)................................ 5,097,492 21.09%
--------------
* indicates less than one (1) percent.
(1) Includes 258,779 shares subject to options exercisable by Mr. Manning
within 60 days of August 1, 2002.
(2) Includes (a) 400,800 shares held of record by The Francis Family Trust, a
family trust for the benefit of Mr. Francis and his three children; (b)
697,143 shares held of record by Boardwalk Ventures Inc., a holding company
owned 50% by Mr. Francis and 50% by his spouse; and (c) 75,975 shares
subject to options exercisable by Mr. Francis within 60 days of August 1,
2002. This information is derived from a Schedule 13G filed with the
Securities and Exchange Commission by Mr. Francis on February 14, 2002.
(3) Includes (a) 378,572 shares held of record by Daybreak Software Inc., a
holding company owned solely by Mr. Wales, of which Mr. Wales has sole
voting power; (b) 28,125 shares subject to options exercisable by Mr. Wales
within 60 days of August 1, 2002. Mr. Wales disclaims beneficial ownership
of any shares held by his former spouse, Patricia Wales.
(4) Includes 75,000 shares subject to options exercisable within 60 days of
August 1, 2002.
(5) Includes (a) 363,514 shares held of record by Bank of Montreal Capital
Corporation which is managed by Ventures West Management TIP Inc., an
entity wholly owned by Ventures West Capital Ltd.; and (b) 1,195,944 shares
held of record by VW B.C. Technology Investment Fund Limited Partnership,
of which Ventures West Management B.C. Ltd. is the general partner.
Ventures West Management B.C. Ltd. is wholly owned by Ventures West Capital
Ltd. Mr. Louis, as President of Ventures West Capital Ltd., a venture
capital firm with controlled subsidiaries which include Ventures West
Management TIP Inc. and Ventures West Management B.C. Ltd., disclaims
beneficial ownership of such shares except to the extent of his pecuniary
interest. Mr. Louis claims that he does not have nor does he share in the
control of the voting and investment power over these shares. This
information is derived from a Schedule 13G filed with the Securities and
Exchange
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Commission by Ventures West Capital Limited on January 30, 2002.
(6) Includes 15,000 shares subject to an option exercisable within 60 days of
August 1, 2002.
(7) Includes 21,875 shares subject to options exercisable within 60 days of
August 1, 2002.
(8) Includes 50,000 shares subject to options exercisable within 60 days of
August 1, 2002.
(9) Includes 20,499 shares subject to options exercisable within 60 days of
August 1, 2002.
(10) Includes (a) 363,514 shares held of record by Bank of Montreal Capital
Corporation which is managed by Ventures West Management TIP Inc., an
entity wholly owned by Ventures West Capital Ltd.; and (b) 1,195,944 shares
held of record by VW B.C. Technology Investment Fund Limited Partnership,
of which Ventures West Management B.C. Ltd. is the general partner.
Ventures West Management B.C. Ltd. is wholly owned by Ventures West Capital
Ltd. Mr. Louis, as President of Ventures West Capital Ltd., a venture
capital firm with controlled subsidiaries which include Ventures West
Management TIP and Ventures West Management B.C. Ltd., disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest.
This information is derived from a Schedule 13G filed with the Securities
and Exchange Commission by Ventures West Capital Limited on January 30,
2002.
(11) Includes 622,002 shares subject to options exercisable within 60 days of
August 1, 2002. Includes 8,759 shares and 13,750 shares subject to options
exercisable within 60 days of August 1, 2002 by Matt Duncan, who was an
executive officer on August 1, 2002 but resigned on August 15, 2002.
EQUITY COMPENSATION PLAN INFORMATION
---------------------------------------------------------------------------------------------------------------------------
Plan Category Number of Securities to be Weighted-average Exercise Number of Securities
Issued upon Exercise of Price of Outstanding remaining available for
Outstanding Options, Warrants Options, Warrants and Rights future issuance under Equity
and Rights Compensation Plans (excluding
securities reflected in
column (a))
---------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 5,786,416(1) $11.42(1) 1,734,831(1)
approved by security
holders(1))
---------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not -- -- --
approved by security holders
---------------------------------------------------------------------------------------------------------------------------
Total 5,786,416 $11.42 1,734,831
---------------------------------------------------------------------------------------------------------------------------
(1) All equity compensation plans are approved by shareholders and include the
following:
(a) Incentive Stock Option Plan: The Incentive Stock Option Plan includes
compensation plans assumed in connection with the acquisition of
Exactium Ltd. on June 2, 2000 and Simba Digital Technologies Inc. on
June 26, 2000. There are 991 outstanding options under the plan
assumed in the Exactium acquisition, with a weighted-average exercise
price of $0.57. There are 187,854 outstanding options under the plan
assumed in the Simba acquisition, with a weighted-average price of
$22.40.
(b) Employee Stock Purchase Plan: It is not possible to disclose the
number of shares to be issued, as it is determined by employee payroll
deductions during a subscription period. It is not possible to
determine the weighted-average exercise price as the purchase price is
defined as 85% of the lower of the fair market value at the beginning
or end of a subscription period. There are 746,333 shares remaining
available for future issuance under the Employee Stock Purchase Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the year ended June 30, 2001, Pivotal loaned $250,000 to Vincent Mifsud,
the previous Chief Operating Officer, Chief Financial Officer and Executive Vice
President of Pivotal. This loan was made while Mr. Mifsud was still an officer
of Pivotal, was non-interest bearing and was secured by shares of a private
company. During the year ended June 30, 2002, Mr. Mifsud left the employment of
Pivotal and the shares being held as security were subsequently sold and the
proceeds of the sale, which were $250,000, were paid to Pivotal as repayment in
full of the loan balance.
-89-
During the year ended June 30, 2001, Pivotal loaned Cdn$124,000 to Andre J.
Beaulieu, General Counsel and Assistant Secretary of Pivotal. This loan is
non-interest bearing, unsecured and pursuant to an agreement dated May 29, 2002,
Cdn$16,890 of the loan has been repaid and the outstanding balance of the loan
will be repaid through future incentive bonuses payable to Mr. Beaulieu.
On October 1, 2001, Pivotal entered into a consulting agreement with Christopher
Lochhead. Mr. Lochhead was appointed to Pivotal's Board of Directors on November
27, 2001. Pursuant to the consulting agreement, Pivotal agreed to pay Mr.
Lochhead $12,000 per month in exchange for Mr. Lochhead providing a
pre-determined number of monthly consulting hours. Mr. Lochhead may charge an
additional fee if the pre-determined number of monthly consulting hours is
exceeded. During the year ended June 30, 2002, Pivotal paid Mr. Lochhead a total
of US$210,623 pursuant to this agreement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
1. Index to Consolidated Financial Statements
Page
Independent Auditor's Report................................ 52
Consolidated Balance Sheets................................. 53
Consolidated Statements of Operations....................... 54
Consolidated Statements of Shareholders' Equity 55
Consolidated Statements of Cash Flows....................... 56
Notes to Consolidated Financial Statements.................. 57
Page
2. Index to Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts............. 81
(b) Reports on Form 8-K
Not Applicable
(c) 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
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
3.1(4) Memorandum and Articles
4.1(4) Specimen of common share certificate
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4.2(4) Registration Rights (included in Exhibit 10.14)
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) Canadian Imperial Bank of Commerce Cdn$2,000,000 Committed
Installment Loan dated March 18, 1998
10.8(4) Canadian Imperial Bank of Commerce Cdn$3,000,000 Operating
Line of Credit dated March 18, 1998
10.9(4) Security Agreement with Canadian Imperial Bank of Commerce
dated for reference April 15, 1998
10.10(4) Contract Relative to Special Security under the Bank Act
between Canadian Imperial Bank of Commerce and Pivotal dated
April 30, 1998
10.11(4) Canadian Imperial Bank of Commerce Schedule - Standard
Credit Terms dated March 18, 1998
10.12(4) Canadian Imperial Bank of Commerce Schedule - Standard
Credit Terms dated March 18, 1998
#10.13(4) Form of Indemnity Agreement between Pivotal and directors
and officers of Pivotal
10.14(4) Investors' Rights Agreement dated January 15, 1999
10.15(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
#10.16(5) Employment Agreement between Vince Mifsud and Pivotal dated
November 10, 1998
#10.17(6) Exactium Ltd. 1999 Stock Option Plan
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#10.18(7) Simba Technologies Incentive Stock Option Plan, as amended
#10.19 Amended and Restated Incentive Stock Option Plan
10.20(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.
10.21(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.
10.22(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.
10.23(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
10.24(8) Lease dated December 19, 2000 between 485 Properties, LLC
and Pivotal for premises located in Atlanta, Georgia
10.25(8) Lease dated as of November 24, 2000 between Scholl Consumer
Products Limited and Pivotal for premises located in Luton,
England
#10.26(8) Employment Agreement between Kent Roger (Bo) Manning and
Pivotal dated August 22, 2001
10.27(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
10.28(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
#10.29(9) Consulting Agreement between Lochhead Corporation and
Pivotal dated January 28, 2002
10.30(10) Loan Agreement between Canadian Imperial Bank of Commerce
and Pivotal dated December 31, 2001
#10.31 Employment Agreement between John O'Hara and Pivotal dated
June 5, 2001
#10.32 Employment Agreement between Robert Douglas and Pivotal
dated October 21, 2001
#10.33 Employment Agreement between Joe Dworak and Pivotal dated
October 19, 2001
#10.34 Employment Agreement between James Warden and Pivotal dated
May 18, 1999
10.35 Lease Amendment Agreement made as of April 22, 2002 between
354875 B.C. Ltd. and Pivotal with respect to premises
located in North Vancouver, B.C.
10.36 Modification of Lease dated January 8, 2002 between B.C.
Rail Ltd. and Pivotal
10.37 Sub-lease dated September 19, 2001 between The H.W. Wilson
Company Inc. and Pivotal with respect to premises located in
Dublin, Republic of Ireland
10.38 Sub-lease dated August 18, 2000 between Dunsmuir & Hornby
Ltd. and Pivotal with respect to premises located in
Vancouver, B.C.
10.39 Lease Extension dated October 30, 2001 between Dunsmuir &
Hornby Ltd. and Pivotal with respect to premises located in
Vancouver, B.C.
10.40 Lease made May 7, 2000 between 1102758 Ontario Limited and
Pivotal with respect to premises located in Toronto, ON
-92-
#10.41 Loan Agreement made as of January 29, 2001 between Pivotal
and Andre Beaulieu
#10.42 Amendment of Loan Agreement dated May 29, 2002 between
Pivotal and Andre Beaulieu
10.43 Sub-lease dated August 29, 2000 between Pivotal and Primus
Telecommunications (Canada) Inc. with respect to premises
located in Vancouver, B.C.
10.44 Amendment of Lease Extension dated April 29, 2002 between
Pivotal and Dunsmuir and Hornby Ltd. with respect to
premises located in Vancouver, B.C.
21.1 Subsidiaries of Pivotal
23.1 Consent of Deloitte & Touche
24.1 Powers of Attorney (included on signature page)
99.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.2
Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
---------------
# Indicates management contract or compensatory plan or arrangement.
(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.
(9) Incorporated by reference to Pivotal's Quarterly Report on Form 10-Q for
the quarter ended December 31, 2001.
(10) Incorporated by reference to Pivotal's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002.
-93-
SIGNATURES
Registrant. Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Vancouver, British Columbia, Canada, on August 28, 2002.
PIVOTAL CORPORATION
(Registrant)
By: /s/ Kent Roger (Bo) Manning
-------------------------------------
Kent Roger (Bo) Manning
(President and Chief Executive Officer)
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POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kent Roger (Bo) Manning and Divesh Sisodraker,
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all said attorneys-in-fact
and agents of them or their substitute or substitutes, may lawfully do or cause
to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date(s) indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Kent Roger (Bo) Manning President, Chief Executive August 28, 2002
---------------------------- Officer and Director
Kent Roger (Bo) Manning
/s/ Divesh Sisodraker Chief Financial Officer August 28, 2002
----------------------------
Divesh Sisodraker
/s/ Keith R. Wales Director August 28, 2002
----------------------------
Keith R. Wales
/s/ Norman B. Francis Director August 28, 2002
----------------------------
Norman B. Francis
/s/ Jeremy A. Jaech Director August 28, 2002
----------------------------
Jeremy A. Jaech
/s/ Christopher Lochhead Director August 28, 2002
----------------------------
Christopher Lochhead
/s/ Robert J. Louis Director August 28, 2002
----------------------------
Robert J. Louis
/s/ Steven M. Gordon Director August 28, 2002
----------------------------
Steven M. Gordon
/s/ Howard Gwin Director August 28, 2002
----------------------------
Howard Gwin
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