UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] 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
| BRITISH COLUMBIA, CANADA | 98-0366456 | |
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|
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| (State or other Jurisdiction of incorporation) | (I.R.S. Employer Identification No.) |
SUITE 700 — 858 BEATTY STREET
VANCOUVER, BRITISH COLUMBIA, V6B 1C1
CANADA
(Address of principal executive offices and zip code)
Telephone (604) 699-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes No X
Common shares outstanding at November 1, 2003: 26,276,114
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PIVOTAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
| Page No. |
||||||||
| PART I—FINANCIAL INFORMATION | ||||||||
| ITEM 1. | Financial Statements |
3 | ||||||
Condensed Consolidated Balance Sheets as of September 30, 2003
and June 30, 2003 |
3 | |||||||
Condensed Consolidated Statements of Operations for the Three Months Ended
September 30, 2003 and 2002 |
4 | |||||||
Condensed Consolidated Statements of Shareholders’ Equity for the Three Months
ended September 30, 2003 |
5 | |||||||
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
September 30, 2003 and 2002 |
6 | |||||||
Notes to Condensed Consolidated Financial Statements |
7 | |||||||
| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
15 | ||||||
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
28 | ||||||
| ITEM 4. | Controls and Procedures |
29 | ||||||
| PART II—OTHER INFORMATION | ||||||||
| ITEM 4. | Submission of Matters to a Vote of Securityholders |
29 | ||||||
| ITEM 5. | Other Information |
29 | ||||||
| ITEM 6. | Exhibits and Reports On Form 8-K |
30 | ||||||
| SIGNATURES | 35 | |||||||
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PART I – ITEM 1: FINANCIAL STATEMENTS
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in United States dollars; all amounts in thousands)
| September 30, | June 30, | |||||||||
| 2003 | 2003 | |||||||||
| (unaudited) | ||||||||||
ASSETS |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 1,727 | $ | 8,227 | ||||||
Short-term investments |
8,185 | 10,663 | ||||||||
Restricted cash |
3,779 | — | ||||||||
Accounts receivable, net |
6,762 | 8,248 | ||||||||
Prepaid expenses and other |
2,520 | 3,526 | ||||||||
Total current assets |
22,973 | 30,664 | ||||||||
Property and equipment, net |
2,733 | 3,083 | ||||||||
Goodwill |
9,834 | 9,941 | ||||||||
Acquired intangibles, net |
546 | 655 | ||||||||
Other assets |
928 | 973 | ||||||||
Total assets |
$ | 37,014 | $ | 45,316 | ||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||||
Current liabilities: |
||||||||||
Accounts payable and accrued liabilities |
$ | 12,801 | $ | 14,929 | ||||||
Current portion of accrued restructuring costs |
2,556 | 3,554 | ||||||||
Current portion of restructuring costs assumed on acquisition |
1,187 | 1,270 | ||||||||
Deferred revenue |
11,844 | 13,275 | ||||||||
Current portion of obligations under capital leases and long-term debt |
234 | 481 | ||||||||
Total current liabilities |
28,622 | 33,509 | ||||||||
Non-current portion of accrued restructuring costs |
2,588 | 3,105 | ||||||||
Non-current portion of restructuring costs assumed on acquisition |
315 | 567 | ||||||||
Non-current portion of obligations under capital leases and long-term debt |
— | 37 | ||||||||
Total liabilities |
31,525 | 37,218 | ||||||||
Commitments and contingencies (Note 7) |
||||||||||
Shareholders’ equity: |
||||||||||
Preferred shares, undesignated, no par value: authorized
shares – 20,000; no shares issued and outstanding |
— | — | ||||||||
Common shares and additional paid-in capital, no par value: |
||||||||||
authorized shares – 200,000; issued and outstanding shares –
26,275 and 25,717 at September 30, 2003 and June 30, 2003, respectively |
180,264 | 179,932 | ||||||||
Accumulated other comprehensive income |
10 | — | ||||||||
Accumulated deficit |
(174,785 | ) | (171,834 | ) | ||||||
Total shareholders’ equity |
5,489 | 8,098 | ||||||||
Total liabilities and shareholders’ equity |
$ | 37,014 | $ | 45,316 | ||||||
See notes to condensed consolidated financial statements.
-3-
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed In United States Dollars, all amounts in thousands except per share data)
(Unaudited)
| Three months ended | |||||||||
| September 30, | |||||||||
| 2003 | 2002 | ||||||||
Revenues: |
|||||||||
License |
$ | 3,972 | $ | 3,215 | |||||
Services and maintenance |
9,330 | 9,092 | |||||||
Total revenues |
13,302 | 12,307 | |||||||
Cost of revenues: |
|||||||||
License |
165 | 247 | |||||||
Services and maintenance |
3,816 | 5,346 | |||||||
Total cost of revenues |
3,981 | 5,593 | |||||||
Gross profit |
9,321 | 6,714 | |||||||
Operating expenses: |
|||||||||
Sales and marketing |
4,910 | 9,056 | |||||||
Research and development |
2,987 | 3,903 | |||||||
General and administrative |
2,323 | 2,030 | |||||||
Restructuring costs and other charges |
1,851 | — | |||||||
Amortization of acquired intangibles |
109 | 24 | |||||||
Total operating expenses |
12,180 | 15,013 | |||||||
Loss from operations |
(2,859 | ) | (8,299 | ) | |||||
Interest and other income (loss) |
5 | (289 | ) | ||||||
Loss before income taxes |
(2,854 | ) | (8,588 | ) | |||||
Income taxes |
97 | 163 | |||||||
Net loss |
$ | (2,951 | ) | $ | (8,751 | ) | |||
Loss per share |
|||||||||
Basic and diluted |
$ | (0.11 | ) | $ | (0.36 | ) | |||
Weighted average number of shares used to calculated loss per share |
|||||||||
Basic and diluted |
26,188 | 24,316 | |||||||
See notes to condensed consolidated financial statements.
-4-
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003
(Expressed In United States Dollars; all amounts in thousands)
(Unaudited)
| Common Shares and | ||||||||||||||||||||||
| Additional Paid-in | Accumulated | |||||||||||||||||||||
| Capital | Other | Total | ||||||||||||||||||||
| Comprehensive | Accumulated | Shareholders’ | ||||||||||||||||||||
| Shares | Amount | Income | Deficit | Equity (Deficit) | ||||||||||||||||||
Balance, June 30, 2003 |
25,717 | $ | 179,932 | $ | — | $ | (171,834 | ) | $ | 8,098 | ||||||||||||
Comprehensive loss: |
||||||||||||||||||||||
Net loss |
— | — | — | (2,951 | ) | (2,951 | ) | |||||||||||||||
Cumulative translation adjustment |
— | — | 10 | — | 10 | |||||||||||||||||
Total comprehensive loss |
(2,941 | ) | ||||||||||||||||||||
Issuance of common shares on
exercise
of stock options |
196 | 101 | — | — | 101 | |||||||||||||||||
Issuance of common shares related to
Employee Stock Purchase Plan |
362 | 231 | — | — | 231 | |||||||||||||||||
Balance, September 30, 2003 |
26,275 | $ | 180,264 | $ | 10 | $ | (174,785 | ) | $ | 5,489 | ||||||||||||
See notes to condensed consolidated financial statements.
-5-
PIVOTAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed In United States Dollars; all amounts in thousands)
(Unaudited)
| Three months ended September 30, | ||||||||||
| 2003 | 2002 | |||||||||
Cash flows from operating activities: |
||||||||||
Net loss |
$ | (2,951 | ) | $ | (8,751 | ) | ||||
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: |
||||||||||
Depreciation of property and equipment |
335 | 520 | ||||||||
Amortization of acquired intangibles |
109 | 24 | ||||||||
Amortization of deferred share-based compensation |
— | 6 | ||||||||
Non-cash restructuring costs |
160 | — | ||||||||
Gain on disposal of property and equipment |
(1 | ) | — | |||||||
Change in operating assets and liabilities |
||||||||||
Accounts receivable |
1,486 | 3,343 | ||||||||
Prepaid expenses and other |
846 | (399 | ) | |||||||
Accounts payable and accrued liabilities |
(2,128 | ) | (1,737 | ) | ||||||
Accrued restructuring costs |
(1,790 | ) | (973 | ) | ||||||
Deferred revenue |
(1,431 | ) | (1,401 | ) | ||||||
Net cash used in operating activities |
(5,365 | ) | (9,368 | ) | ||||||
Cash flows from investing activities: |
||||||||||
Change in restricted cash |
(3,779 | ) | (1,477 | ) | ||||||
Sales, maturities and (purchases) of short-term investments, net |
2,478 | 6,456 | ||||||||
Recovery of acquired receivables |
107 | — | ||||||||
Purchase of property and equipment |
(50 | ) | (102 | ) | ||||||
Proceeds on disposal of property and equipment |
6 | — | ||||||||
Other non-operating assets |
55 | 24 | ||||||||
Net cash (used in) provided by investing activities |
(1,183 | ) | 4,901 | |||||||
Cash flows from financing activities: |
||||||||||
Repayment of obligations under capital lease |
(284 | ) | (272 | ) | ||||||
Proceeds from issuance of common shares |
332 | 198 | ||||||||
Net cash provided by (used in) financing activities |
48 | (74 | ) | |||||||
Net decrease in cash and cash equivalents |
(6,500 | ) | (4,541 | ) | ||||||
Cash and cash equivalents, beginning of period |
8,227 | 20,322 | ||||||||
Cash and cash equivalents, end of period |
$ | 1,727 | $ | 15,871 | ||||||
See notes to condensed consolidated financial statements.
-6-
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed In United States Dollars; all amounts in thousands except per share data)
(Unaudited)
| 1. | BASIS OF PRESENTATION | |
| The accompanying unaudited condensed consolidated financial statements have been prepared on substantially the same basis as the audited consolidated financial statements included in the Pivotal Corporation Annual Report on Form 10-K for the year ended June 30, 2003. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations regarding interim financial statements. All amounts included herein related to the consolidated financial statements as of September 30, 2003, and the three months ended September 30, 2003 and 2002, are unaudited. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in Pivotal’s Annual Report on Form 10-K for the year ended June 30, 2003. | ||
| In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for their fair presentation. The interim results are not necessarily indicative of results for any subsequent quarter or for the year ending June 30, 2004. Certain prior year amounts have been reclassified to conform to current year presentation. | ||
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | |
| Principles of Consolidation | ||
| These consolidated financial statements include the accounts of Pivotal and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated. | ||
| 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 amounts reported in the financial statements and accompanying notes. Estimates are used for, but not limited to, revenue recognition, the accounting for doubtful accounts, the determination of fair value of acquired intangible assets and goodwill, depreciation and amortization, asset impairments, income taxes, restructuring charges and contingencies. Actual results may differ from those estimates. | ||
| Stock-based Compensation | ||
| Pivotal issues stock options to its employees and outside directors and provides employees the right to purchase its stock pursuant to stockholder approved stock option and employee stock purchase programs. The Company accounts for its stock-based compensation plans under the intrinsic value method of accounting as defined by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No additional stock-based compensation expense is reflected in net loss for the three months ended September 30, 2003 and 2002, as all options granted under these plans had an exercise price equal to or greater than the fair market value of the underlying common stock on the date of grant. Deferred compensation expense of $473 was recorded during fiscal 1999 and was fully amortized over the four years ended June 30, 2003. | ||
| Pivotal applies the disclosure provisions of Financial Accounting Standards Board Statement (SFAS) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure. Pursuant to these provisions, stock options and stock purchases are valued at the grant date using fair values as computed using the Black-Scholes valuation model and the resultant compensation expense is recognized ratably over the vesting period or the six-month purchase period. Had the Company accounted for its share-based compensation plans under the fair value method, the pro forma net loss and basic and diluted loss per share would have been as follows: |
-7-
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed In United States Dollars; all amounts in thousands except per share data)
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) | |
| Stock-based Compensation (Continued) |
| Three months ended | |||||||||
| September 30, | |||||||||
| 2003 | 2002 | ||||||||
Net loss, as reported |
$ | (2,951 | ) | $ | (8,751 | ) | |||
Add: Deferred share-based compensation |
— | 6 | |||||||
Less: Total stock-based compensation expense
determined under the fair value
based method for all awards |
(1,616 | ) | (6,285 | ) | |||||
Pro forma net loss |
$ | (4,567 | ) | $ | (15,030 | ) | |||
Basic and diluted loss per share |
|||||||||
As reported |
$ | (0.11 | ) | $ | (0.36 | ) | |||
Pro forma |
$ | (0.17 | ) | $ | (0.62 | ) | |||
| Option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Any changes in the subjective assumptions can materially affect the fair value estimates. The fair value of the options granted and the employees’ stock purchase rights under the employee stock purchase program were estimated at the date of grant using the Black-Scholes valuation model with the following weighted average assumptions: |
| Three months ended September 30, | ||||||||
| Employee and Director Stock Options | 2003 | 2002 | ||||||
Volatility factor of expected market price of Pivotal’s
shares |
85% | 127% | ||||||
Dividend yield |
— | — | ||||||
Weighted average expected life of stock options |
4.0 years | 4.0 years | ||||||
Risk free interest rates |
2.3% | 3.0% | ||||||
Weighted average fair value at grant date |
$0.70 | $1.87 | ||||||
| Three months ended September 30, | ||||||||
| Employee Stock Purchase Plan | 2003 | 2002 | ||||||
Volatility factor of expected market price of Pivotal’s shares |
85% | 127% | ||||||
Dividend yield |
— | — | ||||||
Weighted average expected life of stock options |
0.5 years | 0.5 years | ||||||
Risk free interest rates |
2.3% | 3.0% | ||||||
Weighted average fair value at grant date |
$0.15 | $1.12 | ||||||
| Foreign Currency Translation | ||
| The functional currency of the Company and its subsidiaries is determined in accordance with SFAS No. 52, Foreign Currency Translation (SFAS 52). The Company’s reporting currency is the United States dollar. | ||
| Historically, the functional currency of all of the Company’s subsidiaries has been the U.S. dollar. Foreign currency denominated monetary assets and liabilities are remeasured into the U.S. dollar at end-of-period |
-8-
PIVOTAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Expressed In United States Dollars; all amounts in thousands except per share data)
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) | |