1 UNITED STATED 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, 2000 ------------- 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 Not Applicable (State or other Jurisdiction of (IRS Employer Identification Number) Incorporation or Organization) 300-224 West Esplanade North Vancouver, British Columbia Canada (Address of Principal Executive Offices) V7M 3M6 (Zip Code) (604) 988-9982 (Registrant's Telephone Number, Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- N/A N/A 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]

2 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 September 1, 2000 as reported on the Nasdaq National Market was approximately U.S.$583,393,858. 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 Pivotal. This determination of affiliate status is not a conclusive determination for other purposes. As of September 1, 2000, 22,466,823 common shares of the registrant were outstanding. DOCUMENTS INCORPORATED BY REFERENCE NOT APPLICABLE.

3 TABLE OF CONTENTS <TABLE> <S> <C> PART I.........................................................................1 ITEM 1. BUSINESS...............................................................1 ITEM 2. PROPERTIES............................................................25 ITEM 3. LEGAL PROCEEDINGS.....................................................25 ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS ....................25 PART II.......................................................................25 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ..............................................................26 ITEM 6. SELECTED FINANCIAL DATA...............................................27 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..........43 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .............44 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE........................................63 PART III......................................................................63 ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT ................................63 ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS ..............................65 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ......................................................69 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ......................71 PART IV.......................................................................71 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ..........................................................71 </TABLE> -1-

4 PART 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 listed in Item 7 of this report. In some cases, you can identify forward-looking statements by our use of words such as "may," "will," "should," "could," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential" or "continue" or the negative or other variations of these words, or other comparable words or phrases. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements or other future events. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of forward-looking statements. We are under no duty to update any of our forward-looking statements after the date of this report. You should not place undue reliance on forward-looking statements. ITEM 1. BUSINESS OVERVIEW Pivotal Corporation's technology solutions enable large and medium-sized businesses worldwide to increase, serve and manage their customer base. We refer to our solutions as demand chain network solutions because they automate and manage marketing, selling and servicing processes over the Internet by integrating customer relationship management, electronic selling, electronic commerce and wireless technologies. Our demand chain solutions are designed to compliment and integrate with a business' supply chain, therefore enabling businesses to increase efficiency and revenues. Pivotal's scalable, XML-based demand chain network solutions are designed to meet the needs of businesses ranging from emerging companies in the new digital economy to traditional businesses that are seeking to integrate the opportunities presented by the Internet into their business model. Pivotal solutions are sold in 35 countries and are available in English, French, German, Spanish, Portuguese, Swedish, Japanese and Chinese. Pivotal's worldwide customer base includes more than 1000 organizations in traditional, commercial, public market sectors and in the new digital economy and includes companies such as ING Barings LLC, Deutsche Bank, KPMG, Intrawest Corporation, USFilter, NEC, Ericsson, Emerson Electric, Norsat International, Ford Credit Denmark A/S, Nissan Motor (Denmark), Fairmont Hotels and Resorts, Amazon.com (Auctions), Digital Insight, Headhunter.net, Clarus Corporation, insLogic, Qiagen, Capitalthinking, Software Spectrum, Heller Financial, Uniglobe Travel, InterCon Security Limited, HarperCollins Publishing, Trader.com, Southern Company, Deloitte & Touche, and Principal Financial Group. We market and sell our solutions through a direct sales force as well as through third party solution providers. Pivotal is listed on NASDAQ under the symbol "PVTL" and The Toronto Stock Exchange under the symbol "PVT." Our home page on the Internet can be found at www.pivotal.com. Information contained on our Web site does not constitute part of this report. The terms "Pivotal," "our company" and "we" in this filing refer to Pivotal Corporation, a British Columbia company and all of Pivotal Corporation's wholly owned subsidiaries including Pivotal Corporation, incorporated in Washington State, Pivotal Corporation Limited, incorporated in the United Kingdom, Pivotal Corporation France S.A., incorporated in France, Exactium Ltd., incorporated in Israel, Exactium Inc., incorporated in Delaware State, Pivotal Technologies Corporation Limited, incorporated in the Republic of Ireland, Pivotal Corporation (N.I.) Limited, incorporated in Northern Ireland, Pivotal GmbH, incorporated in Germany, Digital Conversations Inc., incorporated in British Columbia, and Pivotal Corporation Australia Pty. Ltd., incorporated in Australia. -1-

5 Pivotal Relationship, Pivotal eRelationship, Pivotal eRelationship, Pivotal eRelationship IntraHub, Pivotal eRelationship CustomerHub, Pivotal eRelationship PartnerHub, Pivotal ePower, Pivotal eSelling, PivotalWeb .NET, PivotalHost, Pivotal Anywhere, Pivotal Intelligence and Pivotal Interaction Center are trademarks and/or registered trademarks of Pivotal Corporation. INDUSTRY BACKGROUND Businesses have recognized the value of improving their customer focus by establishing an Internet presence in order to increase revenues. Businesses began by building websites that contained company information that was used solely as information sources. In addition, businesses used various software applications to automate customer relationship functions such as sales, marketing and customer service. These software applications typically provided a separate program for each of these internal business functions, did not use the Internet as a communication tool, suffered from limited functionality and were difficult to integrate with one another. In recent years, cost-effective customer relationship management applications have become available that enable information to be shared across different business functions within the employer group. In addition, applications that enabled companies to sell and service their customers on the Internet also began to emerge. Over time, businesses began to realize the need for unified applications across their entire demand chain. Many businesses have benefited from solutions that enable them to sell and service their customers and business partners over the Internet. In addition, they have benefited from customer relationship management applications that automate internal business functions. Many businesses are now seeking solutions that are fully integrated and address all customer interactions, enable online collaboration and sharing of information with their customers and business partners, improve one-to-one relationships with each customer and partner and facilitate electronic commerce. The Delphi Group estimates that growth in the business-to-business electronic commerce software market will grow from $5 billion to $40 billion by 2002. THE IMPACT OF CHANGING TECHNOLOGIES Recent technological advances are dramatically affecting the marketplace for electronic business relationship management solutions. These advances include: - The Internet. The Internet is emerging as a dominant platform for worldwide interactive communication and commerce, and therefore businesses are seeking better ways to use the Internet as a platform to conduct their business. As a result, businesses have begun to invest heavily in technologies that support and exploit the capabilities of the Internet. International Data Corporation estimates that the Internet commerce software applications market will grow at a compound annual rate of 97% for the five-year period from 1998 to 2003 to approximately $13.2 billion by 2003. Businesses that implement electronic business relationship management solutions may gain further competitive advantage by exploiting the capabilities of the Internet to allow online collaboration, electronic commerce and sharing of information with customers and partners. - Widespread Adoption of Microsoft Technologies. Microsoft Windows NT, Microsoft Windows 2000 and Microsoft BackOffice platforms offer businesses the opportunity to easily develop, deploy and maintain information technology systems with increased flexibility at a lower cost than was previously possible. These platforms are also widely used and well understood by technical personnel. International Data Corporation estimates that the Microsoft Windows NT installed base will grow at a compound annual rate of 29% for the five-year period from 1997 to 2002 to approximately 5.8 million users by 2002. Electronic business relationship management solutions that are compatible with these platforms are likely to benefit from this growth. - Growth of Wireless Computing. Businesses, customers and partners expect their employees to be able to share information regardless of their location. The proliferation of wireless computing devices, such as palm computers, web-enabled cell phones and improved remote computing has empowered the mobile professional. As a result, electronic solutions should enable users to access information from any location and to use their preferred wireless computing device. -2-

6 THE OPPORTUNITY The businesses Pivotal serves are typically large businesses, divisions of large businesses and mid-size companies. These businesses need to maintain the same or higher levels of customer service as their smaller competitors and must respond quickly to changes in their competitive environment. As a result, many of these businesses often adopt business models that require close integration and collaboration with their customers and partners. Until recently, most electronic business applications designed on the Microsoft platform were designed primarily to address the needs of the smaller enterprise, were often considered too unstable, were not appropriately scalable for large enterprises and were considered not designed for the Internet. Today, Microsoft Windows NT, Microsoft Windows 2000 and Microsoft BackOffice platforms are considered highly scalable, Internet based solutions. Pivotal believes that a significant market opportunity exists for an electronic business demand chain network solution that is easily customized and quickly deployed. Many businesses have adopted the Internet, Microsoft Windows NT, Microsoft Windows 2000 and Microsoft BackOffice platforms. As a result, a new opportunity also has emerged for an electronic business solution that is optimized for these platforms. Such a solution must incorporate many of the benefits enabling businesses to respond quickly to changes to their competitive environment and to operate more cost-effectively than their smaller competitors. Pivotal believes that such a solution must: - support Internet-based collaboration and the sharing of information with customers and partners; - support integration and collaboration among sales, marketing and customer service employees; - support mobile professionals and their wireless computing devices; - be usable by a business without significant customization, to enable rapid deployment at low total cost of ownership; - provide tools for easy implementation to meet specific needs; and - be easy to use by all end-users without extensive training. PIVOTAL SOLUTIONS Pivotal is a leading provider of electronic business solutions focused on the demand chain network. These solutions enable businesses to increase revenues by more effectively managing their interactions with customers and partners over the Internet. Pivotal's electronic business solutions include award-winning, Internet-based applications supported by an array of professional services and Pivotal's global Pivotal Alliance network of third-party distributors. Pivotal's solutions are designed and optimized exclusively for the Internet, Microsoft Windows NT, Microsoft Windows 2000 and Microsoft BackOffice platforms. In December 1999, Pivotal Relationship won Microsoft's Industry Solutions Award for Best Internet Solution for Customer Self Service and Best Integrated Customer Relationship Management Solution. On February 17, 2000, Microsoft used Pivotal's electronic business solution, Pivotal eRelationship 2000, in the worldwide premiere of Microsoft Windows 2000. We believe our solutions deliver the following benefits: - Enables Businesses to Improve Customer Focus and Increase Revenues. Pivotal's solutions unify sales, marketing and customer service employees and partners around customer processes and interactions. By maintaining all customer information in a shared database, Pivotal's applications make it easy for different users to maximize their contribution to customer relationship management. Furthermore, Pivotal's applications enable businesses to better capture customer profiles and build one-to-one customer relationships. Pivotal believes this improvement in customer focus enables businesses to increase revenues through better customer loyalty and retention. - Improves the Collaboration and Interaction Between Businesses and Their Customers. Using Pivotal eRelationship CustomerHub, businesses can transform their static Web site into a collaborative tool used to increase its customers base, -3-

7 service and sell to customers. Prospective customers can obtain information regarding businesses' products and services over the Internet. Customers can place online orders, retrieve information on products and services 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. - Improves the Collaboration and Interaction Between Businesses and Their Partners. Pivotal eRelationship PartnerHub enables businesses to improve their efficiency and selling processes by facilitating interaction and collaboration with their partners over the Internet. Pivotal's application maintains a shared database consisting of information related to products, services, customer contacts and sales opportunities. By enabling partners to access and update the shared database, Pivotal's solutions simplify the sharing of information between businesses and their partners so they can jointly service their customers' needs and concerns. - Increases the Efficiency of Wireless Mobile Professionals. Mobile professionals can access Pivotal's solutions remotely across local-area networks, wide-area networks or over the Internet by using a number of portable computing devices including laptops, palm computers and web-enabled cell phones. Mobile professionals also can work offline and transmit and receive information to automatically update their own files and the shared corporate database. These capabilities increase the efficiency of mobile professionals. - Enables Rapid Implementation and Simple Customization. Businesses can use Pivotal's solutions without significant customization, which expedites the implementation process. If they desire, businesses can customize Pivotal's solutions to reflect their own internal processes without programming by using Pivotal's graphical, point-and-click tools. - Yields a Low Total Cost of Ownership. Pivotal's solutions can be cost-effectively deployed and customized and thus require few resources for ongoing support, system maintenance and end-user training. Pivotal's solutions 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 modifying the solutions. - Scales With the Growing Needs of Pivotal's Customers. Many of Pivotal's customers require that our solutions support their growing number of employees, online customers and partners. Our solutions' architecture enables our customers to expand our solutions as their businesses grow by adding servers in a number of locations. This capability improves performance and enables Pivotal's solutions to support larger numbers of concurrent users. GROWTH STRATEGY Pivotal's goal is to become a leading global provider of electronic business solutions which combine customer relationship management and electronic commerce solutions. The key elements of Pivotal's growth strategy are as follows: - Extend the Scope of Pivotal's Applications. We intend to continue the development of our applications to add new functionality, with a particular emphasis on Internet-based selling, marketing and customer services. We also intend to provide our customers with business modules designed for specific industries that will further simplify the deployment and use of 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. - Expand Pivotal's Worldwide Distribution Capacity. Pivotal currently has 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. We plan to continue to invest in our worldwide distribution capacity to increase market share and penetration. This investment will include expanding our direct sales force, continuing to expand relationships with existing and new resellers and entering into bundling arrangements with technology providers to provide complimentary niche products to our customers. -4-

8 - Broaden Pivotal's Network of Strategic Relationships. We plan to continue broadening our network of strategic relationships, including our Pivotal Alliance network. The Pivotal Alliance network includes over 50 independent companies that distribute our products, install the software purchased by our customers and provide other software to address specific customer needs. This network has allowed us to focus on our core competencies while taking advantage of the strengths of Pivotal Alliance members who may have specific industry expertise or better regional presence and are therefore better able to address the needs of our customers and provide them with a complete electronic business solution. - Continue Focusing on Pivotal's Customers' Success. Pivotal will continue to focus on providing customer solutions 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 solutions. We believe that the benefits of our solutions have helped us to develop a loyal base of customers. Pivotal intends to continue to focus significant resources on customer success programs, including a systematic customer surveying process, to improve our customer-driven product development initiatives and ultimately improve our solutions. - Partner with Application Service Providers to Offer Pivotal's Solutions on a Usage Fee Basis. Pivotal will continue to enter into relationships to provide an alternative licensing arrangement through third party application service providers that enables customers to pay a usage fee to access Pivotal's software on servers operated by the application service providers. This enables businesses to outsource their electronic business solutions and related information technology infrastructure through an alternative pricing model, such as a monthly fee. PRODUCTS AND PROFESSIONAL SERVICES Pivotal's electronic business solutions include three primary products with multiple options all of which are written on top of a highly customizable electronic business computing platform. The three primary components are Pivotal eRelationship, Pivotal ePower and Pivotal eSelling. These three products include many additional optional applications, including Pivotal eRelationship CustomerHub, Pivotal eRelationship PartnerHub, Pivotal Interaction Center, Pivotal Intelligence Center, PivotalWeb .NET and Pivotal Toolkit. Pivotal's products serve the needs of every stakeholder in the customer life cycle, including employees, customers and partners and improve collaboration and sharing of information among these stakeholders. Users can access Pivotal's solutions with convenient portable computing devices. Pivotal's solutions provide other access options, including local-area network-based, mobile and Web browser users, as well as a special option that extends customer relationship management capabilities to all Microsoft Outlook users. Our products are fully integrated with one another and share a common database. PIVOTAL PRODUCTS Pivotal eRelationship. Pivotal eRelationship is a flexible application for sales, marketing and service employees to manage interactions, transactions, and knowledge with customers and business partners in personalized, one-to-one eRelationships. This Web application extends the power of the Internet to sales, marketing, and customer service departments to enable state-of-the-art electronic marketing, electronic sales, electronic commerce and electronic service. By accessing a wide range of capabilities employees can manage customer and partner interactions, transactions and knowledge to maximize teamwork, productivity and customer satisfaction. Pivotal eRelationship merges the power of customer relationship management with electronic business, combining information from corporate databases with live Internet resources. Pivotal eRelationship supports the following functional groups and processes within an organization: -5-

9 <TABLE> <CAPTION> FUNCTIONAL GROUPS PROCESSES ----------------- --------- <S> <C> Marketing Marketing employees can build and manage complex marketing campaigns, tailor communications and track market, competitor and customer trends. Telemarketing Telemarketing employees can qualify leads, manage opportunities and process orders. Inside Sales Inside sales employees can efficiently capture and track prospects, customize sales processes, manage sales opportunities, forecast sales and report on performance. Field and Mobile Sales Field and mobile sales employees have the same functionality available to them as inside sales employees and in addition, can work connected or disconnected to their corporate network by using multiple portable computing devices including laptops, palm computers and Web enabled cell phones. Order Administration Order administration employees can capture and track orders in multiple currencies, track order status and product movement and report on order history and trends. Customer Service Customer service employees can efficiently capture, track and resolve customer problems and notify, alert, and coordinate activities with customer relationship team members. Management By providing access to valuable information such as forecasts and product sales statistics, management can better measure and predict business performance and more efficiently manage their operations </TABLE> Pivotal eSelling. Pivotal eSelling enables clients to sell complex products and services over the Internet by providing an interactive buying experience complete with needs analysis, recommendations, personalization and advice. The benefits of Pivotal eSelling include: simplifying and shortening clients' sales cycles for higher revenues and faster growth; increasing customer satisfaction with personalized, self-guided buying experiences; and broadening market coverage, thus extending sales reach. Pivotal ePower. Pivotal ePower 2000 is an XML-based technology platform that includes the tools, engines and templates required to rapidly deploy and operate Pivotal's electronic business relationship management solution. This platform is optimized for use in conjunction with the Microsoft .NET platform, can be scaled to work in any size of business and is designed to allow all employees, customers and business partners the ability to access and manipulate the same information. OPTIONAL APPLICATIONS Pivotal eRelationship CustomerHub. Pivotal eRelationship CustomerHub enables a business to transform a static information web site into a dynamic collaborative tool used to service and sell to both existing and prospective customers. Customers can access information about products and services, place orders and access a shared database of solutions to previous customer requests without interacting with customer service employees. Customers also can choose to interact with customer service employees in real-time using online meeting options. Prospective customers can register on a Web site to request information, sign-up for marketing programs, submit information regarding demographic data and specific needs and request an immediate call back from an online salesperson. Businesses can use this information to prepare a customized response for each prospect. -6-

10 Pivotal eRelationship PartnerHub. Pivotal eRelationship PartnerHub enables businesses to establish Web sites that allow sales, marketing and customer service employees to coordinate their activities with partners that assist in the selling process. Pivotal eRelationship PartnerHub allows a partner to share information regarding sales opportunities, co-marketing projects and sales order status, and to order marketing material online. Pivotal eRelationship PartnerHub also allows partners to share information about customer service requests and their status. This application also enables companies to build partner affiliations over the Internet. Pivotal Intelligence Center. Pivotal Intelligence Center provides Web-based tools for data mining, data analysis, and marketing campaign management that help sales, marketing, and customer service professionals analyze data and extract knowledge and insight which allows for better business decisions. Pivotal Interaction Center. Pivotal Interaction Center routes phone calls, voice-mail, email, faxes, Internet chat, Web callback requests, and voice-over-Internet calls. This allows organizations to replace traditional systems made up of a private branch exchange (PBX), interactive voice response unit (IVR), and automatic call distribution (ACD) using a single application. Pivotal Toolkit. Pivotal Toolkit helps businesses to easily customize, administer and adapt their Pivotal products without programming to meet business specific needs. This option helps to reduce implementation and customization costs, ongoing administrative burden and the need for employees with advanced technical skills. Using Pivotal Toolkit's simple graphical, point-and-click user interface, businesses can modify any aspect of their Pivotal system without altering source code. Pivotal Toolkit also includes visual scripting tools, called Pivotal agents, which allow users to create work flow processes that do not require programming. By simply connecting arrows between objects on the screen, users can automate and model business processes, develop sales scripts and create online tutorials to guide other users through complex tasks. PivotalHost. PivotalHost is an Internet hosting solution for Pivotal's technology. PivotalHost is a solution whereby Pivotal provides customers access to Pivotal's applications on a monthly subscription basis over the Internet through an application service provider. This solution includes Pivotal software, Microsoft software, server hardware, data center, secure Internet connectivity from the data center, and information technology staff to administer and support the customer's solution. PivotalWeb .NET. PivotalWeb .NET (previously known as the Pivotal B2B Syndicate) is a solution offered to Pivotal's customers in which multiple, third-party, best-in-class Web based services and products are made available through Pivotal to our customers. Instead of the customer having to spend time and resources to identify, evaluate, engage and integrate such products and services, we organize and present these products and services to our customers in a very accessible and convenient way. Pivotal Anywhere. Pivotal Anywhere enables mobile professionals to access Pivotal's solutions remotely over the Internet by using a number of portable computing devices including palm computers and Web-enabled cell phones. PRODUCT PRICING Pivotal eRelationship licenses are priced on a "per user" and "per server" basis, as well as on the number of Internet users. Pivotal eRelationship licenses include solutions for telemarketing, inside sales, field and mobile sales, marketing, order administration, customer service and management. Pivotal Toolkit is licensed on a per-site basis. All Pivotal solutions may be purchased on a monthly subscription basis or as a one-time fee for perpetual licences. PRODUCT AWARDS The following table lists some of the awards Pivotal's products have won: -7-

11 <TABLE> <CAPTION> SPONSOR DATE AWARD ------- ---- ----- <S> <C> <C> Microsoft July 2000 North American Packaged Application Partner of the Year 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 December 1998 Industry Solution Awards for 1998 -- Best Overall Customer Relationship Management Solution December 1997 Industry Solution Awards -- Best Mobile Sales Solution May 1997 Solutions Provider Awards -- Best Solution by a Solution Developer Upside Magazine February 2000 eBusiness Winner Information Systems Marketing February 2000 Top 15 CRM Software Award February 1999 Top 15 CRM Software Award December 1997 Top 15 CRM Software Award December 1996 Top 15 CRM Software Award Open Systems Advisors January 1999 Crossroads 99 A-List Award Information Week Magazine February 1999 IT Innovators for 1999 British Columbia Technology June 2000 Company of the Year Industry Association start Magazine July 2000 Hottest Companies of 2000 Deloitte & Touche September 2000 Fastest Growing Canadian Technology Company </TABLE> PROFESSIONAL SERVICES Pivotal provides customers with access to a combination of services to successfully implement and effectively maintain an electronic business relationship management solution. These services include: - Technical Support and Maintenance. Pivotal maintains technical support centers that provide telephone, Internet and email based problem identification, analysis and resolution to our worldwide customer base. Various levels of support are available depending on the needs of the customer. Pivotal's technical support and maintenance services include upgrades of our software applications. - Education. Pivotal's education services are designed to educate our customers and Pivotal Alliance members about the customization, use and administration of our solutions. Pivotal offers education, training and certification that helps our customers and selling partners to improve their ability to implement Pivotal's solutions. Pivotal also offers customized and on-site training classes to customers with specific needs. - Implementation Services. Pivotal offers implementation services that include project management and systems engineering. We provide a standardized implementation methodology, which we call the rapid productivity methodology, that enables the efficient implementation of our solutions. Customers can work with Pivotal directly or retain one of the Pivotal Alliance members to implement their Pivotal customer relationship management solutions. Members of the Pivotal Alliance currently provide more than 95% of the implementation services for our products. See "Strategic Relationships." - Business Consulting. Pivotal offers business consulting services that are focused on key customer relationship management trends such as the impact of the Internet on customer relationships and the implementation of one-to-one marketing and business practices. We also assist our customers in measuring and maximizing return on customer relationship management investments. -8-

12 Pivotal's technical support and maintenance services are sold on a per user basis and renewed annually. Pivotal's education fees are standardized on a per day rate. Our business consulting services and implementation services are priced on a time and materials basis. As of June 30, 2000, Pivotal had 122 employees in our Professional Services department. CUSTOMERS AND MARKETS We have licensed our applications on a worldwide basis to over 1000 customers across a wide range of industries. Customers in North America accounted for 90%, 80% and 72% of our revenues in the years ended June 30, 1998, 1999 and 2000, respectively. Some of Pivotal's customers, that purchased a minimum of $100,000 of software licenses from Pivotal prior to June 30, 2000, are set forth in the table below: <TABLE> <CAPTION> CONSULTING INTERNET TECHNOLOGY ---------- -------- ---------- <S> <C> <C> Deloitte & Touche Trader.com Bottomline Technologies Diamond Technology Partners WebEx Inslogic Cadence Design Systems KPMG Medpool.com Hewlett-Packard Malcom Pirnie Broadcast.com (now Yahoo) Lernout & Hauspie Peppers and Rogers Group BroadVision Lucent Technologies Roy F. Weston E.piphany Macola Icarian Micrografx FINANCIAL SERVICES Net Wireless ------------------ INTERSHOP Communications Olicom A/S Heller Financial Active Touch Seagate Software Allied Capital Siemens Electric Dain Rauscher Wessels MANUFACTURING Solectron ------------- Principal Financial Group Sterling Software Savills General Electric ZD Market Intelligence USAA Holophane Kimberly-Clark OTHERS ------ HEALTH CARE M.A. Hanna ----------- Qiagen Australian New Zealand Australian Red Cross US Gypsum Direct Line Blue Cross Blue Shield of Novartis U.S. Naval Reserve Michigan Recruiting Command Novamed Eyecare Management OTHER SERVICES The Conference Board -------------- Novartis Protezione Piante Virginia Economic Pfizer Animal Health Intrawest Development Partnership Sun Healthcare Group Addison-Wesley Longman Syncor International Miller Freeman Vance Publishing Waggener Edstrom UTILITIES --------- CSW Energy Services Southern Company Services </TABLE> SALES AND MARKETING We sell our products through a direct sales force and over 50 independent members of the Pivotal Alliance which resell Pivotal's products. Pivotal's direct sales force is located in the United States, Canada, the United Kingdom -9-

13 and France, and the Pivotal Alliance solution providers are located in North and South America, Europe, the Middle East and Asia. Pivotal's marketing efforts are directed at promoting our products and services, creating market awareness and generating leads. Pivotal's marketing activities include online business seminars, print and online 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. Pivotal has 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 solutions and to anticipate any further needs of the customer. As of June 30, 2000, we employed a total of 204 people on our sales and marketing team. STRATEGIC RELATIONSHIPS PIVOTAL ALLIANCE Pivotal Alliance members help Pivotal market, sell, implement, support and enhance Pivotal's solutions. Members of the Pivotal Alliance include: - Solution Providers. Pivotal has arrangements with over 50 third parties that have been granted the right to market and re-sell our products and to provide education, implementation and customization services for the solutions sold by the third party as well as for most of the sales made through Pivotal's direct sales team. Pivotal refers to these third parties as solution providers. Solution providers usually address the market needs of a specific region, permitting us to sell our solutions in markets that might otherwise be difficult for Pivotal to serve directly. Over 40 of Pivotal's solution providers are outside the United States and Canada. In some foreign markets, Pivotal relies on selected solution providers to customize our solutions and translate our software applications into local languages. - Systems Integrators. Pivotal has arrangements with over 20 third parties that have been granted the right to provide implementation, customization and training services to customers who have purchased solutions through Pivotal's direct sales team. Pivotal refers to these third parties as systems integrators. Our systems integrators include worldwide partners such as KPMG as well as partners focused on specific regional markets. - Technology Providers. Pivotal has arrangements with over 25 third parties that supply software applications that can be integrated with our solutions to address specific industry or customer requirements. Pivotal refers to these third parties as technology providers. We are developing relationships with technology providers in a number of product categories including Internet applications, client/server applications, business productivity, reporting, finance, mobile office products, communications, sales configurators, data mining, business information suppliers and vertical market solutions. The purpose of these relationships is to expand the breadth of technology and services available to our customers. Pivotal provides education and training services to members of the Pivotal Alliance to increase their understanding of Pivotal's solutions. Pivotal is implementing a certification program that will require members of the Pivotal Alliance that perform implementation and customization services to meet our certification standards in the areas of business analysis, systems design, installation, customization, training and support. Pivotal intends to expand the Pivotal Alliance and to upgrade the capabilities of its members. MICROSOFT Pivotal participates with Microsoft in numerous industry tradeshows, partner focused events, public relations activities, seminars and presentations. Pivotal has chosen to align our product development, sales and marketing strategies with Microsoft. Pivotal's strong relationship with Microsoft, as evidenced by Pivotal's participation in the launch of Microsoft Windows 2000, has enabled Pivotal to participate in early product development initiatives with -10-

14 them. As a result, Pivotal's products are optimized for Microsoft platforms. We have won several awards from Microsoft in the following categories: ability to deliver customer satisfaction and return on investment, scalability, ease of deployment, integration with other applications, and technical architecture. TECHNOLOGY Pivotal's software architecture provides a foundation for the development of new and innovative products and allows our applications 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 Pivotal's applications to be used over the Internet. Pivotal has invested in the following technologies which serve as a basis for our customer relationship management solutions: - Microsoft Technology. Pivotal's applications are optimized for the Microsoft Windows NT, Microsoft Windows 2000 and Microsoft BackOffice platforms. Our focused development efforts have enabled Pivotal to create solutions that exploit the capabilities of Microsoft's products, including SQL Server, that are bundled and licensed with Pivotal's solutions. 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, Pivotal's solutions use Microsoft Internet technologies to publish information across the Internet. - Platform Architecture. Pivotal's applications are structured to be able to use XML both within the platform architecture and for interfacing to the applications. This allows Pivotal's professional service staff, partners and customers the ability to work in the applications in an industry standard fashion allowing integration with other systems and technologies. This also allows for a well defined interface between Pivotal's applications thereby reducing the dependency between such applications. In addition, it allows Pivotal to more easily integrate other XML capable technologies and products into our applications and offerings. - Metadata Repository. Pivotal's software contains a database, called a metadata repository, that is the blueprint for each application's data structure, forms, lists, business rules, work flow, queries and reports. The inclusion of this database allows for rapid adaptability and deployment by enabling customization to occur without source code modification. A business can distribute custom application changes throughout its organization in the normal data synchronization process. Pivotal believes these benefits differentiate our solution from those of our competitors. - Pivotal's SyncStream. Pivotal's SyncStream 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. - Distributed Database Design. Pivotal's solution is designed to support databases that reside on multiple servers. This design allows data from the central database to be replicated to servers in different locations and on mobile remote databases (eg. laptops), and to be updated by Pivotal's 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's Enterprise Manager. Pivotal's 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. -11-

15 RESEARCH AND DEVELOPMENT Pivotal's research and development department is divided into six teams: Advanced Technology, Software Development, Documentation, Quality Assurance, Program Management and Product Management. As of June 30, 2000, there were 126 employees in Pivotal's research and development department. To expand the capacity of Pivotal's research and development department, where appropriate, we contract with third-party developers. Pivotal's 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 solutions. Pivotal's 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 cross-functional team is established to implement the project. Pivotal's Program Management team takes responsibility for documenting a detailed product specification. The Program Management team designs prototypes to assess the risks and business requirements of a project at this stage. This enables programmers in the Software Development team to concentrate solely on research and development activities. Through the later stages of development we perform final testing and quality assurance. Pivotal's Product Management team is involved at all stages of development so that market requirements continue to be addressed. The Product Management team also assists with the introduction of the product by training our direct sales force and internal professional services staff. Pivotal places 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 Pivotal in order to automate our testing processes and increase the quality of code we develop. COMPETITION The market for Pivotal's software is intensely competitive, fragmented and rapidly changing. Pivotal faces competition from companies in two distinct markets, the customer relationship management software market and the electronic commerce software market. Competitors in the electronic commerce software market include Internet relationship management and other electronic commerce software companies such as Vignette Corporation, Kana Communications Inc., Calico Commerce Inc., Selectica Inc. and Primus Knowledge Solutions Inc. Competitors in the customer relationship management software market include vendors such as Siebel Systems, Inc., Onyx Software Corporation and Clarify, Inc. Pivotal expects competition from companies like these to continue to increase. Our competitors in each of these markets may enter the other market as they develop new products and applications and as demand for products in either market grows. It is also possible that Microsoft Corporation may decide to introduce products that compete with those of Pivotal. In addition, as Pivotal develops new products, particularly applications focused on electronic commerce or on 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. Some of Pivotal's 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. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS Pivotal relies 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. Pivotal does 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 Pivotal will not be challenged or invalidated. -12-

16 As part of Pivotal's 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. Pivotal also enters into license agreements with respect to our technology, documentation and other proprietary information. These licenses are perpetual and are generally transferable subject to obtaining Pivotal's prior consent. Despite the efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain the use of Pivotal 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 Pivotal's proprietary rights to the same extent as in the United States and Canada. There can be no assurance that protection of Pivotal's 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, Pivotal 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 Pivotal is successful, our business and operating results could be seriously harmed. EMPLOYEES As of June 30, 2000 we had a total of 526 employees, excluding independent contractors and temporary employees. Of this number, 126 people were engaged in research and development, 204 people were engaged in sales and marketing, 122 people were engaged in professional services and 74 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. RECENT DEVELOPMENTS EXACTIUM ACQUISITION Under an agreement dated April 12, 2000, effective June 2, 2000, Pivotal purchased all of the outstanding shares of Exactium Ltd., an Israeli company based in Atlanta, Georgia. Exactium is a leading electronic selling software provider whose Internet products enable companies to sell complex products and services on their electronic commerce Web sites with intelligent features such as needs analysis, product and service recommendation, advice on features and options and configuration of complex orders. The aggregate purchase price under this agreement was approximately U.S.$45,140,000, less indebtedness owing to Exactium by the selling shareholders and other closing adjustments. A portion of the purchase price was satisfied by the issuance of 1,116,955 common shares of Pivotal. In addition, Pivotal agreed to amendments to Exactium's stock option plan whereby options to purchase 137,000 common shares of Exactium held by the selling shareholders became options to purchase 108,424 common shares in the capital of Pivotal at an exercise price equal to 1.26343 times the exercise price of the Exactium options that were amended. Prior to the closing of the acquisition by Pivotal, Exactium was majority-owned by publicly-held Industrial & Financial Systems AB, a global leader in the enterprise application marketplace. Concurrent with the transaction, Pivotal and IFS have established an agreement whereby IFS will distribute Pivotal's solutions, and Pivotal will provide support services for IFS's customers and prospects. Upon completion of the acquisition, Exactium was established as the Pivotal Intelligent eSelling Product Division and Eli Barak, the CEO of Exactium, was appointed to the position of vice president and general manager of the product division. -13-

17 SIMBA ACQUISITION Pivotal entered into an agreement dated May 29, 2000 to purchase all the issued and outstanding shares of Simba Technologies Inc. which completed on June 26, 2000. Simba is a private developer of electronic marketing analytics solutions that enable companies to transform multiple Internet activities into a single, integrated "digital conversation". This enables the collector of the data to obtain a profile of customer's preferences, needs and behavior trends, allowing them to anticipate buying patterns and tailor marketing campaigns. The aggregate purchase price under the terms of the Simba purchase agreement was approximately U.S.$17,590,000 and satisfied by Pivotal issuing 537,823 common shares of Pivotal to holders of securities of Simba and by agreeing to amendments to Simba's stock option plan whereby options to purchase approximately 3,900,000 common shares of Simba held by the selling shareholders became options to purchase 299,645 common shares in the capital of Pivotal at an exercise price equal to 13 times the exercise price of the Simba options that were amended. IMPORTANT FACTORS THAT MAY AFFECT OUR BUSINESS, OUR RESULTS OF OPERATIONS AND OUR STOCK PRICE 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 annual report. If any of the risks described below occurs, our business, results of operation 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 the annual report. You should not place undue reliance on forward-looking statements. FACTORS RELATING TO OUR BUSINESS AND THE MARKET FOR DEMAND CHAIN NETWORK SOLUTIONS MAKE OUR 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: - market acceptance of our solutions; - the length and variability of the sales cycle for our solutions, which typically ranges between two and six months from our initial contact with a potential customer to the signing of a license agreement; - the 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; - our ability to successfully expand our sales force and marketing programs; - our ability to successfully expand our international operations; - the introduction or enhancement of our solutions or our competitors' solutions; - changes in our or our competitors' pricing policies; - our ability to develop, introduce and market new solutions on a timely basis; and - general economic conditions, which may affect our customers' capital investment levels in management information systems. -14-

18 Our product revenues are not predictable with any significant degree of certainty and future product revenues may differ from historical patterns. Historically, we have recognized a substantial portion of our revenues in the last month of a quarter. 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 expected 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 earnings or greater losses than we anticipate for any given period. WE EXPECT SEASONAL TRENDS TO CAUSE OUR QUARTERLY LICENSE REVENUES TO FLUCTUATE AND IN RECENT YEARS OUR LICENSE REVENUES FOR THE FOURTH QUARTER OF OUR FISCAL YEAR HAVE EXCEEDED THE REVENUES FOR THE FOLLOWING QUARTER We have experienced, and expect to continue to experience, seasonality with respect to product license revenues. In recent years, we have experienced relatively greater revenues from licenses in the fourth quarter of our fiscal year, which ends June 30th, than in each of the first three quarters, particularly the first quarter. 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 during the summer months than during other periods. We expect that these seasonal trends are likely to continue in the future. If revenues for a quarter ending September 30 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 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 demand chain network solutions. We commercially released the initial versions of our solutions on the following dates: - Pivotal Relationship in April, 1996; - Pivotal eRelationship in February, 1999; - Pivotal Anywhere in October, 1999; - Pivotal eRelationship 2000 in February, 2000; - Pivotal eSelling 2000 in June, 2000; and - Pivotal ePower 2000 (originally a component of eRelationship) in June, 2000. 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: - no history of profitable operations; - uncertain market acceptance of our solutions; - our reliance on a limited number of solutions; -15-

19 - the risks that competition, technological change or evolving customer preferences could adversely affect sales of our solutions; - the need to expand our sales and support capabilities; - our reliance on third parties to market, install and support our solutions; - our dependence on a limited number of key personnel, including our co-founders; and - the risk that our management will not be able to effectively manage growth or acquisitions we have undertaken or may undertake in the future. The new and evolving nature of the demand chain network solutions 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 BECAUSE OF OUR PLAN TO INCREASE 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, 2000, we had an accumulated deficit of approximately $15.8 million. We have increased our operating expenses in recent periods and plan further increases in the future. Our planned increases in operating expenses may result in larger losses in future periods. As a result, we will need to generate significantly greater revenues than we have to date to achieve and maintain profitability. We cannot assure you that our revenues will increase. Our business strategies may not be successful and we may not be profitable in any future period. THE MARKET FOR OUR SOLUTIONS IS HIGHLY COMPETITIVE The market for our software is intensely competitive, fragmented and rapidly changing. We face competition from companies in two distinct markets, the demand chain network solutions market and the electronic commerce software market. In addition, as we develop new solutions, 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. Some of our actual and potential competitors are larger, more 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. WE DEPEND UPON MICROSOFT AND THE CONTINUED ADOPTION AND PERFORMANCE OF THE MICROSOFT WINDOWS 2000 AND MICROSOFT BACKOFFICE PLATFORMS We have designed our solutions to operate on the Microsoft Windows 2000 and Microsoft BackOffice platforms. The Windows 2000 operating system is a new product of Microsoft released in February 2000. We have spent considerable resources testing the compatibility of our product with the Windows 2000 operating system. The performance of our solutions with the Windows 2000 operating system has limited experience in the marketplace. As a result, we market our solutions exclusively to customers who have developed their computing systems around these platforms. -16-

20 Our future financial performance will depend on continued growth in the number of businesses that successfully adopt the Microsoft Windows 2000 and Microsoft BackOffice computing platforms. The Microsoft Windows 2000 and Microsoft BackOffice computing platforms face increasing competition, particularly from platforms such as Unix and Linux, databases from companies such as Oracle and IBM and Internet server software from companies such as Sun Microsystems, Inc. Acceptance of the Microsoft Windows 2000 and Microsoft BackOffice platforms 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 2000 and Microsoft BackOffice fails to grow or grows more slowly than we currently expect, or if Microsoft delays the release of new or enhanced solutions, our revenues from Pivotal eRelationship 2000 could be adversely affected. The performance of our solutions depends, to some extent, on the technical capabilities of the Microsoft Windows 2000 and Microsoft BackOffice platforms. If these platforms do not meet the technical demands of our solutions, the performance or scalability of our solutions could be limited and, as a result, our revenues from Pivotal eRelationship 2000 could be adversely affected. It is also possible that Microsoft Corporation may decide to introduce solutions or services that compete with ours. Broad antitrust actions initiated by federal and state regulatory authorities have resulted in a verdict against Microsoft. The government has proposed that, as a result of the verdict, Microsoft should be divided into two companies. Microsoft has appealed the verdict to the U.S. Court of Appeals for the District of Columbia. Any outcome to these actions that weakens the competitive position of Microsoft Windows 2000 or BackOffice solutions could adversely affect the market for our solutions. THE MARKET FOR OUR SOLUTIONS IS NEW AND HIGHLY UNCERTAIN AND OUR PLAN TO FOCUS ON INTERNET-BASED APPLICATIONS AND TO INTEGRATE ELECTRONIC COMMERCE FEATURES ADDS TO THIS UNCERTAINTY The market for demand chain network solutions is still emerging and continued growth in demand for and acceptance of demand chain network solutions remains uncertain. Even if the market for demand chain network solutions grows, businesses may purchase our competitors' solutions or develop their own. We believe that many of our potential customers are not fully aware of the benefits of demand chain network solutions and, as a result, these solutions may never achieve full market acceptance. The development of our Internet-based solutions for demand chain management 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 demand chain network solutions. The use of the Internet is evolving rapidly and many companies are developing new solutions and services that use the Internet. We do not know what forms of solutions and services may emerge as alternatives to our existing solutions or to any future Internet-based or electronic commerce features and services we may introduce. We have spent and will continue to spend, considerable resources educating potential customers about our solutions and demand chain network solutions in general. However, even with these educational efforts, market acceptance of our solutions may not increase. If the markets for our solutions do not grow or grow more slowly than we currently anticipate, our revenues may not grow and may even decline. We commenced our PivotalHost program in October 1999, whereby we provide customers access to our software applications on a monthly subscription basis over the Internet through an application service provider. Since the inception of the PivotalHost program, a majority of our new customers have continued to purchase perpetual licenses rather than subscribing to the PivotalHost program. We do not know if this will prove to be a successful business model in the future. If it proves to be a successful business model in the future, we may experience a significant change in our revenue recognition due to the recognition of license revenue over the extended life of the contract rather than revenue recognition on delivery of the product. -17-

21 We commenced our PivotalWeb .NET in October 1999 (formerly known as the business-to-business (B2B) Syndicate program). Under this program, we use the Internet to furnish our customers with information or services provided by the PivotalWeb .NET members. We do not know if this will continue to be a successful business model or if it will result in any material revenue for Pivotal. OUR SUCCESS WILL DEPEND UPON THE SUCCESS OF OUR SOLUTIONS We anticipate that a majority of our revenues and growth in the foreseeable future will come from sales of our integrated product suite, consisting of Pivotal eRelationship 2000, IntraHub, eRelationship 2000 CustomerHub and eRelationship 2000 PartnerHub product suite licenses and related services. Accordingly, failure of our integrated product suite to gain increased market acceptance and to 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 suite and related services, as well as the development of new versions and enhancements of these products. THE SUCCESS OF OUR SOLUTIONS WILL DEPEND UPON THE CONTINUED USE AND EXPANSION OF THE INTERNET Increased sales of our solutions and any future Internet-based applications and electronic commerce features we integrate with our current solutions, 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 solutions could be significantly reduced and our solutions 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: - concerns about security of transactions conducted over the Internet; - concerns about privacy and the use of data collected and stored recording interactions over the Internet; - 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 - 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 ANYWHERE SOLUTION Our Pivotal Anywhere solution provides a wireless platform that allows our other solutions to be accessed wirelessly. We depend on third-party providers of wireless services for the successful implementation of Pivotal Anywhere. Because Pivotal Anywhere 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: - extensive government regulation in licensing, construction, operation, sale and interconnection arrangements of wireless telecommunications systems which may prevent our third-party providers from successfully expanding their wireless services; - rapid expansion of the wireless services infrastructure which may result in flaws in the infrastructure; and -18-

22 - concerns over radio frequency emissions or other health and safety risks which may discourage use of wireless services. OUR FUTURE REVENUE GROWTH COULD BE IMPAIRED IF WE ARE UNABLE TO EXPAND OUR DIRECT SALES AND SUPPORT INFRASTRUCTURE Our future revenue growth will depend in large part on our ability to successfully expand our direct sales force and our customer support capability. We may not be able to successfully manage the expansion of these functions or to recruit and train additional direct sales, consulting and customer support personnel. There is presently a shortage of qualified personnel to fill these positions. If we are unable to hire and retain additional 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. We are not likely to be able to increase our revenues as we plan if we fail to expand our direct sales force or our consulting and customer support staff. Even if we are successful in expanding our direct sales force and customer support capability, the expansion may not result in revenue growth. WE RELY ON OUR PIVOTAL ALLIANCE NETWORK OF INDEPENDENT COMPANIES TO SELL, INSTALL AND SERVICE OUR SOLUTIONS AND TO PROVIDE SPECIALIZED SOFTWARE FOR USE WITH THEM AND OUR PIVOTAL HOST 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 relied on our international network of independent companies we call the Pivotal Alliance. Members of the Pivotal Alliance market and sell our solutions, provide implementation services, provide technical support and maintenance on a continuing basis and provide us with software applications that we can bundle with our solutions to address specific industry and customer requirements. Approximately 24% and 28% of our revenues for the years ended June 30, 2000 and 1999, respectively, were from sales made through third-party resellers. Almost all of our customers retain members of the Pivotal Alliance to install and customize our solutions. If we fail to maintain our existing Pivotal Alliance relationships, or to establish new relationships, or if existing or new members of the Pivotal Alliance do not perform to our expectations, our ability to sell, install and service our solutions may suffer. There is an industry trend toward consolidation of systems integrators that implement, customize and maintain solutions. Some of the systems integrators in the Pivotal Alliance 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 Alliance. 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 solutions. THE LOSS OF OUR CO-FOUNDERS OR OTHER 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 our co-founders, Norman Francis, President, Chief Executive Officer and director and Keith Wales, our Chief Technical Officer and director. We do not have employment agreements with Messrs. Francis and Wales and, therefore, Messrs. Francis and Wales could terminate their employment with us at any time without penalty. Nor do we maintain key man life insurance on the lives of Messrs. Francis and Wales. 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 in the future. In addition, due to intense competition for qualified employees, it may be necessary for us to increase the level of compensation paid to existing and new employees to the degree that our operating expenses could be materially increased. -19-

23 WE FACE RISKS FROM THE EXPANSION OF OUR INTERNATIONAL OPERATIONS We intend to substantially expand our operations outside the United States and Canada. We began by acquiring Transitif in France and opening offices in the Republic of Ireland, the United Kingdom, the Netherlands, Germany, Japan, Australia and New Zealand. We expect to continue this expansion of our international operations. International operations are subject to numerous inherent potential risks, including: - unexpected changes in regulatory requirements; - export restrictions, tariffs and other trade barriers; - changes in local tax rates or rulings by local tax authorities; - challenges in staffing and managing foreign operations, differing technology standards, employment laws and practices in foreign countries; - less favorable intellectual property laws; - longer accounts receivable payment cycles and difficulties in collecting payments; - political and economic instability; and - 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 expansion will require significant management attention and financial resources. We will have 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 solutions. 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 should 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 should fail to adequately secure our software against unauthorized copying, our proprietary software could be compromised. POLITICAL UNREST MAY ADVERSELY AFFECT THE OPERATION OF OUR EUROPEAN CUSTOMER SUPPORT CENTER LOCATED IN NORTHERN IRELAND We have 15 employees located in our Belfast, Northern Ireland customer support center. This center provides customer support primarily to all of our customers in Europe and provides back-up support for other customers around the world. Northern Ireland has historically experienced periods of religious, civil and political unrest. Northern Ireland may experience further unrest which could disrupt our ability to provide customer support to our customers and have a material adverse effect on our results of operations and financial condition. FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND RISKS ASSOCIATED WITH OUR HEDGING POLICIES MAY AFFECT OUR OPERATING RESULTS Substantially all of our revenues and corresponding receivables are in United States dollars. However, a majority of our research and development expenses, customer support costs and administrative expenses are in Canadian dollars. In the quarter ended March 31, 1999, we adopted a hedging policy intended to reduce the effects of foreign exchange fluctuations on our results of operations. As part of our hedging policy, we identify our future Canadian currency requirements related to payroll costs, capital expenditures and operating lease commitments and purchase forward -20-

24 exchange contracts at the beginning of an operational period to cover these currency needs. The operational period for our contracts is generally limited to two quarters. If our actual currency requirements differ materially from our hedged position during periods of currency volatility, or if we do not continue to hedge our Canadian currency commitments, we could experience unanticipated currency gains or losses. Our hedging policy subjects us to risks relating to the creditworthiness of the commercial banks that we contract with in our hedging transactions. 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 in United Kingdom pound sterling, French franc, Euro, German mark, Japanese yen, Australian dollars and New Zealand dollars. We are exposed to fluctuations in the exchange rates between the United States dollar and these currencies. Our exposure to exchange fluctuations in these foreign currencies has been minimal to date. Accordingly, our current hedging practice does not cover any foreign exchange risk related to these operations. The purpose of our hedging policy is to reduce the effect of exchange rate fluctuations on our results of operations. Therefore, while our hedging policy reduces 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. WE HAVE EXPERIENCED RAPID GROWTH WHICH HAS PLACED A STRAIN ON OUR RESOURCES AND ANY FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD CAUSE OUR BUSINESS TO SUFFER We have been expanding our operations rapidly and intend to continue this expansion for the foreseeable future. The number of our employees increased from 151 on June 30, 1998 to 270 on June 30, 1999. As of June 30, 2000 we had 526 employees, 76 of which were added through acquisitions in the last quarter of 2000. This expansion has placed, and is expected to continue to place, a significant strain on our managerial, operational and financial resources as we integrate and manage new employees, more locations and more customers, supplier and other business relationships. In the past we have decided to and in the future we may need to improve or replace our existing operational and customer service systems, procedures and controls. Any failure by us to properly manage our growth of these systems and procedural transitions could impair our ability to efficiently manage our business, to maintain and expand important relationships with members of the Pivotal Alliance and other third parties and to attract and service customers which could 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. THE INTEGRATION OF TRANSITIF, EXACTIUM, SIMBA AND ANY FUTURE ACQUISITIONS MAY BE DIFFICULT AND DISRUPTIVE We are currently in the process of integrating the Transitif, Exactium and Simba businesses with our business and we are expending significant financial resources in this effort. The integration of these three companies is 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 integrate. We will also need to integrate the solutions of Exactium and Simba into our product offerings. We may not successfully overcome these risks or any other problems that may be encountered in connection with the acquisitions of Transitif, Exactium or Simba. 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 have invested in them. Amortization of intangible assets resulting from acquisitions will adversely affect our reported income. In connection with the acquisitions of Exactium, Simba and Transitif, we allocated an aggregate of $58.1 million of the purchase prices to intangible assets that we are amortizing over a period of three years on a straight-line basis. During the year ending June 30, 2001, we expect amortization expenses related to these intangible assets to be approximately $20.0 million. Future acquisitions may result in the creation of significant additional intangible assets and related amortization expense. As part of our business strategy, we may seek to grow by making additional acquisitions. We may not effectively select acquisition candidates or negotiate or finance acquisitions or integrate the acquired businesses and their personnel or acquired solutions or technologies into our business. We cannot assure you that we -21-

25 can complete any acquisition we pursue on favorable terms, or that any acquisition will ultimately benefit our business. OUR SALES CYCLE IS LONG AND SALES DELAYS COULD CAUSE OUR OPERATING RESULTS TO VARY WIDELY We believe that an enterprise's decision to purchase a demand chain network solutions system is discretionary, involves a significant commitment of its resources and is influenced by its budget cycles. To successfully sell licenses for our solutions, we typically must educate our potential customers regarding the use and benefits of demand chain network solutions in general and our solutions in particular, which can require significant time and resources. Consequently, the period between initial contact and the purchase of licenses for our solutions is often long and subject to delays associated with the lengthy budgeting, approval and competitive evaluation processes that typically accompany significant capital expenditures. We frequently must invest substantial resources to develop a relationship with a potential customer and educate its personnel about our solutions and services with no guarantee that our efforts will be rewarded with a sale. Our sales cycles are lengthy and variable, typically ranging between two and six months from our initial contact with a potential customer to the signing of a license agreement, although sales sometimes require substantially more time. Sales delays could cause our operating results to vary widely. 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. 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. However, there is no certainty that our customers will renew their technical support contracts. 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. To meet our expansion goals, we expect to hire additional services personnel. If demand for our services organization does not increase in proportion to the number of additional personnel we hire, gross profits could fall, or we may incur losses from our services activities. In addition, 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 SOLUTIONS We incorporate into our solutions software that is licensed to us by third-party software developers including Microsoft SQL Server 7.0, Sheridan Calendar Control, InstallShield 3, Seagate Crystal Reports, E.piphany E.4 and Interactive Intelligence Enterprise Interaction Center. We are seeking to further increase the capabilities of our solutions 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 solutions incorporate software developed and maintained by third parties, we depend on these third parties' abilities to deliver and support reliable solutions, enhance their current solutions, develop new solutions 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 solutions becomes obsolete or incompatible with future versions of our solutions, we may not be able to continue -22-

26 to offer some of the features we presently include in our solutions unless we can license alternative software or develop the features ourselves. WE MUST CONTINUE TO DEVELOP ENHANCEMENTS TO OUR SOLUTIONS AND NEW APPLICATIONS AND FEATURES THAT RESPOND TO EVOLVING NEEDS OF OUR CUSTOMERS. RAPID TECHNOLOGICAL CHANGE 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 solutions become obsolete and unmarketable when solutions using new technologies are introduced and new industry standards emerge. New technologies could change the way demand chain network solutions are sold or delivered. As a result, the life cycles of our solutions are difficult to estimate. We also may need to modify our solutions when third parties change software we integrate into our solutions. To be successful we must continue to enhance our current product line 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 solutions. We have delayed enhancements and new product release dates several times in the past and may not be able to introduce new solutions, product enhancements, new applications or features successfully or in a timely manner in the future. If we delay release of our new solutions 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 solutions 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, although we have not signed these types of agreements in every case. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our solutions 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. CLAIMS BY OTHER COMPANIES THAT OUR SOLUTIONS INFRINGE THEIR COPYRIGHTS OR PATENTS COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR SOLUTIONS AND INCREASE OUR COSTS If any of our solutions violates third-party proprietary rights, including copyrights and patents, we may be required to reengineer our solutions or obtain licenses from third parties to continue offering our solutions without substantial reengineering. Although some of our current and potential competitors have sought patent protection for similar demand chain network solutions systems, we have not sought patent protection for our solutions. 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 solutions, we would need to obtain a license or re-engineer our product to function without infringing the patent. Any efforts to re-engineer our solutions or obtain licenses from third parties may not be successful and, in any case, could substantially increase our costs, force us to interrupt product sales or delay product releases. OUR SOFTWARE SOLUTIONS MAY SUFFER FROM DEFECTS OR ERRORS Solutions 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 solutions until software problems were corrected and in some cases have provided product enhancements to correct errors in released solutions. Enhancements, new applications and features to our solutions may not be free from errors after commercial -23-

27 shipments have begun. Any errors that are discovered after the commercial release of enhancements, new applications and features to our solutions 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 solutions 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 solutions rely on these products to operate properly. Therefore, any defects in these products could adversely affect the operation of and market for our solutions, reduce our revenues, increase our costs and damage our reputation. IF OUR CUSTOMERS SYSTEMS' 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 solutions 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 disclaimers and indemnities for any damages claimed against us. However, if unauthorized third parties are successful in obtaining confidential information from users of our solutions, 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 product licenses on delivery of our solutions if: - persuasive evidence of an arrangement exists; - the fee is fixed or determinable; - vendor specific objective evidence exists to allocate the total fee among all elements of the arrangement; and - collection of the license fee is probable. Under certain license arrangements, with either a fixed or indefinite term, our customers agree to pay for the license with periodic payments extending beyond one year. We recognize revenues from these arrangements as the periodic payments become due, provided all other conditions for revenue recognition are met. If these arrangements 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 Securities and Exchange Commission and the Financial Accounting Standards Board, are also reviewing the accounting standards related to business combinations and share-based compensation. Any changes to these accounting standards, any other accounting standards, or the way these standards are interpreted or applied could require us to change the manner in which we recognize revenue, how we account for share compensation, for any future acquisitions or other aspects of our business, which could adversely affect our reported financial results. -24-

28 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 solutions 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 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. 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, 2000. 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 research and development facilities are located in North Vancouver, British Columbia, Canada, and consist of approximately 43,000 square feet of office space in three separate buildings. Each of the leases for these buildings expires in September 2002. Our principal sales and 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 sales and training center in Des Plaines, Illinois that consists of approximately 8,309 square feet of space under a lease that expires in August 2003. Our main administrative office for Europe, the Middle East and Africa is located in Dublin, Ireland held under a lease expiring in August 2001. Our principal sales and marketing office for Europe, the Middle East and Africa is located in Hemel Hempstead, England held under a lease that expires in March 2004. Our European customer support center is located in Belfast, Northern Ireland and consists of approximately 9,648 square feet of office space under a lease that expires in April 2010. As of June 30, 2000, we also leased offices in: Tokyo, Japan; Sydney, Australia; Heidelberg, Germany; San Bruno and Irvine, California; Dallas, Texas; Denver, Colorado; Levallois-Perret, France; North Andover, Massachusetts; Morristown, New Jersey; New York, New York; and Bethesda, Maryland. ITEM 3. LEGAL PROCEEDINGS We are not currently party to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS Not Applicable. -25-

29 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 fiscal year, as reported on the Nasdaq National Market. <TABLE> <CAPTION> Price Range of Common Shares ---------------- High Low ------ ------ <S> <C> <C> Year Ended June 30, 2000 First Quarter (beginning August 5, 1999)................................ $19.69 $12.06 Second Quarter.......................................................... 59.00 18.13 Third Quarter........................................................... 68.56 30.06 Fourth Quarter.......................................................... 45.50 18.78 </TABLE> Our common shares began trading on The Toronto Stock Exchange on August 17, 2000 under the symbol PVT. On September 22, 2000, the high and low closing prices per share of our common shares were CDN $83.00 and CDN $74.00, respectively, as reported on The Toronto Stock Exchange. HOLDERS As of September 1, 2000, there were approximately 265 holders of record of our common shares. This does not include the number of persons whose shares are in nominee or "street name" accounts through brokers. 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 On June 2, 2000, in connection with the acquisition of Exactium Ltd., we issued 1,116,955 common shares. This transaction was exempt from Securities Act registration pursuant to the exemption from registration provided by Section 4(2) of the Securities Act. On June 26, 2000, in connection with the acquisition of Simba Technologies Inc., we issued 537,823 common shares. This transaction was exempt from Securities Act registration pursuant to the exemption from registration provided by Rule 506 of Regulation D under the Securities Act and the exclusion from registration provided by Regulation S under the Securities Act. USE OF PROCEEDS On August 4, 1999 Pivotal's registration statement on Form F-1, Registration No. 333-82871, became effective. The offering date was August 5, 1999. The offering has terminated as a result of all of the shares offered being sold. The managing underwriters were Merrill Lynch & Co., Bear, Stearns & Co. Inc. and Dain Rauscher Wessels. The -26-

30 offering consisted of 3,975,000 common shares of Pivotal, which includes 475,000 common shares offered pursuant to the subsequent exercise of the underwriter's over allotment option on August 19, 1999. The aggregate price of the shares offered and sold was $47.7 million. Proceeds to Pivotal, after accounting for $3.3 million in underwriting discounts and commissions and $1.3 million in other expenses, were $43.1 million. Pivotal generated interest income of approximately $2.36 million during the year ended June 30, 2000. We used $13.1 million of the $43.1 million net proceeds in connection with the acquisition of Exactium Ltd. The remaining $30 million of the net proceeds continues to be invested in investment-grade, interest bearing, short-term instruments. None of the net offering proceeds were paid, and none of the initial public offering expenses related to payments, directly or indirectly to directors, officers or general partners of Pivotal or their associates, persons owning 10% or more of any class of securities or affiliates of Pivotal. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto, with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this report. The consolidated statement of operations data for each of the three years ended June 30, 2000, 1999 and 1998 and the consolidated balance sheet data as of June 30, 2000 and 1999 are derived from audited financial statements included elsewhere in this report. The consolidated statement of operations data for the years ended June 30, 1997 and 1996 and the consolidated balance sheet data as of June 30, 1998, 1997 and 1996 are derived from audited consolidated financial statements not included in this report. <TABLE> <CAPTION> YEAR ENDED JUNE 30, ----------------------------------------------------------- 2000(1) 1999 1998 1997 1996 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: <S> <C> <C> <C> <C> <C> Licenses $37,384 $18,819 $11,311 $ 2,916 $ 368 Services and maintenance 15,555 6,508 2,898 590 31 ------- ------- ------- ------- ------- Total revenues 52,939 25,327 14,209 3,506 399 ------- ------- ------- ------- ------- COST OF REVENUES: Licenses 2,141 536 401 121 2 Services and maintenance 8,147 3,078 1,281 387 - ------- ------- ------- ------- ------- Total cost of revenues 10,288 3,614 1,682 508 2 ------- ------- ------- ------- ------- Gross profit 42,651 21,713 12,527 2,998 397 OPERATING EXPENSES: Sales and marketing 31,165 16,830 9,226 2,646 604 Research and development 8,906 4,958 1,910 1,163 742 General and administrative 4,190 2,466 1,513 725 397 Amortization of goodwill 1,409 - - - - In-process research and development and other charges 6,979 - - - - ------- ------- ------- ------- ------- Total operating expenses 52,649 24,254 12,649 4,534 1,743 ------- ------- ------- ------- ------- </TABLE> -27-

31 <TABLE> <CAPTION> YEAR ENDED JUNE 30, -------------------------------------------------------------------- 2000(1) 1999 1998 1997 1996 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> Loss from operations (9,998) (2,541) (122) (1,536) (1,346) Interest and other income 2,193 (24) 136 142 85 -------- -------- -------- -------- -------- Income (loss) before income taxes (7,805) (2,565) 14 (1,394) (1,261) Income taxes 557 243 10 - - -------- -------- -------- -------- -------- Net income (loss) for the period $ (8,362) $ (2,808) $ 4 $ (1,394) $ (1,261) ======== ======== ======== ======== ======== Basic and diluted earnings (loss) per share $ (0.45) $ (0.72) $- $ (0.41) $ (0.37) Pro forma basic and diluted loss per share(2) $ (0.39) $ (0.18) Shares used to calculate earnings (loss) per share Basic 18,643 3,888 3,720 3,393 3,372 Diluted 18,643 3,888 14,927 3,393 3,372 Pro forma basic and diluted loss per share(2) 21,339 15,940 </TABLE> <TABLE> <CAPTION> AS OF JUNE 30, ------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents $ 4,734 $ 9,338 $ 1,202 $ 3,898 $ 706 Working capital 28,297 7,257 3,317 4,417 731 Total assets 121,945 21,722 10,752 6,729 1,114 Long-term obligations -- -- -- -- -- Redeemable convertible preferred shares -- 17,500 9,500 9,500 4,100 Total shareholders' equity (deficit) 96,097 (7,192) (4,455) (4,533) (3,229) </TABLE> NOTES: (1) Results for the year ended June 30, 2000 include a charge for in process research and development and other charges related to the acquisition of Exactium and Simba. See note 2 to consolidated financial statements. (2) See note 1 of notes to consolidated financial statements for calculation of pro forma earnings (loss) per share. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Pivotal Corporation's technology solutions enable large and medium-sized businesses worldwide to increase, serve and manage their customer base. We refer to our solutions as demand chain network solutions because they automate and manage marketing, selling and servicing processes over the Internet by integrating customer relationship management, electronic selling, electronic commerce and wireless technologies. Our demand chain solutions are designed to compliment and integrate with a business' supply chain, therefore enabling businesses to increase efficiency and revenues. Pivotal's scalable, XML-based demand chain network solutions are designed to meet the needs of businesses ranging from emerging companies in the new digital economy to traditional businesses that are seeking to integrate the opportunities presented by the Internet into their business model. -28-

32 RECENT ACQUISITIONS During the year ended June 30, 2000, we expanded our portfolio of solutions and distribution capabilities by completing the acquisitions described below. These acquisitions were accounted for using the purchase method of accounting. Accordingly, the results of operations of each acquired company are included in our consolidated statement of income since the acquisition date and the related assets acquired and liabilities assumed were recorded based upon their respective fair values at the date of acquisition. TRANSITIF S.A. Effective December 3, 1999, Pivotal acquired Transitif S.A. (now Pivotal Corporation France S.A.), a French corporation that distributes demand chain network solutions. Transitif deploys Pivotal solutions through its network of systems integrators throughout France. We paid cash of $1.3 million including acquisition-related expenditures of $120,000. Additional consideration is payable if the net after-tax earnings of Transitif and license revenues received by Transitif from the future sale of licenses for Pivotal solutions exceed certain targets to June 2002. No payments related to additional consideration were required to be made for the period ended June 30, 2000. EXACTIUM LTD. On June 2, 2000, Pivotal acquired Exactium Ltd., an Israeli company based in Atlanta, Georgia that provides electronic selling solutions for Internet and Microsoft standards. We paid a total purchase price of $45.1 million. Significant components of the purchase price include the issuance of common shares and options to purchase common shares with a fair value of $32 million and cash of $13.1 million from working capital (including a shareholder loan repayment of $5.4 million and acquisition related expenditures of $775,000). The amount allocated to in-process research and development of $2.8 million was expensed on the acquisition date. Our valuation employed the SEC's guidelines regarding acceptable methodologies for valuing in-process research and development. SIMBA TECHNOLOGIES INC. On June 26, 2000, Pivotal acquired Simba Technologies Inc. (now Digital Conversations Inc.), a Vancouver, British Columbia company that provides digital solutions to aggregate and analyze all Internet customer interactions such as eMail messages, Web chat sessions and Web site surfing into an integrated conversation for Microsoft standards. We paid a total purchase price of $17.6 million consisting of common shares and options to purchase common shares with a fair value of $17.1 million and acquisition-related expenditures of $455,000. The purchased in-process research and development of $1.9 million was expensed at the time of the acquisition. SOURCE OF REVENUE AND REVENUE RECOGNITION POLICY We derive our revenues from the sale of software and services. We recognize product license revenues on delivery of our solutions if: - there is persuasive evidence of an arrangement; - the fee is fixed or determinable; - there is vendor-specific objective evidence supporting allocating the total fee among all elements of a multiple-element arrangement; and - the collection of the license fee is probable. Multiple-element arrangements could consist of software licenses, upgrades, enhancements, maintenance and consulting services. Under some license arrangements, with either a fixed or indefinite term, our customers agree to pay for the license with periodic payments extending beyond one year. We recognize revenues from these arrangements as the periodic payments become due, provided all other conditions for revenue recognition are met. We enter into reseller and sub-licensing arrangements that provide a fee payable to us based on a percentage of list price. We recognize revenue only on the fees payable to us, net of any amount payable to the reseller by the customer. We typically sell first year maintenance with the related software license. -30-

33 Revenue related to maintenance is recognized over the term of the maintenance contract, typically one year. Revenues relating to technical support and maintenance have increased due to our increasing customer base and the renewal of technical support and maintenance contracts upon expiration of first year maintenance arrangements. We recognize revenues from consulting, implementation services, and education as these services are performed. We derive revenue from these services primarily on a time-and-materials basis under a separate service arrangement with the customer. More than 90% of the implementation services provided to our customers in connection with installations of our solutions are provided by third-party consulting and implementation service providers. These third-party service providers contract directly with the customer. Our cost of license revenues primarily consists of costs relating to the packaging and distribution of solutions and related documentation and license fees due to third parties for integrated technology. Our cost of services revenues includes salaries and related expenses for our implementation, consulting support and education organizations and an allocation of facilities, communications and depreciation expenses. Our operating expenses are classified into three general categories: sales and marketing, research and development and general and administrative. We classify all charges to these operating expense categories based on the nature of the expenditures. We allocate the costs for overhead and facilities to each of the functional areas based on their headcount. Software development costs incurred prior to the establishment of technological feasibility are included in research and development costs as incurred. Since license revenues from our solutions are not recognized until after technological feasibility has been established, software development costs are not generally expensed in the same period in which license revenues for the developed solutions are recognized. RESULTS OF OPERATIONS The following table sets forth statement of operations data for the three years ended June 30, 2000 expressed as a percentage of total revenues: <TABLE> <CAPTION> Year ended June 30, ------------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> REVENUES: Licenses 71% 74% 80% Services and maintenance 29% 26% 20% ------------------------------------------------------------------------------------------------------- Total revenues 100% 100% 100% ------------------------------------------------------------------------------------------------------- COST OF REVENUES: Licenses 4% 2% 3% Services and maintenance 15% 12% 9% ------------------------------------------------------------------------------------------------------- Total cost of revenues 19% 14% 12% ------------------------------------------------------------------------------------------------------- Gross profit 81% 86% 88% ------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Sales and marketing 59% 66% 65% Research and development 17% 20% 13% General and administrative 8% 10% 11% Amortization of goodwill 3% -- -- In-process research and development and other charges 13% -- -- ------------------------------------------------------------------------------------------------------- Total operating expenses 100% 96% 89% ------------------------------------------------------------------------------------------------------- Loss from operations (19%) (10%) (1%) Interest and other income (loss) 4% -- 1% ------------------------------------------------------------------------------------------------------- Loss before income taxes (15%) (10%) -- Income taxes 1% 1% -- ------------------------------------------------------------------------------------------------------- Net loss (16%) (11%) -- ======================================================================================================= </TABLE> -31-

34 YEARS ENDED JUNE 30, 2000 AND 1999 REVENUES Total revenues increased 109% to $52.9 million for the year ended June 30, 2000 from $25.3 million for the year ended June 30, 1999. LICENSES Revenues from licenses increased 99% to $37.4 million for the year ended June 30, 2000 from $18.8 million for the year ended June 30, 1999. Our revenues from licenses increased due to sales to new customers and follow-on sales to existing customers. These increases were attributable to increased market acceptance of our solutions, increased sales as a result of our expansion of our direct and indirect channels of distribution and our marketing organization. We believe that the availability of our Pivotal eRelationship 2000 product suite and Pivotal eSelling 2000 product has contributed to the increase in revenue from licenses, as this has extended the overall functionality of our solutions by permitting organizations to collaborate with customers and partners over the Internet. Revenues from licenses represented 71% and 74% of total revenues for the years ended June 30, 2000 and 1999, respectively. No single customer accounted for 10% or more of our revenues for the years ended June 30, 2000 and 1999. North American license revenues accounted for 72% and 80% of total license revenues in the years ended June 30, 2000 and 1999, respectively. SERVICES AND MAINTENANCE Revenues from services and maintenance increased 139% to $15.6 million for the year ended June 30, 2000 from $6.5 million for the year ended June 30, 1999. This resulted from an increase of $4.6 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 $4.5 million in revenues from implementation, education and consulting service engagements. Our revenues from services and maintenance represented 29% and 26% of total revenues for the years ended June 30, 2000 and 1999, respectively. We believe that revenues from services and maintenance will continue to increase as a percentage of total revenues, due to an increase in the number of technical support and maintenance contracts we expect to obtain as our customer base grows. We intend to expand consulting services targeted at helping customers understand more about matters such as effective one-to-one marketing and using the Internet to increase revenues and improve customer service. We plan to continue relying on third parties to provide a majority of implementation services to our customers, rather than providing those services directly. COST OF REVENUES Total cost of revenues increased 185% to $10.3 million for the year ended June 30, 2000 from $3.6 million for the year ended June 30, 1999. LICENSES Cost of revenues from licenses consists of costs relating to the packaging and distribution of solutions, related documentation and fees paid for incorporation of third-party solutions into our solutions. Cost of revenues from licenses increased to $2.1 million for the year ended June 30, 2000 from $536,000 for the year ended June 30, 1999. The increase is due primarily to increased costs for third-party technology integrated with our solutions. Cost of revenues from licenses as a percentage of revenues from licenses was 6% and 3% for the years ended June 30, 2000 and 1999, respectively. We expect that the cost of licenses as a percentage of revenue from licenses will increase because we expect to integrate additional software applications licensed from third parties into our solutions. SERVICES AND MAINTENANCE Cost of revenues from services and maintenance consists of personnel and other expenses relating to the cost of providing maintenance and customer -32-

35 support, education and consulting services. Cost of revenues from services and maintenance will vary depending on the mix of services we provide between support and maintenance, education, implementation and consulting services. Gross profit margins are higher for support and maintenance services than they are for education and consulting services. Support and maintenance services involve the delivery of software upgrades, which the customers download and install themselves and customer support. Education and consulting services generally require more involvement by our employees, resulting in higher compensation, travel and similar expenses. Cost of revenues from services and maintenance increased 165% to $8.1 million for the year ended June 30, 2000 from $3.1 million for the year ended June 30, 1999. The increase in dollar amount resulted from the hiring of consulting, customer support and educating personnel to support our growing customer base. Cost of revenues from services and maintenance as a percentage of revenues from services and maintenance was 52% and 47% for the years ended June 30, 2000 and 1999, respectively. We expect that cost of revenues from services and maintenance will continue to increase as a percent of revenues from services and maintenance as we expand our service capabilities in international markets to support planned expansion of our international business and as we expand our consulting services. This will occur because we will be incurring expenses to hire and train employees before we will be earning revenue for their services and because we may not generate enough demand for our services to use all the capacity we add. OPERATING EXPENSES SALES AND MARKETING Sales and marketing expenses consist primarily of salaries, commissions, bonuses and benefits earned by sales and marketing personnel, direct expenditures such as travel, communication and occupancy for direct sales offices and marketing expenditures related to direct mail, online marketing, trade shows, advertising and promotion. Sales and marketing expenses increased 85% to $31.2 million for the year ended June 30, 2000 from $16.8 million for the year ended June 30, 1999. The increase in dollar amounts reflects the expansion of our international sales capability which required an increase in the number of sales and marketing professionals. Sales and marketing expenses decreased as a percentage of total revenues to 59% in the year ended June 30, 2000 from 66% in the year ended June 30, 1999. This decrease of sales and marketing expenses as a percentage of total revenues resulted from the improved productivity of our sales and marketing personnel and programs. We expect that sales and marketing expenses will continue to increase in future periods as we continue to expand our North American and international sales and marketing efforts to expand our market position and increase sales of our solutions. RESEARCH AND DEVELOPMENT Research and development expenses consist primarily of salaries, benefits and equipment for software engineers, quality assurance personnel, program managers, product managers, technical writers and outside contractors used to augment the research and development efforts. Research and development expenses increased 80% to $8.9 million for the year ended June 30, 2000 from $5.0 million for the year ended June 30, 1999. The increase was due to the increase in the number of research and development employees. Research and development expenses were 17% and 20% of total revenues for the years ended June 30, 2000 and 1999, respectively. This decrease in the percentage of research and development expenditures compared to total revenues resulted from the higher growth rate of revenues in the year ended June 30, 2000 compared to the growth rate of research and development expenditures. We expect to continue to significantly increase research and development expenditures with a particular emphasis on Internet-related development projects. GENERAL AND ADMINISTRATIVE General and administrative expenses consist primarily of salaries, benefits and related costs for executive, finance, administrative, human resources and information services personnel. General and administrative expenses also -33-

36 include legal and other professional fees. General and administrative expenses increased 70% to $4.2 million for the year ended June 30, 2000 from $2.5 million for the year ended June 30, 1999. General and administrative expenses were 8% and 10% of total revenues, respectively, for the same periods. The increase in general and administrative expenses was due to hiring additional personnel and the implementation of internal financial and administrative systems. We expect general and administrative expenses will increase as we continue to expand the business and begin to increase our administrative capability in international markets. IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER CHARGES During the year ended June 30, 2000, we recorded in-process research and development charges of $4.7 million related to the acquisitions of Exactium and Simba. These amounts were expensed as the underlying projects had not reached technical feasibility, had no alternative future uses and successful development was uncertain. We also recorded a write-down of $2.3 million of other Pivotal assets which were made redundant as a result of the acquisitions of Exactium and Simba. EXACTIUM LTD. On June 2, 2000, Pivotal completed the purchase of Exactium and recorded a charge to income of $2.8 million, or $0.15 per share, for in-process research and development. Purchased in-process research and development was related to the completion of Exactium's electronic selling technology and its integration into Pivotal's solutions. At the time of acquisition, a prototype of Exactium's product existed and was being used in limited trials. This prototype was not stable or sufficiently developed to be scaleable on an enterprise-wide basis. We estimated that Exactium's product was approximately 80% complete as of the acquisition date. There was a considerable amount of uncertainty related to increasing the product's scalability for deployment on an enterprise-wide basis, improving the stability of the application and identifying and fixing bugs. In the opinion of management, the acquired in-process research and development had not yet reached technological feasibility and had no alternative future uses. Accordingly, we recorded a charge of $2.8 million in the fourth quarter of fiscal year 2000 related to the acquired in-process research and development. Our valuation of in-process research and development was based upon the forecasted operating 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 in-process technology. The forecasted cash flows assumed inclusion of the product developed from acquired technology into the existing Pivotal product suite. The purchased in-process research and development expense related to completion of Exactium's eSelling 2000 product. This product was completed in late June 2000. We estimated that revenues related to the sale of solutions incorporating Exactium's technology would commence in the year ending June 30, 2001 and would increase thereafter. Revenue increases were based upon the historical growth rate of software sales for the demand chain network market. The estimated operating costs as a percentage of estimated revenue were based upon Pivotal's normal operating margin. Operating cash flows were reduced by an expected effective tax rate of 40%. Net 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. SIMBA TECHNOLOGIES INC. On June 26, 2000, Pivotal completed its purchase of Simba. We recorded a charge to income of $1.9 million for in-process research and development or $0.10 per share. At the time of the acquisition, Simba did not have a first-generation product. There were a considerable number of uncertainties as to completion of the product. In the opinion of management, the acquired in-process research and development had not yet reached technological feasibility and had no alternative future uses. Accordingly, we recorded a charge of $1.9 million in the fourth quarter of fiscal 2000 related to the acquired in-process research and development. Our valuation of the acquired research and -34-

37 development was based upon the present value of forecasted operating 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. The forecasted cash flows assumed inclusion of the product developed from acquired technology into the existing Pivotal product suite. Our valuation of acquired research and development was prepared using the income approach and contemplated that sales of solutions incorporating Simba's 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 for Pivotal. Operating costs as a percentage of revenue were estimated based upon our normal operating margin. Operating cash flows were reduced by an expected effective tax rate of 40%. Net 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 solutions. Failure to achieve the expected levels of revenues and net income from the Exactium and Simba products will negatively impact the return on investment expected at the time the acquisitions were completed and may potentially result in impairment of other assets related to the acquisitions. AMORTIZATION OF GOODWILL Amortization of goodwill was $1.4 million in the year ended June 30, 2000 related to goodwill arising from the acquisitions of Transitif and Exactium. There was no amortization of goodwill in the year ended June 30, 1999. We expect amortization of goodwill to increase in future periods due to the amortization of goodwill related to the acquisition of Simba and as a result of a full year's amortization being taken on the goodwill arising from the acquisitions of Transitif and Exactium. In addition, we anticipate acquiring other companies or assets in the future which could result in significant goodwill amortization charges and this could materially impact our operating results. SHARE-BASED COMPENSATION We recorded deferred compensation expenses of $473,000 during the year ended June 30, 1999 in connection with grants of employee share purchase options with exercise prices lower than the deemed fair market value of our common shares. We are amortizing this amount over the four-year period in which the options vest. We will allocate the expense among operating expense categories based on the primary activity of the employee that holds the option. We recognized $223,000 and $57,000 in compensation expense in the years ended June 30, 2000 and 1999, respectively. We currently expect to recognize $113,000, $58,000 and $22,000 in the years ending June 30, 2001, 2002 and 2003, respectively. INTEREST AND OTHER INCOME (LOSS) Interest and other income (loss) consist of earnings on cash, cash equivalents and short-term investments, net of interest expense, foreign exchange gains and losses and gains and losses on sale of property and equipment. Interest and other income (loss) increased to income of $2.2 million for the year ended June 30, 2000 from a loss of $24,000 for the year ended June 30, 1999. These increases are primarily due to interest earned from cash, cash equivalents and short-term investments generated by our initial public offering. Interest and other income for the year ended June 30, 2000 included foreign exchange losses of $168,000 compared to losses of $191,000 for the year ended June 30, 1999. The other components of interest and other income were not material for the periods presented. INCOME TAXES Income taxes increased to $557,000 for the year ended June 30, 2000 from $243,000 for the year ended June 30, 1999. These taxes related to the United States and the United Kingdom. As a result of net operating losses and the availability of loss carry forwards in Canada, we have not incurred significant Canadian income taxes. -35-

38 YEARS ENDED JUNE 30, 1999 AND 1998 REVENUES Total revenues increased 78% to $25.3 million for the year ended June 30, 1999 from $14.2 million for the year ended June 30, 1998. LICENSES Revenues from licenses increased 66% to $18.8 million for the year ended June 30, 1999 from $11.3 million for the year ended June 30, 1998. Increased sales of licenses for Pivotal Relationship and related solutions contributed $6.9 million of this increase and sales of Pivotal eRelationship solutions contributed approximately $600,000. Revenues from licenses decreased to 74% from 80% as a percentage of total revenues for the years ended June 30, 1999 and 1998, respectively. No single customer accounted for 10% or more of our revenues for the years ended June 30, 1999 and 1998. North American license revenues accounted for 80% and 90% of total license revenues in the years ended June 30, 1999 and 1998, respectively. SERVICES AND MAINTENANCE Revenues from services and maintenance increased 125% to $6.5 million for the year ended June 30, 1999 from $2.9 million for the year ended June 30, 1998. This resulted from an increase of $2.8 million in revenues from technical support and maintenance contracts, which entitle the customer to new versions of the product and to technical support and maintenance services, and an increase of $800,000 in revenues from implementation, education and consulting service engagements. Our revenues from services and maintenance represented 26% and 20% of total revenues for the years ended June 30, 1999 and 1998, respectively. COST OF REVENUES Total cost of revenues increased 115% to $3.6 million for the year ended June 30, 1999 from $1.7 million for the year ended June 30, 1998. LICENSES Cost of revenues from licenses increased to $536,000 for the year ended June 30, 1999 from $401,000 for the year ended June 30, 1998. Cost of revenues from licenses as a percentage of revenues from licenses was 3% and 4% for the years ended June 30, 1999 and 1998, respectively. SERVICES AND MAINTENANCE Cost of revenues from services and maintenance increased 140% to $3.1 million for the year ended June 30, 1999 from $1.3 million for the year ended June 30, 1998. The increase in dollar amount resulted from the hiring of consulting, customer support and educating personnel to support our growing customer base. Cost of revenues from services and maintenance as a percentage of revenues from services and maintenance was 47% and 44% for the years ended June 30, 1999 and 1998, respectively. OPERATING EXPENSES SALES AND MARKETING Sales and marketing expenses increased 82% to $16.8 million for the year ended June 30, 1999 from $9.2 million for the year ended June 30, 1998. Sales and marketing expenses increased as a percentage of total revenues to 66% for the year ended June 30, 1999 from 65% for the year ended June 30, 1998. This increase resulted primarily from expanding our North America and international sales and marketing organizations. RESEARCH AND DEVELOPMENT Research and development expenses increased 160% to $5.0 million for the year ended June 30, 1999 from $1.9 million for the year ended June 30, 1998. The increases were due to increases in the number of research and development employees. Research and development expenses increased to 20% from 13% as a percentage of total revenues for the years ended June 30, 1999 and 1998, respectively. -36-

39 GENERAL AND ADMINISTRATIVE General and administrative expenses increased 63% to $2.5 million for the year ended June 30, 1999 from $1.5 million for the year ended June 30, 1998. General and administrative expenses declined to 10% from 11% as a percentage of total revenues for the same respective periods. INTEREST AND OTHER INCOME (LOSS) Interest and other income (loss) declined to a loss of $24,000 for the year ended June 30, 1999 from income of $136,000 for the year ended June 30, 1998. This decline occurred because our interest income was offset by $191,000 in foreign exchange losses and a $52,000 loss on disposal of property and equipment. We have not had significant interest expense, as we have not borrowed any funds. INCOME TAXES Income taxes increased to $243,000 for the year ended June 30, 1999 from $10,000 for the year ended June 30, 1998. As a result of net operating losses and the availability of loss carry forwards in Canada, we have not incurred significant Canadian income taxes. QUARTERLY RESULTS OF OPERATIONS The following tables present our unaudited quarterly results of operations both in absolute dollars and on percentage of revenue basis for each of our last eight quarters. This data has been derived from unaudited consolidated financial statements that have been prepared on the same basis as the annual audited consolidated financial statements and, in our opinion, include all normal recurring adjustments necessary for the fair presentation of such information. These unaudited quarterly results should be read in conjunction with our consolidated financial statements. -37-

40 <TABLE> <CAPTION> Three months ended --------------------------------------------------------------------------------------------------------------------------- Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, 1998 1998 1999 1999 1999 1999 2000 2000 --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> REVENUES: Licenses $ 3,276 $ 4,323 $ 5,006 $ 6,214 $ 6,097 $ 8,026 $ 10,125 $ 13,136 Services and maintenance 1,292 1,390 1,717 2,109 2,578 3,516 4,412 5,049 --------------------------------------------------------------------------------------------------------------------------- Total revenues 4,568 5,713 6,723 8,323 8,675 11,542 14,537 18,185 --------------------------------------------------------------------------------------------------------------------------- COST OF REVENUES: Licenses 73 97 268 98 284 410 635 812 Services and maintenance 562 589 822 1,105 1,368 1,813 2,295 2,671 --------------------------------------------------------------------------------------------------------------------------- Total cost of revenues 635 686 1,090 1,203 1,652 2,223 2,930 3,483 --------------------------------------------------------------------------------------------------------------------------- Gross profit 3,933 5,027 5,633 7,120 7,023 9,319 11,607 14,702 --------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Sales and marketing 3,488 3,933 4,404 5,005 5,715 6,917 8,214 10,319 Research and development 808 1,166 1,184 1,800 1,569 2,125 2,409 2,803 General and administrative 543 512 566 845 707 968 1,197 1,318 Amortization of goodwill -- -- -- -- -- 32 97 1,280 In-process research and development and other charges -- -- -- -- -- -- -- 6,979 --------------------------------------------------------------------------------------------------------------------------- Total operating expenses 4,839 5,611 6,154 7,650 7,991 10,042 11,917 22,699 --------------------------------------------------------------------------------------------------------------------------- Loss from operations (906) (584) (521) (530) (968) (723) (310) (7,997) Interest and other income (loss) 107 1 (63) (69) 357 685 673 478 --------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (799) (583) (584) (599) (611) (38) 363 (7,519) Income taxes 60 60 63 60 75 126 139 217 --------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (859) $ (643) $ (647) $ (659) $ (686) $ (164) $ 224 $ (7,736) =========================================================================================================================== </TABLE> -38-

41 <TABLE> <CAPTION> Three months ended ------------------------------------------------------------------------------------------------------------------------------ Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, 1998 1998 1999 1999 1999 1999 2000 2000 ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> REVENUES: Licenses 72% 76% 74% 75% 70% 70% 70% 72% Services and maintenance 28% 24% 26% 25% 30% 30% 30% 28% ------------------------------------------------------------------------------------------------------------------------------ Total revenues 100% 100% 100% 100% 100% 100% 100% 100% ------------------------------------------------------------------------------------------------------------------------------ COST OF REVENUES: Licenses 2% 2% 4% 1% 3% 3% 4% 4% Services and maintenance 12% 10% 12% 13% 16% 16% 16% 15% ------------------------------------------------------------------------------------------------------------------------------ Total cost of revenues 14% 12% 16% 14% 19% 19% 20% 19% ------------------------------------------------------------------------------------------------------------------------------ Gross profit 86% 88% 84% 86% 81% 81% 80% 81% ------------------------------------------------------------------------------------------------------------------------------ OPERATING EXPENSES: Sales and marketing 76% 69% 66% 60% 66% 60% 56% 57% Research and development 18% 20% 17% 22% 18% 19% 17% 15% General and administrative 12% 9% 8% 10% 8% 8% 8% 7% Amortization of goodwill -- -- -- -- -- -- 1% 7% In-process research and development and other charges -- -- -- -- -- -- -- 39% ------------------------------------------------------------------------------------------------------------------------------ Total operating expenses 106% 98% 91% 92% 92% 87% 82% 125% ------------------------------------------------------------------------------------------------------------------------------ Loss from operations (20%) (10%) (7%) (6%) (11%) (6%) (2%) (44%) Interest and other income (loss) 2% -- (1%) (1%) 4% 6% 5% 3% ------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes (18%) (10%) (8%) (7%) (7%) -- 3% (41%) Income taxes 1% 1% 1% 1% 1% 1% 1% 1% ------------------------------------------------------------------------------------------------------------------------------ Net income (loss) (19%) (11%) (9%) (8%) (8%) (1%) 2% (42%) ============================================================================================================================== </TABLE> -39-

42 We have typically experienced an increase in revenues during our fourth fiscal quarter ended June 30 which we believe is primarily related to sales compensation policies and annual objectives. In addition, a pattern of reduced buying by European customers during July and August has resulted in lower European license revenues in the quarter ended September 30 and our license revenues for the quarters ended September 30 have been lower than license revenues for the previous quarter ended June 30. We incurred operating losses as we increased the level of investment in all facets of our business. Our quarterly operating results have fluctuated significantly in the past and will continue to fluctuate in the future as a result of a number of factors, many of which are outside of our control. As a result of our limited operating history and recent acquisitions, 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, 2000, we had $4.7 million in cash and cash equivalents, $30.8 million in short-term investments and $28.3 million in working capital. During the quarter ended September 30, 1999, we successfully concluded our initial public offering, generating $43.1 million cash proceeds net of expenses and brokers' commissions. Our cash, cash equivalents and short-term investments increased to a total of $35.5 million as of June 30, 2000 from $9.3 million as of June 30, 1999. Our working capital increased to $28.3 million at June 30, 2000 from $7.3 million at June 30, 1999. We generated cash from operating activities of $4.9 million and $2.5 million for the years ended June 30, 2000 and 1999, respectively, as a result of obtaining improved payment terms from our principal suppliers and up front payments for maintenance support from our customers. Cash used in operating activities in the year ended June 30, 1998 was $1.1 million. Net cash used in investing activities was $54.3 million, $2.4 million and $1.6 million for the years ended June 30, 2000, 1999, 1998, respectively. Capital expenditures totaled $6.1 million, $2.4 million and $1.7 million for the years ended June 30, 2000, 1999 and 1998, respectively. These capital expenditures related primarily to the acquisition of computer software and equipment as well as furniture and fixtures as a result of our growing employee base. During the year ended June 30, 2000, we used $14.5 million (net of cash acquired) on the acquisitions of Transitif, Exactium and Simba. During the year ended June 30, 2000, we purchased short-term investments of $30.8 million and other assets of $2.9 million. Net cash provided by financing activities was $44.8 million, $8.0 million and $74,000 for the years ended June 30, 2000, 1999 and 1998, respectively. Net cash provided by financing activities resulted from sales of equity securities. For the year ended June 30, 2000, we raised $43.1 million from our initial public offering and we received $1.7 million on exercise of stock options. Our principal source of liquidity at June 30, 2000 was our cash, cash equivalents and short-term investments of $35.5 million. We also have credit facilities with a Canadian chartered bank, which include an operating facility of US$10.0 million bearing interest at the bank's prime rate and a term loan facility of US$5.0 million bearing interest at the bank's prime rate to be used for various capital expenditures. The credit facilities are secured by all of our assets, including our equipment and accounts receivable and the shares of our subsidiaries. At June 30, 2000, no amounts were outstanding under the operating facility or the term loan facility. We believe that the total amount of cash, 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 through the year ending June 30, 2001. Thereafter, depending on the development of our business, we may need to raise additional cash for working capital or other expenses. We also may encounter opportunities for acquisitions or other -40-

43 business initiatives that require significant cash commitments, or unanticipated problems or expenses that could result in a requirement for additional cash before that time. If we need to raise additional cash, financing may not be available to us on favorable terms or at all. FOREIGN EXCHANGE AND HEDGING ACTIVITIES We are exposed to foreign currency fluctuations through our operations in Canada. Substantially all of our revenues and corresponding receivables are in United States dollars. However, a majority of our research and development expenses, customer support costs and administrative expenses are in Canadian dollars. As part of our hedging policy implemented during 1999, we identify our future Canadian currency requirements related to payroll costs, capital expenditures and operating lease commitments, and purchase forward exchange contracts to cover our currency needs at the beginning of an operational period, generally two quarters. We do not enter into forward exchange contracts or any derivative financial instruments for trading purposes. Prior to the year ended June 30, 1999, we did not engage in hedging transactions and our gains and losses on foreign currency transactions were not significant. Under our current hedging policy, we identify our forward contracts related to operating lease commitments and commitments for capital expenditures as hedges of firm, identifiable Canadian currency commitments. We recognize the gains and losses on these contracts when the related lease commitment is paid or the capital expenditure is made. We recognize gains and losses on other forward contracts in earnings in the current period. As of June 30, 2000, we had outstanding currency forward exchange contracts of $5.5 million which will be held to maturity and relate to operating expenses. As of June 30, 1999, we had no outstanding currency forward exchange contracts because forward contracts generally mature at the end of a quarterly period. During the quarter ended June 30, 2000 and 1999, we recorded a foreign exchange loss of $168,000 and $122,000, respectively, from the unhedged portion of our foreign currency exposure as the Canadian dollar strengthened substantially during the quarter. While we expect to continue to use our current method of hedging our foreign currency risk in the future, we may change our hedging methodology. If our currency requirements differ materially from our hedged position during periods of currency volatility, or if we do not continue to hedge our Canadian currency commitments, we could experience unanticipated currency gains or losses. We assume the risk relating to the creditworthiness of our counterparties when we engage in hedging transactions. We mitigate this risk by dealing only with substantial commercial banks we believe to be creditworthy. We do not believe that the credit risk associated with these transactions is material. AUDIT COMMITTEE We have established an Audit Committee of the Board of Directors, the charter of which is to oversee the activities of management and Pivotal's external auditors as they relate to the financial reporting process. In the year ended June 30, 2000, the Audit Committee was comprised of Robin Louis, Doug Mackenzie and Roger Siboni. Roger Siboni resigned in April 2000. 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 Pivotal's external auditors. In these meetings, the Audit Committee discussed with management and our external auditors the quality and acceptability of accounting principles and significant transactions or issues encountered during the period. In addition, the Audit Committee met with Pivotal's 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. Subsequent to year end, we adopted an Audit Committee Charter as required by the Nasdaq Stock Exchange, Inc. ("Nasdaq") in compliance with the Nasdaq's Marketplace Rules. Pivotal is committed to supporting this process and the Audit Committee in fulfilling their role of ensuring the integrity of our internal controls and financial reporting. -41-

44 YEAR 2000 ISSUES We believe that the current versions of our internally developed solutions, as well as our management and information systems, are Year 2000 compliant. When the century changed, we experienced no disruption of our business operations and no product failures as a result of Year 2000 compliance issues or otherwise. The costs we incurred in connection with remediating our systems during 1999 were immaterial. At this time, we are not aware of any material defects resulting from Year 2000 issues, either with our solutions, our internal systems, or the solutions and services of third parties on which we rely. Nevertheless, some Year 2000 problems may not appear until after January 1, 2000. As a result, we may still face claims for undiscovered Year 2000 errors in our own solutions or for Year 2000 issues arising from third-party solutions that we integrate into our solutions or with which our solutions and systems exchange data. In addition, if our suppliers or distributors encounter Year 2000 problems, our ability to deliver our solutions and services could be disrupted. -42-

45 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to foreign currency fluctuations through our operations in Canada. Substantially all of our revenues and corresponding receivables are in United States dollars. However, a majority of our research and development expenses, customer support costs and administrative expenses are in Canadian dollars. As part of our hedging policy implemented in 1999, we identify our future Canadian currency requirements related to payroll costs, capital expenditures and operating lease commitments, and purchase forward exchange contracts to cover our currency needs at the beginning of an operational period, generally two quarters. We do not enter into forward exchange contracts or any derivative financial instruments for trading purposes. Prior to the year ended June 30, 1999, we did not engage in hedging transactions and our gains and losses on foreign currency transactions were not significant. Under our current hedging policy, we identify our forward contracts related to operating lease commitments and commitments for capital expenditures as hedges of firm, identifiable Canadian currency commitments. We recognize the gains and losses on these contracts when the related lease commitment is paid or the capital expenditure is made. We recognize gains and losses on other forward contracts in earnings in the current period. As of June 30, 2000, we had outstanding currency forward exchange contracts of $5.5 million which will be held to maturity and relate to future operating expenses. As of June 30, 1999, we had no outstanding currency forward exchange contracts because forward contracts generally mature at the end of a quarterly period. During the quarters ended June 30, 2000 and 1999, we recorded a foreign exchange loss of $168,000 and $122,000, respectively, from the unhedged portion of our foreign currency exposure as the Canadian dollar strengthened substantially during the quarter. While we expect to continue to use our current method of hedging our foreign currency risk in the future, we may change our hedging methodology. If our currency requirements differ materially from our hedged position during periods of currency volatility, or if we do not continue to hedge our Canadian currency commitments, we could experience unanticipated currency gains or losses. -43-

46 We assume the risk relating to the creditworthiness of our counterparties when we engage in hedging transactions. We mitigate this risk by dealing only with substantial commercial banks we believe to be creditworthy. We do not believe that the credit risk associated with these transactions is material. ITEM 8. CONSOLIDATED 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, 2000 and 1999 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 2000. Our audit also included the financial statement schedule listed in the Index at Item 14(a). These consolidated financial statements and schedule 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 audit provides 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, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2000 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 13, 2000 -44-

47 PIVOTAL CORPORATION CONSOLIDATED BALANCE SHEETS (Expressed in United States dollars; all amounts in thousands except par value data) <TABLE> <CAPTION> June 30, --------------------------------------------------------------------------------------------------------------------------- 2000 1999 --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 4,734 $ 9,338 Short term investments 30,788 -- Accounts receivable 16,764 8,304 Prepaid expenses 1,859 1,029 --------------------------------------------------------------------------------------------------------------------------- Total current assets 54,145 18,671 Property and equipment, net 7,231 3,051 Goodwill, intangibles and other assets, net 60,569 -- --------------------------------------------------------------------------------------------------------------------------- Total assets $ 121,945 $ 21,722 =========================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued liabilities $ 16,877 $ 6,329 Deferred revenue 8,971 5,085 --------------------------------------------------------------------------------------------------------------------------- Total current liabilities 25,848 11,414 --------------------------------------------------------------------------------------------------------------------------- Redeemable convertible preferred shares, authorized, issued and outstanding shares - none at June 30, 2000 and 9,946 at June 30, 1999 -- 17,500 Shareholders' equity (deficit): Preferred shares, undesignated, no par value, authorized shares - 20,000 at June 30, 2000 and June 30, 1999; no shares issued and outstanding -- -- Class A convertible preferred shares, no par value, authorized, issued and outstanding shares - none in 2000 and 2,000 in 1999 -- 83 Common shares, no par value, authorized shares - 200,000 at June 30, 2000 and June 30, 1999, respectively; issued and outstanding shares - 22,057 and 3,454 at June 30, 2000 and June 30, 1999, respectively 105,076 563 Class B common shares, Cdn.$0.03 par value, authorized shares - none and 600 in 2000 and 1999, respectively; issued and outstanding shares - none and 477 in 2000 and 1999, respectively -- 4 Additional paid-in capital 7,002 -- Deferred share-based compensation (193) (416) Accumulated deficit (15,788) (7,426) --------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity (deficit) 96,097 (7,192) --------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity (deficit) $ 121,945 $ 21,722 =========================================================================================================================== </TABLE> See accompanying notes -45-

48 PIVOTAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Expressed in United States dollars; all amounts in thousands except amounts per share) <TABLE> <CAPTION> Years ended June 30, -------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> REVENUES: Licenses $ 37,384 $ 18,819 $ 11,311 Services and maintenance 15,555 6,508 2,898 -------------------------------------------------------------------------------------------------------------------- Total revenues 52,939 25,327 14,209 -------------------------------------------------------------------------------------------------------------------- COST OF REVENUES: Licenses 2,141 536 401 Services and maintenance 8,147 3,078 1,281 -------------------------------------------------------------------------------------------------------------------- Total cost of revenues 10,288 3,614 1,682 -------------------------------------------------------------------------------------------------------------------- Gross profit 42,651 21,713 12,527 -------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Sales and marketing 31,165 16,830 9,226 Research and development 8,906 4,958 1,910 General and administrative 4,190 2,466 1,513 Amortization of goodwill 1,409 -- -- In process research and development and other charges 6,979 -- -- -------------------------------------------------------------------------------------------------------------------- Total operating expenses 52,649 24,254 12,649 -------------------------------------------------------------------------------------------------------------------- Loss from operations (9,998) (2,541) (122) Interest and other income (loss) 2,193 (24) 136 -------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (7,805) (2,565) 14 Income taxes 557 243 10 -------------------------------------------------------------------------------------------------------------------- Net income (loss) for the year $ (8,362) $ (2,808) $ 4 ==================================================================================================================== Earnings (loss) per share: Basic $ (0.45) $ (0.72) $- Diluted $ (0.45) $ (0.72) $- Pro forma basic and diluted $ (0.39) $ (0.18) $- Weighted average number of shares used to calculate earnings (loss) per share: Basic 18,643 3,888 3,720 Diluted 18,643 3,888 14,927 Pro forma basic 21,339 15,940 </TABLE> See accompanying notes -46-

49 PIVOTAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (Expressed in United States dollars; all amounts in thousands) <TABLE> <CAPTION> Total Class A Convertible Additional Class B Common Deferred Shareholders' Preferred Shares Common Shares Paid-in Shares Share-based Equity Shares Amount Shares Amount Capital Shares Amount Compensation (Deficit) (Deficit) ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance, June 30, 1997 2,000 $83 3,430 $ 6 $ -- $-- $-- $ (4,622) $ (4,533) Issuance of common shares on exercise of stock options -- -- 423 74 -- -- -- -- -- 74 Net income -- -- -- -- -- -- -- -- 4 4 ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1998 2,000 83 3,853 80 -- -- -- -- (4,618) (4,455) Conversion of common shares on exercise of stock options -- -- 78 14 -- -- -- -- -- 14 Conversion of common shares into Class B common shares -- -- (477) (4) -- 477 4 -- -- -- Deferred share-based compensation -- -- -- 473 -- -- -- (473) -- -- Amortization of share-based compensation -- -- -- -- -- -- -- 57 -- 57 Net loss -- -- -- -- -- -- -- -- (2,808) (2,808) ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1999 2,000 83 3,454 563 -- 477 4 (416) (7,426) (7,192) 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 42,123 7,002 -- -- -- -- 49,125 Amortization of share-based compensation -- -- -- -- -- -- -- 223 -- 223 Net loss -- -- -- -- -- -- -- -- (8,362) (8,362) ------------------------------------------------------------------------------------------------------------------------------------ Balance June 30, 2000 -- $-- 22,057 $ 105,076 $7,002 -- $-- $ (193) $ (15,788) $ 96,097 ==================================================================================================================================== </TABLE> See accompanying notes -47-

50 PIVOTAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in United States dollars; all amounts in thousands) <TABLE> <CAPTION> Years ended June 30, -------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Cash flows from operating activities: Net income (loss) for the period $ (8,362) $ (2,808) $ 4 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization of goodwill 1,409 -- -- Depreciation 2,215 1,017 410 In-process research and development and other charges 6,979 -- -- Loss on disposal of property and equipment -- 52 55 Non-cash share-based compensation expense 223 57 -- Change in operating assets and liabilities 2,469 4,196 (1,596) -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 4,933 2,514 (1,127) -------------------------------------------------------------------------------------------------------------------------------- Cash flows for investing activities: Purchase of property and equipment (6,110) (2,392) (1,666) Acquisitions (net of cash acquired) (14,520) -- -- Purchase of short-term investments (30,788) -- -- Other assets (2,921) -- 23 -------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (54,339) (2,392) (1,643) -------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net proceeds from initial public offering of common shares 43,101 -- -- Proceeds from issuance of common shares 1,701 14 74 Proceeds from issuance of redeemable convertible preferred shares -- 8,000 -- -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 44,802 8,014 74 -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (4,604) 8,136 (2,696) Cash and cash equivalents, beginning of period 9,338 1,202 3,898 -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 4,734 $ 9,338 $ 1,202 ================================================================================================================================ SUPPLEMENTAL CASH FLOW DISCLOSURE Income taxes paid (recovered) $ 324 $ 137 $ (12) SUPPLEMENTAL NON-CASH INVESTING DISCLOSURE Acquisitions of Exactium and Simba $ 49,125 $- $- SUPPLEMENTAL NON-CASH FINANCING DISCLOSURE Issuance of common shares and options on acquisitions $ 49,125 $- $- Conversion of preferred shares into common shares $ 17,583 $- $- </TABLE> See accompanying notes -48-

51 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 NATURE OF OPERATIONS Pivotal Corporation enables large and medium-sized businesses worldwide to make, serve, and manage customers efficiently and intelligently by providing demand chain networks based on Microsoft standards. Pivotal helps companies manage collaborative relationships between customers, business partners and employees; guide intelligent commerce transactions across multiple channels; and seamlessly integrate the demand chain with the supply chain. Pivotal's software solutions include Pivotal eRelationship, developed to manage the eBusiness relationships, Pivotal eSelling, designed to sell complex products over the Internet, and Pivotal ePower, an integrated Internet application platform that is built on best-in-class resources. PRINCIPLES OF CONSOLIDATION These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and include the accounts of Pivotal and its wholly owned subsidiaries. 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 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, taxes and contingencies. Actual results may differ from those estimates. REVENUE RECOGNITION Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), was issued in October 1997 by the American Institute of Certified Public Accountants ("AICPA") and was amended by Statement of Position 98-4 (SOP 98-4). Pivotal adopted SOP 97-2 effective for Pivotal's year ended June 30, 1998. Additionally, the AICPA issued SOP 98-9, which provides certain amendments to SOP 97-2, which is effective for transactions entered into beginning July 1, 1999. Pivotal adopted SOP 98-9 in the first quarter of fiscal year 2000 and its adoption had no material impact on Pivotal's operating results or financial position. Pivotal generates revenues through two sources: (1) software license revenues and (2) services and maintenance revenues. Software license revenues are normally generated from licensing the perpetual right to use Pivotal's products directly to end-users and indirectly through resellers and, to a lesser extent, through third-party products Pivotal distributes. Pivotal recognizes as revenue only the fee payable from the reseller, net of any discount. Service revenues are generated from consulting services, education 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. Revenues for license arrangements with payment term extending beyond one year are recognized periodically as payments become due, provided all other conditions for revenue recognition are met. Maintenance revenues -49-

52 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 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 services do not include significant customization or modification of the base 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. 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 Short term investments consist of money market instruments with maturities of less than one year. As at June 30, 2000, Pivotal's short-term investments consisted solely of held-to-maturity investments and their carrying value was substantially the same as their market value. FAIR VALUE OF FINANCIAL INSTRUMENTS At June 30, 2000 and 1999, Pivotal had the following financial instruments: cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities, and at June 30, 1999, redeemable convertible preferred shares. 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. At June 30, 1999, due to the uncertainty surrounding the actual date that the redeemable convertible preferred shares would be redeemed, it was not practical to determine the fair value of this financial instrument. DERIVATIVE FINANCIAL INSTRUMENTS Pivotal's use of derivative financial instruments is limited to short-term foreign currency forward exchange contracts ("forward contracts") used 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 enters into forward contracts to hedge exposure to fluctuations in the Canadian dollar. Gains and losses on forward contracts that are designated and effective 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 income in the current period. As at June 30, 2000, Pivotal had outstanding forward contracts to purchase Canadian dollars for US$5.5 million. The unrealized loss on these contracts at June 30, 2000 was $79. As of June 30, 1999, Pivotal had no outstanding forward contracts. 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: <TABLE> <S> <C> Computer software 2 year straight line -------------------------------------------------------------------------------- Computer hardware and equipment 30% declining balance or 3 year straight line -------------------------------------------------------------------------------- Furniture and fixtures 20% declining balance -------------------------------------------------------------------------------- </TABLE> Leasehold improvements are amortized using the straight-line method over three to five years. 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. -50-

53 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) IMPAIRMENT OF LONG-LIVED ASSETS Pivotal makes periodic reviews for the impairment of long-lived assets including goodwill and other intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Under Statement of Financial Accounting Standard ("SFAS") No. 121, an impairment loss would be recognized when estimates of undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. No such impairment losses have been identified by Pivotal for the years ended June 30, 2000, 1999 and 1998. 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 and the Asia Pacific and consists of companies in a variety of industries. Pivotal does not require collateral or other security to support credit sales, but provides an allowance for bad debts based on historical experience and specifically identified risks. FOREIGN CURRENCY TRANSLATION The functional currency of Pivotal and its subsidiaries is the U.S. dollar. Assets and liabilities denominated in other than the U.S. dollar are translated using the exchange rates prevailing at the balance sheet date. 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 $924, $538 and $172 in 2000, 1999 and 1998, 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. 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 10. 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. -51-

54 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) EARNINGS (LOSS) PER COMMON SHARE Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities 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 earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding and the weighted average redeemable convertible preferred shares and Class A convertible preferred shares outstanding as if such shares were converted into common shares and had been outstanding since July 1, 1999. The following table sets forth the computation of basic and diluted, and pro forma basic and diluted earnings (loss) per share: <TABLE> <CAPTION> Years ended June 30, ------------------------------------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Net income (loss) (A) $ (8,362) $ (2,808) $ 4 ================================================================================================ Weighted average number of common shares outstanding (B) 18,643 3,888 3,720 Dilutive effect of: Stock options -- -- 444 Convertible preferred shares -- -- 10,763 ------------------------------------------------------------------------------------------------ Diluted weighted average number of shares (C) 18,643 3,888 14,927 ================================================================================================ Pro forma adjustment for convertible preferred shares 2,696 12,052 Pro forma basic and diluted weighted average number of shares (D) 21,339 15,940 ------------------------------------------------------------------------------------------------ Earnings (loss) per share Basic (A/B) $ (0.45) $ (0.72) $- Diluted (A/C) $ (0.45) $ (0.72) $- Pro forma basic and diluted (A/D) $ (0.39) $ (0.18) </TABLE> COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income," establishes standards for the reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. Pivotal adopted SFAS No. 130 in 1999. Pivotal has no comprehensive income items, other than the net earnings (loss), in any of the periods presented. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The FASB subsequently issued SFAS No. 137 which delayed the required effective date for adoption of SFAS No. 133 to fiscal years beginning after June 15, 2000. Pivotal will adopt SFAS No. 133 as amended by SFAS No. 137 in the first quarter of fiscal year 2001. Pivotal does not expect that adoption of this standard will have a material effect on its consolidated financial position or results of operations. In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation." Pivotal will be required to adopt FIN 44 effective July 1, 2000 with respect to certain provisions applicable to new awards, exchanges of awards in a business combination, modifications to outstanding awards, and changes in grantee status that occur on or after that date. FIN 44 addresses practice issues related to the application of APB Opinion No. 25, "Accounting for Stock Issued to Employees." Pivotal does not expect the application of FIN 44 to have a material impact on its consolidated financial position or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") and amended it in March 2000. Pivotal is currently reviewing the provisions of SAB 101 and has not fully assessed the impact of its adoption. While SAB 101 does not supercede the software industry specific revenue recognition guidance, which Pivotal believes it is in compliance with, the SEC Staff has recently -52-

55 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) informally indicated its views that SAB 101 may change current interpretations of software revenue recognition requirements. Such SEC interpretations could result in companies recording a cumulative effect of a change in accounting principle. Pivotal is required to adopt SAB 101 no later than the fourth quarter of fiscal 2001. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform with the current period presentation. 2. BUSINESS COMBINATIONS During the year ended June 30, 2000, Pivotal completed the acquisitions described below which were accounted for under the purchase method of accounting. Accordingly, the results of operations of each acquisition are included in the consolidated statement of income since the acquisition date, and the related assets and liabilities were recorded based upon their respective fair values at the date of acquisition. TRANSITIF S.A. Effective December 3, 1999, Pivotal acquired 100% of Transitif S.A. ("Transitif"), a French corporation that distributes electronic business 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. No earn-out payments were required to be made for the period ended June 30, 2000. EXACTIUM LTD. Effective June 2, 2000, Pivotal acquired 100% of Exactium Ltd. ("Exactium"), an Israeli company based in Atlanta, Georgia that provides eSelling 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 expenses of $775. SIMBA TECHNOLOGIES INC. On June 26, 2000, Pivotal acquired 100% of Simba Technologies Inc. ("Simba"). Pivotal paid an aggregate purchase price of $17,590 consisting of 837 common shares and stock options, and acquisition related expenditures of $455. The total consideration, including acquisition costs, was allocated based on estimated fair values on the acquisition date as follows: <TABLE> <CAPTION> Transitif Exactium Simba Total -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 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 Other liabilities (1,050) (926) (683) (2,659) -------------------------------------------------------------------------------------------------------------- (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 ============================================================================================================== </TABLE> -53-

56 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) The fair value of the common shares of Pivotal 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 ("IPR&D") charges relate to acquisitions of companies accounted for under the purchase method in which a portion of the purchase prices was allocated to acquired in process technology. During 2000, Pivotal acquired Exactium and Simba and included in the respective purchase prices was an aggregate amount of purchased IPR&D of $4,720. Independent valuations were performed to assess and allocate a value to purchased IPR&D. The value allocated to IPR&D 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 analysing purchased IPR&D 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 IPR&D for each acquisition is set for below. EXACTIUM The allocation to IPR&D 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 an eSelling product released in late June 2000. SIMBA The allocation to IPR&D was related to the Simba eMarketing 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 IPR&D 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 eMarketing market and Pivotal. Net after tax cash flows were discounted to -54-

57 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 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. Amounts attributable to developed technology, goodwill and other intangibles will be amortized over their estimated useful life of three years on a straight-line basis. 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. 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 1999 fiscal year. <TABLE> <CAPTION> June 30, --------------------------------------------------------------- 2000 1999 --------------------------------------------------------------- <S> <C> <C> Net revenues $ 58,602 $ 30,594 Net loss $(33,943) $(25,905) Basic and diluted loss per share $ (1.68) $ (4.67) </TABLE> 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. ACCOUNTS RECEIVABLE Accounts receivable are net of an allowance for doubtful accounts of $740 and $334 at June 30, 2000 and 1999, respectively. 4. PROPERTY AND EQUIPMENT <TABLE> <CAPTION> June 30, ---------------------------------------------------------- 2000 1999 ---------------------------------------------------------- <S> <C> <C> Computer software $ 3,126 $ 476 Computer equipment 3,763 2,317 Furniture and fixtures 2,389 1,169 Leasehold improvements 1,695 626 ---------------------------------------------------------- 10,973 4,588 Accumulated depreciation (3,742) (1,537) ---------------------------------------------------------- Net book value $ 7,231 $ 3,051 ========================================================== </TABLE> 5. GOODWILL, INTANGIBLES AND OTHER ASSETS <TABLE> <CAPTION> June 30, -------------------------------------------------- 2000 1999 -------------------------------------------------- <S> <C> <C> Goodwill $ 58,079 $ -- Acquired intangibles 1,620 -- Other assets 2,288 -- -------------------------------------------------- $ 61,987 $ -- Accumulated amortization (1,418) -- -------------------------------------------------- Net book value $ 60,569 $ -- ================================================== </TABLE> Other assets in the amount of $2,288 consist of prepaid long-term royalties and long-term investments. Amortization of $1,418 includes the amortization of goodwill and acquired workforce. -55-

58 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The components of accounts payable and accrued liabilities were as follows: <TABLE> <CAPTION> June 30, ---------------------------------------------------- 2000 1999 ---------------------------------------------------- <S> <C> <C> Accounts payable $ 9,369 $ 3,054 Accrued compensation 3,020 2,368 Accrued acquisition costs 1,229 -- Other accrued liabilities 3,259 907 ---------------------------------------------------- $16,877 $ 6,329 ==================================================== </TABLE> 7. LINE OF CREDIT Pivotal has negotiated a credit facility with a Canadian chartered bank which includes: a revolving term operating line of $10,000, bearing interest at the bank's prime rate and a committed term loan of $5,000 bearing interest also at the bank's prime rate, secured by a charge on all current and future personal property of Pivotal. As of June 30, 2000 and 1999, no amounts were outstanding under the credit facility. 8. COMMITMENTS AND CONTINGENCIES OPERATING LEASES 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 for the years ending June 30 pursuant to leases outstanding as of June 30, 2000 are due as follows: <TABLE> <S> <C> 2001 $ 2,720 2002 2,594 2003 1,672 2004 673 2005 298 ------------------------------------------------------- $ 7,957 ======================================================= </TABLE> Rent expense totalled approximately $2,237, $1,075 and $496 in the years ended June 30, 2000, 1999 and 1998, respectively. Certain of these lease obligations have been secured by irrevocable letters of credit for $0, $50, and $170 at June 30, 2000, 1999 and 1998, respectively. OTHER LETTERS OF CREDIT In June 2000, Pivotal entered into a $723 (Cdn. $ 1,070) irrevocable letter of credit with a Canadian chartered bank. The letter of credit, which expires June 19, 2001, collaterizes Pivotal's obligations to a third party for tenant improvement costs. LEGAL PROCEEDINGS Pivotal is subject to legal proceedings, claims and litigation arising in the ordinary course of business. Pivotal believes that the ultimate costs to resolve these matters will not have a material adverse effect on Pivotal's consolidated financial position, results of operations or cash flows. -56-

59 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 9. REDEEMABLE CONVERTIBLE PREFERRED SHARES The redeemable convertible preferred shares at June 30, 2000 and 1999 are as follows: <TABLE> <CAPTION> June 30, ------------------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------------------ <S> <C> <C> Class B, 2,000 shares with par value of Cdn.$1.17 each, redeemable at $1.00 each, authorized, issued and outstanding in 1999 $ -- $ 2,000 Class D, 2,658 shares with no par value, redeemable at $0.79 each, authorized, issued and outstanding in 1999 -- 2,100 Class E, 4,000 shares with no par value, redeemable at $1.35 each, authorized, issued and outstanding in 1999 -- 5,400 Class F, 1,288 shares with no par value, redeemable at $6.21 each, authorized, issued and outstanding in 1999 -- 8,000 ------------------------------------------------------------------------------------------ $ -- $17,500 ========================================================================================== </TABLE> During the year ended June 30, 1997, Pivotal's shareholders approved an increase in the authorized capital of Pivotal by authorizing 4,000 Class E preferred shares which were issued during that year for total proceeds of $5,400. During the year ended June 30, 1999, Pivotal's shareholders approved an increase in the authorized capital of Pivotal by authorizing 1,288 Class F preferred shares which were issued during that year for total proceeds of $8,000. The holders of each class of preferred shares had the right to one vote for each common share into which the preferred shares could be converted. All of the redeemable preferred shares had the right to receive non-cumulative dividends at amounts as determined by the directors of Pivotal. When dividends were paid on any other outstanding class of shares of Pivotal, the holders of the Class B, Class D, Class E and Class F preferred shares were entitled to an amount per share equal to that paid on the other class of shares, as determined on a basis as if all of the outstanding redeemable preferred shares had been converted into common shares. The Class B, Class D, Class E and Class F preferred shares were redeemable at Pivotal's option with the approval of the holders of 75% of the outstanding shares of the applicable class, and were retractable at the holder's option on or after June 30, 2001 at the issue price plus any declared and unpaid dividends. Each class of redeemable preferred shares was convertible into common shares at any time at the option of the holder, using the formula of 0.95 to 1.00 for the Class B preferred shares and one-for-one for Class D, Class E and Class F preferred shares as provided in the Articles of Pivotal. All classes of preferred shares were to automatically convert into common shares at the conversion price immediately upon the earlier of: (a) the acquisition of the assets or the take-over of Pivotal by a third party resulting in payment to all of the shareholders of Pivotal of not less than $7.50 per common share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) calculated on the basis that all of the preferred shares had been converted into common shares and without regard to any liquidation preferences for any class of shares; and, (b) the consummation of Pivotal's sale of its common shares in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933 of the United States, as amended, at a public offering price of not less than $7.50 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) and $15,000 in the aggregate, provided that the underwriters in such public offering were acceptable to the holders of a majority of the outstanding Class B, Class D, Class E and Class F preferred shares, such acceptance not to be unreasonably withheld. All of these shares were converted into common shares during the year ended June 30, 2000. 10. SHAREHOLDERS' EQUITY (DEFICIT) 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., Inc., 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 -57-

60 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 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. Preferred Shares, Common Shares and Class B Common Shares On December 1, 1997, Pivotal's shareholders approved an increase in the number of authorized common shares from 20,000 to 50,000 shares. On December 16, 1998, Pivotal's shareholders approved the redesignation of common shares without par value to Class A common shares without par value. Pivotal's shareholders also approved the increase in authorized capital by creating 600 Class B common shares with a par value of Cdn.$0.03 each. In December 1998 and January 1999, Pivotal issued an aggregate of 477 Class B common shares in exchange for 477 Class A common shares. Prior to completion of the initial public offering, all of the issued and outstanding Class B common shares were exchanged for common shares on a one-for-one basis. On June 17, 1999, Pivotal's shareholders approved an increase in the number of authorized Class A common shares from 50,000 to 200,000 and an increase in authorized capital by creating 20,000 unissued preferred shares without par value. Pivotal's shareholders also approved the redesignation of Class A common shares, both issued and unissued, to common shares without par value. The holder of each common share has the right to one vote per share. The preferred shares could at any time and from time to time be issued in one or more series and the Board of Directors could determine the special rights and restrictions of each series including any dividend, conversion or redemption rights, subject to the approval of at least 75% of the holders of any outstanding Class A, B, D, E and F preferred shares. The holders of the Class A preferred shares had the right to one vote for each common share into which the preferred shares could be converted. The Class A preferred shares had the same rights to receive dividends as the redeemable preferred shares discussed in Note 9, and were convertible into common shares on a one-for-one basis, subject to adjustment under certain circumstances. The Class A preferred shares were not redeemable or retractable. On June 17, 1999, Pivotal's shareholders also approved, subject to the conversion of the redeemable convertible preferred shares, the Class A convertible preferred shares and the Class B common shares into common shares, the cancellation of the authorized Class B common share capital and the authorized Class A, B, D, E, and F preferred share capital. 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 its subsidiaries, and of partnerships, joint ventures and other entities in which Pivotal holds a 50% voting interest including directors thereof. Generally, Pivotal grants stock options with exercise prices equal to the quoted market value of the common share 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 five years from the date of grant. On June 17, 1999, the Company's shareholders approved changes to the Plan that increased the number of shares reserved for issuance pursuant to the Plan by (a) 1,076 common shares plus (b) an automatic increase on the first day of each fiscal year beginning on July 1, 2001, equal to the lesser of 800 shares or 4% of the average number of common shares outstanding as used to calculate fully 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: -58-

61 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) <TABLE> <CAPTION> Options Outstanding ------------------------------------------------------------------------ Weighted Options Number of Average Available Common Exercise for Grant Shares Price ------------------------------------------------------------------------ <S> <C> <C> <C> (Expressed in Canadian dollars, except as noted) Balances, June 30, 1997 586 337 Cdn.$0.12 ------------------------------------------------------------------------ Options authorized 1,000 - - Options granted (877) 877 0.88 Options exercised - (423) 0.25 Options cancelled 49 (49) 0.26 ------------------------------------------------------------------------ Balances, June 30, 1998 758 742 Cdn.$0.94 ------------------------------------------------------------------------ Options authorized 2,576 - - Options granted (866) 866 9.71 Options exercised - (78) 0.28 Options cancelled 75 (75) 3.74 ------------------------------------------------------------------------ Balances, June 30, 1999 2,543 1,455 Cdn.$6.07 ------------------------------------------------------------------------ Options authorized 408 - - Options granted (1,837) 1,837 23.12 Options exercised - (376) 2.96 Options cancelled 270 (270) 10.37 ------------------------------------------------------------------------ Balances, June 30, 2000 1,384 2,646 US$16.95 ======================================================================== </TABLE> The U.S. dollar equivalents of the weighted average exercise price calculated using the year end exchange rates were as follows: $4.12, $0.64 and $0.08 as of June 30, 1999, 1998 and 1997 respectively. The following tables summarize information concerning outstanding and exercisable options at June 30, 2000: <TABLE> <CAPTION> 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 ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> $ 0.08 137 1.4 $ 0.08 92 $ 0.08 $ 0.17 13 6.9 0.17 5 0.17 $ 0.57-0.68 187 8.4 0.62 131 0.59 $ 1.70 57 7.7 1.70 27 1.70 $ 5.09-6.42 537 5.3 5.67 119 5.61 $ 10.54-12.88 614 6.3 13.13 53 13.92 $ 16.75-21.25 145 9.2 18.69 8 20.88 $ 25.44-33.13 747 9.8 27.68 - - $ 40.75-52.06 209 9.6 48.49 4 50.50 ----------------------------------------------------------------------------------------- $ 0.08-52.06 2,646 $ 16.95 439 $ 8.11 ========================================================================================= </TABLE> EMPLOYEE STOCK PURCHASE PLAN ("ESPP") On June 17, 1999, Pivotal's shareholders approved the adoption of an ESPP 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 ESPP, 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. -59-

62 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) COMMON SHARES RESERVED FOR FUTURE ISSUANCE Pivotal has reserved common shares as of June 30, 2000 as follows: <TABLE> <S> <C> Exercise of stock options 4,030 Employee Stock Purchase Plan 931 ------------------------------------------------------------- 4,961 ============================================================= </TABLE> SHARE-BASED COMPENSATION 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 $193 at June 30, 2000 will approximate $113, $58 and $22 during the fiscal years ending June 30, 2001, 2002 and 2003, respectively. 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, pro forma net income (loss) and net earnings (loss) per share would have been as follows: <TABLE> <CAPTION> Years Ended June 30, ------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------- <S> <C> <C> <C> Net income (loss) As reported $ (8,362) $(2,808) $ 4 SFAS No. 123 pro forma (10,541) (2,849) (2) Basic and diluted earnings (loss) per share As reported $ (0.45) $ (0.72) $-- SFAS No. 123 pro forma (0.57) (0.73) -- </TABLE> 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, 2000, 1999 and 1998 were US$15.45, Cdn.$1.92 (US$1.30) and Cdn.$0.21 (US$0.14) per share respectively. The fair value for these options was estimated at the date of grant using the following weighted average assumptions: <TABLE> <CAPTION> Years Ended June 30, -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- <S> <C> <C> <C> Assumptions Volatility factor of expected market price of the Company's shares 85.0% 0.0% 0.0% 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 7.0% 5.6% 5.5% </TABLE> -60-

63 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 11. INCOME TAXES Details of the income tax provision (recovery) are as follows: <TABLE> <CAPTION> Years ended June 30, ------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------ <S> <C> <C> <C> Current Canadian $ -- $ (47) $(132) Foreign 557 290 120 ------------------------------------------------------------------ 557 243 (12) Deferred Canadian -- -- 22 ------------------------------------------------------------------ Income tax provision $ 557 $ 243 $ 10 ================================================================== </TABLE> The reported income tax provision (recovery) differs from the amount computed by applying the Canadian basic statutory rate to the income (loss) before income taxes. The reasons for this difference and the related tax effects are as follows: <TABLE> <CAPTION> Years Ended June 30, -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- <S> <C> <C> <C> Canadian basic statutory tax rate 45% 45% 45% -------------------------------------------------------------------------------- Expected income tax provision (recovery) $(3,512) $(1,154) $ 6 Foreign tax rate differences (155) (144) (20) Benefit of losses not tax affected 389 1,484 -- Non-deductible expenses 2,661 56 82 Research and development tax credits (127) (47) (132) Benefit of temporary differences not recognized 1,301 48 74 -------------------------------------------------------------------------------- $ 557 $ 243 $ 10 ================================================================================ </TABLE> 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, 2000 and 1999 are as follows: <TABLE> <CAPTION> 2000 1999 -------------------------------------------------------------------------------- <S> <C> <C> Deferred income tax assets Net operating tax loss carry-forwards $ 4,547 $ 3,129 Research and development expenses 85 87 Book and tax base differences on assets -- 66 Other 80 84 Total deferred income tax assets 4,712 3,366 Valuation allowance for deferred income tax assets (4,547) (3,366) -------------------------------------------------------------------------------- Net deferred income tax assets 165 -- Deferred income tax liabilities Book and tax base differences on assets 187 -- -------------------------------------------------------------------------------- Net deferred income tax liabilities included in accounts payable and accrued liabilities $ 22 $ -- ================================================================================ </TABLE> 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, 2000 and 1999 was a provision of $1,346 and $1,542, respectively. As of June 30, 2000, Pivotal has Canadian tax loss carry-forwards of approximately $7,189 available to reduce future years' income for tax purposes. These carry-forward losses expire in 2001 to 2007. -61-

64 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 12. CHANGE IN OPERATING ASSETS AND LIABILITIES The change in operating assets and liabilities is as follows: <TABLE> <CAPTION> June 30, -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- <S> <C> <C> <C> Accounts receivable $(7,511) $(1,188) $(4,971) Prepaid expenses (545) (323) (570) Accounts payable and accrued liabilities 7,260 4,370 1,117 Deferred revenue 3,265 1,337 2,828 -------------------------------------------------------------------------------- $ 2,469 $ 4,196 $(1,596) ================================================================================ </TABLE> 13. RELATED PARTY TRANSACTIONS During the year, Pivotal entered into an agreement to license software from a company, with whom Pivotal had a former director in common, under which Pivotal paid $350. 14. SEGMENTED INFORMATION Pivotal operates in one business segment, the development, marketing, and supporting of Internet and corporate network-based software applications used for managing customer and selling partner relationships. Pivotal licenses and markets its products internationally. The following table presents a summary of revenues by geographical region. <TABLE> <CAPTION> Years Ended June 30, ------------------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------------ <S> <C> <C> <C> United States $32,591 $18,779 $11,931 Canada 5,574 1,463 903 International 14,774 5,085 1,375 ------------------------------------------------------------------------------ $52,939 $25,327 $14,209 ============================================================================== </TABLE> Pivotal attributes revenue among the geographical areas based on the location of the customers involved. During 2000, 1999 and 1998, no single customer accounted for 10% or more of total revenue. The following table presents a summary of property and equipment by geographic region: <TABLE> <CAPTION> Years ended June 30, ------------------------------------------------------------- 2000 1999 ------------------------------------------------------------- <S> <C> <C> Property and Equipment United States $1,395 $ 449 Canada 4,624 2,435 International 1,212 167 ------------------------------------------------------------- $7,231 $3,051 ============================================================= </TABLE> -62-

65 Schedule II -- Valuation and Qualifying Accounts Years ended June 30, 2000, 1999 and 1998 (in thousands) Allowance for Doubtful Accounts <TABLE> <CAPTION> Balance at Additions Additions beginning of charged to costs charged to Balance at Year year and expenses other accounts Write-offs end of Year <S> <C> <C> <C> <C> <C> 2000 $334 626 -- 220 $740 1999 $ 91 243 -- -- $334 1998 $ 79 88 -- 76 $ 91 </TABLE>

66 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT EXECUTIVE OFFICERS AND DIRECTORS The table below provides the names, ages, and positions with Pivotal of our executive officers and directors: <TABLE> <CAPTION> NAME AGE POSITION --------------------------------- -------- ------------------------------------------------------ <S> <C> <C> Norman B. Francis............ 51 President, Chief Executive Officer and Director Keith R. Wales............... 55 Chief Technical Officer and Director Vincent D. Mifsud............ 33 Chief Financial Officer and Executive Vice President Glenn S. Hasen............... 40 Executive Vice President, Global Field Operations Christine E. Rogers.......... 44 Senior Vice President, Professional Services Robert A. Runge.............. 46 Chief Marketing Officer Salvatore Sanci.............. 42 Vice President and General Manager, eRelationship Products Division Jeremy A. Jaech.............. 45 Director Robert J. Louis.............. 55 Director Douglas J. Mackenzie......... 40 Director Donald A. Mattrick........... 36 Director </TABLE> ---------- NORMAN B. FRANCIS co-founded Pivotal in 1990 and has served as President, Chief Executive Officer and a director since December 1990. 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 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 Chief Technical Officer since May 1999. Mr. Wales also served 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. -63-

67 VINCENT D. MIFSUD has served as Chief Financial Officer since December 1998 and Executive Vice President since July 2000. Mr. Mifsud also served as Vice President, Operations from December 1998 to July 2000. Prior to joining Pivotal, Mr. Mifsud served as Controller, Vice President, Finance and Chief Financial Officer of Rand Technology, Inc., a software developer and value added reseller of mechanical design automation tools and services, from May 1993 to December 1998. Prior to this, Mr. Mifsud worked for three years with Arthur Andersen LLC in their Enterprise Division. Mr. Mifsud holds a bachelor's degree in Commerce and Economics from the University of Toronto, Canada and is a Chartered Accountant. GLENN S. HASEN has served as Executive Vice President, Global Field Operation since July 2000. Mr. Hasen also served as Vice President, Worldwide Sales from October 1996 to July 2000. Prior to joining Pivotal, Mr. Hasen served as Director of International Sales of Information Builders Inc., a global software tools and middleware company, from February 1994 to October 1996. In addition, he served as General Manager of Information Builders Inc., from January 1990 to February 1994. Mr. Hasen also served as Director of Sales of Computer Associates International, Inc. from 1985 to 1990. Mr. Hasen holds a bachelor's degree from the University of Waterloo, Ontario, Canada and a Certificate in Finance from the Wharton School, University of Pennsylvania. CHRISTINE E. ROGERS has served as Senior Vice President, Professional Services, since July 2000. Ms. Rogers also served as Vice President, Professional Services, North America from April 1999 to July 2000. Ms. Rogers served as Associate Partner of Andersen Consulting's Customer Relationship Management practice from September 1998 to April 1999. Ms. Rogers served as Director of Andersen Consulting's Customer Relationship Management practice from October 1996 to September 1998. Ms. Rogers served as the Director of Database Marketing of AT&T Wireless Services from January 1995 to September 1996. Ms. Rogers served as the Director, Channel Sales of the Tracker Corporation from July 1994 to December 1994. Ms. Rogers served as Director, National Retail Sales of Rogers Cantel Mobile Communications Inc., a cable and telecommunications service provider from November 1987 to June 1994. ROBERT A. RUNGE has served as Chief Marketing Officer since July 2000. Mr. Runge also served as Vice President, Worldwide Marketing from September 1997 to July 2000. Before joining Pivotal, Mr. Runge served as Vice President, Marketing of BroadVision, Inc., an Internet marketing software company, from September 1995 to September 1997. Mr. Runge served as Director of Product Marketing of Sybase, a software company, from September 1990 to September 1995. Prior to that, Mr. Runge served as Director of Education Services of Oracle Corporation, a software company, from July 1988 to September 1990. Mr. Runge holds two bachelors' degrees from the University of Illinois, Champagne-Urbana and a master's degree in Business Administration (Marketing) from the University of Illinois, Chicago. SALVATORE SANCI has served as Vice President and General Manager, eRelationship Products Division since July 2000. Mr. Sanci also served as Vice President, Research and Development from August 1999 to July 2000. Before joining Pivotal, Mr. Sanci served as Vice President, Research and Development for PC DOCS Group International Inc., a software company, from January 1998 to July 1999, and as a software architect with PC DOCS Group International Inc. from August 1997 to December 1998. Mr. Sanci served as Vice President, Research and Development for InContext Corporation, a software company, from July 1991 to August 1997. Prior to that, Mr. Sanci served as Vice President, Research and Development for Amberon Inc., a predecessor to InContext Corporation, from July 1987 to June 1991. Mr. Sanci holds a bachelor's degree in Electrical Engineering and Computer Science from Ryerson Polytechnical Institute. JEREMY A. JAECH has served as a director since July 1996. Mr. Jaech currently serves as Vice President, Microsoft Corporation, Visio Division, a supplier of enterprise-wide business diagramming and technical drawing software for Microsoft Windows. Prior to Microsoft, Jeremy co-founded Visio Corporation, which was later sold to Microsoft, in September 1990. 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 holds a bachelor's degree in Mathematics and a master's degree in Computer Science from the University of Washington. -64-

68 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 degree in Science from the University of Victoria, British Columbia, Canada and a Ph.D. in Physics from the University of British Columbia, Canada. DOUGLAS J. MACKENZIE has served as a director since July 1992. Mr. Mackenzie has served as a Limited Partner of Kleiner, Perkins, Caufield & Byers, a venture capital firm specializing in high-tech companies, since June 1989 and a General Partner since April 1994. Mr. Mackenzie also serves as a director of Marimba, Inc. and E.piphany, Inc. Mr. Mackenzie holds a bachelor's degree in Economics and a master's degree in Industrial Engineering from Stanford University, and a master's degree in Business Administration from Harvard University. DONALD A. MATTRICK has served as a director since May 1999. Mr. Mattrick has served as the President of Electronic Arts Worldwide Studios, a manufacturer of gaming software, since September 1997. Mr. Mattrick served as Executive Vice President, North American Studios of Electronic Arts Worldwide Studios from October 1995 to September 1997 and as Executive Vice President and General Manager of Electronic Arts Worldwide Studios from 1991 to October 1995. Mr. Mattrick co-founded Distinctive Software in 1982 and served as its Chairman and Chief Executive Officer until 1991. Distinctive Software was purchased by Electronic Arts in 1991. Simon Frasier University awarded Mr. Mattrick an honorary Doctor of Laws degree in 1999. ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS The following table describes the compensation we paid to, or earned by, our chief executive officer and our executive officers who earned more than $100,000 during the fiscal year ended June 30, 2000. SUMMARY COMPENSATION TABLE <TABLE> <CAPTION> LONG TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------ ------------- SECURITIES NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDER OPTIONS --------------------------- ---- ------------ ------------- ------------- <S> <C> <C> <C> <C> Norman B. Francis 2000 Cdn.$175,000 Cdn.$78,983 25,000 President and Chief Executive Officer Keith R. Wales 2000 Cdn.$150,000 Cdn.$35,931 25,000 Chief Technical Officer Vincent D. Mifsud 2000 Cdn.$175,000 Cdn.$103,755 20,000 Chief Financial Officer and Executive Vice President Glenn S. Hasen 2000 $150,000 $106,513 30,000 Executive Vice President, Global Field Operations Robert A. Runge 2000 $160,000 $ 53,665 20,000 Chief Marketing Officer </TABLE> ----------------------------- -65-

69 OPTION GRANTS IN LAST FISCAL YEAR The following table provides information regarding stock option grants to our chief executive officer and our executive officers who earned more than $100,000 during the fiscal year ended June 30, 2000. The potential realizable value of the options is calculated based on the assumption that 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: - multiplying the number of common shares subject to a given option by the exercise price; - 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 - subtracting from that result the aggregate option exercise price. <TABLE> <CAPTION> INDIVIDUAL GRANTS --------------------------------------------------- NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE AT SECURITIES OPTIONS ASSUMED ANNUAL RATES OF SHARE UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION FOR OPTION TERM OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------------------------- NAME OPTIONS FISCAL YEAR SHARE DATE 5% 10% ----------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Norman B. Francis 25,000 1.75% $51.25 Jan. 19, 2010 $805,771 $2,041,983 Keith R. Wales 25,000 1.75% $51.25 Jan. 19, 2010 $805,771 $2,041,983 Vincent D. Mifsud 20,000 1.4% $51.25 Jan. 19, 2010 $644,617 $1,633,586 Glenn S. Hasen 30,000 2.1% $21.25 Oct. 13, 2009 $400,920 $1,016,011 Robert A. Runge 20,000 1.4% $21.25 Oct. 13, 2009 $267,280 $ 677,341 </TABLE> OPTION EXERCISES AND FISCAL YEAR-END VALUES The following table provides information regarding the exercise of options to purchase common shares by our chief executive officer and our executive officers who earned more than $100,000 during the fiscal year ended June 30, 2000. The value of unexercised in-the-money options is based on the closing price of our common shares on the Nasdaq National Market on June 30, 2000 of $23.50, minus the exercise price per share. -66-

70 AGGREGATED OPTIONS EXERCISED DURING 2000 FISCAL YEAR AND FINANCIAL YEAR-END OPTION VALUES <TABLE> <CAPTION> 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 ------------------- --------------- -------- ----------- ------------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> Norman B. Francis -- -- 28,765 44,085 $669,609 $ 435,558 Keith R. Wales -- -- 0 25,000 -- -- Vincent D. Mifsud 40,000 $2,326,950 20,000 120,000 $361,600 $1,808,000 Glenn S. Hasen 57,750 $1,455,100 3,750 82,500 $ 8,438 $ 165,000 Robert A. Runge 25,000 $ 372,132 2,500 55,000 $ 5,625 $ 729,938 </TABLE> ------------------- 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. -67-

71 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, only Messrs. Francis and Wales received stock options for their participation on our board of directors for the year ended June 30, 2000. Both Messrs. Francis and Wales received options to purchase 25,000 common shares at a price of US$51.25 per share. EMPLOYMENT CONTRACTS Pivotal entered into an employment contract with Robert Runge on August 14, 1997. Mr. Runge's current base salary is $160,000, with a potential incentive compensation of $90,000. Mr. Runge's salary is reviewed annually by the board of directors' compensation committee. Mr. Runge was also granted options to purchase common shares in Pivotal and is eligible to receive further grants in the future. Pivotal entered into an employment contract with Glenn Hasen on September 24, 1996. Mr. Hasen's current base salary is $150,000, with a potential incentive compensation of $150,000. Mr. Hasen's salary is reviewed annually by the board of directors' compensation committee. Mr. Hasen was also granted options to purchase common shares in Pivotal and is eligible to receive further grants in the future. Pivotal entered into an employment contract with Vincent Mifsud on November 16, 1999. Mr. Mifsud's current base salary is Cdn. $175,000, with a potential incentive compensation of $75,000. Mr. Mifsud's salary is reviewed annually by the board of directors' compensation committee. Mr. Mifsud was also granted options to purchase common shares in Pivotal and is eligible to receive further grants in the future. REPORT ON EXECUTIVE COMPENSATION BY THE COMPENSATION COMMITTEE The Compensation Committee of our board of directors currently consists of Jeremy A. Jaech, Robert J. Louis and Douglas J. Mackenzie. The committee is responsible for establishing and monitoring our long range plans and programs for attracting, training, developing and motivating employees. The committee reviews recommendations for the appointment of persons to senior executive positions, considers terms of employment, including succession planning and matters of compensation, and recommends awards under our incentive stock option plan and the employee share purchase plan. Our compensation policies and programs are designed to be competitive with similar customer relationship management companies in the electronic commerce environment and to recognize and reward executive performance consistent with the success of our business. These policies and programs are intended to attract and retain capable and experienced people. In addition to industry comparables, the Committee considers a variety of factors when determining both compensation policies and programs and individual compensation levels. These factors include the long range interests of Pivotal and its shareholders, overall financial and operating performance of Pivotal and the committee's assessment of each executive's individual performance and contribution towards meeting goals and objectives. The total compensation plan for executive officers is comprised of the following three components: competitive base salary, annual cash bonuses and stock options. Base Salary. In establishing base salaries of all executive officers, the committee reviews competitive market data for each of the executive positions and determines placement at an appropriate level in a range. Compensation levels are typically negotiated with the candidate for the position prior to his or her final selection as an executive officer. Additionally, a review of the chief executive officer's performance and a general review of Pivotal's stock price are considered. The compensation range for executive officers normally moves annually to reflect external factors such as inflation. The chief executive officer's base salary was increased from Cdn$120,000 to Cdn$175,000, effective September 1, 1999. The base salary of the chief executive officer is set at an amount the committee believes is competitive with salaries paid to executives of companies of comparable size in similar industries and located within the local area. Bonuses. Cash bonuses are used to reward executive officers for meeting specific performance targets as mutually agreed upon on an annual basis. During the year ended June 30, 2000, the chief executive officer was awarded a bonus in the amount of Cdn$78,983. This bonus was paid to the chief executive officer both for achieving success in completing Pivotal's initial public offering on the Nasdaq National Market in August 1999 and for his significant contribution to the strong performance of Pivotal's common shares on the Nasdaq National Market during the past fiscal year. Stock Option Grants. Pivotal provides its executive officers and other employees with long-term incentives through its incentive stock option plan, which is intended to emphasize management's commitment to growth of Pivotal and the enhancement of shareholder value. The committee relies on a variety of subjective factors when granting options, including the responsibilities of the individual officers and their expected future contribution to Pivotal. In the year ended June 30, 2000, the chief executive officer was granted options to purchase 25,000 common shares in the capital stock of Pivotal as an incentive for his continued commitment to the success of Pivotal and the ongoing enhancement of shareholder value. PERFORMANCE GRAPH The following graph shows a comparison of cumulative total shareholder return for Pivotal, the S&P 500 Index and the Application Software Index (as reported by Microsoft MoneyCentral Investor). The graph shows the value of $100 invested on August 5, 1999 in our common shares, the S&P 500 Index and the Application Software Index. [PERFORMANCE GRAPH OMITTED] <TABLE> <CAPTION> -------------------------------------------------------------------------- August 5, 1999 August 4, 2000 -------------------------------------------------------------------------- <S> <C> <C> Pivotal Corporation $100.00 $275.52 -------------------------------------------------------------------------- S&P 500 $100.00 $129.15 -------------------------------------------------------------------------- Application Software Index (as reported by Microsoft MoneyCentral Investor) $100.00 $111.36 ----------------------------------------------------------------------- </TABLE> -68-

72 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 September 1, 2000: - our chief executive officer; - all officers whose annual compensation was more than $100,000 during fiscal 2000; - each of our directors; - each shareholder that we know owns more than 5% of our outstanding common shares; and - all our directors and executive officers as a group. The principal address of each of the shareholders below is 224 West Esplanade, Suite 300, North Vancouver, BC, Canada V7M 3M6, except where another address is listed. <TABLE> <CAPTION> NUMBER OF SHARES PERCENT OF COMMON NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED SHARES OWNED -------------------------------------------- ------------------ ----------------- <S> <C> <C> Norman B. Francis(1)........................ 2,363,850 10.5% Keith R. Wales(2)........................... 1,125,800 5.0% Vincent D. Mifsud........................... 140,000 * Jeremy A. Jaech(3).......................... 115,556 * Robert J. Louis(4).......................... 2,173,258 9.7% Douglas J. Mackenzie(5)..................... 2,418,051 10.8% Donald A. Mattrick(6)....................... 15,000 * Glenn S. Hasen(7)........................... 246,526 1.1% Robert A. Runge(8).......................... 256,541 1.1% Ventures West Capital Limited............... 2,173,258 9.7% 280 -- 1285 West Pender Street </TABLE> -69-

73 <TABLE> <CAPTION> <S> <C> <C> Vancouver, BC V6E 4B1(9) Kleiner Perkins Caufield & Byers VI(10)........... 2,385,880 10.6% 2750 Sand Hill Road Menlo Park, CA 94025 Integral Capital Partners II, L.P.(11)............ 1,730,915 7.7% 2750 Sand Hill Road Menlo Park, CA 94025 All directors and executive officers as a group (11 persons)(12).................................. 8,925,473 40% </TABLE> ----------------- * Less than 1% (1) Includes: (a) 600,800 shares held of record by The Francis Family Trust, a family trust for the benefit of Mr. Francis and his three children; (b) 797,143 shares held of record by Boardwalk Ventures Inc., a holding company owned 50% by Mr. Francis and 50% by his spouse; and (c) 35,121 shares subject to options exercisable by Mr. Francis within 60 days of September 1, 2000. (2) Includes 428,572 shares held of record by Daybreak Software Inc., a holding company owned solely by Mr. Wales, of which Mr. Wales has sole voting power. Mr. Wales disclaims beneficial ownership of any shares held by his former spouse, Patricia Wales. (3) Includes 60,000 shares subject to options exercisable within 60 days of September 1, 2000. (4) Includes: (a) 506,720 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) 1,666,529 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. (5) Includes 2,385,880 shares held by Kleiner Perkins Caufield & Byers VI, an entity affiliated with Kleiner Perkins Caufield & Byers of which Mr. Mackenzie is a limited partner. Mr. Mackenzie disclaims beneficial ownership of such shares except to the extent of his pecuniary interest. Brook Byers, L. John Doerr, Vinod Khosla, E. Floyd Kvamme, Joseph Lacob, Bernie Lacroute and Jim Lally are the General Partners of KPCB VI Associates, the General Partner of Kleiner Perkins Caufield and Byers VI. (6) Includes 15,000 shares subject to an option exercisable within 60 days of September 1, 2000. (7) Includes 18,750 shares subject to an option exercisable within 60 days of September 1, 2000. Of the shares held by Mr. Hasen, up to 51,000 shares are currently subject to repurchase by Pivotal at the option exercise price paid by Mr. Hasen if Mr. Hasen's employment is terminated. (8) Includes 12,500 shares subject to an option exercisable within 60 days of September 1, 2000. Of the shares held by Mr. Runge, up to 93,750 shares are subject to repurchase by Pivotal at the option exercise price paid by Mr. Runge if Mr. Runge's employment is terminated. (9) Includes: (a) 506,729 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) 1,666,529 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. -70-

74 (10) Includes 2,385,880 shares held by Kleiner Perkins Caufield & Byers VI, an entity affiliated with Kleiner Perkins Caufield and Byers of which Mr. Mackenzie is a limited partner. Mr. Mackenzie disclaims beneficial ownership of such shares except to the extent of his pecuniary interest. Brook Byers, L. John Doerr, Vinod Khosla, E. Floyd Kvamme, Joseph Lacob, Bernie Lacroute and Jim Lally are the General Partners of KPCB VI Associates, the General Partner of Kleiner Perkins Caufield and Byers VI. (11) Includes: (a) 1,025,608 shares held of record by Integral Capital Partners II, L.P.; (b) 324,807 shares held of record by Integral Capital Partners International II C.V.; (c) 258,440 shares held of record by Integral Capital Partners IV, L.P.; (d) 1,210 shares held of record by Integral Capital Partners IV MS Side Fund, L.P.; (e) 119,440 shares held of record by Integral Capital Partners V, L.P.; and (f) 1,410 shares held of record by Integral Capital Partners V Side Fund, L.P. Roger McNamee, John Powell and Pamela Hagenah are the General Partners of Integral Capital Management II, L.P., the General Partner and Investment General Partner, respectively, of Integral Capital Partners II, L.P. and Integral Capital Partners International II C.V., and they are the Managing Directors of Integral Capital Management IV, LLC, the General Partner of Integral Capital Partners IV, L.P. Roger McNamee, John Powell, Pamela Hagenah, Glen Kacher and Neil Strumingher are the Managing Directors of Integral Capital Partners NBT, LLC, the General Partner of Integral Capital Partners IV MS Side Fund, L.P. and of Integral Capital Management V, LLC, the General Partner of Integral Capital Partners V, L.P. and of ICP Management V, LLC, the General Partner of Integral Capital Partners V Side Fund, L.P. (12) Includes 173,193 shares subject to options exercisable within 60 days of September 1, 2000. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. 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 <TABLE> <CAPTION> Page <S> <C> Independent Auditor's Report.............................. 44 Consolidated Balance Sheets............................... 45 Consolidated Statements of Operations..................... 46 Consolidated Statements of Shareholders' Equity (Deficit). 47 Consolidated Statements of Cash Flows..................... 48 Notes to Consolidated Financial Statements................ 49 </TABLE> 2. Index to Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts (b) Reports on Form 8-K On July 11, 2000, Pivotal filed a current report on Form 8-K, as amended by Form 8-K on September 11, 2000, announcing the acquisition of all of the issued and outstanding shares of Simba Technologies Inc. -71-

75 On June 19, 2000, Pivotal filed a current report on Form 8-K, as amended by Form 8-K/A on August 16, 2000, announcing the acquisition of all of the issued and outstanding shares of Exactium, Ltd. On January 25, 2000, Pivotal filed a current report on Form 8-K announcing the acquisition of all of the issued and outstanding shares of Transitif S.A. (c) Exhibits <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ----------- ----------- <S> <C> 2.1* 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** 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*** Share Purchase Agreement among Pivotal and David Pritchard, Kirk Herrington, Michael Satterfield, Calvin Mah, VW B.C. Technology Investment Fund, LP, Venrock Associates, Venrock Associates II, LP, Working Ventures Canadian Fund Inc., Bank of Montreal Capital Corporation, Sussex Capital Inc. and the Other Shareholders of Simba Technologies Inc. concerning all of the Shares of Simba Technologies Inc. dated May 29, 2000 3.2+ Memorandum and Articles 4.1+ Specimen of common share certificate 4.2+ Registration Rights (included in Exhibit 10.15) 4.3** Registration Rights Agreement dated June 2, 2000 (included in Exhibit 2.2) 4.4*** Registration Rights Agreement dated June 26, 2000 (included in Exhibit 2.3) 10.1+ Amended and Restated Incentive Stock Option Plan dated as of January 28, 1999 10.2+ Form of Amended and Restated Incentive Stock Option Plan effective as of August 10, 1999 10.3+ Employee Share Purchase Plan 10.4+ Lease dated as of July 18, 1997 between Sodican (B.C.) Inc. and Pivotal for premises located in North Vancouver, B.C. 10.5+ Lease dated as of May 26, 1998 between Novo Esplanade Ltd. and Pivotal for premises located in North Vancouver, B.C. 10.6+ Lease(1) dated as of December 14, 1998 between B.C. Rail Ltd. and Pivotal for premises located in North Vancouver, B.C. 10.7+ Lease(2) dated as of December 14, 1998, between B.C. Rail Ltd. and Pivotal with respect to premises located in North Vancouver, B.C. 10.8+ Lease dated as of December 11, 1998 between Yarrow Bay Office III Limited Partnership and Pivotal with respect to premises located in Kirkland, Washington 10.9+ Lease dated as of March 12, 1999 between Erachange Limited and Pivotal for premises located in Hemel Hempstead, Hertfordshire, England 10.10+ Lease dated as of April 19, 1999 between Massachusetts Mutual Life Insurance Company and Pivotal for premises located in Des Plaines, Illinois #10.11+ Letter agreement dated November 21, 1997 between Pivotal and Robert A. Runge granting an option to purchase 250,000 common shares </TABLE> -72-

76 <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ----------- ----------- <S> <C> #10.12+ Letter agreement dated November 2, 1997 between Pivotal and Glenn S. Hasen granting an option to purchase 136,000 common shares 10.13+ Class F Preferred Share Subscription and Purchase Agreement dated January 15, 1999, with respect to Class F Preferred Shares 10.14+ Shareholders' Agreement dated January 15, 1999 10.15+ Investors' Rights Agreement dated January 15, 1999 10.16+ Form of Share Purchase Agreement with respect to the issuance of Class B common shares 10.17+ Form of Share Purchase Agreement with respect to the issuance of common shares in exchange for Class B common shares 10.18+ Form of Lock-up Agreement 10.19+ Canadian Imperial Bank of Commerce $2,000,000 Committed Installment Loan dated March 18, 1998 10.20+ Canadian Imperial Bank of Commerce $3,000,000 Operating Line of Credit dated March 18, 1998 10.21+ Security Agreement with Canadian Imperial Bank of Commerce dated for reference April 15, 1998 10.22+ Contract Relative to Special Security under the Bank Act between Canadian Imperial Bank of Commerce and Pivotal dated April 30, 1998 10.23+ Canadian Imperial Bank of Commerce Schedule -- Standard Credit Terms dated March 18, 1998 10.24+ Canadian Imperial Bank of Commerce Schedule -- Standard Credit Terms dated March 18, 1998 10.25+ Form of Indemnity Agreement between Pivotal and directors and officers of Pivotal 10.26 Assignment agreement dated July 12, 2000 between Pivotal and MetaCreations International Limited for premises located in Dublin, Republic of Ireland; Sub-Lease dated September 22, 1999 between The H.W. Wilson Company Inc. and MetaCreations International Limited for premises located in Dublin, Republic of Ireland 10.27 Lease dated April 14, 2000 among Deramore Holdings Limited(1), Pivotal Corporation (NI) Limited (2) and Pivotal for premises located in Belfast, Northern Ireland 10.28 Lease dated December 4, 1997 by and between EOP-Lakeside Office, L.L.C. and Exactium, Inc. #10.29 Employment Agreement between Vince Mifsud and Pivotal dated November 10, 1998 10.30++ Exactium Ltd. 1999 Stock Option Plan 10.31+++ Simba Technologies Incentive Stock Option Plan, as amended 13.1 Annual Report to Shareholders 21.1 Subsidiaries of Pivotal 23.1 Consent of Deloitte & Touche LLP 24.1 Powers of Attorney (included on signature page) 27.1 Financial Data Schedule 99.1 Notice of Meeting and Management Information and Proxy Circular for the Annual General Meeting to be held on Wednesday, October 25, 2000 </TABLE> ------------------ -73-

77 # Indicates management contract. * Incorporated by reference to Pivotal's Form 8-K filed on January 25, 2000. ** Incorporated by reference to Pivotal's Form 8-K filed on June 19, 2000. *** Incorporated by reference to Pivotal's Form 8-K filed on July 11, 2000. + Incorporated by reference to Pivotal's Registration Statement on Form F-1 (No. 333-82871). ++ Incorporated by reference to Pivotal's Registration Statement on Form S-8 (No. 333-39922). +++ Incorporated by reference to Pivotal's Registration Statement on Form S-8 (No. 333-42460). -74-

78 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 September 28, 2000. PIVOTAL CORPORATION (Registrant) By: /s/ Norman B. Francis --------------------------------------- Norman B. Francis (President and Chief Executive Officer) -75-

79 POWERS OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Norman B. Francis and Vincent D. Mifsud, 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 Registration Statement, 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 Pivotal and in the capacities and on the date(s) indicated. <TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <S> <C> <C> President, Chief Executive September 28, 2000 /s/ Norman B. Francis Officer and Director -------------------------------------- Norman B. Francis Chief Financial Officer and September 28, 2000 /s/ Vincent D. Mifsud Executive Vice President -------------------------------------- Vincent D. Mifsud Chief Technical Officer and September 28, 2000 /s/ Keith R. Wales Director -------------------------------------- Keith R. Wales Director September 28, 2000 -------------------------------------- Jeremy A. Jaech /s/ Douglas J. Mackenzie Director September 28, 2000 -------------------------------------- Douglas J. Mackenzie /s/ Robert J. Louis Director September 28, 2000 -------------------------------------- Robert J. Louis /s/ Donald A. Mattrick Director September 28, 2000 -------------------------------------- Donald A. Mattrick </TABLE> -76-

80 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ----------- ----------- <S> <C> #10.12+ Letter agreement dated November 2, 1997 between Pivotal and Glenn S. Hasen granting an option to purchase 136,000 common shares 10.13+ Class F Preferred Share Subscription and Purchase Agreement dated January 15, 1999, with respect to Class F Preferred Shares 10.14+ Shareholders' Agreement dated January 15, 1999 10.15+ Investors' Rights Agreement dated January 15, 1999 10.16+ Form of Share Purchase Agreement with respect to the issuance of Class B common shares 10.17+ Form of Share Purchase Agreement with respect to the issuance of common shares in exchange for Class B common shares 10.18+ Form of Lock-up Agreement 10.19+ Canadian Imperial Bank of Commerce $2,000,000 Committed Installment Loan dated March 18, 1998 10.20+ Canadian Imperial Bank of Commerce $3,000,000 Operating Line of Credit dated March 18, 1998 10.21+ Security Agreement with Canadian Imperial Bank of Commerce dated for reference April 15, 1998 10.22+ Contract Relative to Special Security under the Bank Act between Canadian Imperial Bank of Commerce and Pivotal dated April 30, 1998 10.23+ Canadian Imperial Bank of Commerce Schedule -- Standard Credit Terms dated March 18, 1998 10.24+ Canadian Imperial Bank of Commerce Schedule -- Standard Credit Terms dated March 18, 1998 10.25+ Form of Indemnity Agreement between Pivotal and directors and officers of Pivotal 10.26 Assignment agreement dated July 12, 2000 between Pivotal and MetaCreations International Limited for premises located in Dublin, Republic of Ireland; Sub-Lease dated September 22, 1999 between The H.W. Wilson Company Inc. and MetaCreations International Limited for premises located in Dublin, Republic of Ireland 10.27 Lease dated April 14, 2000 among Deramore Holdings Limited(1), Pivotal Corporation (NI) Limited (2) and Pivotal for premises located in Belfast, Northern Ireland 10.28 Lease dated December 4, 1997 by and between EOP-Lakeside Office, L.L.C. and Exaction, Inc. #10.29 Employment Agreement between Vince Mifsud and Pivotal dated November 10, 1998 10.30++ Exactium Ltd. 1999 Stock Option Plan 10.31+++ Simba Technologies Incentive Stock Option Plan, as amended 13.1 Annual Report to Shareholders 21.1 Subsidiaries of Pivotal 23.1 Consent of Deloitte & Touche LLP 24.1 Powers of Attorney (included on signature page) 27.1 Financial Data Schedule 99.1 Notice of Meeting and Management Information and Proxy Circular for the Annual General Meeting to be held on Wednesday, October 25, 2000 </TABLE>

81 # Indicates management contract. * Incorporated by reference to Pivotal's Form 8-K filed on January 25, 2000. ** Incorporated by reference to Pivotal's Form 8-K filed on June 19, 2000. *** Incorporated by reference to Pivotal's Form 8-K filed on July 11, 2000. + Incorporated by reference to Pivotal's Registration Statement on Form F-1 (No. 333-82871). ++ Incorporated by reference to Pivotal's Registration Statement on Form S-8 (No. 333-39922). +++ Incorporated by reference to Pivotal's Registration Statement on Form S-8 (No. 333-42460).

1 EXHIBIT 10.26 DATED 12 JULY 2000 (1) METACREATIONS INTERNATIONAL LIMITED (2) PIVOTAL TECHNOLOGIES CORPORATION LIMITED -------------------------------------------------------------- ASSIGNMENT OF PART OF GROUND FLOOR, WILSON HOUSE, FENIAN STREET, DUBLIN 2 -------------------------------------------------------------- MATHESON ORMSBY PRENTICE 30 HERBERT STREET DUBLIN 2 IRELAND TEL +353 1 619 9000 FAX +353 1 619 9010

2 THIS ASSIGNMENT is made on 12 JULY 2000 between (1) METACREATIONS INTERNATIONAL LIMITED having its registered office at 2 Harbourmaster Place, Custom House Dock, Dublin 1 (hereinafter called the "Vendor" which expression shall where the context so admits or requires include it successors and assigns): (2) PIVOTAL TECHNOLOGIES CORPORATION LIMITED having its registered office at 30 Herbert Street (hereinafter called the "PURCHASER" which expression shall where the context so admits or requires include its successors and assigns) WHEREAS A. By Lease (the "LEASE") dated 22 September 1999 between (1) The HW Wilson Company Inc. and (2) The Vendor, the premises (the "PREMISES") described in the Schedule hereto were demised unto the Vendor for the period commencing on 22 August 1999 and expiring on 21 August 2001 (the "TERM") subject to the yearly rent of IEP76,420.00 (the "RENT") and to the covenants on the part of the tenant and conditions therein contained. B. The Vendor has agreed with the Purchaser for the sale to the Purchaser of the Premises for IEP25,500.00 NOW THIS ASSIGNMENT WITNESSETH 1. That in pursuance of the said agreement and in consideration of IEP25,500.00 (Twenty Five Thousand Five Hundred Irish Pounds) now paid by the Purchaser to the Vendor (the receipt of which the Vendor hereby acknowledges) the Vendor as beneficial owner hereby GRANTS AND ASSIGNS unto the Purchaser the Premises TO HOLD the same unto and to the use of the Purchaser for all the residue unexpired of the Term SUBJECT to the Rent and to the covenants on the part of the tenant and the conditions contained in the Lease. 2. The Purchaser hereby covenants with the Vendor to pay the Rent and observe and perform the covenants on the part of the tenant and conditions contained in the Lease and to indemnify and keep indemnified the Vendor against all actions, costs, claims and demands arising out of the non-payment of the Rent or any part thereof or the breach, non-observance or non-performance of the said covenants and conditions or any of them. IT IS HEREBY CERTIFIED 1. That the Premises is situate the City of Dublin. 2. That the consideration (other than rent) for the sale is wholly attributable to property which is not residential property and that the transaction effected by this instrument does not form part of a larger transaction or of a series of transactions in respect of which the amount or value or aggregate amount or value of the consideration (other than rent) which is attributable to property which is not residential property exceeds L50,000.00. 1

3 3. That Section 29 (Conveyance on Sale combined with Building Agreement for dwellinghouse/apartment) of the Stamp Duties Consolidation Act, 1999 does not apply to this instrument. IN WITNESS WHEREOF the parties have duly executed this Assignment on the date first written above. SCHEDULE ALL THAT part of the ground floor of Wilson House, Fenian Street, Dublin 2 as is more particularly described in and demised by a supplemental lease (the "SUPPLEMENTAL LEASE") dated 11 June 1996(1) Dwale Limited (2) The HW Wilson Company Inc. and coloured yellow on the map annexed thereto for identification purposes only together with the right to the exclusive use of two car parking spaces as designated from time to time by the landlord therein for use by the tenant therein within the curtilage of Wilson House together with all necessary rights of access thereto in common with all others entitled to such access and where appropriate with the benefit of the rights mentioned in the lease (the "HEAD LEASE") dated 29 October 1992(1) Dwale Limited(2) The HW Wilson Company Inc. and the Supplemental Lease and where appropriate subject to the rights of others mentioned in the Head Lease. 2

4 SIGNED FOR AND ON BEHALF of METACREATIONS INTERNATIONAL LIMITED by its lawfully appointed Attorney LISA DOYLE in the presence of: /s/ Lisa Doyle PRESENT WHEN THE COMMON SEAL of PIVOTAL TECHNOLOGIES CORPORATION LIMITED was affixed hereto: _____________________________ Director _____________________________ For Matsack Trust Limited Secretary 3

5 DATED 12 JULY 2000 (1) METACREATIONS INTERNATIONAL LIMITED (2) PIVOTAL TECHNOLOGIES CORPORATION LIMITED --------------------------------------- ASSIGNMENT OF GROUND FLOOR, WILSON HOUSE, FENIAN STREET, DUBLIN 2 --------------------------------------- MATHESON ORMSBY PRENTICE 30 HERBERT STREET DUBLIN 2 IRELAND TEL + 353 1 619 9000 FAX + 353 1 619 9010

6 THIS SUB-LEASE dated the 22nd day September 1999 BETWEEN (1) THE H. W. WILSON COMPANY INC. having its principal office at 950 University Avenue, Bronx, New York 10452, USA and with an address at Wilson House, Fenian Street in the City of Dublin (hereinafter called "the Landlord" which expression shall include whoever for the time being owns the interest in the property which gives the right to possession of it when this lease ends) AND (2) METACREATIONS INTERNATIONAL LIMITED having its registered office at 2 Harbourmaster Place, Custom House Dock, Dublin 1 (hereinafter referred to as "the Tenant" which expression shall include whoever for the time being is entitled to the property under this lease) 1 In this lease: 1.1 Whenever there is more than one tenant, all their obligations can be enforced against all of the tenants jointly and against each individually; 1.2 A reference to an Act of the Oireachtas refers to that Act as it applies at the date of this lease and any later amendment or re-enactment of it; 1.3 "Interest" means the rate of interest defined as the prescribed rate in the Head Lease as hereinafter defined; 1.4 Any obligation to pay money refers to a sum exclusive of value added tax ("VAT") and any VAT charged on it is payable in addition;

7 2 "The Head Lease" means the lease dated 29th of October 1992 and made between Dwale Limited (the "Superior Landlord") of the one part and the Landlord of the other part together with "Supplemental Lease" (herein after separately called the Supplemental Lease) dated 11th June, 1996 made between the same parties. 3 In exchange for the obligations undertaken by the Tenant:- 3.1 The Landlord lets the property described below ("the Property") to the Tenant for the period commencing on the 22nd day of August 1999 and expiring on the 21st day of August 2001 (subject to the option to renew contained in clause 6.1 hereof) on the Tenant agreeing to pay (pound)76,420 a year ("the Basic Rent") and as further rent ("insurance rent") the entire of the sums the Landlord spends each year during the lease period as required by the Supplemental Lease to reimburse the Superior Landlord for the cost of insuring the Property. 3.2 The Property is that part of the Ground Floor of Wilson House, Fenian Street, Dublin 2 as is more particularly described in and demised by the Supplemental Lease and coloured yellow on the map annexed hereto for identification purposes only together with the right to the exclusive use of two carparking spaces as designated from time to time by the Landlord for use by the Tenant within the cartilage of Wilson House together with all necessary rights of access thereto in common with all others entitled to such access and where appropriate with the benefit of the rights mentioned in the Head Lease and where appropriate subject to the rights of others mentioned in the Head Lease. 4 The Tenant agrees with the Landlord:- 2

8 4.1 To pay the Basic Rent by equal quarterly instalments in advance on the days appointed for payment of rent under the Head Lease in each year throughout the lease period (the first and last payments being proportionate sums if appropriate, the first payment being made on the date of this lease); 4.2 To pay the insurance rent on the next quarter day after being notified of the amount of it. 4.3 To pay the entire of the service charge payable by the Landlord under the Supplemental Lease. Each instalment is due as soon as the Landlord gives the Tenant notice, accompanied by reasonable evidence of the amount payable under the Supplemental Lease, provided always that it is hereby agreed and declared by between the parties hereto that the Tenant shall not be obliged to contribute towards the replacement or major repair of the exterior fabric of the building or the plant and machinery and the Tenant's liability hereunder shall be reduced accordingly where appropriate. 4.4 Not to reduce any payment of rent by making any deduction from it or by setting any sum off against it. 4.5 To pay and indemnify the Landlord against all existing and future rates, taxes, duties, charges, assessments, impositions and outgoings whatsoever (whether parliamentary, parochial, local or of any other description and whether or not of a capital or non-recurring nature or of a wholly novel character) which now are or may at any time during the term be charged, levied, assessed or imposed upon or payable in respect of the Property (including the car spaces) or upon the owner or 3

9 occupier of them (excluding any tax payable by the Landlord occasioned by any disposition of or dealing with the reversion of this Lease or any other Landlord's Capital Tax). 4.6 To pay Interest on any rent or other sum payable hereunder which is paid more than fourteen days after it falls due. 4.7 To comply with the obligations, so far as they relate to the Property, undertaken in the Head Lease by the person named in it as tenant, except the obligation to pay rent. 4.8 Not at any time to assign transfer underlet or part with or share the possession or occupation of the Property or any part thereof or suffer any person to occupy the Property or any part thereof as a licensee without the prior consent in writing of the Landlord and (without prejudice to the provisions of Clause 4.7 hereof and for the purposes of clarification only) by the Superior Landlord. 4.9 To pay the stamp duty payable on this lease and counterpart and any VAT payable on the granting of this lease. 4.10 The Tenant shall not knowingly do, omit, suffer or permit in relation to the Property any act or thing which would or might cause the Landlord to be in breach of the Head Lease or which if done, omitted or suffered or permitted by the Landlord would or might constitute a breach of the covenants on the part of the tenant and the conditions contained in the head Lease. 4

10 4.11 The Tenant shall permit the Landlord and all persons authorised by the Landlord (including agents, professional advisers, contractors, workmen and others) upon reasonable notice (except in the case of emergency) to enter upon the Property for any purpose which is necessary to enable the Landlord to comply with the covenants and the conditions contained in the Head Lease insofar as the Tenant does not expressly covenant to observe and perform the same or insofar as they relate to premises not hereby demised but otherwise contained in the Head Lease and the Landlord in so doing shall exercise all reasonable care. 5 The Landlord agrees with the Tenant:- 5.1 So long as the Tenant does not contravene any term of this lease to allow the Tenant to exclusively possess and use the Property without interference from the Landlord, anyone who derives title from, or Trustee for, the Landlord or anyone from whom the Landlord derives title. 5.2 To comply with its obligations where appropriate and pay the rents and other sums payable under the Head Lease promptly. 5.3 To take all reasonable steps to enforce promptly the obligations undertaken by the Superior Landlord in the Head Lease including without prejudice to the generality of the foregoing to use all reasonable endeavours to procure the provision of the services by the Superior Landlord under the Head Lease and to procure evidence of the calculation of the Service Charge when requested. 5

11 6 The parties agree: 6.1 The Tenant, if it wishes to remain in occupation of the Property for a further one year at the expiration of the term herein, must, not less than six months prior to the expiration of the term herein, serve a notice in writing on the Landlord expressing its wish to remain in the Property for a further year. If the Landlord is agreeable, the Landlord shall notify the Tenant of its agreement to allow the Tenant to remain in occupation of the Property for one year after the expiration of the term subject to the same terms, covenants and conditions contained in this Sub-Lease save the option to renew herein. If the Landlord is not agreeable then the Landlord shall notify the Tenant that it is not prepared to allow the Tenant to remain in occupation after the expiration of the term herein and in such event the Tenant shall vacate the Property by the date of expiry of the term herein and in accordance with its obligations hereunder so to do. 6.2 The Landlord is entitled to forfeit this Lease by entering any part of the Property whenever the Tenant:- 6.2.1 is twenty one days late in paying any rent even if it was not formally demanded; provided that Landlord has given Tenant at least five days written notice with an opportunity to cure; 6.2.2 has not complied with any obligation in this Lease, provided that Landlord has given Tenant at least five days written notice with an opportunity to cure; 6.2.3 when the Tenant being an individual is adjudicated bankrupt or compounds or arranges with its creditors 6

12 6.2.4 when a company goes into liquidation unless that is solely for the purpose of amalgamation or reconstruction when solvent or it permits or suffers a receiver to be appointed over its assets. The forfeiture of this Lease does not cancel any outstanding obligation which the Tenant owes the Landlord. 6.3 During any period not exceeding three years when all or part of the Property cannot be put to its accustomed use because of damage to the Property or the Building or to its essential accesses from an insured risk as defined in the Head Lease the Basic Rent is to be cancelled or reduced as appropriate unless or to the extent that the insurers do not pay under the policy because of something done or not done by the Tenant. Any dispute whether and how this clause applies is to be referred to arbitration. 6.4 Any disputed matter referred to arbitration under this lease is to be decided by arbitration under the Arbitration Acts 1954 to 1980 by a single arbitrator appointed by the parties to the dispute. If they do not agree on that appointment the then President of the Incorporated Law Society of Ireland may appoint the arbitrator at the request of any party. 6.5 Any notices requiring to be served on the Tenant hereunder shall be validly served if left addressed or sent by post to the Tenant (or if there shall be more than one of them to any one or more of them: at the Property or at the last known address or addresses of the Tenant or any of them in the Republic of Ireland and any notice required to be served on the Landlord shall be validly served if left or posted to the registered office of the Landlord and any such notice may be served by the 7

13 Landlord's servants and agents and be served on the Tenant's servants or agents. IN WITNESS whereof the parties hereto have caused their Common Seals to be affixed the day and year first herein written. 8

14 PRESENT when the Common Seal of the ) Landlord was affixed hereto:- ) /s/ WILLIAM V. JOYCE, V.P. ----------------------------------- William V. Joyce, V.P. PRESENT when the Common Seal of the ) Tenant was affixed hereto:- ) /s/ TERRY KINNINGER ----------------------------------- Terry Kinninger, Director /s/ JOHN HARTNETT ----------------------------------- John Hartnett, Director 9

15 [GROUND FLOOR PLAN]

16 Dated the 22nd day of September 1999 THE H. W. WILSON COMPANY INC. One Part - AND - METACREATIONS INTERNATIONAL LIMITED Other Part SUB-LEASE ARTHUR COX Solicitors Earlsfort Centre Earlsfort Terrace Dublin 2

1 EXHIBIT 10.27 Dated the ___ day of __________ 2000 DERAMORE HOLDINGS LIMITED (1) and PIVOTAL CORPORATION (NI) LIMITED (2) and PIVOTAL CORPORATION (3) LEASE of Third Floor, Capital House, 3 Upper Queen Street, Belfast. KEARNEY SEFTON Solicitors, 12 Brunswick Street, BELFAST, BT2 7GE

2 LEASE: Dated day of 2000 <TABLE> <S> <C> <C> <C> 1. PARTICULARS 1.1.1 The Landlord DERAMORE HOLDINGS LIMITED having its registered office at 160 Brompton Road, Knightsbridge, London SW3 1RP 1.1.2 The Tenant PIVOTAL CORPORATION (NI) LIMITED having its registered office at 50 Bedford Street, Belfast, BT2 7FU 1.1.3 The Guarantor PIVOTAL CORPORATION having its registered office at 224 West Esplanade, Suite 300 North, Vancouver, British Columbia, VYM 3M6, Canada 1.2 The Building The building (including the car park and yard to the rear thereof) known as Capital House, 3 Upper Queen Street, Belfast shown (for the purposes of identification only) edged [blue] on the Plan 1.3 The Premises The third floor of the Building as the same is more particularly defined in the First Schedule 1.4 Total Lettable Area 9,648 square feet of the Premises 1.5 Term 10 years from and including the 17th day of April 2000 subject to clause 10.16 1.6.1 First Rent Commencement 17th day of May 2000 Date </TABLE> -1-

3 <TABLE> <S> <C> <C> <C> 1.6.2 Second Rent Commencement 17th day of October 2000 Date 1.7 Initial Rent Pound Sterling 115,776.00 per annum. 1.8 Review Date 17th day of April 2005 1.9 Interest Rate 4% per cent per annum above the Base Rate of the Bank of Ireland (or some other bank nominated in writing from time to time by the Landlord) 1.10 Permitted Hours 7am to 7pm Monday to Friday inclusive 1.11 Decorating Year 2005 1.12 Service Charge the amount referred to in clause 7.4 1.13 Insurance Rent a reasonable proportion (as determined by the Surveyor) of the sums which the Landlord shall from time to time reasonably pay by way of premiums for insuring the Building against the risks set out in clauses 8.3(a), (b) and (d), (b) all of any increased premium payable by any act or omission of the Tenant or by the user carried out by the Tenant on the Premises, and (c) all the reasonable premium that the Landlord shall from time to time pay (or where such insurance includes other premises, a reasonable proportion of such premium to be determined by the </TABLE> -2-

4 <TABLE> <S> <C> <C> <C> Surveyor acting as an expert and not as an arbitrator) for insuring against the loss of Rent and Service Charge in accordance with clause 8.3(c). </TABLE> 2. DEFINITIONS 2.1 The terms defined in this clause and in the Particulars shall for all purposes of this Lease have the meanings specified. 2.2 'the Plan' means the plan and drawings referred to in the First Schedule and annexed to this Lease. 2.3 'Rent' means the Initial Rent and the rents ascertained in accordance with the Fourth Schedule and such term includes neither the Service Charge nor the Insurance Rent but the term 'rents' includes Rent, the Service Charge, and the Insurance Rent. 2.4 'Pipes' means pipes, sewers, drains, mains, ducts, conduits, gutters, watercourses, wire cables, channels, subways, flues and all other conducting media, including any fixings, louvres, cowls and other covers. 2.5 'the Services' mean the services set out in the Sixth Schedule. 2.6 'the Annual Expenditure' means: (a) all reasonable costs expenses and outgoings whatsoever reasonably incurred by the Landlord in providing all or any of the Services; and (b) all sums reasonably incurred by the Landlord in relation to the items set out in the Seventh Schedule; and any VAT payable thereon ('the Costs') (including any of the Costs incurred by a third party such as (without prejudice to the generality of the foregoing) the Surveyor or the managing agents where the Costs have been incurred for and on behalf of the Landlord and where the Landlord is liable to re-imburse the third party for the Costs) Provided that the Annual Expenditure shall not include any costs for the Building with respect to the employment of security staff at the main entrance to the Building outside the hours from 6.30a.m. to 7.30p.m. -3-

5 Monday to Friday inclusive save where the Landlord reasonably incurs such security costs outside the aforesaid hours acting in accordance with the principles of good estate management. 2.7 'the Common Parts' mean the entrance halls, landings, lift shafts, staircases, passages, service yard, car park and any other areas which are from time to time during the Term provided by the Landlord for common use and enjoyment by the tenants and occupiers of the Building and all persons expressly or by implication authorised by them. 2.8 'the Retained Parts' mean all parts of the Building not let or intended to be let to a tenant including (but without prejudice to the generality of the foregoing): (a) the Common Parts; (b) office accommodation for security and any ancillary staff; (c) all Pipes in on or serving the Building except any that are within and solely serve premises let or intended to be let; (d) such parts of the Building including (again without prejudice to the generality of the foregoing) those parts of the walls foundations and roofs not let or intended to be let to a tenant; (e) the windows and window frames serving the Premises. 2.9 'Interest' means interest during the period from the date on which the payment is due to the date of payment, both before and after any judgment, at the Interest Rate then prevailing or should the Base Rate referred to in clause 1.9 cease to exist, such other rate of interest as is most closely comparable with the Interest Rate to be agreed between the parties or in default of agreement to be determined by the Accountant acting as an expert and not as an arbitrator. 2.10 'the Planning Acts' means the Planning (Northern Ireland) Order 1991 and all statutes regulations and orders included by virtue of clause 3.14. 2.11 'Insured Risk' means any risk against which the Landlord shall at the time of the damage or destruction in question have effected insurance. -4-

6 2.12 'the Office Covenants' mean the covenants set out in the Fifth Schedule. 2.13 'the Surveyor' means any suitably qualified person or firm appointed by or acting for the Landlord (including an employee of the Landlord or a Group Company and including the person or firm appointed by the Landlord to collect the rents and manage the Building) to perform the function of a surveyor for any purpose of this Lease. 2.14 'the Accountant' means any suitably qualified person or firm appointed by or acting for the Landlord (including an employee of the Landlord or a Group Company and including the person or firm appointed by the Landlord to collect the rents and manage the Building) to perform the function of an accountant for the purpose of this Lease. 2.15 'Adjoining Property' means any neighbouring or adjoining land or property in which the Landlord or a Group Company has a freehold or leasehold interest or in which during the Term the Landlord (or a Group Company) shall have acquired a freehold or leasehold interest. 2.16 'the Other Buildings' shall mean all buildings now or at any time during the Term erected on the Adjoining Property. 2.17 'the 1996 Order' means the Business Tenancies (Northern Ireland) Order 1996. 2.18 'Group Company' means a company that is a member of the same Group as the Landlord within the meaning of article 31 of the 1996 Order. 3. INTERPRETATION 3.1 The expressions 'the Landlord' and 'the Tenant' wherever the context so admits include their reactive successors in title. 3.2 Where the Landlord the Tenant or the Guarantor for the time being are two or more individuals the terms 'the Landlord', 'the Tenant' and 'the Guarantor' include the plural number and obligations expressed or implied to be made by or with such party are deemed to be made by or with such individuals jointly and severally. -5-

7 3.3 Words importing the one gender include all other genders and words importing the singular include the plural and vice versa. 3.4 The expression 'the Guarantor' includes any person who enters into covenants with the Landlord pursuant to clause 5.21. 3.5 The expression 'the Term' in relation to clause 9 includes any period of holding over or extension or continuance thereof whether by statute or common law and elsewhere in this Lease the said expression includes such period where the context so admits. 3.6 References to 'the last year of the Term' include the last year of the Term if the same shall determine otherwise than by effluxion of time and to 'the expiration of the Term' include such sooner determination of the Term 3.7 References to any right of the Landlord to have access to the Premises shall be construed as extending to all persons properly authorised by the Landlord (including agents, professional advisers, contractors, workmen and others). 3.8 References to 'the Premises' in the absence of any provision to the contrary include any part thereof. 3.9 Any covenant by the Tenant not to do an act or thing shall be deemed to include an obligation not to permit such act or thing to be done and to use all reasonable endeavours to prevent such act or thing being done by a third party. 3.10 Whenever the consent or approval of the Landlord is required or requested in relation to this Lease, such provisions shall be construed as also requiring the consent or approval of any mortgagee of the Premises where the same shall be required except that nothing in this Lease shall be construed as implying that any obligation is imposed upon any mortgagee not unreasonably to refuse any such consent. 3.11 References to 'consent of the Landlord' or words to similar effect mean a consent in writing signed by or on behalf of the Landlord and to 'approved' and 'authorised' or words to similar effect mean (as the case may be) approved or authorised in writing by or on behalf of the Landlord. -6-

8 3.12 The terms 'the parties' or 'party' shall mean the Landlord and/or the Tenant but except where there is an express indication to the contrary shall exclude the Guarantor. 3.13 'Development' has the meaning given by Article 11 of the Planning (Northern Ireland) Order 1991. 3.14 Any reference to a specific statute includes any statute which that statute has directly or indirectly replaced (with or without modification) and any statutory extension or modification or re-enactment of such statute and any regulations or orders made thereunder and any general reference to 'statute' or 'statutes' includes any regulations or orders made thereunder. 3.15 The paragraph headings do not form part of this Lease and shall not be taken into account in its construction or interpretation. 4. DEMISE The Landlord DEMISES to the Tenant the Premises TOGETHER WITH the rights specified in the Second Schedule but EXCEPTING AND RESERVING to the Landlord the rights specified in the Third Schedule TO HOLD the Premises to the Tenant for the Term SUBJECT TO all rights easements privileges restrictions covenants and stipulations of whatever nature affecting the Premises YIELDING AND PAYING to the Landlord: (a) the Rent, payable without any deduction by equal quarterly payments in advance on the first days of February, May, August and November in every year, and proportionately for any period of less than a year, a proportionate sum in respect of the period from and including the Second Rent Commencement Date to and including the day before the quarter day next thereafter to be paid on the Second Rent Commencement Date Provided Always that the Tenant shall pay an abated Rent at the rate of Pounds Sterling 54,996.00 per annum for the period from and including the First Rent Commencement Date to the day immediately prior to the Second Rent Commencement Date, such abated Rent to be payable without any deduction by equal quarterly payments in advance on the aforesaid quarter days, and proportionately for any period of less than a year, the first such payment being a proportionate sum in respect of the period from and including the First Rent Commencement Date to and including the day -7-

9 before the quarter day next thereafter to be paid on the First Rent Commencement Date hereof, and (b) by way of further rent, the Service Charge payable on demand in accordance with clause 7 and the Insurance Rent payable on demand in accordance with clause 8. 5. The Tenant COVENANTS with the Landlord: Rent 5.1 To pay the rents on the days and in the manner set out in clause 4. Outgoings and VAT 5.2 To pay and to indemnify the Landlord against: (a) all rates, taxes, assessments, duties, charges, impositions and outgoings which are now or during the Term shall be, charged, assessed or imposed upon the Premises or upon the owner or occupier of them save taxes arising from the receipt of rents or from dealings with the Landlord's reversionary interest in the Premises or the Building; (b) Value Added Tax (or any tax of a similar nature that may be substituted for it, or levied in addition to it) chargeable in respect of any payment made by the Tenant under any of the provisions of or in connection with this Lease, or paid by the Landlord on any payment made by the Landlord where the Tenant agrees in this Lease to reimburse the Landlord for such payment. Electricity, Gas and Other Services Consumed 5.3 To pay to the suppliers and to indemnify the Landlord against all charges for electricity, gas and other services consumed or used at or in relation to the Premises (including meter rents) where a separate supply is provided for the Premises. Repair 5.4 To repair and keep in repair the Premises (damage caused by an inherent or latent structural defect in the Building or Insured Risk -8-

10 excepted other than to the extent that the insurance monies are irrecoverable in consequence of any act or default of the Tenant or anyone at the Premises expressly or by implication with the Tenant's authority) and to replace from time to time the Landlord's fixtures, fittings and appurtenances in the Premises which may be or become beyond repair at any time during or at the expiration of the Term. Alterations and Additions 5.5.1 Not to: (a) commit or permit waste, on or at the Premises; (b) build, erect, construct or place any new or additional building or structure on the Premises, including (without prejudice to the generality of the foregoing) any hut, shed, garage, cycle shelter, store, caravan, house on wheels, or any temporary or moveable building or structure; (c) make any alterations, additions or improvements to the Premises provided that: (i) internal non-structural alterations by the Tenant in the Premises of a design and of materials approved in writing by the Landlord (such approval not to be unreasonably withheld or delayed) shall not be deemed to be a breach of this covenant; and (ii) the Tenant may with the consent of the Landlord (such consent not to be unreasonably withheld or delayed) install and alter internal partitions from time to time and install new partitions. 5.5.2 To remove any additional buildings, additions, alterations or improvements made to the Premises at the expiration of the Term if so requested by the Landlord and to make good any part or parts of the Premises which may be damaged by such removal. 5.5.3 Not to cut injure or remove nor, except in accordance with clause 5.5.4, make any connection with the Pipes serving the Premises either exclusively or in conjunction with other premises. -9-

11 5.5.4 To make connection with those Pipes that exclusively serve the Premises only in accordance with plans and specifications approved by the Landlord (such approval not to be unreasonably withheld or delayed). Statutory Obligations 5.6.1 At the Tenant's own expense, to execute all works and provide and maintain all arrangements upon or in respect of the Premises or the use to which the Premises are being put that are required (whether by the lessor, the lessee or the occupier) in order to comply with the requirements of any statute (already or in the future to be passed) or any government department, local authority, other public or competent authority, or court of competent jurisdiction. 5.6.2 Not to do in or near the Premises any act or thing by reason of which the Landlord may under any enactment incur, have imposed upon it, or become liable to pay any penalty, damages, compensation, costs, charges or expenses. 5.6.3 Without prejudice to the generality of the foregoing, to comply in all respects with the provisions of any statutes and any other obligations imposed by law or by any byelaws applicable to the Premises or in regard to carrying on the trade or business for the time being carried on by the Tenant on the Premises. Access of Landlord and Notice to Repair 5.7.1 To permit the Landlord: (a) to enter upon the Premises for the purpose of ascertaining that the covenants and conditions of this Lease have been observed and performed; (b) to view (and to open up floors and ceiling where the same is reasonably required in order to view) the state of repair and condition of the Premises; and (c) to give to the Tenant (or leave upon the Premises) a notice specifying any repairs, cleaning, maintenance and painting that the Tenant has failed to execute in breach of the terms hereof and to request the Tenant forthwith to execute the same including the making good of the said opening-up (if any) - 10 -

12 provided that any such opening-up shall be made good by and at the cost of the Landlord where the same reveals no breaches of the terms hereof which justified such opening up. 5.7.2 Forthwith to repair, cleanse, maintain and paint the Premises as required by such notice. 5.7.3 If within one month of the service of such a notice, the Tenant shall not have commenced and be proceeding diligently with the execution of the work referred to in the notice, or shall fail to complete the work within a reasonable time or if in the Landlord's Surveyor's reasonable opinion the Tenant is unlikely to have completed the work by the date upon which the work has to be completed to permit the Landlord to enter the Premises to execute such work as may be necessary to comply with the notice, and to pay to the Landlord the cost of so doing and all expenses incurred by the Landlord (including legal. costs and surveyor's fees) within fourteen days of a written demand. Alienation 5.8.1 Not to hold on trust for another, part with or share the possession or occupation of the whole of the Premises except as permitted under clause 5.8.2 hereof. 5.8.2 Not to assign, underlet (save as permitted under clause 5.8.4 hereof), charge, hold on trust for another, part with nor share possession or occupation of part only of the Premises save that the Tenant may share occupation of the Premises or part or parts thereof with other group companies of the Tenant as defined by Article 31 of the Business Tenancies (Northern Ireland) Order 1996. 5.8.3 Not to assign nor charge the whole of the Premises without the prior written consent of the Landlord, such consent not to be unreasonably withheld or delayed, provided that the proposed assignee is of good financial standing and proved to be such to the reasonable satisfaction of the Landlord 5.8.4 Not to underlet the whole or part of the Premises without the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed) provided that the proposed sub-tenant is of good financial standing and proved to be such to the reasonable satisfaction of the Landlord PROVIDED ALWAYS that each such underletting of part of the Premises must comprise the entire part of the third floor -11-

13 hereby demised which is located on either side of the lifts/main stairs/toilet area on the said floors. 5.8.5 Prior to any permitted assignment, to procure that the assignee enters into direct covenants with the Landlord to perform and observe all the Tenant's covenants and all other provisions during the residue of the Term. 5.8.6 Prior to any permitted underletting, to procure that the underlessee enters into direct covenants with the Landlord as follows: (a) to observe and perform all the Tenant's covenants and all other provisions of this Lease (other than the payment of rents) during the residue of the Term; (b) an unqualified covenant by the underlessee that the underlessee will not assign, underlet, charge, hold on trust for another, part with nor share the possession or occupation of part only of the underlet premises or underlet, charge, hold on trust for another, part with nor share the possession or occupation of the whole of the underlet premises; and (c) a covenant by the underlessee that the underlessee will not assign the whole of the premises demised by the said underlessee without obtaining the prior written consent (which shall not be unreasonably withheld) of the Landlord under this Lease. 5.8.7 That each and every permitted underlease shall be granted without any fine or premium, at a rent equal to the then open market rental value of the Premises or the proportionate part thereof where part of the Premises is underlet (such rental value to be assessed in accordance with the provisions of the Fourth Schedule of this Lease) or if greater the Rent then being paid or the proportionate part of the Rent then being paid where only part of the Premises is underlet such rent being payable in advance on the days on which Rent is payable under this Lease, and shall contain provisions approved by the Landlord: (a) for the upwards only review of the rent thereby reserved on the basis and on the dates on which the rent is to be reviewed in this Lease; -12-

14 (b) prohibiting the underlessee from doing or allowing any act or thing in relation to the underlet premises inconsistent with or in breach of the provisions of this Lease; (c) a condition for re-entry by the underlessor on breach of any covenant by the underlessee, and (d) an absolute covenant against underletting and the same restrictions on assignment charging holding on trust for another parting with or sharing with another possession occupation of the underlet premises and the same provisions for direct covenants and registration as in this Lease. 5.8.8 To enforce the performance and observance by every such underlessee of the provisions of the underlease and not at any time either expressly or by implication to waive any breach of the covenants or conditions on the part of any underlessee or assignee of any underlease nor (without the consent of the Landlord such consent not to be unreasonably withheld) vary the terms or accept a surrender of any permitted underlease. Nuisance etc and Residential Restrictions 5.9.1 Not to do (or permit or suffer to remain upon the Premises) anything which may be or become or cause a nuisance, injury or damage to the Landlord or its tenants or the occupiers of adjacent or neighboring premises. 5.9.2 Not to use the Premises for a sale by auction or for any dangerous, noxious, noisy or offensive trade or business, nor for any illegal or immoral act or purpose. 5.9.3 Not to sleep or allow any person to sleep on the Premises and not to use the Premises for residential purposes nor keep any animal, fish, reptile or bird on the Premises. Landlord's Costs 5.10 To pay to the Landlord all reasonable costs, fees, charges, disbursements and expenses (including without prejudice to the generality of the foregoing those payable to Counsel, Solicitors, Surveyors and bailiffs) incurred by the Landlord in relation or incidental to: -13-

15 (a) every application made by the Tenant for a consent or license required or made necessary by the provisions of this Lease whether the same be granted or refused or proffered subject to any lawful qualification or condition or whether the application be withdrawn; (b) the preparation and service of notices under the 1996 Order; (c) the recovery or attempted recovery of arrears of rent or other sums due from the Tenant; and (d) any steps taken in contemplation of or in connection with the preparation and service of a Schedule of Dilapidations during or after the expiration of the Term. Planning Acts 5.11.1 To comply with the provisions and requirements of the Planning Acts, whether as to the Permitted User or otherwise, and to indemnify (both during or following the expiration of the Term) and keep the Landlord indemnified against all liability whatsoever including costs and expenses in respect of any contravention. 5.11.2 At the expense of the Tenant, to obtain all planning permissions and to serve all such notices as may be required for the carrying out of any operations or user on the Premises which may constitute Development, provided that no application for planning permission shall be made without the previous consent of the Landlord (such consent not to be unreasonably withheld or delayed). 5.11.3 Subject only to any statutory direction to the contrary, to pay and satisfy any charge or levy that may hereafter be imposed under the Planning Acts in respect of the carrying out or maintenance of any such operations, or the commencement or continuance of any such user. 5.11.4 Notwithstanding any consent which may be granted by the Landlord under this Lease, not to carry out or make any alteration or addition to the Premises, or any change of use until: (a) all necessary notices under the Planning Acts have been served and copies produced to the Landlord; -14-

16 (b) all necessary permissions under the Planning Acts have been obtained and produced to the Landlord; and (c) the Landlord has acknowledged that every necessary planning permission is acceptable to it (such acknowledgement not to be unreasonably withheld or delayed); the Landlord being entitled to refuse to acknowledge its acceptance of a planning permission on the grounds that any condition contained in it, or anything omitted from it, or the period referred to in it, would in the reasonable opinion of the Surveyor) be (or be likely to be) prejudicial to the Landlord's interest in the Premises, the Building, or any Adjoining Property whether during or following the expiration of the Term. 5.11.5 Unless the Landlord shall otherwise direct, to carry out and complete before the expiration of the Term: (a) any works stipulated to be carried out to the Premises by a date subsequent to such expiration as a condition of any planning permission granted for any Development begun before the expiration of the Term; and (b) any Development begun upon the Premises in respect of which the Landlord shall or may be or become liable for any charge or levy under the Planning Acts. 5.11.6 In any case where a planning permission is granted subject to conditions, and if the Landlord so requires, to provide security for the compliance with such conditions, and not to implement the planning permission until security has been provided. 5.11.7 If reasonably required by the Landlord, but at the cost of the Tenant, to appeal against any refusal of planning permission or the imposition of any conditions on a planning permission relating to the Premises following an application by the Tenant. Plans Documents and Information 5.12.1 If called upon so to do, to produce to the Landlord or the Surveyor all plans, documents and other evidence as the Landlord may reasonably -15-

17 require in order to satisfy itself that the provisions of this Lease have been complied with. 5.12.2 If called upon so to do, to furnish to the Landlord, the Surveyor, any other surveyor acting for the Landlord, or any person acting as the Arbitrator under the Fourth Schedule, such information as may be reasonably requested in writing in relation to any pending or intended step under the 1996 Order or the implementation of the provisions of the Fourth Schedule. Indemnities 5.13 To be responsible for, and to keep the Landlord fully indemnified against, all damage, damages, losses, costs, expenses, actions, demands, proceedings, claims and liabilities made against or suffered or incurred by the Landlord arising directly or indirectly out of: (a) any act omission or negligence of the Tenant or its sub- tenants or any persons at the Premises expressly or impliedly with its or their Tenant's authority; or (b) any breach or non observance by the Tenant or its sub-tenants of the covenants, conditions or other provisions of this Lease. Re-letting Boards 5.14 To permit the Landlord at any time during the last six months of the Term to enter upon the Premises and affix and retain upon such part of the Premises as may be reasonable a notice for re-letting the same and during such period to permit persons with written authority of the Landlord or its agent at reasonable times of the day to view the Premises. Rights of Light and Encroachments 5.15.1 Not to stop-up, darken or obstruct any windows or light belonging to the Building. 5.15.2 Not to permit any new window, light, opening, doorway, path passage, drain or other encroachment or easement to be made or acquired in against out of or upon the Premises and if any such -16-

18 window light opening path passage drain or other encroachment or easement shall be made or acquired, or attempted to be made or acquired, to give immediate notice to the Landlord and at the request and cost of the Landlord to adopt such means as may be reasonably required or deemed proper for preventing any such encroachment or the acquisition of any such easement. Yield Up 5.16.1 At the expiration of the Term, to yield up the Premises in repair as required by this Lease and otherwise in accordance with the terms of this Lease, to give up all keys of the Premises to the Landlord, and to remove all lettering and signs erected by the Tenant in upon or near the Premises and forthwith to make good any damage caused by such removal. 5.16.2 If at the expiration of the Term, the Premises are not in the state of repair and decoration in which they should be having regard to the Tenant's covenants and conditions contained in this Lease, the Tenant shall (if so required by the Landlord) pay to the Landlord on demand by way of liquidated damages: (a) such sum as shall be reasonably certified by the Surveyor to represent in his professional opinion: (i) the cost of putting the Premises into the state of repair and decoration in which they should have been had the Tenant complied with the terms of this Lease; and (ii) the Rent at the rate prevailing at the expiration of the Term that would have been payable under this Lease if the Term had been extended for such period as is necessary to put the Premises into the state of repair and decoration in which they should have been; and (b) the reasonable fees of the Surveyor for the preparation and service of a schedule of dilapidations and the preparation and issue of the said certificate. Interest on Arrears 5.17.1 If the Tenant shall fail to pay the Rent within 14 days of the due date or Service Charge and/or Insurance Rent within 14 days of formal -17-

19 demand or any other sum due under this Lease within 14 days of formal demand the Tenant shall pay the Landlord Interest on the rents or other sum from the date when it was due to the date on which it is paid (and such Interest shall be deemed to be rent due to the Landlord). 5.17.2 Nothing in the preceding clause shall entitle the Tenant to withhold or delay any payment of the rents or any other sum due under this Lease after the date upon which it falls due, or in any way prejudice affect or derogate from the rights of the Landlord in relation to the said non-payment, including (but without prejudice to the generality of the foregoing) under the proviso for re-entry contained in this Lease. Registration of Documents, Rent Reviews, Notices and Keys 5.18.1 Within twenty eight days of any assignment, charge, underlease or sub-underlease or any transmission or other devolution relating to the Premises, to produce for registration with the Landlord's Solicitor the said deed or document (or a certified copy thereof) and to pay the Landlord's Solicitor's charges for the registration of every such document. 5.18.2 Where there has been an underletting of all or part of the Premises, to give notice of the details of the determination of every rent review to the Landlord within 28 days of the determination. 5.18.3 To give full particulars to the Landlord of any notice direction order or proposal for the same made given or issued to the Tenant by any local or public authority within seven days of receipt, and if so required by the Landlord to produce it to the Landlord and (where such notice direction order or proposal relates to the Tenant's obligations under this Lease) without delay to take all necessary steps to comply with the notice direction or order, and at the request of the Landlord and at the equal joint cost of the Landlord and of the Tenant to make or join with the Landlord in making such objection or representation against or in respect of any proposal for a notice direction or order as the Landlord shall deem expedient. 5.18.4 To ensure that at all times the Landlord has written notice of the name, home address and home telephone number of at least one keyholder of the Premises. -18-

20 Sale of Reversion etc 5.19 To permit upon reasonable notice at any time during the Term prospective purchasers of or dealers in or agents instructed in connection with the sale of the Landlord's reversion or of any interest superior to the Term to view the Premises without interruption providing the same are authorised in writing by the Landlord or its agents. Defective Premises 5.20 To give notice to the Landlord of any defect in the Premises which might give rise to an obligation on the Landlord to do or refrain from doing any act or thing in order to comply with the provisions of this Lease or the duty of care imposed on the Landlord pursuant to the Defective Premises (NI) Order 1975 or otherwise, and at all times to display and maintain all notices which the Landlord may from time to time reasonably require to be displayed at the Premises. New Guarantor 5.21 Within fourteen days of the death during the Term of any Guarantor or of such person becoming bankrupt or having a Receiving Order made against him or being a Company passing a Resolution to wind up, or entering into liquidation or having a receiver appointed, to give notice of this to the Landlord and if so required by the Landlord at the expense of the Tenant within twenty eight days to procure some other person acceptable to the Landlord (such acceptance not to be unreasonably withheld) to execute a guarantee in respect of the Tenant's obligations contained in this Lease in the form set out in clause 9. Landlord's Rights 5.22 To permit the Landlord at all times during the Term to exercise without interruption or interference any of the rights granted to it by virtue of the provisions of this Lease. Office Covenants 5.23 To observe and perform the Office Covenants. -19-

21 Criminal Damage 5.24 If the Premises or any part thereof should be damaged or destroyed by an event for which compensation is payable under the provisions of the Criminal Damage (Compensation) (Northern Ireland) Order 1977 to immediately give notice thereof to the Landlord and forthwith to institute a claim under the said Order and to pursue such claim expeditiously AND EITHER to apply all compensation paid relating to the Premises in rebuilding and reinstating the same pursuant to the Tenant's covenants herein contained making good any deficiency out of the Tenant's own monies OR if the Landlord so reasonably requires to assign its rights under any such claim and all monies payable thereunder and to pay to the Landlord any deficiency and if the amount of compensation awarded should be reduced or excluded as the result of the general conduct or act or neglect of the Tenant or its sub-tenants (if any) or anyone at or near the Premises expressly or by implication with its or their authority the Tenant shall pay to the Landlord any amount by which any compensation recoverable by the Landlord shall be reduced by reason of such conduct, act or neglect. Stamp Duty and other expenses 5.25 To pay the Stamp Duty payable on this Lease and a counterpart thereof, the cost of registering this Lease in the Registry of Deeds (if applicable). 6. LANDLORD'S COVENANTS The Landlord COVENANTS with the Tenant: 6.1 To permit the Tenant to peaceably and quietly hold and enjoy the Premises without any lawful interruption or disturbance from or by the Landlord or any person claiming under or in trust for the Landlord. 6.2 So long as Pivotal Corporation (NI) Limited or any Group Company of Pivotal Corporation (NI) Limited is the Tenant to give to the Tenant immediate notice of receipt by the Landlord from the then tenant of the 1st and 2nd floors of the Building written notice of such tenant's intention to exercise any option to terminate its Lease of the said 1st and 2nd floors. 6.3 Subject to the Tenant paying any relevant costs under clause 7.9 to ensure that the Tenant may use the Premises and have access thereto at all times -20-

22 so far as same lies within the Landlord's control such access to include access through the main entrance from Upper Queen Street. 7. SERVICES 7.1 The Landlord covenants with the Tenant to perform the Services throughout the Term provided that the Landlord shall not be liable to the Tenant in respect of: (a) any failure or interruption in any of the Services by reason of necessary repair, replacement, maintenance of any installations or apparatus, or their damage or destruction, or by reason of mechanical or other defect or breakdown, or frost or other inclement conditions, or shortage of fuel, materials, water or labour, or any other cause beyond the Landlord's control; and (b) any act, omission, or negligence of any porter, attendant or other person undertaking the Services or any of them on behalf of the Landlord. 7.2 For the purposes of this clause: (a) 'Computing Date' means the 31st January in every year of the Term or such other date as the Landlord may from time to time nominate; and (b) 'Financial Year' means the period; (i) from the commencement of the term to (and including) the first Computing Date and thereafter; (ii) between two consecutive Computing Dates (excluding the first but including the second Computing Date in the period). (c) 'Due Proportion' means the due proportion (subject to clause 7.7) of the Annual Expenditure payable by the Tenant equivalent to the same proportion pro rata as the Total Lettable Area of the Premises bears to the total lettable area of the Building (excluding any ground floor premises) provided that in calculating the Due Proportion the Tenant shall not be -21-

23 responsible to contribute towards costs incurred as a result of inherent or latent structural defects in the Building. 7.3 The Landlord or its surveyor or other nominated agent shall as soon as convenient after each Computing Date prepare an account showing the Annual Expenditure for that Financial Year, and containing a fair summary of the expenditure referred to therein, and same shall (in the absence of manifest error) be conclusive evidence for the purposes of this Lease of all matters of fact referred to in the said account. 7.4 The Tenant shall pay for the period from the commencement date of the Term to the next Computing Date an initial provisional Service Charge in respect of the Due Proportion (calculated upon an estimate by the Surveyor acting as an expert and not as an arbitrator of what the Annual Expenditure is likely to be for the current Financial Year), the first payment being a proportionate sum in respect of the period from and including the commencement date of the Term to and including the day before the next quarter day to be paid on the date hereof, the subsequent payments to be made in advance on the usual quarter days in respect of the said quarters. 7.5 The Tenant shall pay for the next and each subsequent Financial Year a provisional sum in respect of the Due Proportion (calculated upon an estimate by the Surveyor acting as an expert and not as an arbitrator of the Annual Expenditure is likely to be for that Financial Year) by four equal quarterly payments on the usual quarter days. 7.6 If the Service Charge for any Financial Year shall: (a) exceed the provisional sum for that Financial Year the excess shall be due to the Landlord on demand; or (b) be less than the said provisional sum the overpayment shall be credited to the Tenant against the next quarterly payment of the Rent and Service Charge. 7.7 If at any time during the Term the total property enjoying or capable of enjoying the benefit of any of the Services be increased or decreased on a permanent basis, or the benefit of any of the Services be extended on like basis to any adjoining or neighbouring property, the Due Proportion shall be varied with effect from the Computing Date following such event by agreement between the parties, or in default of agreement within three months of the first proposal for variation -22-

24 made by either party as shall be determined to be a fair and reasonable variation reflecting the event in question by the Surveyor (acting as an expert and not as an arbitrator) except that nothing herein contained shall imply an obligation on the part of the Landlord to provide the Services to any adjoining or neighbouring property. 7.8 The Landlord may withhold, add to, extend, vary or make any alteration in the rendering of the Services, or any of them, from time to time if the Landlord at its discretion deems it desirable to do so the Landlord acting at all times in the interests of good estates management. 7.9 In the event that following a request by the Tenant and agreement to such request by the Landlord (such request not to be unreasonably refused provided that the Landlord shall not refuse the Tenant's request for Services outside the Permitted Hours which are reasonably required for the use of the Premises outside the Permitted Hours including (without prejudice to the generality of the foregoing) lifts) (and as the case may be following any request by and agreement with any other tenant(s) in the Building (excluding any ground floor premises)) the Landlord provides any Services or incurs any Additional Items of Expenditure outside the Permitted Hours then the Tenant shall be responsible and liable to pay for all extra Costs (including any VAT payable thereon) to the Annual Expenditure as a result of the use of the Premises outside the Permitted Hours or a reasonable proportion (to be decided by the Surveyor acting as an expert and not as an arbitrator) of such extra Costs where any other tenant(s) in the Building (excluding any ground floor premises) also use their premises outside the Permitted Hours. 8. INSURANCE 8.1 The Tenant warrants that prior to the execution of this Lease it has disclosed to the Landlord in writing any conviction, judgment, or finding of any court or tribunal relating to the Tenant (or any director, other officer, or major shareholder of the Tenant) of such a nature as to be likely to affect the decision of any insurer or underwriter to grant or to continue insurance of any of the risks appearing in this clause. 8.2 Subject to the Tenant paying the Insurance Rent, the Landlord covenants to insure the Building subject to such excesses exclusions or limitations as the Landlord's insurers may require; -23-

25 in such insurance office or with such underwriters and through such agency and for such amount as in the reasonable opinion of the Landlord from time to time represents the full cost of rebuilding or reinstatement including architects', surveyors' and other professional fees, the cost of debris removal, demolition, site clearance, any works that may be required by statute and incidental expenses. 8.3 Such insurance shall be against: (a) loss or damage by fire, accidental explosion, storm, lightning, subsidence, tempest, flood, burst pipes and tanks, impact and (in peacetime) aircraft and articles dropped therefrom, and such other risks insurance against which the Landlord may from time to time reasonably deem necessary; (b) the liability of the Landlord arising out of or in connection with any matter involving or relating to the Building; (c) the loss of Rent and Service Charge payable under this Lease from time to time (having regard to any review of rent which may become due under this Lease) for three years or such longer period as the Landlord may from time to time reasonably consider to be sufficient for the purposes of planning and carrying out rebuilding or reinstatement; and (d) (if available) any reduction in the amount of compensation payable to the Landlord with respect to repair or reinstatement of the Building following any successful claim under the Criminal Damage (Compensation) (Northern Ireland) Order 1977 due to betterment. 8.4 The Tenant shall pay the Insurance Rent on the date hereof for the period from and including the commencement date of the Term to the day before the next policy renewal date and thereafter the Tenant shall pay the Insurance Rent on demand and (if demanded) in advance of the policy renewal date. 8.5 If and whenever during the Term: (a) the Premises or any part of them or access to them are destroyed or damaged by an Insured Risk so that the Premises or any part of them are unfit for occupation or use; and -24-

26 (b) except to the extent that the insurance of the Premises has been vitiated by the act, neglect, default or omission of the Tenant or its sub-tenants or anyone at the Premises expressly or by implication with its or their authority; the Rent and the Service Charge or a fair proportion of the Rent and the Service Charge according to the nature and the extent of the damage sustained (the amount of such proportion to be reasonably determined by the Surveyor) shall be suspended and cease to be payable until the Premises, the damaged part, or the access shall have been reinstated so that the Premises or the damaged part are made fit for occupation or use or until the expiration of three years from the destruction or damage whichever is the shorter. 8.6 If and whenever during the Term: (a) the Premises and/or the Building are damaged or destroyed by an Insured Risk; and (b) except to the extent that the payment of the insurance monies is refused by reason of any act or default of the Tenant or anyone at or near the Premises expressly or by implication with the Tenant's authority; the Landlord will subject to clause 8.7 with all convenient speed take such steps as may be requisite and proper to obtain any planning permissions or other permits and consents that may be required under the Planning Acts or other Statute for the time being in force to enable the Landlord to rebuild and reinstate the Premises and/or the Building, and will as soon as these have been obtained spend and lay out all monies received in respect of such insurance (except sums in respect of loss of rent) in rebuilding or reinstating the Premises and/or the Building so destroyed or damaged making good any deficiency in such insurance monies out of the Landlord's own monies (save to the extent that such deficiency arises from the act neglect or default of the Tenant or its sub-tenants (if any) or anyone at or near the Premises with its or their authority) provided that the Landlord shall not be liable to rebuild or reinstate the Premises if the Landlord is unable (having used all reasonable endeavours) to obtain all planning permissions, permits and consents necessary to execute such rebuilding and reinstating, or if this Lease shall be frustrated (or if the rebuilding or reinstating is prevented for any other reason beyond the -25-

27 control of the Landlord) in which event the Landlord shall be entitled to retain all the insurance monies received by the Landlord. 8.7 If after three years from the date of damage or destruction of the Premises and/or the Building by an Insured Risk or by any event giving rise to a claim under the Criminal Damage (Compensation) (Northern Ireland) Order 1977 the Premises and/or the Building remain completely unfit for occupation and use, the Landlord or the Tenant may by not less than three month's notice given to expire at any time prior to the Premises and/or the Building being reinstated or repaired and made fit for occupation and use determine this Lease ('the Determination Notice') and upon the expiry of the Determination Notice this Lease shall determine without prejudice to any rights or remedies which may then have accrued to either party against the other in respect of any breach of any of the covenants and conditions contained in this Lease and the Landlord shall be entitled to retain the insurance moneys received by the Landlord. 8.8 The Tenant COVENANTS with the Landlord: (a) to comply with all the reasonable and/or normal requirements and recommendations of the insurers; (b) not to do or omit anything that could cause any policy of insurance on the Premises to become void or voidable wholly or in part nor (unless the Tenant shall have previously notified the Landlord and have agreed to pay the increased premium) anything whereby additional insurance premiums may become payable; (c) to keep the Premises supplied with such fire fighting equipment as the insurers and the fire authority may require and to maintain the same to their satisfaction; (d) not to store or bring onto the Premises any article, substance or liquid of a specially combustible, inflammable or explosive nature and to comply with the requirements and recommendations of the fire authority (and the reasonable requirements of the Landlord) as to fire precautions relating to the Premises; (e) not to obstruct the access to any fire equipment or the means of escape from the Premises; -26-

28 (f) to give notice to the Landlord forthwith upon the happening of any event which might affect any insurance policy relating to the Premises; (g) if and whenever during the Term the Premises or any part thereof are damaged or destroyed by an Insured Risk, and the insurance money under the policy of insurance is by reason of any act or default of the Tenant or its sub-tenants or anyone at the Premises expressly or by implication with its or their Tenant's authority wholly or partially irrecoverable, forthwith in every such case to pay to the Landlord on demand with Interest the amount of such insurance money so irrecoverable in which event the provisions of clauses 8.5 and 8.6 shall apply; (h) forthwith to inform the Landlord in writing of any conviction judgment or finding of any court or tribunal relating to the Tenant (or any director other officer or major shareholder of the Tenant) of such a nature as to be likely to affect the decision of any insurer or underwriter to grant or to continue insurance of any of the above mentioned risks; and (i) if at any time the Tenant shall be entitled to the benefit of any insurance on the Premises (which is not affected or maintained in pursuance of any obligation herein contained), to apply all monies received by virtue of such insurance in making good the loss or damage in respect of which the same shall have been received. 8.9 If at any time during the Term the total property of which the Premises are a part shall be increased or decreased on a permanent basis the percentage referred to in clause 1.13 shall be varied in the manner set out in clause 7.7. 9. The Guarantor COVENANTS with the Landlord: 9.1 If at any time during the Term the Tenant shall make any default in payment of the rents or in observing or performing any of the material covenants, conditions or other terms of this Lease the Guarantor will pay the rents and observe or perform the covenants, conditions or terms in respect of which the Tenant shall be in default notwithstanding: -27-

29 (a) any time or indulgence granted by the Landlord to the Tenant, or any neglect or forbearance of the Landlord in enforcing the payment of rent or the observance or performance of the Tenant's covenants, or any refusal by the Landlord to accept rent tendered by or on behalf of the Tenant at a time when the Landlord was entitled to re-enter the Premises; (b) that the terms of this Lease may have been varied by agreement between the parties; (c) that the Tenant shall have surrendered part of the Premises, in which event the liability of the Guarantor hereunder shall continue in respect of the part of the Premises; (d) any other act or thing whereby but for this provision the Guarantor would have been released. 9.2 If at any time during the Term the Tenant (being an individual) shall become bankrupt or (being a company) shall enter into liquidation and the trustee-in-bankruptcy or liquidator shall disclaim this Lease, the Guarantor will if the Landlord shall by notice within sixty (60) days after such disclaimer so require take from the Landlord a lease of the Premises for the residue of the Term which would have remained had there been no disclaimer at the Rent then being paid hereunder and subject to the same covenants and conditions as in the Lease with the exception of this clause, such new lease to take effect from the date of the said disclaimer and in such case the Guarantor shall pay the costs of such new lease and execute and deliver to the Landlord a counterpart thereof. 10. PROVISOES Re-entry 10.1 If at any time during the Term: (a) the rents (or any of them or any part thereof) shall be in arrear and unpaid for 14 days after becoming payable (whether formally demanded or not) or shall be unpaid within 14 days of demand in the case of Service Charge and Insurance Rent; or -28-

30 (b) there shall be any breach, non-performance or non-observance by the Tenant of any of the covenants and conditions contained in this Lease; or (c) the Tenant (being an individual) becomes bankrupt or (being a company) enters into liquidation whether compulsory or voluntary (save for the purpose of amalgamation or reconstruction of a solvent company) or has a receiver appointed of its undertaking or (in either case) enters into an arrangement or composition for the benefit of its creditors or suffers any distress or execution to be levied on its goods; the Landlord may at any time thereafter (and notwithstanding the waiver of any previous right of re-entry) re-enter the Premises or any part thereof in the name of the whole and thereupon the Term shall absolutely cease and determine but without prejudice to any rights or remedies which may then have accrued to the Landlord against the Tenant in respect of any antecedent breach (including the breach in relation to which re-entry is made) of any of the covenants and conditions contained in this Lease. Covenants Relating to Adjoining Land 10.2 Nothing contained in or implied by this Lease shall give the Tenant the benefit of or the right to enforce or to prevent the release or modification of any covenant agreement or condition entered into by any tenant of the Landlord in respect of any property not comprised in this Lease. Disputes with Adjoining Occupiers 10.3 If any dispute arises between the Tenant and the lessees tenants or occupiers of adjoining or neighbouring property belonging to the Landlord as to any easement, right or privilege in connection with the use of the Premises and the adjoining property, or as to the amount of any contribution towards the expenses or services used in common with any other property it shall be decided by the Landlord or in such manner as the Landlord shall direct. Floor Area 10.4 Save in the case of manifest error, the figure set out in clause 1.4 shall for all purposes in relation to this Lease be taken as representing the -29-

31 Total Lettable Area of the Premises unless and until any alteration shall be carried out to the Premises with the Landlord's consent the effect of which is to increase or decrease the said area. Effect of Waiver 10.5 Each of the Tenant's covenants shall remain in full force both at law and in equity notwithstanding that the Landlord shall have waived or released temporarily any such covenant, or waived or released temporarily or permanently revocably or irrevocably a similar covenant or similar covenants affecting other adjoining or neighbouring premises belonging to the Landlord. Rights Easements etc 10.6 The operation of Section 6 of the Conveyancing and Law of Property Act 1881 shall be excluded from this Lease and the only rights granted to the Tenant are those expressly set out in this Lease and the Tenant shall not by virtue of this Lease be deemed to have acquired, or be entitled to, and the Tenant shall not during the Term acquire or become entitled by any means whatsoever to, any right or easement from or over or affecting any other land or premises now or at any time hereafter belonging to the Landlord and not comprised in this Lease. Party Walls 10.7 The internal division walls that divide the Premises from the adjoining units in the Building shall be deemed to be party walls and shall be maintained at the equally shared expense of the Tenant and the other respective estate owners. Exclusion of Use Warranty 10.8 Nothing in this Lease or in any consent granted by the Landlord under this Lease shall imply or warrant that the Premises may be used for the purpose herein authorised (or any purpose subsequently authorised) under the Planning Acts. Accidents 10.9 The Landlord shall not be responsible to the Tenant or its sub-tenants or to anyone at the Premises expressly or by implication with its or -30-

32 their authority for any accident happening or injury suffered or for any damage to or loss of any chattel sustained in the Premises or the Building save and to the extent of the Landlord's insurance cover therefor. Entire Understanding 10.10 This Lease embodies the entire understanding of the parties relating to the Premises or to any of the matters dealt with by any of the provisions of this Lease save for pre-lease enquiries. Representations 10.11 The Tenant acknowledges that this Lease has not been entered into in reliance wholly or partly on any statement or representation made by or on behalf of the Landlord except any such statement or representation that is expressly set out in this Lease save for pre-lease enquiries. Licences etc Under Hand 10.12 Whilst the Landlord is a limited company or other corporation, all licences, consents, approvals and notices required or permitted to be given by the Landlord shall be sufficiently given if given under the hand of a Director, the Secretary or other duly authorised officer of the Landlord (or the Surveyor on behalf of the Landlord). Tenant's Property 10.13 If after the Tenant has vacated the Premises on the expiry of the Term any property of the Tenant remains in or on the Premises, and the Tenant fails to remove it within seven days after being requested in writing by the Landlord so to do, or if after using reasonable endeavours the Landlord is unable to make such a request to the Tenant within fourteen days from the first attempt so made by the Landlord: (a) the Landlord may as the agent of the Tenant sell such property, provided that the Tenant will indemnify the Landlord against any liability incurred by it to any third party whose property shall have been sold by the Landlord in the bona fide mistaken belief (which shall be presumed unless the contrary be proved) that such property belonged to the Tenant; -31-

33 (b) if the Landlord having made reasonable efforts is unable to locate the Tenant the Landlord shall be entitled to retain the said proceeds of sale absolutely unless the Tenant shall claim the same within six months of the date upon which the Tenant vacated the Premises; and (c) the Tenant shall indemnify the Landlord against any damage occasioned to the Premises or the Building or any adjacent or neighbouring premises of the Landlord and any actions, claims, proceedings, costs, expenses and demands made against the Landlord caused by or related to the presence of the property in or on the Premises. Service of Notices 10.14 The provisions of Section 67 of the Conveyancing and Law of Property Act 1881 as amended by the Recorded Delivery Service Act (Northern Ireland) 1963 shall apply to the giving and service of all notices and documents under or in connection with this Lease except that Section 67 shall be deemed to be amended as follows: In Section 67(4) the words "and that service shall be deemed to be made at the time at which the registered letter would in the ordinary course be delivered" shall be deleted and there shall be substituted the words "and that service shall be deemed to be made on the third Working Day after the registered letter has been posted, "Working Day" meaning any day from Monday to Friday (inclusive) other than Christmas Day, Good Friday and any statutory bank holiday". Tenant's Option to Determine 10.15 Subject to the Tenant having paid the rents and all other sums due to the Landlord under this Lease as at the seventh anniversary of the commencement date of the Term the Tenant shall have the option to determine this Lease on the seventh anniversary of the commencement date of the Term on giving either at least twelve months prior written notice to the Landlord or at least six months prior written notice to the Landlord (time to be of the essence) and on the said seventh anniversary of the commencement date of the Term this Lease shall absolutely cease and determine without prejudice to any rights or remedies which may then have accrued to either party against the other in respect of any breach of covenant or other term of this Lease -32-

34 PROVIDED THAT in the event that the Tenant gives to the Landlord at least six months prior written notice but less than twelve months prior written notice the Tenant shall on the seventh anniversary of the commencement date of the Term pay to the Landlord a sum equal to 6 months Rent then payable together with Value Added Tax thereon. THE PARTIES HERETO HEREBY CERTIFY that there is no Agreement for Lease to which this Lease gives effect. IN WITNESS whereof this Lease has been executed by the parties hereto the day and year first herein written. -33-

35 FIRST SCHEDULE The Premises `the Premises' mean all that part of the Building referred to in clause 1.3 for the purposes of identification only shown edged red on the Plan including: (a) the paint, paper and other decorative finishes applied to the interior of the exterior walls of the Building but not any other part of the exterior walls; (b) the floor finishes so that the lower limit of the Premises includes such finishes but does not extend to anything below them; (c) the ceiling finishes so that the upper limit of the Premises shall include such finishes but shall not extend to anything above them; (d) the entirety of any non loadbearing internal walls within the Premises; (e) the inner half severed medially of the internal non loadbearing walls dividing the Premises from other parts of the Building; (f) all additions and improvements to the Premises; (g) all the Landlord's fixtures and fittings and fixtures of every kind which shall from time to time be in or upon the Premises whether originally affixed or fastened to or upon the same or otherwise except any such fixture installed by the Tenant and that can be removed from the Premises without defacing the same; and (h) any Pipes that exclusively serve the Premises. 34

36 SECOND SCHEDULE Rights Granted 1. Common Parts The right for the Tenant and all persons expressly or by implication authorised by it (in common with the Landlord and all other persons having a like right) to use the Common Parts for all proper purposes in connection with the use and enjoyment of the Premises. 2. Toilets The right for the Tenant as aforesaid (in common with the Landlord and all other persons having a like right) to use such toilets in the Building as shall be reasonably designated from time to time by the Landlord. 3. Pipes The free passage and running (subject to temporary interruption for repair alteration or replacement) of water, soil, gas, electricity and other supplies to and from the Premises in and through the Pipes that now or hereafter serve the Premises presently or hereafter laid in on through or under other parts of the Building, and (if any) the Adjoining Property. 4. Support The right of support and protection for the benefit of the Premises as is now enjoyed from all other parts of the Building. 5. Car Park Spaces The right to use two car park spaces as designated from time to time by the Landlord or the Surveyor in the car park of the Building. 6. Rear Gantry The right to place air conditioning and other equipment on the gantry area shown edged green on the map annexed hereto (the specifications and positioning of such equipment requiring the prior written approval of the Landlord such approval not to be unreasonably withheld or delayed). 35

37 THIRD SCHEDULE Rights Reserved 1. Pipes The free and uninterrupted passage and running of water, soil, gas, electricity, telephone and other services or supply from and to other parts of the Building or any Adjoining Property in and through the Pipes which now are or may hereafter during the Term be in upon through under or over the Premises. 2. Construct Easements The right to construct and to maintain in upon through under or over the Premises at any time during the Term any easements or services for the benefit of any part of the Building or any Adjoining Property. 3.1 Access The right at any time during the Term (at reasonable times and upon reasonable notice except in cases of emergency) to enter (or in cases of emergency to break and enter) the Premises to: (a) inspect, cleanse, connect, lay, repair, remove, relay, replace with others alter or execute any works whatever to or in connection with, the Pipes, easements or services referred to in paragraphs 1 and 2 of this Schedule; (b) view the state and condition of and repair and maintain the Building (and if any the Other Buildings) where such viewing or work would not otherwise be reasonably practicable; (c) carry out work or do anything whatsoever comprised within the Landlord's obligations in this Lease whether or not the Tenant is liable to make a contribution; (d) take schedules or inventories of fixtures and other items to be yielded-up on the expiry of the Term; and (e) exercise any of the rights granted to the Landlord by this Lease. 36

38 3.2 The right with the Surveyor or any other surveyor acting for Landlord and any person acting as the Arbitrator under the Fourth Schedule at convenient hours and on reasonable prior notice to enter and to inspect and measure the Premises for all purposes connected with any pending or intended step under the 1996 Order or the implementation of the provisions of the Fourth Schedule. 4. Scaffolding The right to erect scaffolding for the purpose of altering repairing maintaining or cleaning the Building (and (if any) the Other Buildings) and any buildings now or hereafter during the Term on the Adjoining Property notwithstanding that such scaffolding may temporarily restrict the access to or enjoyment and use of the Premises. 5. Support etc The rights of light, air, support, shelter and all other easements and rights now or hereafter belonging to or enjoyed by other parts of the Building. 6. Light Full right and liberty at any time hereafter: (a) to alter raise the height of or re-build the Building or any part thereof or any of the Other Buildings; (b) to erect the Other Buildings of any height; or (c) to erect install or alter any structure erections fixtures fittings or equipment in on or to the Building or any part thereof or any of the other Buildings; in such manner as the Landlord shall think fit notwithstanding the fact that the same may obstruct, affect or interfere with the amenity of or access to the Premises, or the passage of light and air to the Premises Provided Always that there is provided at all times (save for any necessary temporary introduction thereto) adequate means of access to the Premises. 37

39 FOURTH SCHEDULE Rent Review 1.1 The terms defined in this paragraph shall for all purposes of this Schedule have the meanings specified. 1.2 `Review Period' means the period between the Review Date and the expiry of the Term. 1.3 `the Assumptions' mean the following assumptions at the relevant Review Date: (a) that the Premises are fit for and fitted out and equipped for immediate occupation and use (but disregarding the fit-out works themselves), and that no work has been carried out on the Premises by the Tenant its sub-tenants or their predecessors in title during the Term which has diminished the rental value of the Premises, and if the Premises have been destroyed or damaged they have been fully restored; (b) that the Premises are available to let by a willing landlord to a willing tenant as a whole, without a premium, but with vacant possession, and subject to the provisions of this Lease (other than the amount of the Rent but including the provisions for rent review), for a term equal to the Term, and that the said letting would be renewed at the expiry of the term thereof under the provisions of the 1996 Order; (c) that the covenants contained in this Lease on the part of the Landlord and the Tenant have been fully performed and observed; (d) that the Tenant and tenants in the market generally are registered for Value Added Tax ("VAT") and will be able to set off in full by way of input tax any VAT payable in respect of any payment of rents against the output tax payable by them; and (e) in case the Premises or the access thereto or any other part of the Building have been destroyed or damaged that they have been fully reinstated. 38

40 1.4 'the Disregarded Matters' mean: (a) any effect on rent arising from the fact that the Tenant, its sub-tenants or their respective predecessors in title have been in occupation of the Premises; (b) any goodwill attached to the Premises by reason of the carrying on at the Premises of the business of the Tenant its sub-tenants, or their predecessors in title in their respective businesses; (c) any increase in rental value of the Premises attributable to the existence at the Review Date of any improvement to the Premises and carried out with consent where required otherwise than in pursuance of an obligation to the Landlord or its predecessors in title either: (i) by the Tenant, its sub-tenants, or their respective predecessors in title during the Term, or during any period of occupation prior thereto arising out of an agreement to grant such term; or (ii) by any tenant or sub-tenant of the Premises before the commencement of the Term, so long as the Landlord or its predecessors in title have not since the improvement was carried out had vacant possession of the relevant part of the Premises. (d) any obligation on the part of the Tenant to reinstate the Premises at the end or sooner determination of the Term or at any other time in pursuance of any obligation to the Landlord whether under this Lease or any other deed or document executed after the date of this Lease. (e) any discount or rebate of the market rent to allow for any customary concessionary rent, rent free period or other inducement which a willing landlord would customarily grant to a willing tenant upon such a letting for tenant's fit-out works. (f) all fit-out works carried out by occupiers of the Premises. 1.5 'the Arbitrator' means a person appointed by agreement between the parties, or in default of agreement within fourteen days of one party giving notice to the other of its nomination or nominations nominated by the Chairman on the 39

41 application either party made not earlier than six months before the relevant Review Date or at any time thereafter. 1.6 'the Chairman' means the Chairman for the time being of the Northern Ireland branch of the Royal Institution of Chartered Surveyors, the duly appointed deputy of the Chairman, or any person authorised by the Chairman to make appointments on his behalf. 2. The Rent shall be: (a) until the Review Date the Initial Rent, and (b) during the Review Period, a rent equal to the Rent previously payable under this Lease immediately prior to the Review Date or such revised rent as may be ascertained in accordance with this Schedule whichever shall be the greater. 3. Such revised rent for the Review Period may be agreed in writing at any time between the parties or (in the absence of agreement) determined (not earlier than the relevant Review Date) by the Arbitrator. 4. The revised rent to be determined by the Arbitrator shall be such as he shall decide should be the rent at which the Premises might reasonably be expected to be let on the open market after the expiry of a rent free period of such length as would be negotiated in the open market between a willing landlord and a willing tenant at the relevant Review Date for the Premises making the Assumptions but disregarding the Disregarded Matters and having regard to open market rental values current at the Review Date. 5. The arbitration shall be conducted in accordance with the Arbitration Act 1996. 6. When the Rent shall have been ascertained in accordance with this Schedule, memoranda thereof shall be signed by or on behalf of the parties and annexed to this Lease and its counterpart and the parties shall bear their own costs in respect of this. 7. If the revised rent payable on and from any Review Date has not been ascertained by that Review Date, Rent shall continue to be payable at the rate previously payable (such payments being on account of the Rent for that Review Period), and forthwith upon the revised rent being ascertained (that is to say the date when the same has been agreed between the parties or the date of the Arbitrator's award), the Tenant shall pay to the Landlord any shortfall between what would have been paid on the Review Date and on any subsequent rent 40

42 days, had the revised rent been determined, and the payment made by the Tenant on account together with Interest (interest at the Base Rate of the Bank referred to in or nominated pursuant to clause 1.9 prevailing on the day upon which the shortfall is paid) on each instalment of Rent due on or after the Review Date on the difference between what would have been paid on that rent day, had the revised rent been determined, and the amount paid on account the interest being payable for the period from that date upon which the instalment was due up to the date of payment of the shortfall. 8. If at any of the Review Dates there shall be in force a statute which shall prevent restrict or modify the Landlord's right to review the Rent in accordance with this Lease and/or to recover any increase in the Rent, the Landlord shall when such restriction or modification is removed, relaxed or modified be entitled (but without prejudice to its rights - if any - to recover any rent the payment of which has only been deferred by law) on giving not less than one month's notice in writing to the Tenant (at any time within 6 months (time being of the essence in this regard) of the restriction or modification being removed relaxed or modified) to proceed with any review of the Rent which may have been prevented or further to review the Rent in respect of any review where the Landlord's right was restricted or modified and the date specified in the said notice shall be deemed for the purposes hereof to be a Review Date (providing that nothing herein shall be construed as varying any subsequent Review Dates except any Review Dates where such a statute shall be in force in which event the provisions of this paragraph shall apply) and the Landlord shall be entitled to recover any resulting increase in Rent with effect from the earliest date as shall be permitted by law. 41

43 FIFTH SCHEDULE The Office Covenants 1. Repair etc and Decoration 1.1 Not to cut injure alter or remove any of the Building. 1.2 In every Decorating Year and in the last year of the Term to redecorate the Premises in good and workmanlike manner and with appropriate materials of good quality (to the reasonable satisfaction of the Surveyor) all tints colours and patterns to be approved by or on behalf of the Landlord in writing (such approval not to be unreasonably withheld or delayed). 1.3 To clean the inside of all windows (and the inside of all window frames) in the Premises at least once in every month. 1.4 To employ for the cleaning of the Premises only such firm or company as shall be approved by the Landlord (such approval not to be unreasonably withheld or delayed). 2. User 2.1 Not to use the Premises for any purpose other than as offices within Classes 2 or 3 of the Schedule to the Planning (Use Classes) Order (Northern Ireland) 1989 and/or for the use of a software company. 2.2 Not to play or use any musical instrument loudspeaker tap recorder gramophone radio or other equipment or apparatus that produces sound in the Premises so as to be heard in nearby premises or outside the Premises. 2.3 Not to cease to carry on business in the Premises or have them vacant for longer than 14 days without: (a) notifying the Landlord; and (b) providing such caretaking or security arrangements as the Landlord shall reasonably require in order to protect the Premises from vandalism theft damage or unlawful occupation. 42

44 3. Aerials, Signs and Advertisements 3.1 Not without the prior written consent of the Landlord (such consent not to be unreasonably withheld or delayed) to erect any pole mast or wire (whether in connection with telegraphic, telephonic, radio or television communication or otherwise) upon any part of the outside of the Building. 3.2 Not to affix or to exhibit on the outside of the Building or to or through any window of the Premises or Building any placard sign notice fascia board or advertisement except the approved sign referred to in paragraph 3.3 of this Schedule. 3.3 At all times to display and maintain a suitable sign showing the Tenant's trading name and business of a size and kind first approved by the Surveyor (such approval not to be unreasonably withheld or delayed) and at a point with the Building to be reasonably specified in writing by him. 4. Common Parts 4.1 Not to cause the Common Parts (or any other land roads or pavements adjoining on the Premises) to become untidy or in a dirty condition but at all times to keep the Common Parts and other land, roads or pavements free from deposits of materials and refuse. 4.2 Not to place deposit or expose outside any part of the Premises any goods materials articles or things whatsoever for display or sale or for any other purpose nor cause any obstruction of the Common Parts. 5. Pollution Not to permit to be discharged into the Pipes any oil or grease, or any deleterious, objectionable, dangerous, poisonous or explosive matter or substance, and to take all reasonable measures to ensure that effluent discharged into the Pipes will not be corrosive or otherwise harmful to the Pipes or cause obstruction to them. 6. Roof and Floor Weighting 6.1 Not without the consent in writing of the Landlord to: 43

45 (a) suspend any undue weight from the walls or ceilings of the Building or use the same for the storage of goods or place any undue weight on them; or (b) have on the Premises any safes, machinery, goods or other articles which may unduly strain or damage the Premises. 6.2 On any application by the Tenant for the Landlord's consent under paragraph 6.1, the Landlord shall be entitled to consult and obtain the advice of an engineer or other person in relation to the roof or floor loading proposed by the Tenant and the Tenant shall repay to the Landlord on demand the fees of such engineer or other person. 7. Machinery 7.1 Not to install or use in or upon the Premises any machinery or apparatus which will cause noise or vibration which can be heard or felt in nearby premises or outside the Premises or which may cause structural damage. 7.2 To keep all machinery and equipment upon the Premises properly maintained and in good working order, and for that purpose to employ reputable contractors for the regular periodic inspection and maintenance of them, to renew all working and other parts as and when necessary or when recommended by such contractors, to ensure by directions to the Tenant's staff and otherwise that such plant, apparatus and machinery is properly operated, and to avoid damage to the Premises by vibration or otherwise. 8. Unloading and Parking Not to load or unload any goods or materials onto or from vehicles and convey the same into the Building and the Premises except through the entrances designated as service entrances from time to time by the Landlord or the Surveyor (and by means of any lift designated for such purposes). 9. Heating and Cooling Ventilation 9.1 Not to do anything which interferes with the heating cooling or ventilation of the Common Parts or which imposes an additional load on the heating cooling or ventilation plant and equipment. 44

46 9.2 During the Permitted Hours to operate the ventilation equipment in the Premises which comprises part of the system for the air conditioning of the Common Parts in accordance with the regulations for such purpose made by the Landlord from time to time. 10. Regulations To comply with all reasonable regulations made by the Landlord from time to time for the management of the Building provided that in the event of conflict between such regulations and the terms of this Lease then the terms of this Lease shall apply. 45

47 SIXTH SCHEDULE The Services Maintaining etc Retained Parts 1. Maintaining, repairing, (and where beyond economic repair or necessary to comply with statutory requirements) renewing and replacing and, where appropriate, painting and decorating (to such standard as the Landlord may reasonably from time to time consider adequate) the Retained Parts. Lift 2. Providing a lift service during the Permitted Hours by the operation of the lifts now installed in the Building or (where the existing lifts are beyond economic repair or necessary to comply with statutory requirements) by such substituted lifts as the Landlord may from time to time decide to install. 3. Hot and Cold Water Maintaining during the Permitted Hours an adequate supply of hot and cold water and supplying necessary washing and toilet requisites in the toilet accommodation situate in the Retained Parts. 4. Central Heating Supplying during the Permitted Hours central heating to the Premises and the Common Parts. 5. Maintaining etc Apparatus, Plant, Machinery etc Inspecting, servicing, maintaining, repairing, amending, overhauling, (and where beyond economic repair or necessary to comply with statutory requirements renewing and replacing, and insuring (save in so far as insured under other provisions of this Lease) all apparatus, plant, machinery and equipment within the Retained Parts from time to time including (without prejudice to the generality of the foregoing) lifts, lift shafts, stand-by generators and boilers and items relating to mechanical ventilation, heating, cooling, public address, closed circuit television (if any). 46

48 6. Maintaining etc Pipes Maintaining, repairing, cleansing, emptying, draining, amending and renewing all Pipes in or serving the Building except those that are within and solely serve the Premises or any part of the Building that is let or intended for letting. 7. Maintaining etc Fire Alarms etc Maintaining, repairing, replacing and renewing any fire alarms and ancillary apparatus, fire prevention and fire fighting equipment, and other apparatus in the Retained Parts. 8. Cleaning etc Retained Parts Cleaning, treating, polishing, heating, ventilating and lighting the Retained Parts to such standard as the Landlord may from time to time consider adequate. 9. Fixtures Fittings etc Supplying, providing, purchasing, hiring, maintaining, renewing, replacing, repairing, servicing, overhauling and keeping in good and serviceable order and condition all appurtenances, fixtures, fittings, bins, receptacles, tools, appliances, materials, equipment and other things which the Landlord may deem desirable or necessary for the maintenance, appearance, upkeep or cleanliness of the Building or any part of it. 10. Windows Cleaning as frequently as the Landlord shall in its reasonable discretion consider adequate the exterior of all windows in the Building and interior and exterior of all windows and window frames in the Retained Parts. 11. Refuse Collecting and disposing of refuse from the Building and the provision, repair, maintenance, and renewal of plant and equipment for the collection, treatment, packaging, or disposal of refuse. 12. Additional Such other services relating to the Building as the Landlord shall from time to time reasonably deem necessary or desirable and not expressly mentioned herein. 47

49 Provided Always that all services shall be provided by the Landlord in accordance with the principles of good estate management. 48

50 SEVENTH SCHEDULE Additional items of Expenditure 1.1 Fee The reasonable fees and disbursements (and any VAT payable thereon) of: (a) the Surveyor and any other individual firm or company employed or retained by the Landlord for (or in connection with) such surveying or accounting functions, or the management of the Building;, (b) the managing agents whether or not the Surveyor for (or in connection with): (i) the management of the Building; (ii) the collection of the rents and all other sums due to the Landlord from the tenants of the Building; (iii) the performance of the Services and any other duties in and about the Building or any part of it relating to (without prejudice to the generality of the foregoing) the general management, administration, security, maintenance, protection, cleanliness of the Building; (c) any other individual firm or company employed or retained by the Landlord to perform (or in connection with) any of the Services or any of the functions or duties referred to in this paragraph. 1.2 The reasonable fees of the Landlord or a Group Company for any of the Services or the other functions and duties referred to in paragraph 1.1 above that shall be undertaken by the Landlord or a Group Company and not by a third Party. 2. Staff etc The reasonable cost of employing (whether by the Landlord, a Group Company, the managing agents or any other individual firm or company) such staff as the Landlord may reasonably deem necessary for the performance of the Services and the other functions and duties referred to in paragraph 1.1 above and all other incidental expenditure in relation to such employment or the termination thereof. 49

51 3. Outgoings All existing and future rates, water rates, charges, duties, assessments, impositions and other outgoings payable by the Landlord in respect of the Building or any part of it (excluding the Premises and any other part of the Building that is let or intended for letting) including (but without prejudice to the generality of the foregoing) residential accommodation for caretakers engineers and other staff employed in connection with the Building. 4. Electricity and Gas etc The cost of the supply of electricity gas oil or other fuel for the provision of the Services and for all purposes in connection with the Retained Parts. S. Road etc Charges The amount which the Landlord shall be called upon to pay as a contribution towards the expense of making, repairing, maintaining, rebuilding and cleansing any ways roads pavements or structures Pipes party fences walls or anything which may belong to or be used for the Building or any part of it exclusively or in common with other premises near or adjoining the Building. 6. Regulations The costs charges and expenses of preparing and supplying to the tenants copies of any Regulations made by the Landlord relating to the Building or the use of it. 7. Statutory etc Requirements The cost of taking all steps deemed desirable or expedient by the Landlord for complying with, making representations against, or otherwise contesting the incidence of the provisions of any regulation, byelaw notice, legislation, order or statutory requirements concerning town planning, public health, highways, streets, drainage or other matters relating or alleged to relate to the Building or any part of it for which any tenant is not directly liable. 8. Nuisance The cost to the Landlord of abating a nuisance in respect of the Building or any part of it in so far as the same is not the liability of any individual tenant. 9. Anticipated Expenditure 50

52 Such provision (if any) for anticipated expenditure in respect of any of the Services or the above mentioned matters as the Landlord shall in its reasonable discretion consider appropriate. SEALED with the COMMON SEAL of DERAMORE HOLDINGS LIMITED in the presence of:- SEALED with the COMMON SEAL of PIVOTAL CORPORATION (NI) LIMITED in the presence of:- SEALED with the COMMON SEAL of PIVOTAL CORPORATION in the presence of:- -51-

53 We, THE GOVERNOR AND COMPANY OF THE BANK OF IRELAND, as Mortgagee hereby consent to the within Lease. Dated day of 2000 ----------------------------------- Authorised Signatory 52

54 [DERAMORE PROPERTY GROUP LOGO] 14th April 2000 Pivotal Corporation Limited, Hamilton House, 111 Marlowes, Hemel Hempstead, Hertfordshire. HP1 1BD. Dear Sirs, THIRD FLOOR CAPITAL HOUSE, 3 UPPER QUEEN STREET, BELFAST In consideration of you agreeing to take a lease of the above premises on the agreed terms, we confirm that we shall permit you to take occupation of the whole of the premises at 9 am on 17 April 2000 and we shall grant to you a lease in the form annexed hereto and shall complete the same within 28 days. We further agree as follows: 1. We shall, at our own expense, install a 24-hour card access system at the main door of the building to a specification notified to you. The system shall be installed within 21 days of you taking occupation of the premises and the cost of installation shall be added to the Service Charge. 2. As regards the Service Charge, we confirm as follows: 2.1 No major capital expenditure is currently planned for the building. 2.2 During the term of the Lease we shall give you reasonable prior notice of any individual item of capital expenditure under the Service Charge which is likely to exceed (pound) 100,000.00 and shall consult with you thereon. 2.3 We confirm that the present Service Charge estimates are based on (pound)3 per square foot. 41 ROYAL AVENUE BELFAST BT1 1FB TEL: 028 90 244030 FAX: 028 90243652 Email@deramore.co.uk

55 2.4 We confirm that the cost of the presently anticipated restructuring and refurbishment of the ground floor area shall not be added to Service Charge and Service Charge shall not include any other building costs which arise as a result of such works. 3. We approve the drawings and specifications of your fit out, subject to same meeting statutory requirements. On any future disposal of our interest in Capital House, we shall procure that the relevant purchaser shall provide you with a side-letter incorporating points 2.1 and 2.4 (in so far as same relates to the present refurbishment programme at the date hereof) of this letter. Signed on behalf of Deramore Holdings Limited /s/ [SIGNATURE ILLEGIBLE] -------------------------------------- We accept and confirm the foregoing conditions Dated day of 2000 Signed on Behalf of Pivotal Corporation Limited --------------------------------------- Signed on Behalf of Pivotal Corporation Dated day of 2000

56 Deramore Holdings Limited 160 Brompton Road Knightsbridge London SW3 1RP 14 April 2000 Pivotal Corporation Limited Hamilton House 111 Marlowes Hemel Hempstead Hertfordshire HP1 1BD BY POST & FAX Dear Sirs THIRD FLOOR CAPITAL HOUSE 3 UPPER QUEEN STREET BELFAST In consideration of you agreeing to take a lease of the above premises on the agreed terms, we confirm that we shall permit you to take occupation of the whole of the premises at 9 am on 17 April 2000 and we shall grant to you a lease in the form annexed hereto and shall complete the same within 28 days. We further agree as follows: 1 We shall, at our own expense, install a 24-hour card access system at the main door of the building to a specification notified to you. The system shall be installed within 21 days of you taking occupation of the premises and the cost of installation shall not be added to the Service Charge. 2 As regards the Service Charge, we confirm as follows: 2.1 No major capital expenditure is currently planned for the building. 2.2 During the term of the Lease we shall give you reasonable prior notice of any individual item of capital expenditure under the Service Charge which is likely to exceed (pound sterling)100,000.00 and shall consult with you thereon.

57 2.3 We confirm that the present Service Charge estimates are based on (pound sterling)3 per square foot. 2.4 We confirm that the cost of the presently anticipated restructuring and refurbishment of the ground floor area shall not be added to Service Charge and Service Charge shall not include any other building costs which arise as a result of such works. 3 We approve the drawings and specifications of your fit out, subject to same meeting statutory requirements. On any future disposal of our interest in Capital House, we shall procure that the relevant purchaser shall provide you with a side-letter incorporating points 2.1 and 2.4 (in so far as same relates to the present refurbishment programme at the date hereof) of this letter. Signed on behalf of Deramore Holdings Limited We accept and confirm the foregoing conditions Dated 14 day of April 2000 Signed on Behalf of Pivotal Corporation Limited /s/ VINCENT MIFSUD VINCENT MIFSUD ----------------------------- /s/ VINCENT MIFSUD VINCENT MIFSUD Signed on Behalf of Pivotal Corporation Dated 14 day of April 2000

58 [STREET MAP]

59 [THIRD FLOOR PLAN]

1 EXHIBIT 10.28 [EQUITY OFFICE LETTERHEAD] July 7, 1999 VIA HAND DELIVERY Exactium, Inc. Lakeside Building 5775-B Glenridge Drive, Suite 200 Atlanta, Georgia 30328 Attention: Jeanne B. Jambor Re: Office Lease Agreement dated as of December 4, 1997, by and between EOP- LAKESIDE OFFICE, L.L.C., a Delaware limited liability company (as successor by merger to Beacon Properties, L.P.), as Landlord, and EXACTIUM, INC., a Delaware corporation, as Tenant, relating to which Landlord has leased to Tenant certain premises containing approximately 10,638 rentable square feet (the "Premises") on the 2nd floor of the building commonly known as Lakeside Building B located at 5775-B Glenridge Drive, Atlanta, Georgia 30328 (the "Building"), which lease has been previously amended by instruments dated May 14, 1999 (the "First Amendment") and June 22, 1999 (the "Second Amendment") (collectively, the "Lease"). Dear Ms. Jambor: In order to correct a clerical error, the parties to the Lease hereby agree that Section II.D of the Second Amendment is revised by deleting Section II.D. and replacing it with the following: "Twelve (12) equal installments of $2,322.55 each payable on or before the first day of each month during the period beginning February 1, 2002, and ending January 31, 2003." Please acknowledge your agreement to the foregoing by executing all three (3) copies of this letter agreement and return two (2) fully executed copies of the same to my attention. Sincerely, EOP Operating Limited Partnership, a Delaware limited partnership, as agent for Landlord By: Equity Office Properties Trust, a Maryland real estate investment trust, its managing general partner By: /s/ ANNE WOOD ----------------------------------- Name: Anne Wood Title: Property Manager

2 Ms. Jeanne B. Jambor July 7, 1999 Page 2 The undersigned hereby agree to the foregoing as of 7/7, 1999 EXACTIUM, INC., A DELAWARE CORPORATION By: JEANNE B. JAMBOR -------------------------- Name: JEANNE B. JAMBOR ------------------------ Title: CFO -----------------------

3 [EQUITY OFFICE LETTERHEAD] LAKESIDE Date: 03/16/99 Tenant: Exactium, Inc. Address: 5775 B Glenridge Drive Suite - 200 Atlanta, Georgia 30328 Re: Commencement Letter with Respect to that certain Lease Dated DECEMBER 4, 1997 by and between BEACON PROPERTIES, L.P. whose interest has been assigned to EQUITY OFFICE PROPERTIES TRUST as Landlord, and EXACTIUM, INC., as Tenant, for 6,968 square feet of Rentable Area on the SECOND floor of the Building located at 5775 B GLENRIDGE DRIVE ATLANTA, GEORGIA 30328. Dear Mrs. Jambor: In Accordance with the terms and conditions of the above reference Lease, Tenant hereby accepts possession of the Premises and agrees as follows: 1. The Commencement Date of the Lease is JANUARY 23, 1998. 2. The Termination Date of the Lease is JANUARY 31, 2003. Please acknowledge your acceptance of possession and agreement to the terms set forth above by signing all three (3) copies of this Commencement Letter in the space provided and returning two (2) fully executed copies of the same to my attention Sincerely, [ILLEGIBLE] Property Manager Agreed and Accepted: Tenant: EXACTIUM, INC. --------------------- By: /s/ JEANNE B. JAMBOR ------------------------- Name: JEANNE B. JAMBOR ----------------------- Title: CFO ---------------------- Date: 1/16/99 -----------------------

4 <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------------------------ ACORD(TM) CERTIFICATE OF LIABILITY INSURANCE DATE (MM/DD/YY) 4/06/99 ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> PRODUCER THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE HOLDER. JSL & CO. OF ATLANTA THIS CERTIFICATE DOES NOT AMEND, EXTEND, OR ALTER THE J. Smith Lanier & Company COVERAGE AFFORDED BY THE POLICIES BELOW. P.O. Box 80707 ------------------------------------------------------- Atlanta, GA 30366-0707 COMPANIES AFFORDING COVERAGE (770) 476-1770 ------------------------------------------------------- COMPANY A Federal Insurance Co. ------------------------------------------------------------------------------------------------------------------------------------ INSURED COMPANY B Exactium, Inc ------------------------------------------------------- 5775-B Glenridge Dr. COMPANY Atlanta, GA 30328 C ------------------------------------------------------- COMPANY D ------------------------------------------------------------------------------------------------------------------------------------ COVERAGES ------------------------------------------------------------------------------------------------------------------------------------ THIS IS TO CERTIFY THAT THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY PERIOD INDICATED, NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THE CERTIFICATE MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES. LIMITS SHOWN MAY HAVE BEEN REDUCED BY PAID CLAIMS. ------------------------------------------------------------------------------------------------------------------------------------ CO POLICY EFFECTIVE POLICY EXPIRATION LTR TYPE OF INSURANCE POLICY NUMBER DATE (MM/DD/YY) DATE (MM/DD/YY) LIMITS ------------------------------------------------------------------------------------------------------------------------------------ A GENERAL LIABILITY 35364820T16 12/30/98 12/30/99 GENERAL AGGREGATE $2,000 ------------------------------------- X COMMERCIAL GENERAL LIABILITY PRODUCTS-COMP/OP AGG $2,000 --- ------------------------------------- CLAIMS MADE X OCCUR PERSONAL & ADV INJURY $1,000 --- --- ------------------------------------- OWNER'S & CONTRACTOR'S PROT EACH OCCURRENCE $1,000 --- ------------------------------------- FIRE DAMAGE (Any one fire) $ 350 --- --------------------------- ------------------------------------- MED EXP (Any one person) $ 10 ------------------------------------------------------------------------------------------------------------------------------------ AUTOMOBILE LIABILITY COMBINED SINGLE LIMIT $ ------------------------------------- ANY AUTO BODILY INJURY $ --- (Per person) ALL OWNED AUTOS ------------------------------------- --- BODILY INJURY $ SCHEDULED AUTOS (Per accident) --- ------------------------------------- HIRED AUTOS PROPERTY DAMAGE --- ------------------------------------- NON-OWNED AUTOS --- --- --------------------------- --- --------------------------- ------------------------------------------------------------------------------------------------------------------------------------ GARAGE LIABILITY AUTO ONLY - EA ACCIDENT $ ------------------------------------- ANY AUTO OTHER THAN AUTO ONLY: --- ------------------------------------- EACH ACCIDENT $ --- --------------------------- ------------------------------------- AGGREGATE $ --- --------------------------- ------------------------------------------------------------------------------------------------------------------------------------ A EXCESS LIABILITY 79766562ATL 12/30/98 12/30/99 EACH OCCURRENCE $1,000 ------------------------------------- X UMBRELLA FORM AGGREGATE $1,000 --- ------------------------------------- OTHER THAN UMBRELLA FORM --- ------------------------------------------------------------------------------------------------------------------------------------ WORKERS COMPENSATION AND WC STATUTORY LIMITS OTHER EMPLOYERS' LIABILITY ------------------------------------- EL EACH ACCIDENT $ THE PROPRIETOR/ [ ] INCL. ------------------------------------- PARTNERS/EXECUTIVE [ ] EXCL. EL DISEASE-POLICY LIMIT $ OFFICERS ARE: ------------------------------------- EL DISEASE-EA EMPLOYEE $ ------------------------------------------------------------------------------------------------------------------------------------ OTHER ------------------------------------------------------------------------------------------------------------------------------------ DESCRIPTION OF OPERATIONS/LOCATIONS/VEHICLES/SPECIAL ITEMS EOP-Lakeside Office, L.L.C., a Delaware limited liability company, Equity Office Properties Trust, a Maryland real estate investment trust, EOP Operating Limited Partnership, A Delaware limited partnership, and their respective agents, members, partners, employees and mortgagees as Additional Insureds. ------------------------------------------------------------------------------------------------------------------------------------ CERTIFICATE HOLDER CANCELLATION Lakeside Office Park SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED BEFORE THE 5775 B Glendride Drive Ste 500 EXPIRATION DATE THEREOF, THE ISSUING COMPANY WILL ENDEAVOR TO ???? Atlanta, GA 30328-1223 30 DAYS WRITTEN NOTICE TO THE CERTIFICATE HOLDER NAMED TO THE ???? BUT FAILURE TO MAIL SUCH NOTICE SHALL IMPOSE NO OBLIGATION OR LIABILITY OF ANY KIND UPON THE COMPANY, ITS AGENTS OR REPRESENTATIVES. ------------------------------------------------------------------- AUTHORIZED REPRESENTATIVE [SIGNATURE ILLEGIBLE] ------------------------------------------------------------------------------------------------------------------------------------ ACORD 25-S (1/95) (C) ACORD CORPORATION ------------------------------------------------------------------------------------------------------------------------------------ CERTIFICATE: 001/001/00001 </TABLE>

5 [EQUITY OFFICE LETTERHEAD] SOUTHEAST REGION June 24, 1999 Ms. Jeannie Jambor Exactium, Inc. 5775-B Glenridge Drive Suite 200 Atlanta, Georgia 30328 RE: Second Amendment to Lease Agreement Lakeside Building B Dear Jeannie: Enclosed please find one (1) fully executed copy of the above referenced document. This copy is for your permanent records. Should you have any questions regarding the enclosed, please do not hesitate to contact Kristie Abney or myself. Sincerely, /s/ SHERI E. WELCH Sheri E. Welch Leasing Assistant Enclosures

6 FIRST AMENDMENT THIS FIRST AMENDMENT (the "Amendment") is made and entered into as of the 14 day of MAY, 1999, by and between EOP-LAKESIDE OFFICE, L.L.C., a Delaware limited liability company ("Landlord"), and EXACTIUM, INC., a Delaware corporation ("Tenant"). WITNESSETH A. WHEREAS, Landlord (as successor by merger to Beacon Properties, L.P.) and Tenant are parties to that certain lease dated the 4th day of December, 1997 (the "Lease"), for space currently containing approximately 6,968 rentable square feet (the "Original Premises") described as Suite No. 200 on the 2nd floor of the building commonly known as Lakeside Building B and the address of which is 5775-B Glenridge Drive, Atlanta, Georgia 30328 (the "Building"); and B. WHEREAS, Tenant has requested that additional space containing approximately 2,332 rentable square feet described as Suite No. 250 on the 2nd floor of the Building shown on EXHIBIT A hereto (the "Expansion Space") be added to the Original Premises and that the Lease be appropriately amended and Landlord is willing to do the same on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows: I. EXPANSION AND EFFECTIVE DATE. A. Effective as of June 1, 1999 (the "Expansion Effective Date"), the Premises, as defined in the Lease, is increased from 6,968 rentable square feet on the 2nd floor to 9,300 rentable square feet on the 2nd floor by the addition of the Expansion Space, and from and after the Expansion Effective Date, the Original Premises and the Expansion Space, collectively, shall be deemed the Premises, as defined in the Lease. The Term for the Expansion Space shall commence on the Expansion Effective Date and end on the Expiration Date, which the parties hereby agree is deemed to mean January 31, 2003. The Expansion Space is subject to all the terms and conditions of the Lease except as expressly modified herein and except that Tenant shall not be entitled to receive any allowances, abatements or other financial concessions granted with respect to the Original Premises unless such concessions are expressly provided for herein with respect to the Expansion Space. B. The Expansion Effective Date shall be delayed to the extent that Landlord fails to deliver possession of the Expansion Space for any reason, including but not limited to, holding over by prior occupants. Any such delay in the Expansion Effective Date shall not subject Landlord to any liability for any loss or damage resulting therefrom. If the Expansion Effective Date is delayed, the Expiration Date under the Lease shall not be similarly extended. II. BASE RENT. In addition to Tenant's obligation to pay Base Rent for the Original Premises, Tenant shall pay Landlord the sum of One Hundred Seventy One Thousand One Hundred Thirty Seven and 60/100 Dollars ($171,137.60) as aggregate Base Rent for the Expansion Space in forty four (44) monthly installments ("Monthly Rental") as follows: A. Eight (8) equal installments of Three Thousand Seven Hundred Three and 99/100 Dollars ($.3,703.99) each payable on or before the first day of each month during the period beginning June 1, 1999, and ending January 31, 2000, provided that the installment of Monthly Rental for the first full calendar month of the Term for the Expansion Space shall be payable upon the execution of this Amendment by Tenant. B. Twelve (12) equal installments of Three Thousand Eight Hundred Fourteen and 76/100 Dollars ($3,814.76) each payable on or before the first day of each month during the period beginning February 1, 2000, and ending January 31, 2001. 1

7 C. Twelve (12) equal installments of Three Thousand Nine Hundred Twenty Nine and 42/100 Dollars ($3,929.42) each payable on or before the first day of each month during the period beginning February 1, 2001, and ending January 31, 2002. D. Twelve (12) equal installments of Four Thousand Forty Seven and 96/100 Dollars ($4,047.96) each payable on or before the first day of each month during the period beginning February 1, 2002, and ending January 31, 2003. All such Base Rent shall be payable by Tenant in accordance with the terms of the Lease. III. ADDITIONAL SECURITY DEPOSIT. Upon Tenant's execution hereof, Tenant shall pay Landlord the sum of Three Thousand Seven Hundred Three and 99/100 Dollars ($3,703.99) which is added to and becomes part of the Security Deposit, if any, held by Landlord as provided under the Lease as security for payment of Rent and the performance of the other terms and conditions of the Lease by Tenant. Accordingly, simultaneous with the execution hereof, the Security Deposit is increased from $28,781.44 to $32,485.43. IV. TENANT'S SHARE AND OPERATING COSTS. A. Effective as of the date of this Amendment, the "Total Building Rentable Area", as defined in Section 3(c) of the Lease, shall be deemed to mean 390,721 rentable square feet, rather than 388,832 rentable square feet, as previously provided in the Lease. B. Effective as of the date of this Amendment, Tenant's Share for the Original Premises is deemed to mean 1.7834% rather than 1.8%. C. For the period commencing with the Expansion Effective Date and ending on the Expiration Date, Tenant's Share for the Expansion Space shall be deemed to mean .5968%. For the period commencing with the Expansion Effective Date and ending on the Expiration Date, Tenant shall pay, as Additional Rent, for Tenant's Share of Operating Costs applicable to the Expansion Space in accordance with the terms of Section 3 of the Lease. V. IMPROVEMENTS TO EXPANSION SPACE. A. CONDITION OF EXPANSION SPACE AND THE ORIGINAL PREMISES. Tenant has inspected the Expansion Space and the Original Premises and agrees to accept the same "as is" without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements, except as may be expressly provided otherwise in this Amendment. B. COST OF IMPROVEMENTS TO EXPANSION SPACE AND THE ORIGINAL PREMISES. Provided Tenant is not in default, Tenant shall be entitled to receive an improvement allowance (the "Improvement Allowance") in an amount not to exceed Thirteen Thousand Nine Hundred Ninety Two 00/100 Dollars ($13,992.00) to be applied toward the cost of performing initial construction, alteration or improvement of the Expansion Space and the Original Premises, including but not limited to the cost of space planning, design and related architectural and engineering services. In the event the total cost of the initial improvements to the Expansion Space and the Original Premises exceeds the Improvement Allowance, Tenant shall pay for such excess upon demand. The entire unused balance of the Improvement Allowance if any, shall accrue to the sole benefit of Landlord. Landlord shall pay such Improvement Allowance directly to the contractors retained to perform the construction, design or related improvement work to the Expansion Space and the Original Premises. Landlord shall be entitled to deduct from the Improvement Allowance a construction management fee for Landlord's oversight of the improvements in an amount equal to four and half percent (4.5%) of the total cost of such improvements. C. RESPONSIBILITY FOR IMPROVEMENTS TO EXPANSION SPACE AND THE ORIGINAL PREMISES. Landlord shall enter into a direct contract for the initial improvements to the Expansion Space and the Original Premises with a general contractor selected by Landlord. Tenant shall devote such time in 2

8 consultation with Landlord or Landlord's architect as may be required to provide all information Landlord deems necessary in order to enable Landlord to complete, and obtain Tenant's written approval of, the plans for the initial improvements to the Expansion Space and the Original Premises in a timely manner. All plans for the initial improvements to the Expansion Space and the Original Premises shall be subject to Landlord's consent, which consent shall not be unreasonably withheld. If the cost of such improvements exceeds the Improvement Allowance, then prior to commencing any construction of improvements to the Expansion Space and the Original Premises, Landlord shall submit to Tenant a written estimate setting forth the anticipated cost, including but not limited to the cost of space planning, design and related architectural and engineering services, labor and materials, contractor's fees, and permit fees. Within a reasonable time thereafter, Tenant shall either notify Landlord in writing of its approval of the cost estimate or specify its objections thereto and any desired changes to the proposed improvements. In the event Tenant notifies Landlord of such objections and desired changes, Tenant shall work with Landlord to reach a mutually acceptable alternative cost estimate. D. Tenant acknowledges that the improvement work in the Expansion Space and the Original Premises may be performed by Landlord in the Expansion Space and Original Premises during normal business hours prior to or subsequent to the Expansion Effective Date. Landlord and Tenant agree to cooperate with each other in order to enable such work to be performed in a timely manner and with as little inconvenience to the operation of Tenant's business as is reasonably possible. Notwithstanding anything herein to the contrary, any delay in the completion of the improvement work or inconvenience suffered by Tenant during the performance of such work; shall not subject Landlord to any liability for any loss or damage resulting therefrom or entitle Tenant to any credit, abatement or adjustment of Rent or other sums payable under the Lease. VI. EARLY ACCESS TO EXPANSION SPACE. During any period that Tenant shall be permitted to enter the Expansion Space prior to the Expansion Effective Date (e.g., to perform alterations or improvements, if any), Tenant shall comply with all terms and provisions of the Lease, except those provisions requiring payment of Base Rent or Additional Rent as to the Expansion Space. If Tenant takes possession of the Expansion Space prior to the Expansion Effective Date for any reason whatsoever (other than the performance of work in the Expansion Space with Landlord's prior approval), such possession shall be subject to all the terms and conditions of the Lease and this Amendment, and Tenant shall pay Base Rent and Additional Rent as applicable to the Expansion Space to Landlord on a per diem basis for each day of occupancy prior to the Expansion Effective Date. VII. OTHER PERTINENT PROVISIONS. Landlord and Tenant agree that, effective as of the date hereof (unless different effective date(s) is/are specifically referenced in this Section), the Lease shall be amended in the following additional respects: A. LANDLORD ADDRESSES. Section 20 of the Lease, "Notices", and the first (1st) sentence of Section 2(a) of the Lease are modified to reflect that the address for notices to Landlord and payments of Rent shall be as follows: EOP-Lakeside Office, L.L.C. c/o Equity Office Properties Trust 5775B Glenridge Drive, Suite 500 Atlanta, Georgia 30323 Attention: Building Manager with a copy to: Equity Office Properties Trust Two North Riverside Plaza Suite 2200 Chicago, Illinois 60606 Attention: Regional Counsel - Southeast Region 3

9 Payments of Rent only shall be made payable to the order of EQUITY OFFICE PROPERTIES and forwarded to the following address: EOP Operating Limited Partnership, as agent for EOP-Lakeside Office, L.L.C. P.O. Box 931591 Atlanta, Georgia 31193-1591 B. PARKING AND ACCESS AREAS. Section 27, "Parking and Access Areas", of the Lease, regarding the parking spaces which are available to Tenant and its employees, remains unmodified hereby and, effective as of the Expansion Effective Date with respect to the Expansion Space, ten (10) additional unreserved parking spaces shall be made available to Tenant with respect to the Expansion Space for parking by Tenant and its employees, free of charge, during the remainder of the Term. The use of such parking spaces shall be subject to the terms of Section 27 and Section 44 of the Lease. The parking spaces available in connection with the Original Premises remains unchanged for the remainder of the Term. C. Section 9 of Exhibit C, "Rules and Regulations", of the Lease is modified so that all references to "7:00 a.m." in Section 9 of Exhibit C shall be deemed to mean "8:00 a.m.". VIII. CONTINGENCY. The parties hereto acknowledge that the Expansion Space currently is subject to the terms of that certain lease agreement dated April 24, 1995, as amended (the "Prior Lease") by and between Landlord and PM Group Life Insurance Company ("Prior Tenant"). This Amendment specifically is contingent upon Landlord entering into an agreement with the Prior Tenant to terminate the Prior Lease with respect to the Expansion Space (the "Prior Lease Termination Agreement"). If the Prior Lease Termination Agreement has not been executed on or before May 21, 1999 (the "Contingency Date"), then Landlord may terminate this Amendment by providing written notice thereof to Tenant on or before the earlier of (i) five (5) days after the Contingency Date and (ii) execution of the Prior Lease Termination Agreement by Prior Tenant, whereupon, this Amendment shall be null and void and of no force or effect and the Lease shall continue in full force and effect as if this Amendment had not been executed. IX. MISCELLANEOUS. A. This Amendment sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements. Under no circumstances shall Tenant be entitled to any Rent abatement, improvement allowance, leasehold improvements, or other work to the Premises, or any similar economic incentives that may have been provided Tenant in connection with entering into the Lease, unless specifically set forth in this Amendment. B. Except as herein modified or amended, the provisions, conditions and terms of the Lease shall remain unchanged and in full force and effect. C. In the case of any inconsistency between the provisions of the Lease and this Amendment, the provisions of this Amendment shall govern and control. D. Submission of this Amendment by Landlord is not an offer to enter into this Amendment but rather is a solicitation for such an offer by Tenant. Landlord shall not be bound by this Amendment until Landlord has executed and delivered the same to Tenant E. The capitalized terms used in this Amendment shall have the same definitions as set forth in the Lease to the extent that such capitalized terms are defined therein and not redefined in this Amendment. F. Tenant hereby represents to Landlord that Tenant has dealt with no broker in connection with this Amendment. Tenant agrees to indemnify and hold Landlord, its members, principals, beneficiaries, partners, officers, directors, employees, mortgagee(s) and agents, and the respective principals and members of any such agents (collectively, the "Landlord 4

10 Related Parties") harmless from all claims of any brokers claiming to have represented Tenant in connection with this Amendment. Landlord hereby represents to Tenant that Landlord has dealt with no broker in connection with this Amendment. Landlord agrees to indemnify and hold Tenant, its members, principals, beneficiaries, partners, officers, directors, employees, and agents, and the respective principals and members of any such agents (collectively, the "Tenant Related Parties") harmless from all claims of any brokers claiming to have represented Landlord in connection with this Amendment. IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the day and year first above written. LANDLORD: EOP-LAKESIDE OFFICE, L.L.C., a Delaware limited liability company By: EOP Operating limited Partnership, a Delaware limited partnership, its sole member By: Equity Office Properties Trust, a Maryland real estate investment trust, its managing general partner By: /s/ JEFF SWEENEY ------------------------------ Name: JEFF SWEENEY ---------------------------- Title: V.P. LEASING --------------------------- TENANT: EXACTIUM, INC., a Delaware corporation By: /s/ JEANNE B. JAMBOR --------------------------------------- Name: JEANNE B. JAMBOR ------------------------------------- Title: CHIEF FINANCIAL OFFICER ------------------------------------ 5

11 EXHIBIT A Attach Floor Plan Showing Expansion Space [FLOOR PLAN] 6

12 SECOND AMENDMENT THIS SECOND AMENDMENT (the "Amendment") is made and entered into as of the 22nd day of June, 1999, by and between EOP-LAKESIDE OFFICE, L.L.C., a Delaware limited liability company ("Landlord"), and EXACTIUM, INC., a Delaware corporation ("Tenant"). WITNESSETH A. WHEREAS, Landlord (as successor by merger to Beacon Properties, L.P.) and Tenant are parties to that certain lease dated the 4th day of December, 1997, for space currently containing approximately 9,300 rentable square feet (the "Original Premises") described as Suite Nos. 200 and 250 on the 2nd floor of the building commonly known as Lakeside Building B and the address of which is 5775-B Glenridge Drive, Atlanta, Georgia 30328 (the "Building"), which lease has been previously amended by instrument dated May 14, 1999, (the "First Amendment") (collectively, the "Lease"); and B. WHEREAS, Tenant has requested that additional space described as Suite 290 containing approximately 1,338 rentable square feet on the 2nd floor of the Building shown on EXHIBIT A hereto (the "Expansion Space") be added to the Original Premises and that the Lease be appropriately amended and Landlord is willing to do the same on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree as follows: I. EXPANSION AND EFFECTIVE DATE. Effective as of the Expansion Effective Date (as hereinafter defined), the Premises, as defined in the Lease, is increased from 9,300 rentable square feet on the 2nd floor to 10,638 rentable square feet on the 2nd floor by the addition of the Expansion Space, and from and after the Expansion Effective Date, the Original Premises and the Expansion Space, collectively, shall be deemed the Premises, as defined in the Lease. The Term for the Expansion Space shall commence on the Expansion Effective Date and end on the Expiration Date. The Expansion Space is subject to all the terms and conditions of the Lease except as expressly modified herein and except that Tenant shall not be entitled to receive any allowances, abatements or other financial concessions granted with respect to the Original Premises unless such concessions are expressly provided for herein with respect to the Expansion Space. A. The Expansion Effective Date shall be the later to occur of (i) August 1, 1999, ("Target Expansion Effective Date"), and (ii) the date upon which Landlord's improvement work in the Expansion Space has been substantially completed; provided, however, that if Landlord shall be delayed in substantially completing the Landlord's work in the Expansion Space as a result of the occurrence of any of the following (a "Delay"): 1. Tenant's failure to furnish information or to respond to any request by Landlord for any approval or information within any time period prescribed or, if no time period is prescribed, then within two (2) business days of such request; or 2. Tenant's insistence on materials, finishes or installations that have long lead times after having first been informed by Landlord that such materials, finishes or installations will cause a Delay; or 3. Changes in any plans and specifications requested by Tenant after approval of same; or 4. The performance or nonperformance by a person or entity employed by Tenant in the completion of any work (all such work and such persons or entities being subject to the prior approval of Landlord); or 5. Any request by Tenant that Landlord delay the completion of any of the Landlord's work; or 6. Any delay resulting from Tenant having taken possession of the Expansion Space for any reason prior to substantial completion of the Landlord's work; or 1

13 7. Any other delay chargeable to Tenant, its agents, employees or independent contractors; then, for purposes of determining the Expansion Effective Date, the date of substantial completion shall be deemed to be the day that said Landlord's work would have been substantially completed absent any such Delay(s). The Expansion Space shall be deemed to be substantially completed on the date that Landlord reasonably determines that all Landlord's work has been performed (or would have been performed absent any Delays), other than any details of construction, mechanical adjustment or any other matter, the noncompletion of which does not materially interfere with Tenant's use of the Expansion Space. The adjustment of the Expansion Effective Date and, accordingly, the postponement of Tenant's obligation to pay Rent on the Expansion Space, shall be Tenant's sole remedy and shall constitute full settlement of all claims that Tenant might otherwise have against Landlord by reason of the Expansion Space not being ready for occupancy by Tenant on the Target Expansion Effective Date. B. In addition to the postponement, if any, of the Expansion Effective Date as a result of the applicability of Paragraph I.A. of this Amendment, the Expansion Effective Date shall be delayed to the extent that Landlord fails to deliver possession of the Expansion Space for any other reason (other than Delays by Tenant), including but not limited to, holding over by prior occupants. Any such delay in the Expansion Effective Date shall not subject Landlord to any liability for any loss or damage resulting therefrom. If the Expansion Effective Date is delayed, the Termination Date under the Lease shall not be similarly extended. II. BASE RENT In addition to Tenant's obligation to pay Base Rent for the Original Premises, Tenant shall pay Landlord the sum of $93,941.10 as aggregate Base Rent for the Expansion Space in forty two (42) monthly installments ("Monthly Rental") as follows: A. Six (6) equal installments of $2,125.19 each payable on or before the first day of each month during the period beginning August 1, 1999, and ending January 31, 2000, provided that the installment of Monthly Rental for the first full calendar month of the Term for the Expansion Space shall be payable upon the execution of this Amendment by Tenant. B. Twelve (12) equal installments of $2,188.75 each payable on or before the first day of each month during the period beginning February 1, 2000, and ending January 31, 2001. C. Twelve (12) equal installments of $2,254.53 each payable on or before the first day of each month during the period beginning February 1, 2001, and ending January 31, 2002. D. Twelve (12) equal installments of $2,322.55 each payable on or before the first day of each month during the period beginning February 1, 2002, and ending January 31, 2003. All such Base Rent shall be payable by Tenant in accordance with the terms of the Lease. Landlord and Tenant acknowledge that the foregoing schedule is based on the assumption that the Expansion Effective Date is the Target Expansion Effective Date. If the Expansion Effective Date is other than the Target Expansion Effective Date, the schedule set forth above with respect to the payment of any installments of Base Rent for the Expansion Space shall be appropriately adjusted on a per diem basis to reflect the actual Expansion Effective Date and the actual Expansion Effective Date shall be set forth in a confirmation letter to be prepared by Landlord. However, the effective date of any increases or decreases in the Base Rent rate shall not be postponed as a result of an adjustment of the Expansion Effective Date as provided above. III. ADDITIONAL SECURITY DEPOSIT. Upon Tenant's execution hereof, Tenant shall pay Landlord the sum of $2,125.19 which is added to and becomes part of the Security Deposit, if any, held by Landlord as provided under the Lease as security for payment of Rent and the performance of the other terms and conditions of the 2

14 Lease by Tenant. Accordingly, simultaneous with the execution hereof, the Security Deposit is increased from $32,485.43 to $34,610.62. IV. TENANT'S SHARE AND OPERATING COSTS. For the period commencing with the Expansion Effective Date and ending on the Expiration Date, Tenant's Share for the Expansion Space is 0.3424%. For the period commencing with the Expansion Effective Date and ending on the Expiration Date, Tenant shall pay, as Additional Rent, for Tenant's Share of Operating Costs applicable to the Expansion Space in accordance with the terms of Section 3 of the Lease. V. IMPROVEMENTS TO EXPANSION SPACE. A. CONDITION OF EXPANSION SPACE. Tenant has inspected the Expansion Space and agrees to accept the same "as is" without any agreements, representations, understandings or obligations on the part of Landlord to perform any alterations, repairs or improvements, except as may be expressly provided otherwise in this Amendment. B. COST OF IMPROVEMENTS TO EXPANSION SPACE. Provided Tenant is not in default, Tenant shall be entitled to receive an improvement allowance (the "Expansion Improvement Allowance") in an amount not to exceed $8,028.00 (i.e., $6.00 per rentable square foot of the Expansion Space) to be applied toward the cost of performing initial construction, alteration or improvement of the Expansion Space, including but not limited to the cost of space planning, design and related architectural and engineering services. In the event the total cost of the initial improvements to the Expansion Space exceeds the Expansion Improvement Allowance, Tenant shall pay for such excess upon demand. The entire unused balance of the Expansion Improvement Allowance, if any, shall accrue to the sole benefit of Landlord. Landlord shall pay such Expansion Improvement Allowance directly to the contractors retained to perform the construction, design or related improvement work to the Expansion Space. Landlord shall be entitled to deduct from the Expansion Improvement Allowance a construction management fee for Landlord's oversight of the improvements in an amount equal to four and half percent (4.5%) of the total cost of such improvements. C. RESPONSIBILITY FOR IMPROVEMENTS TO EXPANSION SPACE. Landlord shall enter into a direct contract for the initial improvements to the Expansion Space with a general contractor selected by Landlord. Tenant shall devote such time in consultation with Landlord or Landlord's architect as may be required to provide all information Landlord deems necessary in order to enable Landlord to complete, and obtain Tenant's written approval of, the plans for the initial improvements to the Expansion Space in a timely manner. All plans for the initial improvements to the Expansion Space shall be subject to Landlord's consent, which consent shall not be unreasonably withheld. If the cost of such improvements exceeds the Expansion Improvement Allowance. then prior to commencing any construction of improvements to the Expansion Space, Landlord shall submit to Tenant a written estimate setting forth the anticipated cost, including but not limited to the cost of space planning, design and related architectural and engineering services, labor and materials, contractor's fees, and permit fees. Within a reasonable time thereafter, Tenant shall either notify Landlord in writing of its approval of the cost estimate or specify its objections thereto and any desired changes to the proposed improvements. In the event Tenant notifies Landlord of such objections and desired changes, Tenant shall work with Landlord to reach a mutually acceptable alternative cost estimate. VI. EARLY ACCESS TO EXPANSION SPACE. During any period that Tenant shall be permitted to enter the Expansion Space prior to the Expansion Effective Date (e.g., to perform alterations or improvements, if any), Tenant shall comply with all terms and provisions of the Lease, except those provisions requiring payment of Base Rent or Additional Rent as to the Expansion Space. If Tenant takes possession of the Expansion Space prior to the Expansion Effective Date for any reason whatsoever (other than the performance of work in the Expansion Space with Landlord's prior approval), such possession shall be subject to all the terms and conditions of the Lease and this Amendment, and Tenant shall pay Base Rent and Additional Rent as applicable to the Expansion Space to Landlord on a per diem basis for each day of occupancy prior to the Expansion Effective Date. VII. OTHER PERTINENT PROVISIONS. Landlord and Tenant agree that, effective as of the 3

15 date of this Amendment (unless different effective date(s) is/are specifically referenced in this Section), the Lease shall be amended in the following additional respects: A PARKING AND ACCESS AREAS. Section 27, "Parking and Access Areas", of the Lease, regarding the parking spaces which are available to Tenant and its employees, remains unmodified hereby and, in accordance with said Section 27, effective as of the Expansion Effective Date with respect to the Expansion Space, six (6) additional unreserved parking spaces shall be made available to Tenant with respect to the Expansion Space for parking by Tenant and its employees, free of charge, during the remainder of the Term. The use of such parking spaces shall be subject to the terms of Section 27 and Section 44 of the Lease. The parking spaces available in connection with the Original Premises remains unchanged for the remainder of the Term. B. DELETED PROVISION. Special Stipulation 1, "Right of First Refusal", of Exhibit F of the Lease has been satisfied or otherwise expired and is hereby deleted in its entirety and is of no further force and effect. VIII. MISCELLANEOUS. A. This Amendment sets forth the entire agreement between the parties with respect to the matters set forth herein. There have been no additional oral or written representations or agreements. Under no circumstances shall Tenant be entitled to any Rent abatement, improvement allowance, leasehold improvements, or other work to the Premises, or any similar economic incentives that may have been provided Tenant in connection with entering into the Lease, unless specifically set forth in this Amendment. B. Except as herein modified or amended, the provisions, conditions and terms of the Lease shall remain unchanged and in full force and effect. C. In the case of any inconsistency between the provisions of the Lease and this Amendment, the provisions of this Amendment shall govern and control. D. Submission of this Amendment by Landlord is not an offer to enter into this Amendment but rather is a solicitation for such an offer by Tenant. Landlord shall not be bound by this Amendment until Landlord has executed and delivered the same to Tenant. E. The capitalized terms used in this Amendment shall have the same definitions as set forth in the Lease to the extent that such capitalized terms are defined therein and not redefined in this Amendment. F. Tenant hereby represents to Landlord that Tenant has dealt with no broker in connection with this Amendment. Tenant agrees to indemnify and hold Landlord, its members, principals, beneficiaries, partners, officers, directors, employees, mortgagee(s) and agents, and the respective principals and members of any such agents (collectively, the "Landlord Related Parties") harmless from all claims of any brokers claiming to have represented Tenant in connection with this Amendment. Landlord hereby represents to Tenant that Landlord has dealt with no broker in connection with this Amendment. Landlord agrees to indemnify and hold Tenant, its members, principals, beneficiaries, partners, officers, directors, employees, and agents, and the respective principals and members of any such agents (collectively, the "Tenant Related Parties") harmless from all claims of any brokers claiming to have represented Landlord in connection with this Amendment. 4

16 IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of the day and year first above written. LANDLORD: EOP-LAKESIDE OFFICE, L.L.C., A DELAWARE LIMITED LIABILITY COMPANY By: EOP Operating Limited Partnership, a Delaware limited partnership, its sole member By: Equity Office Properties Trust, a Maryland real estate investment trust, its managing general partner By: /s/ JEFF SWEENEY ------------------------------- Name: JEFF SWEENEY ----------------------------- Title: V. P. LEASING ---------------------------- TENANT: EXACTIUM, INC., A DELAWARE CORPORATION By: /s/ JEANNE B. JAMBOR --------------------------------------- Name: JEANNE B. JAMBOR ------------------------------------- Title: CFO ------------------------------------ 5

17 EXHIBIT A Expansion Space [FLOORPLAN] 6

18 [BEACON MANAGEMENT COMPANY LETTERHEAD] December 12, 1997 Ms. Jeannie Jambor Director of Finance & Administration 5775 - B Glenridge Drive Suite 200 Atlanta, Georgia 30328 RE: New Lease Agreement between BEACON PROPERTIES, L.P., a Delaware limited partnership (the "Landlord"), and EXACTIUM, INC. (the "Tenant"). Dear Jeannie: Enclosed please find one (1) fully executed original of the New Lease Agreement for Exactium. Please retain this original for your records. Feel free to call if you should require any further assistance in this matter. Best regards, /s/ CANDY WALTON Candy Walton Leasing Assistant Enclosure cc: Ms. Lee Eastwood - w/copy of enclosure

19 LEASE AGREEMENT LAKESIDE ATLANTA, GEORGIA LANDLORD: BEACON PROPERTIES, L.P. TENANT: EXACTIUM, INC. BUILDING: 5775-B SUITE: 200 SQ. FT.: 6,968 RENTABLE SQUARE FEET TERM: FIVE (5) YEARS

20 TABLE OF CONTENTS <TABLE> <CAPTION> Item Page ---- ---- <S> <C> 1. PREMISES AND TERM .................................................. 1 2. RENT ............................................................... 2 3. REIMBURSEMENT FOR INCREASES IN OPERATING EXPENSES AND .............. 3 4. DELIVERY OF THE PREMISES ........................................... 6 5. ACCEPTANCE OF THE PREMISES ......................................... 7 6. USE ................................................................ 7 7. CARE OF THE PREMISES ............................................... 7 8. SERVICES ........................................................... 9 9. DESTRUCTION OR DAMAGE TO PREMISES .................................. 9 10. DEFAULT BY TENANT; LANDLORD'S REMEDIES ............................. 10 11. ASSIGNMENT AND SUBLETTING .......................................... 12 12. CONDEMNATION ....................................................... 14 13. INSPECTIONS ........................................................ 15 14. SUBORDINATION ...................................................... 15 15. INDEMNIFICATION AND HOLD HARMLESS .................................. 16 16. TENANT'S INSURANCE ................................................. 16 17. REMEDIES CUMULATIVE ................................................ 17 18. ENTIRE AGREEMENT - NO WAIVER ....................................... 17 19. HOLDING OVER ....................................................... 17 20. NOTICES ............................................................ 17 21. HEIRS, SUCCESSORS, AND ASSIGNS - PARTIES ........................... 18 </TABLE> i

21 <TABLE> <S> <C> 22. ATTORNEY'S FEES .................................................... 18 23. TIME OF THE ESSENCE ................................................ 18 24. NO ESTATE IN LAND .................................................. 18 25. SECURITY DEPOSIT ................................................... 18 26. COMPLETION OF THE PREMISES ......................................... 19 27. PARKING AND ACCESS AREAS ........................................... 19 28. RULES AND REGULATIONS .............................................. 19 29. RIGHT TO RELOCATE .................................................. 19 30. LATE PAYMENTS -- ACCORD AND SATISFACTION ........................... 20 31. ESTOPPEL CERTIFICATE ............................................... 20 32. SEVERABILITY AND INTERPRETATION .................................... 20 33. MULTIPLE TENANTS ................................................... 20 34. FORCE MAJEURE ...................................................... 20 35. QUIET ENJOYMENT .................................................... 21 36. BROKERAGE COMMISSION; INDEMNITY .................................... 21 37. EXCULPATION OF LANDLORD ............................................ 21 38. ORIGINAL INSTRUMENT ................................................ 21 39. APPLICABLE LAW ..................................................... 21 40. NO RECORDATION OF LEASE ............................................ 21 41. HAZARDOUS WASTES ................................................... 21 42. BANKRUPTCY ......................................................... 22 43. SIGNS .............................................................. 25 44. CONTROL OF COMMON AREAS AND PARKING FACILITIES ..................... 25 </TABLE> ii

22 <TABLE> <S> <C> 45. NO SMOKING ......................................................... 26 46. PRIOR OCCUPANCY .................................................... 26 47. GUARANTEE .......................................................... 26 48. LEASE BINDING UPON DELIVERY ........................................ 26 49. SPECIAL STIPULATIONS ............................................... 26 50. HEADINGS ........................................................... 26 51. SURRENDER OF LEASE NOT MERGER ...................................... 27 52. MORTGAGEE PROTECTION ............................................... 27 53. INTERFERENCE ....................................................... 27 54. NO PARTNERSHIPS .................................................... 27 55. ADA ................................................................ 27 56. USE OF PRONOUN, RELATIONSHIP ....................................... 27 57. SURRENDER .......................................................... 27 58. WAIVER OF JURY TRIAL ............................................... 27 59. NO THIRD PARTY BENEFICIARY ......................................... 28 60. REPRESENTATIONS OF TENANT .......................................... 28 </TABLE> Exhibit "A" - Space Plan of Premises Exhibit "B" - Legal Description of Land Exhibit "C" - Rules and Regulations Exhibit "D" - Work Agreement Exhibit "E" - Prohibited Use of Premises Exhibit "F" - Special Stipulations Exhibit "G" - Complex Standard Services Exhibit "H" - Guaranty iii

23 DEFINITIONS <TABLE> <CAPTION> Term Paragraph ---- --------- <S> <C> ADA 54 Additional Rental Exhibit "D" Adjusted Monthly Rental 2(b) Allowance Exhibit "D" Bankruptcy Code 42 Base Rent 2 Complex 1(b) Complex Operating Hours Exhibit "G" Complex Standard Services Exhibit "G" Commencement Date 1(c) Common Areas 44 Expiration Date 1(c) Hazardous Substances or Materials 41 Holidays Exhibit "G" Initial Calendar Year 3(a) Initial Monthly Rental 2(a) Initial Operating Costs 3(a) Insolvency Laws 42 Landlord Caption Lease Caption Lease Year 1(d) Monthly Rental 2 Mortgagee 14(a) Operating Costs 3(b) Premises 1(a) Property 1(e) Rent 2 Rentable Square Foot (Feet) 1(b) Rules 6 and Exhibit "F" Scheduled Commencement Date 4 Services 37 Tenant Caption Tenant's Share 3(c) Term 1(c) Work Agreement 4 </TABLE>

24 LEASE AGREEMENT THIS LEASE AGREEMENT (the "Lease"), made this 4th day of December 1997, by and between BEACON PROPERTIES, L.P. ("Landlord") a Delaware limited partnership which has as its address for all purposes hereunder as follows: Beacon Properties, L.P. c/o Beacon Properties Corporation 50 Rowes Wharf Boston, Massachusetts 02110 Attn: General Counsel with a copy of all notices to: Beacon Properties, L.P. 115 Perimeter Center Place, Suite 225 Atlanta, Georgia 30348 and EXACTIUM, INC. ("Tenant"), a corporation of the State of Delaware which has as its address: 5775-B Glenridge Drive Suite 200 Atlanta, GA 30328 WITNESSETH: WHEREAS, the Mutual Life Insurance Company of New York ("MONY") and ARAD, Inc. ("ARAD") did enter into a Lease Agreement (the "Existing Lease"), dated as of December 5, 1996, for space in the Building known as "Suite 410." WHEREAS, MONY has conveyed its interest as "Landlord" in the Existing Lease to Landlord. WHEREAS, ARAD has conveyed its interest as "Tenant" in the Existing Lease to Tenant. WHEREAS, Landlord and Tenant desire to enter into this Lease, to replace the Existing Lease. 1. PREMISES AND TERM (a) Landlord hereby rents and leases to Tenant, and Tenant hereby rents and leases from Landlord, the following described space (the "Premises"): Floor: 2nd Suite: 200 Square Feet: 6,968 rentable square feet Tenant's Share: 1.8% (subject to re-calculation pursuant to Section 3(c)) (b) The Premises are more particularly shown and outlined on the space plans attached hereto as Exhibit "A", and made a part hereof, designated as Suite 200 in the building (the "Building") known as 5775-B Glenridge Drive, having an address of 5775-B Glenridge Drive, in the development known as Lakeside comprised of the Building and four (4) other buildings (the five (5) buildings including the Building being collectively referred to as the "Complex".) For all purposes under this Lease, Landlord and Tenant have agreed that the Premises shall be deemed to

25 include 6,968 rentable square feet of area (including both Tenant's exclusive usable area contained in the Premises and common areas in the Complex attributable to Tenant's usable area). Landlord and Tenant acknowledge to each other that each party has had the opportunity to measure the square footage contained in the Premises and waive any claims after the date of this Lease to adjust the rental or amounts due under this Lease resulting from any error in the measurement of the square footage of the Premises. (c) The term of this Lease (the "Term") shall commence (the "Commencement Date"), subject to the provisions of Paragraph 4 herein, on the earlier of (i) January 1, 1998 (the "Scheduled Commencement Date") or (ii) the date on which Landlord delivers possession of the Premises to Tenant in accordance with Paragraph 4 of this Lease or the date Landlord would have so delivered possession of the Premises but for any omission, delay or default caused by the Tenant or other "Tenant Delays" (as hereinafter defined in the Work Agreement) and end at midnight on the last day of the month in which the fifth (5th) anniversary of the Commencement Date occurs (the "Expiration Date") or on such earlier date as the Term may expire or be terminated pursuant to the provisions of this Lease or pursuant to law. This Lease shall be effective and enforceable between Landlord and Tenant upon its execution and delivery, whether such execution and delivery occurs on, prior to, or after the Commencement Date. Upon the Commencement Date, the Existing Lease shall be deemed null, void and of no further force and effect, and Tenant shall have vacated the space leased under the Existing Lease and left such space in the condition required thereunder. (d) "Lease Year" as used herein shall mean (i) each and every twelve (12) month period during the Term of this Lease, or (ii) in the event of Lease expiration or termination, the period between the end of the then most recently completed twelve (12) month period and said expiration or termination. The first such twelve (12) month period shall commence on the Commencement Date. (e) The Complex and land upon which said Complex is located, described on Exhibit "B", attached hereto and by reference incorporated herein, is referred to as the "Property". All drives, parking areas, parking lots, walkways, terraces and landscaped areas that shall be used and maintained in connection with the Complex that are contiguous to the Property whether in fact located within the boundaries of the Land for purposes of this Lease shall be included in the definition of "Complex" and "Property". (f) Subject to the terms herein provided, the Premises shall include the appurtenant right to use, in common with others, on a non-exclusive basis, public lobbies, entrances, stairs, corridors, elevators, all drives, parking areas, parking lots and other public portions of the Complex. All the windows and outside walls of the Premises, and any space in the Premises used for shafts, pipes, conduits, ducts, telephone ducts and equipment, electric or other utilities, sinks or other Building facilities, and the use thereof and access thereto through the Premises for the purposes of operation, maintenance, inspection, display and repairs are hereby reserved to Landlord. No easement for light, air or view, is granted or implied hereunder, and the reduction or elimination of Tenant's light, air or view will not affect Tenant's liability under this Lease. 2. RENT (a) Tenant shall pay to Landlord at P.O. Box 102309, Atlanta, Georgia 30368-2309, or at such other place as Landlord may designate in writing, without demand, deduction or set off, an annual rental for each year of the Term in the amounts set forth hereinbelow (the "Base Rent"): <TABLE> <CAPTION> Lease Year Base Rent P.S.F. Base Monthly Base Annual Rent ---------- ---------------- ------------ ---------------- <S> <C> <C> <C> 1 $18.50 $10,742.33 $128,908.00 2 $19.06 $11,067.51 $132,810.08 3 $19.63 $11,398.49 $136,781.84 4 $20.22 $11,741.08 $140,892.96 5 $20.83 $12,095.29 $145,143.44 </TABLE> (b) Base Rent shall be due and payable in equal monthly installments (the "Monthly Rental") in advance on the first (1st) day of each calendar month during the Term. The term "Rent" as used herein shall mean the Monthly Rental, "Additional Rent" (as that term is herein defined) and any additional amounts or charges due from Tenant hereunder. 2

26 (c) Should this Lease commence at any time other than the first day of a calendar month, or terminate at any time other than the last day of a calendar month, the amount of Rent due from Tenant shall be proportionately adjusted based on that portion of the month that this Lease is in effect. (d) At all times that Landlord shall direct Tenant to pay Monthly Rental or Additional Rental to a "lockbox" or other depository whereby checks issued in payment of Rent are initially cashed or deposited by a person or entity other than Landlord (albeit on Landlord's authority), then, for any and all purposes under this Lease: (i) Landlord shall not be deemed to have accepted such payment until ten (10) days after the date on which Landlord shall have actually received such funds, and (ii) Landlord shall be deemed to have accepted such payment if (and only if) within said ten (10) day period, Landlord shall not have refunded (or attempted to refund) such payment to Tenant. Nothing contained in the immediately preceding sentence shall be construed to place Tenant in default of Tenant's obligation to pay Rent if and for so long as Tenant shall timely pay the rent required pursuant to this Lease in the manner designated by Landlord. 3. REIMBURSEMENT FOR INCREASES IN OPERATING EXPENSES AND TAXES (a) The Monthly Rental provided for herein is based, in part, upon Landlord's estimate of "Operating Costs," as hereinafter defined. The "Initial Operating Costs" are stipulated to be the Operating Costs for the calendar year 1998 (the "Initial Calendar Year"). (b) The term "Operating Costs" shall mean all operating expenses of the Building and the "Building's Allocated Share" (hereinafter defined) of the common areas of the Complex, all of which shall be computed on a modified cash basis and which shall include all expenses, costs, and disbursements of every kind and nature, which Landlord (i) shall pay; or (ii) become obligated to pay in connection with the ownership, operation, management, maintenance, repair, replacement and security of the Building, including, but not limited to, the following: (i) Wages and salaries of all employees engaged in the operation and maintenance of the Building, including, but not limited to, taxes, insurance and benefits relating thereto; (ii) All supplies and materials used in the operation and maintenance of the Building. (iii) Cost of water, sewage, electricity and other utilities furnished in connection with the operation of the Building; (iv) Cost of all service agreements and maintenance for the Building and/or the Property and/or the equipment therein, including, but not limited to, trash removal, security services, alarm services, window cleaning, janitorial service, HVAC maintenance, elevator maintenance, and grounds maintenance; (v) Cost of all insurance relating to the Complex including, but not limited to, the cost of casualty and liability insurance applicable to the Complex and Landlord's personal property used in connection therewith; (vi) All taxes (ad valorem and otherwise), assessments, and governmental charges whether federal, state, county, or municipal, and whether by taxing districts or authorities presently taxing the Building or by others, subsequently created or otherwise, and any other taxes (other than federal and state income taxes) and assessments attributable to any portion of the Building or its operation or any Rent or any personal property in connection with the operation of the Building, and any reasonable consultants and legal fees incurred with respect to issues, concerns or appeals involving the taxes or the Building; (vii) Cost of repairs and general maintenance of the interior and exterior of the Building (including, but not limited to, glass breakage). 3

27 (viii) Cost of management fees for general operation and management of the Building, which service may be provided by an affiliated company or subsidiary of Landlord, provided that such management fee shall not exceed the management fee paid for the management of comparable office buildings in the area of the Property for comparable services negotiated at arms length; and (ix) A reasonable amortization cost due to any capital expenditures incurred (i) which are incurred to have the effect of reducing or limiting Operating Costs of the Building, or improving the operating efficiency of the Complex and the Property, if such reduction or limitation would inure to Tenant's benefit, or (ii) which may be required by governmental authority or by Landlord's insurance carrier, or (iii) which are designed to protect or enhance the health, safety or welfare of the tenants in the Complex or their invitees. (x) Cost of repairs, replacements, damages in respect to the Building incurred due to casualties or other causes to the extent uninsured including any deductible amounts. (xi) Cost of auditing and maintaining accounting books and records in respect to the Building. (xii) Cost of conducting any indoor air quality testing in any portions of the Building deemed necessary or desirable by Landlord, including regularly scheduled testing, and any costs incurred in connection with work arising out of the results of such tests or reports or the recommendations in such tests or reports. (xiii) The Building's Allocated Share of all costs and expenses for the general operation, management, maintenance and repair of all common areas of the Complex, including all such costs and expenses described in items (i) through (xii) above in respect to the common areas of the Complex. Landlord shall be permitted to contract with its affiliates for supplies, materials, and services used for the operation, maintenance, and management of the Property and Complex and its affiliates shall be permitted to subcontract for the acquisition of said supplies, materials, and services; provided, however, Landlord's payments to any affiliates for such supplies, services, and materials shall not exceed the costs normally charged by third parties for such supplies, materials, and services. Notwithstanding any provision herein to the contrary, to the extent that Landlord incurs any Operating Costs which are allocable to the Building but shall not be directly and allocable only to the Building or other building in the Complex, then Landlord shall allocate such Operating Cost to the Building and the other buildings that such Operating Costs are allocable on a consistent basis determined by Landlord. Expressly excluded from the definition of the term "Operating Costs" are: (i) Replacement of capital investment items (excepting those expenditures referred to above) (ii) Landlord's home office expense; (iii) Leasing commissions; (iv) Reimbursements paid by specific tenants or other third parties for direct costs incurred at their request; (v) Depreciation; (vi) Principal, interest, and other costs directly related to financing the Property; (vii) The cost of any repairs or general maintenance paid by the proceeds of insurance policies carried by Landlord on the Property; 4

28 (viii) The wages and salaries of any supervisory or management employee of Landlord not involved in the day-to-day operation and maintenance of the Complex. (c) The term "Tenant's Share" shall mean the portion that the Rentable Square Feet in the Premises bears to the "Total Building Rentable Area" (as hereinafter defined). Notwithstanding anything to the contrary contained herein, in the event the Total Building Rentable Area does not have an average occupancy of ninety-five percent (95%) during any calendar year, appropriate adjustments shall be made to determine Operating Costs as though the Complex had been ninety-five percent (95%) occupied, but in no event shall Tenant ever be required to pay more than Tenant's Share of the determined Operating Costs. The average occupancy shall be determined by adding together the total leased space on the last day of each month during the calendar year in question and dividing by twelve (12). For purposes of this Lease, the Total Building Rentable Area is 388,832 square feet (which is the square footage of all of the buildings in the Complex) and the "Tenant's Share" equals 1.8%. (d) On or about January 31st of each calendar year after the Initial Calendar Year (or as soon thereafter as practical) Landlord shall provide Tenant with a comparison of the Initial Operating Costs and the projected Operating Costs for such current calendar year, and Tenant shall thereafter pay, as "Additional Rent", Tenant's Share of any excess of Landlord's projected Operating Costs in such calendar year over the Initial Operating Costs. Such projected increase in Operating Costs shall be payable in advance on a monthly basis by paying one-twelfth (1/12th) of such projected increase during each month of such respective calendar year. If Landlord has not furnished Tenant such comparison by January 1 of a calendar year after the calendar year immediately following the Initial Calendar Year, Tenant shall continue to pay on the basis of the prior year's estimate until the month after such comparison is given. Landlord shall, within a period of one hundred twenty (120) days (or as soon thereafter as practical) after the close of each such respective calendar year following the Initial Calendar Year provide Tenant an unaudited statement of such year's actual Operating Costs compared to the Initial Operating Costs (such unaudited statement shall be herein referred to as the "Final Annual Statement of Operating Costs"). If the actual Operating Costs are greater than the projected Operating Costs as shown on the Final Annual Statement of Operating Costs, Tenant shall pay Landlord, within thirty (30) days of such statement's receipt, Tenant's Share of the difference thereof. If such year's projected Operating Costs are greater than the actual Operating Costs as shown on the Final Annual Statement of Operating Costs, Landlord shall credit Tenant, within thirty (30) days of such statement issuance, Tenant's Share of the difference between the projected Operating Costs and the greater of actual Operating Costs or Initial Operating Costs. In no event, however, shall Tenant pay as Operating Costs an amount which is less than the Initial Operating Costs for the Initial Calendar Year. (e) Anything herein to the contrary notwithstanding, in no event shall the Monthly Rental as set forth in Paragraph 2(a) ever be reduced on account of Operating Costs. (f) Should this Lease commence at any time other than the first day of a calendar year, or terminate at any time other than the last day of a calendar year, the amount of Additional Rent due from Tenant shall be proportionately adjusted based on that portion of the year that this Lease was in effect. (g) (i) Tenant shall have the right for a period of thirty (30) days after receipt of the Final Annual Statement of Operating Costs to review Landlord's books and records with respect to actual annual Operating Costs for the period covered by the Final Annual Statement of Operating Costs. Such review shall take place in Landlord's manager's office in the Complex or at such other place as designated by Landlord. Tenant shall give Landlord not less than ten (10) days nor more than twenty (20) days written notice of the date on which Tenant intends to conduct such review. In the event Tenant either fails to give written notice or thereafter fails to complete such inspection within ten (10) business days after the date for the inspection set forth in Tenant's written notice, then Tenant's right to review Landlord's books and records shall terminate on such 10th day and the Final Statement of Operating Costs in question shall be binding on both Landlord and Tenant. The results of such review shall be for the benefit of Landlord and Tenant only, shall be maintained in confidence by Tenant, and shall not be disseminated or furnished to any other person or entity. Tenant may use accountants or other professionals to aid Tenant in conducting the audit, but Tenant may not use any auditing services or consultants that are paid on a contingent fee basis or owned by, affiliated with, employed by or related to any office building landlords or office building management companies or services. 5

29 (ii) If, as a result of Tenant's review, Tenant claims that any particular items shall be incorrectly included as an Operating Costs under this Lease or Tenant claims any mathematical errors exist in the Final Statement of Operating Costs, Tenant may give written notice to Landlord within ten (10) days after the thirty (30) day review period. Said notice may only contest Landlord's Final Statement of Operating Costs for the two (2) reasons included in this subparagraph (g) and said notice shall clearly reflect the reasons for the disagreement and the amount claimed by Tenant as owed from Landlord. Tenant and Landlord shall then meet in an effort to resolve the differences in their respective findings. (iii) If a resolution is not reached within twenty (20) days of Tenant's written notice, then Landlord shall designate an independent certified public accountant to audit the actual annual Operating Expenses for the period in question. The findings of said accountant shall be binding on both Landlord and Tenant. (iv) To the extent that the accountant's determination of Operating Expenses is less than ninety percent (90%) of the amount reflected on Landlord's final statement, Landlord shall bear the cost of the audit. Conversely, to the extent that the accountant's determination of the amount reflected on Landlord's final statement is equal to or within ninety percent (90%) of said statement, then Tenant shall bear the cost of the audit. (v) If as a result of such audit it is determined that the amount of Additional Rent due from Tenant shall be less than that shown due on Landlord's statement, Landlord shall make such adjustments as necessary to correct such statement and Landlord shall refund to Tenant any over payments of Additional Rent made by Tenant. (h) Tenant's payments of Additional Rent shall not be deemed payments of base rental as that term is construed relative to governmental wage and price controls or analogous governmental actions affecting the amount of rent which Landlord may charge Tenant for the Premises. 4. DELIVERY OF THE PREMISES (a) Landlord shall endeavor to deliver possession of the Premises to Tenant, substantially complete on the Scheduled Commencement Date with the improvements to be installed or constructed pursuant to the work agreement attached as Exhibit "D" (the "Work Agreement"), which is incorporated herein and made a part of this Lease. If Landlord, for any reason whatsoever, cannot deliver possession of the Premises to Tenant, with the improvements to be installed or constructed pursuant to the Work Agreement substantially complete, on the Scheduled Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom. If the delay is due to any "Unavoidable Delays" (as defined in Section 4 (a) of the Work Agreement) or to any reason other than "Tenant Delays" (as defined in Section 4 (c) of the Work Agreement), the Commencement Date shall be postponed until the date, and Rent shall be waived for the period between the Scheduled Commencement Date and the date, which Landlord has advised Tenant is the date that Landlord can deliver possession of the Premises to Tenant with the improvements to be installed or constructed pursuant to the Work Agreement substantially complete, and Tenant agrees that such waiver shall constitute a full settlement of any and all claims Tenant might have against Landlord arising out of Landlord's failure to tender possession on the Scheduled Commencement Date. If the delay is due to any Tenant Delays, the Scheduled Commencement Date shall not be postponed, and the Term and Tenant's obligation to pay Rent shall commence as of the Scheduled Commencement Date plus any delays caused by Unavoidable Delays, if any, and not Tenant Delays. If Landlord delivers possession of the Premises prior to the Scheduled Commencement Date, the Term and Tenant's obligation to pay Rent shall commence on the date of such delivery. (b) Upon delivery of possession of the Premises by Landlord in accordance with the Work Letter, Tenant shall execute and deliver an agreement confirming the Commencement Date and Expiration Date, and Tenant's acceptance of the Premises, which agreement shall be in the form of Exhibit D, Schedule 2. 6

30 5. ACCEPTANCE OF THE PREMISES The taking of possession of any portion of the Premises by Tenant shall be conclusive evidence that Tenant has inspected the Premises and accepts the same "as is" and that said portion of the Premises and the Complex are in good and satisfactory condition for the use intended at the time such possession was taken. 6. USE Tenant shall use the Premises only for office purposes, generally in accordance with the manner of use by other tenants in the Complex. The foregoing notwithstanding, the Premises shall not be used for any of the purposes or uses described in Exhibit "E"; any illegal purposes; nor in any manner to create any nuisance or trespass; nor in any manner to vitiate the insurance or increase the rate of insurance on the Premises. Tenant's use of the Premises shall not violate any ordinance, law or regulation of any governmental body or the "Rules and Regulations" of Landlord (the "Rules") as set forth in Exhibit "C" attached hereto and made a part hereof, or cause an unreasonable amount of use of any of the services provided in the Complex. Tenant agrees, at its own expense, to promptly comply with any and all municipal, county, state and federal statutes, regulations, or requirements applicable or in any way relating to the use and occupancy of the Premises. Tenant agrees to conduct its business in the manner and according to the generally accepted business principles of the business or profession in which Tenant is engaged. 7. CARE OF THE PREMISES (a) LANDLORD'S REPAIRS (i) Tenant agrees that no representations respecting the Premises or the Complex, or the condition thereof, and that no promises to decorate, alter, repair or improve the Premises, either before or after the execution hereof, have been made by Landlord or its agents to Tenant, unless the same are contained in this Lease. (ii) Landlord shall maintain and repair only the common hallways and corridors, common rest rooms, main lobby area, heating, ventilating and air-conditioning systems, driveways and parking areas located on the Land, if any, the roof, foundation, floors and exterior walls and glass of the Building. Tenant shall immediately give Landlord written notice of any defect or need for repairs, after which Landlord shall have a reasonable time within which to repair same or cure such defect. Landlord's liability hereunder shall be limited only to the cost of correcting such defects or making such repairs. Notwithstanding Landlord's obligation to maintain and repair under this Section 7(a), Tenant shall reimburse Landlord for the repair of any damage caused by Tenant, or Tenant's employees, agents, contractors, invitees or licensees, or caused by Tenant's default hereunder. (iii) Notwithstanding any other provisions herein, Landlord shall not be liable to Tenant for any damage occasioned by plumbing, electrical, gas, water, steam or other utility pipes, systems or facilities or by the bursting, stopping, leaking or running of any tank, sprinkler, washstand, water closet or pipes in or about the Premises or the Building; nor for any damage occasioned by water being upon or coming through or around the roof or any flashing, window, skylight, vent, door, or the like unless directly resulting from Landlord's act or willful neglect after reasonable notice; nor for any damage arising out of any acts or neglect of co-tenants, other occupants of the Building, occupants of adjacent property or the public. (b) TENANT'S REPAIRS. Tenant will, at its sole cost and expense, maintain the Premises and the fixtures and appurtenances therein in good order, condition and repair, and will neither commit nor suffer any active or permissive waste or injury thereof. At all times, Tenant shall maintain the Premises in accordance with all laws, rules and regulations governing its occupancy of the Premises. Tenant's responsibilities in conjunction therewith shall include, but not be limited to maintain the Premises in a first-class condition and state of repair. All such repair work, maintenance and any alterations permitted by Landlord (i) shall be done at Tenant's sole cost and expense; (ii) shall be done by Landlord's employees or agents or, with Landlord's express written consent, by persons requested by Tenant; and (iii) shall first be consented to in writing by Landlord. Tenant shall, at Tenant's expense, but under the direction of Landlord and performed by Landlord's employees or agents, or with Landlord's express written consent, by persons requested 7

31 by Tenant and consented to in writing by Landlord, promptly repair any injury or damage to the Premises or Complex caused by the misuse or neglect thereof by Tenant, by Tenant's contractors, subcontractors, customers, employees, licensees, agents, or invitees permitted or invited (whether by express or implied invitation) on the Premises by Tenant, or by Tenant moving in or out of the Premises. In the event any repairs are required to be made in or to the Premises as a result of the actions or inactions of Tenant, its agents, contractors, servants, employees, subtenant, concessionaires, licensees, invitees or guests, Tenant shall be responsible for payment of all such repairs, which shall be made by Landlord or its contractors. If Tenant does not make repairs promptly and adequately, Landlord may, but need not, make repairs, and Tenant shall promptly pay the cost thereof as Rent in addition to the Base Rental and Additional Rent. Tenant shall pay Landlord as Rent in addition to the Base Rental and Additional Rent for overtime and for any other expense incurred in the event repairs, alterations, decorating or other work in the Premises are not made, at Tenant's request, during ordinary business hours. Upon expiration or other termination of the Term, Tenant shall quit and surrender to Landlord the Premises, broom clean, in good order and condition as provided in this Lease, ordinary wear and tear excepted, and Tenant shall remove all of its property. (c) ALTERATIONS. Tenant will not, without Landlord's prior written consent, (which consent may be withheld for any reason whatsoever in Landlord's sole and absolute discretion) make alterations, additions or improvements (including, but not limited to, structural alterations, additions or improvements) in or about the Premises and will not do anything to or on the Premises which will increase the rate of fire or other insurance on the Complex or the Property. If Landlord shall fail to notify Tenant in writing of such election within said thirty (30) day period, Landlord shall be deemed to have elected to deny such consent. All alterations, additions or improvements of a permanent nature made or installed by Tenant to the Premises shall become the property of Landlord at the expiration or earlier termination of this Lease. Landlord reserves the right to require Tenant, at Tenant's sole cost and expense, to remove any improvements or additions made to the Premises by Tenant and to repair and restore the Premises to their condition prior to such alteration, addition or improvement, reasonable wear and tear, unrepaired casualty not caused by Tenant (or by Tenant's contractors, subcontractors, customers, employees, licensees, agents or invitees permitted or invited [whether by express or implied invitation]) and condemnation excepted, unless Landlord has agreed in writing, at or prior to the time Tenant requests the right to make such alteration, addition or improvement, that such item need not be removed by Tenant at the expiration or earlier termination of the Term. Landlord shall have the right to assess an administrative fee and a legal processing fee to cover Landlord's review of materials for any proposed Tenant alteration, addition or improvement. (d) CONDITION OF PREMISES ON SURRENDER OF PREMISES. Prior to the Expiration Date or upon any earlier termination of this Lease, Tenant, at Tenant's sole cost and expense, will remove all Tenant's personal property and repair all injury done by or in connection with installation or removal of said property and surrender the Premises (together with all keys, access cards or entrance passes to the Premises or the Complex) in as good a condition as they were when delivered to Tenant at the beginning of the Term, reasonable wear and tear, insured casualty not caused by Tenant (by Tenant's contractors, subcontractors, customers, employees, licensees, agents or invitees permitted or invited [whether by express or implied invitation]) and condemnation excepted. All property of Tenant remaining in the Premises after expiration of the Term or earlier termination of this Lease shall be conclusively deemed to be abandoned, shall thereupon at the election of Landlord, become the property of Landlord and Landlord may remove and dispose of such property in any way Landlord sees fit without liability to Tenant. Tenant shall reimburse Landlord for the cost of removing and storing such abandoned property. The foregoing notwithstanding, Landlord shall continue to have the right (which shall survive termination or expiration of the Lease) to require Tenant to remove any improvements or additions made to the Premises by Tenant pursuant to (b) above. (e) CONTRACTORS DOING WORK. In doing any work related to the installation of Tenant's furnishings, fixtures, or equipment in the Premises, Tenant will use only contractors or workers consented to by Landlord in writing prior to the time such work is commenced. Landlord may condition its consent upon its receipt from such contractors or workers of acceptable (i) lien waivers; and (ii) evidence that such contractors have contractor's liability insurance with at least $5,000,000 coverage; automobile liability insurance with at least $1,000,000 coverage; and worker's compensation insurance in the statutory amounts required by the State of Georgia which coverage shall be obtained from carriers satisfactory to Landlord. Landlord shall have the right to 8

32 periodically review and modify the coverages required hereunder. Landlord and Landlord's property manager shall be named additional insureds on the policies required hereunder. Tenant shall within ten (10) days of filing promptly remove any lien or claim of lien for material or labor claimed against the Premises, the Building or Complex, or both, by such contractors or workers if such claim should arise, and Tenant shall and does hereby indemnify and hold harmless Landlord from and against any and all claims, loss, cost, damage, expense or liabilities including, but not limited to, reasonable attorney's fees, incurred by Landlord, as a result of or in any way related to such claims or such liens. (f) PERSONAL PROPERTY AT RISK. All personal property brought into the Premises by Tenant, its employees, licensees and invitees shall be at the sole risk of Tenant. Landlord shall not be liable for theft thereof or of money deposited therein or for any damages thereto, such theft or damage being the sole responsibility of Tenant. (g) LANDLORD'S RIGHT TO DO WORK. Landlord shall also have the right, at any time, without the same constituting an actual or constructive eviction and without incurring any liability to Tenant therefor, to reasonably change the arrangement and/or location of entrances or passageways, doors and doorways, corridors, elevators, toilets or other public parts of the Property, and to reasonably close entrances, doors, corridors, elevators or other facilities. 8. SERVICES Provided Tenant is in compliance with the terms and conditions of this Lease, Landlord shall furnish the services described in Exhibit "G", attached hereto and by reference made a part hereof (certain costs of which services shall be reimbursed to Landlord in accordance with Section 3 herein). Landlord will provide to Tenant heating or air conditioning service after the Complex operating hours (defined in "Exhibit "G" provided Tenant gives Landlord notice of the desire for such service by 4:00 p.m. on the business day on which Tenant desires the service, and by 4:00 p.m. on the Thursday prior to any Saturday, Sunday or holiday on which Tenant desires such service. Such service will be provided by Landlord at such rates as shall be established by Landlord from time to time. As of the date of this Lease, such rates are $40.00 per floor per hour, provided such rates are subject to increase in connection with increases costs of administrative services, labor, equipment and utilities. 9. DESTRUCTION OR DAMAGE TO PREMISES (a) If the Premises, the Building or the Complex or any building in the Complex or the parking in the Complex are totally destroyed (or so substantially damaged as to be wholly untenantable or not usable or not repairable within one hundred eighty (180) days in the determination of Landlord's architect or engineer) by storm, fire, earthquake or other casualty, Landlord shall have the option to: (i) Terminate this Lease as of the date of the occurrence of the storm, earthquake, fire or other casualty by giving written notice to Tenant within ninety (90) days from the date of such damage or destruction; or (ii) Commence the process of restoration of the Premises to a tenantable condition within thirty (30) days from the date of receipt by Landlord of all of the insurance proceeds paid with respect to such casualty, and proceed with due diligence to complete said restoration of the Premises. Provided, however, that Landlord shall not be obligated to expend for such repair an amount in excess of the net insurance proceeds actually received as a result of such damage and in no event shall Landlord be required to repair or replace any alteration or improvement made by or for Tenant, including but not limited to Tenant's Work (as defined in the Work Agreement), nor any trade fixtures, furniture, equipment or other property belonging to the Tenant. If Landlord chooses to restore the Premises, Rent shall abate with respect to the untenantable portion of the Premises from the date of such casualty until the date of substantial restoration thereof. If Landlord shall not elect to terminate this Lease, the Landlord shall complete such restoration with reasonable diligence within one hundred eighty (180) days of the date of receipt by Landlord of all of the insurance proceeds paid with respect to such casualty, as described above subject Tenant Delays. During such period of repair, if any portion of the Premises shall be 9

33 untenantable as a result of casualty, Base Rental and Additional Rent shall abate beginning with the date of such casualty and ending on the date the Premises are rendered tenantable by an amount bearing the same ratio to the total amount of Base Rental and Additional Rent due under this Lease as the untenantable portion of the Premises bears to the entire Premises. Notwithstanding such abatement, Tenant shall remain obligated to perform and discharge all of its remaining covenants under this Lease during the period of abatement. (b) If such damage or destruction occurs within one (1) year of the expiration of the Term, either party may, at its option on written notice to the other party within thirty (30) days of such destruction or damage, terminate this Lease as of the date of such destruction or damage. (c) Rent shall not abate if the damage or destruction of the Premises, whether total or partial, is the result of the negligence of Tenant, its contractors, subcontractors, agents, employees, guests or invitees. 10. DEFAULT BY TENANT; LANDLORD'S REMEDIES (a) The occurrence of any of the following shall constitute an event of default hereunder by Tenant: (i) The Rent or any other sum of money due of Tenant hereunder is not paid within five (5) days of the date when Tenant receives written notice thereof from Landlord; provided however, that Landlord shall not be required to give any such notice of nonpayment more than two (2) times in any 12-month period; and for the third (3rd) and any subsequent nonpayment; it shall be an event of default if payment is not received within five (5) days or when due; (ii) The Premises are deserted or vacated, and Tenant does not occupy the Premises within ten (10) days after notice from Landlord to Tenant; (iii) Tenant fails to bond off or otherwise remove (in a manner acceptable to Landlord) any lien filed against the Premises or the Complex by reason of Tenant's actions, within ten (10) days after Tenant has notice of the filing of such lien; (iv) Tenant fails to observe, perform and keep any of the other covenants, agreements, provisions, stipulations, conditions and Rules herein contained to be observed, performed and kept by Tenant and persists in such failure after ten (10) days written notice by Landlord requiring that Tenant remedy, correct, desist or comply (or if any such failure to comply on the part of Tenant would reasonably require more than ten (10) days to cure, unless Tenant commences curing within the ten (10) day notice period and thereafter promptly, effectively and continuously proceeds with the curing of the failure to comply on the part of Tenant and, in all such events, cures such failure to comply on the part of Tenant no later than forty-five (45) days after such notice). (b) Upon the occurrence of an event of default, Landlord shall have the option to do and perform any one or more of the following: (i) Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord. If Tenant shall fail to do so, Landlord may, without further notice and without prejudice to any other remedy Landlord may have, enter upon the Premises without the requirement of resorting to the dispossessory procedures set forth by applicable law, if any, and expel or remove Tenant and Tenant's effects without being liable for any claim for trespass or damages therefor. Upon any such termination, Tenant shall remain liable to Landlord for damages, due and payable monthly on the day Rent would have been payable hereunder, in an amount equal to the Rent and any other amounts which would have been owing by Tenant for the balance of the Term, had this Lease not been terminated, less the net proceeds, if any, of any reletting of the Premises by Landlord, plus the aggregate amount of all of Landlord's costs and expenses (including, without limitation, advertising expenses and professional fees) incurred in connection with or in any way related to the termination of this Lease, eviction of Tenant and such reletting; or (ii) Enter the Premises as the agent of Tenant without the requirement of resorting to the dispossessory procedures set forth in O.C.G.A. Section 44-7-50 et. seq., and without being liable for any claim for trespass or damages therefor, and, in connection therewith, re-key the Premises, remove Tenant's effects therefrom and store the same at Tenant's expense, without being liable for any damage thereto, and relet the Premises as the agent of Tenant, without advertisement, by private negotiations, for any term Landlord deems proper, and receive the rent therefor. Upon 10

34 such reletting, all rentals received by the Landlord from such re-letting shall be applied first, to the payment of any indebtedness other than the Rent due hereunder from Tenant to Landlord; secondly, to the payment of any costs and expenses of such reletting, including, without limitation, brokerage fees and attorneys' fees and the costs of such alterations and repairs as may be necessary relative to such re-letting; third, to the payment of the Rents then due and unpaid under the Lease; and the residue, if any, shall be held by the Landlord and applied in payment of future Rents as same may become due and payable hereunder. Tenant shall pay Landlord on demand any deficiency that may arise by reason of such reletting, but Tenant shall not be entitled to any surplus so arising. Tenant shall reimburse Landlord for all costs and expenses (including, without limitation, advertising expenses and professional fees) incurred in connection with or in any way related to the eviction of Tenant and reletting the Premises, and for the amount of any other Rent which would have been due of Tenant to Landlord hereunder if not for certain concessions granted by Landlord to Tenant. Notwithstanding any such re-letting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach; or (iii) Landlord, in addition to but not in lieu of or in limitation of any other right or remedy provided to Landlord under the terms of this Lease or otherwise (but only to the extent such sum is not reimbursed to Landlord in conjunction with any other payment made by Tenant to Landlord), shall have the right to be immediately repaid by Tenant the amount of all sums expended by Landlord and not repaid by Tenant in connection with preparing or improving the Premises to Tenant's specifications and any and all costs and expenses incurred in renovating or altering the Premises to make it suitable for reletting; or (iv) As agent of Tenant, do whatever Tenant is obligated to do by the provisions of this Lease, including, but not limited to, entering the Premises, without being liable to prosecution or any claims for damages, in order to accomplish this purpose. Tenant agrees to reimburse Landlord immediately upon demand for any expenses which Landlord may incur in thus effecting compliance with this Lease on behalf of Tenant, and Tenant further agrees that Landlord shall not be liable for any damages resulting to Tenant from such action, whether caused by the negligence of Landlord or otherwise. (v) Landlord may declare the entire amount of Base Rental, Additional Rent and other sums which would have become due and payable during the remainder of the Term of this Lease to be due and payable immediately without notice to Tenant, and thereafter Landlord may terminate this Lease and recover from Tenant, as full liquidated damages, all damages Landlord may incur by reason of Tenant's default, which damages shall be limited to (a) the amounts due and owing prior to such termination, plus (b) the cost of recovering the Premises, plus (c) reasonable attorney's fees and costs, plus (d) a sum which, at the date of such termination, equals the present value [discounted at ten percent (10%) per annum] of (i) the Base Rental, Additional Rent and all other sums which would have been due and payable by Tenant hereunder for the remainder of the Term (including any Extended Term, if the Term of the Lease has been extended) less (ii) the aggregate reasonable rental value of the Premises for the same period, accounting for the cost, time and other factors necessary to relet the Premises, all of which amounts shall be immediately due and payable; provided, however, if Landlord elects to pursue this remedy, Landlord shall do so exclusively and shall not thereafter pursue any of the other remedies set forth in section 10(b)(i)(iv) to collect Base Rental and Additional Rent due from Tenant. The foregoing limitation of remedies is without prejudice to Landlord's right to enforce Tenant's indemnity obligation with respect to claims, damages and liabilities (other than Base Rental and Additional Rent) resulting to Landlord by or through Tenant's use and occupancy of the Premises. Landlord and Tenant agree that such amounts constitute a good faith reasonable estimate of the damages which might be suffered by Landlord upon the occurrence of a Default and that it as impossible to estimate more precisely such damages. Landlord's receipt of the aforesaid amount is intended not as a penalty but as full liquidated damages. (c) Pursuit by Landlord of any of the foregoing remedies shall not preclude the pursuit of general or special damages incurred, or of any of the other remedies provided herein, at law or in equity; provided, however, Landlord's election to pursue the remedy in Section 10(b)(v) shall be exclusive of any other remedies available to Landlord except as provided in said Section 10(b)(v). (d) No act or thing done by Landlord or Landlord's employees or agents during the Term shall be deemed an acceptance of a surrender of the Premises. Neither the mention in this Lease of any particular remedy, nor the exercise by Landlord of any particular remedy hereunder, at 11

35 law or in equity, shall preclude Landlord from any other remedy Landlord might have under this Lease, at law or in equity. Any waiver of or redress of or any violation of any covenant or condition contained in this Lease or any of the Rules now or hereafter adopted by Landlord, shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of Rent with knowledge of the breach of any covenant in this Lease shall not be deemed a waiver of such breach. (e) Landlord's reentry, demand for possession, notice that the tenancy hereby created will be terminated on the date therein named, institution of an action of unlawful detainer or ejectment or the entering of a judgment for possession in such action or any other act or acts resulting in the termination of Tenant's right to possession of the Premises shall not relieve Tenant from Tenant's obligation to pay all sums due hereunder during the balance of the Term, except as herein expressly provided. Landlord may collect and receive any Base Rental, Additional Rent, or charges due from Tenant, and the payment thereof shall not constitute a waiver of or affect any notice or demand given, suit instituted or judgment obtained by Landlord, or be held to waive, affect, change, modify or alter the rights or remedies which Landlord has in equity or at law by virtue of this Lease. (f) The Base Rental is calculated for the Term of this Lease and a substantial portion of the Base Rental includes reimbursement to Landlord of direct out-of-pocket investment costs and expenses with respect to leasing the Premises to Tenant that Landlord has incurred or will incur during the Term for tenant improvements, leasing commissions and other costs, various tenant concessions, and other similar direct costs and expenses relating to Landlord's investment in the Premises, the aggregate amount of which Landlord has spread over the entire Term. Tenant acknowledges that Landlord will suffer damages, including, but not limited to, such unreimbursed direct out-of-pocket costs and expenses unless Tenant pays to Landlord all the Base Rental due to Landlord for the entire Term. (g) In the event Landlord commences any proceedings for nonpayment of Base Rental, Additional Rent or other sums due hereunder, Tenant will not interpose any counterclaim of whatever nature or description which is not directly related to the Lease in any such proceeding. This shall not, however, be construed as a waiver of Tenant's right to assert such claims in any separate action or actions brought by Tenant. (h) Except as expressly provided in this Lease, Tenant hereby waives any and every form of demand and notice prescribed by statute or other law, including without limitation the notice of any election of remedies made by Landlord under this Section, demand for payment of any rent, or demand for possession. (i) All rights and remedies of Landlord created or otherwise existing at law or in equity are cumulative and the exercise of one or more rights or remedies shall not be taken to exclude or waive the right to exercise any other. (j) Tenant shall and hereby agrees to pay all costs and expenses incurred by Landlord, including, but not limited to, reasonable attorneys' fees in enforcing any of the covenants and agreements of this Lease or as a result of any action brought by Landlord against Tenant for an unlawful detainer of the Premises, and all such costs, expenses and attorneys' fees shall be paid by Tenant to Landlord within ten (10) days after Landlord's written demand therefor. (k) Notwithstanding anything in this Lease to the contrary, Tenant shall have no claim, and hereby waives the right to any claim, against Landlord for money damages by reason of any refusal, withholding or delaying by Landlord of any consent, approval or statement of satisfaction, and in such event, Tenant's only remedies therefor shall be an action for specific performance or injunction to enforce any such requirements. If the result of any such action or arbitration shall be adverse to Landlord, Landlord shall be liable to Tenant for Tenant's reasonable expenses and attorney's fees thereby incurred. 11. ASSIGNMENT AND SUBLETTING (a) Tenant shall not sublet any part of the Premises, nor assign this Lease or any interest herein, without the prior written consent of Landlord. Any sublease or assignment made without Landlord's consent shall be void. Landlord shall be entitled to deny consent to an assignment or 12

36 sublease for any reason or no reason. For illustration only, without limiting in any respect the reasons Landlord may withhold its consent, the following are examples of reasons Landlord may withhold its consent: (i) the proposed subtenant or assignee may, in Landlord's judgment unreasonably burden the Complex, its amenities or services (ii) if the rate of compensation, including, but not limited to, all rent requested by Tenant for the portion of the Premises to be subleased or subject to an assignment of the Lease, impacts upon or impairs Landlord's ability to rent space in the Complex at the then market rate as offered by Landlord, (iii) the financial statements or the business experience of the proposed assignee or sublessee are unsatisfactory to Landlord, (iv) the proposed use of the Premises conflicts with other uses within the Complex, (v) the prospective assignee or sublessee is an existing tenant of the Complex and in Landlord's judgment such sublease or assignment may affect Landlord's lease relationship with such tenant, or (vi) Tenant's proposed subletting or assignment will in Landlord's judgment compete with landlord's ability to lease other vacant space in the Complex. Consent by Landlord to one assignment or sublease shall not destroy or waive this provision, and all later assignments and subleases shall likewise be made only upon prior written consent of Landlord. If a sublease or assignment is consented to by Landlord, any sublessees or assignees shall become liable directly to Landlord for all obligations of Tenant hereunder without relieving or in any way modifying Tenant's liability hereunder. If Tenant desires to assign this Lease or sublet the Premises or any part thereof, Tenant shall give Landlord written notice at least sixty (60) days in advance of the date on which Tenant desires to make such assignment or sublease, which notice shall specify: (a) the name and business of the proposed assignee or sublessee; (b) the amount and location of the space in the Premises affected; (c) the proposed effective date of the subletting or assignment; and (d) the proposed rental to be paid to Tenant by such sublessee or assignee. If Tenant shall give such notice, Tenant shall pay on demand Landlord's reasonable costs, including attorneys' fees incurred to consider and as necessary to document such transaction. If Tenant notifies Landlord of Tenant's intent to sublease or assign this Lease, Landlord shall within thirty (30) days from receipt of such notice (a) consent to such proposed assignment or subletting; (b) deny such consent (if Landlord shall fail to notify Tenant in writing of such election within said thirty (30) day period, Landlord shall be deemed to have elected to deny such consent); or (c) elect to cancel this Lease, or to reduce the Premises by the area requested to be subleased or assigned if the area is less than the entire Premises. If Landlord's election is to cancel or to reduce the area of the Premises as provided in the foregoing clause (c) (such election being referred to herein as "Landlord's Modification Election"), Tenant shall have ten (10) days from receipt of Landlord's Modification Election to notify Landlord of Tenant's acceptance of such cancellation or reduction or Tenant's desire to remain in possession of the Premises under this Lease for the remainder of the Term. If Tenant fails to notify Landlord of Tenant's election to accept termination or reduction or to continue as Tenant hereunder, such failure shall be deemed an election to terminate or have the area of the Premises reduced, as the case may be, in accordance with Landlord's Modification Election and such termination or reduction shall be effective at the end of the ten (10) day period provided for above. If Landlord gives its consent to any such assignment or sublease, any rent or other cost to the assignee or subtenant for all or any portion of the Premises over and above the Rent payable by Tenant for such space shall be due and payable, and shall be paid, to Landlord. If this Lease is cancelled, the area of the Premises is reduced or a sublease or assignment is made as herein provided, Tenant shall pay Landlord a charge equal to the actual costs incurred by Landlord, in Landlord's reasonable judgment (including, but not limited to, the use and time of Landlord's personnel), for all of the necessary legal, management, leasing or accounting services required to accomplish such cancellation, reduction of area of the Premises, assignment or subletting, as the case may be. Any physical alterations necessary with respect to any such assignment, subletting or reduction of the area of the Premises shall be subject to the provisions of this Lease regarding alterations and shall be at Tenant's sole cost and expense and subject to applicable building codes. No acceptance by Landlord of any rent or any other sum of money from any assignee, sublessee, or other category of transferee shall release Tenant from any of its obligations under this Lease or be deemed to constitute Landlord's consent to such assignment, sublease or transfer. 13

37 (b) The sale or transfer of Tenant's voting stock (if a corporation) or a partnership interest (if a partnership) or member interest (if a limited liability company) in Tenant resulting in the transfer of control of a majority of such stock or interest, or the occupancy of the Premises by any successor firm of Tenant or by any firm into which or with which Tenant may become merged or consolidated shall be deemed an assignment of this Lease requiring the prior written consent of Landlord. (c) The joint and several liability of Tenant named herein and any immediate and remote successor in interest of Tenant (by assignment or otherwise), and the due performance of the obligations of this Lease on Tenant's part to be performed or observed, shall not in any way be discharged, released or impaired by any (i) agreement which modifies any of the rights or obligations of the parties under this Lease, (ii) stipulation which extends the time within which an obligation under this Lease is to be performed, (iii) waiver of the performance of an obligation required under this Lease, or (iv) failure to enforce any of the obligations set forth in this Lease; provided, however, that (a) in the case of any modification of this Lease made after the date of an assignment or other transfer of this Lease by Tenant, if such modification increases or enlarges the obligations of Tenant or reduces the rights of Tenant, then Tenant named herein and each respective assignor or transferor shall not be liable under or bound by any such increase, enlargement or reduction; and (b) in the case of any waiver by Landlord of a specific obligation of an assignee or transferee of Tenant, such waiver shall also be deemed a waiver of such obligation with respect to the immediate and remote assignors or transferors of such assignee or transferee. (d) Tenant shall have no right whatsoever to encumber any of the Tenant's rights, title or interest under this Lease, without the prior written consent of the Landlord. (e) Nothing in this Lease shall in any way restrict Landlord's right to assign or encumber this Lease in its sole and absolute discretion. Should the Landlord assign this Lease as provided for above, or should Landlord encumber all or any portion of the Complex and should the holder of such encumbrance succeed to the interest of Landlord, Tenant shall be bound to said assignee or any such holder under all the terms, covenants and conditions of this Lease for the balance of the Lease term remaining after such succession and Tenant shall attorn to such succeeding party as its Landlord under this Lease promptly under any such succession. Tenant agrees that should any party so succeeding to the interest of Landlord require a separate agreement of attornment regarding the matters covered by this Lease, then Tenant shall enter into such attornment agreement, provided the same does not substantially modify any of the provisions of this Lease and has no material adverse effect upon Tenant's continued occupancy of the Premises. 12. CONDEMNATION (a) If all or a part of the Premises is taken by virtue of eminent domain or other similar proceeding, or are conveyed in lieu of such taking, this Lease shall expire on the date when title or right of possession shall vest, and any Rent paid for any period beyond said date shall be repaid to Tenant. If all or a part of the Complex other than the Premises is taken by virtue of eminent domain or other similar proceeding, or is conveyed in lieu of such taking rendering the remaining part of the Complex not subject to such condemnation shall be substantially and adversely affected thereby, then Landlord, in its sole discretion may terminate this Lease. If there is a partial taking where this Lease is not terminated, the Rent shall be adjusted in proportion to the Rentable Square Footage of the Premises taken, as determined by the Landlord's architect or engineer. In any event, Landlord shall be entitled to, and Tenant shall not have any right to claim, any award made in any condemnation proceeding, action or ruling relating to the Complex or the Land; provided however, in the event of a termination of this Lease Tenant shall be entitled to make a separate claim in any condemnation proceeding, action or ruling relating to the Complex for Tenant's moving expenses, loss of goodwill and the unamortized value of leasehold improvements in the Premises actually paid for by Tenant without contribution by Landlord, to the extent such claim does not in any manner impact upon or reduce Landlord's claim or award in such eminent domain proceeding, action or ruling and Tenant shall likewise have no claim against Landlord for the value of any unexpired portion of this Lease. (b) Landlord shall have, in Landlord's sole discretion, the option of terminating this Lease if any such condemnation, action or ruling or conveyance in lieu thereof makes continuation of Landlord's use of the Complex economically unfeasible, and Landlord shall be entitled to the 14

38 entire award as above provided, and in such case, Tenant shall likewise have no claim against Landlord for the value of any unexpired portion of this Lease. 13. INSPECTIONS Landlord, its agents, employees, contractors and subcontractors, may enter the Premises at reasonable hours to (a) exhibit the Premises to prospective purchasers or tenants of the Premises or the Complex; (b) inspect the Premises to see that Tenant is complying with its obligations hereunder; and (c) make repairs or alterations (i) required of Landlord under the terms hereof; (ii) to any adjoining space in the Complex; or (iii) to any systems serving the Complex which run through the Premises; and (d) to perform any and all of Landlord's obligations under this Lease, or any other lease, where entry to such Premises is reasonably required for such performance. In addition to the foregoing, Landlord, its agents, employees, contractors and/or sub-contractors may enter the Premises at any time if an emergency requires such entry. Any such entry shall not constitute an eviction of Tenant or be deemed as disturbing Tenant's quiet enjoyment of the Premises and no abatement of rent shall result because of such entry and/or performance. Landlord shall be allowed to take all material into and upon Premises that may be required therefor without the same constituting an eviction of Tenant in whole or in part; and the Base Rental and Additional Rent reserved shall in no way abate while said decorations, repairs, alterations, improvements or additions are being made. If Tenant shall not be personally present to open and permit an entry into the Premises, at any time, when for any reason an entry therein shall be necessary or permissible, Landlord or Landlord's agents may enter the same by a pass key, or when for any reason an entry therein shall be necessary and entry by pass key is not possible, may forcibly enter the same, without rendering Landlord or such agents liable therefor (if during such entry Landlord or such agents shall accord reasonable care to Tenant's property), and without in any manner affecting the obligations and covenants of this Lease. All entries shall, where possible, be performed at such times and in such fashion so as not to unreasonably interfere with the conduct and operation of Tenant's business. Nothing herein contained, however, shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever, for the care, supervision or repair of the Premises or Complex other than as herein provided. 14. SUBORDINATION (a) This Lease shall be subject and subordinate to any underlying land leases or deeds to secure debt which may now or hereafter affect this Lease, the Complex or the Property and also to all renewals, modifications, extensions, consolidations, and replacements of such underlying land leases and such deeds to secure debt. In confirmation of the subordination set forth in this Section 14, Tenant shall, at Landlord's request, execute and deliver such further instruments as may be desired by the holder(s) of the deed(s) to secure debt (a "Mortgagee") or by any lessor under any such underlying land leases. Notwithstanding the foregoing, Landlord or such Mortgagee shall have the right to subordinate or cause to be subordinated, in whole or in part, any such underlying land leases or deed(s) to secure debt to this Lease (but not in respect to priority of entitlement of insurance or condemnation proceeds). If any such underlying land leases or deed(s) to secure debt terminates for any reason or any such deed(s) to secure debt is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, deliver to Mortgagee or the Landlord within ten (10) days of written request an attornment agreement, providing that such Tenant shall continue to abide by and comply with the terms and conditions of this Lease. (b) If any proceedings are brought for the foreclosure of, or in the event of exercise of the power of sale or conveyance in lieu of foreclosure under any deed to secure debt, Tenant shall at the option of the purchaser at such foreclosure or other sale, attorn to such purchaser and recognize such person as Landlord under this Lease. Tenant agrees that the institution of any suit, action or other proceeding by a Mortgagee or a sale of the Property pursuant to the powers granted to a Mortgagee under its deed to secure debt, shall not, by operation of law or otherwise, result in the cancellation or the termination of this Lease or of the obligations of the Tenant hereunder. (c) If such purchaser requests and accepts such attornment, from and after the time of such attornment, Tenant shall have the same remedies against such purchaser for the breach of an agreement contained in this Lease that Tenant might have had against Landlord if the deed to secure debt had not been terminated or foreclosed, except that such purchaser shall not be (i) liable for any act or omission of the prior Landlord; (ii) subject to any offsets or defenses which Tenant 15

39 might have against the prior Landlord; (iii) bound by any Rent or security deposit which Tenant might have paid in advance to the prior Landlord; (iv) obligated to cure any default of any prior Landlord under the Lease that occurred prior to the time that such purchaser succeeded to the interest of Landlord in the Property; or (v) bound by any amendment or modification of the Lease made without the prior written consent of such purchaser. (d) As used in this Section 14, the term "deed(s) to secure debt" shall also include mortgage(s) and deed(s) of trust. 15. INDEMNIFICATION AND HOLD HARMLESS (a) Tenant hereby indemnifies and holds harmless Landlord from and against any injury, expense, damage, liability or claim, imposed on Landlord by any person whomsoever, whether due to damage to the Premises, claims for injuries to the person or property of any other tenant of the Complex or of any other person in or about the Complex or the Property for any purpose whatsoever, or administrative or criminal action by a governmental authority, if such injury, expense, damage, liability or claim results either directly or indirectly from the act, omission, negligence, misconduct or breach of any provisions of this Lease by Tenant, the agents, servants, or employees of Tenant, or any other person entering in the Complex or upon the Premises under express or implied invitation or consent of Tenant. Tenant further agrees to reimburse Landlord for any costs or expenses, including, but not limited to, court costs and reasonable attorney's fees, which Landlord may incur in investigating, handling or litigating any such claim or any action by a governmental authority. (b) Tenant shall report in writing to Landlord any defective condition in or about the Premises known to Tenant, and further agrees to attempt to contact Landlord immediately in such instance. 16. TENANT'S INSURANCE (a) Tenant shall carry (at its sole expense during the Term): (i) fire and extended coverage insurance insuring Tenant's improvements to the Premises and any and all furniture, equipment, supplies, contents and other property owned, leased, held or possessed by Tenant and contained therein, such insurance coverage to be equal to the full replacement value of such improvements and property, as such may increase from time to time; (ii) worker's compensation insurance required by the State of Georgia; and (iii) commercial general liability coverage on an occurrence basis for injury to or death of a person or persons and for damage to property occasioned by or arising out of the condition, use, or occupancy of the Premises, or other portions of the Complex, including contractual liability and such other coverages and endorsements as are reasonably required by Landlord, such policy to have a combined single limit of not less than Three Million and No/100 Dollars ($3,000,000) for any bodily injury or property damage occurring as a result of or in connection with the above. Landlord and Landlord's property manager, asset manager, and their respective partners, officers, shareholders, policyholders, employees, attorneys and agents, and employees shall be named additional insureds on the policies required hereunder and such policies shall provide that the coverage thereunder is primary to, and not contributing with, any policy carried by any such additional insured. (b) Tenant shall have included in all policies of insurance respectively obtained by it with respect to the Complex or Premises a waiver by the insurer of all right of subrogation against Landlord in connection with any loss or damage thereby insured against, and Landlord shall have included in all property insurance policies required to be maintained by Landlord under this Lease a waiver by the insurer of all right of subrogation against Tenant in connection with any loss or damage thereby insured against. To the full extent permitted by law, Landlord as to its property insurance policies and Tenant as to all its policies, each waives all right of recovery against the other for, and agrees to release the other from liability for, loss or damage to the extent such loss or damage results from a cause covered by valid and collectible insurance in effect at the time of such loss or damage; provided however, that the foregoing release by each party is conditioned upon the other party's carrying insurance with the above described waiver of subrogation to the extent required above, and if such coverage is not obtained or maintained by either party, then the other party's foregoing release shall be deemed to be rescinded until such waiver is either obtained or reinstated. 16

40 (c) All said insurance policies shall be carried with companies licensed to do business in the State of Georgia reasonably satisfactory to Landlord having a Best's Rating of A XII or better and shall be noncancellable and nonamendable except after thirty (30) days' written notice to Landlord. At Landlord's request, duly executed certificates of such insurance shall be delivered to Landlord prior to the Commencement Date and at least thirty (30) days prior to the expiration of each respective policy term. Landlord shall have the right to periodically review the coverages required hereunder and if Landlord deems it reasonably necessary to require additional coverage resulting from inflation or from increases in jury verdicts or other economic conditions in the jurisdiction where the Property is located, Tenant shall obtain the coverage requested by Landlord. 17. REMEDIES CUMULATIVE The rights given to Landlord and Tenant herein are in addition to any rights that may be given to Landlord or Tenant by any statute or under law. The utilization by a party of any remedy shall not be deemed an election of remedies, so as to preclude said party from utilizing other remedies at the same time. 18. ENTIRE AGREEMENT - NO WAIVER (a) This Lease contains the entire agreement of the parties hereto and no representations, inducements, promises or agreements, oral or otherwise, between the parties not embodied herein shall be of any force and effect. The failure of either party to insist in any instance on strict performance of any covenant or condition hereof, or to exercise any option herein contained, shall not be construed as a waiver of such covenant, condition or option in any other instance. This Lease (except for changes to "Rules" (as defined below) pursuant to Section 28 hereof) cannot be changed or terminated orally, and can be modified only in writing, executed by each party hereto. Tenant acknowledges and agrees that Tenant has not relied upon any statement, representation, prior written promises, or prior oral promises, agreements or warranties, except such as are expressed herein. (b) Failure of Landlord to declare any default immediately upon occurrence thereof, or delay in taking any action in connection therewith, shall not waive such default, but Landlord shall have the right to declare any such default at any time and take such action as might be lawful or authorized hereunder, in law or in equity. No waiver by Landlord of a default by Tenant shall be implied, and no express waiver by Landlord shall affect any default other than the default specified in such waiver, and that only for the time and extension therein stated. 19. HOLDING OVER If Tenant remains in possession of the Premises after expiration of the Term, or after any permitted termination of the Lease by Landlord, with Landlord's acquiescence and without any written agreement between the parties, Tenant shall be a tenant at sufferance and such tenancy shall be subject to all the provisions hereof, except that the Monthly Rental for said holdover period shall be double the amount of Rent due in the last month of the Term. Nothing herein shall be deemed to require Landlord to so acquiesce and any acquiescence, if given, can be terminated by Landlord, at any time. The provisions of this paragraph do not exclude Landlord's rights of re-entry or any other right or remedies provided or allowed hereunder and/or by law. There shall be no renewal of this Lease by operation of law. Nothing in this Paragraph shall be construed as a consent by Landlord to the possession of the Premises by Tenant after the expiration of the Term or any permitted termination of the Lease by Landlord. 20. NOTICES (a) Any notice by either party to the other shall be valid only if in writing and shall be deemed to be duly given only if delivered personally or sent by certified mail return receipt requested addressed (i) if to Tenant, at the Premises and (ii) if to Landlord, at Landlord's addresses set forth above, or at such other address for either party as that party may designate by notice in writing to the other. Notice shall be deemed given, if delivered personally, upon delivery thereof, and if sent by certified mail return receipt requested, three (3) days after deposit with the United States Postal Service. 17

41 (b) Tenant hereby appoints as its agent to receive service of all dispossessory or distraint proceedings, an employee of Tenant at the Premises at the time of such service. 21. HEIRS, SUCCESSORS, AND ASSIGNS-PARTIES (a) The provisions of this Lease shall bind and inure to the benefit of Landlord and Tenant, and their respective successors, heirs, legal representatives and permitted assigns, it being understood that the term "Landlord" as used in this Lease means only the owner (or the ground lessee) for the time being of the Building of which the Premises are a part, so that in the event of any sale or sales of said Building (or of any lease thereof), Landlord named herein shall be and hereby is entirely released of all covenants and obligations of Landlord hereunder accruing thereafter, and it shall be deemed without further agreement that the purchaser, or the new ground lessee, as the case may be, has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder during the period such party has possession of the Building. Should the Complex be severed as to ownership by sale and/or lease, then the owner of the Building or lessee of the Building that has the right to lease space in the Building to tenants shall be deemed "Landlord". Tenant shall be bound to any such succeeding party for performance by Tenant of all the terms, covenants, and conditions of this Lease and agrees to execute any attornment agreement not in conflict with the terms and provisions of this Lease at the request of such party. (b) The terms "Landlord" and "Tenant" and pronouns relating thereto, as used herein, shall include male, female, singular and plural, corporation, partnership or individual, as may fit the particular parties. 22. ATTORNEY'S FEES In the event of any law suit or court action between Landlord and Tenant arising out of or under this Lease or the terms and conditions stated herein, the prevailing party in such law suit or court action shall be entitled to and shall collect from the non-prevailing party the reasonable attorney's fees and court costs actually incurred by the prevailing party with respect to said lawsuit or court action. 23. TIME OF THE ESSENCE It is understood and agreed between the parties hereto that time is of the essence of all the terms, provisions, covenants and conditions of this Lease. 24. NO ESTATE IN LAND Tenant has only a usufruct under this Lease, not subject to levy or sale. No estate shall pass out of Landlord by this Lease. 25. SECURITY DEPOSIT Landlord shall retain the security deposit paid under the Existing Lease of $28,781.44 as a security deposit for the performance by Tenant of all the terms, covenants and conditions of this Lease upon Tenant's part to be performed. Unless required to do so by law, Landlord shall have no obligation to segregate such security deposit from any other funds of Landlord, and interest earned on such security deposit, if any, shall belong to Landlord. Security deposits shall not be considered advance payments of Rent or a measure of Landlord's damages, in the case of a default by Tenant. The security deposit shall be returned to Tenant within thirty (30) days after the Expiration Date, provided Tenant has fully performed its obligations hereunder. Regardless of any permitted assignment of this Lease by Tenant, Landlord may return the security deposit to the original Tenant in the absence of evidence satisfactory to Landlord of an assignment of the right to receive the security deposit or the balance thereof, which shall satisfy in full Landlord's obligation to return the security deposit. Landlord shall have the right to apply any part of said security deposit to cure any default of Tenant and if Landlord does so, Tenant shall upon demand deposit with Landlord the amount so applied so that Landlord shall have the full security deposit on deposit at all times during the Term of this Lease. In the event of a sale or lease of the Building subject to this Lease, Landlord shall transfer the security deposit to the Purchaser or lessee, and Landlord shall thereupon be released from all liability for the return of such security deposit and Tenant shall look solely to 18

42 the successor Landlord for the return of the security deposit. This provision shall apply to every transfer or assignment made of the security deposit to a successor Landlord. The security deposit shall not be assigned or encumbered by Tenant without the prior written consent of Landlord and any such unapproved assignment or encumbrance shall be void. 26. COMPLETION OF THE PREMISES The Work Agreement sets forth, among other things, Landlord's and Tenant's agreement regarding improvements if any, to be made to the Premises. Any work required by Tenant as provided for in said Exhibit "D" shall be performed within the provisions and according to all standards of said Exhibit "D". 27. PARKING AND ACCESS AREAS (a) Landlord shall maintain unreserved parking facilities for the purpose of accommodating Tenant, Tenant's invitees and employees, and other tenants, their invitees and employees, subject to such limitations and conditions from time to time imposed by Landlord and subject to reservation of certain parking spaces for particular tenants. Said parking shall be maintained on the Property or on areas located in the vicinity of the Property. Said parking shall be provided in quantities which are in accordance with the zoning regulations or variances then in effect for the Property in which the Building is located. (b) Tenant agrees that the number of parking spaces in the Project actually used by Tenant and its employees and guests will never at any time exceed the ratio of 4.0 parking spaces per 1,000 rentable square feet of the Premises. Landlord shall have the right to undertake any measures or promulgate and enforce any rules and regulations which Landlord deems necessary or appropriate to enforce this provision, including, by way of illustration but not limitation, restricting access to such parking spaces, or parking fines against or towing the automobiles of violating parties. 28. RULES AND REGULATIONS The Rules and Regulations (collectively "Rules") set forth on Exhibit "C" are incorporated into and made a part of this Lease. Landlord may from time to time amend, modify, delete or add new and additional reasonable Rules for the use, operation, safety, cleanliness and care of the Premises and the Building. Such new or modified Rules shall be effective upon notice thereof to Tenant. Tenant will cause its employees and agents, or any others permitted by Tenant to occupy or enter the Premises to abide by the Rules at all times. In the event of any breach of any Rules and failure to cure as permitted hereunder, Landlord shall have all remedies provided for in this Lease in the event of default by Tenant and shall, in addition, have any remedies available at law or in equity, including but not limited to, the right to enjoin any breach of the Rules. Landlord shall not be responsible to Tenant for the nonobservance of the Rules by any other tenant or person. 29. RIGHT TO RELOCATE If the Premises contains less than 5,000 square feet of rentable area, Landlord may move Tenant from the Premises to other office space within the Complex by giving Tenant not less than thirty (30) days' written notice, provided such other office space is substantially equivalent in area and interior finish (but not necessarily floor plan lay-out) to the Premises. If Tenant fails to relocate to such other office space or, in Landlord's sole opinion, unreasonably delays in relocating to such other office space, Tenant shall be in default hereunder, and notwithstanding any other provision herein to the contrary, Landlord, upon giving Tenant not less than fifteen (15) days written notice, shall immediately, without any further notice, be entitled to exercise any and all of Landlord's remedies hereunder in the event of default. If Landlord shall exercise its rights under this provision, Landlord shall reimburse Tenant for Tenant's actual and reasonable out-of-pocket expenses (including but not limited to moving costs, new stationery, business cards and similar paper products of Tenant which include Tenant's address) incurred in moving to such relocated Premises after Tenant shall submit to Landlord an invoice together with evidence of the actual expenses incurred by Tenant. 19

43 30. LATE PAYMENTS - ACCORD AND SATISFACTION Any payment due of Tenant hereunder not received by Landlord within ten (10) days of the date when due shall be assessed a five percent (5%) charge for Landlord's administrative and other costs in processing and pursuing the payment of such late payment, and shall be assessed an additional five percent (5%) charge for the aforesaid costs of Landlord for each month thereafter until paid in full. No payment by Tenant or receipt by Landlord of a lesser amount than any installment or payment of Rent then due shall be deemed to be other than on account of the earliest stipulated Rent or other sums then due and payable under this Lease; nor shall any endorsement or statements on any check or any letter or other writing accompanying any check or payment be deemed an accord and satisfaction. Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such Rent or other sums then due under this Lease or pursue any other remedy provided in this Lease. 31. ESTOPPEL CERTIFICATE At any time, Tenant shall, within ten (10) days of the request by Landlord, execute, acknowledge and deliver to Landlord, any Mortgagee, prospective Mortgagee or any prospective purchaser of the Property, the Building and the Complex, or both (as designated by Landlord), an Estoppel Certificate in recordable form, or in such other form which Landlord requires, evidencing whether or not (a) this Lease is in full force and effect; (b) this Lease has been amended in any way; (c) Tenant has accepted and is occupying the Premises; (d) there are any existing defaults on the part of Landlord hereunder or defenses or offsets against the enforcement of this Lease to the knowledge of Tenant (specifying the nature of such defaults, defenses or offsets, if any) (e) the date to which Rent and other amounts due hereunder, if any, have been paid; and (f) any such other information reasonably requested by Landlord. Each certificate delivered pursuant to this Paragraph may be relied on by Landlord, any prospective purchaser or transferee of Landlord's interest hereunder, or any Mortgagee or prospective Mortgagee. Tenant irrevocably appoints Landlord as its attorney-in-fact, coupled with an interest, to execute and deliver, for and in the name of Tenant, any document or instrument provided for in this paragraph, if Tenant fails to provide same in a timely manner. 32. SEVERABILITY AND INTERPRETATION (a) If any clause or provision of this Lease shall be deemed illegal, invalid or unenforceable under present or future laws effective during the Term, the remainder of this Lease shall not be affected by such illegality, invalidity or unenforceability, and in lieu of each clause or provision of this Lease that is illegal, invalid or unenforceable, there shall be added as a part of this Lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. (b) Should any provisions of this Lease require judicial interpretation, it is agreed that the court interpreting or construing the same shall not apply a presumption that the terms of any such provision shall be more strictly construed against one party or the other by reason of the rule of construction that a document is to be construed most strictly against the party who itself or through its agent prepared the same, it being agreed that the agents of all parties hereto have participated in the preparation of this Lease. 33. MULTIPLE TENANTS If more than one individual or entity comprises and constitutes Tenant, then all individuals and entities comprising Tenant are and shall be jointly and severally liable for the due and proper performance of Tenant's duties and obligations arising under or in connection with this Lease. 34. FORCE MAJEURE Notwithstanding any provision in this Lease to the contrary, Landlord shall be excused for the period of any delay and shall not be deemed in default with respect to the performance of any of the terms, covenants, and conditions of this Lease when prevented from so doing by causes beyond Landlord's control, which shall include, but not be limited to, all labor disputes, governmental regulations or controls, fire or other casualty, inability to obtain any material or services, or acts of God. 20

44 35. QUIET ENJOYMENT So long as Tenant is in full compliance with the terms and conditions of this Lease, Landlord shall warrant and defend Tenant in the quiet enjoyment and possession of the Premises during the Term against any and all claims made by, through or under Landlord, subject to the terms of this Lease. 36. BROKERAGE COMMISSION; INDEMNITY FAISON & ASSOCIATES, INC. ("FAISON") HAS ACTED AS AGENT FOR LANDLORD IN THIS TRANSACTION. NO BROKER HAS ACTED AS AGENT FOR TENANT IN THIS TRANSACTION. FAISON SHALL BE PAID A COMMISSION BY LANDLORD. Tenant warrants that there are no other claims for broker's commissions or finder's fees in connection with its execution of this Lease. Tenant hereby indemnifies Landlord and holds Landlord harmless from and against all claims, loss, cost, damage or expense, including, but not limited to, reasonable attorney's fees actually incurred without regard to any statutory presumption and court costs, incurred by Landlord as a result of or in conjunction with a claim of any real estate agent or broker, if made by, through or under Tenant relative to this Lease. Landlord hereby indemnifies Tenant and holds Tenant harmless from and against all claims, loss, cost, damage or expense, including, but not limited to, reasonable attorney's fees actually incurred without regard to any statutory presumption and court costs, incurred by Tenant as a result of or in conjunction with a claim of any real estate agent or broker, if made by, through or under Landlord, relative to this Lease. 37. EXCULPATION OF LANDLORD (a) Notwithstanding any provision in this Lease to the contrary, Landlord and Landlord's managing agent's liability with respect to or arising from or in connection with this Lease shall be limited solely to Landlord's interest in the Complex. Neither Landlord, any of the partners of Landlord, any officer, director, principal, trustee, policyholder, shareholder, attorney nor employee of Landlord or its managing agent shall have any personal liability whatsoever with respect to this Lease. (b) Landlord and Landlord's managing agent shall have absolutely no personal liability with respect to any provision of this Lease or any obligation or liability arising from this Lease or in connection with this Lease. Tenant shall look solely to the equity of Landlord in the Complex for the satisfaction of any money judgment to Tenant. Such exculpation of liability shall be absolute and without exception whatsoever. 38. ORIGINAL INSTRUMENT Any number of counterparts of this Lease may be executed, and each such counterpart shall be deemed to be an original instrument. 39. APPLICABLE LAW This Lease has been made under and shall be construed, interpreted and enforced under and in accordance with the laws of the State of Georgia. 40. NO RECORDATION OF LEASE Without the prior written consent of Landlord, neither this Lease nor any memorandum hereof shall be recorded or placed on public record. 41. HAZARDOUS WASTES Neither Tenant, its successors or assigns, nor any permitted assignee or sublessee, licensee or other person or entity acting by or through Tenant, shall (either with or without negligence) cause or permit the escape, disposal or release of any "Hazardous Substances, or Materials" (as hereinafter defined). Tenant shall not allow the storage or use of such Hazardous Substances or Materials in any manner not sanctioned by law and by the highest standards prevailing in the 21

45 industry for the storage and use of such Hazardous Substances or Materials, nor allow to be brought into the Complex, the Property or the Premises any such Hazardous Substances or Materials except to use in the ordinary course of Tenant's business, relative to office copiers and then only if such Hazardous Substances or Materials are not prohibited by (and are only in amounts permitted by) law, after notice is given to Landlord of the identity of such Hazardous Substances or Materials. Without limitation, Hazardous Substances or Materials shall include any biologically or chemically active substance and any waste, substance or material described in Section 101(14) of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended from time to time, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended from time to time, 42 U.S.C. Section 6901 et seq., any applicable state or local laws and the regulations adopted under these acts. If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release of Hazardous Substances or Materials, then the reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand as additional charges if such requirement applies to the Premises. In addition, Tenant shall execute affidavits, representations and the like from time to time at Landlord's request concerning Tenant's best knowledge and belief regarding the presence of Hazardous Substances or Materials on the Premises, the Complex or the Property. Tenant indemnifies and covenants and agrees at its sole cost and expense, to protect and save Landlord harmless against and from any and all damages, losses, liabilities, obligations, penalties, claims, litigation, demands, defenses, judgments, suits, proceedings, costs, or expenses of any kind or of any nature whatsoever (including without limitation, reasonable attorney's fees and expert's fees) which may at any time be imposed upon, incurred by or asserted or awarded against Landlord arising from or out of any Hazardous Substances or Materials on, in, under or affecting the Premises, the Complex or the Property or any part thereof as a result of any act or omission by Tenant, its successors or assigns, or any permitted assignee, permitted sublessee or licensee or other person or entity acting at the direction with the consent of Tenant. The within covenants shall survive the expiration or earlier termination of the Lease Term. 42. BANKRUPTCY (a) The following shall be events of bankruptcy under this Lease: (i) Tenant's becoming insolvent, as that term is defined in Title 11 of the United States Code, entitled "Bankruptcy, 11 U.S.C., Sec. 101, et. seq." (the "Bankruptcy Code"), or under applicable insolvency laws (the "Insolvency Laws"); (ii) the appointment of a receiver or custodian for any or all of Tenant's property or assets, if such appointment shall not be dismissed within ninety (90) days; or (iii) the filing of a voluntary petition under the provisions of the Bankruptcy Code or the Insolvency Laws; or (iv) the filing of an involuntary petition under the provisions of the Bankruptcy Code or the Insolvency Laws, which is not dismissed within sixty (60) days of filing; or (v) Tenant's making or consenting to an assignment for the benefit of creditors or a common law composition of creditors. In the event of Tenant's bankruptcy, Landlord at its option may, in addition to all other rights and remedies provided in this Lease at law or in equity, terminate this Lease by giving written notice to Tenant. If termination of this Lease shall be stayed by order of any court having jurisdiction over any bankruptcy or insolvency proceeding or by federal or state statute, then, following the expiration of any such stay, or if Tenant or Tenant as debtor-in-possession or the trustee appointed in any such proceeding (being collectively referred to as "Tenant" only for the purposes of this Section) shall fail to assume Tenant's obligations under this Lease within the period prescribed therefor by law or within fifteen (15) days after entry of the order for relief or as may be allowed by the court, or if Tenant shall fail to provide adequate protection of Landlord's right, title and interest in and to the Premises or adequate assurance of the complete and continuous future performance of Tenant's obligation under this Lease, Landlord, to the extent permitted by law or by leave of the court having jurisdiction over such proceeding, shall have the right, at its election, to terminate this Lease on fifteen (15) days' notice to Tenant and upon the expiration of said fifteen (15) day period this Lease shall cease and expire as aforesaid and Tenant shall immediately quit and surrender the Premises as aforesaid. Upon the termination of this Lease as provided above, Landlord, without notice, may re-enter and repossess the Premises using such force for that purpose as may be necessary without being liable to indictment, prosecution or damages therefor and may dispossess Tenant by summary proceedings or otherwise. (b) For the purposes of the preceding paragraph (a), adequate protection of Landlord's right, title and interest in and to the Premises, and adequate assurance of the complete and 22

46 continuous future performance of Tenant's obligations under this Lease, shall include, without limitation, the following requirements: (i) that Tenant comply with all of its obligations under this Lease; (ii) that Tenant pay to Landlord, on the first day of each month occurring subsequent to the entry of such order, or the effective date of such stay, a sum equal to the amount by which the Premises diminished in value during the immediately preceding monthly period, but, in no event, shall such amount be less than the aggregate Rental payable for such monthly period; (iii) that Tenant continue to use the Premises in the manner originally required by the Lease; (iv) that Landlord be permitted to supervise the performance of Tenant's obligations under this Lease; (v) that Tenant pay to Landlord within fifteen (15) days after entry of such order or the effective date of such stay, as partial adequate protection against future diminution in value of the premises and adequate assurance of the complete and continuous future performance of Tenant's obligations under this Lease, an additional security deposit in an amount acceptable to Landlord; (vi) that Tenant has and will continue to have unencumbered assets after the payment of all secured obligations and administrative expenses to assure Landlord that sufficient funds will be available to fulfill the obligations of Tenant under this Lease; (vii) that if Tenant assumes this Lease and proposes to assign the same (pursuant to Title 11 U.S.C. Section 365, or as the same may be amended) to any person who shall have made a bona fide offer to accept an assignment of this Lease on terms acceptable to such court having competent jurisdiction over Tenant's estate, then notice of such proposed assignment, setting forth (x) the name and address of such person, (y) all of the terms and conditions of such offer, and (z) the adequate assurance to be provided Landlord to assure such person's future performance under this Lease, including, without limitation, the assurances referred to in Title 11 U.S.C. Section 365(b)(3), as it may be amended, shall be given to Landlord by Tenant no later than fifteen (15) days after receipt by Tenant of such offer, but in any event no later than thirty (30) days prior to the date that Tenant shall make application to such court for authority and approval to enter into such assignment and assumption, and Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept, or to cause Landlord's designee to accept, an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person less any brokerage commissions which may be payable out of the consideration to be paid by such person for the assignment of this Lease; and (vii) that if Tenant assumes this Lease and proposes to assign the same, and Landlord does not exercise its option pursuant to paragraph (vii) of this Section, Tenant hereby agrees that: (A) such assignee shall have a net worth not less that the net worth of Tenant as of the Commencement Date, or such Tenant's obligations under this Lease shall be unconditionally guaranteed by a person having a net worth equal to Tenant's net worth as of the Commencement Date; (B) such assignee shall not use the Premises except subject to all the restrictions contained in this Lease; 23

47 (C) such assignee shall assume in writing all of the terms, covenants and conditions of this Lease including, without limitation, all of such terms, covenants and conditions respecting the Uses permitted herein and payment of Rent, and such assignee shall provide Landlord with assurances satisfactory to Landlord that it has the operating experience sufficient to enable it so to comply with the terms, covenants and conditions of this Lease and successfully operate the Premises; (D) such assignee shall indemnify Landlord against, and pay to Landlord the amount of, any payments which may be obligated to be made to any Mortgagee by virtue of such assignment; (E) such assignee shall pay to Landlord an amount equal to the unamortized portion of any construction allowance made to Tenant; and (F) if such assignee makes any payment to Tenant, or for Tenant's account, for the right to assume this Lease (including, without limitation, any lump sum payment, installment payment or payment in the nature of rent over and above the Rental payable under this Lease), Tenant shall pay over to Landlord one-half of any such payment, less any amount paid to Landlord pursuant to clause (E) above on account of any construction allowance. As a material inducement to Landlord executing this Lease, Tenant acknowledges and agrees that Landlord is relying upon (i) the financial condition and specific operating experience of Tenant and Tenant's obligation to use the Premises specifically in accordance with this Lease, (ii) Tenant's timely performance of all of its obligations under this Lease notwithstanding the entry of an order for relief under the Bankruptcy Code or the Insolvency Laws for Tenant and (iii) all defaults under the Lease being cured promptly and the Lease being assumed within 60 days of any order for relief entered under the Bankruptcy Code or the Insolvency Laws for Tenant, or the Lease being rejected within such 60-day period and the Premises surrendered to Landlord. Accordingly, in consideration of the mutual covenants contained in this Lease and for other good and valuable consideration, Tenant hereby agrees that: (i) All obligations that accrue under this Lease (including the obligation to pay rent), from and after the date that a petition is filed or other action is commenced under the Bankruptcy Code or the Insolvency Laws (an "Action") shall be timely performed exactly as provided in this Lease and any failure to so perform shall be harmful and prejudicial to Landlord; (ii) Any and all rents that accrue from and after the date that an Action is commenced and that are not paid as required by this Lease shall, in the amount of such rents, constitute administrative expense claims allowable under the Bankruptcy Code with priority of payment at least equal to that of any other actual and necessary expenses incurred after the commencement of the Action; (iii) Any extension of the time period within which Tenant may assume or reject the Lease without an obligation to cause all obligations under the Lease to be performed as and when required under the Lease shall be harmful and prejudicial to Landlord; (iv) Any time period designated as the period within which Tenant must cure all defaults and compensate Landlord for all pecuniary losses that extends beyond the date of assumption of the Lease shall be harmful and prejudicial to Landlord; 24

48 (v) Any assignment of the Lease must result in all terms and conditions of the Lease being assumed by the assignee without alteration or amendment, and any assignment that results in an amendment or alteration of the terms and conditions of the Lease without the express written consent of Landlord shall be harmful and prejudicial to Landlord; (vi) Any proposed assignment of the Lease to an assignee: (1) that will not use the Premises specifically in accordance with the Lease, (2) that does not possess financial condition, operating performance and experience characteristics equal to or better than the financial condition, operating performance and experience of Tenant as of the date of this Lease, or (3) that does not provide guarantors of the Lease obligations with financial condition equal to or better than the financial condition of the original guarantors of the Lease as of the date of this Lease, shall be harmful and prejudicial to Landlord; (vii) The rejection (or deemed rejection) of the Lease for any reason whatsoever shall constitute cause for immediate relief from the automatic stay provisions of the Bankruptcy Code, and Tenant stipulates that such automatic stay shall be lifted immediately and possession of the Premises will be delivered to Landlord immediately without the necessity of any further action by Landlord. No provision of this Lease shall be deemed a waiver of Landlord's rights or remedies under the Bankruptcy Code, the Insolvency Laws, or applicable law to oppose any assumption and/or assignment of this Lease, to require timely performance of Tenant's obligations under this Lease, or to regain possession of the Premises as a result of the failure of Tenant to comply with the terms and conditions of this Lease or the Bankruptcy Code. Notwithstanding anything in this Lease to the contrary, all amounts payable by Tenant to or on behalf of Landlord under this Lease, whether or not expressly denominated as such, shall constitute "rent" for purposes of the Bankruptcy Code. For purposes of this Section addressing the rights and obligations of Landlord and Tenant if an Action is commenced, the term "Tenant" shall include Tenant's successor in bankruptcy, whether a trustee, Tenant as debtor in possession or other responsible person." 43. SIGNS No sign of any type or description shall be erected, placed or painted in or about the Premises, the Complex or the Property, except those signs submitted to Landlord in writing, and approved by Landlord in writing, which signs shall be in conformance with Landlord's sign criteria established for the Complex. 44. CONTROL OF COMMON AREAS AND PARKING FACILITIES All automobile parking areas, driveways, entrances and exits thereto, and other facilities furnished by Landlord, including all parking areas, truck way or ways, loading areas, pedestrian walkways and ramps, landscaped areas, stairways, corridors, and other areas and improvements provided by Landlord for the general use, in common (the "Common Areas"), of tenants, their officers, agents, employees, servants, invitees, licensees, visitors, patrons and customers, shall be at all times subject to the exclusive control and management of Landlord, and Landlord shall have the right but not the obligation from time to time to establish, modify, and enforce reasonable rules and regulations with respect to the Common Areas; to police same, from time to time (it being expressly understood that such right of Landlord shall in no event be construed to create any affirmative duty or obligation on the part of Landlord to police or provide security or protection or give rise to any liability of Landlord in the event of a third-party's criminal act); to change the area, level and location and arrangement of parking areas and other facilities hereinabove referred to; to restrict parking by, and enforce parking charges (by operation of meters or otherwise) to tenants, their officers, agents, invitees, employees, servants, licensees, visitors, patrons, and customers; to close all or any portion of said areas or facilities to such extent as may, in the opinion of Landlord's counsel, be legally sufficient to prevent a dedication thereof or the accrual of any rights to any 25

49 person of the public therein; to close temporarily all or any portion of the Common Areas; to discourage non-tenant parking; to charge a fee for visitors and customer parking; and to do and perform such other acts in and to said areas and improvements as, in the sole judgment of Landlord, shall be advisable with a view to the improvement of the convenience and use thereof by tenants, their officers, agents, employees, servants, invitees, visitors, patrons, licensees and customers. Landlord will operate and maintain the Common Areas in such a reasonable manner as Landlord shall determine from time to time. Without limiting the scope of such discretion, Landlord shall have the full right and authority but not the obligation to designate a manager of the parking facilities or Common Areas or other facilities, who shall have full authority to make and enforce rules and regulations regarding the use of the same and to employ all personnel and to make and enforce all Rules pertaining to, and necessary for, the proper operation and maintenance of the parking areas or the Common Areas. Tenant shall comply (and shall require all persons within its control to comply) with such Rules, upon notice of same. 45. NO SMOKING Tenant acknowledges that "smoking" is prohibited in all areas of the Premises, the Complex (including common areas and all grounds) and the Property except in areas, if any, outside the Building (and outside any other building in the Complex) that are designated by Landlord as "Designated Smoking Areas". Landlord shall have the right, but not the obligation, to designate an area or areas outside buildings in the Complex as "Designated Smoking Areas". Landlord shall have the right from time to time to change and or limit such Designated Smoking Areas and to enact future rules and regulations concerning smoking in such Designated Smoking Areas, including the right in Landlord's discretion, to prohibit smoking in the Designated Smoking Areas or the right to refuse to designate Designated Smoking Areas. Tenant agrees to comply in all respects with Landlord's prohibition and regulation of smoking and to enforce compliance against its employees, agents, invitees and other persons under the control and supervision of Tenant on the Premises, Complex and Property. Any violation of this provision shall be a default under this Lease and in addition and without limiting Landlord's rights and remedies in consequence of such default, entitle Landlord to assess a monetary fine against Tenant for each violation of this Section in the amount of $25.00. For purposes hereof, "smoking" means inhaling, exhaling, burning or carrying any lighted cigar, cigarette, pipe or other smoking equipment or device in any manner or form. Notwithstanding anything in this Lease to the contrary, no liability shall attach to Landlord for any failure to enforce this provision (or similar provisions in other leases). 46. PRIOR OCCUPANCY If Tenant, with Landlord's consent shall occupy the Premises prior to the beginning of the Term specified in Section 1(c) hereof, all provisions of this Lease shall be in full force and effect commencing upon such occupancy, and Rent for such period shall be paid by Tenant at the same rate herein specified. 47. GUARANTEE As an inducement for Landlord to enter into this Lease, Landlord shall be provided with a guaranty in the form attached as Exhibit "H". 48. LEASE BINDING UPON DELIVERY This Lease shall not be binding until and unless all parties have duly executed said Lease and a fully executed counterpart of said Lease has been delivered to Tenant. 49. SPECIAL STIPULATIONS The special stipulations attached hereto on Exhibit "F" and made a part hereof, if any, shall control if in conflict with any of the foregoing provisions of this Lease. 50. HEADINGS The headings in this Lease are included for convenience only and shall not be taken into consideration in any construction or interpretation of any part of this Lease. 26

50 51. SURRENDER OF LEASE NOT MERGER The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation hereof, shall not work a merger and may, at the option of Landlord, terminate all or any existing subleases or subtenants, or may, at the option of Landlord, operate as an assignment to Landlord of any or all such subleases or subtenants. 52. MORTGAGEE PROTECTION If there is a default by Landlord under this Lease, Tenant covenants to give notice by registered mail to, in addition to Landlord, any grantee of a deed to secure debt, mortgagee under a mortgage, or beneficiary under a deed of trust encumbering the Premises, whose address shall have been furnished it, and shall offer such grantee, mortgagee or beneficiary, a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effect a cure. 53. INTERFERENCE Landlord shall have no liability to Tenant nor shall Tenant have any right to terminate this Lease or claim any offset against or reduction in any sum to be paid hereunder because of interference with, or impairment to any extent, of light, air, visibility, or view, or because of damage or inconvenience due to noise, vibration or other matters resulting from the excavation, construction, repair or addition of or to, buildings adjacent to or near the Complex. No easement of light or air is granted in this Lease or otherwise. 54. NO PARTNERSHIPS Landlord shall not by the execution of this Lease in any way or for any purpose become a partner of Tenant in the conduct of its business or otherwise, or joint venturer or a member of a joint enterprise with Tenant. 55. ADA Tenant shall be responsible for compliance with Title III of the American with Disabilities Act of 1990 ("ADA") within the Premises and Landlord shall be responsible for compliance with Title III of the ADA relative to the Common Areas within the remainder of the Complex. 56. USE OF PRONOUN, RELATIONSHIP The use of the neuter singular pronoun to refer to Landlord or Tenant shall be deemed a proper reference even though Landlord or Tenant may be an individual, a partnership, a corporation, a trust or a group of two or more individuals or corporations. The necessary grammatical changes required to make the provisions of this Lease apply in the plural sense when there is more than one Tenant and to either corporations, trusts, associations, partnerships, or individuals, males or females, shall in all instances be assumed as though in each case fully expressed. 57. SURRENDER No surrender of the Premises, or of the remainder of the Term of this Lease, shall be valid unless accepted in writing by Landlord. 58. WAIVER OF JURY TRIAL TO THE EXTENT PERMITTED BY LAW, IT IS MUTUALLY AGREED BY AND BETWEEN LANDLORD AND TENANT THAT THE RESPECTIVE PARTIES HERETO SHALL, AND THEY DO HEREBY, WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BETWEEN THE PARTIES HERETO OR THEIR SUCCESSORS OR ASSIGNS ON ANY MATTERS ARISING OUT OF, OR IN ANY WAY CONNECTED WITH, THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, AND/OR TENANT'S USE OF, OR OCCUPANCY OF, THE PREMISES. TENANT FURTHER AGREES THAT IT SHALL NOT INTERPOSE ANY COUNTERCLAIM OR 27

51 COUNTERCLAIMS IN A SUMMARY PROCEEDING OR IN ANY ACTION BASED UPON NON-PAYMENT OF RENT OR ANY OTHER PAYMENT REQUIRED BY TENANT HEREUNDER. THIS WAIVER IS MADE FREELY AND VOLUNTARILY, WITHOUT DURESS AND ONLY AFTER EACH OF THE PARTIES HERETO HAS HAD THE BENEFIT OF ADVICE FROM LEGAL COUNSEL ON THIS SUBJECT. 59. NO THIRD PARTY BENEFICIARY. This Agreement is only intended to benefit, and is only enforceable by and against the parties hereto, their successors and assigns and no provisions herein are intended to benefit or be enforceable by any persons not a party to or successor or assign to any of the parties herein. 60. REPRESENTATIONS OF TENANT. Tenant, by its execution hereof, represents and warrants to Landlord and its successors and assigns that as of the date hereof Tenant is a duly established and validly existing corporation of the State of __________ and that the individual(s) signing this Lease on behalf of Tenant has/have been duly authorized to do so and thereby bind Tenant. IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed under seal, on the day and year first above written. TENANT: EXACTIUM, INC. /s/ ELI BARAK ------------------------------------ Authorized Signature Eli Barak ------------------------------------ Type Name of Signatory /s/ JEANNE B. JAMBER ------------------------------------ Authorized Signature Jeanne B. Jamber ------------------------------------ Type Name of Signatory Tenant Tax Identification Number 58-2260868 ------------------------------------ Date Executed by Tenant: 12/2/97 ----------- (CORPORATE SEAL) Note: If Tenant is a corporation, two authorized corporate officers must execute this Lease in their appropriate capacities for Tenant, affixing the corporate seal. "LANDLORD" BEACON PROPERTIES, L.P., a Delaware limited partnership By: Beacon Properties Corporation, General Partner By: /s/ DONALD B. BROOKS ------------------------------------ Donald B. Brooks, Senior Vice President Date Executed by Landlord: 12-10-97 ------------- (CORPORATE SEAL) 11/5/97 28

52 EXHIBIT "A" [FLOOR PLAN SUITE 200 GRAPHIC]

53 EXHIBIT "B" LEGAL DESCRIPTION OF THE LAND All that tract and parcel of land lying and being in land lot 37 of the 17th district of Fulton County, Georgia as shown and described on Property Line Plat for The Landmarks Group prepared by Roger L. Cordes & Associates and dated August 19,1970 and being more particularly described as follows: Beginning at a point on the southerly line of land lot 37, said district and county, located 150.0' easterly, as measured along said land lot line from the easterly right-of-way line of Glenridge Drive and running thence n.01 degrees 33'30"w. 220.9' to a point; thence n.03 degrees 33'w. 98.8' to a point; thence s.85 degrees 14'30"w.5.0' to a point; thence n.06 degrees 13'30"w.5.0' to a point; thence s.63 degrees 55'30"w. 156.7' to the easterly right-of-way line of Glenridge Drive; thence northerly along said Glenridge Drive 51.9' to a point; thence s.85 degrees 14'30"w. along said Glenridge Drive 5.0' to a point; thence northerly along said Glenridge Drive 7.1' to a point; thence n. 63 degrees 55'30"s. 159.4' to a point; thence n. 06 degrees 13'30"w. 76.3' to a point; thence n.09 degrees 41'w. 75.0' to a point, thence s. 63 degrees 55'30"w. 139.6' to a point; thence s.06 degrees 13'30"e. 77.8' to a point; thence s.63 degrees 55'30"w. 15.0" to the easterly right-of-way line of Glenridge Drive; thence northerly along said Glenridge Drive 190.8' to a point; thence n.78 degrees 16'30"e. 145.9' to a point; thence n.09 degrees 41'w. 188.1' to the southeasterly line of property now or formerly owned by Lane; thence n.66 degrees 41'30"e. along said Lane property 1,064.7' to the westerly right-of-way and limit of access line of the North Fulton Expressway; thence s. ll degrees 32'e. along said North Fulton Expressway 241.2' to a concrete monument at the beginning of a ramp connecting said expressway with said Interstate Highway 285; thence southwesterly along, and following the curvature of said right-of-way and limit of access line of said ramp 1,342.9' to an iron pin corner on the southerly line of said land lot 37; thence n.89 degrees 07'30"w. along said land lot line 170.2' to the point of beginning. Together with full fights of ingress and egress to and from Glenridge Drive over the parcel of land separating the herein described parcel from said Glenridge Drive.

54 EXHIBIT "C" RULES AND REGULATIONS 1. No sign, picture, advertisement or notice shall be displayed by Tenant on any part of the Premises or the Complex unless the same is first approved by Landlord. Any such sign, picture, advertisement or notice approved by Landlord shall be painted or installed for Tenant by Landlord at Tenant's expense. No awnings, curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with any window or door of the Premises without the prior consent of the Landlord, including approval by Landlord of the quality, type, design, color and manner of attachment. 2. Tenant agrees that its use of electrical current shall never exceed the capacity of existing feeders, risers or wiring installation. 3. Tenant shall not do or permit to be done in or about the Premises or Complex anything which shall increase the rate of insurance on said Complex or obstruct or interfere with the rights of other lessees of Landlord or annoy them in any way, including, but not limited to, using any musical instrument, making loud or unseemly noises, or singing, etc., nor use the Premises for sleeping, lodging, or cooking by any person at any time except with permission of Landlord. Tenant will be permitted to use for its own employees within the Premises a conventional coffeemaker. No vending machines of any kind will be installed, permitted or used on any part of the Premises. No part of said Complex or Premises shall be used for gambling, immoral or other unlawful purposes. No intoxicating beverage shall be sold in said Complex or Premises without prior written consent of Landlord. No area outside of the Premises shall be used for storage purposes at any time. 4. No bicycles, motorcycles or other motorized vehicles, birds or animals of any kind shall be brought into said Complex. All vehicles shall be parked only in areas designated therefor by Landlord. 5. The sidewalks, entrances, passages, corridors, halls, elevators, and stairways in the Complex shall not be obstructed by Tenant or used for any purposes other than those for which same were intended as ingress and egress. No windows, floors or skylights that reflect or admit light into the Complex shall be covered or obstructed by Tenant. Toilets, wash basins and sinks shall not be used for any purpose other than those for which they were constructed, and no sweeping, rubbish, or other obstructing or improper substances shall be thrown therein. Any damage resulting to them, or to heating apparatus, from misuse by Tenant or its employees, shall be borne by Tenant. 6. Only one key for each office in the Premises will be furnished Tenant without charge. No additional lock, latch or bolt of any kind shall be placed upon any door nor shall any changes be made in existing locks or mechanisms thereof without written consent of Landlord. At the termination of the Lease, Tenant shall return to Landlord all keys furnished to Tenant by Landlord, or otherwise procured by Tenant, and in the event of loss of any keys so furnished, Tenant shall pay to Landlord the cost thereof. 7. Landlord shall have the right to prescribe the weight, position and manner of installation of heavy articles such as safes, filing cabinets, machines and other equipment which Tenant may use in the Premises. No safes, furniture, boxes, large parcels or other kind of freight shall be taken to or from the Premises or allowed in any elevator, hall or corridor at any time except by permission of and at times allowed by Landlord. Tenant shall make prior arrangements with Landlord for use of freight elevator for the purpose of transporting such articles and such articles may be taken in or out of said Complex only between or during such hours as may be arranged with and designated by Landlord. The persons employed to move the same must be approved by Landlord. In no event shall any weight be placed upon any floor by Tenant so as to exceed 50 pounds per square foot of floor space without prior written approval of Landlord. 8. Tenant shall not cause or permit any gases, liquids or odors to be produced upon or permeate from the Premises, and no flammable, combustible, explosive, toxic or other hazardous fluid, chemical or substance shall be brought into the Complex.

55 9. The Complex shall be open to Tenant, its employees, and business visitors, between the hours of 7:00 a.m. and 6:00 p.m., on all days except Saturdays, Sundays and holidays and on Saturdays between the hours of 7:00 a.m. and 1:00 p.m. Landlord may implement a card access security system to control access during other times. Landlord shall not be liable for excluding any person from the Complex during other times, or for admission of any person to the Complex at any time, or for damages or loss for theft resulting therefrom to any person, including Tenant. 10. Unless explicitly permitted by the Lease, Tenant shall not employ any person other than Landlord's contractors and employees for the purpose of cleaning and taking care of the Premises. Landlord shall not be responsible for any loss, theft, mysterious disappearance of or damage to, any property, however occurring. Only persons authorized by Landlord may furnish ice, drinking water, towels, and other similar services within the Complex and only at hours and under regulations fixed by Landlord. 11. No connection shall be made to the electric wires or gas or electric fixtures, without the consent in writing on each occasion of Landlord. All glass, locks and trimmings in or upon the doors and windows of the Premises shall be kept whole and in good repair. Tenant shall not injure, overload or deface the Complex, the woodwork or the walls of the Premises, nor permit upon the Premises any noisome, noxious, noisy or offensive business. 12. If Tenant requires wiring for a bell or buzzer system, such wiring shall be done by the electrician of the Landlord only, and no outside wiring men shall be allowed to do work of this kind unless by the written permission of Landlord or its representatives. If telegraph or telephonic service is desired, the wiring for same shall be approved by Landlord, and no boring or cutting for wiring shall be done unless approved by Landlord or its representatives, as stated. The electric current shall not be used for power or heating unless written permission to do so shall first have been obtained from Landlord or its representatives in writing, and at an agreed cost to Tenant. 13. Tenant and its employees and invitees shall observe and obey all parking and traffic regulations as imposed by Landlord. 14. Canvassing, peddling, soliciting and distribution of handbills or any other written materials in the Complex are prohibited, and Tenant shall cooperate to prevent the same. 15. Landlord shall have the right to change the name of the Complex and to change the street address of the Complex, provided that in the case of a change in the street address, Landlord shall give Tenant not less than 180 days' prior notice of the change, unless the change is required by governmental authority. 16. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular lessee, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other lessee, nor prevent Landlord from thereafter enforcing any such Rules and Regulations against any or all of the other lessees of the Complex. 17. These Rules and Regulations are supplemental to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of the Lease. 18. Landlord reserves the right to make such other and reasonable Rules and Regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Complex and the Property, and for the preservation of good order therein.

56 EXHIBIT D WORK AGREEMENT In consideration of the mutual covenants and agreements contained in this Lease and in this Exhibit D, Landlord and Tenant do hereby expressly agree as follows: 1. DESIGN OF TENANT'S WORK. Landlord and Tenant have agreed on a preliminary plan described on Exhibit D - Schedule 3 (the "Preliminary Plan") for the improvements required by Tenant for the Premises, and the current estimate of the cost to complete the work contemplated by this preliminary plan is $21,164.53 (which cost shall be Tenant's cost, if incurred). Tenant shall, at Tenant's cost and expense, using an architect that shall be first approved by Landlord, cause final detail design plans, specifications and working drawings designated as being ready for construction to be prepared in accordance with all applicable laws, ordinances, rules, regulations and codes of all governmental or quasi- governmental bodies (hereinafter collectively referred to as "Legal Requirements") and to be approved, in writing, by both Landlord and Tenant (hereinafter collectively referred to as "Tenant's Plans"). Subject to the provisions of paragraph 7 below in this Work Agreement Tenant may use "Tenant's Allowance" (hereinafter defined) for payment of preparation of Tenant's Plans. For the convenience of Tenant and on behalf of the Tenant, Landlord, as Tenant's agent, has contracted with __________ to prepare Tenant's Plans for Tenant pursuant to the provisions hereof. Tenant's Plans shall include, but not be limited to demolition plans, the location of all interior partitions, doors, electrical switches and outlets and telephone outlets; reflected ceiling plan showing the location of all lights, fans, diffusers, and vents, electrical outlets, plumbing and mechanical plans, floor and wall coverings; signs and such other items as may be necessary or desirable in order to determine if, in Landlord's sole opinion, the work shown on Tenant's Plans is aesthetically compatible with the surrounding improvements, and in order to allow the Landlord to obtain accurate bids on, and to accurately determine the cost to complete the installation of all such work shown on the Tenant's Plans (hereinafter collectively referred to as "Tenant's Work"). Tenant's Plans shall be minimum 1/8-inch scale architectural and engineering drawings although details may be shown with a different scale. Tenant shall submit four (4) copies of Tenant's Plans to Landlord within thirty (30) days after the execution and delivery of this Lease by both Landlord and Tenant. Tenant's Plans shall conform to and be consistent with the Preliminary Plan. Landlord shall within five (5) business days either approve (or approve with conditions) Tenant's Plans or disapprove Tenant's Plans and give Tenant the reasons for such disapproval. If Landlord shall disapprove Tenant's Plans, Tenant shall make the changes to Tenant's Plans as required by Landlord in order to obtain Landlord's approval of Tenant's Plans and Tenant shall resubmit Tenant's Plans to Landlord for Landlord's written approval. If Landlord has "approved with conditions" Tenant shall either accept in writing such conditions or resubmit the Tenant's Plans with changes to correct the issues that are the basis for such conditions and in such event, such resubmission shall be treated in the same way as if the Tenant's Plans had been initially disapproved by Landlord. This procedure shall continue until Tenant's Plans shall be finally approved, in writing, by Landlord and Tenant. Landlord agrees to give Tenant its approval or disapproval of Tenant's Plans within five (5) business days of the date Tenant shall submit or resubmit any plans to Landlord. If Tenant shall fail to obtain Landlord's approval of Tenant's Plans within forty (40) days after the date of this Lease, for reasons other than a Landlord delay approving or giving comments to Tenant's Plans, then such delay after forty (40) days shall be a Tenant Delay for purposes of Section 4 (b) hereof. Four (4) sets of Tenant's Plans as finally approved by both Landlord and Tenant shall be signed and dated by both Landlord and Tenant as ready for construction. Three (3) signed copies of same shall be retained by Landlord and one (1) signed copy shall be retained by Tenant. Tenant's Work performed pursuant to this Exhibit D shall be deemed permanent fixtures and shall become the property of Landlord upon completion of same by Landlord. 2. REVIEW OF TENANT'S PLANS. The review and approval of Tenant's Plans by Landlord are solely for purposes of determining, in Landlord's sole opinion, whether or not Tenant's Plans are compatible with the function, design, capacity and layout of the mechanical, structural, electrical and plumbing systems, facilities and equipment located in the Building. The Landlord shall not be liable in any way whatsoever to the Tenant or to any other person for the performance, design or

57 quality of Tenant's Work, for its failure to comply with applicable legal requirements or for the utility or functional aspects of Tenant's Work. 3. PERFORMANCE OF TENANT'S WORK (a) Unless Landlord and Tenant otherwise agree, after approval of Tenant's Plans, Landlord shall obtain, if Landlord does not act as CM coordinator, three (3) bids from outside contractors approved by Landlord to perform Tenant's Work. Landlord agrees to use the contractor providing the lowest bid and such bid price plus Landlord's direct contractor cost(s) and construction management fee (as set forth in 3(e) below) shall for purposes of this Lease be the "Cost of Tenant's Work". (b) If Landlord shall be delayed in completing Landlord's construction as a result of: (i) Tenant's request for materials, finishes or installations other than Landlord's standard; or (ii) Tenant's changes in the approved plans; or (iii) Tenant's failure to approve the plans and specifications or the estimate of construction costs in a timely manner pursuant to the provisions hereinabove set forth; or (iv) The performance of work by a person, firm or corporation employed by Tenant and delays in the completion of said work by said person, firm or corporation, then, Tenant agrees to pay to Landlord, in addition to any sum provided above, a sum equal to any additional cost to Landlord in completing Landlord's construction resulting from any of the foregoing failures, acts or omissions of Tenant. Any such sums may be collected by Landlord as "additional rent" from time to time, upon demand, whether or not the Term shall have commenced and in the event of the default in payment thereof, Landlord shall (in addition to all other remedies) have the same rights as in the event of default in payment of Rent. All such delays in this Section shall be called Tenant Delays and shall not cause any extension or delay of the Commencement Date of this Lease as provided in Section 1 and 4 of the Lease. (c) Promptly after approval of Tenant's Plans and the "Cost of Tenant's Work" (as hereinafter defined) by Landlord and Tenant, and provided Tenant has paid Landlord the "Cost Differential" (as hereinafter defined), if any, Landlord shall cause construction of Tenant's Work to be commenced. Landlord shall use reasonable efforts to cause Tenant's Work to be completed substantially in accordance with the Tenant's Plans in a prompt manner subject, however, to an extension of said number of days for a period of time equal to the period of time that the performance of Landlord's obligations is prevented, delayed, retarded or hindered by acts of God, weather or unusual severity, fire, earthquake, flood, explosion, action of the elements, malicious mischief, inability to procure or general shortage of labor, services material, equipment, facilities, or supplies in the open market, failure of transportation, strikes, lockouts, actions of labor unions, condemnation, public requisition, laws, orders of government or civil or defense authorities, or any other cause, whether similar or dissimilar to the foregoing, not within the reasonable control of Landlord (all the foregoing hereinafter collectively referred to as "Unavoidable Delays"). In the event of any Unavoidable Delays, from time to time, during the course of performing Tenant's Work, the number of days set forth above in this Paragraph 4 shall be increased each time by a number of days equal to the number of days of each such delay. (d) Tenant hereby appoints JEANNE B. JAMBOR as the authorized representative of Tenant for purposes of dealing with Landlord with respect to all matters involving, directly or indirectly, Tenant's Plans and Tenant's Work including without limitation, change orders to Tenant's Plans (such person hereinafter referred to as the "Designated Representative"). Tenant hereby warrants and represents to Landlord that the Designated Representative has the requisite power and authority to deal with Landlord in the manner

58 contemplated herein and that Tenant shall be bound by the acts and omissions of the Designated Representative. (e) Subject to the provisions set forth in this Exhibit D and Landlord's receipt of a building permit, Landlord shall commence construction of Tenant's Work within ten (10) days after final approval by Landlord of Tenant's Plans and approval by Landlord of the cost to complete Tenant's Work (hereinafter referred to as the "Cost of Tenant's Work"). Tenant acknowledges and agrees that the Cost of Tenant's Work shall include a construction management fee payable to Landlord in the amount of six (6%) percent of the Cost of Tenant's Work as CM coordinator. 5. NOTICE OF SUBSTANTIAL COMPLETION. Upon completion of the Tenant's Work substantially in accordance with Tenant's Plans, Landlord shall furnish Tenant with notice thereof. Within five (5) days after receipt of such notice from Landlord: (a) Tenant shall execute and deliver to Landlord an Estoppel Statement in the form attached hereto as Schedule 1 and incorporated herein by this reference; (b) Tenant shall execute and deliver to Landlord the Certificate as to Term of Lease attached hereto as Schedule 2 and incorporated herein by this reference if requested by Landlord; (c) Tenant shall pay the first installment of Base Rental due under the Lease; (d) Tenant shall pay to Landlord the unpaid balance, if any, of the Cost Differential (which is hereinafter defined in Section 8 below); and (e) Tenant shall furnish Landlord at Tenant's expense with final as-built plans of Tenant's Work on reproducible mylar drawn to minimum 1/8-inch architectural scale. Promptly upon receipt of all of the items set forth above in this Paragraph 5, or at Landlord's election prior to such receipt, Landlord shall tender possession of the Premises to Tenant by written notice to Tenant. 6. TENANT'S INSPECTION OF PREMISES. (a) Within five (5) days after the date of notice of substantial completion referred to in Paragraph 5 of this Exhibit D, the Designated Representative and Landlord shall jointly inspect the Premises for purposes of determining whether or not any unfinished work required to be performed pursuant to Tenants' Plans (such unfinished work hereinafter referred to as "Punchlist Items") remains incomplete. Landlord shall be responsible for causing the Punchlist Items to be completed as expeditiously as reasonably practicable, but in any event within ninety (90) days after the date of notice of substantial completion, subject, however, to extensions of such ninety (90) day period resulting from Unavoidable Delays. Substantial completion of the Premises shall be deemed to have occurred so long as any Punchlist item does not reasonably prevent Tenant from beneficially occupying substantially all of the Premises and using the Premises for the purposes set forth in Paragraph 6 of this Lease. (b) The Designated Representative may, from time to time, visit the Premises and inspect same and may consult with Landlord and its supervisors, architects, engineers, and agents, provided, however, that the Designated Representative shall comply with all applicable legal requirements and the requirements of all insurance policies carried by Landlord with respect to the Premises which may prohibit, limit or condition access to the Premises by Tenant, or others, during the period of such construction. Tenant shall promptly notify Landlord of any deviations from Tenant's Plans in the construction of the Premises of which Tenant has knowledge. 7. TENANT'S WORK. Tenant shall take and accept the Premises "as is, where is", with no obligation on the part of Landlord to provide any work within the Premises or any allowance therefor.

59 8. CHANGE ORDERS. After commencement of Tenant's Work by Landlord, but before the commencement of any changes to Tenant's Plans, such changes to Tenant's Plans and the cost thereof (either deductive or additional) shall be mutually agreed upon in writing by Landlord and Tenant and the cost of Tenant's Work shall be adjusted accordingly. No changes to Tenant's Work will be performed without written approval from Landlord and Tenant. Tenant shall comply with all of Landlord's requirements (as to submittals, details, cost figures, cooperation, and any other items and procedures) as to each such request for a change to Tenant's Plans. If any change results in an increase in the cost of Tenant's Work, an amount of money equal to such increase shall be paid to Landlord simultaneously with the approval of such change by both Landlord and Tenant or the payment thereof shall otherwise be secured in a manner acceptable to Landlord. If, in Landlord's opinion, any change will prevent the Landlord from completing Tenant's Work within the number of days set forth in Paragraph 4 of this Exhibit D, then such number of days shall be increased by a number of days which shall be sufficient, in Landlord's reasonable estimation, to allow completion of Tenant's Work and such change.

60 EXHIBIT D SCHEDULE 1 ESTOPPEL STATEMENT RE: Lease Dated: Amended: Landlord: BEACON PROPERTIES, L.P. Tenant: EXACTIUM, INC. Premises: As Tenant under the above-referenced Lease, the undersigned hereby acknowledges for the benefit of Beacon Properties, L.P., which has or is about to acquire the property in which the Premises are located, the truth and accuracy of the following statements pertaining to the Lease. 1. Tenant has accepted, is satisfied with, and is in full possession of said Premises, including all improvements, additions and alterations thereto required to be made by Landlord under the Lease. 2. The Lease is in full force and effect, and Tenant is paying the full rent stipulated in the Lease with no offsets, defenses or claims. 3. Landlord has not been and is not presently in default under any of the terms, covenants or provisions of the Lease. 4. Landlord has complied with all of the requirements and conditions precedent to the commencement of the term of the Lease as specified in the Lease. 5. The fixed annual base rent under the Lease is $______ and no monies have been paid to Landlord in advance of the due date set forth in the Lease described above, except.______________________________________________. 6. The Lease is for a term of ______ years expiring __________, and Tenant has been in occupancy and paying rent since the term commenced on__________________________. 7. No monetary or other considerations, including but not limited to rental concessions by Landlord, tenant improvements in excess of building standard, or Landlord's assumption of prior lease obligations of Tenant, have been granted to Tenant by Landlord for entering into the Lease, except ____________________. 8. Tenant has not been and is not presently in default under any of the terms, covenants or provisions of the Lease. 9. Tenant has delivered to Landlord a security deposit in the amount of $___________. 10. Tenant acknowledges (a) that there have been no modifications or amendments to the Lease other than herein specifically stated, (b) it has no notice of a prior assignment, hypothecation or pledge of rents or of the Lease, and (c) the Lease represents the entire agreement between Landlord and Tenant, (d) no prepayment or reduction of rent and no modification, termination, or acceptance of surrender of the Lease will be valid as to Beacon Properties, L.P. without the consent of said company, and (e) notice of the proposed assignment of Landlord's

61 interest in the Lease may be given it by certified or registered mail, return receipt requested, at the Premises, or as otherwise directed below. TENANT: EXACTIUM, INC. By: --------------------------------- Title: ------------------------------ Date: ------------------------------- (Address to which notices are to be sent to Tenant if other than to the Premises) ----------------------------------- ----------------------------------- -----------------------------------

62 EXHIBIT D SCHEDULE 2 CERTIFICATE AS TO TERM OF LEASE WHEREAS, Beacon Properties, L.P. ("Landlord") and EXACTIUM, INC. ("Tenant") entered into that certain Lease dated _____ (the "Lease"); WHEREAS, Landlord has delivered possession of the Premises pursuant to the Lease; WHEREAS, Landlord and Tenant desire to confirm the date the Lease commences the date the Term expires, the dates Base Rent is due during the Term and the Base Year for purposes of the Lease. NOW, THEREFORE, Landlord and Tenant hereby agree as follows: 1. For all purposes of this Certificate, all terms used herein that are defined in the Lease shall have the same meanings ascribed to them in the Lease. 2. The Term commenced on the _____ day of _______, 19__, and, unless sooner terminated or extended as provided in the Lease, shall expire _____day of _______, 19__, at 5:00 o'clock p.m. 3. Tenant has accepted possession of the Premises, including all improvements, additions and alterations to be made by Landlord under the Lease. 4. The first monthly installment of Base Rental in accordance with the Lease has been paid, and each monthly installment of Base Rental thereafter shall be due and payable on the first (1st) day of each month commencing _______ through and including _______. Accordingly, Base Rental shall be due and payable in the following amounts in accordance with the Lease through the following dates: <TABLE> <CAPTION> DATE MONTHLY INSTALLMENT AMOUNT ---- -------------------------- <S> <C> </TABLE> 5. The Base Year for the Lease shall be the calendar year _____. 6. Landlord and Tenant hereby ratify and affirm the Lease and agree the Lease remains in full force and effect in accordance with its term, provided, however, to the extent of any conflict between the Lease and this Certificate, this Lease Certificate shall control.

63 IN WITNESS WHEREOF, Landlord and Tenant hereby execute this Certificate under seal this _____ day of _______, 19__. LANDLORD: BEACON PROPERTIES, L.P. By: Beacon Properties Corporation, General Partner ----------------------------------------------- By: ----------------------------------------------- Donald B. Brooks, Senior Vice President TENANT: EXACTIUM, INC. By: ------------------------------------ Print or Type Name: -------------------- Title: ---------------------------------

64 EXHIBIT D SCHEDULE 3 PRELIMINARY PLAN [FLOOR PLAN SUITE 200 GRAPHIC]

65 EXHIBIT "E" PROHIBITED USES OF PREMISES Notwithstanding anything to the contrary contained in the Lease, the Premises shall not be used for or as: (a) a school or other school or instructional activities and purposes; a church or other religious activities; a trade association office or facility or to promote any trade association activities or similar purposes; a union office or to promote union activities or purposes; government owned or affiliated office or facility; any pornographic or prurient sex related activity or purpose (such as, but not limited to, an escort service or telephone sex service); a medical or dental office; or (b) any office that, by its nature, shall involve operations substantially on a round-the-clock, 24 hour basis; or shall constitute a material additional burden to the services of the Building as compared to normal general office uses for standard building hours and holidays.

66 EXHIBIT "F" SPECIAL STIPULATIONS 1. Right of First Refusal. Provided this Lease is then in full force and effect and Tenant is in full compliance with the terms and conditions of this Lease, and there is no sublease of any portion of the Premises or assignment of any of Tenant's interest in the Lease, Landlord hereby grants Tenant the right to lease the approximately 1,338 rentable square feet known as "Suite 290" in the Building (the "Expansion Space") in accordance with the within terms and conditions. Should Landlord receive an offer from an unaffiliated third party to lease the Expansion Space, upon terms and conditions and at a rental rate acceptable to Landlord, Landlord shall notify Tenant thereof in writing, and offering to lease the Expansion Space to Tenant upon the same terms and conditions as leased under this Lease. Tenant shall have three (3) days to accept or reject such offer. If Tenant rejects such offer or fails to respond within said three (3) day period, then Landlord shall be entitled to rent said space to such third party. If Tenant accepts said offer, then Tenant shall have leased such space upon the same terms and conditions as leased under this Lease and for a term co-terminus with the Lease, except that the space shall be leased "as is, where is". The Rent for said Expansion Space shall commence on the earlier to occur of (i) thirty (30) days after Tenant accepts such offer for such Expansion Space, or (ii) on the date Tenant occupies said Expansion Space. 2. See "Exactium Additional Language" regarding additional space

67 EXACTIUM ADDITIONAL LANGUAGE If Tenant desires to lease at least an additional five thousand (5,000) rentable square feet in the Building (the "Expansion Space"), as such desire is evidenced by a notice to Landlord, then Landlord shall endeavor to provide such space to Tenant in the Building, subject to and conditioned upon the following: (i) Tenant must be in compliance with all terms and conditions of this Lease for such options to be effective; (ii) Landlord may provide such Expansion Space to Tenant in any location or locations within the Building as Landlord elects as long as such space is at least five thousand (5,000) rentable square feet in size, in the aggregate, and such space may be offered in one or more blocks of space, and may not be contiguous to the Premises; (iii) Once Landlord provides the Expansion Space, then Tenant shall be obligated and hereby covenants and agrees to lease such Expansion Space. Such Expansion Space shall be leased to Tenant on an "as is, where is" basis, on the same terms and conditions as the Premises is leased to Tenant, at the same rate of Rent (on a per square foot per annum basis), for a term co-terminus with the Term, with any allowances provided for under the Lease pro-rated to reflect the shorter duration of the Term. (iv) If Landlord is not able to provide such space to Tenant within ninety (90) days after Tenant first gives notice to Landlord of Tenant's desire to so lease such Expansion Space, then Tenant shall have the right to terminate this Lease and lease space in another building owned by Landlord, such option to be exercised, if at all, within ten (10) days after Tenant first has notice that Landlord is unable to provide such space to Tenant, and such termination to be effective no less than ninety (90) days after Tenant's notice of termination to Landlord; provided, however, as a part of and at the time of such cancellation Tenant shall pay to Landlord the unamortized amount of the leasing commissions incurred as a part of this Lease (such amortization occurring over the full term of the Lease, on a straight-line basis).

68 EXHIBIT "G" COMPLEX STANDARD SERVICES Landlord shall furnish the following services to Tenant during the Term (the "Building Standard Services"): (a) Hot and cold domestic water and common-use restrooms and toilets at locations provided for general use and as reasonably deemed by Landlord to be in keeping with comparable office buildings to the Complex. (b) Subject to curtailment as required by governmental laws, rules or mandatory regulations and subject to the design conditions hereinafter provided, central heat and air conditioning in season, at such temperatures and in such amounts as are reasonably deemed by Landlord to be in keeping with comparable office buildings to the Complex. In order to enable the central heating and air conditioning system to operate efficiently, Tenant agrees that it will not place within the Premises more than one (1) person per 175 square feet of rentable area. Such heating and air conditioning shall be furnished between 8:00 a.m. and 6:00 p.m. on weekdays (from Monday through Friday, inclusive) and between 8:00 a.m. and 1:00 p.m. on Saturdays, all exclusive of Holidays, as defined below (the "Building Operating Hours"). (c) Electric lighting service for all public areas and special service areas of the Complex in the manner and to the extent reasonably deemed by Landlord to be in keeping with the first-class standards of the Complex. (d) Janitor service shall be provided five (5) days per week, exclusive of Holidays (as hereinbelow defined), in a manner that Landlord reasonably deems to be consistent with the firstclass standards of the Complex. (e) Sufficient electrical capacity to operate (i) incandescent lights, typewriters, calculating machines, photocopying machines and other machines of the same low voltage electrical consumption (120 volts), provided that the total rated electrical design load for said lighting and machines of low electrical voltage shall not exceed 1.25 watts per square foot of rentable area; and (ii) lighting (277 volts), provided that the total rated electrical design load for said lighting shall not exceed 1.40 watts per square foot of rentable area (each such rated electrical design load to be hereinafter referred to as the "Building Standard rated electrical design load"). Should Tenant's total rated electrical design load exceed the Building Standard rated electrical design load for either low or high voltage electrical consumption, or if Tenant's electrical design requires low voltage or high voltage circuits in excess of Tenant's share of the Building Standard circuits, Landlord will (at Tenant's expense) install such additional circuits and associated high voltage panels and/or additional low voltage panels with associated transformers shall be hereinafter referred to as the "additional electrical equipment"). If the additional electrical equipment is installed because Tenant's low or high voltage rated electrical design load exceeds the applicable Building Standard rated electrical design load, then a meter shall also be added (at Tenant's expense) to measure the electricity used through the additional electrical equipment. The design and installation of any additional electrical equipment (or any related meter) required by Tenant shall be subject to the prior approval of Landlord (which approval shall not be unreasonably withheld). All expenses incurred by Landlord in connection with the review and approval of any additional electrical equipment shall also be reimbursed to Landlord by Tenant. Tenant shall also pay on demand the actual metered cost of electricity consumed through the additional electrical equipment (if applicable), plus any expenses incurred by Landlord in connection with the metering thereof. If any of Tenant's electrical equipment requires conditioned air in excess of Building Standard air conditioning, the same shall be installed by Landlord (on Tenant's behalf), and Tenant shall pay all design, installation, metering and operating costs relating thereto.

69 If Tenant requires that certain areas within Tenant's Premises must operate in excess of the normal Building Operating Hours (as hereinabove defined), the electrical service to such areas shall be separately circuited and metered (at Tenant's expense) such that Tenant shall be billed the costs associated with electricity consumed during hours other than Building Operating Hours. (f) All Building Standard fluorescent bulb replacement in all areas and all incandescent bulb replacement in public areas, toilet and restroom areas, and stairwells. (g) Non-exclusive multiple elevator cab passenger service to the Premises during Building Operating Hours (as hereinabove defined) and at least one (1) elevator cab passenger service to the floors) on which the Premises are located twenty-four (24) hours per day during Building Operating Hours (all subject to temporary cessation for ordinary repair and maintenance and during times when life safety systems override normal building operating systems) with such freight elevator service available at other times upon reasonable prior notice and the payment by Tenant to Landlord of any additional expense actually incurred by Landlord in connection therewith. To the extent the services described above require electricity and water supplied by public utilities, Landlord's covenants thereunder shall only impose on Landlord the obligation to use its best efforts to cause the applicable public utilities to furnish same. Except for deliberate and willful act of Landlord, failure by Landlord to furnish the services described herein, or any cessation thereof, shall not render Landlord liable for damages to either person or property, not be construed as an eviction of Tenant, nor work an abatement of rent, nor relieve Tenant from fulfillment of any covenant or agreement hereof. In addition to the foregoing, should any of the equipment or machinery, for any cause, fail to operate, or function properly, Tenant shall have no claim for rebate of rent or damages on account of an interruption in service occasioned thereby or resulting therefrom; provided, however, Landlord agrees to use reasonable efforts to promptly repair said equipment or machinery and to restore said services during normal business hours. The following dates shall constitute "Holidays" as that term is used in this Lease Agreement: New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, Friday following Thanksgiving Day, Christmas, and any other holiday generally recognized as such by landlords of office space in the metropolitan Atlanta office market, as determined by Landlord in good faith. If in the case of any specific holiday mentioned in the preceding sentence, a different day shall be observed than the respective day mentioned, then that day which constitutes the day observed by national banks in Atlanta, Georgia on account of said holiday shall constitute the Holiday under this Lease Agreement.

70 EXHIBIT "H" GUARANTY

71 TERMS OF LEASE Exactium, Ltd. The original Lease agreement for the Exactium, Ltd offce is in Hebrew. Therefore, we have provided this summary of the terms of the agreement: Planned Disposition: The landlord is terminating this lease effective May 1, 2000 because another party wishes to lease the space. Instead of subleasing, the new tenant will contract directly with the landlord and terminate Exactium's remaining obligation. Rent Period: 5 years Start Date: 10/1/97 Payment Dates: Every three months, in advance Payment Amount: NIS 6,645 per month Exchange rate for 2/29/00 was 4.032 NIS/$ Therefore, this is about $1,648.07 per month The lease payment is linked to the Israeli pricing index. The lease payment includes 3 parking places. Management fees: $1.75 per square meter per month Square meters: 136 City tax: NIS 648 per month (About 160.71 USD) Offce cleaning: NIS 261 per month (About 64.73 USD) Electricity: Average of NIS 200 per month (About 49.60 USD) Agreement may be canceled with six months' advance notice but not before three years have elapsed. If the agreement is canceled, a fine will be due. If the agreement is canceled before four years have elapsed, the fine will be one month for each two months that have been canceled. If the agreement is canceled after four years have elapsed, the fine will be one month for each three months that have been canceled.

72 Long-Term Loans / Capital Lease Obligations Exactium Inc. 12/31/99 <TABLE> <CAPTION> Loan Balance 2000 2001 2002 Total Total ST Total LT Total ---- ------- ---- ---- ---- ----- -------- -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> Dolphin Capital 1,889 1,210 679 0 1,889 1,210 679 1,889 Dell Financing 797 797 0 0 797 797 0 797 PM Group Life 24,508 24,508 0 0 24,508 24,508 0 24,508 Great America 17,636 6,740 7,155 3,741 17,636 6,740 10,897 17,636 Total 44,830 33,254 7,834 3,741 44,830 33,254 11,575 44,830 </TABLE>

73 Exactium, Inc. Capital Lease Schedules Laptop Computers - 2 Lessor: Dolphin Capital Payments: Monthly Term: 36 $1 Buy out Monthly Payment: $ 118.28 Fair Market Value: $3,389.00 Interest Rate 15.48% <TABLE> <CAPTION> Interest Principal Balance -------- --------- ------- <S> <C> <C> <C> Jul-98 43.72 74.56 3,314.44 Aug-98 42.76 75.52 3,238.91 Sep-98 41.78 76.50 3,162.42 Oct-98 40.80 77.48 3,084.93 Nov-98 39.80 78.48 3,006.45 Dec-98 38.78 79.50 2,926.95 Jan-99 37.76 80.52 2,846.43 Feb-99 36.72 81.56 2,764.87 Mar-99 35.67 82.61 2,682.25 Apr-99 34.60 83.68 2,598.57 May-99 33.52 84.76 2,513.82 Jun-99 32.43 85.85 2,427.96 Jul-99 31.32 86.96 2,341.01 Aug-99 30.20 88.08 2,252.92 Sep-99 29.06 89.22 2,163.71 Oct-99 27.91 90.37 2,073.34 Nov-99 26.75 91.53 1,981.80 Dec-99 25.57 92.71 1,889.09 Jan-00 24.37 93.91 1,795.18 Feb-00 23.16 95.12 1,700.06 Mar-00 21.93 96.35 1,603.74 Apr-00 20.69 97.59 1,506.12 May-00 19.43 98.85 1,407.26 Jun-00 18.15 100.13 1,307.14 Jul-00 16.86 101.42 1,205.72 Aug-00 15.55 102.73 1,102.99 Sep-00 14.23 104.05 998.94 Oct-00 12.89 105.39 893.55 Nov-00 11.53 106.75 786.80 Dec-00 10.15 108.13 678.67 Jan-01 8.75 109.53 569.14 Feb-01 7.34 110.94 458.20 Mar-01 5.91 112.37 345.83 Apr-01 4.46 113.82 232.01 May-01 2.99 115.29 116.73 Jun-01 1.51 116.77 (0.05) </TABLE>

74 Exactium, Inc. Capital Lease Schedules DESKTOP WORKSTATION LESSOR: Dell Financial PAYMENTS: Monthly TERM: 24 $1 Buy Out MONTHLY PAYMENT: $ 118.75 FAIR MARKET VALUE: $2,500.00 INTEREST RATE: 12.91% <TABLE> <CAPTION> Interest Principal Balance <S> <C> <C> <C> Aug-98 26.90 91.85 2,408.15 Sep-98 25.91 92.84 2,315.30 Oct-98 24.91 93.84 2,221.46 Nov-98 23.90 94.85 2,126.61 Dec-98 22.88 95.87 2,030.74 Jan-99 21.85 96.90 1,933.84 Feb-99 20.80 97.95 1,835.89 Mar-99 19.75 99.00 1,736.89 Apr-99 18.69 100.06 1,636.83 May-99 17.61 101.14 1,535.69 Jun-99 16.52 102.23 1,433.46 Jul-99 15.42 103.33 1,330.13 Aug-99 14.31 104.44 1,225.69 Sep-99 13.19 105.56 1,120.13 Oct-99 12.05 106.70 1,013.43 Nov-99 10.90 107.85 905.58 Dec-99 9.74 109.01 796.57 Jan-00 8.57 110.18 686.39 Feb-00 7.38 111.37 575.03 Mar-00 6.19 112.56 462.47 Apr-00 4.98 113.77 348.69 May-00 3.75 115.00 233.69 Jun-00 2.51 116.24 117.46 Jul-00 1.26 117.49 (0.03) </TABLE>

75 PM GROUP -- VARIOUS COMPUTER EQUIPMENT Exactium, Inc. Capital Lease Schedules Payment Amount $5,000.00 Number of Payments 12 Annual Interest 8% Present Value $57,478.91 <TABLE> <CAPTION> PAYMENT PAYMENT PAYMENT INTEREST PRINCIPAL INTEREST REMAINING NUMBER DATE AMOUNT RATE AMOUNT AMOUNT PRINCIPAL <S> <C> <C> <C> <C> <C> <C> 1 6/1/99 $5,000.00 0.67% $4,616.81 $383.19 $52,862.10 2 7/1/99 $5,000.00 0.67% $4,647.59 $352.41 $48,214.52 3 8/1/99 $5,000.00 0.67% $4,678.57 $321.43 $43,535.95 4 9/1/99 $5,000.00 0.67% $4,709.76 $290.24 $38,826.49 5 10/1/99 $5,000.00 0.67% $4,741.16 $258.84 $34,085.03 6 11/1/99 $5,000.00 0.67% $4,772.77 $227.23 $29,312.26 7 12/1/99 $5,000.00 0.67% $4,804.58 $195.42 $24,507.68 8 1/1/00 $5,000.00 0.67% $4,836.62 $163.38 $19,671.06 9 2/1/00 $5,000.00 0.67% $4,868.86 $131.14 $14,802.20 10 3/1/00 $5,000.00 0.67% $4,901.32 $98.68 $9,900.88 11 4/1/00 $5,000.00 0.67% $4,933.99 $66.01 $4,966.89 12 5/1/00 $5,000.00 0.67% $4,966.89 $33.11 ($0.00) Totals $60,000.00 $57,478.91 $2,521.09 </TABLE>

76 Phone system (Great America Leasing) 3/17/00 12:16 Payment Amount $634.53 Number of Payments 36 Annual Interest 6% Present Value $20,857.65 <TABLE> <CAPTION> Payment Invoice Payment Interest Principal Interest Remaining Number Date Amount Rate Amount Amount Principal <S> <C> <C> <C> <C> <C> <C> 1 7/12/99 $634.53 0.50% $530.24 $104.29 $20,327.40 2 8/12/99 $634.53 0.50% $532.89 $101.64 $19,794.51 3 9/12/99 $634.53 0.50% $535.56 $98.97 $19,258.95 4 10/12/99 $634.53 0.50% $538.24 $96.29 $18,720.72 5 11/12/99 $634.53 0.50% $540.93 $93.60 $18,179.79 6 12/12/99 $634.53 0.50% $543.63 $90.90 $17,636.16 7 1/12/00 $634.53 0.50% $546.35 $88.18 $17,089.81 8 2/12/00 $634.53 0.50% $549.45 $85.45 $16,540.73 9 3/12/00 $634.53 0.50% $551.83 $82.70 $15,988.90 10 4/12/00 $634.53 0.50% $554.59 $79.94 $15,434.32 11 5/12/00 $634.53 0.50% $557.36 $77.17 $14,876.96 12 6/12/00 $634.53 0.50% $560.15 $74.38 $14,316.82 13 7/12/00 $634.53 0.50% $562.95 $71.58 $13,753.87 14 8/12/00 $634.53 0.50% $565.76 $68.77 $13,188.11 15 9/12/00 $634.53 0.50% $568.59 $65.94 $12,619.52 16 10/12/00 $634.53 0.50% $571.43 $63.10 $12,048.09 17 11/12/00 $634.53 0.50% $574.29 $60.24 $11,473.80 18 12/12/00 $634.53 0.50% $577.16 $57.37 $10,896.64 19 1/12/01 $634.53 0.50% $580.05 $54.48 $10,316.59 20 2/12/01 $634.53 0.50% $582.95 $51.58 $9,733.64 21 3/12/01 $634.53 0.50% $585.86 $48.67 $9,147.78 22 4/12/01 $634.53 0.50% $588.79 $45.74 $8,558.99 23 5/12/01 $634.53 0.50% $591.74 $42.79 $7,967.25 24 6/12/01 $634.53 0.50% $594.69 $39.84 $7,372.56 25 7/12/01 $634.53 0.50% $597.67 $36.86 $6,774.89 26 8/12/01 $634.53 0.50% $600.66 $33.87 $6,174.24 27 9/12/01 $634.53 0.50% $603.66 $30.87 $5,570.58 28 10/12/01 $634.53 0.50% $606.68 $27.85 $4,963.90 29 11/12/01 $634.53 0.50% $609.71 $24.82 $4,354.19 30 12/12/01 $634.53 0.50% $612.76 $21.77 $3,741.43 31 1/12/02 $634.53 0.50% $615.82 $18.71 $3,125.61 32 2/12/02 $634.53 0.50% $618.90 $15.63 $2,506.71 33 3/12/02 $634.53 0.50% $622.00 $12.53 $1,884.71 34 4/12/02 $634.53 0.50% $625.11 $9.42 $1,259.61 35 5/12/02 $634.53 0.50% $628.23 $6.30 $631.37 36 6/12/02 $634.53 0.50% $631.37 $3.16 ($0.00) Totals $22,843.08 $20,857.65 $1,985.43 </TABLE>

77 APPENDIX K TENANT\CONTRACTOR ASBESTOS NOTICE TO: FROM: DATE: We are committed to making Lakeside Office Park a safe and comfortable place to work. This facility was constricted at a time when asbestos (a naturally occurring mineral) was extensively used. When in good condition, and not disturbed, asbestos-containing materials (ACM) should not pose a health hazard,. There are no regulations requiring removal of intact ACM in good condition unless disturbed by repair or renovation activity. Do not disturb materials on the attached list, which identifies ACM locations in this facility. To reduce future risk, we have had an Operations and Maintenance Manual prepared to provide guidance for those working on repair, renovation or installation within our building until the asbestos is removed. To examine the Operations and Maintenance Manual, contact Anne Wood/Malcolm Wordin, the "Asbestos Coordinator". Under the facility's Asbestos Operations and Maintenance Plan, contractor and tenant employees must comply with the following general 1. Personnel of tenants and contractors performing any abatement, maintenance, renovation or cleaning activity in or near areas where ACM are present and may be disturbed must refer to the Operations and Maintenance Plan for appropriate guidance before beginning work. Such work shall only be performed by personnel who have been specially trained and authorized. 2. If ACM have been damaged or disturbed, do not try to sweep them up or otherwise further disturb them. Disturbing the materials may spread the asbestos fibers and make them airborne. Disturbed ACM must be cleaned by trained personnel according to approved procedures. 3. Any incidents involving damage to or significant changes in the condition of ACM must be reported immediately to the Asbestos Coordinator. I have read and understand this notice. I will ensure that my company's employees will follow the procedures and requirements as outlined above and in the Operations and Maintenance Plan. Signature /s/ JEANNE B. JAMBOR ----------------------------------- Print Name JEANNE B. JAMBOR ---------------------------------- Print Company Name Exactium, Inc. -------------------------- K-1

1 EXHIBIT 10.29 November 10, 1998 Mr. Vincent Mifsud 2106 Brays Lane Oakville, Ontario L6M 2T1 Dear Vince: I am very pleased to offer you employment with our team at Pivotal Software Inc. ("Pivotal"). Following are the terms of your employment, as we have discussed: 1. Your position at Pivotal will be Chief Financial Officer and Vice President, Operations to be located in North Vancouver, B. C. You will report to the President and CEO. 2. Your salary will be Cdn $150,000 per year, payable semi-monthly. 3. You will be entitled to earn additional incentive compensation of US $50,000 in the first year of your employment based on Pivotal achieving its corporate revenue and profit objectives. The revenue and profit objectives which determine how your incentive compensation is earned is established by Pivotal's Board of Directors, based on Pivotal's fiscal year which ends on June 30. Your incentive compensation will be paid thirty days after the end of each calendar quarter. In the first year of employment, we will provide a non-repayable monthly draw of US $3,125 against the incentive payable. 4. You are required to provide an automobile in order to conduct business and negotiate contracts on behalf of Pivotal. You will pay the costs of operating the vehicle, however you will be given a car allowance of Cdn $1,500 per month in respect of such business use of your car. 5. Your employment will commence on November 16, 1998 or at such other mutually agreed date, but in no event shall your employment commence later than December 1, 1998. 6. You will be entitled to four weeks paid vacation per annum plus statutory holidays. 7. As a condition of employment, you are required to participate in the Pivotal employee benefits plan. Details of this plan are available for you to review. In summary, under this plan you are required to pay the premiums for basic MSP and Long Term Disability, whereas Pivotal pays the total premium for Extended Health, Dental and Life Insurance. The foregoing is subject to you confirming that neither you nor any eligible member has any unusual health condition that would significantly affect Pivotal's premiums or your eligibility, and is subject to you being accepted by Pivotal's third party

2 Page 2 health and life insurers. You are entitled to a maximum of eight days of sick leave per annum without loss of pay. You may not accrue sick leave from year to year. 8. As a condition of your employment, you are required to sign an agreement of confidentiality and acknowledge that the intellectual property which results from your employment is owned by Pivotal. In addition, should your employment by Pivotal terminate for any reason, the agreement prohibits you from interfering with the employees, customers or business of Pivotal for a period of time following the cessation of employment. Two copies are attached for your signature. 9. Subject to approval by Pivotal's Board of Directors, you will be granted an option to purchase 160,000 voting common shares of Pivotal at a price of Cdn $8.00 per share in accordance with the provisions of the Pivotal Incentive Stock Option Plan (the "Plan"). This option will be effective December 1, 1998. The option vests over a period of four years in accordance with the provisions of the Plan. There are certain rights and restrictions attached to this option which are outlined in detail in the Plan documents which are available for your review. In the event that substantially all of the shares or assets of Pivotal are acquired by a third party as result of a corporate acquisition, and, as a result of such acquisition, your employment is terminated without cause, the standard vesting clause for your share options shall be adjusted as follows: (i) In the event that such acquisition occurs within the first year of your employment, then 80,000 of the options shall vest immediately, and the remainder shall be canceled. (ii) In the event that such acquisition occurs during years two through four, one-half of the options (of the original 160,000) that remain unvested at the time of the acquisition shall vest immediately, and the remainder shall be canceled. 10. As a condition of your employment, you agree in advance to relocate to Pivotal's office in North Vancouver, B. C. Pivotal will reimburse you for reasonable documented costs of relocating you, your family and household goods. We anticipate that your family will relocate to Vancouver in January 1999. As part of your relocation reimbursement, we agree to pay one-half of the lease payments remaining on your current residence subsequent to your family's relocation. We understand that this re-imbursement will be in the Cdn $10,000 to $15,000 range. In the event that you voluntarily resign your employment with Pivotal within one year of your date of employment, you are obligated to reimburse Pivotal for the amount of the relocation costs paid by Pivotal on your behalf. If for any reason you do not relocate, your employment by Pivotal may be terminated without cause and without notice of termination or severance pay in lieu of notice. This offer of employment is open for your acceptance until Wednesday, November 11, 1998. Please sign the attached copy of this letter and the Employee Confidentiality Agreement to indicate your agreement, and return the signed copies to us.

3 Page 3 We look forward to you joining us in our quest to build a major software company, and we look forward to a long and mutually rewarding relationship. Yours very truly, Norm Francis President & CEO I agree with and accept the above terms :jll and conditions of employment. Encs. --------------------------------------- Vincent Mifsud Date: ----------------------------------

1 EXHIBIT 13.1 [PIVOTAL LOGO] 2000 Annual Report

2 [INSIDE COVER]

3 Accelerating Demand Chain Networks(TM)

4 Quarterly Revenue Growth - Global (FY Ends June 30) [GRAPH]

5 Contents

6 <TABLE> <S> <C> 4-6 Message to our shareholders 7 Selected Financial Highlights 8-9 Corporate Profile 10-11 Pivotal Solutions 12-13 Focus on Microsoft Corporation 14-15 Focus on Financial 16-17 Focus on Hospitality 18-19 Focus on Manufacturing 20-21 Focus on High Tech 22-23 Focus on Healthcare 24-25 Focus on Consulting & Services 26-27 Pivotal People 28-43 Management's Discussion & Analysis 44-63 2000 Financial Statements 45 Independent Auditors' Report 46 Consolidated Balance Sheets 47 Consolidated Statements of Operations 48 Consolidated Statements of Shareholders' Equity (Deficit) 49 Consolidated Statements of Cash Flows 50-63 Notes to the Consolidated Financial Statements 64-65 Corporate Information </TABLE> (C) 2000 Pivotal Corporation. All rights reserved. Pivotal, Pivotal eRelationship, Pivotal eSelling, PivotalWeb .NET, Pivotal ePower, Pivotal Interaction Engine, Pivotal Intelligence Engine, Pivotal Anywhere and PivotalHost are trademarks and/or registered trademarks of Pivotal Corporation. Microsoft, Microsoft .NET, Windows, Windows 2000, Windows NT, and BackOffice are trademarks and/or registered trademarks of Microsoft Corporation in the United States and/or other countries. All other trade names mentioned are trademarks and/or registered trademarks of their respective owners. 3

7 Norm Francis, President & CEO, Co-Founder "Pivotal is dedicated to delivering innovative demand chain network solutions that leverage the Internet to help power today's fastest, smartest companies."

8 To our shareholders, Fiscal year 2000 was a year of expansion and acceleration for Pivotal. Our business accelerated its financial growth, launched many new products, expanded our customers to more than 1,000, formed new and solidified existing business partner relationships and expanded employees to over 550. This enabled us to make rapid strides in our pursuit of global success. During this expansion Pivotal continued to deliver consistent financial performance. Annual revenues rose 109 percent to $52.9 million, our quarter over quarter growth increased in every quarter and we achieved operating profitability in the fourth quarter. We are proud of the fact that our business outside North America grew to be 28% of total revenue and have now deployed our solutions in 35 countries around the world. PRODUCTS AND SOLUTIONS Our comprehensive demand chain network solution enables enterprises around the world to make, serve, and manage customers with unparalleled speed and efficiency over the Internet. Pivotal's demand chain network solution includes the award-winning Pivotal eRelationship(TM) 2000 CRM application; Pivotal eSelling(TM) 2000, an intelligent Internet selling solution for complex products and services; and Pivotal ePower(TM) 2000, a robust Internet architecture. Our solutions are built for the Internet, optimized for Microsoft server technologies, and are fully customizable to achieve the eBusiness goals of a wide variety of enterprises -- including hosted and wireless capabilities to provide all constituents, channels, devices and processes access to the same network. By effectively managing interactions with customers, partners and employees over the Internet with Pivotal solutions, enterprises around the world can increase revenue and improve customer service. "Our customers look to Pivotal to successfully integrate the power of the Internet into their businesses. With award-winning solutions, a strong Microsoft partnership, and proven results, we are capitalizing on the trend towards Internet-based demand chain networks." Norm Francis, President & CEO, Pivotal Corporation 5

9 Message to our Shareholders CONTINUED CUSTOMERS AND PARTNERSHIPS In fiscal year 2000, our customer base grew to over 1,000 enterprises spanning a diverse range of industries including healthcare, finance, technology, manufacturing, and services. Today, our customers represent some of the smartest, fastest companies in the world. A key part of our fiscal year 2000 success can be attributed to our partnering strategy. At Pivotal, we continuously look for new opportunities and alliances while focusing on expanding our existing relationships with our most important partners. During fiscal year 2000, we further solidified our partnership with Microsoft allowing us to maximize the power of the Internet to develop leading-edge solutions. As a testament to our product leadership and partnership, Microsoft Chairman Bill Gates demonstrated our solution as part of his keynote address at the launch of Windows 2000. In addition, our Pivotal ePower 2000 Internet platform holds the world record for scalability on Microsoft Windows 2000. Our partnering strategy has also resulted in a diverse range of best-in-class technology and service relationships. We recently integrated technology from E.piphany, Inc. and Interactive Intelligence Inc., bringing enhanced decision-making and interactive management to our solution. Partnering efforts have also expanded our product footprint into wireless communications to provide universal access to Pivotal solutions anywhere, anytime. In fiscal year 2000, we also continued to strengthen our service relationships with a variety of companies, improving our ability to make customer deployments some of the most rapid and efficient in the global market. ACQUISITIONS AND GLOBAL EXPANSION Our acquisition strategy has enabled us to expand our product, our global presence and our solution. In fiscal year 2000, we acquired Exactium Ltd., an Atlanta-based company that provides intelligent eSelling solutions, and Simba Technologies Inc., a leading provider of enhanced eMarketing solutions. With these advanced technologies, the Pivotal solution now powers complete, end-to-end demand chain networks that accelerate business over the Internet. In December 1999 we acquired Transitif S.A., a leading French eBusiness solution provider which strengthens our European operations. To further help enable rapid international growth we also established an eBusiness Center of Excellence in Northern Ireland. In North America, we opened new offices in Washington, Denver, and Minneapolis, and expanded our Chicago operation to include a world-class services and education facility. We opened new offices in Tokyo, Japan and Sydney, Australia giving us over 25 offices worldwide. Pivotal products and services are now available in 35 countries across the globe. With this international presence we believe we are ideally positioned to strengthen our leadership in both traditionally strong markets and emerging, high-growth regions. LOOKING FORWARD In closing, I want to thank the people who have contributed so much to Pivotal's success. Our customers who have invested in our vision and our solutions, reaching and exceeding their eBusiness goals with a level of innovation and drive that constantly inspires our company. Our dedicated, focused team of entrepreneurial employees and business partners who have consistently delivered superior products and services to help our customers improve the way they do business. Finally, our corporate, institutional, and private investors who have encouraged us with their continued support and belief in our company. With this community of customers, employees, partners and investors dedicated to Pivotal's continued success, we are moving forward into fiscal year 2001 with enthusiasm and optimism. Sincerely, /s/ NORM FRANCIS Norm Francis President and CEO 6

10 Selected Financial Highlights Increasing International Revenues (FY Ends June 30) [GRAPH] Annual Revenue Growth and Mix (FY Ends June 30) [GRAPH] Quarterly Revenue Growth and Mix (FY Ends June 30) [GRAPH] 7

11 Corporate Profile

12 Corporate Profile ACCELERATING DEMAND CHAIN NETWORKS(TM) This is the era in which making, serving and managing customers is the key to any business. To stay competitive, it is critical for companies to respond rapidly and effectively to their customers. Pivotal enables large and medium-sized businesses worldwide to help meet this challenge--to increase revenue and market value by managing Internet demand chain networks. Our XML-based Internet solutions exploit leading-edge technologies to power smarter, faster companies, enabling enterprises to move their demand chains to the Internet for more effective marketing, direct and channel sales, customer service, field service, order processing, shipping and billing, and partner relationships. By leveraging the Internet, companies can get new products to market faster, respond to feedback rapidly and establish profitable, personalized marketing, sales and service relationships. The power of our solution is measurable: accelerate demand chain networks and gain the enhanced ability to build customer satisfaction, productivity and increase revenue. Pivotal and Microsoft collaborate on product development, marketing, and sales initiatives to enable technology advancement and product leadership for our more than 1,000 joint customers. Pivotal's Global Business Partner Alliance program continues to generate leading-edge innovation and customer value. One of our most expansive partnering initiatives, PivotalWeb.NET, is a diverse group of companies that gives our customers access to value-added Internet content, applications and services to increase productivity and profitability. We have also expanded our product footprint with industry-leading technology partners such as E.piphany, Inc. resulting in one of the most comprehensive, scalable demand chain solutions in the world. PIVOTAL CUSTOMERS Enterprises spanning digital and traditional economies look to Pivotal for a competitive edge. Today, over 1,000 customers in 35 countries have invested in the Pivotal solution. In the last year, Pivotal won two prestigious Microsoft Industry Solutions Awards for technology excellence, and the "Gold Best-in-Class" award at the First Annual Users Choice Awards. Recently, the company was named an "eBusiness Winner" by Upside Magazine, and "Company of the Year" by the British Columbia Technology Industry Awards. Pivotal eRelationship 2000, our flagship product, was also named one of the "Top 15 Software for 2000" by Information Systems Marketing Inc. Pivotal Statistics (FY 2000) - $52.9 million in revenue - Over 1,000 customers - Over 550 employees - 25 offices worldwide - Business presence in 35 countries - Comprehensive eBusiness solution with hosted and wireless options - Trading symbols: NASDAQ: PVTL, TSE: PVT 9

13 MARKET OPPORTUNITY. AMR Research estimates that worldwide customer relationship management license revenues will grow at a compound annual rate of 58% for the five-year period from 1997 to 2002 to approximately $7.5 billion by 2002. International Data Corporation estimates that the Internet commerce software applications market will grow at a compound annual rate of 97% for the five-year period from 1998 to 2003 to approximately $13.2 billion by 2003. [PIVOTAL LOGO] PIVOTAL SOLUTIONS SERVICES. Pivotal Professional Services is meeting the demand for world-class services by providing the complete skill set and resource set to deploy a solution unique to each customer's needs. From global technical support, maintenance, education, implementation, and customization to business consulting, Pivotal Professional Services is helping accelerate customer success.

14 Pivotal Solutions Pivotal is a leading provider of demand chain network eBusiness application solutions. Demand chain network solutions enable businesses to increase revenue by more effectively managing their interactions with customers and partners over the Internet. They give today's enterprise the infrastructure to network every participant, process, device, and channel in the demand chain to make business move fast. Pivotal's eBusiness offering includes award-winning, Internet-based applications Pivotal eRelationship 2000 and Pivotal eSelling 2000 as well as our Internet platform solution--Pivotal ePower 2000. These solutions are supported by an array of options, including hosted and wireless solutions, as well as our Professional Service Team and Global Alliance Network. PIVOTAL ePOWER(TM) 2000 The XML-based platform for developing and deploying Pivotal demand chain network solutions. Designed for interoperability and optimized for the Microsoft .NET platform, Pivotal ePower 2000 includes the high performance engines and robust tools to build and deploy enterprise-scale eBusiness solutions. PIVOTAL eRELATIONSHIP(TM) 2000 Bring all points of the demand chain cost-effectively to the enterprise with Pivotal's award-winning front office customer relationship management solution. Gives a unified view of customers throughout the relationship lifecycle from making to managing to serving them. PIVOTAL eRELATIONSHIP INTRAHUB(TM) Pivotal eRelationship IntraHub gives front office employees and executives the ability to manage interactions, transactions and knowledge with customers and partners in personalized, one-to-one eRelationships. PIVOTAL eRELATIONSHIP CUSTOMERHUB(TM) Pivotal eRelationship CustomerHub gives customers a secure eCommerce and self-service channel to interact with front office sales, marketing and service employees. PIVOTAL eRELATIONSHIP PARTNERHUB(TM) Pivotal eRelationship PartnerHub gives authenticated selling and service partners a Web site workspace in which to collaborate with front office employees on marketing campaigns, sales programs, and customer service activities. PIVOTAL eSELLING(TM) 2000 Sell sophisticated products and services more effectively over the Internet. Provides guided and advisory services for configuring, pricing, and buying online, meeting customers' growing demand for fast, personalized, 24x7 service. PIVOTALWEB .NET(TM) A delivery system for business-critical information and services from a best-of-breed community of online service providers to bring powerful Internet resources directly to Pivotal eRelationship 2000 users according to their roles and needs. PIVOTALHOST(TM) A hosted solution gives easy, affordable access to Pivotal solutions through Application Service Providers. PIVOTAL ANYWHERE(TM) Pivotal Anywhere supports the latest industry standards connecting wireless users -- whether customers, partners, or employees -- to the demand chain network for immediate and personalized interactions anywhere, anytime. OPTIONS Pivotal Interaction Engine(TM) Pivotal Interaction Engine powers unified message processing, queuing and distribution, universal inbox, and live communication over the Internet. Pivotal Intelligence Engine(TM) Powers Web-based experience/behavior modeling and analysis with data mining and decision support tools. "Companies around the world are creating XML-based demand chain networks that enable them to make, serve, and manage customers with speed and efficiency." Bob Runge Chief Marketing Officer Pivotal Corporation [PICTURE] "Pivotal greatly values each and every customer and recognizes that our success depends on our ability to work with them to deliver innovative demand chain solutions." [PICTURE] Glenn Hasen Executive Vice President Global Field Operations Pivotal Corporation "Pivotal has exploited the advantages the Microsoft platform has to offer -- including world-class scalability, reliability and cost-effectiveness." [PICTURE] Keith Wales Chief Technical Officer Pivotal Corporation 11

15 SOLUTION. By developing solutions exclusively for Microsoft technology, Pivotal's solutions are optimized for increased performance, functionality, deployability and lower total cost of ownership. [MICROSOFT LOGO] TEAMWORK. A global Windows 2000 launch partner, Pivotal's commitment to Microsoft spans every major Microsoft .NET initiative. Pivotal has won five Microsoft Industry Solution Awards, the most ever awarded to a single company.

16 Microsoft Corporation Microsoft and Pivotal have redefined how the world's most innovative companies do business. Over 1,000 joint customers have the opportunity of accelerated profitability by improving the speed at which they drive and process business transactions. By deploying demand chain networks to enable information and knowledge sharing, companies can build online communities of lasting relationships. By working closely with Microsoft, our demand chain network solutions capitalize on the power of the XML standard to unify all information, processes, people, touchpoints, devices and transactions critical to managing customers. The result -- Pivotal customers can get new products to market faster, react to market feedback more quickly, and interact with precision and intelligence at each point of contact and in every aspect of business. Pivotal is an eBusiness solutions provider that demonstrates proven customer success and a strong connection with Microsoft. As this relationship has grown and expanded, Pivotal has achieved leading-edge innovation and performance.We enhance the success of our joint customers with reliability, leadership and vision. "Pivotal has had a very close relationship with Microsoft for many years. The combination of Pivotal and Microsoft .NET delivers exceptional eBusiness functionality, services and solutions." Charles Stevens, Vice President Enterprise and Partner Group, Microsoft Corporation 13

17 SOLUTION. Founded in 1919, Heller Financial is a worldwide commercial finance company with almost $20 billion in assets. Heller is developing tools and Web environments to work closer with their customers and partners in the data intense environment of commercial lending and leasing. [HELLER FINANCIAL LOGO] TEAMWORK. "Pivotal is paving the way for bricks-and-mortar companies in the financial sector to join the digital economy. With Pivotal, Heller will forge stronger relationships with customers and leverage the Internet through an innovative strategy and industry-leading technology." Frederick E. Wolfert President & Chief Operating Officer Heller Financial Inc.

18 FINANCE To stay competitive, financial institutions provide a wide array of comprehensive products and services. Companies that strive to reach the pinnacle of success realize that it takes more than a solid suite of products and services. To appeal to today's Internet-savvy and highly knowledgeable market, Pivotal's demand chain network solutions provide the ability to offer online buying and service experiences. The result is the ability to establish and maintain profitable, long-term relationships with business and consumer markets by capitalizing on information captured during each customer interaction. Pivotal finance customers can effectively cross-sell and up-sell additional products and services by offering targeted financial expertise, from precise account coordination to visionary business consulting, with personalized customer service. Pivotal is helping today's innovative finance companies by enabling them to take the right steps towards improving customer retention, loyalty, and ultimately revenue. Finance Customers - Allied Capital Corporation - China Nationalities International Trust & Investment Corporation - Dain Rauscher Wessels - Deutsche Bank - Goldman, Sachs & Co. - Harley-Davidson Financial Services - Heller Financial Inc. - ING Barings - The Principal Financial Group - 1st Global, Inc. 15

19 SOLUTION. Intrawest Corporation has built a family of millions of customers and over 16,000 employees at resort villages around the world. With explosive growth on the horizon, Intrawest realized it was crucial to connect this vast family with intelligence and speed. Intrawest will bring their guest-centric philosophy to life across all touchpoints, heightening operational efficiency and revolutionizing the resort experience for their customers. [INTRAWEST LOGO] TEAMWORK. "Personally engaging our guests over the Internet and in our resorts allows Intrawest to provide a level of service that is unmatched in our industry. This initiative catapults us to new levels of customer service, with the ability to precisely match the right guests with the right services." Dr. Matthew Dunn, Senior Vice President and Chief Information Officer Intrawest Corporation

20 HOSPITALITY The hospitality industry is the quintessential demand-side business, where customer experience is the product. Business value is distilled to customer need and how to deliver on it. Today's innovative hospitality companies know that without a 100% customer-driven product or service, there is no chance of survival in the Internet economy. Hospitality enterprises need infrastructure and applications, where customer input is captured and service and product delivery are coordinated across multiple channels. Customer intelligence is the fuel that feeds competitive advantage. Once described as "moving at Internet speed in the real world", Intrawest Corporation is one of the world's largest resort developer/operators. Intrawest selected Pivotal to compound its real world speed with a massive jump into the Internet-enabled business economy. Intrawest is using Pivotal to develop an enterprise-wide understanding of guests to deliver enhanced world-class marketing, sales and service. HOSPITALITY CUSTOMERS - Delta Hotels Limited - Fairmont Hotels & Resorts - Flag Choice Hotels - Intrawest Corporation - Marriott International - Parc Asterix - Plus Relocation Services, Inc. - Uniglobe Travel 17

21 SOLUTION. In 1902, 30 independent gypsum companies in the United States formed to create USG Corporation. Today, annual sales top $3 billion, employees number 13,800 worldwide, and the company is a highly celebrated member of the Fortune 500. For that kind of stability and growth to continue in the new economy, USG needed a solution that was very robust. USG chose Pivotal. [USG LOGO] TEAMWORK. USG has gained the ability to identify and act on market opportunities faster and to integrate their customer and employee communications.

22 MANUFACTURING Today's innovative manufacturing companies are no longer limited to traditional sales channels because of the complexities of their products, which often have extensive features, options and complex pricing structures. Our demand chain solutions enable customers to quickly and effectively manage the issues they face to succeed in the Internet economy such as the need for mass customization, marketing and selling to meet the increasing demand for access to complex products over the Internet. Pivotal manufacturing customers can recreate highly interactive sales processes online, sell sophisticated products and services over the Internet, and meet their customers' growing demands for fast, convenient, 24x7 service. They also establish opportunity management systems to control raw material and product inventory, product quality, and timely service response to ensure customer orders are correct and customer loyalty is secured. Manufacturing Customers - Kimberly-Clark Corporation - Little Tykes - Nissan Motor Co. Ltd. - Novartis - Novo Nordisk - Siemens Corporation - US Filter - USG Corporation 19

23 SOLUTION. Headhunter.net is an online recruiting Web site featuring over 250,000 job postings representing more than 10,000 employers. Headhunter.net chose Pivotal's demand chain network to enhance online brand loyalty and brand customer interaction by delivering personalized support, sophisticated customer interaction and collaborative communication. [HEADHUNTER.NET LOGO] TEAMWORK. "Our goal is to use Pivotal to gain a detailed understanding of our customer experiences and provide personalized interactions, translating into accelerated revenue growth, market leadership and operational efficiencies." Jay Myer Senior Vice President Corporate Sales and Marketing Headhunter.net

24 HIGH TECH In the explosive high tech market, there is intense pressure to outperform the competition to keep and grow the customer base. Change is constant and relentless and there is increased pressure for companies to grow and retain customer relationships. Pivotal's demand chain network solutions enable high tech businesses to network participants, channels, devices, and processes in their demand chain to accelerate the way their company does business to help meet this challenge. Pivotal's solution provides high tech companies with the tools they need to help keep their customers and prospects loyal, such as personalized one-to-one Web marketing and eCommerce, intelligent self-service, and easy-to-access personalized interactions. Now they can be prepared to attract and retain a new generation of customers and decrease costs by providing a more efficient and unique interactive style of customer service and online buying experience. High Tech Customers - Agilent Technologies - Alliance Data Systems - Bottomline Technologies, Inc. - CornerDrugstore.com - E.piphany, Inc. - GE Industrial Systems - Headhunter.net - Hewlett-Packard - Intershop Communications - Research in Motion Limited - Trader.com - Wind2 Software, Inc. 21

25 SOLUTION. Dedicated to accelerating deployment of Web-based physician offices and medical management solutions worldwide, iMcKesson, InterQual Products uses a Pivotal solution to streamline fulfillment, accelerate process automation, and provide real-time information to their remote sales and account management team. With Pivotal as an integral part of their internal processes, iMcKesson InterQual Products has increased sales by 50%. [iMcKESSON LOGO] TEAMWORK. "Speaking intelligently to prospects shows that we know how the changing healthcare landscape affects them. With the information in our Pivotal system, even a temporary employee could instantly access the entire history of the relationship we have with a prospect. That's an incredibly valuable asset." Chandra Lothian, Application Analyst, iMcKesson, InterQual Products

26 HEALTHCARE For healthcare enterprises, the speed of change is accelerating. In an increasingly competitive market, healthcare enterprises are seeking ways to increase efficiency and improve effectiveness. Pivotal's solution provides personalized, interactive 24x7 customer self-service that serves customers while offering them a network of information, and instant, selling opportunities. Customers can receive services that intelligently address their unique situations. Fast, Web-based collaboration between partners streamlines every step of every process, resulting in superior customer service at a lower cost per transaction. Customer needs can be anticipated and new information provided as it becomes available allowing new opportunities to be acted on--fast. Healthcare Customers - Australian Red Cross - CardioResponse, Inc. - iMcKesson, Interqual Products - Keystone Health Plan Central - Premera Blue Cross - NovaMed Eyecare, Inc. - Occupational Health Clinics for Ontario Workers Inc. - Syncor International Corporation 23

27 SOLUTION. The Pivotal solution will enable KPMG Consulting's client service managers to collaborate over the Internet on consulting projects, sales opportunities and marketing initiatives, allowing users to share ideas anytime, anywhere. By consolidating all client information, interactions, and transactions into a single, unified system, KPMG Consulting will sharpen its customer focus to increase revenue. [KPMG CONSULTING LOGO] TEAMWORK. "Our global implementation of the Pivotal solution is at the heart of our own e-Business strategy. Pivotal will enable our employees around the world to more effectively manage our sales, marketing, and client relationship processes." Ross Curtis Executive Vice President Worldwide Sales KPMG Consulting LLC

28 CONSULTING & SERVICES At the heart of any services enterprise is the customer. The Internet has created incredible opportunities and challenges for servicing customers. Pivotal solutions help consulting and service enterprises realize the depth of their assets in customer knowledge and the ability to deliver personalized services over the Internet. Pivotal demand chain network solutions can also be the center of any leading services provider's infrastructure for the internetworking of vastly distributed consulting professionals, partners, implementation partners and knowledge providers. Our consulting and services customers excel at helping businesses leverage the Internet and engineer the way they do business, while putting these new Internet business and technology practices at the heart of their own internal business strategy. Consulting & Services Customers - Cambridge Energy Research Associates - Deloitte Touche Tohmatsu International - The Dwyer Group - Hellmuth, Obata & Kassabaum, Inc. (HOK) - KPMG - Mercer Management Consulting, Inc. - The Patricia Seybold Group, Inc. - United Business Media 25

29 GLOBAL PERSPECTIVE. A key part of our success is our ability to have a global perspective and consider global implications. We exhibit creativity and innovation, and challenge the status quo to find new ways of doing things. As a result, our people are not satisfied with average achievement and instead demand the extraordinary results that are mandatory to compete in today's Internet economy. This helps us maximize our customers' success and ultimately our shareholders' value. [PIVOTAL LOGO] TEAMWORK. Pivotal has always been about relationships. Our solutions help companies to build networks of people engaged in business. In order to lead in this market we have always focused our efforts on building a team of committed and dedicated members -- a team of over 550 staff who bring innovation and tireless energy to our company. Together, we are speed-of-thought builders--of customers, of technology and of lasting momentum.

30 PIVOTAL PEOPLE In the technology business, accepting change is vital to survival. And embracing change is vital to thrive. Our financial success reflects our team's ability to adapt to change with speed and agility, to learn new technology and to understand changing customer demands. From the day of our inception, engaging people who demonstrate extraordinary drive and energy has been our vision. As a result, we have created a Pivotal culture and work ethic that reflects our customer successes. This year, we built stronger relationships by bringing together our global community of customers, partners and team members. By living the philosophy of connectivity and a united focus, we have created a working environment that generates responsiveness and innovation on a daily basis. "Pivotal's ability to embrace the accelerating opportunities of today's Internet economy is made possible by our people. Pivotal's staff understand the need to change and adapt, to be flexible and always think big to deliver extraordinary results." Heather Claridge Vice President, Human Resources Pivotal Corporation 27

31 MANAGEMENT'S DISCUSSION & ANALYSIS

32 OVERVIEW Fiscal year 2000 was an eventful year for Pivotal Corporation. Every facet of the company grew -- our products and solutions, our employee and customer base, and our revenues. This past year was our first as a public company. We completed our Initial Public Offering on NASDAQ on August 5, 1999. Analysts and investors alike have responded to us favorably and this led to our decision to list on the Toronto Stock Exchange on August 17, 2000. We more than doubled our global employee base during fiscal year 2000. This growth in staff meant additional facilities were required to support our increased global presence. While we started fiscal year 2000 with 12 offices, we ended the year with over 25 offices around the world. An exciting addition was the new Pivotal eBusiness Center of Excellence in Northern Ireland which services our customers and partners in Europe, the Middle East and Africa. This growth was partly due to the three corporate acquisitions that were completed in fiscal year 2000. As a result of these acquisitions, we were able to expand not only our employee base but also our global presence and to expand our demand chain network solution. Aside from the acquisition of technology, our research and development team released a variety of new solutions and programs. In particular, we launched Pivotal eRelationship 2000, Pivotal eSelling 2000, Pivotal ePower 2000, Pivotal Interaction Engine and Pivotal Intelligence Engine. We also established the PivotalWeb .NET and PivotalHost programs. Finally, we introduced Pivotal Anywhere, "Pivotal's first year as a public company was a success. Pivotal accelerated revenue growth each quarter in fiscal year 2000 with net revenue growth of 109% for the year. We've more than doubled our global staff and increased our presence in North America, Europe and Asia Pacific. We were extremely pleased with our performance on all fronts during fiscal 2000." Vincent Mifsud Executive Vice-President & CFO Pivotal Corporation 29

33 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. our first wireless solution for the demand chain. Pivotal Corporation takes pride in its commitment to and its track record of constantly growing and improving our demand chain network solutions. Our relationship with Microsoft became stronger over the past year as well. We were featured at the Microsoft Windows 2000 launch and won two Microsoft Industry Solutions Awards for Technology Excellence. Our customer base grew to over 1,000 customers. Pivotal's net revenues in the fourth quarter of fiscal 2000 increased 118 percent to $18.2 million compared to $8.3 million in the fourth quarter of fiscal 1999. Net revenues for the year ended June 30, 2000 increased 109 percent to $52.9 million compared to $25.3 million for the year ended June 30, 1999. In summary, we were extremely pleased by our performance in our first year as a public company. CORPORATE DESCRIPTION The terms "Pivotal," "our company" and "we" in this report refer to Pivotal Corporation, a British Columbia company and all of Pivotal Corporation's wholly-owned subsidiaries including Pivotal Corporation, incorporated in Washington State, Pivotal Corporation Limited, incorporated in the United Kingdom, Pivotal Corporation France S.A., incorporated in France, Exactium Ltd., incorporated in Israel, Exactium Inc., incorporated in Delaware State, Pivotal Technologies Corporation Limited, incorporated in the Republic of Ireland, Pivotal Corporation (N.I.) Limited, incorporated in Northern Ireland, Pivotal GmbH, incorporated in Germany, Digital Conversations Inc., incorporated in British Columbia, and Pivotal Corporation Australia Pty. Ltd., incorporated in Australia. PERFORMANCE GRAPH The following graph shows a comparison of cumulative total shareholder return for Pivotal, the S&P 500 Index and the Application Software Index (as reported by Microsoft MoneyCentral Investor). The graph shows the value of $100 invested on August 5, 1999 in our common stock, the S&P 500 Index and the Application Software Index. Comparison of Cumulative Total Return Among Pivotal Corporation, S&P 500 Index and the Application Software Index [PERFORMANCE GRAPH] <TABLE> <CAPTION> Aug. 5, 1999 Aug. 4, 2000 ------------ ------------ <S> <C> <C> PVTL Index $ 100.00 $ 275.52 S&P 500 Index $ 100.00 $ 129.15 Application Software Index $ 100.00 $ 111.36 </TABLE> (as reported by Microsoft MoneyCentral Investor) 30

34 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. RECENT ACQUISITIONS During the year ended June 30, 2000, we expanded our portfolio of solutions and distribution capabilities by completing the acquisitions described below. These acquisitions were accounted for using the purchase method of accounting. Accordingly, the results of operations of each acquired company are included in our consolidated statement of income since the acquisition date and the related assets acquired and liabilities assumed were recorded based upon their respective fair values at the date of acquisition. TRANSITIF S.A. Effective December 3, 1999, Pivotal acquired Transitif S.A. (now Pivotal Corporation France S.A.), a French corporation that distributes demand chain network solutions. Transitif deploys Pivotal solutions through its network of systems integrators throughout France. We paid cash of $1.3 million including acquisition-related expenditures of $120,000. Additional consideration is payable if the net after-tax earnings of Transitif and license revenues received by Transitif from the future sale of licenses for Pivotal solutions exceed certain targets to June 2002. No payments related to additional consideration were required to be made for the period ended June 30, 2000. EXACTIUM LTD. On June 2, 2000, Pivotal acquired Exactium Ltd., an Israeli company based in Atlanta, Georgia that provides electronic selling solutions for Internet and Microsoft standards. We paid a total purchase price of $45.1 million. Significant components of the purchase price include the issuance of common shares and options to purchase common shares with a fair value of $32 million and cash of $13.1 million from working capital (including a shareholder loan repayment of $5.4 million and acquisition related expenditures of $775,000). The amount allocated to in-process research and development of $2.8 million was expensed on the acquisition date. Our valuation employed the SEC's guidelines regarding acceptable methodologies for valuing in-process research and development. SIMBA TECHNOLOGIES INC. On June 26, 2000, Pivotal acquired Simba Technologies Inc. (now Digital Conversations Inc.), a Vancouver, British Columbia company that provides digital solutions to aggregate and analyze all Internet customer interactions such as eMail messages, Web chat sessions and Web site surfing into an integrated conversation for Microsoft standards. We paid a total purchase price of $17.6 million consisting of common shares and options to purchase common shares with a fair value of $17.1 million and acquisition-related expenditures of $455,000. The purchased in-process research and development of $1.9 million was expensed at the time of the acquisition. SOURCE OF REVENUE AND REVENUE RECOGNITION POLICY We derive our revenues from the sale of software and services. We recognize product license revenues on delivery of our solutions if: - there is persuasive evidence of an arrangement; - the fee is fixed or determinable; - there is vendor-specific objective evidence supporting allocating the total fee among all elements of a multiple-element arrangement; and - the collection of the license fee is probable. Multiple-element arrangements could consist of software licenses, upgrades, enhancements, maintenance and consulting services. Under some license arrangements, with either a fixed or indefinite term, our customers agree to pay for the license with periodic payments extending beyond one year. We recognize revenues from these arrangements as the periodic payments become due, provided all other conditions for revenue recognition are met. We enter into reseller and sub-licensing arrangements that provide a fee payable to us based on a percentage of list price. We recognize revenue only on the fees payable to us, net of any amount payable to the reseller by the customer. We typically sell first year maintenance with the related software license. 31

35 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. Revenue related to maintenance is recognized over the term of the maintenance contract, typically one year. Revenues relating to technical support and maintenance have increased due to our increasing customer base and the renewal of technical support and maintenance contracts upon expiration of first year maintenance arrangements. We recognize revenues from consulting, implementation services, and education as these services are performed. We derive revenue from these services primarily on a time-and-materials basis under a separate service arrangement with the customer. More than 90% of the implementation services provided to our customers in connection with installations of our solutions are provided by third-party consulting and implementation service providers. These third-party service providers contract directly with the customer. Our cost of license revenues primarily consists of costs relating to the packaging and distribution of solutions and related documentation and license fees due to third parties for integrated technology. Our cost of services revenues includes salaries and related expenses for our implementation, consulting support and education organizations and an allocation of facilities, communications and depreciation expenses. Our operating expenses are classified into three general categories: sales and marketing, research and development and general and administrative. We classify all charges to these operating expense categories based on the nature of the expenditures. We allocate the costs for overhead and facilities to each of the functional areas based on their headcount. Software development costs incurred prior to the establishment of technological feasibility are included in research and development costs as incurred. Since license revenues from our solutions are not recognized until after technological feasibility has been established, software development costs are not generally expensed in the same period in which license revenues for the developed solutions are recognized. RESULTS OF OPERATIONS The following table sets forth statement of operations data for the three years ended June 30, 2000 expressed as a percentage of total revenues: <TABLE> <CAPTION> Year ended June 30, ------------------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> REVENUES: Licenses 71% 74% 80% Services and maintenance 29% 26% 20% ------------------------------------------------------------------------------------------------------- Total revenues 100% 100% 100% ------------------------------------------------------------------------------------------------------- COST OF REVENUES: Licenses 4% 2% 3% Services and maintenance 15% 12% 9% ------------------------------------------------------------------------------------------------------- Total cost of revenues 19% 14% 12% ------------------------------------------------------------------------------------------------------- Gross profit 81% 86% 88% ------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Sales and marketing 59% 66% 65% Research and development 17% 20% 13% General and administrative 8% 10% 11% Amortization of goodwill 3% -- -- In-process research and development and other charges 13% -- -- ------------------------------------------------------------------------------------------------------- Total operating expenses 100% 96% 89% ------------------------------------------------------------------------------------------------------- Loss from operations (19%) (10%) (1%) Interest and other income (loss) 4% -- 1% ------------------------------------------------------------------------------------------------------- Loss before income taxes (15%) (10%) -- Income taxes 1% 1% -- ------------------------------------------------------------------------------------------------------- Net loss (16%) (11%) -- ======================================================================================================= </TABLE> 32

36 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. YEARS ENDED JUNE 30, 2000 AND 1999 REVENUES Total revenues increased 109% to $52.9 million for the year ended June 30, 2000 from $25.3 million for the year ended June 30, 1999. LICENSES Revenues from licenses increased 99% to $37.4 million for the year ended June 30, 2000 from $18.8 million for the year ended June 30, 1999. Our revenues from licenses increased due to sales to new customers and follow-on sales to existing customers. These increases were attributable to increased market acceptance of our solutions, increased sales as a result of our expansion of our direct and indirect channels of distribution and our marketing organization. We believe that the availability of our Pivotal eRelationship 2000 product suite and Pivotal eSelling 2000 product has contributed to the increase in revenue from licenses, as this has extended the overall functionality of our solutions by permitting organizations to collaborate with customers and partners over the Internet. Revenues from licenses represented 71% and 74% of total revenues for the years ended June 30, 2000 and 1999, respectively. No single customer accounted for 10% or more of our revenues for the years ended June 30, 2000 and 1999. North American license revenues accounted for 72% and 80% of total license revenues in the years ended June 30, 2000 and 1999, respectively. SERVICES AND MAINTENANCE Revenues from services and maintenance increased 139% to $15.6 million for the year ended June 30, 2000 from $6.5 million for the year ended June 30, 1999. This resulted from an increase of $4.6 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 $4.5 million in revenues from implementation, education and consulting service engagements. Our revenues from services and maintenance represented 29% and 26% of total revenues for the years ended June 30, 2000 and 1999, respectively. We believe that revenues from services and maintenance will continue to increase as a percentage of total revenues, due to an increase in the number of technical support and maintenance contracts we expect to obtain as our customer base grows. We intend to expand consulting services targeted at helping customers understand more about matters such as effective one-to-one marketing and using the Internet to increase revenues and improve customer service. We plan to continue relying on third parties to provide a majority of implementation services to our customers, rather than providing those services directly. COST OF REVENUES Total cost of revenues increased 185% to $10.3 million for the year ended June 30, 2000 from $3.6 million for the year ended June 30, 1999. LICENSES Cost of revenues from licenses consists of costs relating to the packaging and distribution of solutions, related documentation and fees paid for incorporation of third-party solutions into our solutions. Cost of revenues from licenses increased to $2.1 million for the year ended June 30, 2000 from $536,000 for the year ended June 30, 1999. The increase is due primarily to increased costs for third-party technology integrated with our solutions. Cost of revenues from licenses as a percentage of revenues from licenses was 6% and 3% for the years ended June 30, 2000 and 1999, respectively. We expect that the cost of licenses as a percentage of revenue from licenses will increase because we expect to integrate additional software applications licensed from third parties into our solutions. SERVICES AND MAINTENANCE Cost of revenues from services and maintenance consists of personnel and other expenses relating to the cost of providing maintenance and customer 33

37 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. support, education and consulting services. Cost of revenues from services and maintenance will vary depending on the mix of services we provide between support and maintenance, education, implementation and consulting services. Gross profit margins are higher for support and maintenance services than they are for education and consulting services. Support and maintenance services involve the delivery of software upgrades, which the customers download and install themselves and customer support. Education and consulting services generally require more involvement by our employees, resulting in higher compensation, travel and similar expenses. Cost of revenues from services and maintenance increased 165% to $8.1 million for the year ended June 30, 2000 from $3.1 million for the year ended June 30, 1999. The increase in dollar amount resulted from the hiring of consulting, customer support and educating personnel to support our growing customer base. Cost of revenues from services and maintenance as a percentage of revenues from services and maintenance was 52% and 47% for the years ended June 30, 2000 and 1999, respectively. We expect that cost of revenues from services and maintenance will continue to increase as a percent of revenues from services and maintenance as we expand our service capabilities in international markets to support planned expansion of our international business and as we expand our consulting services. This will occur because we will be incurring expenses to hire and train employees before we will be earning revenue for their services and because we may not generate enough demand for our services to use all the capacity we add. OPERATING EXPENSES SALES AND MARKETING Sales and marketing expenses consist primarily of salaries, commissions, bonuses and benefits earned by sales and marketing personnel, direct expenditures such as travel, communication and occupancy for direct sales offices and marketing expenditures related to direct mail, online marketing, trade shows, advertising and promotion. Sales and marketing expenses increased 85% to $31.2 million for the year ended June 30, 2000 from $16.8 million for the year ended June 30, 1999. The increase in dollar amounts reflects the expansion of our international sales capability which required an increase in the number of sales and marketing professionals. Sales and marketing expenses decreased as a percentage of total revenues to 59% in the year ended June 30, 2000 from 66% in the year ended June 30, 1999. This decrease of sales and marketing expenses as a percentage of total revenues resulted from the improved productivity of our sales and marketing personnel and programs. We expect that sales and marketing expenses will continue to increase in future periods as we continue to expand our North American and international sales and marketing efforts to expand our market position and increase sales of our solutions. RESEARCH AND DEVELOPMENT Research and development expenses consist primarily of salaries, benefits and equipment for software engineers, quality assurance personnel, program managers, product managers, technical writers and outside contractors used to augment the research and development efforts. Research and development expenses increased 80% to $8.9 million for the year ended June 30, 2000 from $5.0 million for the year ended June 30, 1999. The increase was due to the increase in the number of research and development employees. Research and development expenses were 17% and 20% of total revenues for the years ended June 30, 2000 and 1999, respectively. This decrease in the percentage of research and development expenditures compared to total revenues resulted from the higher growth rate of revenues in the year ended June 30, 2000 compared to the growth rate of research and development expenditures. We expect to continue to significantly increase research and development expenditures with a particular emphasis on Internet-related development projects. GENERAL AND ADMINISTRATIVE General and administrative expenses consist primarily of salaries, benefits and related costs for executive, finance, administrative, human resources and information services personnel. General and administrative expenses also 34

38 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. include legal and other professional fees. General and administrative expenses increased 70% to $4.2 million for the year ended June 30, 2000 from $2.5 million for the year ended June 30, 1999. General and administrative expenses were 8% and 10% of total revenues, respectively, for the same periods. The increase in general and administrative expenses was due to hiring additional personnel and the implementation of internal financial and administrative systems. We expect general and administrative expenses will increase as we continue to expand the business and begin to increase our administrative capability in international markets. IN-PROCESS RESEARCH AND DEVELOPMENT AND OTHER CHARGES During the year ended June 30, 2000, we recorded in-process research and development charges of $4.7 million related to the acquisitions of Exactium and Simba. These amounts were expensed as the underlying projects had not reached technical feasibility, had no alternative future uses and successful development was uncertain. We also recorded a write-down of $2.3 million of other Pivotal assets which were made redundant as a result of the acquisitions of Exactium and Simba. EXACTIUM LTD. On June 2, 2000, Pivotal completed the purchase of Exactium and recorded a charge to income of $2.8 million, or $0.15 per share, for in-process research and development. Purchased in-process research and development was related to the completion of Exactium's electronic selling technology and its integration into Pivotal's solutions. At the time of acquisition, a prototype of Exactium's product existed and was being used in limited trials. This prototype was not stable or sufficiently developed to be scaleable on an enterprise-wide basis. We estimated that Exactium's product was approximately 80% complete as of the acquisition date. There was a considerable amount of uncertainty related to increasing the product's scalability for deployment on an enterprise-wide basis, improving the stability of the application and identifying and fixing bugs. In the opinion of management, the acquired in-process research and development had not yet reached technological feasibility and had no alternative future uses. Accordingly, we recorded a charge of $2.8 million in the fourth quarter of fiscal year 2000 related to the acquired in-process research and development. Our valuation of in-process research and development was based upon the forecasted operating 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 in-process technology. The forecasted cash flows assumed inclusion of the product developed from acquired technology into the existing Pivotal product suite. The purchased in-process research and development expense related to completion of Exactium's eSelling 2000 product. This product was completed in late June 2000. We estimated that revenues related to the sale of solutions incorporating Exactium's technology would commence in the year ending June 30, 2001 and would increase thereafter. Revenue increases were based upon the historical growth rate of software sales for the demand chain network market. The estimated operating costs as a percentage of estimated revenue were based upon Pivotal's normal operating margin. Operating cash flows were reduced by an expected effective tax rate of 40%. Net 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. SIMBA TECHNOLOGIES INC. On June 26, 2000, Pivotal completed its purchase of Simba. We recorded a charge to income of $1.9 million for in-process research and development or $0.10 per share. At the time of the acquisition, Simba did not have a first-generation product. There were a considerable number of uncertainties as to completion of the product. In the opinion of management, the acquired in-process research and development had not yet reached technological feasibility and had no alternative future uses. Accordingly, we recorded a charge of $1.9 million in the fourth quarter of fiscal 2000 related to the acquired in-process research and development. Our valuation of the acquired research and 35

39 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. development was based upon the present value of forecasted operating 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. The forecasted cash flows assumed inclusion of the product developed from acquired technology into the existing Pivotal product suite. Our valuation of acquired research and development was prepared using the income approach and contemplated that sales of solutions incorporating Simba's 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 for Pivotal. Operating costs as a percentage of revenue were estimated based upon our normal operating margin. Operating cash flows were reduced by an expected effective tax rate of 40%. Net 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 solutions. Failure to achieve the expected levels of revenues and net income from the Exactium and Simba products will negatively impact the return on investment expected at the time the acquisitions were completed and may potentially result in impairment of other assets related to the acquisitions. AMORTIZATION OF GOODWILL Amortization of goodwill was $1.4 million in the year ended June 30, 2000 related to goodwill arising from the acquisitions of Transitif and Exactium. There was no amortization of goodwill in the year ended June 30, 1999. We expect amortization of goodwill to increase in future periods due to the amortization of goodwill related to the acquisition of Simba and as a result of a full year's amortization being taken on the goodwill arising from the acquisitions of Transitif and Exactium. In addition, we anticipate acquiring other companies or assets in the future which could result in significant goodwill amortization charges and this could materially impact our operating results. SHARE-BASED COMPENSATION We recorded deferred compensation expenses of $473,000 during the year ended June 30, 1999 in connection with grants of employee share purchase options with exercise prices lower than the deemed fair market value of our common shares. We are amortizing this amount over the four-year period in which the options vest. We will allocate the expense among operating expense categories based on the primary activity of the employee that holds the option. We recognized $223,000 and $57,000 in compensation expense in the years ended June 30, 2000 and 1999, respectively. We currently expect to recognize $113,000, $58,000 and $22,000 in the years ending June 30, 2001, 2002 and 2003, respectively. INTEREST AND OTHER INCOME (LOSS) Interest and other income (loss) consist of earnings on cash, cash equivalents and short-term investments, net of interest expense, foreign exchange gains and losses and gains and losses on sale of property and equipment. Interest and other income (loss) increased to income of $2.2 million for the year ended June 30, 2000 from a loss of $24,000 for the year ended June 30, 1999. These increases are primarily due to interest earned from cash, cash equivalents and short-term investments generated by our initial public offering. Interest and other income for the year ended June 30, 2000 included foreign exchange losses of $168,000 compared to losses of $191,000 for the year ended June 30, 1999. The other components of interest and other income were not material for the periods presented. INCOME TAXES Income taxes increased to $557,000 for the year ended June 30, 2000 from $243,000 for the year ended June 30, 1999. These taxes related to the United States and the United Kingdom. As a result of net operating losses and the availability of loss carry forwards in Canada, we have not incurred significant Canadian income taxes. 36

40 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. YEARS ENDED JUNE 30, 1999 AND 1998 REVENUES Total revenues increased 78% to $25.3 million for the year ended June 30, 1999 from $14.2 million for the year ended June 30, 1998. LICENSES Revenues from licenses increased 66% to $18.8 million for the year ended June 30, 1999 from $11.3 million for the year ended June 30, 1998. Increased sales of licenses for Pivotal Relationship and related solutions contributed $6.9 million of this increase and sales of Pivotal eRelationship solutions contributed approximately $600,000. Revenues from licenses decreased to 74% from 80% as a percentage of total revenues for the years ended June 30, 1999 and 1998, respectively. No single customer accounted for 10% or more of our revenues for the years ended June 30, 1999 and 1998. North American license revenues accounted for 80% and 90% of total license revenues in the years ended June 30, 1999 and 1998, respectively. SERVICES AND MAINTENANCE Revenues from services and maintenance increased 125% to $6.5 million for the year ended June 30, 1999 from $2.9 million for the year ended June 30, 1998. This resulted from an increase of $2.8 million in revenues from technical support and maintenance contracts, which entitle the customer to new versions of the product and to technical support and maintenance services, and an increase of $800,000 in revenues from implementation, education and consulting service engagements. Our revenues from services and maintenance represented 26% and 20% of total revenues for the years ended June 30, 1999 and 1998, respectively. COST OF REVENUES Total cost of revenues increased 115% to $3.6 million for the year ended June 30, 1999 from $1.7 million for the year ended June 30, 1998. LICENSES Cost of revenues from licenses increased to $536,000 for the year ended June 30, 1999 from $401,000 for the year ended June 30, 1998. Cost of revenues from licenses as a percentage of revenues from licenses was 3% and 4% for the years ended June 30, 1999 and 1998, respectively. SERVICES AND MAINTENANCE Cost of revenues from services and maintenance increased 140% to $3.1 million for the year ended June 30, 1999 from $1.3 million for the year ended June 30, 1998. The increase in dollar amount resulted from the hiring of consulting, customer support and educating personnel to support our growing customer base. Cost of revenues from services and maintenance as a percentage of revenues from services and maintenance was 47% and 44% for the years ended June 30, 1999 and 1998, respectively. OPERATING EXPENSES SALES AND MARKETING Sales and marketing expenses increased 82% to $16.8 million for the year ended June 30, 1999 from $9.2 million for the year ended June 30, 1998. Sales and marketing expenses increased as a percentage of total revenues to 66% for the year ended June 30, 1999 from 65% for the year ended June 30, 1998. This increase resulted primarily from expanding our North America and international sales and marketing organizations. RESEARCH AND DEVELOPMENT Research and development expenses increased 160% to $5.0 million for the year ended June 30, 1999 from $1.9 million for the year ended June 30, 1998. The increases were due to increases in the number of research and development employees. Research and development expenses increased to 20% from 13% as a percentage of total revenues for the years ended June 30, 1999 and 1998, respectively. 37

41 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. GENERAL AND ADMINISTRATIVE General and administrative expenses increased 63% to $2.5 million for the year ended June 30, 1999 from $1.5 million for the year ended June 30, 1998. General and administrative expenses declined to 10% from 11% as a percentage of total revenues for the same respective periods. INTEREST AND OTHER INCOME (LOSS) Interest and other income (loss) declined to a loss of $24,000 for the year ended June 30, 1999 from income of $136,000 for the year ended June 30, 1998. This decline occurred because our interest income was offset by $191,000 in foreign exchange losses and a $52,000 loss on disposal of property and equipment. We have not had significant interest expense, as we have not borrowed any funds. INCOME TAXES Income taxes increased to $243,000 for the year ended June 30, 1999 from $10,000 for the year ended June 30, 1998. As a result of net operating losses and the availability of loss carry forwards in Canada, we have not incurred significant Canadian income taxes. QUARTERLY RESULTS OF OPERATIONS The following tables present our unaudited quarterly results of operations both in absolute dollars and on percentage of revenue basis for each of our last eight quarters. This data has been derived from unaudited consolidated financial statements that have been prepared on the same basis as the annual audited consolidated financial statements and, in our opinion, include all normal recurring adjustments necessary for the fair presentation of such information. These unaudited quarterly results should be read in conjunction with our consolidated financial statements. 38

42 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. <TABLE> <CAPTION> Three months ended --------------------------------------------------------------------------------------------------------------------------- Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, 1998 1998 1999 1999 1999 1999 2000 2000 --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> REVENUES: Licenses $ 3,276 $ 4,323 $ 5,006 $ 6,214 $ 6,097 $ 8,026 $ 10,125 $ 13,136 Services and maintenance 1,292 1,390 1,717 2,109 2,578 3,516 4,412 5,049 --------------------------------------------------------------------------------------------------------------------------- Total revenues 4,568 5,713 6,723 8,323 8,675 11,542 14,537 18,185 --------------------------------------------------------------------------------------------------------------------------- COST OF REVENUES: Licenses 73 97 268 98 284 410 635 812 Services and maintenance 562 589 822 1,105 1,368 1,813 2,295 2,671 --------------------------------------------------------------------------------------------------------------------------- Total cost of revenues 635 686 1,090 1,203 1,652 2,223 2,930 3,483 --------------------------------------------------------------------------------------------------------------------------- Gross profit 3,933 5,027 5,633 7,120 7,023 9,319 11,607 14,702 --------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Sales and marketing 3,488 3,933 4,404 5,005 5,715 6,917 8,214 10,319 Research and development 808 1,166 1,184 1,800 1,569 2,125 2,409 2,803 General and administrative 543 512 566 845 707 968 1,197 1,318 Amortization of goodwill -- -- -- -- -- 32 97 1,280 In-process research and development and other charges -- -- -- -- -- -- -- 6,979 --------------------------------------------------------------------------------------------------------------------------- Total operating expenses 4,839 5,611 6,154 7,650 7,991 10,042 11,917 22,699 --------------------------------------------------------------------------------------------------------------------------- Loss from operations (906) (584) (521) (530) (968) (723) (310) (7,997) Interest and other income (loss) 107 1 (63) (69) 357 685 673 478 --------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (799) (583) (584) (599) (611) (38) 363 (7,519) Income taxes 60 60 63 60 75 126 139 217 --------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (859) $ (643) $ (647) $ (659) $ (686) $ (164) $ 224 $ (7,736) =========================================================================================================================== </TABLE> 39

43 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. <TABLE> <CAPTION> Three months ended ------------------------------------------------------------------------------------------------------------------------------ Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, 1998 1998 1999 1999 1999 1999 2000 2000 ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> REVENUES: Licenses 72% 76% 74% 75% 70% 70% 70% 72% Services and maintenance 28% 24% 26% 25% 30% 30% 30% 28% ------------------------------------------------------------------------------------------------------------------------------ Total revenues 100% 100% 100% 100% 100% 100% 100% 100% ------------------------------------------------------------------------------------------------------------------------------ COST OF REVENUES: Licenses 2% 2% 4% 1% 3% 3% 4% 4% Services and maintenance 12% 10% 12% 13% 16% 16% 16% 15% ------------------------------------------------------------------------------------------------------------------------------ Total cost of revenues 14% 12% 16% 14% 19% 19% 20% 19% ------------------------------------------------------------------------------------------------------------------------------ Gross profit 86% 88% 84% 86% 81% 81% 80% 81% ------------------------------------------------------------------------------------------------------------------------------ OPERATING EXPENSES: Sales and marketing 76% 69% 66% 60% 66% 60% 56% 57% Research and development 18% 20% 17% 22% 18% 19% 17% 15% General and administrative 12% 9% 8% 10% 8% 8% 8% 7% Amortization of goodwill -- -- -- -- -- -- 1% 7% In-process research and development and other charges -- -- -- -- -- -- -- 39% ------------------------------------------------------------------------------------------------------------------------------ Total operating expenses 106% 98% 91% 92% 92% 87% 82% 125% ------------------------------------------------------------------------------------------------------------------------------ Loss from operations (20%) (10%) (7%) (6%) (11%) (6%) (2%) (44%) Interest and other income (loss) 2% -- (1%) (1%) 4% 6% 5% 3% ------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes (18%) (10%) (8%) (7%) (7%) -- 3% (41%) Income taxes 1% 1% 1% 1% 1% 1% 1% 1% ------------------------------------------------------------------------------------------------------------------------------ Net income (loss) (19%) (11%) (9%) (8%) (8%) (1%) 2% (42%) ============================================================================================================================== </TABLE> 40

44 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. We have typically experienced an increase in revenues during our fourth fiscal quarter ended June 30 which we believe is primarily related to sales compensation policies and annual objectives. In addition, a pattern of reduced buying by European customers during July and August has resulted in lower European license revenues in the quarter ended September 30 and our license revenues for the quarters ended September 30 have been lower than license revenues for the previous quarter ended June 30. We incurred operating losses as we increased the level of investment in all facets of our business. Our quarterly operating results have fluctuated significantly in the past and will continue to fluctuate in the future as a result of a number of factors, many of which are outside of our control. As a result of our limited operating history and recent acquisitions, 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, 2000, we had $4.7 million in cash and cash equivalents, $30.8 million in short-term investments and $28.3 million in working capital. During the quarter ended September 30, 1999, we successfully concluded our initial public offering, generating $43.1 million cash proceeds net of expenses and brokers' commissions. Our cash, cash equivalents and short-term investments increased to a total of $35.5 million as of June 30, 2000 from $9.3 million as of June 30, 1999. Our working capital increased to $28.3 million at June 30, 2000 from $7.3 million at June 30, 1999. We generated cash from operating activities of $4.9 million and $2.5 million for the years ended June 30, 2000 and 1999, respectively, as a result of obtaining improved payment terms from our principal suppliers and up front payments for maintenance support from our customers. Cash used in operating activities in the year ended June 30, 1998 was $1.1 million. Net cash used in investing activities was $54.3 million, $2.4 million and $1.6 million for the years ended June 30, 2000, 1999, 1998, respectively. Capital expenditures totaled $6.1 million, $2.4 million and $1.7 million for the years ended June 30, 2000, 1999 and 1998, respectively. These capital expenditures related primarily to the acquisition of computer software and equipment as well as furniture and fixtures as a result of our growing employee base. During the year ended June 30, 2000, we used $14.5 million (net of cash acquired) on the acquisitions of Transitif, Exactium and Simba. During the year ended June 30, 2000, we purchased short-term investments of $30.8 million and other assets of $2.9 million. Net cash provided by financing activities was $44.8 million, $8.0 million and $74,000 for the years ended June 30, 2000, 1999 and 1998, respectively. Net cash provided by financing activities resulted from sales of equity securities. For the year ended June 30, 2000, we raised $43.1 million from our initial public offering and we received $1.7 million on exercise of stock options. Our principal source of liquidity at June 30, 2000 was our cash, cash equivalents and short-term investments of $35.5 million. We also have credit facilities with a Canadian chartered bank, which include an operating facility of US$10.0 million bearing interest at the bank's prime rate and a term loan facility of US$5.0 million bearing interest at the bank's prime rate to be used for various capital expenditures. The credit facilities are secured by all of our assets, including our equipment and accounts receivable and the shares of our subsidiaries. At June 30, 2000, no amounts were outstanding under the operating facility or the term loan facility. We believe that the total amount of cash, 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 through the year ending June 30, 2001. Thereafter, depending on the development of our business, we may need to raise additional cash for working capital or other expenses. We also may encounter opportunities for acquisitions or other 41

45 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. business initiatives that require significant cash commitments, or unanticipated problems or expenses that could result in a requirement for additional cash before that time. If we need to raise additional cash, financing may not be available to us on favorable terms or at all. FOREIGN EXCHANGE AND HEDGING ACTIVITIES We are exposed to foreign currency fluctuations through our operations in Canada. Substantially all of our revenues and corresponding receivables are in United States dollars. However, a majority of our research and development expenses, customer support costs and administrative expenses are in Canadian dollars. As part of our hedging policy implemented during 1999, we identify our future Canadian currency requirements related to payroll costs, capital expenditures and operating lease commitments, and purchase forward exchange contracts to cover our currency needs at the beginning of an operational period, generally one quarter. We do not enter into forward exchange contracts or any derivative financial instruments for trading purposes. Prior to the year ended June 30, 1999, we did not engage in hedging transactions and our gains and losses on foreign currency transactions were not significant. Under our current hedging policy, we identify our forward contracts related to operating lease commitments and commitments for capital expenditures as hedges of firm, identifiable Canadian currency commitments. We recognize the gains and losses on these contracts when the related lease commitment is paid or the capital expenditure is made. We recognize gains and losses on other forward contracts in earnings in the current period. As of June 30, 2000, we had outstanding currency forward exchange contracts of $5.5 million which will be held to maturity and relate to operating expenses. As of June 30, 1999, we had no outstanding currency forward exchange contracts because forward contracts generally mature at the end of a quarterly period. During the quarter ended June 30, 2000 and 1999, we recorded a foreign exchange loss of $168,000 and $122,000, respectively, from the unhedged portion of our foreign currency exposure as the Canadian dollar strengthened substantially during the quarter. While we expect to continue to use our current method of hedging our foreign currency risk in the future, we may change our hedging methodology. If our currency requirements differ materially from our hedged position during periods of currency volatility, or if we do not continue to hedge our Canadian currency commitments, we could experience unanticipated currency gains or losses. We assume the risk relating to the creditworthiness of our counterparties when we engage in hedging transactions. We mitigate this risk by dealing only with substantial commercial banks we believe to be creditworthy. We do not believe that the credit risk associated with these transactions is material. AUDIT COMMITTEE We have established an Audit Committee of the Board of Directors, the charter of which is to oversee the activities of management and Pivotal's external auditors as they relate to the financial reporting process. In the year ended June 30, 2000, the Audit Committee was comprised of Robin Louis, Doug Mackenzie and Roger Siboni. Roger Siboni resigned in April 2000. 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 Pivotal's external auditors. In these meetings, the Audit Committee discussed with management and our external auditors the quality and acceptability of accounting principles and significant transactions or issues encountered during the period. In addition, the Audit Committee met with Pivotal's 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. Subsequent to year end, we adopted an Audit Committee Charter as required by the Nasdaq Stock Exchange, Inc. ("Nasdaq") in compliance with the Nasdaq's Marketplace Rules. Pivotal is committed to supporting this process and the Audit Committee in fulfilling their role of ensuring the integrity of our internal controls and financial reporting. 42

46 MANAGEMENT'S DISCUSSION & ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS. YEAR 2000 ISSUES We believe that the current versions of our internally developed solutions, as well as our management and information systems, are Year 2000 compliant. When the century changed, we experienced no disruption of our business operations and no product failures as a result of Year 2000 compliance issues or otherwise. The costs we incurred in connection with remediating our systems during 1999 were immaterial. At this time, we are not aware of any material defects resulting from Year 2000 issues, either with our solutions, our internal systems, or the solutions and services of third parties on which we rely. Nevertheless, some Year 2000 problems may not appear until after January 1, 2000. As a result, we may still face claims for undiscovered Year 2000 errors in our own solutions or for Year 2000 issues arising from third-party solutions that we integrate into our solutions or with which our solutions and systems exchange data. In addition, if our suppliers or distributors encounter Year 2000 problems, our ability to deliver our solutions and services could be disrupted. FORWARD LOOKING STATEMENTS Statements in this annual report 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 listed under "Risk Factors" or described elsewhere in this annual report. In some cases, you can identify forward-looking statements by our use of words such as "may," "will," "should," "could," "expects," "plans," "intends," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative or other variations of these words, or other comparable words or phrases. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements or other future events. Moreover, neither we nor anyone else assumes responsibility for the accuracy and completeness of forward-looking statements. We are under no duty to update any of our forward-looking statements after the date of this report. You should not place undue reliance on forward-looking statements. RISK FACTORS - Factors relating to our business and the market for demand chain network solutions make our future operating results uncertain and may cause them to fluctuate from period to period. - We expect seasonal trends to cause our quarterly license revenues to fluctuate and in recent years our license revenues for the fourth quarter of our fiscal year have exceeded the revenues for the following quarter. - Our limited operating history makes it difficult to predict our future operating results. - We have a history of losses, we may incur losses in the future and our losses may increase because of our plan to increase operating expenses. - The market for our solutions is highly competitive. - We depend upon Microsoft and the continued adoption and performance of the Microsoft Windows 2000 and Microsoft Backoffice platforms. - The market for our solutions is new and highly uncertain and our plan to focus on Internet-based applications and to integrate electronic commerce features adds to this uncertainty. - The success of our solutions will depend upon the continued use and expansion of the Internet. - We depend on third-party wireless service providers for the successful implementation of our Pivotal Anywhere solution. - Our future revenue growth could be impaired if we are unable to expand our direct sales and support infrastructure. - We rely on our Pivotal Alliance network of independent companies to sell, install and service our solutions and to provide specialized software for use with them and our PivotalHost Program relies on third-party application service providers. - The loss of our co-founders or other key personnel or our failure to attract and retain additional personnel could adversely affect our business. - We face risks from the expansion of our international operations. - Political unrest may adversely affect the operation of our European customer support center located in Northern Ireland. - Fluctuations in currency exchange rates and risks associated with our hedging policies may affect our operating results. - We have experienced rapid growth which has placed a strain on our resources and any failure to manage our growth effectively could cause our business to suffer. - The integration of Transitif, Exactium, Simba and any future acquisitions may be difficult and disruptive. - Our sales cycle is long and sales delays could cause our operating results to vary widely. - Our plan to expand our service capability could adversely affect gross profit margins and operating results. - We rely on software licensed to us by third parties for features we include in our solutions. - We must continue to develop enhancements to our solutions and new applications and features that respond to the evolving needs of our customers, rapid technological change and advances introduced by our competitors. - We may be unable to adequately protect our proprietary rights. - Claims by other companies that our solutions infringe their copyrights or patents could adversely affect our ability to sell our solutions and increase our costs. - Our software solutions may suffer from defects or errors. - If our customers' systems' security is breached, our business and reputation could suffer. - Changes in accounting standards and in the way we charge for licenses could affect our future operating results. - Our share price may continue to be volatile. - Certain shareholders may be able to exercise control over matters requiring shareholder approval. 43

47 2000 Financial Statements

48 INDEPENDENT AUDITORS' REPORT To the Shareholders of Pivotal Corporation We have audited the accompanying consolidated balance sheets of Pivotal Corporation as of June 30, 2000 and 1999 and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 2000. 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 United States generally accepted auditing standards. 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, 2000 and 1999 and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2000 in conformity with United States generally accepted accounting principles. /s/ Deloitte & Touche LLP DELOITTE & TOUCHE LLP Vancouver, Canada July 13, 2000 45

49 PIVOTAL CORPORATION CONSOLIDATED BALANCE SHEETS (Expressed in United States dollars; all amounts in thousands except par value data) <TABLE> <CAPTION> June 30, --------------------------------------------------------------------------------------------------------------------------- 2000 1999 --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 4,734 $ 9,338 Short term investments 30,788 -- Accounts receivable 16,764 8,304 Prepaid expenses 1,859 1,029 --------------------------------------------------------------------------------------------------------------------------- Total current assets 54,145 18,671 Property and equipment, net 7,231 3,051 Goodwill, intangibles and other assets, net 60,569 -- --------------------------------------------------------------------------------------------------------------------------- Total assets $ 121,945 $ 21,722 =========================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued liabilities $ 16,877 $ 6,329 Deferred revenue 8,971 5,085 --------------------------------------------------------------------------------------------------------------------------- Total current liabilities 25,848 11,414 --------------------------------------------------------------------------------------------------------------------------- Redeemable convertible preferred shares, authorized, issued and outstanding shares - none at June 30, 2000 and 9,946 at June 30, 1999 -- 17,500 Shareholders' equity (deficit): Preferred shares, undesignated, no par value, authorized shares - 20,000 at June 30, 2000 and June 30, 1999; no shares issued and outstanding -- -- Class A convertible preferred shares, no par value, authorized, issued and outstanding shares - none in 2000 and 2,000 in 1999 -- 83 Common shares, no par value, authorized shares - 200,000 at June 30, 2000 and June 30, 1999, respectively; issued and outstanding shares - 22,057 and 3,454 at June 30, 2000 and June 30, 1999, respectively 105,076 563 Class B common shares, Cdn.$0.03 par value, authorized shares - none and 600 in 2000 and 1999, respectively; issued and outstanding shares - none and 477 in 2000 and 1999, respectively -- 4 Additional paid-in capital 7,002 -- Deferred share-based compensation (193) (416) Accumulated deficit (15,788) (7,426) --------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity (deficit) 96,097 (7,192) --------------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity (deficit) $ 121,945 $ 21,722 =========================================================================================================================== </TABLE> See accompanying notes 46

50 PIVOTAL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Expressed in United States dollars; all amounts in thousands except amounts per share) <TABLE> <CAPTION> Years ended June 30, -------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> REVENUES: Licenses $ 37,384 $ 18,819 $ 11,311 Services and maintenance 15,555 6,508 2,898 -------------------------------------------------------------------------------------------------------------------- Total revenues 52,939 25,327 14,209 -------------------------------------------------------------------------------------------------------------------- COST OF REVENUES: Licenses 2,141 536 401 Services and maintenance 8,147 3,078 1,281 -------------------------------------------------------------------------------------------------------------------- Total cost of revenues 10,288 3,614 1,682 -------------------------------------------------------------------------------------------------------------------- Gross profit 42,651 21,713 12,527 -------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Sales and marketing 31,165 16,830 9,226 Research and development 8,906 4,958 1,910 General and administrative 4,190 2,466 1,513 Amortization of goodwill 1,409 -- -- In process research and development and other charges 6,979 -- -- -------------------------------------------------------------------------------------------------------------------- Total operating expenses 52,649 24,254 12,649 -------------------------------------------------------------------------------------------------------------------- Loss from operations (9,998) (2,541) (122) Interest and other income (loss) 2,193 (24) 136 -------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (7,805) (2,565) 14 Income taxes 557 243 10 -------------------------------------------------------------------------------------------------------------------- Net income (loss) for the year $ (8,362) $ (2,808) $ 4 ==================================================================================================================== Earnings (loss) per share: Basic $ (0.45) $ (0.72) $- Diluted $ (0.45) $ (0.72) $- Pro forma basic and diluted $ (0.39) $ (0.18) $- Weighted average number of shares used to calculate earnings (loss) per share: Basic 18,643 3,888 3,720 Diluted 18,643 3,888 14,927 Pro forma basic 21,339 15,940 </TABLE> See accompanying notes 47

51 PIVOTAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (Expressed in United States dollars; all amounts in thousands) <TABLE> <CAPTION> Total Class A Convertible Additional Class B Common Deferred Shareholders' Preferred Shares Common Shares Paid-in Shares Share-based Equity Shares Amount Shares Amount Capital Shares Amount Compensation (Deficit) (Deficit) ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balance, June 30, 1997 2,000 $83 3,430 $ 6 $ -- $-- $-- $ (4,622) $ (4,533) Issuance of common shares on exercise of stock options -- -- 423 74 -- -- -- -- -- 74 Net income -- -- -- -- -- -- -- -- 4 4 ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1998 2,000 83 3,853 80 -- -- -- -- (4,618) (4,455) Conversion of common shares on exercise of stock options -- -- 78 14 -- -- -- -- -- 14 Conversion of common shares into Class B common shares -- -- (477) (4) -- 477 4 -- -- -- Deferred share-based compensation -- -- -- 473 -- -- -- (473) -- -- Amortization of share-based compensation -- -- -- -- -- -- -- 57 -- 57 Net loss -- -- -- -- -- -- -- -- (2,808) (2,808) ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 1999 2,000 83 3,454 563 -- 477 4 (416) (7,426) (7,192) 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 42,123 7,002 -- -- -- -- 49,125 Amortization of share-based compensation -- -- -- -- -- -- -- 223 -- 223 Net loss -- -- -- -- -- -- -- -- (8,362) (8,362) ------------------------------------------------------------------------------------------------------------------------------------ Balance June 30, 2000 -- $-- 22,057 $ 105,076 $7,002 -- $-- $ (193) $ (15,788) $ 96,097 ==================================================================================================================================== </TABLE> See accompanying notes 48

52 PIVOTAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Expressed in United States dollars; all amounts in thousands) <TABLE> <CAPTION> Years ended June 30, -------------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Cash flows from operating activities: Net income (loss) for the period $ (8,362) $ (2,808) $ 4 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization of goodwill 1,409 -- -- Depreciation 2,215 1,017 410 In-process research and development and other charges 6,979 -- -- Loss on disposal of property and equipment -- 52 55 Non-cash share-based compensation expense 223 57 -- Change in operating assets and liabilities 2,469 4,196 (1,596) -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 4,933 2,514 (1,127) -------------------------------------------------------------------------------------------------------------------------------- Cash flows for investing activities: Purchase of property and equipment (6,110) (2,392) (1,666) Acquisitions (net of cash acquired) (14,520) -- -- Purchase of short-term investments (30,788) -- -- Other assets (2,921) -- 23 -------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (54,339) (2,392) (1,643) -------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net proceeds from initial public offering of common shares 43,101 -- -- Proceeds from issuance of common shares 1,701 14 74 Proceeds from issuance of redeemable convertible preferred shares -- 8,000 -- -------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 44,802 8,014 74 -------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (4,604) 8,136 (2,696) Cash and cash equivalents, beginning of period 9,338 1,202 3,898 -------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 4,734 $ 9,338 $ 1,202 ================================================================================================================================ SUPPLEMENTAL CASH FLOW DISCLOSURE Income taxes paid (recovered) $ 324 $ 137 $ (12) SUPPLEMENTAL NON-CASH INVESTING DISCLOSURE Acquisitions of Exactium and Simba $ 49,125 $- $- SUPPLEMENTAL NON-CASH FINANCING DISCLOSURE Issuance of common shares and options on acquisitions $ 49,125 $- $- Conversion of preferred shares into common shares $ 17,583 $- $- </TABLE> See accompanying notes 49

53 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 NATURE OF OPERATIONS Pivotal Corporation enables large and medium-sized businesses worldwide to make, serve, and manage customers efficiently and intelligently by providing demand chain networks based on Microsoft standards. Pivotal helps companies manage collaborative relationships between customers, business partners, and employees; guide intelligent commerce transactions across multiple channels; and seamlessly integrate the demand chain with the supply chain. Pivotal's software solutions include Pivotal eRelationship, developed to manage the eBusiness relationships, Pivotal eSelling, designed to sell complex products over the Internet, and Pivotal ePower, an integrated Internet application platform that is built on best-in-class resources. PRINCIPLES OF CONSOLIDATION These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") and include the accounts of Pivotal and its wholly owned subsidiaries. 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 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, taxes and contingencies. Actual results may differ from those estimates. REVENUE RECOGNITION Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), was issued in October 1997 by the American Institute of Certified Public Accountants ("AICPA") and was amended by Statement of Position 98-4 (SOP 98-4). Pivotal adopted SOP 97-2 effective for Pivotal's year ended June 30, 1998. Additionally, the AICPA issued SOP 98-9, which provides certain amendments to SOP 97-2, which is effective for transactions entered into beginning July 1, 1999. Pivotal adopted SOP 98-9 in the first quarter of fiscal year 2000 and its adoption had no material impact on Pivotal's operating results or financial position. Pivotal generates revenues through two sources: (1) software license revenues and (2) services and maintenance revenues. Software license revenues are normally generated from licensing the perpetual right to use Pivotal's products directly to end-users and indirectly through resellers and, to a lesser extent, through third-party products Pivotal distributes. Pivotal recognizes as revenue only the fee payable from the reseller, net of any discount. Service revenues are generated from consulting services, education 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. Revenues for license arrangements with payment term extending beyond one year are recognized periodically as payments become due, provided all other conditions for revenue recognition are met. Maintenance revenues 50

54 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 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 services do not include significant customization or modification of the base 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. 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 Short term investments consist of money market instruments with maturities of less than one year. As at June 30, 2000, Pivotal's short-term investments consisted solely of held-to-maturity investments and their carrying value was substantially the same as their market value. FAIR VALUE OF FINANCIAL INSTRUMENTS At June 30, 2000 and 1999, Pivotal had the following financial instruments: cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities, and at June 30, 1999, redeemable convertible preferred shares. 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. At June 30, 1999, due to the uncertainty surrounding the actual date that the redeemable convertible preferred shares would be redeemed, it was not practical to determine the fair value of this financial instrument. DERIVATIVE FINANCIAL INSTRUMENTS Pivotal's use of derivative financial instruments is limited to short-term foreign currency forward exchange contracts ("forward contracts") used 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 enters into forward contracts to hedge exposure to fluctuations in the Canadian dollar. Gains and losses on forward contracts that are designated and effective 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 income in the current period. As at June 30, 2000, Pivotal had outstanding forward contracts to purchase Canadian dollars for US$5.5 million. The unrealized loss on these contracts at June 30, 2000 was $79. As of June 30, 1999, Pivotal had no outstanding forward contracts. 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: <TABLE> <S> <C> Computer software 2 year straight line -------------------------------------------------------------------------------- Computer hardware and equipment 30% declining balance or 3 year straight line -------------------------------------------------------------------------------- Furniture and fixtures 20% declining balance -------------------------------------------------------------------------------- </TABLE> Leasehold improvements are amortized using the straight-line method over three to five years. 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. 51

55 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) IMPAIRMENT OF LONG-LIVED ASSETS Pivotal makes periodic reviews for the impairment of long-lived assets including goodwill and other intangibles whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Under Statement of Financial Accounting Standard ("SFAS") No. 121, an impairment loss would be recognized when estimates of undiscounted future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. No such impairment losses have been identified by Pivotal for the years ended June 30, 2000, 1999 and 1998. 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 and the Asia Pacific and consists of companies in a variety of industries. Pivotal does not require collateral or other security to support credit sales, but provides an allowance for bad debts based on historical experience and specifically identified risks. FOREIGN CURRENCY TRANSLATION The functional currency of Pivotal and its subsidiaries is the U.S. dollar. Assets and liabilities denominated in other than the U.S. dollar are translated using the exchange rates prevailing at the balance sheet date. 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 $924, $538 and $172 in 2000, 1999 and 1998, 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. 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 10. 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. 52

56 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) EARNINGS (LOSS) PER COMMON SHARE Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities 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 earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding and the weighted average redeemable convertible preferred shares and Class A convertible preferred shares outstanding as if such shares were converted into common shares and had been outstanding since July 1, 1999. The following table sets forth the computation of basic and diluted, and pro forma basic and diluted earnings (loss) per share: <TABLE> <CAPTION> Years ended June 30, ------------------------------------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Net income (loss) (A) $ (8,362) $ (2,808) $ 4 ================================================================================================ Weighted average number of common shares outstanding (B) 18,643 3,888 3,720 Dilutive effect of: Stock options -- -- 444 Convertible preferred shares -- -- 10,763 ------------------------------------------------------------------------------------------------ Diluted weighted average number of shares (C) 18,643 3,888 14,927 ================================================================================================ Pro forma adjustment for convertible preferred shares 2,696 12,052 Pro forma basic and diluted weighted average number of shares (D) 21,339 15,940 ------------------------------------------------------------------------------------------------ Earnings (loss) per share Basic (A/B) $ (0.45) $ (0.72) $- Diluted (A/C) $ (0.45) $ (0.72) $- Pro forma basic and diluted (A/D) $ (0.39) $ (0.18) </TABLE> COMPREHENSIVE INCOME SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. Pivotal adopted SFAS No. 130 in 1999. Pivotal has no comprehensive income items, other than the net earnings (loss), in any of the periods presented. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The FASB subsequently issued SFAS No. 137 which delayed the required effective date for adoption of SFAS No. 133 to fiscal years beginning after June 15, 2000. Pivotal will adopt SFAS No. 133 as amended by SFAS No. 137 in the first quarter of fiscal year 2001. Pivotal does not expect that adoption of this standard will have a material effect on its consolidated financial position or results of operations. In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation." Pivotal will be required to adopt FIN 44 effective July 1, 2000 with respect to certain provisions applicable to new awards, exchanges of awards in a business combination, modifications to outstanding awards, and changes in grantee status that occur on or after that date. FIN 44 addresses practice issues related to the application of APB Opinion No. 25, "Accounting for Stock Issued to Employees." Pivotal does not expect the application of FIN 44 to have a material impact on its consolidated financial position or results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") and amended it in March 2000. Pivotal is currently reviewing the provisions of SAB 101 and has not fully assessed the impact of its adoption. While SAB 101 does not supercede the software industry specific revenue recognition guidance, which Pivotal believes it is in compliance with, the SEC Staff has recently 53

57 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) informally indicated its views that SAB 101 may change current interpretations of software revenue recognition requirements. Such SEC interpretations could result in companies recording a cumulative effect of a change in accounting principle. Pivotal is required to adopt SAB 101 no later than the fourth quarter of fiscal 2001. RECLASSIFICATIONS Certain prior period amounts have been reclassified to conform with the current period presentation. 2. BUSINESS COMBINATIONS During the year ended June 30, 2000, Pivotal completed the acquisitions described below which were accounted for under the purchase method of accounting. Accordingly, the results of operations of each acquisition are included in the consolidated statement of income since the acquisition date, and the related assets and liabilities were recorded based upon their respective fair values at the date of acquisition. TRANSITIF S.A. Effective December 3, 1999, Pivotal acquired 100% of Transitif S.A. ("Transitif"), a French corporation that distributes electronic business 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. No earn-out payments were required to be made for the period ended June 30, 2000. EXACTIUM LTD. Effective June 2, 2000, Pivotal acquired 100% of Exactium Ltd. ("Exactium"), an Israeli company based in Atlanta, Georgia that provides eSelling 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 expenses of $775. SIMBA TECHNOLOGIES INC. On June 26, 2000, Pivotal acquired 100% of Simba Technologies Inc. ("Simba"). Pivotal paid an aggregate purchase price of $17,590 consisting of 837 common shares and stock options, and acquisition related expenditures of $455. The total consideration, including acquisition costs, was allocated based on estimated fair values on the acquisition date as follows: <TABLE> <CAPTION> Transitif Exactium Simba Total -------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 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 Other liabilities (1,050) (926) (683) (2,659) -------------------------------------------------------------------------------------------------------------- (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 ============================================================================================================== </TABLE> 54

58 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) The fair value of the common shares of Pivotal 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 ("IPR&D") charges relate to acquisitions of companies accounted for under the purchase method in which a portion of the purchase prices was allocated to acquired in process technology. During 2000, Pivotal acquired Exactium and Simba and included in the respective purchase prices was an aggregate amount of purchased IPR&D of $4,720. Independent valuations were performed to assess and allocate a value to purchased IPR&D. The value allocated to IPR&D 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 analysing purchased IPR&D 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 IPR&D for each acquisition is set for below. EXACTIUM The allocation to IPR&D 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 an eSelling product released in late June 2000. SIMBA The allocation to IPR&D was related to the Simba eMarketing 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 IPR&D 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 eMarketing market and Pivotal. Net after tax cash flows were discounted to 55

59 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 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. Amounts attributable to developed technology, goodwill and other intangibles will be amortized over their estimated useful life of three years on a straight-line basis. 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. 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 1999 fiscal year. <TABLE> <CAPTION> June 30, --------------------------------------------------------------- 2000 1999 --------------------------------------------------------------- <S> <C> <C> Net revenues $ 58,602 $ 30,594 Net loss $(33,943) $(25,905) Basic and diluted loss per share $ (1.68) $ (4.67) </TABLE> 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. ACCOUNTS RECEIVABLE Accounts receivable are net of an allowance for doubtful accounts of $740 and $334 at June 30, 2000 and 1999, respectively. 4. PROPERTY AND EQUIPMENT <TABLE> <CAPTION> June 30, ---------------------------------------------------------- 2000 1999 ---------------------------------------------------------- <S> <C> <C> Computer software $ 3,126 $ 476 Computer equipment 3,763 2,317 Furniture and fixtures 2,389 1,169 Leasehold improvements 1,695 626 ---------------------------------------------------------- 10,973 4,588 Accumulated depreciation (3,742) (1,537) ---------------------------------------------------------- Net book value $ 7,231 $ 3,051 ========================================================== </TABLE> 5. GOODWILL, INTANGIBLES AND OTHER ASSETS <TABLE> <CAPTION> June 30, -------------------------------------------------- 2000 1999 -------------------------------------------------- <S> <C> <C> Goodwill $ 58,079 $ -- Acquired intangibles 1,620 -- Other assets 2,288 -- -------------------------------------------------- $ 61,987 $ -- Accumulated amortization (1,418) -- -------------------------------------------------- Net book value $ 60,569 $ -- ================================================== </TABLE> Other assets in the amount of $2,288 consist of prepaid long-term royalties and long-term investments. Amortization of $1,418 includes the amortization of goodwill and acquired workforce. 56

60 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The components of accounts payable and accrued liabilities were as follows: <TABLE> <CAPTION> June 30, ---------------------------------------------------- 2000 1999 ---------------------------------------------------- <S> <C> <C> Accounts payable $ 9,369 $ 3,054 Accrued compensation 3,020 2,368 Accrued acquisition costs 1,229 -- Other accrued liabilities 3,259 907 ---------------------------------------------------- $16,877 $ 6,329 ==================================================== </TABLE> 7. LINE OF CREDIT Pivotal has negotiated a credit facility with a Canadian chartered bank which includes: a revolving term operating line of $10,000, bearing interest at the bank's prime rate and a committed term loan of $5,000 bearing interest also at the bank's prime rate, secured by a charge on all current and future personal property of Pivotal. As of June 30, 2000 and 1999, no amounts were outstanding under the credit facility. 8. COMMITMENTS AND CONTINGENCIES OPERATING LEASES 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 for the years ending June 30 pursuant to leases outstanding as of June 30, 2000 are due as follows: <TABLE> <S> <C> 2001 $ 2,720 2002 2,594 2003 1,672 2004 673 2005 298 ------------------------------------------------------- $ 7,957 ======================================================= </TABLE> Rent expense totalled approximately $2,237, $1,075 and $496 in the years ended June 30, 2000, 1999 and 1998, respectively. Certain of these lease obligations have been secured by irrevocable letters of credit for $0, $50, and $170 at June 30, 2000, 1999 and 1998, respectively. OTHER LETTERS OF CREDIT In June 2000, Pivotal entered into a $723 (Cdn. $ 1,070) irrevocable letter of credit with a Canadian chartered bank. The letter of credit, which expires June 19, 2001, collaterizes Pivotal's obligations to a third party for tenant improvement costs. LEGAL PROCEEDINGS Pivotal is subject to legal proceedings, claims and litigation arising in the ordinary course of business. Pivotal believes that the ultimate costs to resolve these matters will not have a material adverse effect on Pivotal's consolidated financial position, results of operations or cash flows. 57

61 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 9. REDEEMABLE CONVERTIBLE PREFERRED SHARES The redeemable convertible preferred shares at June 30, 2000 and 1999 are as follows: <TABLE> <CAPTION> June 30, ------------------------------------------------------------------------------------------ 2000 1999 ------------------------------------------------------------------------------------------ <S> <C> <C> Class B, 2,000 shares with par value of Cdn.$1.17 each, redeemable at $1.00 each, authorized, issued and outstanding in 1999 $ -- $ 2,000 Class D, 2,658 shares with no par value, redeemable at $0.79 each, authorized, issued and outstanding in 1999 -- 2,100 Class E, 4,000 shares with no par value, redeemable at $1.35 each, authorized, issued and outstanding in 1999 -- 5,400 Class F, 1,288 shares with no par value, redeemable at $6.21 each, authorized, issued and outstanding in 1999 -- 8,000 ------------------------------------------------------------------------------------------ $ -- $17,500 ========================================================================================== </TABLE> During the year ended June 30, 1997, Pivotal's shareholders approved an increase in the authorized capital of Pivotal by authorizing 4,000 Class E preferred shares which were issued during that year for total proceeds of $5,400. During the year ended June 30, 1999, Pivotal's shareholders approved an increase in the authorized capital of Pivotal by authorizing 1,288 Class F preferred shares which were issued during that year for total proceeds of $8,000. The holders of each class of preferred shares had the right to one vote for each common share into which the preferred shares could be converted. All of the redeemable preferred shares had the right to receive non-cumulative dividends at amounts as determined by the directors of Pivotal. When dividends were paid on any other outstanding class of shares of Pivotal, the holders of the Class B, Class D, Class E and Class F preferred shares were entitled to an amount per share equal to that paid on the other class of shares, as determined on a basis as if all of the outstanding redeemable preferred shares had been converted into common shares. The Class B, Class D, Class E and Class F preferred shares were redeemable at Pivotal's option with the approval of the holders of 75% of the outstanding shares of the applicable class, and were retractable at the holder's option on or after June 30, 2001 at the issue price plus any declared and unpaid dividends. Each class of redeemable preferred shares was convertible into common shares at any time at the option of the holder, using the formula of 0.95 to 1.00 for the Class B preferred shares and one-for-one for Class D, Class E and Class F preferred shares as provided in the Articles of Pivotal. All classes of preferred shares were to automatically convert into common shares at the conversion price immediately upon the earlier of: (a) the acquisition of the assets or the take-over of Pivotal by a third party resulting in payment to all of the shareholders of Pivotal of not less than $7.50 per common share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) calculated on the basis that all of the preferred shares had been converted into common shares and without regard to any liquidation preferences for any class of shares; and, (b) the consummation of Pivotal's sale of its common shares in a bona fide, firm commitment underwriting pursuant to a registration statement under the Securities Act of 1933 of the United States, as amended, at a public offering price of not less than $7.50 per share (adjusted to reflect subsequent stock dividends, stock splits or recapitalizations) and $15,000 in the aggregate, provided that the underwriters in such public offering were acceptable to the holders of a majority of the outstanding Class B, Class D, Class E and Class F preferred shares, such acceptance not to be unreasonably withheld. All of these shares were converted into common shares during the year ended June 30, 2000. 10. SHAREHOLDERS' EQUITY (DEFICIT) 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., Inc., 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 58

62 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 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. Preferred Shares, Common Shares and Class B Common Shares On December 1, 1997, Pivotal's shareholders approved an increase in the number of authorized common shares from 20,000 to 50,000 shares. On December 16, 1998, Pivotal's shareholders approved the redesignation of common shares without par value to Class A common shares without par value. Pivotal's shareholders also approved the increase in authorized capital by creating 600 Class B common shares with a par value of Cdn.$0.03 each. In December 1998 and January 1999, Pivotal issued an aggregate of 477 Class B common shares in exchange for 477 Class A common shares. Prior to completion of the initial public offering, all of the issued and outstanding Class B common shares were exchanged for common shares on a one-for-one basis. On June 17, 1999, Pivotal's shareholders approved an increase in the number of authorized Class A common shares from 50,000 to 200,000 and an increase in authorized capital by creating 20,000 unissued preferred shares without par value. Pivotal's shareholders also approved the redesignation of Class A common shares, both issued and unissued, to common shares without par value. The holder of each common share has the right to one vote per share. The preferred shares could at any time and from time to time be issued in one or more series and the Board of Directors could determine the special rights and restrictions of each series including any dividend, conversion or redemption rights, subject to the approval of at least 75% of the holders of any outstanding Class A, B, D, E and F preferred shares. The holders of the Class A preferred shares had the right to one vote for each common share into which the preferred shares could be converted. The Class A preferred shares had the same rights to receive dividends as the redeemable preferred shares discussed in Note 9, and were convertible into common shares on a one-for-one basis, subject to adjustment under certain circumstances. The Class A preferred shares were not redeemable or retractable. On June 17, 1999, Pivotal's shareholders also approved, subject to the conversion of the redeemable convertible preferred shares, the Class A convertible preferred shares and the Class B common shares into common shares, the cancellation of the authorized Class B common share capital and the authorized Class A, B, D, E, and F preferred share capital. 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 its subsidiaries, and of partnerships, joint ventures and other entities in which Pivotal holds a 50% voting interest including directors thereof. Generally, Pivotal grants stock options with exercise prices equal to the quoted market value of the common share 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 five years from the date of grant. On June 17, 1999, the Company's shareholders approved changes to the Plan that increased the number of shares reserved for issuance pursuant to the Plan by (a) 1,076 common shares plus (b) an automatic increase on the first day of each fiscal year beginning on July 1, 2001, equal to the lesser of 800 shares or 4% of the average number of common shares outstanding as used to calculate fully 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: 59

63 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) <TABLE> <CAPTION> Options Outstanding ------------------------------------------------------------------------ Weighted Options Number of Average Available Common Exercise for Grant Shares Price ------------------------------------------------------------------------ <S> <C> <C> <C> (Expressed in Canadian dollars, except as noted) Balances, June 30, 1997 586 337 Cdn.$0.12 ------------------------------------------------------------------------ Options authorized 1,000 - - Options granted (877) 877 0.88 Options exercised - (423) 0.25 Options cancelled 49 (49) 0.26 ------------------------------------------------------------------------ Balances, June 30, 1998 758 742 Cdn.$0.94 ------------------------------------------------------------------------ Options authorized 2,576 - - Options granted (866) 866 9.71 Options exercised - (78) 0.28 Options cancelled 75 (75) 3.74 ------------------------------------------------------------------------ Balances, June 30, 1999 2,543 1,455 Cdn.$6.07 ------------------------------------------------------------------------ Options authorized 408 - - Options granted (1,837) 1,837 23.12 Options exercised - (376) 2.96 Options cancelled 270 (270) 10.37 ------------------------------------------------------------------------ Balances, June 30, 2000 1,384 2,646 US$16.95 ======================================================================== </TABLE> The U.S. dollar equivalents of the weighted average exercise price calculated using the year end exchange rates were as follows: $4.12, $0.64 and $0.08 as of June 30, 1999, 1998 and 1997 respectively. The following tables summarize information concerning outstanding and exercisable options at June 30, 2000: <TABLE> <CAPTION> 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 ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> $ 0.08 137 1.4 $ 0.08 92 $ 0.08 $ 0.17 13 6.9 0.17 5 0.17 $ 0.57-0.68 187 8.4 0.62 131 0.59 $ 1.70 57 7.7 1.70 27 1.70 $ 5.09-6.42 537 5.3 5.67 119 5.61 $ 10.54-12.88 614 6.3 13.13 53 13.92 $ 16.75-21.25 145 9.2 18.69 8 20.88 $ 25.44-33.13 747 9.8 27.68 - - $ 40.75-52.06 209 9.6 48.49 4 50.50 ----------------------------------------------------------------------------------------- $ 0.08-52.06 2,646 $ 16.95 439 $ 8.11 ========================================================================================= </TABLE> EMPLOYEE STOCK PURCHASE PLAN ("ESPP") On June 17, 1999, Pivotal's shareholders approved the adoption of an ESPP 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 ESPP, 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. 60

64 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) COMMON SHARES RESERVED FOR FUTURE ISSUANCE Pivotal has reserved common shares as of June 30, 2000 as follows: <TABLE> <S> <C> Exercise of stock options 4,030 Employee Stock Purchase Plan 931 ------------------------------------------------------------- 4,961 ============================================================= </TABLE> SHARE-BASED COMPENSATION 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 $193 at June 30, 2000 will approximate $113, $58 and $22 during the fiscal years ending June 30, 2001, 2002 and 2003, respectively. 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, pro forma net income (loss) and net earnings (loss) per share would have been as follows: <TABLE> <CAPTION> Years Ended June 30, ------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------- <S> <C> <C> <C> Net income (loss) As reported $ (8,362) $(2,808) $ 4 SFAS No. 123 pro forma (10,541) (2,849) (2) Basic and diluted earnings (loss) per share As reported $ (0.45) $ (0.72) $-- SFAS No. 123 pro forma (0.57) (0.73) -- </TABLE> 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, 2000, 1999 and 1998 were US$15.45, Cdn.$1.92 (US$1.30) and Cdn.$0.21 (US$0.14) per share respectively. The fair value for these options was estimated at the date of grant using the following weighted average assumptions: <TABLE> <CAPTION> Years Ended June 30, -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- <S> <C> <C> <C> Assumptions Volatility factor of expected market price of the Company's shares 85.0% 0.0% 0.0% 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 7.0% 5.6% 5.5% </TABLE> 61

65 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 11. INCOME TAXES Details of the income tax provision (recovery) are as follows: <TABLE> <CAPTION> Years ended June 30, ------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------ <S> <C> <C> <C> Current Canadian $ -- $ (47) $(132) Foreign 557 290 120 ------------------------------------------------------------------ 557 243 (12) Deferred Canadian -- -- 22 ------------------------------------------------------------------ Income tax provision $ 557 $ 243 $ 10 ================================================================== </TABLE> The reported income tax provision (recovery) differs from the amount computed by applying the Canadian basic statutory rate to the income (loss) before income taxes. The reasons for this difference and the related tax effects are as follows: <TABLE> <CAPTION> Years Ended June 30, -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- <S> <C> <C> <C> Canadian basic statutory tax rate 45% 45% 45% -------------------------------------------------------------------------------- Expected income tax provision (recovery) $(3,512) $(1,154) $ 6 Foreign tax rate differences (155) (144) (20) Benefit of losses not tax affected 389 1,484 -- Non-deductible expenses 2,661 56 82 Research and development tax credits (127) (47) (132) Benefit of temporary differences not recognized 1,301 48 74 -------------------------------------------------------------------------------- $ 557 $ 243 $ 10 ================================================================================ </TABLE> 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, 2000 and 1999 are as follows: <TABLE> <CAPTION> 2000 1999 -------------------------------------------------------------------------------- <S> <C> <C> Deferred income tax assets Net operating tax loss carry-forwards $ 4,547 $ 3,129 Research and development expenses 85 87 Book and tax base differences on assets -- 66 Other 80 84 Total deferred income tax assets 4,712 3,366 Valuation allowance for deferred income tax assets (4,547) (3,366) -------------------------------------------------------------------------------- Net deferred income tax assets 165 -- Deferred income tax liabilities Book and tax base differences on assets 187 -- -------------------------------------------------------------------------------- Net deferred income tax liabilities included in accounts payable and accrued liabilities $ 22 $ -- ================================================================================ </TABLE> 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, 2000 and 1999 was a provision of $1,346 and $1,542, respectively. As of June 30, 2000, Pivotal has Canadian tax loss carry-forwards of approximately $7,189 available to reduce future years' income for tax purposes. These carry-forward losses expire in 2001 to 2007. 62

66 PIVOTAL CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States dollars; all amounts in thousands except amounts per share) 12. CHANGE IN OPERATING ASSETS AND LIABILITIES The change in operating assets and liabilities is as follows: <TABLE> <CAPTION> June 30, -------------------------------------------------------------------------------- 2000 1999 1998 -------------------------------------------------------------------------------- <S> <C> <C> <C> Accounts receivable $(7,511) $(1,188) $(4,971) Prepaid expenses (545) (323) (570) Accounts payable and accrued liabilities 7,260 4,370 1,117 Deferred revenue 3,265 1,337 2,828 -------------------------------------------------------------------------------- $ 2,469 $ 4,196 $(1,596) ================================================================================ </TABLE> 13. RELATED PARTY TRANSACTIONS During the year, Pivotal entered into an agreement to license software from a company, with whom Pivotal had a former director in common, under which Pivotal paid $350. 14. SEGMENTED INFORMATION Pivotal operates in one business segment, the development, marketing, and supporting of Internet and corporate network-based software applications used for managing customer and selling partner relationships. Pivotal licenses and markets its products internationally. The following table presents a summary of revenues by geographical region. <TABLE> <CAPTION> Years Ended June 30, ------------------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------------ <S> <C> <C> <C> United States $32,591 $18,779 $11,931 Canada 5,574 1,463 903 International 14,774 5,085 1,375 ------------------------------------------------------------------------------ $52,939 $25,327 $14,209 ============================================================================== </TABLE> Pivotal attributes revenue among the geographical areas based on the location of the customers involved. During 2000, 1999 and 1998, no single customer accounted for 10% or more of total revenue. The following table presents a summary of property and equipment by geographic region: <TABLE> <CAPTION> Years ended June 30, ------------------------------------------------------------- 2000 1999 ------------------------------------------------------------- <S> <C> <C> Property and Equipment United States $1,395 $ 449 Canada 4,624 2,435 International 1,212 167 ------------------------------------------------------------- $7,231 $3,051 ============================================================= </TABLE> 63

67 CORPORATE INFORMATION MANAGEMENT TEAM: NORMAN B. FRANCIS, President and Chief Executive Officer KEITH R. WALES, Chief Technical Officer VINCENT MIFSUD, Executive Vice President and Chief Financial Officer GLENN HASEN, Executive Vice President, Global Field Operations ROBERT RUNGE, Chief Marketing Officer KIRK HERRINGTON, Vice President, Advanced Technology SAL SANCI, Vice President and General Manager, eRelationship Products Division ELI BARAK, Vice President and General Manager, eSelling Products Division HEATHER CLARIDGE, Vice President, Human Resources CHRISTINE ROGERS, Senior Vice President Professional Services ANDRE BEAULIEU, General Counsel MARK INSKIPP, Vice President Europe, Middle East & Africa MATT DUNCAN, Vice President Corporate and Solutions Marketing GEORGE REZNIK, Vice President, Finance DIRECTORS: NORMAN B. FRANCIS, President and Chief Executive Officer, Pivotal Corporation KEITH R. WALES, Chief Technical Officer, Pivotal Corporation JEREMY A. JAECH, Vice President, Microsoft Corporation, Visio Division ROBERT J. LOUIS, President, Ventures West Management Ltd. DOUGLAS J. MACKENZIE, General Partner, Kleiner, Perkins Caufield & Byers DONALD A. MATTRICK, President, Electronic Arts Worldwide Studios TRANSFER AGENTS: AMERICAN STOCK TRANSFER & TRUST COMPANY 40 Wall Street, 46th Floor, New York, NY 10005, USA Tel: (800) 937-5449 CIBC MELLON TRUST COMPANY 1066 West Hastings Street, Suite 1600, V6E 3X1, Canada Tel: (604) 688-4330 64

68 CORPORATE OFFICES: HEAD OFFICE 300-224 West Esplanade, North Vancouver, BC,V7M 3M6 Tel: (604) 988-9982 Fax: (604) 988-0035 USA Plaza at Yarrow Bay, 10210 NE Points Drive, Building 3, Suite 400, Kirkland, WA 98033 Tel: (425) 455-4230 Fax: (425) 455-3972 EUROPE Wilson House, Fenian Street Dublin 2, Ireland Tel: (353) 1 631-9325 Fax: (353) 1 662-9334 ASIA PACIFIC Level 11 Park West Building, 6-12-1 Nishi-Shinjuku, Shinjuku, Tokyo 1630023 Tel: 81-3-5325-3018 Fax: 81-3-5325-3131 OTHER OFFICES Atlanta, Georgia, USA Bethesda, Maryland, USA San Bruno, California, USA Waite Park, Minnesota, USA Des Plaines, Illinois, USA Dallas, Texas, USA Denver, Colorado, USA Florida, USA Lansing, Kansas, USA Morristown, New Jersey, USA Kirkland, Washington, USA Toronto, Ontario, Canada St. Peters, Missouri, USA Belfast, Northern Ireland North Andover, Massachusetts, USA Schipol Rijk, Netherlands New York, New York, USA Levallois-Perret, France Portland, Oregon, USA Walldorf-Heidelberg, Germany Irvine, California, USA Hemel Hempstead, Herts, England Mentor, Ohio, USA Sydney, Australia INDEPENDENT AUDITORS: DELOITTE & TOUCHE LLP P.O. Box 49279, Four Bentall Centre, 2100-1055 Dunsmuir, Vancouver, BC, V7X 1P4, Canada Tel: (604) 669-4466 Fax: (604) 669-4186 LEGAL COUNSEL: DIANE S. MALAHER, PIVOTAL CORPORATION 300-224 West Esplanade, North Vancouver, BC, V7M 3M6, Canada Tel: (604) 988-9982 Fax: (604) 983-6658 DORSEY & WHITNEY LLP 1420 Fifth Avenue, Suite 400, Seattle, WA, 98101, USA Tel: (206) 903-8800 Fax: (206) 903-8820 BORDEN LADNER GERVAIS LLP 1200-200 Burrard Street, Vancouver, BC, V7X 1T2, Canada Tel: (604) 687-5744 Fax: (604) 687-1415 EXCHANGES: NASDAQ Trading Symbol: PVTL TSE Trading Symbol: PVT INVESTOR RELATIONS: SOPHIA COUSPOS, PIVOTAL CORPORATION 300-224 West Esplanade, North Vancouver, BC, V7M 3M6, Canada Tel: (604) 988-9982 Fax: (604) 988-0035 Investor-relations@pivotal.com www.pivotal.com 65

69 [PIVOTAL LOGO]

1 Exhibit 21.1 Pivotal Corporation - Subsidiaries <TABLE> <CAPTION> Jurisdiction of incorporation or Name of Subsidiary organization ------------------ ---------------- <S> <C> Pivotal Corporation Washington Pivotal Corporation Limited U.K. Pivotal Corporation France S.A. (formerly Transitif S.A.) France Exactium Ltd. (formerly Arad Systems Ltd.) Israel Exactium Inc. Delaware 590813 British Columbia Ltd. British Columbia 590822 British Columbia Ltd. British Columbia Pivotal Corporation Ireland Ireland Pivotal Technologies Corporation Limited Ireland Pivotal Corporation (N.I.) Limited Northern Ireland Pivotal GmbH Germany Simba Technologies Inc. British Columbia Simba Technologies Inc. Washington State Pivotal Corporation Australia Pty. Ltd. Australia </TABLE>

1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the Registration Statements of Pivotal Corporation on Form S-8 (No. 333-42460, 333-39922, 333-93607) of our report dated July 13, 2000, appearing in the Annual Report on Form 10-K of Pivotal Corporation for the year ended June 30, 2000. /s/ Deloitte & Touche LLP Vancouver, Canada September 28, 2000

<TABLE> <S> <C>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-K FOR THE
YEAR ENDED JUNE 30, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S>                             <C>
<PERIOD-TYPE>                   12-MOS
<FISCAL-YEAR-END>                          JUN-30-2000
<PERIOD-START>                             JUL-01-1999
<PERIOD-END>                               JUN-30-2000
<CASH>                                           4,734
<SECURITIES>                                    30,788
<RECEIVABLES>                                   17,504
<ALLOWANCES>                                     (740)
<INVENTORY>                                          0
<CURRENT-ASSETS>                                54,145
<PP&E>                                          10,973
<DEPRECIATION>                                  (3,742)
<TOTAL-ASSETS>                                 121,945
<CURRENT-LIABILITIES>                           25,848
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                       105,076
<OTHER-SE>                                     (8,979)
<TOTAL-LIABILITY-AND-EQUITY>                   121,945
<SALES>                                         37,384
<TOTAL-REVENUES>                                52,939
<CGS>                                           10,288
<TOTAL-COSTS>                                   52,649
<OTHER-EXPENSES>                                 2,193
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                   0
<INCOME-PRETAX>                                (7,805)
<INCOME-TAX>                                       557
<INCOME-CONTINUING>                            (8,362)
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</TABLE>

1 EXHIBIT 99.1 PIVOTAL CORPORATION NOTICE OF MEETING AND MANAGEMENT INFORMATION AND PROXY CIRCULAR for the Annual General Meeting to be held on Wednesday, October 25, 2000

2 September 1, 2000 Dear Shareholder: It is my pleasure to invite you to attend the Company's 2000 annual general meeting of shareholders. The meeting will be held on Wednesday, October 25, 2000 at 2:30 p.m., Vancouver time, at The Waterfront Centre Hotel, 900 Canada Place Way, Vancouver, British Columbia. If you are unable to attend the meeting in person, please complete, date, sign and return the enclosed form of proxy to ensure that your vote is counted. The Notice of Meeting, Management Information and Proxy Circular, and form of proxy for the annual general meeting, and a reply card for use by shareholders who wish to receive the Company's interim financial statements, are all enclosed. These documents contain important information and I encourage you to read them carefully. Yours truly, (signed) NORMAN B. FRANCIS President and Chief Executive Officer

3 PIVOTAL CORPORATION Suite 300 - 224 West Esplanade North Vancouver, British Columbia V7M 3M6 NOTICE OF MEETING Pivotal Corporation (the "Company") will hold its annual general meeting (the "Meeting") of shareholders at The Waterfront Centre Hotel, 900 Canada Place Way, Vancouver, British Columbia, on Wednesday, October 25, 2000 at 2:30 p.m. (Vancouver time) for the following purposes: (a) to receive the annual report to shareholders of the directors of the Company; (b) to receive and consider the financial statements of the Company for the financial period ended June 30, 2000 and the report of the auditors thereon; (c) to elect directors of the Company for the ensuing year; (d) to approve and confirm, by ordinary resolution, an amendment to the Company's Incentive Stock Option Plan as set out in the accompanying Information Circular. The text of this resolution is set out in Schedule "A" to the Information Circular. (e) to appoint Deloitte & Touche LLP, Chartered Accountants, as auditor of the Company for the ensuing year and to authorize the directors to fix the auditor's remuneration; and (f) to transact such other business as may properly come before the Meeting or any adjournments or postponements thereof. Accompanying this Notice of Meeting are: (1) a Management Information and Proxy Circular; (2) the Annual Report for the Company for the year ended June 30, 2000; (3) the audited consolidated financial statements of the Company prepared in accordance with Canadian generally accepted accounting principles for the year ended June 30, 2000; (4) a form of proxy and notes thereto; and (5) a reply card for use by shareholders who wish to receive the Company's interim financial statements. If you are a registered shareholder of the Company and are unable to attend the Meeting in person, please date and execute the accompanying form of proxy, and deposit it with CIBC Mellon Trust Company at Suite 1600, 1066 West Hastings Street, Vancouver, British Columbia, V6E 3X1, Attention: Mr. Doug Allen before 2:30 p.m. (Vancouver time) on Monday, October 23, 2000, or not less than 48 hours (excluding Saturdays and holidays) before any adjournment of the Meeting. If you are a non-registered shareholder of the Company and receive these materials through your broker or through another intermediary, please complete and return the materials in accordance with the instructions provided to you by your broker or such other intermediary. IF YOU FAIL TO FOLLOW THESE INSTRUCTIONS, YOUR SHARES MAY NOT BE ELIGIBLE TO BE VOTED AT THE MEETING. This Notice of Meeting, the Management Information and Proxy Circular, the Annual Report, the financial statements, the form of proxy and notes thereto for the Meeting, and the reply card are first being sent to shareholders of the Company on or about September 25, 2000. DATED at Vancouver, British Columbia this 1st day of September, 2000. BY ORDER OF THE BOARD OF DIRECTORS (signed) DIANE MALAHER Secretary - i -

4 TABLE OF CONTENTS <TABLE> <CAPTION> LETTER TO SHAREHOLDERS <S> <C> NOTICE OF MEETING ........................................................................ i MANAGEMENT INFORMATION AND PROXY CIRCULAR ................................................ 1 Solicitation of Proxies ............................................................... 1 Appointment and Revocation of Proxies ................................................. 1 Exercise of Discretion ................................................................ 1 Abstention from Voting ................................................................ 2 Securities Entitled to Vote ........................................................... 2 Principal Shareholders ................................................................ 2 Currency .............................................................................. 2 PARTICULARS OF MATTERS TO BE ACTED UPON .................................................. 2 Election of Directors ................................................................. 2 Amendment to Incentive Stock Option Plan .............................................. 5 Appointment of Auditor ................................................................ 6 CORPORATE GOVERNANCE ..................................................................... 6 Mandate of the Board of Directors ..................................................... 6 Composition of the Board of Directors ................................................. 7 Description of Decisions Requiring Prior Approval of the Board of Directors ........... 7 Expectations of Management ............................................................ 7 Shareholder Communication ............................................................. 7 Recruitment of New Directors and Assessment of the Board of Directors' Performance .... 7 Committees of the Board of Directors .................................................. 8 Audit Committee ..................................................................... 8 Compensation Committee .............................................................. 8 Options Committee ................................................................... 8 EXECUTIVE COMPENSATION ................................................................... 9 Summary Compensation Table ............................................................ 9 Stock Options ......................................................................... 9 Employment and Consulting Contracts ................................................... 12 Remuneration of Directors ............................................................. 12 Report on Executive Compensation ...................................................... 12 Performance Graph ..................................................................... 13 INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS ........................ 13 INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS ............................................ 13 INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON .................................. 14 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE ................................................ 14 OTHER BUSINESS ........................................................................... 14 </TABLE> - ii -

5 PIVOTAL CORPORATION MANAGEMENT INFORMATION AND PROXY CIRCULAR This Management Information and Proxy Circular ("Information Circular") is furnished in connection with the solicitation of proxies by the management of Pivotal Corporation ("Pivotal" or the "Company") to be voted at the annual general meeting of the shareholders of the Company to be held on Wednesday, October 25, 2000 (the "Meeting") at the time and place and for the purposes set forth in the accompanying Notice of Meeting. It is anticipated that this Information Circular and the accompanying Notice of Meeting and form of proxy will be first mailed to the shareholders of the Company on or about September 25, 2000. Unless otherwise stated, the information contained in this Information Circular is given as at September 1, 2000. Pursuant to section 111 of the Company Act (British Columbia), advance notice of the Meeting was published in The Vancouver Sun and The Province on August 30, 2000. SOLICITATION OF PROXIES While it is expected that the solicitation for proxies will be conducted primarily by mail, proxies may be solicited personally or by telephone by directors, officers and regular employees of the Company. All costs of solicitation will be borne by the Company. APPOINTMENT AND REVOCATION OF PROXIES The individuals named in the accompanying form of proxy are the President and Chief Executive Officer and the Chief Financial Officer of the Company. A shareholder has the right to appoint a person, who need not be a shareholder, to attend and act for the shareholder and on the shareholder's behalf at the Meeting other than either of the persons designated in the accompanying form of proxy, and may do so either by inserting the name of that other person in the blank space provided in the accompanying form of proxy or by completing and delivering another suitable form of proxy. A proxy will not be valid unless the completed, signed and dated form of proxy is delivered to CIBC Mellon Trust Company, Suite 1600, 1066 West Hastings Street, Vancouver, British Columbia, V6E 3X1, not less than 48 hours (excluding Saturdays, Sundays and holidays) before the time for holding the Meeting or any adjournment thereof at which the proxy is to be used. A shareholder who has given a proxy may revoke it by an instrument in writing duly executed and delivered either to CIBC Mellon Trust Company or to the registered office of the Company at any time up to and including the last business day that precedes the day of the Meeting, or any adjournment thereof, at which the proxy is to be used, or to the Chairman of the Meeting on the day of the Meeting or any adjournment thereof. A revocation of a proxy will not affect a matter on which a vote is taken before the revocation. EXERCISE OF DISCRETION On a poll, the nominees named in the accompanying form of proxy will vote or withhold from voting the shares represented thereby in accordance with the instructions of the shareholder on any ballot that may be called for. The proxy will confer discretionary authority on the nominees named therein with respect to: - 1 -

6 (a) each matter or group of matters identified therein for which a choice is not specified other than the appointment of an auditor and the election of directors; (b) any amendment to or variation of any matter identified therein; and (c) any other matter that properly comes before the Meeting. In respect of a matter described in this Information Circular for which a choice is not specified in the proxy, the nominees named in the accompanying form will vote shares represented by the proxy for the approval of such matter. As of the date of this Information Circular, management of the Company knows of no amendment, variation or other matter that may come before the Meeting, but if any amendment, variation or other matter properly comes before the Meeting each nominee intends to vote thereon in accordance with the nominee's best judgement. ABSTENTION FROM VOTING Shareholders may abstain from voting in respect of a matter described in this Information Circular by completing the box marked "Withhold" on the accompanying form of proxy, or by attending the Meeting in person, and abstaining from voting for or against a particular matter. SECURITIES ENTITLED TO VOTE As of September 1, 2000, the Company had outstanding 22,466,823 fully paid and non-assessable Common Shares without par value, each carrying the right to one vote. Only shareholders of record at the close of business on September 20, 2000 who either attend the Meeting personally or complete, sign and deliver a form of proxy in the manner and subject to the provisions described above will be entitled to vote or to have their shares voted at the Meeting. PRINCIPAL SHAREHOLDERS To the knowledge of the directors and senior officers of the Company, as at September 1, 2000, only Norman B. Francis, Douglas J. Mackenzie and Kleiner, Perkins, Caufield & Byers beneficially owned directly or indirectly, or exercised control or direction over, voting securities carrying 10% or more of the voting rights of the Company. CURRENCY All references to monetary amounts are in Canadian dollars unless otherwise indicated. PARTICULARS OF MATTERS TO BE ACTED UPON ELECTION OF DIRECTORS The directors of the Company are elected at each annual general meeting and hold office until the close of the next annual general meeting or until their successors are duly elected or appointed. Management proposes to nominate each of the following six persons for election as a director of the Company. All the proposed nominees are presently directors of the Company. - 2 -

7 The six nominees who receive the most votes in favour of their respective appointments will be elected to the Board of Directors. Proxies cannot be voted for a greater number of persons than the number of nominees named. IN THE ABSENCE OF INSTRUCTIONS TO THE CONTRARY, THE ENCLOSED FORM OF PROXY WILL BE VOTED FOR THE NOMINEES SET OUT BELOW. Information concerning the six nominees, as furnished by them individually, is set forth below. <TABLE> <CAPTION> NOMINEE'S NAME AND RESIDENCE RESUME ---------------------------- ------ <S> <C> NORMAN B. FRANCIS(1) Norman B. Francis co-founded Pivotal West Vancouver, British Columbia, Canada in 1990 and has served as President, Chief Executive Officer and a director since December 1990. 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 holds a bachelor of science degree in Computer Science from the University of British Columbia, Canada and is a Chartered Accountant. KEITH R. WALES Keith R. Wales co-founded Pivotal West Vancouver, British Columbia, Canada in 1990 and has served as a director since December 1990 and as Chief Technical Officer since May 1999. Mr. Wales also served 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. </TABLE> ---------- (1) Member of the Option Committee. - 3 -

8 <TABLE> <CAPTION> NOMINEE'S NAME AND RESIDENCE RESUME ---------------------------- ------ <S> <C> JEREMY A. JAECH Jeremy A. Jaech has served as a Seattle, Washington, U.S.A. director since July 1996. Mr. Jaech currently serves as Vice President, Microsoft Corporation, Visio Division, a supplier of enterprise-wide business diagramming and technical drawing software for Microsoft Windows. Prior to Microsoft, Jeremy co-founded Visio Corporation, which was later sold to Microsoft, in September 1990. 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 holds a bachelor's degree in Mathematics and a master's degree in Computer Science from the University of Washington. ROBERT J. LOUIS(2)(3) Robert J. Louis has served as a West Vancouver, British Columbia, Canada 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 degree in Science from the University of Victoria, British Columbia, Canada and a Ph.D. in Physics from the University of British Columbia, Canada. DOUGLAS J. MACKENZIE(2)(3) Douglas J. Mackenzie has served as a Palo Alto, California, U.S.A. director since July 1992. Mr. Mackenzie has served as Limited Partner of Kleiner, Perkins, Caufield & Byers, a venture capital firm specializing in high-tech companies, since April 1994. Mr. Mackenzie also serves as a director of Marimba, Inc. and e. Piphany, Inc. Mr. Mackenzie holds a bachelor's degree in Economics and a master's degree in Industrial Engineering from Stanford University, and a master's degree in Business Administration from Harvard University. </TABLE> -------- (2) Member of the Audit Committee. (3) Member of the Compensation Committee. - 4 -

9 NOMINEE'S NAME AND RESIDENCE RESUME ---------------------------- ------ DONALD A. MATTRICK Donald A. Mattrick has served as a Vancouver, British Columbia, Canada director since May 1999. Mr. Mattrick has served as the President of Electronic Arts Worldwide Studios, a manufacturer of gaming software, since September 1997. Mr. Mattrick served as Executive Vice President, North American Studios of Electronic Arts Worldwide Studios from October 1995 to September 1997 and as Executive Vice President and General Manager of Electronic Arts Worldwide Studios from 1991 to October 1995. The following table sets out the number of Common Shares and stock options beneficially owned by each nominee for election to the Board of Directors and the senior officers of the Company, directly or indirectly, or over which each nominee or officer exercised control or direction, as at September 1, 2000. <TABLE> <CAPTION> NAME OF BENEFICIAL OWNER NUMBER OF SHARES(1) NUMBER OF OPTIONS ------------------------ ------------------- ----------------- <S> <C> <C> Norman B. Francis(2) 2,266,000 97,850 President, Chief Executive Officer and Director Keith R. Wales(3) 1,075,800 50,000 Chief Technical Officer and Director Jeremy A. Jaech(4) 55,556 60,000 Director Robert J. Louis(5) 2,173,260 Nil Director Douglas J. Mackenzie(6) 2,418,051 Nil Director Donald A. Mattrick Nil 15,000 Director TOTAL: 7,988,667 222,850 --------- ------- % of total outstanding: 35.6% 1% ========= ======= </TABLE> -------------------- Notes: (1) Information as to the number of Common Shares beneficially owned, directly or indirectly, is based on information furnished by the Registrar and Transfer Agent of the Company and by the nominees or officers. (2) The Common Shares owned by Mr. Francis represent 10.1% of the outstanding voting securities of the Company. (3) The Common Shares owned by Mr. Wales represent 4.8% of the outstanding voting securities of the Company. (4) The Common Shares owned by Mr. Jaech represent .25% of the outstanding voting securities of the Company. (5) The Common Shares owned by Mr. Louis represent 9.7% of the outstanding voting securities of the Company. (6) The Common Shares owned by Mr. Mackenzie represent 10.8% of the outstanding voting securities of the Company. AMENDMENT TO INCENTIVE STOCK OPTION PLAN At the Meeting, approval of the shareholders will be sought to pass an ordinary resolution, being a resolution passed by a majority of shareholders at the Meeting, confirming an amendment to the Incentive Stock Option Plan (the "Plan") of the Company as approved by the directors of the Company. The - 5 -

10 amendment will increase the maximum number of Common Shares reserved for issuance under the Plan by 1,500,000 Common Shares, from 5,076,186 to 6,576,186, in order to ensure sufficient options are available to permit the Company to maintain its policy of granting options to employees to align their interests with those of the Company's shareholders. Copies of the amended Plan may be obtained by any shareholder from the Secretary of the Company and are available for inspection by shareholders of the Company at its corporate head office at Suite 300 - 224 West Esplanade, North Vancouver, British Columbia V7M 3M6, and will be available for review at the Meeting. Implementation of the amendment to the Plan is subject to the approval of regulatory authorities. The remainder of the Plan remains unchanged from the form previously approved by shareholders. The text of the proposed resolution to approve this amendment to the Plan is set out in Schedule A hereto. APPOINTMENT OF AUDITOR Unless otherwise instructed, the proxies received pursuant to this solicitation will be voted for the re-appointment of Deloitte & Touche LLP, Chartered Accountants, of Vancouver, British Columbia, as the auditors of the Company to hold office until the close of the next annual general meeting of the Company or until a successor is appointed. The appointment of Deloitte & Touche LLP as auditor of the Company must be approved by a majority of more than fifty per cent of the votes cast by the holders of Common Shares who vote in person or by proxy at the Meeting. It is proposed that the remuneration to be paid to the auditor be fixed by the Board of Directors. Deloitte & Touche LLP has been the auditor of the Company since July, 1998. Deloitte & Touche LLP has been invited to, and will attend, the Meeting. CORPORATE GOVERNANCE MANDATE OF THE BOARD OF DIRECTORS Pursuant to the British Columbia Company Act, the Board of Directors is required to manage or supervise the management of the business and affairs of the Company. The Board of Directors' principal responsibilities are to supervise and evaluate management, to oversee the conduct of the business, to set policies appropriate for the business and to approve corporate strategies and goals. The mandate and responsibilities of the Board of Directors are to be carried out in a manner consistent with the fundamental objective of protecting and enhancing the value of the Company and providing ongoing benefit to the shareholders. The responsibilities of the Board of Directors include the review and critique of management's strategy and plans on a formal basis at least once each year, and on an ongoing basis as part of the continuing dialogue between management and directors. A fundamental part of the planning and review process includes the identification by management and the directors of areas of risk to the Company and the development of plans to address those risks. The Board of Directors also makes inquiries to satisfy itself that the Company has in place proper management information systems and internal controls. The directors are kept informed of the Company's operations at meetings of the Board of Directors and its committees and through reports and analyses by management. There were ten meetings (in person or by teleconference) of the Board of Directors during the financial year ended June 30, 2000. Each of Messrs. Mattrick, Mackenzie and Roger S. Siboni, a former director of the Company, missed more than one meeting of the Board due to business obligations. The frequency of meetings, as well as the nature of the matters dealt with, will vary from year to year depending on the state of the Company's business and the opportunities or risks which the Company faces from time to time. Within this framework, it is - 6 -

11 anticipated that the Board of Directors will meet four times during the financial year ending June 30, 2001. In addition, informal communications between management and directors occur outside of regularly scheduled board and committee meetings. COMPOSITION OF THE BOARD OF DIRECTORS The current composition of the Board of Directors is in compliance with the guidelines for corporate governance adopted by The Toronto Stock Exchange, which recommend that the Board of Directors be constituted with a majority of individuals who qualify as unrelated directors. An unrelated director is a director who is independent of management and is free from any interest and any other business or other relationship which could, or could reasonably be perceived to, materially interfere with the director's ability to act with a view to the best interests of the corporation, other than interests and relationships arising from shareholding. A related director is a director who is not an unrelated director. The Board of Directors has determined that of its six present directors, four are unrelated and two, Norman B. Francis and Keith R. Wales are related directors as they currently serve as President and Chief Executive Officer and Chief Technical Officer of the Company respectively. The Company does not have a significant shareholder with the ability to exercise a majority of the votes for the election of the Board of Directors. DESCRIPTION OF DECISIONS REQUIRING PRIOR APPROVAL OF THE BOARD OF DIRECTORS In addition to matters which by law or by the Articles of the Company must be approved by the Board of Directors, management is required to seek Board of Director approval for major transactions such as strategic alliances, acquisitions and financings. EXPECTATIONS OF MANAGEMENT Management is responsible for developing and implementing the strategies and tactics of the Company within the context of authorized budgets and corporate policies and procedures. Management provides information to the Board of Directors in a regular and comprehensive fashion. The Board of Directors uses this information along with other information requested from time to time to assist management by providing advice and guidance to identify issues and opportunities for the Company. SHAREHOLDER COMMUNICATION The Company employs a combination of active and passive methods to communicate with its shareholders. Regular communications are conducted with shareholders through press releases, newsletters and annual and quarterly reports. At the Meeting, a full opportunity is afforded shareholders to ask questions concerning the Company's business and, in addition, the Company organizes or makes presentations at many investor conferences each year. The Company's investor relations department also answers numerous queries and makes information about the Company available on the Company's Website at www.pivotal.com. The Board of Directors believes that the Company's communications with shareholders and investors is responsive and effective. RECRUITMENT OF NEW DIRECTORS AND ASSESSMENT OF THE BOARD OF DIRECTORS' PERFORMANCE The Board of Directors and senior officers of the Company are responsible for identifying, evaluating and recommending nominees for the Board of Directors and reviewing incumbent directors for re-election to the Board of Directors. Incumbent and potential new directors are evaluated by the Board of Directors and the senior officers of the Company with the objective of obtaining a balanced mix of board members with the experience and expertise to ensure that the Board of Directors is composed of - 7 -

12 individuals who will best serve the interests of the Company and assist management in reaching the Company's strategic goals. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors has established three standing committees: the Audit Committee, the Compensation Committee and the Options Committee. The Board of Directors has delegated certain responsibilities to each of these Committees and has also instructed each of them to perform certain advisory functions and make recommendations and report to the Board of Directors. Where considered prudent, certain matters falling under the responsibility of these Committees are at times dealt with at a meeting of the entire Board of Directors. AUDIT COMMITTEE The Audit Committee meets with the financial officers of the Company and the independent auditors to review and inquire into matters affecting financial reporting, the system of internal accounting and financial controls and procedures and audit procedures and plans. The Committee also makes recommendations to the Board of Directors regarding the appointment of independent auditors. In addition, the Committee reviews and recommends to the Board of Directors for approval the annual financial statements of the Company and certain other documents required by the regulatory authorities. The Committee is also responsible for approving the policies under which the financial officers of the Company may invest funds in excess of those required for current operations. In the financial year ended June 30, 2000, this Committee met four times. This Committee is composed of Robert J. Louis and Douglas J. Mackenzie, neither of whom is a current or former officer of the Company. Both members of the Committee are unrelated directors. COMPENSATION COMMITTEE The Compensation Committee is responsible for establishing and monitoring the Company's long range plans and programs for attracting, training, developing and motivating employees. The Committee reviews recommendations for the appointment of persons to senior executive positions, considers terms of employment, including succession planning and matters of compensation and recommends awards under the Company's incentive stock option plan and the employee share purchase plan. In the financial year ended June 30, 2000, this Committee met once. The Committee is composed of Jeremy A. Jaech, Robert J. Louis and Douglas J. Mackenzie, none of whom are current or former officers of the Company. All members of the Committee are unrelated directors. OPTIONS COMMITTEE The Option Committee has been given the authority to grant options to employees of Pivotal pursuant to Pivotal's Incentive Stock Option Plan. The Committee is currently composed of Norman B. Francis who is a current officer of the Company and therefore, a related director. The corporate governance policies of The Toronto Stock Exchange recommend that the committees of the Board of Directors be composed of outside directors, the majority of whom are unrelated directors, although some board committees may include one or more inside directors. The Board has considered this issue and supports the continued membership of Mr. Francis on this Committee, however, the Board intends to appoint an additional director to this Committee. - 8 -

13 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE During the Company's financial year ended June 30, 2000, the aggregate cash compensation paid or payable by the Company to its directors and senior officers was $1,786,468. The table below contains a summary of the compensation paid to the Company's President and Chief Executive Officer and the Company's four most highly compensated executive officers (other than the President and Chief Executive Officer) who were serving as executive officers at the end of the Company's most recently completed financial year (collectively, the "Named Executive Officers"), for each of the Company's three most recently completed financial years ended June 30, 2000, 1999 and 1998. SUMMARY COMPENSATION TABLE <TABLE> <CAPTION> Long Term Annual Compensation Compensation ---------------------------------- ------------ Securities Other Name and Principal Position Year Salary Bonus Under Options Compensation --------------------------- ---- -------- -------- ------------- ------------ <S> <C> <C> <C> <C> <C> Norman B. Francis 2000 $175,000 $78,983 25,000 Nil President and Chief Executive 1999 $120,000 Nil Nil Nil Officer 1998 $120,000 Nil 25,850 Nil Keith R. Wales 2000 $150,000 $35,931 25,000 Nil Chief Technical Officer 1999 $120,000 $37,064 Nil Nil 1998 $120,000 $68,392 Nil Nil Vincent D. Mifsud(1) 2000 $175,000 $103,755 20,000 Nil Chief Financial Officer and 1999 $85,192 $32,799 160,000 $14,269 Executive Vice President 1998 Nil Nil Nil Nil Glenn S. Hasen 2000 US$150,000 $106,513 30,000 Nil Executive President, Field 1999 US$125,000 $87,425 90,000 Nil Operations 1998 US$100,000 Nil 136,000 Nil Robert A. Runge 2000 US$160,000 $53,665 20,000 Nil Chief Marketing Officer 1999 US$145,000 $39,651 60,000 Nil 1998 US$125,000 Nil 250,000 Nil </TABLE> ------------------------- Notes: (1) Mr. Mifsud was hired in December of 1998. STOCK OPTIONS Pivotal's Board of Directors and shareholders approved the Company's Incentive Stock Option Plan (the "Plan") in July, 1992. Initially, 1,096,800 Common Shares were reserved for issuance under the Plan. This reserve has been increased several times. Initially, the eligible persons under the Plan were Pivotal's directors, officers and employees and the directors, officers and employees of Pivotal's subsidiaries. The Plan was subsequently amended to extend eligibility to include Pivotal's independent contractors and consultants, independent contractors and consultants of Pivotal's subsidiaries and any partnership, joint venture, or other entity in which Pivotal holds a 50% or greater voting interest, and directors of any such partnership, joint venture, or other entity. The exercise price for options granted - 9 -

14 under the Plan is determined by the Board of Directors, and must not be less than the fair market value of the Common Shares on the date of grant as determined by the Board of Directors, less any discount permitted by law and by regulatory bodies having jurisdiction over Pivotal. In the case of U.S. residents and citizens, the Plan provides for the grant of both incentive stock options that may qualify under section 422 of the U.S. Internal Revenue Code and non-qualified stock options on terms determined by the Board of Directors, subject to statutory and other limitations in the Plan, including limitations on the exercise price, which for incentive options to comply with section 422 of the Code, may not be less than 100% of the fair market value of the Common Shares on the date of grant. Incentive options may be granted to Pivotal's employees and those of Pivotal's subsidiaries, while non-qualified options may be issued to non-employee directors, and independent contractors, as well as to employees. The Plan is administered by the Board of Directors, which determines the individuals who receive options, the time period during which the options may be partially or fully exercised, the number of Common Shares issuable upon the exercise of each option and the option exercise price. No option may be transferred by an optionee other than by the laws of succession, descent and distribution, and, during the lifetime of an optionee, the option is exercisable only by the optionee. If an optionee's employment or engagement is terminated other than by death or disability, no further instalments of options that have not vested as of the date of termination will become exercisable, and the optionee will be entitled to exercise vested options for a period of 30 days following termination. If an optionee is terminated for cause, any option or unexpired portion granted to the optionee terminates immediately. Upon termination of employment or engagement of an optionee by reason of death or permanent and total disability, the optionee's options remain exercisable for 12 months to the extent that the options had vested and were exercisable on the date of termination. Each option vests and becomes exercisable at such times determined by the Board of Directors at the time of grant. Holders of options granted before June 1999 under the Plan cannot exercise these options more than five years from the date of grant, or an earlier date as may be fixed by the Board of Directors. In June 1999, Pivotal's shareholders approved amendments to the Plan which became effective on August 5, 1999. These amendments, among other things: (a) permitted the grant of options with a duration of up to ten years; (b) extended the expiry date for the Plan from July 31, 2002 to July 31, 2006; (c) deleted the requirements for shareholders approval for future amendments to the Plan, other than as required by law; (d) allowed administration of the Plan by a committee of the Board of Directors; and (e) permitted the Plan administrator to authorize two of Pivotal's officers acting together to make option grants to eligible individuals other than executive officers or directors within limits set by the Plan administrator. The amendments also increased the number of Common Shares reserved for issuance pursuant to the Plan by: (a) 1,076,186 Common Shares (which, when combined with earlier increases, resulted in a maximum of 5,076,186 Common Shares being issuable under the Plan); plus (b) an automatic increase on the first day of each fiscal year beginning in 2001, equal to the lesser of 800,000 Common Shares or 4% of the average Common Shares outstanding as used to calculate fully diluted earnings per share as reported in Pivotal's annual report to shareholders for the preceding year. On September 21, 2000, the Board of Directors of the Company approved a further increase in the maximum number of Common Shares reserved for issuance under the Plan by 1,500,000 Common Shares, from 5,076,186 to 6,576,186, in order to ensure sufficient options are available to permit the Company to maintain its policy of granting options to employees to align their interests with those of the Company's shareholders prior to the automatic increase which, as discussed above, will not occur until July 1, 2001. This amendment to the Plan is subject to the approval of regulatory authorities. The usual period over which options become vested under the Plan is four years, with vesting as to 25% on the first anniversary of the date of grant and 12.5% at the end of each six month period thereafter, but - 10 -

15 the Plan administrator may provide for different vesting schedules in particular cases. The exercise price payable for Common Shares purchased under the Plan must be paid in cash or by certified cheque, or other consideration with equivalent value at the time of purchase as the Plan administrator may determine. Any unexercised options that expire or that terminate upon an employee ceasing to be employed by Pivotal become available again for issuance under the Plan. The Plan as amended will terminate on July 31, 2006. A summary of stock options granted to the Named Executive Officers under the Plan during the financial year ended June 30, 2000 is set out in the table below. No stock appreciation rights ("SARs") are outstanding, and it is currently intended that none be issued. As at September 1, 2000, options to purchase 2,271,008 Common Shares were outstanding. <TABLE> <CAPTION> OPTIONS GRANTED DURING 2000 FINANCIAL YEAR(1) Market Value of Securities Underlying % of Total Exercise Price Options on the Securities Options Granted (per Common Date of Grant Expiration Date Name Under Options in the Year Share) (per Common Share) Date of Grant ----------------- ------------- --------------- -------------- ------------------ ------------ ------------- <S> <C> <C> <C> <C> <C> <C> Norman B. Francis 25,000 1.75% US$51.25 US$51.25 Jan.19, 2010 Jan.20, 2000 Keith R. Wales 25,000 1.75% US$51.25 US$51.25 Jan.19, 2010 Jan.20, 2000 Vincent D. Mifsud 20,000 1.4% US$51.25 US$51.25 Jan.19, 2010 Jan.20, 2000 Glenn S. Hasen 30,000 2.1% US$21.25 US$21.25 Oct.13, 2009 Oct.14, 1999 Robert A. Runge 20,000 1.4% US$21.25 US$21.25 Oct.13, 2009 Oct.14, 1999 </TABLE> ---------- (1) All stock options are for Common Shares of the Company. The following table summarizes all stock options exercised by Named Executive Officers during the financial year ended June 30, 2000. <TABLE> <CAPTION> AGGREGATED OPTIONS EXERCISED DURING 2000 FINANCIAL YEAR AND FINANCIAL YEAR-END OPTION VALUES(1) Value of Unexercised Securities Unexercised Options at in-the-Money Options at Acquired on Aggregate Value June 30, 2000 June 30, 2000 Name Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable ----------------- ----------- --------------- ------------------------- ------------------------- <S> <C> <C> <C> <C> Norman B. Francis Nil Nil 72,850 $1,105,160 Keith R. Wales Nil Nil 25,000 Nil Vincent D. Mifsud 40,000 $2,326,950 140,000 $1,808,000 Glenn S. Hasen 57,750 $1,455,100 86,250 $1,103,300 Robert A. Runge 25,000 $372,132 57,500 $735,533 </TABLE> ---------- (1) Based on the closing price of the Common Shares on the NASDAQ National Market on the last trading day of the financial year, being US$23.50. - 11 -

16 EMPLOYMENT AND CONSULTING CONTRACTS The Company has entered into employment agreements with each of Glenn S. Hasen (effective from October 21, 1996), Robert Runge (effective from September 8, 1997) and Vincent D. Mifsud (effective from November 16, 1998). Each agreement requires the execution of confidentiality agreements containing customary terms, including non-solicitation provisions. The agreements with Messrs. Runge and Mifsud also provide that in the event of dismissal without just cause or where all or substantially all of the shares or assets of Pivotal are acquired, the standard vesting schedule under the Company's Incentive Stock Option Plan will be accelerated. REMUNERATION OF DIRECTORS The Company does not pay cash compensation to directors for serving on the Board of Directors, but it does reimburse directors for out-of-pocket expenses for attending board and committee meetings. The Company does not provide additional compensation for committee participation or special assignments of the Board of Directors. Of the Directors, only Messrs. Francis and Wales received stock options for their participation on the Board of Directors for the year ended June 30, 2000. Both Messrs. Francis and Wales received options to purchase 25,000 Common Shares at a price of US$51.25 per share. REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors reviews and recommends to the Board of Directors the compensation and benefits of all Pivotal's executive officers and establishes and reviews general policies relating to compensation and benefits of Pivotal's employees. The Company's compensation policies and programs are designed to be competitive with similar customer relationship management companies in the e-commerce environment and to recognize and reward executive performance consistent with the success of the Company's business. These policies and programs are intended to attract and retain capable and experienced people. In addition to industry comparables, the Committee considers a variety of factors when determining both compensation policies and programs and individual compensation levels. These factors include the long range interests of the Company and its shareholders, overall financial and operating performance of the Company and the Committee's assessment of each executive's individual performance and contribution towards meeting goals and objectives. The total compensation plan for executive officers is comprised of four components: base salary, cash bonuses, stock options and an employee stock purchase plan. In establishing base salaries, the Committee reviews competitive market data for each of the executive positions and determines placement at an appropriate level in a range. Compensation levels are typically negotiated with the candidate for the position prior to his or her final selection as an executive officer. The compensation range for executives normally moves annually to reflect external factors such as inflation. Cash bonuses are used to reward officers for meeting specific performance targets as mutually agreed upon on an annual basis. The third component of the compensation plan is the Incentive Stock Option Plan, which is intended to emphasize management's commitment to growth of the Company and the enhancement of shareholder value. The fourth component of the compensation plan is the employee stock purchase plan, which is used to encourage participants to remain in the employ of the Company and to have a strong commitment to, and a personal interest in, the success of the Company. - 12 -

17 PERFORMANCE GRAPH The following graph compares the monthly percentage change in the Company's cumulative total shareholder return on its Common Shares with the cumulative total return of the NASDAQ National Market(1), for the period from August 5, 1999 to June 30, 2000. [PERFORMANCE GRAPH] Note: The Company completed an initial public offering and its securities were listed on the NASDAQ National Market on August 5, 1999. The Company's securities were listed on the Toronto Stock Exchange on August 17, 2000. INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS None of the directors, executive officers or senior officers of the Company or any proposed nominees for directors of the Company, or any associates of any of them, is or has been indebted to the Company or any subsidiary thereof. INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS To the knowledge of management of the Company, no insider or nominee for election as a director of the Company had any interest in any material transaction involving the Company during the year ended June 30, 2000 or has any interest in any actual or proposed material transaction involving the Company in the current year. - 13 -

18 INTEREST OF CERTAIN PERSONS IN MATTERS TO BE ACTED UPON None of the directors or senior officers of the Company, nor any person who has held such a position since the beginning of the last completed financial year end of the Company, nor any proposed nominee for election as a director of the Company, nor any associate or affiliate of the foregoing persons, has any substantial or material interest, direct or indirect, by way of beneficial ownership of securities or otherwise, in any matter to be acted on at the Meeting. BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The Company is a "foreign private issuer" under the Securities Exchange Act of 1934 (the "Act") and as such its insiders are not required to file reports under section 16(a) of the Act. OTHER BUSINESS At this time management knows of no other business proposed for the Meeting. DATED at Vancouver, British Columbia this 1st day of September, 2000. BY ORDER OF THE BOARD OF DIRECTORS (signed) Diane Malaher Secretary - 14 -

19 SCHEDULE "A" PROPOSED TEXT OF RESOLUTION REGARDING AMENDMENT TO INCENTIVE STOCK OPTION PLAN BE IT RESOLVED that an amendment to the Company's Incentive Stock Option Plan (the "Plan") pursuant to which the maximum number of Common Shares reserved for issuance under the Plan is increased by 1,500,000 Common Shares, from 5,076,186 Common Shares to 6,576,186 Common Shares, all as more particularly described in the Information Circular dated as of September 1, 2000, is hereby approved.

20 PIVOTAL CORPORATION Suite 300 - 224 West Esplanade North Vancouver, BC V7M 3M6 PROXY FOR THE 2000 ANNUAL GENERAL MEETING OCTOBER 25, 2000 THIS PROXY IS SOLICITED BY MANAGEMENT OF THE COMPANY The undersigned shareholder of Pivotal Corporation (the "Company") hereby appoints Norman B. Francis, or failing him, Vincent D. Mifsud, or failing either of them ___________________________ as the proxyholder for and on behalf of the undersigned to attend, act and vote for and on behalf of the undersigned at the annual general meeting (the "Meeting") of the shareholders of the Company to be held at The Waterfront Centre Hotel, 900 Canada Place Way, Vancouver, British Columbia, on Wednesday, October 25, 2000 at 2:30 p.m. and at any adjournment thereof, to the same extent and with the same powers as if the undersigned were present at the Meeting or any adjournment thereof, and, without limiting the foregoing, the persons named are specifically directed to vote as indicated below. For further information regarding the Meeting and the matters that will be acted upon at the Meeting, reference is specifically made to the accompanying Notice of Annual Meeting, and Management Information and Proxy Circular, both dated September 1, 2000. The instructions to this proxy form part of this proxy. The undersigned directs the proxyholder appointed by this proxy to vote as follows: 1. To elect the following persons as directors of the Company until the next annual general meeting: Norman B. Francis..........FOR [ ] WITHHOLD [ ] Keith R. Wales.............FOR [ ] WITHHOLD [ ] Jeremy A. Jaech............FOR [ ] WITHHOLD [ ] Robert J. Louis............FOR [ ] WITHHOLD [ ] Douglas J. MacKenzie.......FOR [ ] WITHHOLD [ ] Donald A. Mattrick.........FOR [ ] WITHHOLD [ ] 2. To approve and confirm an amendment to the Company's Incentive Stock Option Plan, increasing the number of Common Shares reserved for issuance under the Plan as described in the accompanying Information Circular. FOR [ ] AGAINST [ ] 3. To appoint Deloitte & Touche LLP, Chartered Accountants, as auditor of the Company until the next annual general meeting at a remuneration to be fixed by the directors of the Company. FOR [ ] WITHHOLD [ ] EXECUTED on the _____ day of __________________, 2000. ---------------------------------------------- ----------------------------- Signature of Shareholder (or Authorized Number of Common Shares Held Attorney or Signatory on behalf of Shareholder) -------------------------------------------------------------------------------- Name of Shareholder (Please Print Clearly) -------------------------------------------------------------------------------- Address -------------------------------------------------------------------------------- City/Province INSTRUCTIONS: 1. The common shares represented by this proxy will, on any ballot, be voted as you may have specified by marking an "X" in the spaces provided for that purpose. IF NO CHOICE IS SPECIFIED AND EITHER OF NORMAN B. FRANCIS OR VINCENT D. MIFSUD IS APPOINTED AS PROXYHOLDER, THE COMMON SHARES WILL BE VOTED AS IF YOU HAD SPECIFIED AN AFFIRMATIVE VOTE. 2. YOU MAY APPOINT AS PROXYHOLDER SOMEONE OTHER THAN THE PERSONS NAMED IN THIS PROXY BY STRIKING OUT THEIR NAMES AND INSERTING IN THE BLANK SPACE PROVIDED THE NAME OF THE PERSON YOU WISH TO ATTEND AND ACT AS PROXYHOLDER, AND THAT PERSON NEED NOT BE A SHAREHOLDER OF THE COMPANY. IF THE INSTRUCTIONS ON THIS PROXY ARE CERTAIN, THE COMMON SHARES REPRESENTED BY THE PROXY WILL BE VOTED ON ANY POLL IN ACCORDANCE WITH SUCH INSTRUCTIONS, AND WHERE YOU SPECIFY A CHOICE WITH RESPECT TO ANY MATTER TO BE ACTED ON, THE COMMON SHARES WILL BE VOTED ON ANY POLL IN ACCORDANCE WITH THE SPECIFICATIONS SO MADE. 3. THIS PROXY ALSO CONFERS A DISCRETIONARY AUTHORITY TO VOTE THE COMMON SHARES WITH RESPECT TO: (a) AMENDMENTS TO, OR VARIATIONS OF, MATTERS IDENTIFIED IN THE NOTICE OF ANNUAL MEETING; AND (b) OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING, BUT ONLY IF MANAGEMENT HAS NOT BEEN MADE AWARE, A REASONABLE TIME PRIOR TO THIS SOLICITATION, THAT THE AMENDMENTS, VARIATIONS OR OTHER MATTERS ARE TO BE PRESENTED FOR ACTION AT THE MEETING. No matters other than those stated in the attached Notice of Annual Meeting are, at present, known to be considered at the Meeting but, if such matters should arise, proxies will be voted in accordance with the best judgment of the proxyholder. 4. In order to be valid this proxy must be signed by the shareholder or by his or her attorney duly authorized in writing or, in the case of a corporation, executed under its corporate seal or by an officer or officers or attorney for the corporation duly authorized. If this proxy is executed by an attorney for an individual shareholder or joint shareholder or by an officer or officers or attorney of a corporate shareholder not under its corporate seal, the instrument so empowering the officer or officers or the attorney, as the case may be, or a notarial copy thereof, should accompany the proxy. The signature and name must conform to the name of the shareholder as registered. Executors, administrators and trustees signing on behalf of the registered shareholder should so indicate. If common shares are jointly held, either of the registered owners may sign the proxy. If this proxy is not dated in the blank space provided, it will be deemed to bear the date on which it was mailed by management of the Company. 5. This proxy may not be used at the Meeting unless it is deposited at the office of CIBC Mellon Trust Company at Suite 1600, 1066 West Hastings Street, Vancouver, British Columbia, V6E 3X1, Attention: Mr. Doug Allen before 2:30 p.m. (Vancouver time) on Monday, October 23, 2000, or not less than 48 hours (excluding Saturdays and holidays) before any adjournment of the Meeting. The Chairman of the Meeting has the discretion to accept proxies received subsequently.