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
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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
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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
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(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]
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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>
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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.
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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.
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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,
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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.
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- 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:
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<TABLE>
<CAPTION>
FUNCTIONAL GROUPS PROCESSES
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<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.
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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:
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<TABLE>
<CAPTION>
SPONSOR DATE AWARD
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<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.
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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
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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
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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.
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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.
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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.
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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.
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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;
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- 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.
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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.
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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
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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-
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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
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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-
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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-
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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.
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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.
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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
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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>
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<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.
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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.
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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.
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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>
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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
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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
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PIVOTAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Expressed in United States
dollars; all amounts in thousands except amounts per share)
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
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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
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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
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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
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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
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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-
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<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-
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<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.
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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-
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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.
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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
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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
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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.
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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 -
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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
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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;
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(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:
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(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;
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(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
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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
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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
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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.
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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.
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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
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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
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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
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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;
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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
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(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
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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;
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(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:
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(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
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(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
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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
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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;
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(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
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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.
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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.
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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).
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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.
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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.
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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.
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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
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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
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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.
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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.
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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:
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(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.
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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.
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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).
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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
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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.
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(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).
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(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;
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(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.
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(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.
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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
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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
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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
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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
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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
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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
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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.
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(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
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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
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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.
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(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.
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(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
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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.
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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.
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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
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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
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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;
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(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;
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(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
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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.
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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
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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
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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.
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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.
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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.
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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
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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)
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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.
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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>
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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
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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
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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)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,362)
<EPS-BASIC> (0.45)
<EPS-DILUTED> (0.45)
</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.