<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 4, 1998
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PCORDER.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 5734 74-2720849
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
----------------
5000 PLAZA ON THE LAKE
AUSTIN, TX 78746
(512) 684-1100
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
----------------
JAMES J. LUTTENBACHER
CHIEF FINANCIAL OFFICER
5000 PLAZA ON THE LAKE
AUSTIN, TX 78746
(512) 684-1100
(NAME, ADDRESS, AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
----------------
COPIES TO:
WILLIAM D. SHERMAN DONALD M. KELLER, JR.
DAVID C. WILSON GLEN R. VAN LIGTEN
JUSTIN L. BASTIAN MITCHELL S. ZUKLIE
ROCHELLE A. KRAUSE VIVIAN P. MORRIS
MORRISON & FOERSTER LLP VENTURE LAW GROUP
755 PAGE MILL ROAD A PROFESSIONAL CORPORATION
PALO ALTO, CA 94304 2800 SAND HILL ROAD
MENLO PARK, CA 94025
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value................ $35,000,000 $10,325
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED SEPTEMBER 4, 1998.
SHARES
[LOGO]
PCORDER.COM, INC.
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
-----------
All of the shares of Common Stock offered hereby are being sold by
pcOrder.com, Inc. ("pcOrder" or the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price per share will be between $
and $ . For factors to be considered in determining the initial public
offering price, see "Underwriting".
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN CONSIDERATION RELEVANT TO
AN INVESTMENT IN THE COMMON STOCK.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "PCOR".
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
<TABLE>
<CAPTION>
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE DISCOUNT(1) COMPANY(2)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total(3)................................ $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(2) Before deducting estimated expenses of $ payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments, if
any. If such option is exercised in full, the total initial public offering
price, underwriting discount and proceeds to company will be $ , $ and
$ , respectively. See "Underwriting".
-----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about October , 1998, against payment therefor in immediately available
funds.
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
SG COWEN
-----------
The date of this Prospectus is , 1998.
<PAGE>
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THIS
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and the Financial Statements and
Notes thereto appearing elsewhere in this Prospectus, including information
under "Risk Factors". Except as otherwise noted, all information in this
Prospectus, including share and per share information, assumes no exercise of
the Underwriters' over-allotment option. See "Description of Capital Stock" and
"Underwriting". As used herein, "Trilogy" refers to Trilogy Software, Inc. and
its predecessor entities, including Trilogy Development Group, Inc.
THE COMPANY
pcOrder is a leading provider of Internet-based electronic commerce solutions
that enable the computer industry's suppliers, resellers and end-users to buy
and sell computer products online. The Company's solutions are designed to
increase the efficiency and effectiveness of the sales, marketing and
distribution of computer products and to enable members of the industry to take
advantage of the increasing adoption of e-commerce. Forrester Research
estimates that the business-to-business e-commerce market will grow from $8
billion in 1997 to $327 billion by 2002. In addition, Forrester also believes
that computer products is the largest and fastest growing segment, by revenue,
in business-to-business e-commerce.
The Company's comprehensive offering consists of software applications and
content databases which enable industry participants to buy and sell computer
products online by increasing the automation product search, comparison,
configuration, pricing, financing, ordering and reseller selection. The Company
believes it is uniquely positioned to deliver these solutions through its: (i)
ability to deliver a broad set of advanced front-office and e-commerce software
applications, including configuration and pricing; (ii) position as a leading
content provider of computer product and compatibility information; and (iii)
experience in delivering industry-specific functionality and integrations into
business systems of computer industry participants.
The Company's solutions have been adopted by market leaders including Bay
Networks, Compaq, CompuCom, Computer City, CMP Publications, GE Capital, IBM,
Ingram Micro, Kingston, MCI Systemhouse, MicroAge Integration Company, PC
Wholesale, Pinacor and Tech Data. In the 12 months ended June 30, 1998, over $3
billion of quotes for computer products had been generated using the Company's
solutions, representing use by more than 3,500 sales representatives from over
500 resellers. The Company's revenues have grown from $3.7 million in 1995 to
$10.6 million in 1997, and were $9.6 million in the first six months of 1998.
The Internet and Internet-related technologies are revolutionizing the way
businesses and consumers communicate, share information and conduct business.
Businesses are increasingly replacing paper-based transactions and
communications with e-commere solutions in an effort to reduce costs, decrease
inventories and shorten time-to-market. The Company believes that the computer
industry is particularly well suited to the use of Internet-enabled e-commerce
solutions due to the large size and fragmented nature of the industry, its high
costs of sales and distribution and the industry's propensity to embrace
technology for automating processes. In addition, rapid technological change
has resulted in the continuing decline of component prices and shorter life
cycles of computer products. Such pressures have heightened the importance for
industry participants to employ build-to-order and configure-to-order models in
order to reduce inventories, to improve the ability to gauge and meet changing
customer demand and to shorten time-to-market by delaying the acquisition of
component parts until the time an order is placed. The Company believes that a
key capability required to address these needs is real-time access to
information providing seamless configuration and pricing at the point of sale.
3
<PAGE>
The Company believes there is a significant need for an independent,
industry-wide solution to enable the buying and selling of computer products
online. The Company leverages Internet technologies to provide comprehensive e-
commerce solutions designed to increase sales and marketing productivity, meet
end-user demand for online ordering, reduce costs and shorten order fulfillment
cycles for industry participants. The Company's solutions include software
applications that are designed to increase the automation of product search,
comparison, configuration, pricing, financing and ordering, combined with what
the Company believes is the industry's largest content database consisting of
detailed product, categorization, compatibility, pricing and availability
information on more than 600,000 active products from over 1,000 manufacturers.
The Company is a party to a technology license agreement with its parent
company, Trilogy, which provides pcOrder the ability to leverage Trilogy's
front-office and e-commerce software applications, including one of the
industry's leading configuration and pricing engines. The Company has extended
these applications to support the specific configuration and pricing rules of
the computer industry in order to help industry sales representatives and end-
users quickly and accurately build custom configured systems across multiple
vendors.
In addition to its development of software applications and content
databases, the Company has completed integrations to the systems of leading
industry suppliers for such functions as order placement, pricing, inventory
queries and order status queries, financing and credit approval. These
integrations can be leveraged by pcOrder customers that wish to establish or
enhance electronic links with their business partners. Furthermore, the Company
provides software integration, customization, training and Web hosting services
designed to ensure the successful deployment of its solutions.
The Company believes that its position as an independent third-party,
combined with its industry focus and experience, has enabled it to build
product functionality, content and supplier integrations that address the
diverse requirements of manufacturers, distributors, resellers, retailers,
other industry participants and end-users, including corporate buyers and
consumers. Accordingly, the Company believes it is able to offer more cost-
effective and rapid time-to-market solutions for e-commerce than the
proprietary development efforts of industry participants. To the extent the
Company continues to develop and enhance its software applications, content
databases and supplier integrations, pcOrder believes that the incentive will
increase for companies to outsource these e-commerce services to the Company.
STRATEGY
The Company's objective is to be the leading e-commerce technology and
content provider to the computer industry. The key elements of the Company's
strategy are as follows:
. Leverage internet technology to provide communication capability and
support complex transactions across a range of computer industry
participants;
. Broaden adoption of the Company's e-commerce solutions through
relationships with computer industry market leaders;
. Extend the Company's position as an industry leading source of product
information source;
. Leverage the Company's position as an independent third-party solutions
provider to achieve broad market adoption; and
. Expand software applications functionality to increase automation of the
sales, marketing, and channel management functions of the industry.
4
<PAGE>
RELATIONSHIP WITH TRILOGY
The Company was established as a separate business unit within Trilogy, its
parent corporation, on July 1, 1993, and was incorporated under the laws of
Delaware on July 18, 1994. Trilogy is a leading provider of sales, marketing
and business-to-business e-commerce applications. The Company has a non-
exclusive, worldwide, royalty-bearing license to certain of Trilogy's front
office automation software. The Company and Trilogy have entered into a
License, Services and Technology Agreement, a Management Services Agreement and
a Tax Allocation Agreement which define the on-going relationship between the
two companies. See "Relationship with Trilogy".
Following this offering, Trilogy will own approximately % of the Common
Stock of the Company. Trilogy has informed the Company that it does not intend
to sell any such shares in the near future. However, other than an agreement
not to sell any of its shares for 180 days after the date of this Prospectus
without the prior consent of the representatives of the Underwriters, Trilogy
is not contractually restricted from selling such shares.
The Company's principal executive offices are located at 5000 Plaza on the
Lake, Austin, Texas 78746. Its telephone number at that location is (512) 684-
1100.
pcOrder(R), pcOrder.com(R), pcOrder Labs(TM), CommerceStation(TM), VIPER(TM),
Channel Assembly Module(TM), Web Storefront(TM), Sales Desktop(TM), Customer
Desktop(TM), TechBuyer(TM), TechBuyer Customer Desktop(TM) and "Moving the
Computer Industry to the Web"(TM) are registered and unregistered trademarks,
service marks and trade names of the Company. This Prospectus also contains
trademarks, service marks and trade names other than those identified in this
paragraph, all of which are the property of their respective holders.
Information contained in the Company's Web site does not constitute a part of
this Prospectus.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.. shares
Common Stock to be outstanding after
this offering....................... shares(1)
Use of proceeds...................... For general corporate purposes, including
capital expenditures and working capital.
See "Use of Proceeds".
Proposed Nasdaq National Market
symbol.............................. "PCOR"
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
JULY 1, 1993 ENDED
(INCEPTION) THROUGH YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------------------ --------------
1993 1994 1995 1996 1997 1997 1998
------------------- ------ ------ ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software applications and
content.................... $ -- $ 450 $3,388 $5,182 $ 8,869 $3,655 $7,113
Service..................... -- 65 335 700 1,720 859 2,470
------ ------ ------ ------ ------- ------ ------
Total revenues............ -- 515 3,723 5,882 10,589 4,514 9,583
------ ------ ------ ------ ------- ------ ------
Cost of revenues:
Software applications and
content.................... 50 485 1,579 1,749 2,588 989 2,130
Service..................... -- 53 192 185 988 361 1,054
------ ------ ------ ------ ------- ------ ------
Total cost of revenues.... 50 538 1,771 1,934 3,576 1,350 3,184
------ ------ ------ ------ ------- ------ ------
Gross profit (loss).......... (50) (23) 1,952 3,948 7,013 3,164 6,399
Operating expenses:
Research and development.... 185 106 660 1,168 1,129 504 1,785
Selling and marketing....... -- 72 577 2,555 4,793 2,171 4,116
General and administrative.. -- -- 116 726 1,792 565 1,296
Amortization of deferred
stock compensation......... -- -- -- -- -- -- 227
------ ------ ------ ------ ------- ------ ------
Total operating expenses.. 185 178 1,353 4,449 7,714 3,240 7,424
------ ------ ------ ------ ------- ------ ------
Operating income (loss)...... (235) (201) 599 (501) (701) (76) (1,025)
Interest income.............. -- -- -- -- -- -- 45
------ ------ ------ ------ ------- ------ ------
Income (loss) before income
taxes....................... (235) (201) 599 (501) (701) (76) (980)
Income tax provision
(benefit)................... (80) (68) 207 (191) 427 47 --
------ ------ ------ ------ ------- ------ ------
Net income (loss)............ $ (155) $ (133) $ 392 $ (310) $(1,128) $ (123) $ (980)
====== ====== ====== ====== ======= ====== ======
Basic and diluted net income
(loss) per share(2)......... $(0.12) $(0.10) $ 0.03 $(0.02) $ (0.09) $(0.01) $(0.08)
====== ====== ====== ====== ======= ====== ======
Weighted average shares
outstanding(3).............. 1,280 1,280 12,800 12,800 12,800 12,800 12,803
====== ====== ====== ====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 6,583 $
Working capital (deficit)(5)............................ (3,344)
Total assets............................................ 15,507
Stockholders' equity (deficit).......................... (1,548)
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1998. Excludes (i)
2,557,111 shares of Common Stock issuable upon the exercise of outstanding
stock options under the Company's 1996 Stock Option Plan (the "1996 Option
Plan") at a weighted average exercise price of $3.00 per share, (ii) an
additional 375,964 shares of Common Stock reserved for future grant under
the 1996 Option Plan and (iii) 320,000 shares of Common Stock issuable upon
the exercise of a certain other option. See "Management--1996 Stock Option
Plan", "--Agreement Regarding Grant of Options" and Note 8 of Notes to
Financial Statements.
(2) Computed on the basis described in Note 2 of Notes to Financial Statements.
(3) For the period July 1, 1993 (inception) through July 17, 1994, the Company
operated as a business unit of Trilogy and was incorporated on July 18,
1994. Accordingly, no Common Stock of the Company was outstanding prior to
the date of incorporation. For purposes of computing net income (loss) per
share, the number of shares of Common Stock issued at the date of
incorporation, restated for effects of subsequent stock splits, has been
reflected as if outstanding from date of inception on July 1, 1993.
(4) Adjusted to give effect to the receipt by the Company of the net proceeds
from the sale of the shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $ per share. See
"Use of Proceeds" and "Capitalization".
(5) Working capital (deficit) at June 30, 1998 includes the effect of deferred
revenue of $12,799,000.
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
purchasers of the Common Stock offered hereby should carefully consider the
following factors in evaluating the Company and its business. This Prospectus
contains certain forward-looking statements, within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements involve risks and
uncertainties, and actual results could differ materially from the results
discussed in the forward-looking statements as a result of certain of the risk
factors set forth below and for the reasons described elsewhere in this
Prospectus. All forward-looking statements and reasons why results may differ
included in this Prospectus are made as of the date hereof, and the Company
assumes no obligation to update any such forward-looking statement or reasons
why actual results might differ.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES AND ANTICIPATED CONTINUING
OPERATING LOSSES
The Company was established as a separate business unit within Trilogy on
July 1, 1993, was incorporated on July 18, 1994 and began to recognize revenue
in April 1994. A majority of the Company's significant customers entered into
their agreements with the Company only since the third quarter of 1997.
Accordingly, the Company has only a limited operating history upon which an
evaluation of the Company and its prospects can be based and is subject to all
of the risks inherent in the establishment of a new business enterprise. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such
as the markets addressed by the Company. To address these risks, the Company
must, among other things, manage its growth, significantly expand its sales
and marketing organization, successfully develop new products and product
enhancements, achieve market acceptance of its products and services and
respond to competitive developments. There can be no assurance that the
Company will be successful in addressing these risks, that the Company's past
revenue growth will continue in the future or that the Company will achieve
profitability in the future or, if achieved, that the Company will maintain
profitability on a quarterly or annual basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Except for a small operating profit in 1995, the Company has incurred annual
losses from operations since its inception on July 1, 1993, and the Company
expects to continue to incur losses from operations on both a quarterly and an
annual basis for the foreseeable future. At June 30, 1998, the Company had an
accumulated deficit of $2.3 million. The Company believes that its future
profitability and success, if any, will depend in large part on, among other
things, its ability to maintain and expand relationships with computer product
manufacturers, distributors, resellers, retailers, other industry participants
and end-users, including corporate buyers and consumers, and its ability to
successfully enter into new relationships with such participants. To date, the
Company has achieved only limited penetration of its current customers. A key
element of the Company's strategy is to increase its penetration of existing
customer accounts through the sale of its products that offer greater
functionality and have higher revenue potential. In order to implement this
strategy, the Company intends to significantly expand its sales and marketing
organization, which will require substantial financial, personnel and
management expenditures. In the event that these or other initiatives
undertaken by the Company do not result in significantly increased revenues,
the Company's business, financial condition and results of operations would be
materially and adversely affected. The Company's business is still in an
emerging stage, and revenue and income potential from the Company's business
is unproven, making an evaluation of the Company and its prospects difficult.
There can be no assurance that the Company's revenues will increase or even
continue at their current levels or that the Company will achieve or maintain
profitability or generate cash from operations in future periods. See "--
Significant Fluctuations in Future Operating Results", "--Risks Associated
with
7
<PAGE>
Emerging Market for E-Commerce; Unproven Business Model" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
SIGNIFICANT FLUCTUATIONS IN FUTURE OPERATING RESULTS
The Company's revenues and operating results have in the past fluctuated
significantly and are expected to fluctuate significantly in the future due to
a combination of factors, many of which are outside of the Company's control.
Factors that may materially and adversely affect the Company's future revenues
and operating results include, but are not limited to, the Company's ability
to significantly expand its sales and marketing organization, the Company's
ability to successfully develop new and enhanced products, the Company's
ability to manage its growth, the level of demand for the Company's products,
the timing and amount of license payments from the Company's customers, the
Company's ability to retain existing customers and increase sales to such
customers, the timing and volume of new orders and the Company's capacity to
fulfill such orders, the Company's ability to maintain or increase current
rates of sales productivity, the level of product and price competition, the
announcement or introduction of new or enhanced products and services by the
Company or its competitors, the Company's ability to upgrade and develop its
internal control systems, the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business and sales and
marketing infrastructure, downtime of the Company's systems or Internet
capacity or reliability problems, risks associated with the Company's
relationship with Trilogy, the Company's ability to attract and retain key
technical, sales and managerial personnel, the growth in the use and
acceptance of, and activity on, the Internet, World Wide Web ("Web") and
Internet-related technologies, particularly by corporate, institutional and
government users for the purchase of computer products, the extent to which
unauthorized access and use of online information is perceived as a threat to
network security, customer budgets, seasonal trends in customer purchasing and
general economic conditions. In response to competitive pressures or new
product introductions, the Company may take certain pricing or marketing
actions that could materially and adversely affect the Company's operating
results. In addition, the timing and amount of revenues associated with
particular sales can vary significantly based upon (i) the number of products
that are accessed and the number of authorized users, and (ii) whether the
fees are perpetual or subscription-based. The Company has in the past
recognized, and may in the future be required to recognize, a significant
portion of revenue derived from license agreements with its customers in a
single fiscal quarter, which can cause significant variations in quarterly
revenues. Moreover, small delays in customer orders can cause significant
variability in the Company's revenues and results of operations for any
particular period. As a result, the timing of significant orders and the
recognition of revenue from such orders is unpredictable. Unfavorable changes
in any of the above factors could materially and adversely affect the
Company's revenues, gross margins and results of operations.
As a result of the Company's limited operating history and the emerging
nature of the e-commerce market in which the Company competes, there can be no
assurance that the Company will be able to accurately forecast its revenues.
The Company's current and future expense levels are based primarily on its
operating plans and estimates of future revenues and are to a large extent
fixed costs. The Company may be unable to adjust spending in a timely manner
to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in revenues would likely have an immediate material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, the Company currently intends to significantly expand
its sales and marketing organization, which would result in a substantial
increase in operating expenses. To the extent such expenses are incurred prior
to or do not result in increased revenues, the Company's operating losses in a
given quarter may be significantly greater than expected. Based upon all of
the foregoing, the Company believes that its quarterly and annual revenues,
expenses and operating results are likely to vary significantly in the future,
that period-to-period comparisons of the Company's results of operations are
not necessarily meaningful and that such comparisons should not be relied upon
as indications of
8
<PAGE>
future performance. Moreover, although the Company's revenues have increased
in recent periods, there can be no assurance that the Company's revenues will
grow in future periods, that they will grow at past rates or that the Company
will achieve profitability on a quarterly or annual basis in the future. Due
to the foregoing as well as other factors, it is likely that the Company's
operating results will be below market analysts' expectations in some future
quarters, which could materially and adversely affect the market price of the
Common Stock. See "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quarterly Results
of Operations".
DEPENDENCE ON SIGNIFICANT GROWTH OF SALES AND MARKETING ORGANIZATION
The Company believes that its future profitability and success will depend
in large part on, among other things, its ability to maintain and expand its
relationships with computer product manufacturers, distributors, resellers,
retailers and other industry participants, and its ability to enter into new
relationships with such participants. To date, the Company has achieved only
limited penetration of its current customers. A key element of the Company's
strategy is to increase its penetration of existing customer accounts. In
order to implement this strategy, the Company intends to significantly expand
its sales and marketing organization. However, competition for sales and
marketing personnel is intense. Moreover, the recruitment and hiring of such
individuals is typically a time-consuming and expensive process. There can be
no assurance that the Company will be able to attract, assimilate and retain
qualified sales and marketing personnel on a timely basis in the future, or at
all. The Company's failure to do so would have a material adverse effect on
the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH EMERGING MARKET FOR E-COMMERCE; UNPROVEN BUSINESS MODEL
The market for software products such as those offered by the Company is
still emerging, and there can be no assurance that it will continue to grow or
that, even if the market does grow, the Company's products will achieve market
acceptance among computer product manufacturers, distributors, resellers,
retailers, other industry participants and end-users, including corporate
buyers and consumers. Historically, these entities have purchased computer
products and accessories and exchanged information regarding such products
primarily through traditional means of commerce and communications. The
Company has expended, and will continue to expend, significant resources
educating potential customers about the Company's products and their
capabilities and benefits. There can be no assurance that these expenditures
will enable the Company's products to achieve market acceptance. If the market
for the Company's products fails to grow or grows more slowly than the Company
anticipates, or if the Company's products fail to achieve significant market
acceptance, the Company's business, results of operation and financial
condition would be materially and adversely affected.
A majority of the Company's significant customers have entered into their
agreements with the Company only since the third quarter of 1997. These
contracts generally have terms ranging from one to five years, and the Company
has only limited experience with renewing such contracts. The Company's future
growth is dependent in part on its ability to renew existing contracts on
terms favorable to the Company and to further penetrate its existing customer
accounts with products that offer greater functionality and higher revenue
potential. Because of the Company's limited experience with these contract
renewals, there can be no assurance the Company will be successful in renewing
existing contracts, or if such contracts are renewed, that they will be
renewed on terms favorable to the Company. Any failure to do so on the part of
the Company would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's business model is evolving and unproven. The Company is
dependent on its ability to attract a significant number of customers and
channel partners from the computer industry
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and expand its existing relationships. There can be no assurance that the
Company will be successful in achieving market acceptance of its independent
third-party e-commerce solutions and services or in achieving significant
market share before competitors offer products, applications or services with
features similar or superior to the Company's current or proposed offerings.
If a significant number of participants fail to adopt the Company's solutions
or adopt such solutions more slowly than anticipated, or if the Company fails
to retain or fails to further penetrate its existing customer accounts, the
Company may not achieve the critical mass of users it believes is necessary to
enable the success of its solutions and services. In particular, a fundamental
element of the Company's business strategy is to enter into contractual
relationships with manufacturers and distributors that enable the Company to
derive increasing revenues from such customers to the extent that the
Company's e-commerce solutions are more broadly adopted by market
participants. Accordingly, the Company intends to incur significant expenses
during the rest of 1998 and 1999 to implement such strategy. There can be no
assurance that the Company will be successful in its efforts to increase the
number of manufacturers, distributors, resellers, retailers and other market
participants that adopt the Company's solutions. Any failure on the part of
the Company to do so would have a material adverse effect on the Company's
business, financial condition and results of operations.
DEPENDENCE ON GROWTH OF THE INTERNET, INTERNET INFRASTRUCTURE DEVELOPMENT AND
INTERNET COMMERCE
The increased use of the Internet for retrieving, sharing and transferring
information among manufacturers, distributors, resellers, retailers and end-
users, including corporate buyers and consumers, of computers and computer
products has only recently begun to develop, and the Company's success will
depend in large part on continued growth in, and the use of, the Internet for
commerce. Critical issues remain unresolved concerning commercial use of the
Internet, including security, reliability, cost, ease of access, quality of
service and necessary increases in bandwidth availability, and these issues
are likely to affect the development of the market for the Company's products.
The adoption of the Internet for information retrieval and exchange, commerce
and communications, particularly by those enterprises that have historically
relied upon traditional means of commerce and communications, generally will
require the acceptance by these entities of a new and evolving medium of
conducting business and exchanging information. Such acceptance is likely only
in the event that the Internet provides these entities with greater efficiency
and an improved arena of commerce and communication. Demand for and market
acceptance of commerce on the Internet are subject to a high level of
uncertainty and are dependent on a number of factors, including the growth in
commercial access to and acceptance of new interactive technologies, the
development of technologies that facilitate interactive communication between
organizations and targeted audiences and increases in user bandwidth. If the
Internet as a commercial or business medium fails to develop or develops more
slowly than expected, the Company's business, results of operations and
financial condition would be materially adversely affected. The recent growth
in the use of the Internet has caused frequent periods of performance
degradation, requiring the upgrade of routers and switches, telecommunications
links and other components forming the infrastructure of the Internet by
Internet service providers and other organizations with links to the Internet.
Any perceived degradation in the performance of the Internet as a whole could
undermine the benefits of the Company's products. The Company's ability to
increase the speed with which it provides services to customers and to
increase the scope of such services ultimately is limited by and reliant upon
the speed and reliability of the networks operated by third parties.
Consequently, the emergence and growth of the market for the Company's
products is dependent on improvements being made to the entire Internet
infrastructure to alleviate overloading and congestion. No assurance can be
given that these improvements will be made or that, if made, they will be made
in a sufficiently timely and cost-effective manner so as to facilitate market
acceptance of the Company's products.
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CUSTOMER CONCENTRATION; RISKS ASSOCIATED WITH RELIANCE ON CERTAIN CONTRACTS
In the year ended December 31, 1995, three of the Company's customers
accounted for approximately 99% of the Company's revenues, and in the years
ended December 31, 1996 and 1997, and the six month period ended June 30,
1998, the Company's top five customers accounted for 89%, 64% and 64%,
respectively, of the Company's total revenues for such corresponding period.
Generally, contracts with these customers have terms ranging from one to five
years and may be terminated earlier in the event of an uncured breach or
certain other events. The Company expects that it will continue to depend upon
a relatively small number of contracts for a substantial portion of its
revenues for the foreseeable future. There can be no assurance that the
Company will derive any revenue from sales of products pursuant to agreements
with these customers in any given future period. In the event that any such
contracts are not renewed or are otherwise terminated, the Company's business,
financial condition and results of operations would be materially and
adversely affected. See "Business--Products".
RISKS ASSOCIATED WITH MAINTAINING DATABASE
The Company updates and maintains an extensive database of technical and
descriptive information on computer products, including over 600,000 computer
products from over 1,000 manufacturers. This information is used to support
the Company's applications and the Company seeks to provide users with timely
access to current, comprehensive information on product specifications,
availability and pricing. Certain of the Company's contracts obligate it to
maintain data accuracy at prescribed levels. Maintaining the Company's
databases is a highly manual process and the Company utilizes a combination of
highly trained internal personnel and contract personnel provided by third-
party service organizations. Furthermore, the Company's computer systems and
databases must be sufficiently scalable to process large amounts of complex
product specification and configuration data without significant degradation
in performance. In the past the Company has experienced periodic difficulties
with data accuracy. For example, in the second quarter of 1998, database
capacity constraints limited the Company's ability to accept daily pricing and
availability updates from distributors, which resulted in a temporary
disruption in the Company's ability to provide this data to certain reseller
customers, and failures to renew and delays of contract renewals by certain of
such customers. Although these difficulties have not in the past materially
adversely effected the Company, there can be no assurance that the Company
will not experience similar data maintenance and accuracy problems in future
periods, which could result in a loss of customers or have a material adverse
effect on the Company's business, financial condition and results of
operations. Furthermore, certain of the Company's customer contracts provide
for service level guarantees for data accuracy. To the extent the Company is
unable to maintain data accuracy at required levels, the Company could incur
significant liabilities and the applicable contracts could be terminated, any
of which would have a material adverse effect on the Company's business,
results of operations and financial condition.
CONTROL BY AND RELATIONSHIP WITH TRILOGY
The Company is currently a subsidiary of Trilogy. Upon completion of this
offering, Trilogy will own approximately % of the outstanding Common Stock of
the Company ( % if the Underwriters' over-allotment option is exercised in
full). For so long as Trilogy continues to beneficially own in excess of 50%
of the outstanding Common Stock of the Company, Trilogy will be able to direct
the election of all directors of the Company and exercise a controlling
influence over the business and affairs of the Company, including any
determinations with respect to mergers or other business combinations
involving the Company, the acquisition or disposition of assets by the
Company, future issuances of Common Stock or other equity securities by the
Company, the incurrence of indebtedness by the Company and the payment of
dividends with respect to the Common Stock. Similarly, Trilogy will have the
power to determine matters submitted to a vote of the Company's stockholders
without the consent of the Company's other stockholders, will have the power
to prevent or cause a change in control of
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the Company and could take other actions that might be favorable to Trilogy
but unfavorable to other stockholders of the Company. The Company and Trilogy
have entered into various agreements intended to define the relationship
between them. There can be no assurance that Trilogy's ownership of the
Company's Common Stock or its other relationships with the Company will not
have a material adverse effect on the Company or its other stockholders. See
"Relationship With Trilogy".
RISKS ASSOCIATED WITH DEPENDENCE ON TRILOGY; LIMITED INDEPENDENT OPERATING
HISTORY; POTENTIAL CONFLICTS OF INTEREST
The Company is dependent upon Trilogy to provide certain key technology and
management functions to the Company. The Company licenses certain technology
from Trilogy on a non-exclusive basis subject to certain limitations. Any
termination of such license, or reduction in the performance of such licensed
technology, that requires the Company to internally develop or license similar
technology from a third party would be disruptive to the Company's business
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company has historically relied on Trilogy to provide certain human
resource, finance, recruiting, legal and other services. Upon completion of
this offering, Trilogy will have no obligation to provide assistance to the
Company except as described in "Relationship with Trilogy". The Company will
be required to develop and implement the operational, administrative and other
systems and infrastructure necessary to support its current and future
business, and any failure to do so could have a material adverse effect on the
Company's business, financial condition and results of operations. See "--
Control By and Relationship with Trilogy" and "--Management of Growth".
Conflicts of interest may arise between the Company and Trilogy in a number
of areas relating to their past and ongoing relationships, including potential
competitive business activities, indemnity arrangements, tax and intellectual
property matters, potential acquisitions or financing transactions, sales or
other dispositions by Trilogy of shares of the Company's Common Stock held by
it following this offering and the exercise by Trilogy of its ability to
control the management and affairs of the Company. There can be no assurance
that any conflicts that may arise between the Company and Trilogy will be
resolved in a manner that does not have a material adverse effect on the
Company or its other stockholders, even if such result is not intended by
Trilogy. In addition, except as described in "Relationship with Trilogy",
nothing in the Company's agreements with Trilogy prohibits Trilogy from
competing directly with the Company or being acquired by a third party, either
of which could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Relationship with Trilogy".
Ownership interests of directors or officers of the Company in the common
stock of Trilogy or service as both a director or officer of the Company and
an officer or employee of Trilogy could create or appear to create potential
conflicts of interest when directors and officers are faced with decisions
that could have different implications for the Company and Trilogy. Joseph A.
Liemandt, a director of the Company, is the Chairman and Chief Executive
Officer and a substantial stockholder of Trilogy.
POSSIBLE FUTURE SALES OF COMMON STOCK BY TRILOGY
Subject to applicable federal securities laws and the restrictions set forth
below, after completion of this offering, Trilogy may sell any and all of the
shares of the Company's Common Stock beneficially owned by it or distribute
any or all of such shares of Common Stock to its stockholders. Sales or
distribution by Trilogy of substantial amounts of Common Stock in the public
market or to its stockholders, or the perception that such sales or
distribution could occur, could adversely affect the prevailing market prices
for the Common Stock. Trilogy is not subject to any obligation to retain its
controlling interest in the Company, except that Trilogy has agreed not to
sell or otherwise dispose of any shares of Common Stock for a period of 180
days after the date of this Prospectus without the
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prior written consent of Goldman, Sachs & Co. See "Underwriting". As a result,
there can be no assurance concerning the period of time during which Trilogy
will maintain its beneficial ownership of Common Stock owned by it following
this offering. Moreover, there can be no assurance that, in any transfer by
Trilogy of a controlling interest in the Company, any holders of Common Stock
will be able to participate in such transaction or will realize any premium or
other amounts with respect to their shares of Common Stock. Trilogy and its
transferees have registration rights with respect to the shares of the Common
Stock owned by it, which rights would facilitate any future disposition. See
"Relationship with Trilogy".
DEPENDENCE ON COMPUTER INDUSTRY
The Company derives substantially all of its revenues either directly or
indirectly from the computer industry, and the Company's future growth is
dependent on the computer industry. The computer industry is sensitive to
general economic, business and industry conditions that can cause buyers of
computers and computer products to reduce or delay their investments in
computer systems. Any event or condition that results in decreased spending on
computers or computer products, or consolidation within the computer industry,
could have a negative effect on the Company's customers and negatively impact
the Company's business, operating results and financial condition.
Furthermore, certain of the Company's customers have recently been acquired.
Although to date such acquisitions have not had an adverse effect on the
Company' s relationships with these customers, there can be no assurance that
these acquisitions or other acquisitions of the Company's customers in the
future will not negatively impact the Company's relationships with these
customers or one or more consolidations in the computer industry which could
have a material adverse effect on the Company's business, results of
operations and financial condition.
RISK OF SYSTEM FAILURE; SINGLE SITE
The Company's success depends largely upon the efficient and uninterrupted
operation of its communication systems. The Company has contracted with
certain of its customers to provide server hosting and to maintain redundant
leased lines to ensure system availability. All of the Company's development
and management systems are located at a single facility leased by the Company
in Austin, Texas. The Company's systems and operations are vulnerable to
damage or interruption from fire, flood, power loss, telecommunications
failure, break-ins and similar events. Although the Company has taken certain
steps to prevent a system failure, there can be no assurance that such
measures will be successful and that the Company will not experience system
failures in the future. Furthermore, the Company does not have a formal
disaster recovery plan and does not carry sufficient business interruption
insurance to compensate it for losses that may occur as a result of any system
failure. The occurrence of any system failure or similar event could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Facilities".
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company requires substantial working capital to fund its business and
expects to use a significant portion of the net proceeds of this offering to
fund its expected continuing operating losses. The Company currently believes
that its existing capital resources, combined with the net proceeds of this
offering, will be sufficient to meet its presently anticipated cash
requirements for at least the next 12 months. Thereafter, the Company may be
required to raise additional funds; provided, however, no assurance can be
given that the Company will not be required to raise additional financing
prior to such time. If additional funds are raised through the issuance of
equity securities, stockholders of the Company may experience significant
dilution. Furthermore, there can be no assurance that additional financing
will be available when needed or that, if available, such financing will be
available on terms acceptable to the Company and its stockholders. If such
financing is not available when required or is not available on acceptable
terms, the Company may be unable to expand its sales and marketing
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organization, develop new products and product enhancements, take advantage of
business opportunities or respond to competitive pressures, any of which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources".
LENGTHY SALES AND IMPLEMENTATION CYCLE
Due in part to the significant departure from traditional means of commerce
and communications entailed by the adoption and use of the Company's products,
the Company is generally required to provide a significant level of education
regarding the use and benefits of its products, and potential customers tend
to engage in extensive internal reviews before making purchase decisions. In
addition, the purchase of the Company's products by its customers for
deployment within a customer's organization typically involves a significant
commitment of capital and other resources, and is therefore subject to delays
that are beyond the Company's control, such as the customers' internal
procedures to approve large capital expenditures, budgetary constraints and
the testing and acceptance of new technologies that affect key operations,
among other factors. The decision-making process can also be substantially
impacted by the sales practices of, and product introductions by, the
Company's competitors. The sales cycle of the Company's products has
historically been 2 to 6 months for resellers and 9 to 12 months or longer for
manufacturers and distributors; however, there can be no assurance that the
Company will not experience longer sales cycles in the future. Certain of the
Company's customers have in the past experienced difficulties or delays in
completing implementations of the Company's products. Although such
difficulties and delays to date have not had a material adverse effect on the
Company, no assurances can be given that similar difficulties or delays will
not occur in the future. Any such difficulties or delays could cause delays in
the recognition of related revenues, cause customers to reject the Company's
solutions or lead to the delay or non-receipt of future orders for the
Company's products, any of which could have a material adverse effect on the
Company's business, operating results and financial condition. See "--
Significant Fluctuations in Future Operating Results".
MANAGEMENT OF GROWTH
The Company's business has grown rapidly in the last three years, with total
revenues increasing from $3.7 million in 1995 to $10.6 million in 1997 and the
total number of employees increasing from 1 in July 1994 to 147 as of June 30,
1998. Furthermore, significant increases in the number of employees are
anticipated during the rest of 1998 and future periods. In particular, the
Company currently intends to significantly expand the number of employees in
its sales and marketing organization and to expand the number of employees in
its client services, research and development and finance organizations. This
growth has resulted in, and can be expected to continue to require,
substantial expansion of the Company's infrastructure, including operating and
financial systems and controls and the geographic scope of its operations and
customers. Recent rapid growth has also resulted, and will continue to result,
in new and increased responsibilities for management personnel, and such
growth has placed and, if it continues, is expected to continue to place, a
significant strain on the Company's management and operations. The Company has
recently hired a significant number of executives to augment its management
infrastructure to manage the potential growth of its business, including its
Chief Financial Officer and certain key sales and marketing personnel. These
individuals have not previously worked together or with the Company's existing
management and are in the process of integrating as a management team. There
can be no assurance that they will be able to work together effectively. In
addition, the Company has historically relied on Trilogy to provide certain
human resource, finance, recruiting, legal and other services, and the Company
is in the process of assuming responsibility for such services and similar
services provided by outside sources. Furthermore, the Company's dependence on
outside sources to provide services previously performed by Trilogy will
likely increase. There can be no assurance that the Company will be able to
manage
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any future expansion successfully, and any inability to do so would have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview".
NEW PRODUCTS AND TECHNOLOGICAL CHANGES; RISKS ASSOCIATED WITH TRANSITION TO
NEW TECHNOLOGY PLATFORM
The market for the Company's products is characterized by rapidly changing
technology, evolving industry standards and frequent new product
introductions. The introduction of products embodying new technologies or the
emergence of new industry standards can render existing products obsolete and
unmarketable. The Company's success will depend upon its ability to enhance
its existing products and to develop and introduce, on a timely and cost-
effective basis, new products that keep pace with technological developments
and emerging industry standards and address increasingly sophisticated
customer requirements. There can be no assurance that the Company will be
successful in identifying, developing and marketing product enhancements or
new products that respond to technological change or evolving industry
standards, that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of these
products, or that its new products and product enhancements will adequately
meet the requirements of the marketplace and achieve market acceptance. The
Company's business, operating results and financial condition would be
materially and adversely affected if the Company were to incur difficulties or
delays in developing new products or enhancements or if such products or
enhancements did not gain market acceptance.
Products as complex as those offered by the Company may contain undetected
errors or defects when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and by current and
potential customers, errors will not be found in new products or product
enhancements after commencement of commercial shipments, resulting in loss of
or delay in market acceptance. The Company's introduction of new products or
product enhancements with reliability, quality or compatibility problems could
also result in reduced bookings, delays in collecting accounts receivable and
additional service and warranty costs. The Company has in the past experienced
difficulties and delays in successfully installing its products at certain
customer sites. Although in each case the problems were remedied and did not
have a material adverse effect on the Company, no assurances can be given that
similar problems will not occur in the future or that such problems, if they
were to occur, would not have a material adverse effect on the Company.
The Company is currently engaged in transitioning certain aspects of its
product architecture to a more modular and flexible design. There can be no
assurance that the Company or its new customers will not experience any
performance problems with this new technology platform, whether in the form of
bugs, compatibility difficulties or otherwise. In addition, there can be no
assurance that the Company's existing customers will be able to successfully
transition to this new technology platform. A failure of the Company's
products based on this new technology platform to perform satisfactorily or a
failure by the Company to properly manage the transition by its existing
customers to this new technology platform could result in cancellation of
customer contracts, a decline in the Company's competitive position or reduced
or delayed sales of its products, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
DEPENDENCE UPON KEY PERSONNEL
The Company's future success depends in significant part upon the continued
service of a relatively small number of key management, technical, sales and
marketing personnel, especially Ross A. Cooley, the Company's Chairman of the
Board and Chief Executive Officer, and Christina C. Jones, the Company's
President and Chief Operating Officer. Mr. Cooley, in his capacity as the
Company's Chairman of the Board and Chief Executive Officer, currently
performs various executive and
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leadership functions, including development of the Company's strategic and
operational plans, executive management of new customer and new account
relationship activities and recruitment of senior management personnel. In
addition, Mr. Cooley is responsible for the financial results of the Company.
Ms. Jones, in her capacity as the Company's President and Chief Operating
Officer, is principally responsible for managing the Company's daily
operations. The Company's future success also depends on its continuing
ability to attract and retain other highly qualified management, technical,
sales and marketing personnel. Competition for such personnel is intense, and
the Company has at times in the past experienced difficulty in recruiting
qualified personnel. There can be no assurance that the Company will retain
its key management, technical, sales and marketing employees or that it will
be successful in attracting, assimilating and retaining other highly qualified
management, technical, sales and marketing personnel in the future. The loss
of any member of the Company's key management, technical, sales and marketing
personnel or the inability to attract and retain additional qualified
personnel would have a material adverse effect on the Company's business,
operating results and financial condition. See "Management".
RISK OF CHANGES IN ACCOUNTING STANDARDS
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition," was
issued in October 1997 by the American Institute of Certified Public
Accountants and amended by Statement of Position 98-4 ("SOP 98-4"). The
Company adopted SOP 97-2 and 98-4 effective January 1, 1998. The Company
believes that its current revenue recognition policies and practices are
materially consistent with SOP 97-2 and SOP 98-4. However, full implementation
guidelines for this standard have not yet been issued. Once available, such
implementation guidance could lead to unanticipated changes in the Company's
current revenue recognition practices, and such changes could materially
adversely affect the Company's future revenue and earnings. Such
implementation guidelines may necessitate significant changes in the Company's
business practices in order for the Company to continue to recognize revenue
in a consistent manner. For these and other reasons, such changes may have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
COMPETITION
The market for software products that enable e-commerce is intensely
competitive, and the Company expects competition in its market segment to
increase substantially. Numerous companies provide e-commerce solutions, and
several competitors target the specific computer and computer related products
industry in which the Company competes. The Company's competitors include both
large companies with substantially greater resources than the Company and the
internal IT departments of certain of the Company's customers and potential
customers. The Company believes that its principal sources of competition are
systems integrators and the internal IT departments of its customers and
potential customers. These organizations may seek to develop e-commerce
solutions through the use of tools offered by the Company's competitors
primarily focused on providing e-commerce enabling solutions to the computer
industry such as Calico Software, Selectica, Inc., SMART Technologies, Inc.,
Open Market, Inc. and BroadVision, Inc. Furthermore, there are a number of
significantly larger companies with which the Company does not currently
compete that do not presently offer the same or similar e-commerce solutions
offered by the Company but that could with limited barriers to entry compete
directly with the Company in the future. In addition, except as described in
"Relationship with Trilogy", nothing in the Company's agreements with Trilogy
prohibits Trilogy from competing directly or indirectly with the Company. The
Company believes that the principal competitive factors for companies seeking
to provide e-commerce enabling solutions are price, functionality, product
performance, content, reliability and customer service. Increased competition
could result in price reductions, reduced margins and loss of market share,
any of which would materially and adversely affect the Company's business,
operating results and financial condition. Many of the Company's current and
potential competitors have significantly longer operating histories and
significantly greater financial, technical, marketing and other resources than
the Company. There can be no assurances that the Company will be able to
compete successfully with its
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existing competitors or with new competitors or that competitive pressures
faced by the Company will not materially and adversely affect its business,
operating results and financial condition. See "Business--Competition".
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY
The Company's success depends in part on its ability to protect its
proprietary software and other intellectual property. To protect its
proprietary rights, the Company relies generally on copyright, trademark and
trade secret laws, confidentiality agreements with employees and third-parties
and license agreements with consultants, vendors and customers, although the
Company has not signed such agreements in every case. Despite such
protections, a third party could, without authorization, copy or otherwise
obtain and use the Company's products or technology, or develop similar
technology. There can be no assurance that the Company's agreements with
employees, consultants and others who participate in product development
activities will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's software or trade secrets will not
otherwise become known or independently developed by competitors.
Many of the Company's current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a blocking patent has issued or issues
in the future, the Company would need to either obtain a license or design
around the patent. There can be no assurance that the Company would be able to
obtain such a license on acceptable terms, if at all, or to design around the
patent. The Company pursues the registration of certain of its trademarks and
service marks in the United States and in certain other countries, although it
has not secured registration of all of its marks. In addition, the laws of
some foreign countries do not protect the Company's proprietary rights to the
same extent as do the laws of the United States, and effective copyright,
trademark and trade secret protection may not be available in such
jurisdictions. The Company licenses certain of its proprietary rights to third
parties, and there can be no assurance that such licensees will abide by
compliance and quality control guidelines with respect to such proprietary
rights or that such licensees will not take actions that would materially and
adversely affect the Company's business, financial condition and results of
operations.
There can be no assurance that the Company's efforts to protect its
intellectual property rights through copyright, trademark and trade secret
laws will be effective to prevent misappropriation of its technology or to
prevent the development by others of products or technologies similar to or
competitive with those developed by the Company. The Company's failure or
inability to protect its proprietary rights could materially and adversely
affect its business, financial condition and results of operations.
The computer software industry is characterized by frequent and substantial
intellectual property litigation that often is complex and expensive and
involves a significant diversion of resources and uncertainty of outcome. In
the future, the Company may need to pursue litigation to enforce and protect
its intellectual property rights or to defend against a claim of infringement
or invalidity. The Company attempts to avoid infringing known proprietary
rights of third parties in its product development efforts. However, the
Company has not conducted and does not intend to conduct comprehensive patent
searches to determine whether the technology used in its products infringes
patents held by third parties. In addition, it is difficult to proceed with
certainty in a rapidly evolving technological environment in which there may
be numerous patent applications pending, many of which are confidential when
filed. If the Company were to discover that its products violate third-party
proprietary rights, there can be no assurance that it would be able to obtain
licenses to continue offering such products, that any such licenses would be
available on commercially reasonable terms, if at all, or that litigation
regarding alleged infringement could be avoided or settled without substantial
expense and damage awards. Any claims against the Company relating to the
infringement of third-party proprietary rights, even if not meritorious, could
result in the expenditure of significant financial and managerial resources
and in
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injunctions preventing the Company from distributing certain products. Such
claims could materially and adversely affect the Company's business, financial
condition and results of operations.
RISK OF PRODUCT LIABILITY CLAIMS
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. However, the limitation of liability provisions contained in
the Company's license agreements may not be effective under the laws of
certain jurisdictions. Although the Company has not experienced any material
product liability claims to date, the sale and support of the Company's
products entails the risk of such claims. The Company currently has only
limited insurance coverage against product liability and errors and omissions
claims and there can be no assurance that such insurance will continue to be
available to the Company on commercially reasonable terms or at all. A product
liability claim brought against the Company could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Product Development".
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. This could result in system failures or miscalculations,
causing disruptions of operations including, among other things, a temporary
inability to process transactions, send invoices or engage in other normal
business activities. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" requirements. The Company has been informed by Trilogy that Trilogy
believes its internal computer systems and products are Year 2000 compliant,
and, based on a preliminary review, the Company believes its own internal
computer systems and products are Year 2000 compliant. There can be no
assurance that Year 2000 errors or defects will not be discovered in the
Company's current or future products. Any failure by the Company to make its
products Year 2000 compliant, or of such products not to be Year 2000
compliant as a result of a failure of Trilogy's products to be Year 2000
compliant, could result in a decrease in sales of the Company's products,
unanticipated expenses to address Year 2000 problems or significant
liabilities resulting from losses suffered by the Company's customers due to
such Year 2000 problems, any of which could have a material adverse effect in
the Company's business, financial condition and results of operations. In
addition, to the extent the Company's customers' systems are not Year 2000
compliant, problems in communications among industry participants could result
in a delay in the Company's products achieving market acceptance. The Company
also utilizes third-party equipment and software that may not be Year 2000
compliant. Failure of such third-party equipment or software, or of systems
maintained by the Company's suppliers, to operate properly with regard to the
Year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, the purchasing patterns of customers or potential customers may
be affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase products from the Company or
computer product manufacturers, which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
NO PRIOR MARKET FOR THE COMMON STOCK; POSSIBLE VOLATILITY OF SHARE PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop upon completion of this offering or, if it does develop, that such
market will be sustained. The initial public offering price of the Common
Stock
18
<PAGE>
will be determined by negotiation between the Company and the representatives
of the Underwriters, and may not be representative of the price that will
prevail in the open market. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price.
The market price of the Common Stock after this offering may be
significantly affected by factors such as the announcement of new products or
product enhancements by the Company or its competitors, technological
innovations by the Company or its competitors, quarterly variations in the
Company's results of operations, and general market conditions or market
conditions specific to particular industries. In particular, the stock prices
for many companies in the technology and emerging growth sector have
experienced wide fluctuations which have often been unrelated to the operating
results of such companies. Such fluctuations may adversely affect the market
price of the Common Stock. Furthermore, in the past, following periods of
volatility in the market price of a company's securities, securities class
action claims have been brought against the issuing company. There can be no
assurance that such litigation will not occur in the future with respect to
the Company. Such litigation could result in substantial costs and a diversion
of management's attention and resources, even if ultimately determined in
favor of the Company, and any adverse determination in such litigation could
also subject the Company to significant liabilities, any or all of which could
have a material adverse effect on the Company's business, operating results
and financial condition.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon completion of this offering, the Company will have of Common Stock
outstanding (assuming no exercise of the Underwriters' over-allotment option
and no exercise of outstanding options under the Company's Option Plans). Of
such shares, the shares sold in this offering will be freely transferable
without restriction or further registration under the Securities Act, except
for any shares held by an existing "affiliate" of the Company, as that term is
defined by the Securities Act (an "Affiliate"), which shares will be subject
to the resale limitations of Rule 144 adopted under the Securities Act. As of
the date of this Prospectus, 12,914,239 "restricted shares" as defined in Rule
144 will be outstanding. Of such shares, and without consideration of the
contractual restrictions described below, no shares would be available for
immediate sale in the public market without restriction pursuant to Rule
144(k). Beginning 90 days after the date of this Prospectus, and without
consideration of the contractual restrictions described below, no shares would
be eligible for sale in reliance upon Rule 144 and 89,239 shares would be
eligible for sale in reliance upon Rule 701 adopted under the Securities Act.
In addition, options to purchase approximately 179,402 shares will be vested
and exercisable and eligible for sale in Reliance upon Rule 701.
In general, under Rule 144 as currently in effect, beginning 90 days after
the offering, a person (or persons whose shares are aggregated) who owns
shares that were purchased from the Company (or any Affiliate) at least one
year previously, including any person who may be deemed an Affiliate of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
the Common Stock, or (ii) the average weekly trading volume of the Common
Stock on the Nasdaq National Market during the four calendar weeks preceding
the date on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. Any person (or persons whose
shares are aggregated) who is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who owns shares
within the definition of "restricted securities" under Rule 144 that were
purchased from the Company (or any Affiliate) at least two years previously,
would be entitled to sell such shares under Rule 144(k) without regard to the
volume limitations, manner of sale provisions, public information requirements
or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers prior to the date the
issuer
19
<PAGE>
becomes subject to the reporting requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), pursuant to written compensatory
benefit plans or written contracts relating to the compensation of such
persons. In addition, the Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired
upon exercise of such options (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this Prospectus, may be sold (i) by
persons other than Affiliates, subject only to the manner of sale provisions
of Rule 144, and (ii) by Affiliates under Rule 144 without compliance with its
one-year holding period requirement.
The Company's officers and directors and Trilogy have agreed not to sell any
of their shares of Common Stock for 180 days after the date of this Prospectus
without the prior written consent of the representatives of the Underwriters.
As a result of these contractual restrictions and subject to the provisions of
Rules 144(k), 144 and 701, as applicable, 12,914,239 shares subject to
restriction will be eligible for sale 180 days after the date of this
Prospectus. See "Underwriting".
The Company has agreed not to offer, sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or any rights to acquire Common Stock for a
period of 180 days after the date of this Prospectus, without the prior
written consent of the representatives of the Underwriters, subject to certain
limited exceptions. See "Underwriting".
The Company intends to file a registration statement under the Securities
Act covering approximately 3,378,686 shares of Common Stock reserved for
issuance under the Option Plan. See "Management--1996 Stock Option Plan". Such
registration statement is expected to be filed within 90 days after the date
of this Prospectus and will automatically become effective upon filing.
Following such filing, shares registered under such registration statement
will, subject to the Lock-Up Agreements, Rule 144 volume limitations
applicable to Affiliates and the lapsing of the Company's repurchase rights,
be available for sale in the open market upon the exercise of vested options
90 days after the effective date of this Prospectus. At June 30, 1998, options
to purchase 2,557,111 shares were issued and outstanding under the 1996 Plan.
See "Shares Eligible for Future Sale".
EFFECT OF CERTAIN CHARTER PROVISIONS; ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF
INCORPORATION, BYLAWS AND DELAWARE LAW
The Company's Certificate of Incorporation, as amended and restated (the
"Certificate of Incorporation"), and Bylaws, as amended and restated
("Bylaws"), contain certain provisions that may have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals that a stockholder might consider favorable,
including provisions authorizing the issuance of "blank check" preferred
stock. In addition, certain provisions of Delaware law may also have the
effect of discouraging, delaying or preventing a change in control of the
Company or unsolicited acquisition proposals. The anti-takeover effect of
these provisions may also have an adverse effect on the public trading price
of the Company's Common Stock. See "Management--Stock Plans", "Description of
Capital Stock--Preferred Stock" and "--Certain Anti-Takeover, Limited
Liability and Indemnification Provisions; Section 203 of the Delaware General
Corporation Law".
20
<PAGE>
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is substantially higher than the book
value per share of the outstanding Common Stock. As a result, investors
purchasing Common Stock in this offering will incur immediate and substantial
dilution. To the extent outstanding options to purchase Common Stock are
exercised, there will be further dilution. See "Dilution" and "Shares Eligible
for Future Sale".
UNCERTAINTY AS TO USE OF PROCEEDS
The principal purposes of this offering are to increase the Company's
working capital, to create a public market for the Company's Common Stock and
to facilitate future access to public equity markets. The Company currently
has no specific plans for the use of the net proceeds from this offering other
than for general corporate purposes, including working capital and capital
expenditures. Accordingly, the Company's management will retain broad
discretion as to the allocation of a substantial portion of the net proceeds
from this offering. Pending any such uses, the Company plans to invest the net
proceeds in investment-grade, interest-bearing securities. See "Use of
Proceeds" and "Certain Transactions".
21
<PAGE>
USE OF PROCEEDS
Based on an assumed initial public offering price of $ per share, the net
proceeds to the Company from the sale of the shares of Common Stock to be
sold by the Company hereby will be approximately $ (approximately $ if
the Underwriters exercise their over-allotment option in full), after
deduction of underwriting discounts and commissions and estimated offering
expenses payable by the Company.
The principal purposes of this offering are to increase the Company's
working capital, to create a public market for the Company's Common Stock, to
facilitate future access by the Company to public equity markets, and to
provide increased visibility and credibility to the Company. The Company
presently has no specific plans for use of the net proceeds of this offering.
The Company intends to use the net proceeds primarily for general corporate
purposes, including working capital to fund anticipated operating losses
arising in part from substantial investment in expanding the Company's sales
and marketing organization, and capital expenditures. The Company may, when
and if the opportunity arises, use an unspecified portion of the net proceeds
to acquire or invest in complementary businesses, products and technologies.
The Company has no present understandings, commitments or agreements with
respect to any material acquisition of, or investment in, third parties. The
Company believes that its existing capital resources, combined with the net
proceeds of this offering, will be sufficient to meet its presently
anticipated cash requirements through at least the next 12 months. There can
be no assurance that the Company will not be required to raise additional
financing prior to such time, that additional financing will be available when
needed or that, if available, such financing will be available on terms
favorable to the Company and its stockholders. Pending use of the net proceeds
for the above purposes, the Company intends to invest such funds in interest-
bearing, investment-grade securities. See "Risk Factors--Future Capital Needs;
Uncertainty of Additional Financing".
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends on its Common Stock in
the foreseeable future.
22
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1998, the cash position and
capitalization of the Company (i) on an actual basis, and (ii) on an as
adjusted basis to give effect to the sale by the Company of the shares of
Common Stock offered by the Company hereby at an assumed initial public
offering price of $ per share and the receipt by the Company of the
estimated net proceeds therefrom.
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS,
EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
Cash and cash equivalents................................. $ 6,583 $
======= ====
Long-term obligations, less current portion............... $ -- $ --
Stockholders' equity (deficit):
Preferred Stock, $.01 par value per share; 3,200,000
shares authorized; no shares issued or outstanding
(actual or as adjusted)................................ -- --
Common Stock, $.01 par value per share; 50,000,000
shares authorized; 12,866,925 shares issued and
outstanding (actual)(1); and shares issued and
outstanding (as adjusted)(1)........................... 129
Additional paid-in capital.............................. 2,072
Deferred stock compensation............................. (1,435)
Retained earnings (deficit)............................. (2,314)
------- ----
Total stockholders' equity (deficit).................. (1,548)
------- ----
Total capitalization.................................. $(1,548) $
======= ====
</TABLE>
- --------
(1) Excludes 2,557,111 shares of Common Stock issuable upon exercise of
options outstanding as of June 30, 1998 at a weighted average exercise
price per share of $3.00, and 375,964 additional shares reserved for
future grant. Also excludes the right under the terms of an applications
subscription arrangement to require the Company to grant an option to
purchase up to 320,000 shares of Common Stock if certain events occur,
including an initial public offering. As of June 30, 1998, no specified
event had occurred and the option was not outstanding. See "Management--
1996 Stock Option Plan" and Note 8 of Notes to Financial Statements.
23
<PAGE>
DILUTION
At June 30, 1998, the net tangible book value of the Company was a deficit
of $1,548,000, or $(0.12) per share of Common Stock. Net tangible book value
(deficit) per share represents the amount of total tangible assets of the
Company reduced by the amount of its total liabilities, divided by the number
of shares of Common Stock outstanding. After giving effect to the sale by the
Company of the shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $ per share and the receipt by the
Company of the estimated net proceeds therefrom, the pro forma net tangible
book value of the Company as of June 30, 1998 would have been $ , or $
per share of Common Stock. This represents an immediate increase in pro forma
net tangible book value of $ per share to existing stockholders and an
immediate dilution of $ per share to new investors purchasing shares of
Common Stock in this offering. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
Net tangible book value (deficit) per share as of June 30, 1998.. $(0.12)
Increase per share attributable to new investors.................
-------
As adjusted net tangible book value per share after this offering..
----
Dilution per share to new investors................................ $
====
</TABLE>
The following table sets forth, on an as adjusted basis as of June 30, 1998,
with respect to existing stockholders and new investors in this offering, a
comparison of the number of shares of Common Stock acquired from the Company,
the percentage ownership of such shares, the total cash consideration paid,
the percentage of total cash consideration paid and the average price per
share paid assuming the sale by the Company of the shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of $
per share and the receipt by the Company of the estimated net proceeds
therefrom:
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
------------------ ---------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 12,866,925 % $539,000 % $0.04
New investors.....................
---------- --- -------- ---
Total........................... 100% 100%
========== === ======== ===
</TABLE>
The preceding table assumes no exercise of any outstanding stock options. As
of June 30, 1998, there were options outstanding to purchase a total of
2,557,111 shares of Common Stock at a weighted average exercise price of $3.00
per share and 375,964 additional shares reserved for future grant. Also
excludes the right under the terms of an applications subscription agreement
to require the Company to grant to a customer an option to purchase up to
320,000 shares of Common Stock if one of specified certain events occurs,
including an initial public offering. As of June 30, 1998, no specified event
had occurred and the option was not outstanding. To the extent outstanding
options are exercised or shares reserved for future grant are issued, there
will be further dilution to new investors. See "Management--1996 Stock Option
Plan" and Note 8 of Notes to Financial Statements.
24
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and with the Financial Statements and Notes thereto which are
included elsewhere in this Prospectus. The statement of operations data for
the fiscal years ended December 31, 1995, 1996 and 1997 and the six months
ended June 30, 1998 and the balance sheet data at December 31, 1996 and 1997
and June 30, 1998 are derived from the audited Financial Statements included
elsewhere in this Prospectus. The balance sheet data as of December 31, 1995
is derived from audited financial statements that are not included in this
Prospectus. The statement of operations data for the six months ended June 30,
1997 is derived from unaudited financial statements included elsewhere in this
Prospectus and, in the opinion of the Company, include all adjustments,
consisting solely of normal recurring accruals, which are necessary to present
fairly the data for such period and as of such date. The statement of
operations data for the period from inception (July 1, 1993) to December 31,
1993 and the year ended December 31, 1994 and the balance sheet data at
December 31, 1993 and 1994 are derived from audited financial statements not
included in this Prospectus. Historical results are not necessarily indicative
of results in the future, and the results for interim periods are not
necessarily indicative of results to be expected for the entire year. See
"Risk Factors--Significant Fluctuations in Future Operating Results" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
<TABLE>
<CAPTION>
PERIOD FROM
JULY 1, 1993
(INCEPTION) SIX MONTHS
THROUGH YEAR ENDED DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, ------------------------------ ----------------
1993 1994 1995 1996 1997 1997 1998
------------ ------ ------ ------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Software applications and
content.................... $ -- $ 450 $3,388 $5,182 $ 8,869 $ 3,655 $ 7,113
Service..................... -- 65 335 700 1,720 859 2,470
------ ------ ------ ------ ------- ------- -------
Total revenues............ -- 515 3,723 5,882 10,589 4,514 9,583
------ ------ ------ ------ ------- ------- -------
Cost of revenues:
Software applications and
content.................... 50 485 1,579 1,749 2,588 989 2,130
Service..................... -- 53 192 185 988 361 1,054
------ ------ ------ ------ ------- ------- -------
Total cost of revenues.... 50 538 1,771 1,934 3,576 1,350 3,184
------ ------ ------ ------ ------- ------- -------
Gross profit (loss).......... (50) (23) 1,952 3,948 7,013 3,164 6,399
Operating expenses:
Research and development.... 185 106 660 1,168 1,129 504 1,785
Selling and marketing....... -- 72 577 2,555 4,793 2,171 4,116
General and administrative.. -- -- 116 726 1,792 565 1,296
Amortization of deferred
stock compensation......... -- -- -- -- -- -- 227
------ ------ ------ ------ ------- ------- -------
Total operating expenses.. 185 178 1,353 4,449 7,714 3,240 7,424
------ ------ ------ ------ ------- ------- -------
Operating income (loss)...... (235) (201) 599 (501) (701) (76) (1,025)
Interest income.............. -- -- -- -- -- -- 45
------ ------ ------ ------ ------- ------- -------
Income (loss) before income
taxes....................... (235) (201) 599 (501) (701) (76) (980)
Income tax provision
(benefit)................... (80) (68) 207 (191) 427 47 --
------ ------ ------ ------ ------- ------- -------
Net income (loss)............ $ (155) $ (133) $ 392 $ (310) $(1,128) $ (123) $ (980)
====== ====== ====== ====== ======= ======= =======
Basic and diluted net income
(loss) per share(1)......... $(0.12) $(0.10) $ 0.03 $(0.02) $ (0.09) $ (0.01) $ (0.08)
====== ====== ====== ====== ======= ======= =======
Weighted average shares
outstanding(2).............. 1,280 1,280 12,800 12,800 12,800 12,800 12,803
====== ====== ====== ====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------ JUNE 30,
1993 1994 1995 1996 1997 1998
----- ----- ------ ------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents(3)............. $ -- $ -- $ -- $ -- $ 2,207 $ 6,583
Working capital
(deficit)(4)............... (155) (291) 255 (253) (1,489) (3,344)
Total assets................ -- 1,088 1,492 3,435 4,978 15,507
Stockholders' equity
(deficit).................. (155) (287) 442 132 (995) (1,548)
</TABLE>
- -------
(1) Computed on the basis described in Note 2 of Notes to Financial
Statements.
(2) For the period July 1, 1993 (inception) through July 17, 1994, the Company
operated as a business unit of Trilogy and was incorporated on July 18,
1994. Accordingly, no Common Stock of the Company was outstanding up to
the date of incorporation. For purposes of computing net income (loss) per
share, the number of shares of Common Stock issued at the date of
incorporation, restated for effects of subsequent stock splits, have been
reflected as if outstanding from date of inception on July 1, 1993.
(3) Prior to 1997, the Company relied on Trilogy for all of its cash
management requirements.
(4) Working capital (deficit) at December 31, 1996 and 1997 and June 30, 1998
includes the effect of deferred revenue of $2,162,000, $4,212,000 and
$12,799,000, respectively.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the more detailed information and the Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this Prospectus.
OVERVIEW
pcOrder is a leading provider of Internet-based e-commerce solutions that
are designed to enable the computer industry's suppliers, resellers and end-
users to buy and sell computer products online. The Company leverages Internet
technologies to provide comprehensive e-commerce solutions designed to
increase sales and marketing productivity, meet end-user demand for online
ordering, reduce costs and shorten order fulfillment cycles for industry
participants. The Company's solutions include software applications that
automate product search, comparison, configuration, pricing, financing and
ordering, combined with what the Company believes is the industry's largest
content database consisting of detailed product, categorization,
compatibility, pricing and availability information.
The Company was established as a separate business unit within Trilogy on
July 1, 1993, and was incorporated on July 18, 1994. The Company began to
recognize revenue in April 1994, and has periodically released new products
and enhancements to its existing products since that date. In late 1996, Ross
A. Cooley joined the Company as Chairman and Chief Executive Officer and
brought significant computer industry experience and long-term relationships
with computer industry participants to the Company. Since that time, the
Company's e-commerce solutions for the computer industry have gained broader
acceptance, and have been adopted by market leaders including Bay Networks,
Inc. ("Bay Networks"), Compaq Computer Corporation ("Compaq"), CompuCom
Systems, Inc. ("CompuCom"), Computer City, Inc. ("Computer City"), CMP
Publications, Inc. ("CMP Publications"), GE Capital Corp. ("GE Capital"),
Ingram Micro, Inc. ("Ingram Micro"), International Business Machines
Corporation ("IBM"), Kingston Technology Corporation ("Kingston"), MCI
Systemhouse Corp. ("MCI Systemhouse"), MicroAge Integration Company, Pinacor,
Inc. ("Pinacor") and Tech Data Corporation ("Tech Data"). In addition, over
500 resellers use the Company's solution. The Company's revenues have grown
from $3.7 million in 1995 to $10.6 million in 1997, and were $9.6 million in
the first six months of 1998.
The Company derives its revenues from software applications and content fees
and related service fees. Software applications fees consist of subscription-
based or perpetual license arrangements. Content fees are contracted for on a
subscription basis. In substantially all cases, the Company's software
applications and content are sold as a single solution. Content fees are
charged for access, entry, updating and maintenance of computer product data.
Service fees are primarily generated from integration, customization and
training. Such fees are generally charged on a time and materials basis;
however, the Company has in the past and may from time to time in the future
provide such services on a fixed price basis. Prior to 1997, software
applications fees had been derived primarily from perpetual licenses of the
Company's products. In late 1996, the Company commenced a transition of its
pricing model to subscription-based arrangements. Currently, the Company
derives the majority of its software applications and content fees from
subscription-based arrangements, but may from time to time grant perpetual
licenses to accommodate individual customer needs.
Revenue from perpetual licenses or software application arrangements
("subscriptions") is recognized when an agreement has been executed, the
product has been delivered or the implementation is complete, as applicable,
and no vendor obligations or customer acceptance rights remain. In the case
26
<PAGE>
of perpetual licenses, revenue is recognized at such time. In the case of
subscriptions, revenue recognition commences at such time, and is generally
recognized ratably over the life of the arrangement. Software maintenance fees
relating to perpetual licenses are recognized ratably over the term of the
applicable maintenance agreement. Content fees are recognized ratably over the
applicable maintenance period, which generally commences upon initial content
entry. See Note 2 of Notes to Financial Statements.
Time and materials service fees are recognized as the services are
performed. The Company recognizes revenue on fixed price service arrangements
upon (i) the completion of specific contractual events, or (ii) based on an
estimated percentage of completion as work progresses.
The Company records cash advances and amounts billed in excess of revenue
recognized as deferred revenue. The timing and amount of cash advances from
customers can vary significantly depending on specific contract terms and can
therefore have a significant impact on the amount of deferred revenue in any
given period.
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition" was
issued in October 1997 by the American Institute of Certified Public
Accountants and amended by Statement of Position 98-4 ("SOP 98-4"). The
Company adopted SOP 97-2 and SOP 98-4 effective January 1, 1998. The Company
believes its current revenue recognition policies and practices are materially
consistent with SOP 97-2 and SOP 98-4. However, full implementation guidelines
for this standard have not been issued. Once available, such implementation
guidance could lead to unanticipated changes in the Company's current revenue
accounting practices, and such changes could materially adversely affect the
Company's future revenue and earnings. Such implementation guidance may
necessitate significant changes in the Company's business practices in order
for the Company to continue to recognize revenue in a consistent manner. Such
changes may have a material adverse effect on the Company's business,
operating results and financial condition.
Pursuant to an intercompany license agreement with Trilogy, the Company is
obligated to pay Trilogy royalties based on fees generated from perpetual
license agreements, software maintenance and subscription-based licenses.
Also, the Company has entered into certain agreements with Trilogy pursuant to
which Trilogy provides certain administrative and corporate support services
to the Company, including certain tax administration, payroll, payroll
accounting, banking, corporate finance, recruiting and employee training
services. In addition, the Company has entered into a tax allocation agreement
with Trilogy. See Notes 2 and 4 of Notes to Financial Statements.
Except for a small profit in 1995, the Company has incurred annual losses
from operations from its inception in July 1993 to date, and the Company
expects to continue to incur losses from operations on both a quarterly and an
annual basis for the foreseeable future. The Company had an accumulated
deficit of $2.3 million at June 30, 1998. Furthermore, the Company intends to
invest significantly in its sales and marketing organization, programs and
activities to increase sales of its products and services to its existing
customers and to new customers. However, historically the Company's sales
cycle has been 2 to 6 months for resellers and up to 9 to 12 months or longer
for manufacturers and distributors. Consequently, even if the Company achieves
increased sales of its products and services as a result of its investments in
its sales force, such increases likely will not be recognized in the quarter
in which such investment are made.
Because the market for the Company's products has only recently emerged, and
based on other factors described in this Prospectus, the Company believes that
its quarterly and annual revenues, expenses and operating results are likely
to vary significantly in the future, that period-to-period comparisons of the
Company's results of operations are not necessarily meaningful and that such
comparisons should not be relied upon as indications of future performance.
Moreover, although the Company's revenues have increased in recent periods,
there can be no assurance that the Company's revenues will grow in future
periods, that they will grow at past rates or that the Company will achieve
27
<PAGE>
profitability on a quarterly or annual basis in the future. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the early stage of development,
particularly companies in new and rapidly evolving markets. There can be no
assurance that the Company will be successful in addressing such risks and
difficulties or that the Company will achieve profitability in the future.
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the Company
expressed as a percentage of total revenues. The Company's historical
operating results are not necessarily indicative of the results for any future
period.
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
----------------- -----------
1995 1996 1997 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Software applications and content................ 91% 88% 84% 81% 74%
Service.......................................... 9 12 16 19 26
--- --- --- --- ---
Total revenues................................. 100 100 100 100 100
--- --- --- --- ---
Cost of revenues:
Software applications and content................ 43 30 25 22 22
Service.......................................... 5 3 9 8 11
--- --- --- --- ---
Total cost of revenues......................... 48 33 34 30 33
--- --- --- --- ---
Gross profit...................................... 52 67 66 70 67
Operating expenses:
Research and development......................... 18 20 11 11 19
Selling and marketing............................ 15 43 45 48 43
General and administrative....................... 3 12 17 13 14
Amortization of deferred stock compensation...... -- -- -- -- 2
--- --- --- --- ---
Total operating expenses....................... 36 75 73 72 78
--- --- --- --- ---
Operating income (loss)........................... 16 (8) (7) (2) (11)
Interest income................................... -- -- -- -- 1
--- --- --- --- ---
Income (loss) before income taxes................. 16 (8) (7) (2) (10)
Income tax provision (benefit).................... 5 (3) 4 1 --
--- --- --- --- ---
Net income (loss)................................. 11% (5)% (11)% (3)% (10)%
=== === === === ===
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1998
REVENUES
Total revenues increased 112% from $4.5 million for the six months ended
June 30, 1997 to $9.6 million for the six months ended June 30, 1998. The
Company's top five customers for the six months ended June 30, 1997 accounted
for 79% of total revenues during that period, and the Company's top five
customers for the six months ended June 30, 1998 accounted for 64% of total
revenues during that period.
SOFTWARE APPLICATIONS AND CONTENT. Software applications and content
revenues increased 95% from $3.7 million for the six months ended June 30,
1997 to $7.1 million for the six months ended
28
<PAGE>
June 30, 1998, representing 81% and 74% of total revenues, respectively. The
increase in absolute dollars was due primarily to the addition of
subscription-based and perpetual license customers and increased subscription-
based arrangements for additional authorized users for existing customers.
Software applications and content revenues recognized under perpetual
licenses were $437,000 and $678,000 in the six months ended June 30, 1997 and
1998, respectively, representing 10% and 7% of total revenues, respectively.
The increase in absolute dollars was due primarily to a perpetual license
agreement executed during the six months ended June 30, 1998. The decline in
perpetual license revenue as a percentage of total revenues was principally
due to the adoption of subscription-based arrangements by a majority of new
customers.
SERVICE. Service revenues increased 188% from $859,000 for the six months
ended June 30, 1997 to $2.5 million for the six months ended June 30, 1998,
representing 19% and 26% of total revenues, respectively. The increase in
absolute dollars and as a percentage of total revenues was due primarily to
software integration, customization and training services associated with an
increase in the number of software applications and content customers and the
recognition of revenue under a fixed-fee agreement in the first quarter of
1998.
COST OF REVENUES
SOFTWARE APPLICATIONS AND CONTENT. Cost of software applications and content
revenues consists primarily of royalties paid to Trilogy and the cost of
providing software and content maintenance. Cost of software applications and
content revenues increased 115% from $989,000 during the six months ended June
30, 1997 to $2.1 million during the six months ended June 30, 1998,
representing 27% and 30% of software applications and content revenues,
respectively. The increase in cost of software applications and content
revenues in absolute dollars was due primarily to (i) the increase in
headcount within the Company's content management group ("PC Labs") and the
depreciation related to additional computer equipment for PC Labs purchased
during 1998 and (ii) the increase in royalties paid to Trilogy on software
applications as a result of increased total revenues. The increase in cost of
software applications and content revenues as a percentage of software
applications and content revenues was due primarily to the increased personnel
and other costs associated with PC Labs providing content management services
to a greater number of customers.
SERVICE. Cost of service revenues consists primarily of the cost of in-house
and contract personnel providing software integration, customization and
training. Cost of service revenues increased 192% from $361,000 for the six
months ended June 30, 1997 to $1.1 million for the six months ended June 30,
1998, representing 42% and 43% of service revenues, respectively. The increase
in cost of service revenues in absolute dollars and as a percentage of service
revenues was due primarily to the increased personnel and other costs
associated with providing these services to a greater number of customers.
Additionally, the increase in cost of service revenues as a percentage of
total revenues for the six months ended June 30, 1998 was offset primarily by
the recognition of revenue under a fixed fee arrangement for which the
majority of the associated costs were expensed in the fourth quarter of 1997.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of personnel costs to support product development. Research and
development expenses increased 254% from $504,000 for the six months ended
June 30, 1997 to $1.8 million for the six months ended June 30, 1998,
representing 11% and 19% of total revenues, respectively. These increases were
due primarily to an increase in internal development personnel. The Company
believes that continued investment in research and development is critical to
attaining its strategic objectives and, as a result, expects research and
development costs in absolute dollars to increase significantly in future
periods.
29
<PAGE>
SELLING AND MARKETING. Selling and marketing expenses consist primarily of
salaries and outsourced personnel costs, advertising, travel, tradeshows and
public relations expenses. Selling and marketing expenses increased 90% from
$2.2 million for the six months ended June 30, 1997 to $4.1 million for the
six months ended June 30, 1998, representing 48% and 43% of total revenues,
respectively. The increase in absolute dollars was due primarily to an
increase in personnel and the Company's increased marketing campaign
expenditures. The Company believes that such expenses will increase in
absolute dollars and as a percentage of revenues in future periods as it
expands its sales and marketing organization and activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of personnel costs, recruiting and professional legal and accounting
services, as well as management fees paid to Trilogy. General and
administrative expenses increased 129% from $565,000 for the six months ended
June 30, 1997 to $1.3 million for the six months ended June 30, 1998,
representing 13% and 14% of total revenues, respectively. The increase in
absolute dollars and as a percentage of total revenues was due primarily to
increased personnel and facility expenses necessary to support the Company's
growth. The Company believes general and administrative expenses will increase
in absolute dollars as the Company expands its personnel and infrastructure to
support its growth and assumes the responsibilities of a public company.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. In 1998, the Company recorded
total deferred stock compensation of $1.7 million in connection with stock
options granted during the six months ended June 30, 1998. Such amount is
being amortized over the vesting periods of the applicable options, resulting
in amortization of $227,000 for the six months ended June 30, 1998. These
amounts represent the difference between the exercise price of certain stock
option grants and the deemed fair value of the Company's Common Stock at the
time of such grants.
INCOME TAXES
The Company is included in the consolidated income tax return of Trilogy.
The Company has also entered into a tax sharing agreement with Trilogy. Should
Trilogy's ownership interest fall below 80% of the outstanding shares, the
Company will no longer be included in the consolidated group or subject to the
tax sharing agreement. See Note 2 of Notes to Financial Statements.
The effective tax rate used to record the income tax provisions was 61% and
0% for the six months ended June 30, 1997 and 1998, respectively. The
effective tax rate for the six months ended June 30, 1997 and 1998 is based on
the estimated annual effective tax rate, including the impact of increases to
the valuation allowance for deferred tax assets.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997
REVENUES
The Company's total revenues increased 80% from $5.9 million in 1996 to
$10.6 million in 1997. The Company's top five customers for 1996 accounted for
approximately 89% of total revenues in 1996, and the Company's top five
customers for 1997 accounted for 64% of total revenues in 1997.
SOFTWARE APPLICATIONS AND CONTENT. Software applications and content
revenues increased 71% from $5.2 million in 1996 to $8.9 million in 1997,
representing 88% and 84% of total revenues, respectively. The increase in
absolute dollars was due primarily to the increase in revenues from
subscription-based arrangements, partially offset by the decrease in revenues
from perpetual licenses, as customer demand shifted from perpetual licenses to
subscription-based arrangements. Software applications and content revenues
recognized under perpetual licenses were $2.0 million and
30
<PAGE>
$744,000 in 1996 and 1997, respectively, representing 33% and 7% of total
revenues, respectively. Revenues from subscription-based arrangements
increased due primarily to additional subscription- based customers.
SERVICE. Service revenues increased 146% from $700,000 in 1996 to $1.7
million in 1997, representing 12% and 16% of total revenues, respectively. The
increase was due primarily to software integration, customization and training
services associated with an increase in the number of software applications
and content customers.
COST OF REVENUES
SOFTWARE APPLICATIONS AND CONTENT. Cost of software applications and content
revenues increased from $1.7 million in 1996 to $2.6 million in 1997,
representing 34% and 29% of software applications and content revenues,
respectively. The decrease in cost of software applications and content
revenues as a percentage of such revenues was due primarily to the decrease in
revenues from perpetual licenses, as to which the Company is required to pay
Trilogy higher royalty rates than on subscription-based arrangements.
SERVICE. Cost of service revenues increased from $185,000 in 1996 to
$988,000 in 1997, representing 26% and 57% of service revenues, respectively.
The increase in cost of service revenues in absolute dollars was due primarily
to an increase in personnel and other costs associated with providing these
services to a greater number of customers. Cost of service revenues increased
as a percentage of service revenues due primarily to the incurrence of costs
associated with deployment of a fixed fee consulting arrangement in 1997 with
the recognition of related revenues in 1998 and the Company's efforts to hire
service personnel.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
marginally from $1.2 million in 1996 to $1.1 million in 1997, representing 20%
and 11% of total revenues, respectively. The decrease as a percentage of
revenues was due primarily to the completion of the development of certain of
the Company's products as such products became available for sale and
deployment in 1997. As a result, research and development expenses in absolute
dollars remained relatively flat from 1996 to 1997.
SELLING AND MARKETING. Selling and marketing expenses increased 88% from
$2.6 million in 1996 to $4.8 million in 1997, representing 43% and 45% of
total revenues, respectively. The increase in absolute dollars was due
primarily to increases in personnel and expenditures relating to the Company's
sales and marketing organization and activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
147% from $726,000 in 1996 to $1.8 million in 1997, representing 12% and 17%
of total revenues, respectively. The increase in absolute dollars and as a
percentage of total revenues was due primarily to increased personnel and
facility expenses necessary to support the Company's growth.
INCOME TAXES
The Company is included in the consolidated income tax return of Trilogy. An
income tax provision was recorded by the Company using an effective tax rate
of 38% and 61% for the years ended December 31, 1996 and 1997, respectively.
The increase in the effective rate for 1997 resulted from the establishment of
a valuation allowance to reduce the net deferred tax assets to zero.
31
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1996
REVENUES
The Company's total revenues increased 58% from $3.7 million in 1995 to $5.9
million in 1996. Three of the Company's customers accounted for approximately
99% of the Company's total revenues in 1995, and the Company's top five
customers for 1996 accounted for approximately 89% of total revenues in 1996.
SOFTWARE APPLICATIONS AND CONTENT. Software applications and content
revenues increased 53% from $3.4 million in 1995 to $5.2 million in 1996,
representing 91% and 88% of total revenues, respectively. The increase in
absolute dollars was due primarily to the increase in revenues from perpetual
licenses. Such revenues were $871,000 and $2.0 million in 1995 and 1996,
respectively.
SERVICE REVENUES. Service revenues increased from $335,000 in 1995 to
$700,000 in 1996, representing 9% and 12% of total revenues, respectively. The
increase in absolute dollars and as a percentage of total revenues was due
primarily to additional services provided to new perpetual license and
subscription-based customers in connection with the deployment of the
Company's applications.
COST OF REVENUES
SOFTWARE APPLICATIONS AND CONTENT. Cost of software applications and content
revenues increased 11% from $1.6 million in 1995 to $1.7 million in 1996,
representing 47% and 34% of software applications and content revenues,
respectively. The decrease as a percentage of software applications and
content revenues was primarily due to a fixed royalty payment of $350,000 to
Trilogy in 1995.
SERVICE. Cost of service revenues decreased 4% from $192,000 in 1995 to
$185,000 in 1996, representing 57% and 26% of service revenues, respectively.
The decrease was attributable primarily to significant non-billable work
performed in 1995 in connection with a customer contract.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses increased 77%
from $660,000 in 1995 to $1.2 million in 1996, representing 18% and 20% of
total revenues, respectively. The increase was due primarily to costs
associated with an increase in internal development personnel.
SELLING AND MARKETING. Selling and marketing expense increased from $577,000
in 1995 to $2.6 million in 1996, representing 15% and 43% of total revenues,
respectively. The increase was due primarily to increased personnel necessary
to support the Company's increased sales and marketing organization and
activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $116,000 in 1995 to $726,000 in 1996, representing 3% and 12% of total
revenues, respectively. The increase in absolute dollars and as a percentage
of total revenues was due primarily to increased personnel and facility
expenses necessary to support the Company's growth.
INCOME TAXES
The Company is included in the consolidated income tax return of Trilogy. An
income tax provision was recorded by the Company using an effective tax rate
of 35% and 38% for the years ended December 31, 1995 and 1996, respectively.
32
<PAGE>
UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statement of
operations data for the six quarters ended June 30, 1998. In the opinion of
management, this information has been prepared substantially on the same basis
as the audited Financial Statements appearing elsewhere in this Prospectus,
and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results of operations. The quarterly data should be
read in conjunction with the audited Financial Statements of the Company and
the Notes thereto appearing elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of the operating
results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1997 1998 1998
-------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Software applications
and content........... $1,745 $1,910 $2,347 $2,867 $3,146 $3,967
Service................ 387 472 469 392 1,359 1,111
------ ------ ------ ------ ------ ------
Total revenues....... 2,132 2,382 2,816 3,259 4,505 5,078
------ ------ ------ ------ ------ ------
Cost of revenues:
Software applications
and content........... 432 557 702 897 910 1,220
Service................ 139 223 270 356 433 621
------ ------ ------ ------ ------ ------
Total cost of
revenues............ 571 780 972 1,253 1,343 1,841
------ ------ ------ ------ ------ ------
Gross profit............ 1,561 1,602 1,844 2,006 3,162 3,237
Operating expenses:
Research and
development........... 283 221 320 305 810 975
Selling and marketing.. 988 1,183 1,270 1,352 1,736 2,380
General and
administrative........ 261 305 404 822 636 660
Amortization of
deferred stock
compensation.......... -- -- -- -- -- 227
------ ------ ------ ------ ------ ------
Total operating
expenses............ 1,532 1,709 1,994 2,479 3,182 4,242
------ ------ ------ ------ ------ ------
Operating income
(loss)................. 29 (107) (150) (473) (20) (1,005)
Interest income......... -- -- -- -- 7 38
------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... 29 (107) (150) (473) (13) (967)
Income tax provision
(benefit).............. (18) 65 93 287 -- --
------ ------ ------ ------ ------ ------
Net income (loss)....... $ 47 $ (172) $ (243) $ (760) $ (13) $ (967)
====== ====== ====== ====== ====== ======
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1997 1998 1998
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues:
Software applications
and content........... 82% 80% 83% 88% 70% 78%
Service................ 18 20 17 12 30 22
------ ------ ------ ------ ------ ------
Total revenues....... 100 100 100 100 100 100
------ ------ ------ ------ ------ ------
Cost of revenues:
Software applications
and content........... 20 24 25 27 20 24
Service................ 7 9 10 11 10 12
------ ------ ------ ------ ------ ------
Total cost of
revenues............ 27 33 35 38 30 36
------ ------ ------ ------ ------ ------
Gross profit............ 73 67 65 62 70 64
Operating expenses:
Research and
development........... 13 9 11 9 18 19
Selling and marketing.. 47 50 45 42 39 47
General and
administrative........ 12 12 15 25 14 13
Amortization of
deferred stock
compensation.......... -- -- -- -- -- 5
------ ------ ------ ------ ------ ------
Total operating
expenses............ 72 71 71 76 71 84
------ ------ ------ ------ ------ ------
Operating income
(loss)................. 1 (4) (6) (14) (1) (20)
Interest income......... -- -- -- -- -- 1
------ ------ ------ ------ ------ ------
Income (loss) before
income taxes........... 1 (4) (6) (14) (1) (19)
Income tax provision
(benefit).............. (1) 3 3 9 -- --
------ ------ ------ ------ ------ ------
Net income (loss)....... 2% (7)% (9)% (23)% (1)% (19)%
====== ====== ====== ====== ====== ======
</TABLE>
33
<PAGE>
The Company's total revenues and software applications and content revenues
increased quarter to quarter during each of the six quarters ended June 30,
1998 due primarily to increasing market acceptance of the Company's products,
and increases in its installed base of customers. Service revenues have
generally increased quarter to quarter due primarily to software integration,
customization and training services associated with an increase in the number
of software applications and content customers. Service revenues decreased in
absolute dollars and as a percentage of total revenues in the fourth quarter
of 1997 and increased significantly in absolute dollars and as a percentage of
total revenues for the quarter ended March 31, 1998 due primarily to the
recognition of revenues from a significant fixed fee arrangement in the
quarter ended March 31, 1998 for which work began in the quarter ended
December 31, 1997. Cost of applications and content revenues increased in
absolute dollars quarter to quarter with the increase in software applications
and content revenues. Cost of service revenues increased in absolute dollars
and as a percentage of service revenues through the quarter ended September
30, 1997 due primarily to an increase in personnel and other costs associated
with providing these services to a greater number of customers.
Research and development expenses in absolute dollars and as a percentage of
total revenues were relatively constant through the four quarters ended
December 31, 1997. Beginning in the quarter ended March 31, 1998, research and
development expenses increased significantly in both absolute dollars and as a
percentage of revenues due to significant increases in research and
development personnel and related costs to fund development of new products,
data models and tools.
Selling and marketing expenses increased in absolute dollars quarter to
quarter during each of the six quarters ended June 30, 1998, reflecting the
increase in growth of the Company's sales and marketing organizations and
activities. Selling and marketing expenses decreased as a percentage of
revenues in the three quarters ended March 31, 1998 because the Company's
total revenues increased at a greater rate than selling and marketing expenses
during such periods.
With the exception of the quarter ended December 31, 1997, general and
administrative expenses generally increased quarter to quarter in absolute
dollars and remained relatively constant as a percentage of total revenues due
primarily to increased personnel and facility expenses necessary to support
the Company's growth. General and administrative expenses increased
significantly in the quarter ended December 31, 1997 as a result of an
increase in accrued management bonuses and allowance for bad debts.
FACTORS AFFECTING OPERATING RESULTS
The Company's revenues and operating results have in the past fluctuated
significantly and are expected to fluctuate significantly in the future due to
a combination of factors, many of which are outside of the Company's control.
In addition, the timing and amount of revenues associated with particular
sales can vary significantly based upon (i) the number of products that are
accessed and the number of authorized users, and (ii) whether the fees are
perpetual or subscription-based. The Company has in the past recognized, and
may in the future be required to recognize, a significant portion of revenue
derived from license agreements with its customers in a single fiscal quarter,
which can cause significant variations in quarterly revenues. Moreover, small
delays in customer orders can cause significant variability in the Company's
total revenues and results of operations for any particular period. As a
result, the timing of significant orders and the recognition of revenue from
such orders is unpredictable. Unfavorable changes in any of the above factors
could materially and adversely affect the Company's revenues, gross margins
and results of operations in future periods.
As a result of the Company's limited operating history and the emerging
nature of the e-commerce market in which the Company competes, there can be no
assurance that the Company will be able to
34
<PAGE>
accurately forecast its revenues. The Company's current and future expense
levels are based primarily on its operating plans and estimates of future
revenues and are to a large extent fixed costs. The Company may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues would likely
have an immediate material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors--Significant
Fluctuation in Future Operating Results". Based upon all of the foregoing, the
Company believes that its quarterly and annual revenues, expenses and
operating results are likely to vary significantly in the future, that period-
to-period comparisons of the Company's results of operations are not
necessarily meaningful and that such comparisons should not be relied upon as
indications of future performance. Moreover, although the Company's revenues
have increased in recent periods, there can be no assurance that the Company's
revenues will grow in future periods, that they will grow at past rates or
that the Company will achieve profitability on a quarterly or annual basis in
the future. Due to the foregoing as well as other factors, it is likely that
the Company's operating results will be below market analysts' expectations in
some future quarters, which could materially and adversely affect the market
price of the Common Stock.
Historically, the Company has received a significant portion of its revenues
from a limited number of customer agreements. The Company believes that a
customer's decision to purchase its products or license its technology is
relatively discretionary and, especially for large-scale users, generally
involves a significant commitment of capital resources. Therefore, any
downturn in the economy or in the business of customers or potential customers
could have a material adverse effect on the Company's revenues and quarterly
results of operations. See "Risk Factors--Significant Fluctuations in Future
Operating Results".
Due to the foregoing factors, it is likely that in some future quarters the
Company's operating results will fall below the expectations of securities
analysts and investors, which would likely have a material adverse effect on
the trading price of the Common Stock.
LIQUIDITY AND CAPITAL RESOURCES
From inception through 1996, the Company financed its operations primarily
through advances from its parent, Trilogy. Since 1997, the Company has
primarily financed its operations from cash provided by operations. As of June
30, 1998, the Company had $6.6 million of cash and cash equivalents. As of
June 30, 1998, the Company's principal commitments consisted of obligations
outstanding under operating leases. Although the Company has no material
commitments for capital expenditures, management anticipates a substantial
increase in its capital expenditures and lease commitments consistent with
anticipated growth in operations, infrastructure and personnel.
Cash used by operations was $647,000 in 1996, and cash provided by
operations was $3.1 million in 1997. Cash used in operations in 1996 resulted
primarily from a net loss of $310,000 and an increase in accounts receivable
of $2.2 million, largely offset by increases in deferred revenue of
$1.1 million and accounts payable and accrued expenses of $618,000. Net cash
provided by operations of $5.9 million for the six months ended June 30, 1998
was primarily attributable to an increase in deferred revenue of $8.6 million
and an increase in payables to Trilogy of $2.2 million, largely offset by a
net loss of $980,000 and an increase of $4.9 million in accounts receivable.
Net cash used in investing activities of $359,000, $662,000, and $1.7
million for 1996 and 1997 and the six months ended June 30, 1998,
respectively, was primarily related to purchases of equipment. In the six
months ended June 30, 1998, the Company also had expenditures for leasehold
improvements related to the move into their current facility and software and
computers for additional employees.
35
<PAGE>
Cash provided by financing activities of $1.0 million in 1996 and cash used
in financing activities of $254,000 in 1997 was primarily attributable to the
net increase and decrease, respectively, in amounts payable to Trilogy for
advances received or repaid. Cash provided by financing activities of $200,000
for the six months ended June 30, 1998, was attributable to the exercise of
stock options.
Since its inception, the Company has significantly increased its operating
expenses. The Company currently anticipates that it will continue to
experience significant growth in its operating expenses for the foreseeable
future and that its operating expenses will be a material use of the Company's
cash resources. The Company believes that its existing capital resources,
combined with the net proceeds of this offering, will be sufficient to meet
its presently anticipated cash requirements through at least the next 12
months. There can be no assurance that the Company will not be required to
raise additional financing prior to such time, that additional financing will
be available when needed or that, if available, such financing will be
available on terms favorable to the Company and its stockholders.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 2 of Notes to Financial Statements for recently adopted and
recently issued accounting standards.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. This could result in system failures or miscalculations,
causing disruptions of operations including, among other things, a temporary
inability to process transactions, send invoices or engage in other normal
business activities. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" requirements. The Company has been informed by Trilogy that Trilogy
believes its internal computer systems and products are Year 2000 compliant,
and, based on a preliminary review, the Company believes its own internal
computer systems and products are Year 2000 compliant. There can be no
assurance that Year 2000 errors or defects will not be discovered in the
Company's current or future products. Any failure by the Company to make its
products Year 2000 compliant, or of such products not to be Year 2000
compliant as a result of a failure of Trilogy's products to be Year 2000
compliant, could result in a decrease in sales of the Company's products,
unanticipated expenses to address Year 2000 problems or significant
liabilities resulting from losses suffered by the Company's customers due to
such Year 2000 problems, any of which could have a material adverse effect in
the Company's business, financial condition and results of operations. In
addition, to the extent the Company's customers' systems are not Year 2000
compliant, problems in communications among industry participants could result
in a delay in the Company's products achieving market acceptance. The Company
also utilizes third-party equipment and software that may not be Year 2000
compliant. Failure of such third-party equipment or software, or of systems
maintained by the Company's suppliers, to operate properly with regard to the
Year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Furthermore, the purchasing patterns of customers or potential customers may
be affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available to purchase products from the Company of
computer product manufacturers, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
36
<PAGE>
BUSINESS
INDUSTRY BACKGROUND
GROWTH OF INTERNET USAGE AND E-COMMERCE
The Internet and Internet-related technologies are revolutionizing the way
businesses and consumers communicate, share information and conduct business.
As the number of Internet users and the sophistication of Internet-enabled
content and development tools have increased, the Internet's functionality has
expanded from a medium primarily for publishing information to enabling
complex business-to-business and business-to-consumer communications and
commerce. At the same time, businesses across many industries are faced with
increasing competitive pressures to lower costs, decrease inventories, and
improve sales and marketing productivity and time-to-market. To address these
challenges, businesses are increasingly replacing paper-based transactions
with e-commerce solutions that provide enhanced accuracy and secure exchange
of time-sensitive business information. Forrester Research, Inc. ("Forrester")
estimates that the business-to-business e-commerce market will grow from $8
billion in 1997 to $327 billion by 2002, representing a compound annual growth
rate of over 100%. In addition, Forrester also believes that computer products
is the largest and fastest growing segment, by revenue, in business-to-
business e-commerce. Moreover, the Company believes that the computer industry
is particularly well suited to the use of Internet-enabled e-commerce
solutions due to: (i) the large size and fragmented nature of the industry,
(ii) the high costs of sales and distribution, (iii) the challenges in
managing the volume and complexity of product, pricing, and configuration
information resulting from a wide array of products, short product life cycles
and increased demand for custom configured solutions, and (iv) the industry's
propensity to embrace technology for automating processes.
NEED TO ENHANCE EFFICIENCIES IN THE SALES, MARKETING AND DISTRIBUTION OF
COMPUTER PRODUCTS
According to International Data Corporation ("IDC"), the North American
computer products market, including PCs, servers, workstations, related
storage devices, peripherals and data communications equipment totaled $129
billion in 1997 and is expected to reach $178 billion by 2002. Furthermore,
purchases of computer products often involve purchases of related software
applications.
As the market for computer products has developed, the diverse group of
participants has grown both in size and complexity. These participants include
(i) over 1,000 computer hardware, software, peripheral and component vendors,
(ii) over 100,000 distribution channel participants, including distributors,
resellers, systems integrators and retailers, and (iii) millions of end-users,
including both corporate buyers and consumers. The computer industry supply
chain consists of various sales and distribution models, including direct-to-
the-end-user and indirect 2-tier and 3-tier models. Industry participants
frequently employ hybrids of these models and multiple industry participants
are typically involved in the sale and fulfillment of a transaction. For
example, national resellers and integrators may buy directly from
manufacturers or indirectly through multiple distributors. In addition,
manufacturers may choose to configure and ship directly to end-users for
orders placed through resellers or they may utilize their distributor and
reseller channel partners to configure and fulfill orders. Direct
manufacturers may contract with distributors, resellers and integrators in
order to provide multi-vendor fulfillment or local service and support. As a
result of these numerous interrelationships, the industry faces challenges in
the timely and accurate sharing of information about customers, products,
configuration, pricing, inventory and ordering.
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<PAGE>
[Graphic depicting the flow of commerce from (i) manufacturers to direct end-
users, (ii) manufacturers to corporate resellers and retailers, and corporate
resellers and retailers to end-users, and (iii) manufacturers to distributors,
distributors to VARs, Integrators and retailers, and VARs, integrators and
retailers to end-users.]
The relative success of the direct-to-the-end-user and build-to-order models
has put additional pressure on computer industry participants to improve
information flows within the channel in order to improve time-to-market,
reduce costs and compete more effectively. Rapid technological change has
resulted in the continuing decline of component prices and shorter life cycles
of computer products. Such pressures have heightened the need for industry
participants to employ build-to-order and configure-to-order models in order
to reduce inventories, improve the ability to gauge and meet changing customer
demand and improve time-to-market by delaying the acquisition of component
parts until an order is placed.
The increasing complexity of computer product distribution and the increase
in customers' demands for time-efficient ordering processes has put pressure
on industry participants to increase the productivity and responsiveness of
their sales forces. Additionally, the substantial pricing pressure throughout
the industry has required manufacturers and distributors to reduce operating
costs and improve the efficiency and effectiveness of their sales and
marketing investments. The wide array of products, short product life cycles
and high volume of new product introductions make it difficult for sales
representatives and end-users to remain current with changing product and
compatibility information. These difficulties have underscored the need for
tools and a central repository of current product information in order to
increase productivity and accuracy of sales representatives and enable end-
users to independently select, configure and order products.
Both business-to-business and business-to-consumer e-commerce transactions
can offer better access to critical information affecting the purchase
decision, including product compatibility and availability, demand/supply data
and detailed end-user preferences. However, because the sale of computer
products frequently involves multiple industry participants, industry-wide
standardization and acceptance is required in order to provide a comprehensive
e-commerce solution for the industry. Past efforts to accomplish this have
been largely proprietary, point-to-point solutions and have required
significant investments to develop and maintain the required IT
infrastructure, including software applications, content databases and
integrations into partners' systems. Additionally, many of these systems have
lacked the ability to scale to meet industry requirements. It has also been
difficult for these systems to achieve widespread adoption because competition
amongst industry participants has made it difficult for them to reach
agreement on a single standard. The Company believes that many participants
seek the benefits of a robust and scalable system, but have not been able to
justify the associated costs of building such a system independently.
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<PAGE>
THE PCORDER OPPORTUNITY
The Company believes there is a significant need for an independent,
industry-wide solution for enabling the computer industry's suppliers,
resellers and end-users to buy and sell computer products online. The Company
leverages Internet technologies to provide a comprehensive e-commerce solution
designed to increase sales and marketing productivity, meet end user demand
for online ordering, reduce costs and shorten order fulfillment cycles for
industry participants.
THE PCORDER SOLUTION
pcOrder is a leading provider of Internet-based e-commerce solutions that
are designed to enable the computer industry's suppliers, resellers and end-
users to buy and sell computer products online. The Company's solutions are
designed to increase the efficiency and effectiveness of the sales, marketing
and distribution of computer products and enable members of the industry to
take advantage of increasing adoption of e-commerce. The Company believes it
is uniquely positioned to deliver these solutions through its: (i) ability to
deliver a broad set of advanced front-office and e-commerce software
applications, including configuration and pricing; (ii) position as a leading
content provider of computer product and compatibility information; and, (iii)
experience in delivering industry-specific functionality and integrations into
business systems of computer industry participants. To date, the Company's
e-commerce solutions have been adopted by industry leaders such as Bay
Networks, Compaq, CompuCom, Computer City, CMP Publications, GE Capital, IBM,
Ingram Micro, Kingston, MCI Systemhouse, MicroAge Integration Company, PC
Wholesale, Pinacor and Tech Data.
The Company's e-commerce solutions include software applications that are
designed to increase the automation of product search, comparison,
configuration, pricing, financing and ordering, and leverage the Company's
content databases. The Company's content databases contain more than 600,000
active products from over 1,000 manufacturers, which the Company believes is
the industry's largest aggregation of product content, including detailed
product, categorization, compatibility, pricing and availability information.
The Company believes that its position as an independent, industry leading
provider of product information has enabled the Company to offer a more cost-
effective and robust product database to industry participants than internally
developed point solutions.
The Company is a party to a technology license agreement with its parent
company, Trilogy, which provides pcOrder the ability to leverage Trilogy's
front-office and e-commerce software applications, including one of the
industry's leading configuration and pricing engines. The Company has extended
these applications to support the specific configuration and pricing rules of
the computer industry in order to help industry sales representatives and end-
users quickly and accurately build and order custom configured solutions
across multiple vendors.
In addition to its development of applications and content, the Company has
completed integrations to the systems of leading industry suppliers for such
functions as order placement, pricing and inventory queries, order status
queries, financing and credit approval. These integrations can be used by
pcOrder customers that wish to establish or enhance the electronic links with
their business partners. Furthermore, the Company provides software
integration, customization, training and web hosting services designed to
ensure the successful deployment of its solutions.
pcOrder's solutions are designed to provide its customers with the following
benefits:
MEET CUSTOMER DEMAND FOR ONLINE ORDERING. The Company believes that end-
users are increasingly demanding the ability to customize and purchase
computer products and services online. The Company's solutions are designed to
provide its customers the ability to offer online product configuration,
pricing, selection and ordering capabilities. This provides end-users with the
ability to order computer products and support services from a manufacturer
providing fulfillment through the
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<PAGE>
channel, or from a reseller providing product through a distributor or
manufacturer, all in a manner transparent to end-users.
INCREASE EFFECTIVENESS AND REDUCE COSTS OF SALES AND MARKETING EFFORTS. The
Company's offering provides customers with a robust solution that is designed
to enhance the productivity and effectiveness of sales and marketing efforts.
The Company believes that its solutions enable computer industry participants
to increase sales force productivity by providing a centralized, comprehensive
source for product data, and, in turn, enabling sales representatives to
rapidly respond to customer needs with accurate and complete information
regarding product, compatibility, pricing and availability. The Company's
electronic configuration and ordering technology is also designed to reduce
costs by producing more accurate multi-vendor product configurations and
enable online ordering.
REDUCE INVENTORY COSTS BY FACILITATING BUILD-TO-ORDER, CONFIGURE-TO-ORDER
AND CHANNEL ASSEMBLY. Rapidly declining prices in the computer industry have
increased the importance of time-to-market. By providing direct communication
links and product data to computer industry participants, the Company believes
that its solutions enhance industry efforts to increase inventory turns
through the automation and coordination of configuration, pricing, selection
and ordering. The Company believes that this in turn enables the Company's
customers to expand their build-to-order and channel assembly efforts,
decreasing the risk of product obsolescence and improving the industry's
ability to meet individual end-user demand. The Company further believes that
reducing order fulfillment cycles offers customers the opportunity to achieve
higher average selling prices and margins by enabling the sale and delivery of
commodity-based products earlier in the product life cycles.
REDUCE COSTS, RISKS, AND TIME-TO-MARKET OF ESTABLISHING E-COMMERCE
CAPABILITIES. The Company's position as an independent third-party solutions
provider, combined with its industry focus and experience, has enabled it to
build product functionality, content and supplier integrations that are
designed to support the diverse requirements of manufacturers, distributors,
resellers, retailers and other industry participants. Accordingly, the Company
believes it is able to offer a more cost-effective and rapid time-to-market
solution for conducting e-commerce than internally developed point solutions.
To the extent the Company continues to develop and enhance its applications,
content and supplier integrations, the Company believes that the incentives
will increase for companies to outsource these e-commerce services to the
Company.
IMPROVE INDUSTRY COORDINATION BY INCREASING ACCURACY, AVAILABILITY AND
TIMELINESS OF INFORMATION. The Company's applications and content databases
are designed to enable multi-vendor search, comparison, configuration,
pricing, financing, ordering and reseller selection. The Company believes that
because of its status as an independent third-party provider of standardized
product information and applications, industry participants are more willing
to use pcOrder's applications and contribute product information to the
Company's databases. To the extent more industry participants adopt pcOrder
applications and content, the Company believes that its customers derive
greater benefit from the increased opportunity to engage in business
electronically with more participants.
STRATEGY
The Company's objective is to be the leading e-commerce technology and
content provider to the computer industry. The Company's strategy to achieve
this objective includes the following key elements:
LEVERAGE INTERNET TECHNOLOGY. pcOrder leverages Internet technology to
provide communication capability and support complex transactions across a
range of computer industry participants, regardless of participants' legacy
computing environment. Unlike traditional proprietary solutions focusing on
point-to-point solutions with narrowly defined functionality, Internet
technology
40
<PAGE>
enables the Company to electronically link computer industry participants,
including manufacturers, distributors, resellers, retailers, other industry
participants and end-users, including corporate buyers and consumers, with the
objective of enhancing sales and marketing efficiency and effectiveness,
reducing costs, shortening the product fulfillment cycle and improving time to
market.
BROADEN ADOPTION THROUGH RELATIONSHIPS WITH COMPUTER INDUSTRY MARKET
LEADERS. The Company aggressively pursues relationships with leading computer
industry manufacturers, distributors, resellers, retailers and other industry
participants in order to increase adoption of its solutions. To date, the
Company has established relationships with Bay Networks, GE Capital, Compaq,
CompuCom, Computer City, IBM, Ingram Micro, Kingston, MCI Systemhouse,
MicroAge, PC Wholesale, Pinacor and Tech Data. The Company's objective is to
cooperate with its customers through direct and indirect marketing initiatives
to broaden adoption of the Company's solutions by resellers and end-users.
EXTEND POSITION AS AN INDUSTRY LEADING SOURCE OF PRODUCT INFORMATION. The
Company has built and maintains content databases containing more than 600,000
products from over 1,000 manufacturers. The Company adds or modifies
information relating to, on average, over 20,000 products per month. The
Company seeks to extend its position as an industry leading product
information source by continually broadening and deepening its product data.
LEVERAGE POSITION AS INDEPENDENT THIRD-PARTY SOLUTIONS PROVIDER. The Company
plans to continue to leverage its position as an independent third-party
solutions provider in order to offer broad solutions to its customers. The
Company believes that its ability to offer standardized e-commerce solutions
to the computer industry creates the opportunity to gain economies of scale,
by leveraging the Company's investment in content, technology and
functionality across a wide range of customers. The Company believes that this
will enable it to offer robust solutions more cost-effectively than individual
industry participants, making its e-commerce solutions increasingly attractive
to industry participants. The Company further believes that its position as an
independent third-party solutions provider may allow it to act as a
significant aggregator of sales order transaction and market demand data for
the computer industry.
EXPAND APPLICATION FUNCTIONALITY TO INCREASE AUTOMATION OF ADDITIONAL SALES,
MARKETING AND CHANNEL MANAGEMENT FUNCTIONS. The Company intends to continue to
invest in the development of additional applications and services to meet the
e-commerce needs of the computer industry. The Company plans to execute this
strategy by working closely with its customers to understand and address their
needs and by further automating the critical processes in the sales, marketing
and distribution of computer products. In addition, the Company intends to
enhance its products with additional functionality, such as the Company's
lease financing product developed in conjunction with GE Capital. The Company
believes that by leveraging the knowledge gained from its relationships with a
broad range of industry participants, it is well positioned to define and add
new functionality to its solutions. The Company further believes that by
helping to make its customers more competitive, it will become an increasingly
important part of its customers' businesses and participate in a higher
percentage of its customers' commerce volume.
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<PAGE>
CUSTOMERS
pcOrder has established a customer base of manufacturers, distributors,
resellers, integrators, retailers and other industry participants. During the
year ended December 31, 1997, only MicroAge represented more than 10% of total
revenues. The customers set forth in the table below represent 66% of total
revenues for the six months ended June 30, 1998, except for Compaq, from which
the Company had not yet received revenues during such period.
<TABLE>
<CAPTION>
RESELLERS, INTEGRATORS
SUPPLIERS DISTRIBUTORS & RETAILERS FINANCING COMPANIES
--------- ------------ ---------------------- -------------------
<S> <C> <C> <C>
Bay Networks Ingram Micro CompuCom GE Capital (Vendor
Compaq PC Wholesale Computer City Financial Services)
IBM Pinacor GE Capital IT Solutions
Kingston Tech Data MCI Systemhouse
MicroAge Integration Company
</TABLE>
In partnership with its major customers, the Company has deployed its
solutions to over 500 small and medium resellers. The following examples
illustrate how certain of the Company's customers use its suite of products
and services to automate and enhance their sales, marketing and inventory
management capabilities.
GE CAPITAL (VENDOR FINANCIAL SERVICES). In 1997, GE Capital (Vendor
Financial Services) launched the TechBuyer service, which provides small and
medium resellers with software and services to automate their sales and
marketing functions. The Company was responsible for providing the entire
software and content infrastructure for this undertaking. In particular, the
Company supplied the resellers with desktop-based sales automation software
designed to enhance the productivity of their sales representatives. In
addition, resellers were provided access to the Company's multi-supplier
content databases. Finally, the Company installed a leasing module into the
sales automation software, offering resellers the option to have their sales
financed by GE Capital (Vendor Financial Services). The Company provides
ongoing software/content maintenance, as well as hosting services to
TechBuyer.
INTERNATIONAL BUSINESS MACHINES. The Company signed an agreement with IBM in
the first quarter of 1998 to support configuration ("Build it Yourself"), PC
product comparisons and reseller pricing online. The Company also provides
reseller pricing and referrals for IBM's Personal Systems Group Web site. This
functionality supports IBM's internally developed application Net.Commerce,
which enables customers to shop online.
MICROAGE. MicroAge is a Fortune 500 provider of global technology solutions.
As a strategic partner of pcOrder for the past two years, MicroAge has
leveraged pcOrder's technology and services with the objective of increasing
internal sales force productivity and driving customer loyalty throughout its
large network of Value Added Resellers. MicroAge has utilized the pcOrder
platform, software and content to help accelerate the deployment of its own
branded e-commerce offering, ECadvantage.
MICROAGE INTEGRATION COMPANY. MicroAge Integration Company, a subsidiary of
MicroAge, provides corporations, institutions and government agencies with
ISO-9001 certified multi-supplier integration services and distributed
computing solutions through a network of Global Locations spanning more
than 39 countries. Today, pcOrder is used by over seven hundred MicroAge
Integration sales representatives to quote pricing and availability,
configure and order computing solutions.
PINACOR. Pinacor, a wholly owned subsidiary of MicroAge, delivers
technology products and services to more than 20,000 resellers, retailers,
dealers and systems integrators. Using e-commerce to streamline the
delivery of technology solutions and services, Pinacor supports
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<PAGE>
customers worldwide from strategic distribution hubs in the United States
and Latin America. pcOrder provides extensive product information that is
incorporated into Pinacor's Web-based e-commerce ordering tool.
TECH DATA. In March 1998, Tech Data adopted pcOrder configuration technology
as a core component of its e-commerce offerings. Tech Data intends to leverage
pcOrder's configuration expertise for the purpose of enabling its customers
and internal sales representatives to quickly and easily configure custom
computer systems. pcOrder's industry relationships will also support Tech
Data's channel assembly strategies. Capitalizing on the heightened demand
created by the industry's movement towards assemble-to-order, pcOrder and Tech
Data have coordinated to introduce the first online configuration solution
designed to support channel assembly initiatives of system manufacturers,
beginning with IBM's Authorized Assembler Program (AAP). This arrangement is
intended to enable Tech Data to gain a competitive advantage by further
streamlining related processes and simplifying component selection.
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<PAGE>
PCORDER PLATFORM
pcOrder provides an integrated platform consisting of application, content
databases, industry integrations and related services that leverages Internet
and Internet-related technologies. The Company's solutions are designed to
meet the specific needs of each industry segment, including manufacturers,
distributors, resellers, integrators, retailers, other industry participants
and end-users, including corporate buyers and consumers.
[Graphic depicting the Company's platform consisting of applications, content
and integrations. Applications are shown as applications Sales Desktop, Web
Storefront, Customer Desktop, Commerce-Station. Subcategories of these
applications are catalog, configuration, pricing, order, referral, finance and
promotion. Content database is shown as integrations and reseller,
distributor, manufacturer and finance company.]
SOFTWARE APPLICATIONS. The Company offers a suite of software applications
that are designed to increase the automation of sales, marketing and
distribution functions. These applications are modular in nature, enabling
customers to purchase and add specific functionality as needed. The Company's
applications are built upon various combinations of the following core
modules:
CATALOG. The Catalog Module is designed to enable users to easily search,
browse, compare, and view product datasheets from the Company's content
databases. For example, users can perform searches such as "show all laptop
computers with hard drives larger than 1 gigabyte."
CONFIGURATION. The Configuration Module is designed to enable users to more
efficiently configure valid systems. Users request desired features through
a needs analysis interface, which then interacts with Trilogy's
configuration engine to select components. This interface shields the user
from technical details of the components while preventing invalid
configurations.
PRICING. The Pricing Module is designed to allow users to access customized
pricing information. Utilizing Trilogy's SC Pricer engine, the Company has
developed a multi-tiered, channel-specific pricing module. For example,
end-user prices can be quoted as a function of the reseller's cost from the
distributor, thus providing seamless, dynamic pricing through the channel.
ORDER. The Order Module is designed to enable online ordering and order
confirmation. Manufacturers, distributors and resellers can access pricing
and availability information from
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<PAGE>
multiple legacy systems and provide such real-time information to their
potential customers. Links between the Company's offering and the
customer's ordering system takes the form of EDI transactions, direct API
calls to the ordering system or direct database integration.
REFERRAL. The Referral Module is designed to enable industry participants
to refer customers to resellers based on location or other characteristics.
In addition, the Referral Module delivers, processes, and tracks referrals
in order to connect end-users with the appropriate channel partners. This
allows manufacturers to work constructively with their resellers with the
obligation of ensuring that customer needs are met.
FINANCE. The Finance Module is designed to allow users to quote lease
rates, electronically submit credit applications and maintain lease data,
as well as customize finance settings, select from multiple financing
options and specify optional financing terms.
PROMOTION. The Promotion Module is designed to provide the capability to
deliver and manage targeted promotions across multiple tiers in the
channel. The Promotion Module can be programmed to dynamically suggest
alternative or add-on products at the point of sale. For example, a
component vendor can coordinate with a reseller to offer the reseller's
online customers pre-packaged alternatives at the point of sale, in order
to maximize reseller margins and dispose of the vendor's excess inventory.
These modules may be accessed either through the Company's packaged software
applications or through customer-specific, custom developed applications.
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<PAGE>
The Company's software applications are specifically designed to meet the
needs of each industry segment, and may be integrated into customers' legacy
transaction and decision-support systems, thus preserving customers'
technology investments. The table below sets forth descriptions of the
Company's software applications and certain of the key benefits of such
products.
<TABLE>
<CAPTION>
SOFTWARE APPLICATIONS TARGET MARKET SEGMENT DESCRIPTION BENEFITS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CommerceStation Manufacturers . Accepts customer orders on Enables
a website and facilitates manufacturers to
electronic transfer of display product,
orders to the appropriate pricing and
channel partner for availability
fulfillment. information and to
. Provides reseller-specific accept orders
pricing. directly from end-
. Provides channel partners users that are
with requests for product fulfilled through
information, referrals or existing channel
leads. partners.
- ----------------------------------------------------------------------------------------------------
Web Storefront Distributors, . Accepts orders directly Enables Web-based
Resellers from customers via a sales, marketing
website. and ordering for
. Provides end-users with distributors and
direct access to product resellers.
catalog, configuration,
pricing and availability
information.
. Provides promotion
capability through delivery
of targeted marketing
messages.
- ----------------------------------------------------------------------------------------------------
Sales Desktop Distributors, . Sales productivity tool Designed to help
Resellers, for sales representatives. distributors,
Integrators, . Provides instant access to resellers,
Retailers information on over 600,000 integrators and
products from over 1,000 retailers to
manufacturers. increase sales
. Automates quote and order force productivity
generation. and order accuracy.
- ----------------------------------------------------------------------------------------------------
Customer Desktop Manufacturers, . Procurement management Designed to help
Resellers and software including support suppliers to
Integrators for custom catalogs, enhance customer
(indirect to end-users) contract pricing and loyalty by
purchase order approval providing
routing. electronic link
. Creates Internet-based between end-users'
link directly to suppliers' procurement
Web Storefront. processes and
suppliers' Web
Storefronts.
- ----------------------------------------------------------------------------------------------------
VIP Program Manufacturers . Provides manufacturer Designed to help
(VIPER) information, such as manufacturers to
product images and detailed enhance their
product specifications to presence at the
the Sales Desktop point of sale by
application. providing timely
. Enables manufacturers to information to end-
enter and maintain their users and channel
own product information partner
within the Company's representatives.
database.
- ----------------------------------------------------------------------------------------------------
Channel Assembly Module Manufacturers, . Delivers channel assembly Supplies
Distributors product, pricing, manufacturers and
configuration and other distributors with
business rules to channel timely and accurate
partners at the point of information to help
sale. increase efficiency
and flexibility of
supply chain.
- ----------------------------------------------------------------------------------------------------
Configuration & Distributors . Provides validation of Enables
Validation multi-vendor systems within distributors and
the on-line quoting and resellers to
ordering systems of provide private
distributors. label and custom
configured systems.
- ----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
CONTENT. The Company's industry content databases contain product
information on more than 600,000 products from over 1,000 manufacturers. These
databases provide the user access to current product information, including
compatibility, necessary to consummate a sale. The Company receives updates
and additions of product data on a regular basis from manufacturers,
distributors, and resellers for an average of 20,000 new products per month,
and supplements the data in three ways:
CATEGORIZATION/CLASSIFICATION. The Company's categorization and
classification processes are designed to create and populate standardized
product groupings across the industry and enable convenient access to a
broad array of products from multiple suppliers. For example, an end-user
can specify all monitors of a certain size and pick from a list of monitors
made by several manufacturers and/or available from multiple suppliers.
DATA AND LOGIC MODELING. The Company's data and logic modeling processes
are designed to enable accurate multi-vendor configuration. For example,
the Company's systems specify that a particular computer accepts SDRAM but
not EDO RAM, thereby helping the user to order the correct upgrade package.
The Company continually develops and enhances its Computer Industry Model
(CIM), a repository of much of the modeling and expertise that enables the
Company's applications to configure multi-vendor computer systems.
DATA SHEET CREATION. The Company creates data sheets designed to give
customers detailed product data in a standardized format, thus enabling
attribute-based searching and side-by-side comparisons of functionality
differences between two or more products. For example, a user deciding
between two otherwise identical laptop computers would be able to see that
one comes with a fax modem and more RAM, but the other is lighter and
smaller.
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<PAGE>
The Company has developed a detailed process for receiving, processing, and
verifying the accuracy of the content in its databases. In addition, the
Company has invested in creating advanced tools to enable pcLabs, the
Company's content management unit, to enter, maintain, and test component
data. pcLabs develops and maintains extensive product and pricing information
on over 600,000 products from over 1,000 manufacturers. The Company receives
electronic updates from many of its manufacturers, distributors and reseller
customers on a daily basis. After a normalization process which assigns
supplier codes and a master product part number, the information is imported
into the Company's databases. pcLabs places each product into the appropriate
class and category, and then performs extensive secondary research for content
modeling and data sheet creation. For example, a laptop requires over 90
technical specifications and allows for up to 40 marketing attributes.
Throughout the content creation process, the information undergoing rigorous
quality assurance testing. In order to manage data quality, the Company has
implemented a comprehensive Data Quality process which involves an automated
regression test and analysis of over 34,000 validation test cases. See "Risk
Factors--Risks Associated with Maintaining Databases".
[Graphic depicting flow of electronic pricing information (SKU) through
normalization, classification, quality assurance, regression testing to
production.]
INTEGRATIONS. The Company has completed mission-critical integrations to
the systems of leading industry suppliers for such functions as order
placement, pricing and inventory queries, order status queries, financing
and credit approval. These integrations can be leveraged by pcOrder
customers that wish to establish or enhance electronic links with their
business partners. For example, a manufacturer can quote pricing and
inventory available through its channel partners on its Web site, and then
transfer the order to a channel partner for delivery. Alternatively, a
reseller can access information about its suppliers, inventories in
addition to its own, and then display the combined total to its customers
through its Web Storefront.
SERVICES. In order to provide a comprehensive platform, the Company offers a
range of services to speed integration and adoption of the Company's solutions
at the customer site.
SOFTWARE INTEGRATION, CUSTOMIZATION AND TRAINING. Several of the
Company's solutions, particularly higher-end installations, require a
significant amount of professional services. These services may include
the development of interfaces for integration with the customer's legacy
systems, the customization of the Company's software to meet the specific
needs and situation of the customer, or the training of the customer's
employees in the operation of the software
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<PAGE>
application. The Company provides all of these services through a
dedicated consulting and training force. Customers typically pay for
consulting and training services on a time-and-materials basis.
WEB HOSTING. While some of the Company's customers host their Web sites
internally, a substantial number of customers utilize the Company's
hosting services. The Company maintains a Web hosting facility including
multiple servers and connectivity through dedicated T-1 lines from its
Austin location.
SALES AND MARKETING
The Company sells and markets its software applications, content and
services primarily through its sales and marketing organization.
SALES. The Company's sales force consists of technical presale consultants,
account developers, field sales representatives and telemarketers. The Company
deploys sales teams consisting of both sales and technical professionals to
provide customized proposals, presentations and demonstrations to potential
customers. The primary decision makers in the Company's customers'
organizations typically include members of such customers' management
executives such as the chief executive officer, the chief financial officer,
vice presidents of marketing, vice presidents of sales and chief information
officers.
MARKETING. The Company's marketing efforts are directed at establishing a
market leadership position and, therefore, the Company is investing heavily in
an expansion of its marketing organization and activities. Targeted at
executives in the computer industry, pcOrder's marketing programs are focused
on creating awareness and generating interest in the pcOrder solution. The
Company engages in a variety of co-marketing activities with certain of its
key customers designed to leverage and strengthen the Company's relationship
with its customers. The Company is an active participant in industry
conferences and expositions. It has sponsored several industry conferences in
the past, and believes that exposure of this nature has contributed to the
Company's visibility within the computer industry. The Company's marketing
personnel engage in a variety of marketing activities, including managing and
maintaining the pcOrder Web site, issuing newsletters, making direct mailings,
placing advertisements, conducting public relations and establishing and
maintaining close relationships with industry analysts.
CLIENT SERVICES
The Company implements its customer support, software integration,
customization and training services primarily through its client services
organization. The organization's goal is to ensure successful and rapid
deployment and high levels of customer satisfaction by facilitating open
communications to quickly identify, analyze and solve problems. The Company's
participation in the customer's implementation may include planning and
requirements definition, project management, custom integration, unit and
system tests and support procedures design. The Company believes that
providing a high level of customer service and technical support is necessary
to achieve timely product implementation. The Company provides ongoing product
support services to its customers in the form of telephone, e-mail and Web-
based support, documentation and software updates and error corrections. All
product updates are available to customers for downloading from the Company's
Web site. A team of dedicated engineers provides product, technical and
product registration support from 7:00 a.m. to 7:00 p.m., Central time, on
business days, from the Company's support offices. The Company also makes
training available to its customers.
TECHNOLOGY
The Company's solutions are based on open industry standards and are
designed to be fully modular and extensible. The architecture is designed to
allow new modules to be added to the
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backbone, and replaced when newer versions become available. The Company's
software application and content databases are made available through both
thin client (Web browser/HTML) and Win32 client-server interfaces. Both
interfaces access the same application layer, which provides functionality
such as configuration, pricing, product information data sheets, financing and
online ordering.
The Company's software applications have been implemented through the use of
industry standard technologies, including HTTP/HTML, C++, COM/DCOM, CORBA,
Windows NT and ODBC. The Company believes this implementation provides timely
systems integration, ease of implementation, broad connectivity and the
ability to leverage technological advancements.
The Company has a nonexclusive, worldwide, royalty-bearing license to use,
make, reproduce and prepare derivative works of certain of Trilogy's front
office automation software. See "Relationship with Trilogy". The Company
customizes application modules licensed to it by Trilogy for the specific
needs and situations of its customers. Examples of this customization include
industry-specific configuration and pricing modules. The Company creates its
own application modules that specifically address the functionality needs of
computer industry participants. An example of one of these modules is
CommerceStation, a computer industry-specific application that allows
manufacturers to accept orders directly from end-users and fulfill them
through existing channel partners.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts include software application
development and customization, data modeling and tools development. The
Company's software application development teams are dedicated to identifying
and developing software solutions to meet the unique needs of computer
industry participants. This includes both the development of original software
applications as well as customizing Trilogy's applications. The Company's
database content research and development efforts are primarily focused on the
development of data models and tools that enhance the Company's content
management and maintenance capabilities.
Research and development expenses were $1.1 million in 1997 and $1.8 million
for the six months ended June 30, 1998. The Company intends to continue to
make substantial investments in research and development and related
activities to maintain and enhance its product lines. The Company believes
that its future success will depend in large part on its ability to support
current and future releases of software applications, to maintain and extend
its content databases and to timely develop new products that achieve market
acceptance. Any failure by the Company to do so would have a material adverse
effect on the Company's business, operating results and financial condition.
See "Risk Factors--New Products and Technological Changes; Risks Associated
with Transition to New Technology Platform".
EMPLOYEES
As of June 30, 1998, the Company had 147 full-time employees, including 37
in sales and marketing, 24 in research and development, 33 in content
management, 23 in customer support, 13 in professional services and 17 in
administration. In addition, the Company also employed 19 part-time and
contract employees in content management and client support. All of these
employees are located in the United States. The Company believes that its
future success is dependent on attracting and retaining highly skilled
engineering, sales and marketing, and senior management personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will continue to be able to attract and retain qualified employees. The
Company's employees are not represented by any collective bargaining unit. The
Company has never experienced a work stoppage and considers its relations with
its employees to be good.
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FACILITIES
The Company's principal facility occupies an aggregate of approximately
22,000 square feet in Austin, Texas, pursuant to leases that expire in January
1999, December 1999 and March 2003, respectively, and pcOrder believes that
its existing principal facility is adequate for its current requirements. The
Company further believes that additional space can be obtained to meet its
future growth requirements.
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RELATIONSHIP WITH TRILOGY
The Company was established as a separate business unit within Trilogy on
July 1, 1993, and was incorporated on July 18, 1994. As of June 30, 1998,
Trilogy owned 99.5% of the outstanding shares of Common Stock of the Company.
Mr. Liemandt, a director of the Company, is Chairman and Chief Executive
Officer and a substantial stockholder of Trilogy. Upon completion of this
offering, Trilogy will beneficially own approximately % of the outstanding
shares of Common Stock ( % if the Underwriters' over-allotment option is
exercised in full). For as long as Trilogy continues to beneficially own more
than 50% of the outstanding shares of the Company's Common Stock, Trilogy will
be able to direct the election of all of the members of the Company's Board of
Directors and exercise a controlling influence over the business and affairs
of the Company, including any determinations with respect to mergers or other
business combinations involving the Company, the acquisition or disposition of
assets by the Company, the incurrence of indebtedness by the Company, the
issuance of any additional Common Stock or other equity securities of the
Company, and the payment of dividends with respect to the Common Stock.
Similarly, Trilogy will have the power to determine matters submitted to a
vote of the Company's stockholders without the consent of the Company's other
stockholders, will have the power to prevent a change in control of the
Company and could take other actions that might be favorable to Trilogy. See
"Risk Factors-- Control By and Relationship with Trilogy".
Trilogy has advised the Company that its current intent is to continue to
hold all of the Common Stock beneficially owned by it following this offering.
However, Trilogy is not subject to any contractual obligation to retain its
controlling interest, except that Trilogy has agreed not to sell or otherwise
dispose of any shares of Common Stock of the Company for a period of days
after the date of this Prospectus without the prior written consent of
Goldman, Sachs & Co. See "Underwriting". As a result, there can be no
assurance concerning the period of time during which Trilogy will maintain its
beneficial ownership of Common Stock owned by it following this offering. Any
disposition by Trilogy of any of the shares of Common Stock it owns following
this offering may be effected in one or more transactions, including a public
offering, a distribution by Trilogy of such Common Stock to its stockholders,
an offer by Trilogy to exchange such Common Stock for outstanding Trilogy
common stock, or other transaction. Beneficial ownership of at least 80% of
the total voting power of the Company and 80% of each class of nonvoting
capital stock of the Company is required in order for Trilogy to be able to
effect a tax free spin off of the shares of Common Stock or certain other tax
free transactions. See "Risk Factors--Risks Associated with Dependence on
Trilogy; Limited Independent Operating History; Potential Conflicts of
Interest" and "Risk Factors--Possible Future Sales of Common Stock by
Trilogy".
In June 1996, the Company and Trilogy entered into certain agreements for
the purpose of clarifying the ongoing relationship with between the two
companies. Because these agreements were entered into at a time when the
Company was a wholly-owned subsidiary of Trilogy, they may not be the result
of arms'-length negotiations between the parties. Pursuant to the terms of an
Asset Transfer Agreement, Trilogy transferred the assets and liabilities
comprising Trilogy's pc.Order.com division to the Company in exchange for 900
shares of the Company's Common Stock (which shares were subsequently split in
September 1996 into 11,520,000 shares of the Company's Common Stock) (the
"Transferred Shares"). Pursuant to the Asset Transfer Agreement, the Company
also granted Trilogy certain piggyback and demand registration rights, which
rights Trilogy may transfer to any transferee of the Transferred Shares,
subject to certain limitations. See "Description of Capital Stock--
Registration Rights". These registration rights have been specifically waived
by Trilogy in connection with this offering.
The Technology, Services and License Agreement, the Master Services
Agreement and the Tax Allocation Agreement described below, have each been
filed as exhibits to the Registration Statement
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of which this Prospectus forms a part and such summaries are qualified in
their entirety by this reference to the full text of such agreements. Because
the Company was greater than a 95% subsidiary of Trilogy at the time these
agreements were entered into, they may not be the result of arms'-length
negotiations between the parties.
TECHNOLOGY, SERVICES AND LICENSE AGREEMENT
In September 1998, the Company and Trilogy entered into a Technology,
Services and License Agreement (the "Technology Agreement"), which amended and
superseded a Master Software License Agreement and a Reseller Agreement
previously entered into by the parties, pursuant to which Trilogy has licensed
certain intellectual property rights to the Company, and the Company has
agreed to license certain intellectual property rights to Trilogy. Each party
has granted the other a nonexclusive, irrevocable, perpetual, worldwide,
license to internally use, make, reproduce and/or prepare derivative works of
certain of its intellectual property (as applicable, the "Trilogy Intellectual
Property" or the "pcOrder Intellectual Property"), or to sublicense any third
party to do so, subject to certain confidentiality and other restrictions.
Trilogy also granted the Company a nonexclusive, irrevocable, perpetual,
worldwide right and license under the Trilogy Intellectual Property to make,
use, reproduce, prepare derivative works based upon, license, offer to
license, import, export, publish, distribute, perform, display, advertise,
market, promote, service and or support those of pcOrder's products that are
network based e-commerce products for enabling sales, purchasing, marketing or
distribution within the computer products market ("Computer E-Commerce
Products"), and to sublicense any third party to do so, subject to the payment
of royalties as described below. Notwithstanding the foregoing, to the extent
that any of the Trilogy Intellectual Property (including Trilogy products
based on such intellectual property) is not of a same, similar, replacement or
equivalent general type as Trilogy Intellectual Property available prior to a
Trigger Event, as defined below, pcOrder will not have rights to such Trilogy
Intellectual Property. The Company also granted Trilogy a nonexclusive,
irrevocable, perpetual, worldwide right and license to use pcOrder
Intellectual Property to make, use reproduce, prepare derivative works based
upon, license, export, publish, distribute, perform, display, advertise,
market, promote, service and support Trilogy Products (as defined in the
Technology Agreement) and to sublicense any third party to do so, subject to
the payment of royalties described below. However, following a change in
control of Trilogy or such time as Trilogy is no longer required by generally
accepted accounting principles to be consolidated with pcOrder for financial
reporting purposes (in either case, a "Trigger Event"), Trilogy shall not
until the later of September 1, 2008 or the expiration of five years following
such Trigger Event, have any license to the pcOrder Intellectual Property with
respect to any Computer E-Commerce Product that utilizes pcOrder's product
content or certain tools developed by pcOrder. Pursuant to the Technology
Agreement, neither party is restricted from entering into or having similar
agreements with third parties or doing any activity relating to competitive
products and services (involving none of the other party's information or
intellectual property). The Technology Agreement further provides that Trilogy
and the Company shall jointly own all inventions, works of authorship and
other intellectual property created, invented or discovered by at least one
employee and/or contractor of the Company in conjunction with at least one
employee and/or contractor of Trilogy. The Company and Trilogy are each
obligated to pay to the other monthly royalties based on a percentage of
license fees derived from sales of products that incorporate and/or data
maintenance services related to the other party's technology; of software
maintenance fees other than data maintenance services in connection with
products that incorporate the other party's technology; and of on-line
subscription service fees from products that incorporate the other party's
technology. The Technology Agreement provides that each party will defend,
indemnify and hold harmless the other party for any claim against such other
party by any third party to the extent based on an actual or alleged: (i)
failure by a party to perform its obligations under the Technology Agreement;
(ii) breach of any one or more of a party's representations or warranties;
(iii) failure by a party to comply with government laws and regulations;
(iv) intentional or grossly negligent acts or omissions on the part of a
party, and (v) to the extent a party delivers Material (as defined in the
Technology Agreement) to the other party, (1) failure by the delivering party
to either own or have
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<PAGE>
sufficient rights to deliver Material to the other party, (2) failure by a
party to either own or have sufficient rights to grant to the other party the
license it has granted under the Technology Agreement, (3) infringement (or
violation) by such delivered Material of a third party's intellectual property
rights, or (4) failure to be Year 2000 compliant. Such indemnification
obligations are subject to the condition that the indemnified party:
(a) promptly provides notice of any claim to the indemnifying party; (b)
allows the indemnifying party to control the defense of the claim and
settlement negotiations; and (c) fully cooperates with the indemnifying party
in such defense and settlement negotiations. The Technology Agreement provides
that upon either party's request, the parties shall negotiate in good faith
regarding the terms and conditions upon which either party will perform
consulting services reasonably requested by the other party; provided,
however, that such obligation shall expire on the later of seven years
following the Trigger Event or September 1, 2010.
MANAGEMENT SERVICES AGREEMENT
The Company and Trilogy entered into a Management Services Agreement,
effective as of July 1, 1998, which amended and superseded a Services
Agreement previously entered into by the parties, pursuant to which Trilogy
will provide certain administrative and corporate support services to the
Company. Trilogy has agreed to provide to the Company certain services
("Mandatory Services") including tax administration, payroll, payroll
accounting, banking, corporate finance, recruiting and employee training
services to the Company. In addition, Trilogy has agreed to provide the
Company certain additional services ("Optional Services"), including hardware
purchasing, shipping and receiving, purchase order database administration,
network administration, audit services, human resources administration, legal
services and customer training. The provision of Mandatory Services may not be
unilaterally terminated by either party during the effectiveness of the
Management Services Agreement. The provision of Optional Services may be
terminated by either party upon 90 days notice. The Management Services
Agreement provides that Trilogy will use the same level of care in rendering
services to the Company that Trilogy uses in rendering services to itself or
any of its other subsidiaries, which will be at least equal to the care, that
Trilogy has used in the past in rendering such services to the Company.
However, the selection of personnel to perform the various services will be
within the sole control of Trilogy. Specifically, Trilogy may, without the
consent or approval of the Company, subcontract any service to be provided
under the Management Services Agreement. The Management Services Agreement
terminates on June 30, 1999, and thereafter is subject to successive one-year
renewal terms upon consent of the parties. The Management Services Agreement
may be terminated: (i) by either party within 30 days of an uncured material
breach by the other party; (ii) by either party upon the liquidation or
dissolution of the other party; (iii) by Trilogy immediately upon notice to
the Company if the Company fails to pay the amount due to Trilogy under such
agreement by the tenth day after notice of nonpayment is given; or (iv) within
30 days of the date at which Trilogy ceases to own a majority of the Company's
Common Stock.
TAX ALLOCATION AGREEMENT
The Company is currently, and after the offering will be, included in
Trilogy's consolidated federal income tax group, and the Company's federal
income tax liability will be included in the consolidated federal income tax
liability of Trilogy. The Company and Trilogy have entered into a Tax
Allocation Agreement pursuant to which the Company and Trilogy will make
payments between them such that, with respect to any period, the amount of
taxes to be paid or received by the Company, subject to certain adjustments,
will be determined as though the Company were to file separate federal, state
and local income tax returns (including, except as provided below, any amounts
determined to be due as a result of a redetermination of the tax liability of
Trilogy arising from an auditor otherwise) rather than a consolidated
subsidiary of Trilogy with respect to federal, state and local income taxes.
Under the terms of the Tax Allocation Agreement, the Company, in computing its
stand alone tax liability or tax refund, will be able to utilize certain tax
items, such as net operating losses, foreign tax credits and other tax credits
(collectively, "Tax Attributes"). In addition, with respect to Tax Attributes
of the
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Company that come into existence after the execution of the Tax Allocation
Agreement, and under the terms of the Tax Allocation Agreement, Trilogy will
be required to make any payment to the Company as such Tax Attributes of the
Company are utilized by the Trilogy consolidated federal income tax group.
Pursuant to the Tax Allocation Agreement, Trilogy's obligation to make any
payment to the Company relating to the Company's Tax Attributes will apply
only to tax periods during which the Company (or its affiliated subsidiaries)
is a member of Trilogy consolidated federal income tax group.
Trilogy will continue to have all the rights of a parent of a consolidated
group (and similar rights provided for by applicable state and local law with
respect to a parent of a combined, consolidated or unitary group), will be the
sole and exclusive agent for the Company in any and all matters relating to
the income, franchise and similar liabilities of the Company, will have sole
and exclusive responsibility for the preparation and filing of consolidated
federal and consolidated or combined state and local income tax returns (or
amended returns), and will have the power, in its sole discretion, to contest
or compromise any asserted tax adjustment or deficiency and to file, litigate
or compromise any claim for refund on behalf of the Company. In addition,
Trilogy has agreed to undertake to provide the aforementioned services with
respect to the Company's separate state and local returns and the Company's
foreign returns.
In general, the Company will be included in Trilogy's consolidated group for
federal income tax purposes for so long as Trilogy beneficially owns at least
80% of the total voting power and value of the outstanding Common Stock. Each
member of a consolidated group is jointly and severally liable for the federal
income tax liability of each other member of the consolidated group.
Accordingly, although the Tax Allocation Agreement allocates tax liabilities
between the Company and Trilogy, during the period in which the Company is
included in Trilogy's consolidated group, the Company could be liable in the
event that any federal tax liability is incurred, but not discharged, by any
other member of Trilogy's consolidated group. Pursuant to the Tax Allocation
Agreement, however, Trilogy is obligated to indemnify the Company for any tax
liabilities, including any liability resulting from a distribution of the
Company's stock to Trilogy's stockholders provided that it has paid its
allocated share of such liabilities to Trilogy.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the executive
officers and directors of the Company as of September 1, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Ross A. Cooley.................. 57 Chairman and Chief Executive Officer
Christina C. Jones.............. 28 President and Chief Operating Officer
James J. Luttenbacher........... 43 Vice President, Chief Financial Officer and
Secretary
Joseph A. Liemandt (1).......... 30 Director
Peter J. Barris (1)(2).......... 46 Director
Linwood A. Lacy, Jr. (1)(2)..... 52 Director
Robert W. Stearns............... 47 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Each director holds office until the next annual meeting of stockholders and
until his successor is elected and qualified or until his earlier resignation
or removal. Each officer serves at the discretion of the Board of Directors
(the "Board"). There are no family relationships among the directors or
executive officers of the Company.
ROSS A. COOLEY has been Chairman and Chief Executive Officer of the Company
since November 1996. From 1984 to 1996, Mr. Cooley was employed by Compaq,
most recently as Senior Vice President and General Manager responsible for all
North American business and operations. Mr. Cooley is a member of the
RosettaNet Board of Directors, the computer industry's e-commerce standards
effort, and a member of its Executive Committee. During his 18-year career at
IBM, Mr. Cooley completed the Harvard Business Senior Executive Program.
Mr. Cooley holds an A.A.S. from Broome Community College.
CHRISTINA C. JONES founded the Company and has been its President and Chief
Operating Officer since June 1996. In 1989, Ms. Jones co-founded Trilogy.
Prior to founding the Company, Ms. Jones was Director of Marketing of Trilogy.
Ms. Jones holds a B.A. in Economics from Stanford University.
JAMES J. LUTTENBACHER has been the Company's Vice President and Chief
Financial Officer since March 1998. In August 1998, Mr. Luttenbacher was
appointed Secretary of the Company. From 1992 to 1998, Mr. Luttenbacher was
employed at Mentor Graphics Corporation, most recently as division manager for
a software product division focused on integrated circuit test and physical
verification applications. Mr. Luttenbacher holds a B.A. in Accounting from
the University of Michigan and a Masters of Management in finance and
operations from Kellogg Graduate School of Management at Northwestern
University.
JOSEPH A. LIEMANDT has been a director of the Company since its inception.
From July 1994 to June 1996, Mr. Liemandt was President of the Company.
Mr. Liemandt founded Trilogy in 1989. Since that time, Mr. Liemandt has served
as the President, Chief Executive Officer and Chairman of Trilogy.
PETER J. BARRIS has been a director of the Company since June 17, 1998.
Since 1992, Mr. Barris has been a partner, and, in 1994, was appointed a
General Partner of New Enterprise Associates, a firm that manages venture
capital investments. Mr. Barris is also a member of the Board of Directors of
Mobius Management Systems, Inc. Mr. Barris holds a B.S.E.E. from Northwestern
University and an M.B.A. from the Amos Tuck School at Dartmouth College.
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LINWOOD A. LACY, JR. has been a director of the Company since August 1998.
In November 1997, Mr. Lacy retired from Micro Warehouse Incorporated where he
had served as President and Chief Executive Officer since October 1996. From
1989 to May 1996, Mr. Lacy served as the Co-Chairman and Chief Executive
Officer of Ingram Micro, Inc., a microcomputer products distributor and a then
wholly-owned subsidiary of Ingram Industries, Inc. From December 1993 to June
1995, Mr. Lacy was also President of Ingram Industries Inc. From June 1995
until April 1996, he was President and Chief Executive Officer of Ingram
Industries Inc., and from April 1996 to May 1996 served as its Vice Chairman.
Mr. Lacy serves as a director of Ingram Industries Inc., Entex Information
Services, Inc. and Earthlink Network, Inc. Mr. Lacy holds a B.S.ChE from the
University of Virginia and an M.B.A. in Business from the Darden Graduate
School of Business Administration at the University of Virginia.
ROBERT W. STEARNS has been a director of the Company since September 1998.
Mr. Stearns is currently a venture capitalist and management consultant. From
January 1996 to August 1998 Mr. Stearns served as the Senior Vice President,
Technology and Corporate Development of Compaq. He joined Compaq as Vice
President of Corporate Development in July 1993. Prior to his arrival at
Compaq, he was employed as a management consultant with McKinsey & Co.,
focusing on high technology clients. Mr. Stearns serves as a director of the
Houston Advanced Research Center and the Cynthia Woods Mitchell Pavilion. In
November 1996 Mr. Stearns was appointed to the Texas Science and Technology
Council and in March 1998 he became a fellow of the Aspen Institute and a
member of the Brookings Council of the Brookings Institute. Mr. Stearns holds
a B.S. in Chemistry from Brown University and a Master of Science from the
Massachusetts Institute of Technology.
BOARD COMPOSITION
The Company currently has authorized five directors. Each director is
elected for a period of one year at the Company's annual meeting of
stockholders and serves until the next annual meeting or until his successor
is duly elected and qualified. The executive officers serve at the discretion
of the Board of Directors. There are no family relationships among any of the
directors or executive officers of the Company.
BOARD COMMITTEES
In August 1998, the Board established the Audit Committee and Compensation
Committee. The Audit Committee of the Board of Directors reviews and monitors
the corporate financial reporting and the internal and external audits of the
Company, including, among other things, the Company's control functions, the
results and scope of the annual audit and other services provided by the
Company's independent accountants, and the Company's compliance with legal
matters that have a significant impact on the Company's financial condition.
The Audit Committee also consults with the Company's management and the
Company's independent accountants prior to the presentation of financial
statements to stockholders and, as appropriate, initiates inquiries into
aspects of the Company's financial affairs. In addition, the Audit Committee
has the responsibility to consider and recommend the appointment of, and to
review fee arrangements with, the Company's independent accountants. The
current members of the Audit Committee are Messrs. Liemandt, Barris and Lacy.
The Compensation Committee of the Board of Directors reviews and makes
recommendations to the Board regarding the Company's compensation policies and
all forms of compensation to be provided to executive officers and directors
of the Company, including, among other things, annual salaries and bonuses and
stock option and other incentive compensation arrangements of the Company. In
addition, the Compensation Committee reviews bonus and stock compensation
arrangements for all other employees of the Company. The current members of
the Compensation Committee are Messrs. Barris and Lacy.
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<PAGE>
DIRECTOR COMPENSATION AND OTHER ARRANGEMENTS
The Company does not currently compensate its outside directors for
attending Board of Directors or committee meetings, but reimburses directors
for their reasonable travel expenses incurred in connection with attending
such meetings. On November 1, 1996, the Company granted to Mr. Liemandt an
option to purchase 100 shares of the Company's Common Stock at an exercise
price of $3.00 per share. Upon joining the Board of Directors, Messrs. Lacy,
Barris and Stearns received options to acquire 30,000 shares, 10,000 shares
and 15,000 shares of Common Stock, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board of Directors
has served at any time as an officer or employee of the Company. Prior to the
establishment of the Compensation Committee, all decisions relating to
executive compensation were made by the Board of Directors. For a description
of the transactions between the Company and members of the Compensation
Committee and entities affiliated with such members. See "Certain
Transactions." No executive officer of the Company serves as a member of the
Board of Directors or Compensation Committee of any entity which has one or
more executive officers serving as a member of the Board of Directors or
Compensation Committee.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and certain other
executive officers of the Company (collectively, the "Named Executive
Officers") whose salary and bonus exceeded $100,000 for services rendered in
all capacities to the Company and its subsidiaries during the fiscal year
ended December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
------------
NAME AND PRINCIPAL POSITION SALARY
--------------------------- ------------
<S> <C>
Ross A. Cooley.................................................... $ 1
Chairman and Chief Executive Officer
Christina C. Jones................................................ 100,908(1)
President and Chief Operating Officer
</TABLE>
- --------
(1) Includes $908 of reimbursement for excess amounts paid toward the
Company's standard employee medical benefit plan.
AGGREGATE OPTION EXERCISED YEAR-END OPTION VALUES
The following table provides certain summary information regarding stock
options granted to the Named Executive Officers during the fiscal year ended
December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1997(#) AT DECEMBER 31, 1997($)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ross A. Cooley.......... -- -- 425,000 450,000 -- --
Christina C. Jones...... -- -- 284,400 365,700 -- --
</TABLE>
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EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Ross A. Cooley, the
Company's Chairman and Chief Executive Officer, Christine C. Jones, the
Company's President and Chief Operating Officer, and James J. Luttenbacher,
the Company's Vice President, Chief Financial Officer and Secretary. Each of
these agreements has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part, and the following summaries are qualified
in their entirety by this reference to the full text of such agreements.
COOLEY EMPLOYMENT AGREEMENT. The Company and Ross A. Cooley are parties to
an employment agreement dated November 1, 1996 and an amendment effective
November 1, 1997 (the "Cooley Agreement"), which provides for an employment
period of four years at an annual salary of not less than $1.00. In addition,
Mr. Cooley is eligible to participate in the Company's management incentive
compensation plan as may be in effect from time to time. Mr. Cooley, in his
capacity as the Company's Chairman of the Board and Chief Executive Officer,
currently performs various executive and leadership functions, including
development of the Company's strategic and operational plans, strategic
planning, executive management of new customer and new account relationship
activities and recruitment of senior management personnel. Pursuant to the
Cooley Agreement, Mr. Cooley has been granted a stock option of 875,000 shares
of the Company's Common Stock at an exercise price of $3.00 per share, of
which 425,000 shares became exercisable at the time the Cooley Agreement was
entered into and an additional 100,000 of such shares shall become exercisable
upon each of November 1, 1998, November 1, 1999 and November 1, 2000. The
remaining 150,000 shares under such stock option grant shall become
exercisable upon November 1, 2003, provided, however, that in the event the
Company shall have made a public offering of its securities prior to
November 1, 1998, then 50,000 shares shall become exercisable on each of
November 1, 1999 and November 1, 2000, provided in each case that the Cooley
Agreement is in effect on such date. Under the terms of the Company's 1996
Stock Option Plan, in the event of a Change of Control (as defined in such
Plan), all unvested shares under such option become immediately exercisable.
The Cooley Agreement may be terminated by the Company or Mr. Cooley at any
time. If the Cooley Agreement is terminated by the Company for Cause (as
defined therein) or by Mr. Cooley for reasons other than as a result of a
Change in Control (as defined therein) of the Company, no further rights to
compensation or benefits shall accrue to Mr. Cooley. If the Cooley Agreement
is terminated by the Company without Cause or by Mr. Cooley as a result of a
Change of Control of the Company, Mr. Cooley shall not be entitled to any
additional compensation under the terms of the Cooley Agreement, but shall
have such rights relating to the exercise of then unexercised stock options as
are provided in his Stock Option Agreement. During his employment by the
Company and for a period of two years following the Company's termination of
his employment, Mr. Cooley shall not (i) solicit any customers of the Company,
(ii) induce or attempt to induce any Customer or withdraw, curtail or cancel
its business with the Company or in any manner modify or fail to enter into
any actual or potential business relationship with the Company, (iii) recruit
or solicit any employee or vendor of the Company to cease his, her or its
relationship with the Company or (iv) permit his name to be used by or engage
in any business competing with the business of the Company.
JONES EMPLOYMENT AGREEMENT. The Company and Christina C. Jones are parties
to an employment agreement dated November 1, 1996 (the "Jones Agreement"),
which provides for an employment period of four years at an annual salary of
not less than $100,000. In addition, Ms. Jones is eligible to participate in
any management incentive compensation plan which the Company may have from
time to time. Pursuant to the Jones Agreement, Ms. Jones has been granted a
stock option to purchase up to 650,000 shares of the Company's Common Stock at
an exercise price of $3.00 per share (the "Option"). As a condition to the
grant of the Option, Ms. Jones entered into a Option Cancellation Agreement
with Trilogy which terminated a Stock Option Agreement dated February 10, 1994
between Trilogy and Ms. Jones pursuant to which Ms. Jones had been granted a
stock option to purchase shares of Trilogy Class B Common Stock at an exercise
price of $1.50 per share. Under the
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terms of the Company's 1996 Stock Option Plan, in the event of a Change of
Control (as defined in such Plan), all unvested shares under the Option become
immediately exercisable. The Jones Agreement may be terminated by the Company
at any time and by Ms. Jones for Good Reason (as defined therein). The
definition of Good Reason includes, among other things, a Change of Control
(as defined therein) of the Company. If the Jones Agreement is terminated by
the Company for Cause (as defined therein), no further rights to compensation
or benefits shall accrue to Ms. Jones. If the Jones Agreement is terminated by
the Company without Cause or by Ms. Jones for Good Reason, including upon a
Change of Control, Ms. Jones shall continue to receive employee benefits and
monthly payments equal to one-twelfth of her then-current annual salary for a
period of twelve months following the effective date of such termination.
During her employment by the Company and for a period of two years following
the Company's termination of her employment, Ms. Jones shall not (i) solicit
any customers of the Company, (ii) induce or attempt to induce any Customer to
withdraw, curtail or cancel its business with the Company or in any manner
modify or fail to enter into any actual or potential business relationship
with the Company, (iii) recruit or solicit any employee or vendor of the
Company or Trilogy to cease his, her or its relationship with the Company or
with Trilogy or (iv) permit her name to be used by or engage in any business
competing with the business of the Company.
LUTTENBACHER EMPLOYMENT AGREEMENT. The Company and James J. Luttenbacher are
parties to an employment agreement dated February 12, 1998 (the "Luttenbacher
Agreement"), which provides for an employment period of four years at an
annual salary of not less than $175,000. In addition, Mr. Luttenbacher is
eligible to participate in any management incentive compensation plan which
the Company may have from time to time for an amount up to 50% of his then-
current annual salary. Mr. Luttenbacher received a bonus of $5,000 upon
commencement of his employment with the Company. Pursuant to the Luttenbacher
Agreement, Mr. Luttenbacher has been granted a stock option to purchase up to
150,000 shares of the Company's Common Stock at an exercise price of $3.00 per
share. Under the terms of the Company's 1996 Stock Option Plan, in the event
of a Change of Control (as defined in such Plan), all unvested shares under
such option become immediately exercisable. The Luttenbacher Agreement may be
terminated by the Company or Mr. Luttenbacher at any time. If the Luttenbacher
Agreement is terminated by the Company for Cause (as defined therein) or by
Mr. Luttenbacher for reasons other than as a result of a Change in Control (as
defined therein) of the Company, no further rights to compensation or benefits
shall accrue to Mr. Luttenbacher. If the Luttenbacher Agreement is terminated
by the Company without Cause or by Mr. Luttenbacher as a result of a Change in
Control (as defined therein) of the Company, Mr. Luttenbacher shall continue
to receive employee benefits and monthly payments equal to one-twelfth of his
then-current annual salary for a period of six months following the effective
date of such termination. During his employment by the Company and for a
period of two years following the Company's termination of his employment,
Mr. Luttenbacher shall not (i) solicit any customers of the Company, (ii)
induce or attempt to induce any Customer to withdraw, curtail or cancel its
business with the Company or in any manner modify or fail to enter into any
actual or potential business relationship with the Company, (iii) recruit or
solicit any employee or vendor of the Company to cease his, her or its
relationship with the Company or (iv) permit his name to be used by or engage
in any business competing with the business of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware provides that a
director of a corporation will not be personally liable for monetary damages
for breach of such individual's fiduciary duties as a director except for
liability (i) for any breach of such director's duty of loyalty to the Company
or to its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases as provided in
Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which a director derives an improper personal benefit.
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The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers, and may indemnify its officers, employees and other
agents, to the full extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross
negligence on the part of an indemnified party. The Company's Bylaws also
permit the Company to advance expenses incurred by an indemnified party in
connection with the defense of any action or proceeding arising out of such
party's status or service as a director, officer or employee or other agent of
the Company. Such indemnified party shall repay such advances if it is
ultimately determined that such party is not entitled to indemnification.
The Company has entered into separate indemnification agreements with each
of its directors and officers. These agreements require the Company, among
other things, to indemnify such director or officer, against expenses
(including attorneys' fees), judgments, fines and settlements (collectively,
"Liabilities") paid by such individual in connection with any action, suit or
proceeding arising out of such individual's status or service as a director or
officer of the Company (other than Liabilities arising from willful misconduct
or conduct that is knowingly fraudulent or deliberately dishonest) and to
advance expenses incurred by such individual in connection with any proceeding
against such individual with respect to which such individual may be entitled
to indemnification by the Company. The Company believes that its Certificate
of Incorporation and Bylaw provisions and indemnification agreements are
necessary to attract and retain qualified persons as directors and officers.
The Company also maintains directors' and officers' liability insurance.
At present the Company is not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of the Company in which
indemnification will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (the "1996 Plan") was approved by the
Board of Directors and stockholders in September 1996. The 1996 Plan provides
for the grant of options intended to qualify as "incentive stock options"
under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and nonqualified stock options. A total of 3,000,000 shares of Common
Stock have been reserved for issuance under the 1996 Plan. As of June 30,
1998, 66,925 shares of Common Stock had been issued upon exercise of options
granted under the 1996 Plan, 2,557,111 shares remained reserved for future
issuance upon the exercise of outstanding options, and 375,964 shares remained
available for future grant.
The Board of Directors or a committee designated by the Board has the power,
subject to the limitations contained in the 1996 Plan, to prescribe the terms
and conditions of any option granted under the 1996 Plan, including the total
number of share to be offered to each optionee. The maximum term of any stock
option granted under the 1996 Plan is ten years, except that with respect to
incentive stock options granted to a person possessing more than 10% of the
combined voting power of the Company (a "10% Stockholder"), the term of such
stock options shall be for no more than five years. The exercise price of
incentive stock options granted under the 1996 Plan must be at least 100% of
the fair market value of the Common Stock on the grant date except that the
exercise price of incentive stock options granted to a 10% Stockholder must be
at least 110% of such fair market value on the date of grant. The aggregate
fair market value on the date of grant of the Common Stock for which incentive
stock options are exercisable for the first time by an employee during any
calendar year may not exceed $100,000. Nonqualified stock options may be
granted in exchange for previously granted stock options having an exercise
price higher than the options received in such exchange. In the event of a
Change of Control (as defined in the 1996 Plan), all of the options granted
under the 1996 Plan shall become immediately exercisable. The Board may amend
the 1996 Plan at any time, except that
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certain amendments require stockholder approval. The 1996 Plan will terminate
in September 2006, unless earlier terminated by the Board of Directors.
AGREEMENT REGARDING GRANT OF OPTIONS
Pursuant to an agreement (the "GE Agreement") between the Company and
General Electric Capital Information Technology Solutions ("GE Capital"), GE
Capital has the right (the "Right") to require the Company to grant GE Capital
an option to purchase up to 320,000 shares of restricted Common Stock of the
Company. The Right is triggered upon the happening of certain events,
including an initial public offering by the Company of its Common Stock. In
the event GE Capital exercises such Right, the GE Option will expire at 11:59
pm on the first date of such public offering. If GE Capital is granted and
exercises the GE Option, the shares of Common Stock issued pursuant to the
exercise of the GE Option will be restricted stock and will not be subject to
any registration rights.
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CERTAIN TRANSACTIONS
AGREEMENTS WITH EXECUTIVE OFFICERS
The Company has entered into employment agreements with Mr. Cooley, Ms.
Jones and Mr. Luttenbacher. See "Management--Employment Agreements".
AGREEMENTS BETWEEN THE COMPANY AND TRILOGY
TECHNOLOGY, SERVICES AND LICENSE AGREEMENT
In September 1998, the Company and Trilogy entered into a Technology,
Services and License Agreement (the "Technology Agreement"), which amended and
superseded a Master Software License Agreement and a Reseller Agreement
previously entered into by the parties, pursuant to which Trilogy has licensed
certain intellectual property rights to the Company, and the Company has
agreed to license certain intellectual property rights to Trilogy. Each party
has granted the other a nonexclusive, irrevocable, perpetual, worldwide,
license to internally use, make, reproduce and/or prepare derivative works of
certain of its intellectual property (as applicable, the "Trilogy Intellectual
Property" or the "pcOrder Intellectual Property"), or to sublicense any third
party to do so, subject to certain confidentiality and other restrictions.
Trilogy also granted the Company a nonexclusive, irrevocable, perpetual,
worldwide right and license under the Trilogy Intellectual Property to make,
use, reproduce, prepare derivative works based upon, license, offer to
license, import, export, publish, distribute, perform, display, advertise,
market, promote, service and or support those of pcOrder's products that are
network based e-commerce products for enabling sales, purchasing, marketing or
distribution within the computer products market ("Computer E-Commerce
Products"), and to sublicense any third party to do so, subject to the payment
of royalties as described below. Notwithstanding the foregoing, to the extent
that any of the Trilogy Intellectual Property (including Trilogy products
based on such intellectual property) is not of a same, similar, replacement or
equivalent general type as Trilogy Intellectual Property available prior to a
Trigger Event, as defined below, pcOrder will not have rights to such Trilogy
Intellectual Property. The Company also granted Trilogy a nonexclusive,
irrevocable, perpetual, worldwide right and license to use pcOrder
Intellectual Property to make, use reproduce, prepare derivative works based
upon, license, export, publish, distribute, perform, display, advertise,
market, promote, service and support Trilogy Products (as defined in the
Technology Agreement) and to sublicense any third party to do so, subject to
the payment of royalties described below. However, following a change in
control of Trilogy or such time as Trilogy is no longer required by generally
accepted accounting principles to be consolidated with pcOrder for financial
reporting purposes (in either case, a "Trigger Event"), Trilogy shall not
until the later of September 1, 2008 or the expiration of five years following
such Trigger Event, have any license to the pcOrder Intellectual Property with
respect to any Computer E-Commerce Product that utilizes pcOrder's product
content or certain tools developed by pcOrder. Pursuant to the Technology
Agreement, neither party is restricted from entering into or having similar
agreements with third parties or doing any activity relating to competitive
products and services involving none of the other party's information or
intellectual property. The Technology Agreement further provides that Trilogy
and the Company shall jointly own all inventions, works of authorship and
other intellectual property created, invented or discovered by at least one
employee and/or contractor of the Company in conjunction with at least one
employee and/or contractor of Trilogy. The Company and Trilogy are each
obligated to pay to the other monthly royalties based on a percentage of
license fees derived from sales of products that incorporate and/or data
maintenance services related to the other party's technology; of software
maintenance fees other than data maintenance services in connection with
products that incorporate the other party's technology; and of on-line
subscription service fees from products that incorporate the other party's
technology. The Technology Agreement provides that each party will defend,
indemnify and hold harmless the other party for any claim against such other
party by any third party to the extent based on an actual or alleged: (i)
failure by a party to perform its obligations under the Technology Agreement;
(ii) breach of any one or more of a party's representations or warranties;
(iii) failure by a party to comply with government laws and regulations;
(iv) intentional or grossly negligent acts or
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omissions on the part of a party, and (v) to the extent a party delivers
Material (as defined in the Technology Agreement) to the other party, (1)
failure by the delivering party to either own or have sufficient rights to
deliver Material to the other party, (2) failure by a party to either own or
have sufficient rights to grant to the other party the license it has granted
under the Technology Agreement, (3) infringement (or violation) by such
delivered Material of a third party's intellectual property rights, or (4)
failure to be Year 2000 compliant. Such indemnification obligations are
subject to the condition that the indemnified party: (a) promptly provides
notice of any claim to the indemnifying party; (b) allows the indemnifying
party to control the defense of the claim and settlement negotiations; and (c)
fully cooperates with the indemnifying party in such defense and settlement
negotiations. The Technology Agreement provides that upon either party's
request, the parties shall negotiate in good faith regarding the terms and
conditions upon which either party will perform consulting services reasonably
requested by the other party; provided, however, that such obligation shall
expire on the later of seven years following the Trigger Event or September 1,
2010.
MANAGEMENT SERVICES AGREEMENT
The Company and Trilogy entered into a Management Services Agreement,
effective as of July 1, 1998, which amended and superseded a Services
Agreement previously entered into by the parties, pursuant to which Trilogy
will provide certain administrative and corporate support services to the
Company. Trilogy has agreed to provide to the Company certain services
("Mandatory Services") including tax administration, payroll, payroll
accounting, banking, corporate finance, recruiting and employee training
services to the Company. In addition, Trilogy has agreed to provide the
Company certain additional services ("Optional Services"), including hardware
purchasing, shipping and receiving, purchase order database administration,
network administration, audit services, human resources administration, legal
services and customer training. The provision of Mandatory Services may not be
unilaterally terminated by either party during the effectiveness of the
Management Services Agreement. The provision of Optional Services may be
terminated by either party upon 90 days notice. The Management Services
Agreement provides that Trilogy will use the same level of care in rendering
services to the Company that Trilogy uses in rendering services to itself or
any of its other subsidiaries, which will be at least equal to the care, that
Trilogy has used in the past in rendering such services to the Company.
However, the selection of personnel to perform the various services will be
within the sole control of Trilogy. Specifically, Trilogy may, without the
consent or approval of the Company, subcontract any service to be provided
under the Management Services Agreement. The Management Services Agreement
terminates on June 30, 1999, and thereafter is subject to successive one-year
renewal terms upon consent of the parties. The Management Services Agreement
may be terminated: (i) by either party within 30 days of an uncured material
breach by the other party; (ii) by either party upon the liquidation or
dissolution of the other party; (iii) by Trilogy immediately upon notice to
the Company if the Company fails to pay the amount due to Trilogy under such
agreement by the tenth day after notice of nonpayment is given; or (iv) within
30 days of the date at which Trilogy ceases to own a majority of the Company's
Common Stock.
TAX ALLOCATION AGREEMENT
The Company is currently, and after the offering will be, included in
Trilogy's consolidated federal income tax group, and the Company's federal
income tax liability will be included in the consolidated federal income tax
liability of Trilogy. The Company and Trilogy have entered into a Tax
Allocation Agreement pursuant to which the Company and Trilogy will make
payments between them such that, with respect to any period, the amount of
taxes to be paid or received by the Company, subject to certain adjustments,
will be determined as though the Company were to file separate federal, state
and local income tax returns (including, except as provided below, any amounts
determined to be due as a result of a redetermination of the tax liability of
Trilogy arising from an auditor otherwise) rather than a consolidated
subsidiary of Trilogy with respect to federal, state and local income taxes.
Under the terms of the Tax Allocation Agreement, the Company, in computing its
stand alone tax liability or tax refund, will be able to utilize certain tax
items, such as net operating losses, foreign tax credits and other tax credits
(collectively, "Tax Attributes"). In addition, with respect to Tax Attributes
of the
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Company that come into existence after the execution of the Tax Allocation
Agreement, and under the terms of the Tax Allocation Agreement, Trilogy will
be required to make any payment to the Company as such Tax Attributes of the
Company are utilized by the Trilogy consolidated federal income tax group.
Pursuant to the Tax Allocation Agreement, Trilogy's obligation to make any
payment to the Company relating to the Company's Tax Attributes will apply
only to tax periods during which the Company (or its affiliated subsidiaries)
is a member of Trilogy consolidated federal income tax group.
Trilogy will continue to have all the rights of a parent of a consolidated
group (and similar rights provided for by applicable state and local law with
respect to a parent of a combined, consolidated or unitary group), will be the
sole and exclusive agent for the Company in any and all matters relating to
the income, franchise and similar liabilities of the Company, will have sole
and exclusive responsibility for the preparation and filing of consolidated
federal and consolidated or combined state and local income tax returns (or
amended returns), and will have the power, in its sole discretion, to contest
or compromise any asserted tax adjustment or deficiency and to file, litigate
or compromise any claim for refund on behalf of the Company. In addition,
Trilogy has agreed to undertake to provide the aforementioned services with
respect to the Company's separate state and local returns and the Company's
foreign returns.
In general, the Company will be included in Trilogy's consolidated group for
federal income tax purposes for so long as Trilogy beneficially owns at least
80% of the total voting power and value of the outstanding Common Stock. Each
member of a consolidated group is jointly and severally liable for the federal
income tax liability of each other member of the consolidated group.
Accordingly, although the Tax Allocation Agreement allocates tax liabilities
between the Company and Trilogy, during the period in which the Company is
included in Trilogy's consolidated group, the Company could be liable in the
event that any federal tax liability is incurred, but not discharged, by any
other member of Trilogy's consolidated group. Pursuant to the Tax Allocation
Agreement, however, Trilogy is obligated to indemnify the Company for any tax
liabilities, including any liability resulting from a distribution of the
Company's stock to Trilogy's stockholders provided that it has paid its
allocated share of such liabilities to Trilogy.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Common Stock as of June 30, 1998, and as adjusted to reflect
the sale of shares offered hereby, by (i) each person who is known by the
Company to own beneficially more than five percent of the Common Stock, (ii)
each of the Company's Named Officers and directors, and (iii) all current
officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
---------------------
5% BENEFICIAL OWNERS,
DIRECTORS
& NAMED EXECUTIVE NUMBER OF SHARES BEFORE AFTER
OFFICERS BENEFICIALLY OWNED(1) OFFERING OFFERING
- --------------------- --------------------- ----------- ----------
<S> <C> <C> <C> <C>
Trilogy Software, Inc. . 12,800,000 99.5%
6034 West Courtyard
Drive
Austin, TX 78730
Joseph A. Liemandt(2)... 12,800,050 99.5
6034 West Courtyard
Drive
Austin, TX 78730
Ross A. Cooley(3)....... 425,000 3.2
Christina C. Jones(4)... 406,300 3.1
James J. Luttenbacher... 25,000 *
Peter J. Barris......... -- *
Linwood A. Lacy, Jr..... -- *
Robert W. Stearns....... -- *
All Directors and
Officers as a Group
(7 persons)(5)......... 13,656,350 99.7%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options held by that person that
are currently exercisable or exercisable within 60 days of June 30, 1998
are deemed outstanding. Percentage of beneficial ownership is based upon
12,866,925 shares of Common Stock outstanding prior to this offering and
shares of Common Stock outstanding after this offering, as of June 30,
1998 and assuming no exercise of the Underwriters' overallotment option or
the GE Option. To the Company's knowledge, except as set forth in the
footnotes to this table and subject to applicable community property laws,
each person named in the table has sole voting and investment power with
respect to the shares set forth opposite such person's name.
(2) Includes 50 shares issuable upon exercise of stock options exercisable
within 60 days of June 30, 1998. In addition, includes 12,800,000 shares
held by Trilogy Software, Inc., of which Mr. Liemandt is President and
Chief Executive Officer. Mr. Liemandt disclaims beneficial ownership of
Trilogy Software, Inc.'s shares.
(3) Includes 425,000 shares issuable upon exercise of stock options
exercisable within 60 days of June 30, 1998.
(4) Includes 406,300 shares issuable upon exercise of stock options
exercisable within 60 days of June 30, 1998.
(5) Includes (i) 831,350 shares issuable upon exercise of stock options
exercisable within 60 days of June 30, 1998 and (ii) 12,800,000 shares
owned by Trilogy (see footnote 2).
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $0.01 per share, and 3,200,000 shares of Preferred
Stock, par value $0.01 per share. Upon consummation of this offering, no
shares of Preferred Stock and shares of Common Stock ( shares if the
Underwriters' overallotment option is exercised in full) will be outstanding.
The following summary is qualified in its entirety by this reference to the
Company's Certificate of Incorporation and Bylaws, copies of which are filed
as exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
As of June 30, 1998, there were 12,866,925 shares of Common Stock
outstanding, 12,800,000 of which were held by Trilogy and the remaining 66,925
shares were held by 13 individuals. The holders of Common Stock are entitled
to one vote per share on a non-cumulative basis on all matters to be voted
upon by the stockholders. The holders of Common Stock are entitled to receive
ratably such noncumulative dividends, if any, as may be declared from time to
time by the Board of Directors out of funds legally available therefor. In the
event of liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are fully paid and nonassessable, and the shares of Common
Stock to be issued upon completion of this offering will be fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue the Preferred Stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any series of Preferred Stock or the designation of such
series, without further vote or action by the stockholders. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders
and may adversely affect the voting and other rights of the holders of Common
Stock. The issuance of Preferred Stock with voting and conversion rights may
have the effect of decreasing the market price of the Common Stock, and may
adversely affect the voting power of the holders of Common Stock, including
the loss of voting control to others. At present, the Company has no plans to
issue any shares of Preferred Stock.
CERTAIN ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS;
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law, as amended ("Section 203"), which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years following the date
that such stockholder became an interested stockholder, unless (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
that resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned
(x) by persons who are directors and also officers and (y) by employee stock
plans in which employee
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participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer, or
(iii) on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock that is not owned by the interested
stockholder.
Section 203 defines business combinations to include (i) any merger or
consolidation involving the corporation or any majority-owned subsidiary of
the corporation and any other person or entity, (ii) subject to certain
exceptions, any sale, transfer, pledge or other disposition of 10% or more of
the assets of the corporation or any majority-owned subsidiary of the
corporation involving the interested stockholder, (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation or any majority-owned subsidiary of the corporation of any stock
of the corporation to the interested stockholder, (iv) any transaction
involving the corporation or any majority-owned subsidiary of the corporation
that has the effect of increasing the proportionate share of the stock of any
class or series of the corporation or any majority-owned subsidiary of the
corporation beneficially owned by the interested stockholder, or (v) the
receipt by the interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the
corporation or any majority-owned subsidiary of the corporation. In general,
Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more or the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
LIMITATION OF DIRECTOR LIABILITY
The Certificate of Incorporation of the Company limits the liability of
directors of the Company (in their capacity as directors but not in their
capacity as officers) to the Company or its stockholders to the fullest extent
permitted by Delaware law. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of a director's fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, which relates to unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (iv) for any transaction from which the
director derived an improper personal benefit.
INDEMNIFICATION ARRANGEMENTS
The Bylaws of the Company provide that the directors and officers of the
Company shall be indemnified and provide for the advancement to any such
indemnified director or officer of expenses in connection with actual or
threatened proceedings and claims arising out of their status as director or
officer of the Company as such to the fullest extent permitted by the Delaware
General Corporation Law. Prior to consummation of this offering, the Company
will enter into indemnification agreements with each of its directors and
officers that will provide them with rights to indemnification and expense
advancement to the fullest extent permitted under the Delaware General
Corporation Law.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is . The Transfer
Agent's address is and telephone number is .
68
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have of Common Stock
outstanding (assuming no exercise of the Underwriters' over-allotment option
and no exercise of outstanding options under the Company's Option Plans). Of
such shares, the shares sold in this offering will be freely transferable
without restriction or further registration under the Securities Act, except
for any shares held by an existing "affiliate" of the Company, as that term is
defined by the Securities Act (an "Affiliate"), which shares will be subject
to the resale limitations of Rule 144 adopted under the Securities Act. As of
the date of this Prospectus, 12,914,239 "restricted shares" as defined in Rule
144 will be outstanding. Of such shares, and without consideration of the
contractual restrictions described below, no shares would be available for
immediate sale in the public market without restriction pursuant to Rule
144(k). Beginning 90 days after the date of this Prospectus, and without
consideration of the contractual restrictions described below, no shares would
be eligible for sale in reliance upon Rule 144 and 89,239 shares would be
eligible for sale in reliance upon Rule 701. In addition, options to purchase
approximately 179,402 shares will be vested and exercisable and eligible for
sale in Reliance upon Rule 701.
In general, under Rule 144 as currently in effect, beginning 90 days after
the offering, a person (or persons whose shares are aggregated) who owns
shares that were purchased from the Company (or any Affiliate) at least one
year previously, including that person who may be deemed an Affiliate of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
the Common Stock (approximately 0 shares immediately after the offering) or
(ii) the average weekly trading volume of the Common Stock on the Nasdaq
National Market during the four calendar weeks preceding the date on which
notice of the sale is filed with the Securities and Exchange Commission (the
"Commission"). Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an Affiliate of the Company at any
time during the 90 days preceding a sale, and who owns shares within the
definition of "restricted securities" under Rule 144 that were purchased from
the Company (or any Affiliate) at least two years previously, would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers prior to the date the
issuer becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written
compensatory benefit plans or written contracts relating to the compensation
of such persons. In addition, the Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject
to the reporting requirements of the Exchange Act, along with the shares
acquired upon exercise of such options (including exercises after the date of
this Prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this Prospectus, may be sold (i) by
persons other than Affiliates, subject only to the manner of sale provisions
of Rule 144, and (ii) by Affiliates under Rule 144 without compliance with its
one-year holding period requirement.
The officers, directors and Trilogy have agreed not to sell any of their
shares of Common Stock for 180 days after the date of this Prospectus without
the prior written consent of the representatives of the Underwriters. As a
result of these contractual restrictions and subject to the provisions of
Rules 144(k), 144 and 701, as applicable, 12,914,239 shares subject to
restriction will be eligible for sale 180 days after the date of this
Prospectus. See "Underwriting".
69
<PAGE>
The Company has agreed not to offer, sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or any rights to acquire Common Stock for a
period of 180 days after the date of this Prospectus, without the prior
written consent of the representatives of the Underwriters, subject to certain
limited exceptions. See "Underwriting".
The Company intends to file a registration statement under the Securities
Act covering approximately 3,378,686 shares of Common Stock reserved for
issuance under the Option Plan. See "Management--1996 Stock Option Plan". Such
registration statement is expected to be filed within 90 days after the date
of this Prospectus and will automatically become effective upon filing.
Following such filing, shares registered under such registration statement
will, subject to the Lock-Up Agreements, Rule 144 volume limitations
applicable to Affiliates and the lapsing of the Company's repurchase rights,
be available for sale in the open market upon the exercise of vested options
90 days after the effective date of this Prospectus. At June 30, 1998, options
to purchase 2,557,111 shares were issued and outstanding under the 1996 Plan.
See "Risk Factors--Shares Eligible for Future Sale".
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Morrison & Foerster LLP, Palo Alto, California. Certain legal
matters in connection with this offering will be passed upon for the
Underwriters by Venture Law Group, A Professional Corporation, Menlo Park,
California.
EXPERTS
The financial statements of the Company at December 31, 1996 and 1997 and
June 30, 1998, and for each of the three years in the period ended December
31, 1997 and the six months ended June 30, 1998, appearing in this Prospectus
and the Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
70
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby
(the "Registration Statement"). This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules to the Registration Statement. For further information with respect
to the Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as a part of the
Registration Statement. Statements contained in this Prospectus concerning the
contents of any contract or any other document are not necessarily complete;
reference is made in each instance to the copy of such contract or any other
document filed as an exhibit to the Registration Statement. Each such
statement is qualified in all respects by such reference to such exhibit. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World
Trade Center, 13th Floor, New York, New York 10048 after payment of fees
prescribed by the Commission. The Commission also maintains a Web site which
provides online access to reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at the address http://www.sec.gov.
71
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity (Deficit)................................ F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of pcOrder.com, Inc.
We have audited the accompanying balance sheets of pcOrder.com, Inc. (the
Company), a subsidiary of Trilogy Software, Inc. and its predecessor entities
including Trilogy Development Group, Inc., as of December 31, 1996 and 1997
and June 30, 1998, and the related statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period
ended December 31, 1997 and the six months ended June 30, 1998. These
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about 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 financial statements referred to above present fairly,
in all material respects, the financial position of pcOrder.com, Inc. at
December 31, 1996 and 1997 and June 30, 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 and the six months ended June 30, 1998 in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Austin, Texas
August 11, 1998,
except for Note 10, as to which the
date is September 4, 1998
F-2
<PAGE>
PCORDER.COM, INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1996 1997 1998
------ ------ --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ -- $2,207 $ 6,583
Accounts receivable, net of allowance of $113 in
1996, $281 in 1997 and $412 in 1998................. 2,449 2,277 7,128
Deferred tax assets.................................. 597 -- --
Other current assets................................. 4 -- --
------ ------ -------
Total current assets............................... 3,050 4,484 13,711
Property and equipment, net........................... 291 494 1,796
Deferred tax assets................................... 94 -- --
------ ------ -------
Total assets....................................... $3,435 $4,978 $15,507
====== ====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................................... $ 226 $ 178 $ 263
Accrued expenses..................................... 392 541 755
Accrued payroll and related liabilities.............. 268 610 622
Payable to parent.................................... 255 432 2,616
Deferred revenue..................................... 2,162 4,212 12,799
------ ------ -------
Total current liabilities.......................... 3,303 5,973 17,055
Commitments and contingencies
Stockholders' equity (deficit):
Preferred Stock, $.01 par value; 3,200 shares
authorized; no shares issued or outstanding......... -- -- --
Common Stock, $.01 par value; 50,000 shares
authorized; issued and outstanding, 12,800 in 1996,
12,800 in 1997 and 12,867 in 1998................... 128 128 129
Additional paid-in capital........................... 210 211 2,072
Deferred stock compensation.......................... -- -- (1,435)
Retained earnings (deficit).......................... (206) (1,334) (2,314)
------ ------ -------
Total stockholders' equity (deficit)............... 132 (995) (1,548)
------ ------ -------
Total liabilities and stockholders' equity
(deficit)......................................... $3,435 $4,978 $15,507
====== ====== =======
</TABLE>
See accompanying notes.
F-3
<PAGE>
PCORDER.COM, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- -------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software applications and
content..................... $ 3,388 $ 5,182 $ 8,869 $ 3,655 $ 7,113
Service...................... 335 700 1,720 859 2,470
------- ------- -------- ------- -------
Total revenues............. 3,723 5,882 10,589 4,514 9,583
------- ------- -------- ------- -------
Costs of revenues:
Software applications and
content..................... 1,579 1,749 2,588 989 2,130
Service...................... 192 185 988 361 1,054
------- ------- -------- ------- -------
Total cost of revenues..... 1,771 1,934 3,576 1,350 3,184
------- ------- -------- ------- -------
Gross profit................. 1,952 3,948 7,013 3,164 6,399
Operating expenses:
Research and development..... 660 1,168 1,129 504 1,785
Selling and marketing........ 577 2,555 4,793 2,171 4,116
General and administrative... 116 726 1,792 565 1,296
Amortization of deferred
stock compensation.......... -- -- -- -- 227
------- ------- -------- ------- -------
Total operating expenses... 1,353 4,449 7,714 3,240 7,424
------- ------- -------- ------- -------
Operating income (loss)........ 599 (501) (701) (76) (1,025)
Interest income................ -- -- -- -- 45
------- ------- -------- ------- -------
Income (loss) before income
taxes......................... 599 (501) (701) (76) (980)
Income tax provision (benefit). 207 (191) 427 47 --
------- ------- -------- ------- -------
Net income (loss).............. $ 392 $ (310) $ (1,128) $ (123) $ (980)
======= ======= ======== ======= =======
Basic and diluted net income
(loss) per share.............. $ 0.03 $ (0.02) $ (0.09) $ (0.01) $ (0.08)
======= ======= ======== ======= =======
Weighted average shares
outstanding................... 12,800 12,800 12,800 12,800 12,803
======= ======= ======== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
PCORDER.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL DEFERRED RETAINED
------------- PAID-IN STOCK EARNINGS
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) TOTAL
------ ------ ---------- ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994................... 1,280 $ 1 $ -- $ -- $ (288) $ (287)
Effect of asset transfer
agreement.............. 11,520 127 210 -- -- 337
Net income.............. -- -- -- -- 392 392
------ ---- ------ ------- ------- -------
BALANCE AT DECEMBER 31,
1995................... 12,800 128 210 -- 104 442
Net loss................ -- -- -- -- (310) (310)
------ ---- ------ ------- ------- -------
BALANCE AT DECEMBER 31,
1996................... 12,800 128 210 -- (206) 132
Exercise of stock
options................ -- -- 1 -- -- 1
Net loss................ -- -- -- -- (1,128) (1,128)
------ ---- ------ ------- ------- -------
BALANCE AT DECEMBER 31,
1997................... 12,800 128 211 -- (1,334) (995)
Exercise of stock
options................ 67 1 199 -- -- 200
Deferred stock
compensation related to
stock options.......... -- -- 1,662 (1,662) -- --
Amortization of deferred
stock compensation..... -- -- -- 227 -- 227
Net loss................ -- -- -- -- (980) (980)
------ ---- ------ ------- ------- -------
BALANCE AT JUNE 30,
1998................... 12,867 $129 $2,072 $(1,435) $(2,314) $(1,548)
====== ==== ====== ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
PCORDER.COM, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............. $ 392 $ (310) $(1,128) $(123) $ (980)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation................ 124 346 459 176 385
Amortization of deferred
stock compensation......... -- -- -- -- 227
Changes in operating assets
and liabilities:
Accounts receivable........ 828 (2,194) 172 (99) (4,851)
Other current assets....... -- (4) 4 1 --
Deferred tax assets........ (207) (483) 691 (116) --
Accounts payable........... -- 226 (48) 115 85
Accrued expenses........... -- 392 149 57 214
Accrued payroll and related
liabilities............... -- 268 342 (59) 12
Payable to parent.......... -- -- 432 291 2,184
Deferred revenue........... (2) 1,112 2,050 621 8,587
------- ------- ------- ----- -------
Net cash provided by (used in)
operating activities......... 1,135 (647) 3,123 864 5,863
INVESTING ACTIVITIES
Purchase of property and
equipment.................... -- (359) (662) (376) (1,687)
------- ------- ------- ----- -------
Net cash used in investing
activities................... -- (359) (662) (376) (1,687)
FINANCING ACTIVITIES
Change in payable to parent... (1,135) 1,006 (255) (28) --
Proceeds from exercise of
stock options................ -- -- 1 -- 200
------- ------- ------- ----- -------
Net cash provided by (used in)
financing activities......... (1,135) 1,006 (254) (28) 200
------- ------- ------- ----- -------
Increase in cash and cash
equivalents.................. -- -- 2,207 460 4,376
Cash and cash equivalents at
beginning of period.......... -- -- -- -- 2,207
------- ------- ------- ----- -------
Cash and cash equivalents at
end of period................ $ -- $ -- $ 2,207 $ 460 $ 6,583
======= ======= ======= ===== =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1. BUSINESS
pcOrder.com, Inc., (the "Company") is a substantially wholly-owned
subsidiary of Trilogy Software, Inc. and its predecessor entities including
Trilogy Development Group, Inc. ("parent" or "Trilogy"). The Company commenced
operations as a separate business unit within Trilogy on July 1, 1993 and was
incorporated as a separate entity on July 18, 1994. The Company provides
electronic commerce technology and tailored solutions to the manufacturers,
distributors and resellers of computer products primarily in the U.S. The
Company's products include software applications and support for those
applications. The software applications consist of an integrated application
suite that includes cataloging, quoting, pricing, availability, and product
configuration. Content for these applications in the form of detailed product
databases containing configuration, pricing, availability and specifications
are also provided and updated by the Company. Customers can choose to have the
Company host the software applications or install them at their site. In
addition, the Company provides consulting services to help customers build and
integrate electronic commerce capabilities to meet their specified needs.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The financial information for the six months ended June 30, 1997 is
unaudited but includes all adjustments, consisting only of normal, recurring
adjustments which the Company considers necessary to present fairly the
Company's results of operations. Results for the six months ended June 30,
1998 are not necessarily indicative of the results to be expected for the
entire fiscal year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences may be material to the financial statements.
REVENUE RECOGNITION
The Company has adopted Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2") and SOP 98-4, Deferral of the Effective Date of a
Provision of SOP 97-2 ("SOP 98-4") as of January 1, 1998. SOP 97-2 and 98-4
provide guidance for recognizing revenue on software transactions and
supersede SOP 91-1. The adoption of SOP 97-2 and 98-4 did not have a material
impact on the Company's financial results.
Software applications revenue consists of subscription based or perpetual
licensing fees under arrangements which provide customers with the right to
use the respective product(s) and software maintenance fees. The Company
generally sells the right to use its products under subscription based license
arrangements which provide the customer with unlimited access to any new
versions or releases and technical support at no additional charge over the
term of the arrangement. Revenue for subscription based arrangements is
recognized ratably over the term of the agreement and recognition commences
when persuasive evidence of an agreement exists, delivery and implementation
of the product has occurred, the fee is fixed or determinable and
collectibility is probable. The Company may also sell the right to use its
products under a perpetual license arrangement. Revenue from perpetual
licenses is recognized when persuasive evidence of an arrangement exists,
delivery and implementation of the product has occurred, the fee is fixed or
determinable, and collectibility is probable. Revenue recognized from
perpetual license arrangements represented 23%, 33%, 7% and 7% of total
revenues in 1995, 1996, 1997 and 1998, respectively. The Company also sells
software
F-7
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
maintenance which provides technical support and the right to unspecified
upgrades on an if-and-when available basis. Revenue from software maintenance
arrangements is recognized ratably over the term of the agreement and
commences once deployment of the product has occurred.
Content revenues consist of fees charged for content access, entry, updates
and maintenance (collectively, "content maintenance"). Content maintenance
provides the customer with constantly updated information within the catalog
database, especially information that is specific to the customer's product
offerings. Content fees are recognized ratably over the term of the
arrangement generally commencing upon initial content entry.
Service fees consist of integration, customization and training and are
generally recognized as the services are performed, upon completion of
specific contractual events or based on an estimated percentage of completion
as work progresses. Services generally occur at the inception of a
subscription or license arrangement to provide installation, integration,
and/or customization to deploy the software products as well as training of
customer personnel.
Customer advances and billed amounts due from customers in excess of revenue
recognized are recorded as deferred revenue.
PRODUCT DEVELOPMENT AND DATABASE MAINTENANCE COST
The Company's policy is to capitalize eligible computer software costs upon
achievement of technological feasibility, which the Company has defined as
completion of a working model, subject to net realizable value considerations.
As of June 30, 1998, no significant costs have met this criteria and,
accordingly, the Company has charged all software development costs to expense
as incurred in the accompanying statements of operations.
Research and development expenses are expensed as incurred.
Costs to maintain the Company's proprietary database are expensed as
incurred and are included as a cost of software applications and content
revenues.
NET INCOME (LOSS) PER SHARE
The Company follows the provisions of Statement of Financial Accounting
Standards No.128, Earnings Per Share ("SFAS 128"). Basic net income (loss) per
share is computed by dividing net income (loss) available to Common
Stockholders by the weighted average number of common shares outstanding
during the period. Diluted net income (loss) per share is calculated using the
weighted average number of outstanding shares of Common Stock plus Dilutive
Common Stock equivalents. For the years ended December 31, 1995, 1996 and 1997
and the six months ended June 30, 1997, there was no impact from common stock
equivalents under the treasury stock method. For the six months ended June 30,
1998, 671,000 common equivalent shares are excluded from the diluted
calculation as they are anti-dilutive. Accordingly, basic and diluted net
income (loss) per share are the same for all periods presented.
In February 1998, the SEC issued Staff Accounting Bulletin No. 98 ("SAB 98")
which requires issuances of common stock, options and warrants for nominal
consideration in periods preceding an initial public offering to be included
in the calculations of earnings per share as if they were outstanding for all
periods presented. To date, the Company has had no issuances of common stock,
options or warrants for nominal consideration.
F-8
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income, which will be required to be adopted by the Company in the year ended
December 31, 1998. The Company adopted SFAS 130 in the six months ended June
30, 1998. There was no impact to the Company as a result of the adoption of
SFAS 130, as there were no significant differences between net income (loss)
and comprehensive income for all periods presented.
CASH AND CASH EQUIVALENTS
Cash equivalents consist primarily of cash deposits and money market
investments with original maturities of ninety days or less when purchased.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation on property and
equipment is computed using the straight-line method over the estimated useful
lives of 18 months to 5 years.
SEGMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS 131"). SFAS 131 is effective for the
year ended December 31, 1998. The Company expects that implementation of this
standard will not have a material effect on its financial disclosures.
INCOME TAXES
The Company's operations are included in consolidated income tax returns
filed by Trilogy. The Company has entered into a tax allocation agreement with
Trilogy covering the period of time the Company has been and continues to be
included in Trilogy's consolidated tax returns. The income tax provision
(benefit) in the accompanying financial statements has been computed as
follows:
In the case of an income tax provision, the Company recognizes the amount
of expense as if the Company had filed separate income tax returns with the
liability shown as a payable to Trilogy.
In the case of an income tax benefit, the Company recognizes the amount of
benefit the consolidated group obtained through utilization of net
operating losses and/or other tax attributes.
The liability method is used for accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
FINANCIAL PRESENTATION
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
F-9
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
3. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Cash and accounts receivable potentially expose the Company to
concentrations of credit risk, as defined by Statement of Financial Accounting
Standards No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk. Excess cash is placed with highly rated financial institutions. The
Company provides credit, in the normal course of business, to a number of
customers geographically dispersed throughout the U.S. The Company performs
ongoing credit evaluations of its customers and maintains allowances for
potential credit losses. The Company generally requires certain up-front
payments from customers, and customers can be denied access to the product in
the event of non-payment.
The following table summarizes the changes in the allowance for doubtful
accounts for 1995, 1996, 1997, and 1998 (in thousands):
<TABLE>
<S> <C>
Balance at January 1, 1995............................................. $ 0
Additions charged to costs and expenses.............................. 40
Write-off of uncollectible accounts.................................. 0
----
Balance at December 31, 1995........................................... 40
Additions charged to costs and expenses.............................. 165
Write-off of uncollectible accounts.................................. (92)
----
Balance at December 31, 1996........................................... 113
Additions charged to costs and expenses.............................. 315
Write-off of uncollectible accounts.................................. (147)
----
Balance at December 31, 1997........................................... 281
Additions charged to costs and expenses.............................. 174
Write-off of uncollectible accounts.................................. (43)
----
Balance at June 30, 1998............................................... $412
====
</TABLE>
Sales to individual customers constituting 10% or more of total revenues for
each period end were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------ -----------------
1995 1996 1997 1997 1998
------ ----- ----- ----------- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customer No. 1.......................... $2,209 $ 958 $ -- $ -- $ --
Customer No. 2.......................... 1,305 935 -- -- --
Customer No. 3.......................... -- 1,397 4,070 2,197 2,085
Customer No. 4.......................... -- 1,588 -- -- --
Customer No. 5.......................... -- -- -- -- 1,265
Customer No. 6.......................... -- -- -- -- 1,156
</TABLE>
4. RELATED PARTY TRANSACTIONS
In 1994, the Company entered into a master license agreement with Trilogy to
use, modify, embed, translate, market, reproduce, sublicense, distribute, and
prepare derivatives of Trilogy's product portfolio. The Company is also a
nonexclusive authorized reseller of Trilogy's product portfolio. In
consideration for such rights, the Company paid Trilogy a one-time fee of
$500,000 ($350,000 in
F-10
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
1995 and $150,000 in years prior). Under this agreement, the Company committed
to pay royalties annually to Trilogy as follows:
. 30% of the license fees derived from sales of the Company's product
during 1994 and 1995.
. 20% of the license fees derived from sales of the Company's product in
1996 and subsequent years.
. 9% of software maintenance fees from the Company's product and related
products.
. 6% of subscription fees from the Company's product and related products.
Such royalties amounted to approximately $390,000, $312,000, $583,000 and
$430,000 in the years ended December 31, 1995, 1996 and 1997 and the six
months ended June 30, 1998, respectively and are included in cost of software
applications and content revenues.
The Company operates under a services agreement with Trilogy whereby Trilogy
provides certain services on behalf of the Company as follows:
. Management services in the form of on-going support in business
operations.
. Financial services support in the form of insurance and risk management,
tax reporting assistance and payroll processing.
. Human resources support in the form of advice and assistance with respect
to compensation, employee benefits and other employee matters.
. Certain administrative services.
The above services agreement may be modified as deemed necessary, upon
mutual consent between Trilogy and the Company.
Prior to 1998, the Company subleased its office space from Trilogy in
accordance with a facility agreement.
In consideration of receipt of the above services and facilities, the
Company must reimburse Trilogy for its pro rata share of the total cost of
such services and facilities based upon its pro rata share of total full-time
equivalent employees and its pro rata share of total space occupied,
respectively. The Company was charged by Trilogy for such services and
facilities approximately $293,000, $455,000, $443,000 and $168,000 in the
years ended December 31, 1995, 1996 and 1997 and the six months ended June 30,
1998, respectively.
See also Notes 2 and 6.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
------------ JUNE 30,
1996 1997 1998
---- ------ --------
<S> <C> <C> <C>
Furniture and fixtures............................... $ -- $ -- $ 271
Equipment............................................ 713 1,375 2,483
Software............................................. -- -- 98
Leasehold improvements............................... -- -- 210
---- ------ -------
713 1,375 3,062
Accumulated depreciation............................. (422) (881) (1,266)
---- ------ -------
Net property and equipment........................... $291 $ 494 $ 1,796
==== ====== =======
</TABLE>
F-11
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
6. INCOME TAXES
Significant components of the provision for income tax expense (benefit)
attributable to continuing operations are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Current:
Federal............................................... $ 414 $ 269 $(239)
State................................................. -- 23 (25)
----- ----- -----
$ 414 292 (264)
Deferred:
Federal............................................... (207) (427) 627
State................................................. -- (56) 64
----- ----- -----
(207) (483) 691
----- ----- -----
$ 207 $(191) $ 427
===== ===== =====
</TABLE>
For the six months ended June 30, 1998, no provision was made for income
taxes based on the Company's estimated annual effective tax rate including the
impact of increases to the valuation allowance for deferred tax assets.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
----------
1996 1997
---- -----
<S> <C> <C>
Deferred tax assets:
Deferred revenue............................................... $493 $ 257
Accrued wages and other........................................ 62 128
Depreciation and related amounts............................... 94 98
Bad debt and other non-deductible allowances................... 42 201
---- -----
Total deferred tax assets........................................ 691 684
Valuation allowance for deferred tax assets...................... -- (684)
---- -----
Net deferred taxes............................................... $691 $ --
==== =====
</TABLE>
A valuation allowance of $684,000 has been provided to offset the deferred
tax assets at December 31, 1997 due to uncertainties regarding the future
realization of the deferred tax assets. For 1998, it is expected that a full
valuation allowance will be required for any additional deferred tax assets
arising during the year due to uncertainties regarding the future realization
of the deferred tax assets.
F-12
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense
(benefit) is:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996 1997
---- ----- -----
<S> <C> <C> <C>
Tax at U.S. statutory rate............................. 34.0% (34.0)% (35.0)%
State taxes--net of federal benefit.................... -- (2.8) (3.0)
Non-deductible expenses and other...................... 0.5 2.4 5.6
Change in valuation allowance.......................... -- -- 97.7
Other.................................................. -- (3.7) (4.3)
---- ----- -----
34.5% (38.1)% 61.0 %
==== ===== =====
</TABLE>
For the six months ended June 30, 1998, income tax attributable to
continuing operations computed at the U.S. federal statutory tax rate of 35%
is offset by the effect of the change in valuation allowance.
The exercise of certain stock options which have been granted under the
Company's stock option plan give rise to compensation which is includable in
the taxable income of the applicable option holder and deductible by the
Company for federal and state income tax purposes. This amount will be
credited to additional paid-in capital, if and when the Company realizes the
associated tax benefits of the exercised options.
7. EMPLOYEE BENEFIT PLAN
Trilogy sponsors a defined contribution plan in accordance with Section
401(k) of the Internal Revenue Code. The Plan is available to all full-time
employees of the Company on the first day of the month following employment.
The Plan is funded through employee contributions. The Company's only expenses
relating to the Plan are administrative costs, which are not significant.
8. STOCKHOLDERS' EQUITY
ASSET TRANSFER AGREEMENT
Effective June 1, 1996, the Company entered into an asset transfer agreement
with Trilogy whereby the Company received title to certain property and
equipment in consideration for the issuance of 11,520,000 shares of the
Company's Common Stock to Trilogy. In connection with the agreement, Trilogy
effectively forgave all amounts owed by the Company to Trilogy for the
purchase of such property and equipment, resulting in contributed capital of
approximately $337,000. The effect of this transaction has been reflected as
of December 31, 1995.
STOCK SPLIT
Effective September 5, 1996, the Board of Directors approved the
authorization of 50,000,000 shares of Common Stock with a par value of $.01
per share and 3,200,000 shares of Preferred Stock with a par value of $.01 per
share. The Board also approved a 12,800-for-1 stock split of Common Stock
resulting in a total of 12,800,000 shares outstanding. All references in the
financial statements which relate to the number of shares of Common Stock have
been restated to reflect the above stock split.
F-13
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
STOCK OPTION PLAN
The Company's stock option plan provides for the grant for up to 3,000,000
shares of Common Stock of incentive and nonqualified options to employees. The
exercise price of each currently outstanding option is the fair value of a
share of the Company's Common Stock on the date of grant. The stock options
vest over various terms, generally with 0% to 25% exercisable immediately, and
an additional 18.75% to 40% exercisable each year thereafter until the option
is fully exercisable. The term of each option is 10 years from the date of
grant.
The Company has elected to follow the Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations in accounting for its employee stock options. Under APB 25,
when the exercise price of the Company's employee stock options equals the
estimated market price of the underlying stock on the date of grant, no
compensation expense is recognized. In connection with certain options granted
during 1998, the Company is recognizing compensation expense totaling
approximately $1,662,000 over the vesting period. This amount represents the
difference between the exercise price and the deemed fair value of the
Company's Common Stock during the period in which such options were granted.
At June 30, 1998, the Company had a total of approximately $1,435,000
remaining to be amortized over the corresponding vesting period of each
respective option, generally four years.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by Financial Accounting Standards Board Statement No. 123,
Accounting for Stock Based Compensation (FAS 123), which also requires that
the information be determined as if the Company had accounted for its employee
stock options granted subsequent to December 31, 1994 under the fair value
method prescribed by FAS 123. The fair value for these options was estimated
at the date of grant using a minimum value option pricing model with the
following weighted-average assumptions (there were no stock options granted
prior to 1996):
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate.............................. 5.8% 6.4% 5.6%
Dividend yield....................................... 0% 0% 0%
Weighted-average expected life of options............ 5 years 5 years 5 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma compensation expense and net loss for 1996, 1997 and 1998
are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
------------- JUNE 30,
1996 1997 1998
------ ------ ----------
<S> <C> <C> <C>
Pro forma compensation expense...................... $ 65 $ 431 $ 422
Pro forma net loss.................................. $ 351 $1,401 $1,402
Pro forma net loss per share........................ $ 0.03 $ 0.11 $ 0.11
</TABLE>
F-14
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
A summary of changes in common stock options is as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
PRICE PRICE
SHARES PER SHARE PER SHARE
------ --------- ---------
<S> <C> <C> <C>
Options outstanding December 31, 1995
Granted........................................ 2,040 $3.00 $3.00
Exercised...................................... -- -- --
Surrendered.................................... -- -- --
------ ----- -----
Options outstanding December 31, 1996............ 2,040 3.00 3.00
Granted........................................ 159 3.00 3.00
Exercised...................................... -- 3.00 3.00
Surrendered.................................... (8) 3.00 3.00
------ ----- -----
Options outstanding December 31, 1997............ 2,191 3.00 3.00
Granted........................................ 1,650 3.00 3.00
Exercised...................................... (67) 3.00 3.00
Surrendered.................................... (1,217) 3.00 3.00
------ ----- -----
Options outstanding June 30, 1998................ 2,557 $3.00 $3.00
====== ===== =====
</TABLE>
At June 30, 1998, 834,000 options were exercisable.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
--------------------- JUNE 30,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Weighted-average deemed fair value of
stock options granted during the year:
Exercise price equal to fair value of
stock on date of grant................ $0.76 $0.82 $0.72
Exercise price less than fair value of
stock on date of grant................ -- -- $3.37
Weighted-average remaining contractual
life of options......................... 9.83 years 8.88 years 8.75 years
</TABLE>
At June 30, 1998, the Company had reserved 2,933,000 shares of common stock
for issuance in connection with the exercise of stock options.
In March 1997, under the terms of an applications subscription arrangement,
the Company gave the right to require the Company to grant to a customer an
option to purchase up to 320,000 shares of common stock of the Company if one
of certain specified events occurs, including an initial public offering. As
of June 30, 1998, no specified event had occurred and the option was not
outstanding. At the time the option is issued, the exercise price will be set
as the fair market value of the underlying stock. The number of shares subject
to the option shall be adjusted for any dilutive event which occurs between
March 1997 and the date of issuance of the option.
F-15
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED JUNE 30, 1997 IS UNAUDITED)
9. COMMITMENTS AND CONTINGENCIES
LEASE ARRANGEMENTS
The Company leases office facilities under various operating leases expiring
from 1998 to 2003. Future lease commitments for office facilities are as
follows (in thousands):
<TABLE>
<S> <C>
1998.................................................................. $266
1999.................................................................. 480
2000.................................................................. 42
2001.................................................................. 33
2002.................................................................. 33
Thereafter............................................................ 8
</TABLE>
Rent expense for the six months ended June 30, 1998 was approximately
$242,000. Prior to 1998, the Company leased its office facilities from
Trilogy. See Note 4.
LITIGATION
The Company is involved in various lawsuits and legal proceedings which have
arisen in the normal course of business. While the ultimate results of these
matters cannot be predicted with certainty, management does not expect them to
have a material adverse effect on the financial position of the Company.
10. SUBSEQUENT EVENT
On August 26, 1998, the Board of Directors authorized an additional 500,000
of Common Stock reserved for issuance upon exercise of nonqualified options to
employes under the 1996 Stock Option Plan.
Effective July 1, 1998, the Company and Trilogy entered into a management
services agreement, pursuant to which Trilogy will provide certain
administrative and corporate support to the Company. Trilogy has agreed to
provide to the Company certain services including tax administration, payroll,
payroll accounting, banking, corporate finance, recruiting and employee
training services to the Company. In addition, Trilogy has agreed to provide
the Company certain additional services, including hardware purchasing,
shipping and receiving, purchase order database administration, network
administration, audit services, human resources administration, legal services
and customer training. The management services agreement terminates on July
30, 1999, and thereafter is subject to successive one-year renewal terms upon
consent of the parties.
Effective September 1, 1998, the Company and Trilogy entered into a
technology, services and license agreement whereby each party granted the
other a nonexclusive, irrevocable, perpetual, worldwide, fully paid-up license
to internally use, make, reproduce and/or prepare derivative works of certain
intellectual property, or to sublicense any non-party to do so, subject to
certain confidentiality restrictions. The Company and Trilogy are each
obligated to pay to the other monthly royalties on license fees derived from
sales of products that incorporate and/or data maintenance services related to
the other party's technology, software maintenance fees other than data
maintenance services in connection with products that incorporate the other
party's technology and subscription service fees from products that
incorporate the other party's technology. The rights granted to Trilogy by the
Company are subject to change of control provisions as described in the
agreement.
On September 4, 1998, the Board of Directors authorized the filing with the
Securities Exchange Commission ("SEC") that would permit the sale of shares of
the Company's Common Stock in connection with a proposed initial public
offering ("IPO").
F-16
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each
of such Underwriters, for whom Goldman, Sachs & Co., Credit Suisse First
Boston Corporation and SG Cowen Securities are acting as representatives, has
severally agreed to purchase from the Company, the respective number of shares
of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
UNDERWRITER COMMON STOCK
----------- ------------
<S> <C>
Goldman, Sachs & Co.............................................
Credit Suisse First Boston Corporation..........................
SG Cowen Securities.............................................
-------
Total.........................................................
=======
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of the Prospectus to purchase up to an aggregate of
additional shares of Common Stock solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing table, bears to the shares of Common Stock
offered.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 180 days after the
date of this Prospectus, it will not offer, sell, contract to sell or
otherwise dispose of any securities of the Company (other than pursuant to
employee stock option plans existing on the date of this Prospectus) which are
substantially similar to the shares of Common Stock or which are convertible
into or exchangeable for securities which are substantially similar to the
shares of Common Stock, without the prior written consent of the
representatives, except for the shares of Common Stock offered in connection
with the offering.
In connection with the offering, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the offering. Stabilizing transactions consist of
certain bids or purchases for the purpose of preventing or retarding a decline
in the market price of the Common Stock; and syndicate short positions involve
the sale by the Underwriters of a greater number of shares of Common Stock
than they are required to purchase from the Company in the offering. The
Underwriters also may impose a penalty bid, whereby selling
U-1
<PAGE>
concessions allowed to syndicate members or other broker-dealers in respect of
the securities sold in the offering for their account may be reclaimed by the
syndicate if such shares of Common Stock are repurchased by the syndicate in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the Common Stock which may be higher
than the price that might otherwise prevail in the open market; and these
activities, if commenced, may be discontinued at any time. These transactions
may be effected on the Nasdaq National Market, in the over-the-counter market
or otherwise.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Common Stock offered by them.
Prior to this offering, there has been no public market for the shares. The
initial public offering price will be negotiated among the Company and the
representatives. Among the factors considered in determining the initial
public offering price of the Common Stock, in addition to prevailing market
conditions, will be the Company's historical performance, estimates of the
business potential and earnings prospects of the Company, an assessment of the
Company's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
Up to percent of the shares of Common Stock offered hereby may be
reserved for sale at the initial public offering price to the Company's
employees, directors and other individuals with direct business relationships
with the Company. The number of shares available for sale to the general
public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as other shares offered
hereby.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "PCOR".
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act.
U-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 22
Dividend Policy........................................................... 22
Capitalization............................................................ 23
Dilution.................................................................. 24
Selected Financial Data................................................... 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 37
Relationship with Trilogy................................................. 52
Management................................................................ 56
Certain Transactions...................................................... 63
Principal Stockholders.................................................... 66
Description of Capital Stock.............................................. 67
Shares Eligible for Future Sale........................................... 69
Legal Matters............................................................. 70
Experts................................................................... 70
Additional Information.................................................... 71
Index to Financial Statements............................................. F-1
Underwriting.............................................................. U-1
</TABLE>
THROUGH AND INCLUDING , 1998 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PRO-
SPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOT-
MENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SHARES
PCORDER
COMMON STOCK
(PAR VALUE $0.01)
----------------
[LOGO]
----------------
GOLDMAN, SACHS & CO.
CREDIT SUISSE FIRST BOSTON
SG COWEN
REPRESENTATIVES OF THE UNDERWRITERS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the Registrant in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
-------
<S> <C>
Securities and Exchange Commission Filing Fee........................ $**
NASD Filing Fee...................................................... **
Nasdaq National Market Listing Fee................................... **
Accounting Fees and Expenses......................................... **
Blue Sky Fees and Expenses........................................... **
Legal Fees and Expenses.............................................. **
Transfer Agent and Registrar Fees and Expenses....................... **
Printing Expenses.................................................... **
Miscellaneous Expenses............................................... **
---
Total.............................................................. **
===
</TABLE>
- --------
* All amounts are estimates except the Securities and Exchange Commission
filing fee, the NASD filing fee and the Nasdaq National Market listing fee.
** To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporate Law of the State of Delaware, the
Registrant has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Bylaws (Exhibit 3.4 hereto) also provide for mandatory indemnification of its
directors and executive officers, and permissive indemnification of its
employees and agents, to the fullest extent permissible under Delaware law.
The Registrant's Certificate of Incorporation (Exhibit 3.2 hereto) provides
that the liability of its directors for monetary damages shall be eliminated
to the fullest extent permissible under Delaware law. Pursuant to Delaware
law, this includes elimination of liability for monetary damages for breach of
the directors' fiduciary duty of care to the Registrant and its stockholders.
These provisions do not eliminate the directors' duty of care and, in
appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for any transaction from which the director derived an improper personal
benefit, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
Prior to the effective date of the Registration Statement, the Registrant
will have entered into agreements with its directors and certain of its
executive officers that require the Registrant to indemnify such persons
against expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any such person
may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person
reasonably believed to be in
II-1
<PAGE>
or not opposed to the best interests of the Registrant and, with respect to
any criminal proceeding, had no reasonable cause to believe his or her conduct
was unlawful. The indemnification agreements also set forth certain procedures
that will apply in the event of a claim for indemnification thereunder.
The Registrant intends to obtain in conjunction with the effectiveness of
the Registration Statement a policy of directors' and officers' liability
insurance that insures the Company's directors and officers against the cost
of defense, settlement or payment of a judgment under certain circumstances.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
For the three year period from June 30, 1995 to June 30, 1998, the
Registrant has issued and sold the following unregistered securities:
1. During the period, the Registrant granted stock options to employees,
directors and consultants under its 1996 Plan covering an aggregate of
2,649,131 shares of the Registrant's Common Stock, at an exercise price of
$3.00.
2. During the period, the Registrant issued and sold an aggregate of
66,925 shares of its Common Stock to 20 employees for cash and promissory
notes in the aggregate amount of $200,775 upon exercise of stock options
granted pursuant to the Registrant's 1996 Plan.
3. During the period, the Registrant issued and sold 11,520,000 shares of
its Common Stock to Trilogy in exchange for certain assets having a total
value of $337,000.
The sale and issuance of securities in the transactions described in
paragraphs 1 and 2 above were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated thereunder in that they were
offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.
The sale and issuance of securities in the transaction described in
paragraph 3 above were deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of such Securities Act as a
transaction by an issuer not involving a public offering.
Appropriate legends were affixed to the stock certificates issued in the
above transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. No Underwriters were employed in any
of the above transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The exhibits are as set forth in the Exhibit Index.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted since they are not required or are not
applicable or the required information is shown in the financial statements or
related notes.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations
and registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-2
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF AUSTIN, STATE OF TEXAS
ON THE 4TH DAY OF SEPTEMBER, 1998.
pcOrder.com, Inc.
By: /s/ Ross A. Cooley__________
ROSS A. COOLEY
CHAIRMAN, CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ross A. Cooley, Christina C. Jones and James J.
Luttenbacher, and each of them, as his or her 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 (including post-effective amendments to this Registration
Statement and sign any registration statement for the same offering covered by
the Registration Statement that is to be effective upon filing pursuant to
Rule 462 promulgated under the Securities Act of 1993, 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 connection
therewith and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ross A. Cooley Chairman and Chief September 4, 1998
______________________________________ Executive Officer
ROSS A. COOLEY (Principal Executive
Officer)
/s/ Christina C. Jones President and Chief September 4, 1998
______________________________________ Operating Officer
CHRISTINA C. JONES (Principal Executive
Officer)
/s/ James J. Luttenbacher Vice President, Chief September 4, 1998
______________________________________ Financial Officer and
JAMES J. LUTTENBACHER Secretary
(Principal Financial
Officer and Accounting
Officer)
/s/ Joseph A. Liemandt Director September 4, 1998
______________________________________
JOSEPH A. LIEMANDT
/s/ Peter J. Barris Director September 4, 1998
______________________________________
PETER J. BARRIS
/s/ Linwood A. Lacy, Jr. Director September 4, 1998
______________________________________
LINWOOD A. LACY, JR.
/s/ Robert W. Stearns Director September 4, 1998
______________________________________
ROBERT W. STEARNS
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------- --------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant, as currently in
effect.
3.2* Amended and Restated Certificate of Incorporation of the Registrant.
3.3 Bylaws of the Registrant, as currently in effect.
3.4* Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
5.1* Opinion of Morrison & Foerster, LLP as to the legality of the Common
Stock being registered.
10.1* Form of Indemnification Agreement between the Company and each of its
Officers and Directors.
10.2 Cooley Employment Agreement.
10.3 Jones Employment Agreement.
10.4 Luttenbacher Employment Agreement.
10.5* 1996 Stock Option Plan.
10.6+* Technology, Services and License Agreement.
10.7+* Management Services Agreement.
10.8 Tax Allocation Agreement.
10.9* Asset Transfer Agreement.
10.10* Amendment to Asset Transfer Agreement.
23.1* Consent of Morrison & Foerster, LLP. Reference is made to Exhibit 5.1.
23.2 Consent of Ernst & Young LLP Independent Auditors.
24.1 Powers of Attorney. Reference is made to the signature page hereof.
27.1 Financial Data Schedule
</TABLE>
- --------
+ Confidential treatment requested as to portions of this exhibit.
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
----------------------------
OF
--
CONQUER, INC.
-------------
ARTICLE ONE
The name of the corporation is Conquer, Inc. (the "Corporation").
ARTICLE TWO
The address of the registered office of the Corporation in the State of
Delaware is 32 Loockerman Square, Suite L-100, City of Dover, County of Kent,
19901. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
ARTICLE THREE
The nature of the business to be conducted, and the purposes to be
promoted, by the Corporation is to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE FOUR
The total number of shares of all classes of stock that the Corporation is
authorized to issue is one thousand (1,000) shares of common stock with a par
value of $0.01 per share.
ARTICLE FIVE
The name and mailing address of the incorporator is;
Name Mailing Address
---- ---------------
Paul A. Wehrmann Cassell & Stone, L.L.P.
5956 Sherry Lane
Suite 1415
Dallas, TX 75225
ARTICLE SIX
The powers of the incorporator shall terminate upon the filing of this
Certificate of Incorporation and the name and mailing address of the persons who
shall serve as directors until the first annual meeting of stockholders or until
their successors are elected and qualified are:
<PAGE>
Name of Director Mailing Address
---------------- ---------------
1. Joseph A. Liemandt 6034 West Courtyard
Suite 130
Austin, TX 78730
2. B. Wade Monroe 6034 West Courtyard
Suite 130
Austin, TX 78730
3. Dennis R. Cassell 5956 Sherry Lane
Suite 1415
Dallas, TX 75225
ARTICLE SEVEN
The Board of Directors of the Corporation may exercise all such powers and
do all such lawful acts and things as are not by statute, the By-Laws, or this
Certificate of Incorporation directed or required to be exercised and done by
the stockholders.
ARTICLE EIGHT
In furtherance of, and not in limitation of, the powers conferred by
statute, the Board of Directors is expressly authorized to adopt, amend, or
repeal the bylaws of the corporation.
ARTICLE NINE
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability to the extent provided by applicable
law (i) for any breach of the director's duty of loyalty to the Corporation or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which such director derived an improper personal benefit. If
the General Corporation Law of the State of Delaware is amended after the date
of filing of this Certificate of Incorporation to authorize corporate action to
further eliminate or limit the personal liability of directors, then the
liability of a director of the Corporation, in addition to the limitation on
personal liability provided in this Article Nine, shall be eliminated or limited
to the fullest extent permitted by the General Corporation Law of the State of
Delaware, as so amended. Any repeal or amendment of this Article Nine by the
stockholders of the Corporation, or any amendment, termination or repeal of
relevant provisions of the General Corporation Law of the State of Delaware or
any other applicable law, shall not adversely
-2-
<PAGE>
affect any elimination of or limitation on the personal liability of a director
of the Corporation for or with respect to any acts or omissions of such
director occurring prior to the effective date of such amendment, termination or
repeal.
ARTICLE TEN
Whenever a compromise or arrangement is proposed between the Corporation
and its creditors or any class of them and/or between the Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for the Corporation under the provisions of
Section 291 of the General Corporation Law of the State of Delaware or on the
application of trustees in dissolution or of any receiver or receivers appointed
for the Corporation under the provisions of Section 279 of the General
Corporation Law of the State of Delaware, order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of the Corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all of the creditors or class of creditors, and/or
on all of the stockholders or class of stockholders, of the Corporation, as the
case may be, and also on the Corporation.
THE UNDERSIGNED, being the incorporator hereinbefore named, hereby
acknowledges, under penalties of perjury, that the foregoing Certificate of
Incorporation is my act and deed and that the facts therein stated are true.
/s/ Paul A. Wehrmann
--------------------------------
Paul A. Wehrmann, Incorporator
-3-
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
CONQUER, INC.
(PURSUANT TO SECTION 242 OF THE GENERAL CORPORATION LAW OF THE STATE OF
DELAWARE)
Christina J. Jones and Dennis R. Cassell, being the President and
Secretary, respectively, of Conquer, Inc., a corporation organized and existing
under and by virtue of the laws of the State of Delaware (the "Corporation") do
each hereby certify as follows:
FIRST: Article One of the Certificate of Incorporation of the Corporation
be, and hereby is, amended in its entirety to read as follows:
"ARTICLE ONE
The name of the corporation is pcOrder.com, Inc. (the "Corporation")."
SECOND: Article Four of the Certificate of Incorporation of the Corporation
be, and hereby is, amended to read in its entirety as follows:
"ARTICLE FOUR
The total number of shares of all classes of stock that the Corporation is
authorized to issue is ten thousand (10,000) shares of common stock with a par
value of $0.01 per share."
THIRD: The Board of Directors of the Corporation approved the foregoing
amendment by written consent pursuant to the provisions of Section 141 and 242
of the General Corporation of the State of Delaware (the "DGCL") and directed
that such amendment be submitted to the stockholders of the Corporation entitled
to vote thereon for their consideration, approval, and adoption thereof.
FOURTH: The stockholders of the Corporation entitled to vote thereon
approved the foregoing amendment by written consent pursuant to Sections 228 and
242 of the DGCL.
* * * * * *
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the President and the Secretary
of the Corporation, for the purpose of amending the Certificate of Incorporation
of the Corporation, pursuant to the DGCL, under penalties of perjury, do each
hereby declare and certify that this is the act and deed of the Corporation, and
the facts stated herein are true and accordingly have hereunto signed this
Certificate of Amendment to the Certificate of Incorporation of the Corporation
as of this 20th day of June, 1996.
CONQUER, INC.
By: /s/ Christina J. Jones
----------------------
Name: Christina J. Jones
Title: President
ATTEST:
By: /s/ Dennis R. Cassell
---------------------------
Name: Dennis R. Cassell
Title: Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
PCORDER.COM, INC.
(PURSUANT TO SECTION 242 OF THE GENERAL CORPORATION LAW OF THE STATE OF
DELAWARE)
Christina J. Jones and Dennis R. Cassell, being the President and
Secretary, respectively, of pcOrder.com, Inc., a corporation organized and
existing under and by virtue of the laws of the State of Delaware (the
"Corporation") do each hereby certify as follows:
FIRST: Article Four of the Certificate of Incorporation of the
Corporation (the "Certificate") be, and hereby is, amended in its entirety to
read as follows:
"ARTICLE FOUR
The total number of shares of all classes of stock that the Corporation is
authorized to issue is fifty million (50,000,000) shares of common stock with a
par value of $0.01 per share."
SECOND: The Board approved the foregoing amendments by written consent
pursuant to the provisions of Sections 141 and 242 of the General Corporation
Law of the State of Delaware and directed that such amendments be submitted to
the stockholders of the Corporation entitled to vote thereon for their
consideration, approval, and adoption thereof.
THIRD: The stockholders of the Corporation entitled to vote thereon
approved the foregoing amendments by written consent pursuant to the provisions
of Sections 228 and 242 of the General Corporation Law of the State of Delaware.
*********
-1-
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the President and the Secretary
of the Corporation, for the purpose of amending the Certificate of Incorporation
of the Corporation, pursuant to the General Corporation Law of the State of
Delaware, under penalties of perjury, do each hereby declare and certify that
this the act and deed of the Corporation, and the facts stated herein are true
and accordingly have hereunto signed this Certificate of Amendment to the
Certificate of Incorporation as of this 5/th/ day of September, 1996.
pcOrder.com, Inc
By: /s/ Christina J. Jones
---------------------------
Name: Christina J. Jones
Title: President
Attest:
By: /s/ Dennis R. Cassell
--------------------------
Name: Dennis R. Cassell
Title: Secretary
-2-
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
PCORDER.COM, INC.
(PURSUANT TO SECTION 242 OF THE GENERAL CORPORATION LAW OF THE STATE OF
DELAWARE)
Christina J. Jones and Dennis R. Cassell, being the President and
Secretary, respectively, of pcOrder.com, Inc., a corporation organized and
existing under and by virtue of the laws of the State of Delaware (the
"Corporation") do each hereby certify as follows:
FIRST: Article Four of the Certificate of Incorporation of the
Corporation (the "Certificate") be, and hereby is, amended in its entirety to
read as follows:
"ARTICLE FOUR
The total number of shares of all classes of stock that the Corporation is
authorized to issue is fifty million (50,000,000) shares of common stock with a
par value of $0.01 per share ("Common Stock").
Effective as of the close of business on September 6, 1996, each share of
Common Stock then issued ("Old Common Stock") has been reclassified and changed
into 12,800 shares of Common Stock without any action by the holder thereof. The
certificate outstanding and previously representing shares of Old Common Stock
shall, until surrendered and exchanged, be deemed, for all corporate purposes,
to represent 12,800 shares of Common Stock for each share of Old Common Stock
previously represented by such certificate."
SECOND: The Board approved the foregoing amendments by written consent
pursuant to the provisions of Sections 141 and 242 of the General Corporation
Law of the State of Delaware and directed that such amendments be submitted to
the stockholders of the Corporation entitled to vote thereon for their
consideration, approval, and adoption thereof.
THIRD: The stockholders of the Corporation entitled to vote thereon
approved the foregoing amendments by written consent pursuant to the provisions
of Sections 228 and 242 of the General Corporation Law of the State of Delaware.
*********
-1-
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the President and the Secretary
of the Corporation, for the purpose of amending the Certificate of Incorporation
of the Corporation, pursuant to the General Corporation Law of the State of
Delaware, under penalties of perjury, do each hereby declare and certify that
this the act and deed of the Corporation, and the facts stated herein are true
and accordingly have hereunto signed this Certificate of Amendment to the
Certificate of Incorporation as of this 7th day of January, 1997.
pcOrder com, Inc
By: /s/ Christina J. Jones
----------------------------
Name: Christina J. Jones
Title: President
Attest:
By: /s/ Dennis R. Cassell
-------------------------
Name: Dennis R. Cassell
Title: Secretary
-2-
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
CONQUER, INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
-------
Section 1. Registered Office. The registered office of the Corporation
-----------------
shall be Prentice-Hall Corporation System, Inc. 32 Lockerman Square, Dover,
Delaware 19901, County of Kent.
Section 2. Other Offices. The Corporation may also have offices at such
-------------
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Place of Meetings. Meetings of the stockholders for the
-----------------
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The Annual Meeting of Stockholders shall be
---------------
held on the last Tuesday in November if not a legal holiday, otherwise on the
next regular business day following at 10:00 a.m., or at such other date and
time as shall be designated from time to time by the Board of Directors and
stated in the notice of the meeting, at which meetings the stockholders shall
elect by a plurality vote a Board of Directors, and transact such other business
as may properly be brought before the meeting. Written notice of the Annual
Meeting stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law or by the
----------------
Certificate of Incorporation, Special Meetings of Stockholders, for any purpose
or purposes, may be called by the President, a majority of the Board of
Directors, or the holders of
BYLAWS OF CONQUER, INC. - PAGE 1 OF 15
<PAGE>
a majority of all the shares of Capital Stock of the Corporation issued and
outstanding and entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting. Written notice of the Special Meeting stating
the place, Date and hour of the meeting and the purpose or purposes for which
the meeting is called shall be given not less than ten nor more than sixty days
before the date of the meeting to each stockholder entitled to vote at such
meeting.
Section 4. Quorum. Except as otherwise provided by law or by the
------
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall not
be present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
the power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder entitled to vote at
the meeting.
Section 5. Voting. Unless otherwise required by law, the Certificate of
------
Incorporation or these Bylaws, any question brought before any meeting of
stockholders shall be decided by the vote of the holders of a majority of the
stock represented and entitled to vote thereat. Each stockholder represented at
a meeting of stockholders shall be entitled to cast one vote thereat held by
such stockholder. Such votes may be cast in person or by proxy, but no proxy
shall be voted on or after three years from its date, unless such proxy provided
for a longer period. The Board of Directors, in its discretion, or the officer
of the Corporation presiding at a meeting of stockholders, in his discretion,
may require that any votes cast at such meeting shall be cast by written ballot.
Section 6. Consent of Stockholders in Lieu of Meeting. Unless otherwise
------------------------------------------
provided in the Certificate of Incorporation, any action required or permitted
to be taken at any Annual or Special Meeting of stockholders of the Corporation
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize such action at
BYLAWS OF CONQUER, INC. - PAGE 2 OF 15
<PAGE>
a meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing.
Section 7. List of Stockholders Entitled to Vote. The officer of the
-------------------------------------
Corporation who has charge of the stock ledger of the corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 8. Stock Ledger. The stock ledger of the Corporation shall be the
------------
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 7 of this Article II or the books of the
corporation, or to vote in person or by proxy at any meeting of stockholders.
ARTICLE III
DIRECTORS
---------
Section 1. Number and Election of Directors. The affairs of the
--------------------------------
Corporation shall be managed by a Board of Directors. The number of directors
may from time to time be fixed by resolution of such Board of Directors. Except
as provided in Section 2 of this Article, directors shall be elected by a
plurality of the votes cast at Annual Meeting of Stockholders, and each director
so elected shall hold office until the next Annual Meeting of Stockholders and
until his successor is duly elected and qualified, or until his earlier
resignation or removal. Any director may resign at any time upon notice to the
Corporation. Directors need not be stockholders.
Section 2. Vacancies. Vacancies and newly created directorships resulting
---------
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until the
next Annual
BYLAWS OF CONQUER, INC. - PAGE 3 OF 15
<PAGE>
Meeting of Stockholders and until their successors are duly elected and
qualified, or until their earlier resignation or removal.
Section 3. Duties and Powers. The business of the Corporation shall be
-----------------
managed by or under the directorship of the Board of Directors, which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
Bylaws directed or required to be exercised or done by the stockholders.
Section 4. Meetings. The Board of Directors of the Corporation may hold
--------
meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman, if there be one, the President, the Secretary, or upon the written
request of one-third of the number of directors of the Corporation. Notice
thereof stating the place, date and hour of the meeting shall be given to each
director either by mail not less than forty-eight (48) hours before the date of
the meeting, by telephone or telegram on twenty-four (24) hours' notice, or on
such shorter notice as the person or persons calling such meeting may deem
necessary or appropriate in the circumstances.
Section 5. Quorum. Except as may be otherwise specifically provided by
------
law, the Certificate of Incorporation or these Bylaws, at all meetings of the
Board of Directors, a majority of the entire Board of Directors shall constitute
a quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors. If a quorum shall not be present at any meeting of the
Board of Directors, the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
Section 6. Actions of Board. Unless otherwise provided by the Certificate
----------------
of Incorporation or these Bylaws, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting, if all of the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 7. Meetings by Means of Conference Telephone. Unless otherwise
-----------------------------------------
provided by the Certificate of Incorporation or these Bylaws, members of the
Board of Directors of the Corporation, or
BYLAWS OF CONQUER, INC. - PAGE 4 OF 15
<PAGE>
any committee designated by the Board of Directors, may participate in a meeting
of the Board of Directors or such committee by means of a conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, and participation in a meeting pursuant to
this Section 7 shall constitute presence in person at such meeting.
Section 8. Committees. The Board of Directors may, by resolution passed
----------
by a majority of the entire Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence of disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member or the Board of Directors to act at the meeting in place of any
absent or disqualified member. Any committee, to the extent allowed by law and
provided in the resolution establishing such committee, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation. Each committee shall
keep regular minutes and report to the Board of Directors when required.
Section 9. Compensation. By resolution of the Board of Directors, the
------------
directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or a stated salary as director. No such
payment shall preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may, by resolution of the Board of Directors, be allowed like
compensation for attending committee meetings.
Section 10. Interested Directors. No contract or transaction between the
--------------------
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorized the contract or transaction, or solely because his or their votes are
counted for such purpose if (i) the material facts as to his or their
relationship or interest and as
BYLAWS OF CONQUER, INC. - PAGE 5 OF 15
<PAGE>
to the contract or transactions are disclosed or are known to the Board of
Directors or the committee, and the Board of Directors or committee in good
faith authorized the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum; or (ii) the material facts as to his or their
relationship or interest and as to the contract or transaction are disclosed or
are known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by the vote of the
stockholders; or (iii) the contract or transaction is fair as to the
Corporation as of the time it is authorized, approved or ratified by the Board
of Directors, a committee thereof or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or a committee which authorized the contract or
transaction.
ARTICLE IV
OFFICERS
--------
Section 1. General. The officers of the Corporation shall be chosen by
-------
the Board of Directors and shall be a President and a Secretary. The Board of
Directors, in its discretion, may also choose a Chairman of the Board,
Treasurer, one or more Vice Presidents, Assistant Secretaries, Assistant
Treasurers and other officers. Any number of offices may be held by the same
person, unless otherwise prohibited by law, the Certificate of Incorporation or
these Bylaws. The officers of the Corporation need not be stockholders of the
Corporation nor, except in the case of the Chairman of the Board of Directors,
need such officers be directors of the Corporation.
Section 2. Election. The Board of Directors at its first meeting held
--------
after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are elected and qualified, or until their earlier resignation
or removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors. The officers shall not receive any stated salary for their
services; however, all officers shall be entitled to be paid or reimbursed for
all costs and expenditures incurred in the Corporation's business.
BYLAWS OF CONQUER, INC. - PAGE 6 OF 15
<PAGE>
Section 3. Voting Securities Owned by the Corporation. Powers of attorney,
------------------------------------------
proxies, waivers of notice of meeting, consents and other instruments relating
to securities owned by the Corporation may be executed in the name and on behalf
of the Corporation by the Chairman of the Board, the President or any Vice
President and any such officer may, in the name of and on behalf of the
Corporation, take all such action as any such officer may deem advisable to vote
in person or by proxy at any meeting of security holders of any corporation in
which the Corporation may own securities and at any such meeting shall possess
and may exercise any and all rights and powers incident to the ownership of such
securities and which, as the owner thereof, the Corporation might have exercised
and possessed if present. The Board of Directors may, by resolution, from time
to time confer like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the Board of
----------------------------------
Directors shall preside at all meetings of the stockholders and of the Board of
Directors. The Chairman of the Board of Directors shall be the Chief Executive
Officer of the Corporation and shall have general supervision of its business.
He shall possess the same power as the President to sign all contracts,
certificates and other instruments of the Corporation which may be authorized by
the Board of Directors. The Chairman of the Board of Directors shall also
perform such other duties and may exercise such other powers as from time to
time may be assigned to him by these Bylaws or by the Board of Directors.
Section 5. President. If no Chairman of the Board shall be elected, the
---------
President shall be the chief executive officer of the Corporation and shall have
the powers and duties of the Chairman of the Board as set forth in Section 4
above. In the absence of the Chairman of the Board, if one shall be elected, the
President shall preside at all meetings of the shareholders and Directors. He
may sign, with any other proper officer, certificates for shares of the
Corporation and any deeds, bonds, mortgages, contracts and other documents which
the Board has authorized to be executed, except where required by law to be
otherwise signed and executed and except where the signing and execution thereof
shall be expressly delegated by the Board or these Bylaws to some other
officer or agent of the Corporation. In addition, the President shall perform
whatever duties and shall exercise all the powers that are given to him by the
Board or by the Chairman of the Board, if one shall be elected.
Section 6. Vice President. At the request of the President or in his
--------------
absence or in the event of his inability or refusal to act (and if there be no
Chairman of the Board of Directors), the Vice President or the Vice Presidents
if there is more than one, if
BYLAWS OF CONQUER, INC. - PAGE 7 OF 15
<PAGE>
there be any, (in the order designated by the Board of Directors) shall perform
the duties of the President, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the President. Each Vice President
shall perform such other duties and have such other powers as the Board of
Directors from time to time may prescribe. If there be no Chairman of the Board
of Directors and no Vice President, the Board of Directors shall designate the
officer of the Corporation who in the absence of the President, or in the event
of the inability or refusal of the President to act, shall perform the duties of
the President, and when so acting, shall have all the powers of and be subject
to all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings of the Board
---------
of Directors and all meetings of stockholders and record all the proceedings
thereat in a book or books to be kept for that purpose; the Secretary shall also
perform like duties of the standing committees when required. The Secretary
shall give, or cause to be given, notice of all meetings of the stockholders and
special meetings of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors, Chairman of the Board, or
President, under whose supervision he shall be. If the Secretary shall be unable
or shall refuse to cause to give notice of all meetings of the stockholders and
special meetings of the Board of Directors, and if there be no Assistant
Secretary, then either the Board of Directors or the President may choose
another officer to cause such notice to be given. The Secretary shall have
custody of the seal of the Corporation, if there be one, and the Secretary or
any Assistant Secretary, if there be one, shall have authority to affix the same
to any instrument requiring it and when so affixed, it may be attested by the
signature of the Secretary or by the signature of any such Assistant Secretary.
The Board of Directors may give general authority to any other officer to affix
any seal of the Corporation and to attest the affixing by his signature. The
Secretary shall see that all books, reports, statements, certificates and other
documents and records required by law to be kept or filed are properly kept or
filed, as the case may be.
Section 8. Treasurer. The Treasurer, if there be one, shall have the cutody
--------
of the corporate funds and securities and shall keep full and accurate accounts
of receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meeting, or
BYLAWS OF CONQUER, INC. - PAGE 8 OF 15
<PAGE>
when the Board of Directors so requires, an account of all of his transactions
as Treasurer and of the financial condition of the Corporation. If required by
the Board of Directors, the Treasurer shall give the Corporation a bond in such
sum and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of the duties of his office and for the
restoration to the Corporation, in case of his death, resignation, retirement or
removal from office, of all books, papers, vouchers, money and other property
of whatever kind in his possession or under his control belonging to the
Corporation.
Section 9. Assistant Secretaries. Except as may be otherwise provided
---------------------
in these Bylaws, Assistant Secretaries, if there be any, shall perform such
duties and have such powers as from time to time may be assigned to them by the
Board of Directors, the President, any Vice President, if there be one, or the
Secretary, and, in the absence of the Secretary or in the event of his
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there be any,
--------------------
shall perform such duties and have such power as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and, in the absence of the Treasurer or in
the event of his disability or refusal to act, shall perform the duties of the
Treasurer, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Treasurer. If required by the Board of Directors,
an Assistant Treasurer shall give the Corporation a bond in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
Section 11. Other Officers. Such other officers as the Board of
--------------
Directors may choose shall perform such duties and have such powers as from time
to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
BYLAWS OF CONQUER, INC. - PAGE 9 OF 15
<PAGE>
ARTICLE V
STOCK
-----
Section 1. Form of Certificates. Every holder of stock in the
--------------------
Corporation shall be entitled to have a certificate signed in the name of the
Corporation (i) by the Chairman of the Board of Directors, the President or a
Vice President and (ii) by the Secretary or an Assistant Secretary, or the
Treasurer or an Assistant Treasurer of the Corporation, certifying the number of
shares owned by him in the Corporation.
Section 2. Signatures. Where a certificate is countersigned by (i) a
----------
transfer agent other than the Corporation or its employee or (ii) a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
Section 3. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the mailing of
an affidavit of the fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, advertise the same in such manner as
the Board of Directors shall require and/or to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable in
---------
the manner prescribed by law and in these Bylaws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by his attorney lawfully constitute in writing and upon the surrender of the
certificate therefor, which shall be canceled before a new certificate shall be
issued.
Section 5. Record Date. In order that the Corporation may determine the
-----------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to
BYLAWS OF CONQUER, INC. - PAGE 10 OF 15
<PAGE>
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock, or for the purpose of any other lawful action, the Board
of Directors may fix in advance a record date, which shall not be more than
sixty days nor less than ten days before the date of such meeting, nor more than
sixty days prior to any other action. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled to
-----------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
ARTICLE VI
NOTICES
-------
Section 1. Notices. Whenever written notice is required by law, the
-------
Certificate of Incorporation or these Bylaws to be given to any director, member
of a committee or stockholder, such notice may be given by mail, addressed to
such director, member of a committee or stockholder, at his address as it
appears on the records of the Corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Written notice may also be given personally
or by telegram, telex or cable.
Section 2. Waivers of Notice. Whenever any notice is required by law,
-----------------
the Certificate of Incorporation or these Bylaws to be given to any director,
member of a committee or stockholder, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
BYLAWS OF CONQUER, INC. -PAGE 11 OF 15
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of the Corporation,
---------
subject to the provisions of the Certificate of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, and may be
paid in cash, in property or in shares of capital stock of the Corporation.
Before payment of any dividend, there by be set aside out of any funds of the
Corporation available for dividends such sum or sums as the Board of Directors
from time to time, in its absolute discretion, deems proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the Corporation, or for any proper purpose, and the
Board of Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and notes of the
-------------
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed
-----------
by resolution of the Board of Directors.
ARTICLE VIII
INDEMNIFICATION
---------------
Section 1. Right to Indemnification.
------------------------
(a) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director or officer of the Corporation against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
---- ----------
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
BYLAWS OF CONQUER, INC. - PAGE 12 OF 15
<PAGE>
criminal action or proceeding had reasonable cause to believe that his conduct
was unlawful.
(b) The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that he is or was a director or officer of the Corporation
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, except that no such
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of such liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery of Delaware or such
other court shall deem proper.
(c) Notwithstanding the foregoing provisions of this Article VIII, the
Corporation shall approve indemnification of any Person to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment).
Section 2. Indemnification for Expenses. Notwithstanding any other
----------------------------
provision of this Article VIII, to the extent that a director or officer has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Section 1 of this Article VIII, or in defense of any
claim, issue or matter therein, he shall be indemnified against all expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
Section 3. Procedure to be Followed. Any indemnification under Section 1 of
------------------------
this Article VIII (unless ordered by a court) shall be paid by the Corporation
if a determination is made (i) by the board of directors by a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding, or (ii) if such a quorum is not attainable, or, even if attainable
and a quorum of disinterested directors so directs, by independent legal counsel
in a written opinion, or (iii) by the majority vote
BYLAWS OF CONQUER, INC. - PAGE 13 of 15
<PAGE>
of a quorum of the stockholders, that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 1 of this Article VIII.
Section 4. Payment of Expenses in Advance. Expenses (including attorneys'
------------------------------
fees) incurred by a director or officer in defending the civil or criminal
action, suit or proceeding, shall be paid by the corporation in advance of the
final disposition of such action, suit or proceeding; provided, however, that
the payment of such expenses incurred by a director or officer in advance of the
final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by or on behalf of the director or officer to repay
all amounts so advanced in the event that it shall ultimately be determined that
such director or officer is not entitled to be indemnified by the corporation as
authorized in this Article VIII. Such expenses incurred by other employees and
agents may be so paid in such circumstances and upon such terms and conditions,
if any, as the board of directors deems appropriate.
Section 5. Other Rights. The indemnification and advancement of expenses
------------
provided, or granted pursuant to, this Article VIII shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under my bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in any other capacity while holding office,
and shall continue as to a person who has ceased to be a director or officer,
and shall inure to the benefit of the estate, heirs, executors and
administrators of such person.
Section 6. Insurance. In addition to the indemnification by the
---------
Corporation, the Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of this Article VIII.
Section 7. Severability. If this Article VIII or any portion hereof shall
------------
be invalidated on any ground by any court of competent jurisdiction, such
invalidation shall in no way affect the remaining portions of this Article VIII,
and the Corporation shall nevertheless indemnify each person sought to be
indemnified under this Article VIII as to any expenses (including attorneys'
fees),
BYLAWS OF CONQUER, INC. - PAGE 14 TO 15
<PAGE>
judgments, fines and amounts paid in settlement with respect to any action, suit
or proceeding, whether civil, criminal, administrative or investigative,
including an action by or in the right of the Corporation, to the fullest extent
permitted by an applicable portion of this Article VIII that shall not have been
invalidated and to the fullest extent permitted by applicable law.
Section 8. Indemnification of Others. Employees and agents who are not
-------------------------
officers of the Corporation and any person who is or was serving at the request
of the Corporation as a director, officer, employee or agent of another
Corporation, partnership, joint venture, trust or other enterprise may be
indemnified to the same extent that indemnification is provided in this Article
VIII to directors and officers of the Corporation, in such circumstances and
subject to such limitations, terms and conditions as the board of directors
deems appropriate. Any indemnification provided pursuant to this Section 8 of
Article VIII shall not be deemed exclusive of any other rights to which such
persons seeking indemnification or advancement of expenses may be entitled under
any bylaw, agreement, or vote of stockholders or disinterested directors.
Section 9. Amendments. No amendment, termination or repeal of this Article
----------
VIII or of relevant provisions of the Delaware General Corporation Law or any
other applicable law shall diminish in any way the rights of any person to
indemnification under the provisions hereof with respect to any action, suit or
proceeding arising out of, or relating to, any actions, transactions or facts
occurring prior to the final adoption of such amendment, termination or repeal.
ARTICLE IX
AMENDMENTS
----------
Section 1. Amendment of Bylaws. These Bylaws may be altered, amended or
-------------------
repealed, in whole or in part, or new Bylaws may be adopted by the stockholders
or by the Board of Directors. All such amendments must be approved by either the
holders of a majority of the outstanding capital stock entitled to vote thereon
or by a majority of the entire Board of Directors then in office.
Section 2. Entire Board of Directors. As used in this Article IX and in
-------------------------
these Bylaws generally, the term "entire Board of Directors" means the total
number of directors which the Corporation would have if there were no vacancies.
BYLAWS OF CONQUER, INC. - PAGE 15 OF 15
<PAGE>
UNANIMOUS CONSENT OF DIRECTORS
IN LIEU OF ORGANIZATIONAL MEETING
OF
CONQUER, INC.
JULY 19, 1994
The undersigned, being all of the directors of Conquer, Inc., a Delaware
corporation (the "Corporation"), hereby, pursuant to the provisions of Section
141(f) of the Delaware General Corporation Law, consent to, approve, and adopt
the following resolutions:
1. Certificate of Incorporation.
----------------------------
RESOLVED, that the Certificate of Incorporation that was submitted to, and
reviewed by, the Board of Directors of the Corporation and that has been filed
in the office of the Secretary of State of the State of Delaware on July 18,
1994, is approved, accepted, ratified, and adopted as the Corporation's
Certificate of Incorporation.
FURTHER RESOLVED, that the Secretary of the Corporation is directed to
insert such Certificate of Incorporation in the minute book of the Corporation.
2. By-Laws.
-------
RESOLVED, that the By-Laws for the regulation and management of the affairs
of the Corporation that were submitted to, and reviewed by, the Board of
Directors of the Corporation are approved and adopted for and as the By-Laws of
the Corporation, and the Secretary of the Corporation is directors to insert a
copy of the By-Laws in the minute book of the Corporation.
3. Corporate Seal.
--------------
RESOLVED, that the corporate seal,
an impression of which appears on the
margin of this Consent, is hereby approved
and adopted as the form of seal of the
Corporation, provided that the use of such
seal shall not be required upon, and shall
not affect the validity of, any instrument
issued or executed by the Corporation.
-1-
<PAGE>
4. Stock Certificate.
-----------------
RESOLVED, that the form of certificate submitted to, and reviewed by, the
Board of Directors of the Corporation is hereby approved and adopted as the form
of certificate to evidence ownership of the Common Stock, $0.01 par value per
share, of the Corporation (the "Common Stock") and the Secretary is hereby
directed to insert a specimen thereof in the minute book of the Corporation.
5. Number of Directors.
-------------------
RESOLVED, that the number of Directors which shall constitute the entire
Board of Directors of the Company be, and the same is hereby, established at
three (3) directors.
6. Election of Officers.
--------------------
RESOLVED, that the following individuals are elected to the offices of the
Corporation set forth opposite their respective names, each to serve as such
until such officer's successor is duly elected and qualified or, if earlier,
until such officer's death, resignation, or removal from office:
Joseph A. Liemandt President
Dennis R. Cassell Secretary
7. Organizational Expenses.
-----------------------
RESOLVED, that the appropriate officers of the Corporation be, and each
hereby is, authorized and directed to pay all charges and expenses incident to
and necessary for the organization of the Corporation and to reimburse any
person who has made any disbursement therefor.
8. Calender Year.
-------------
RESOLVED, that the accounting year or tax year shall be a calender year
including twelve (12) consecutive months ending on December 31.
9. Qualification to Transact Business as a Foreign Corporation.
------------------------------------------------------------
RESOLVED, that the appropriate officers of the Corporation be, and each
hereby is, authorized and directed to cause the Corporation to qualify as a
foreign corporation in such jurisdictions as may be legally required by reason
of the property owned, business conducted, or other activities effected by the
Corporation in such jurisdictions now or at any time hereafter.
-2-
<PAGE>
10. Issuance of Common Stock.
------------------------
RESOLVED, that the Corporation issue 100 shares of its Common Stock to
Trilogy Development Group, Inc. for a cash consideration of ten dollars ($10.00)
per share; and
RESOLVED FURTHER, that, following receipt of payment for such shares, the
proper officers of the Corporation are hereby authorized and directed to issue
certificates representing such shares and that, when such shares of stock are so
issued, they shall be duly authorized, validly issued, fully paid and
nonassessable.
11. Authorization.
-------------
RESOLVED, that the officers of the Corporation are hereby severally
authorized (a) to sign, execute, certify to, verify, acknowledge, deliver,
accept, file, and record any and all instruments and documents, and (b) to take,
or cause to be taken, any and all such action, in the name and on behalf of the
Corporation, as (in such officer's judgement) shall be necessary, desirable, or
appropriate in order to effect the purposes of the foregoing resolutions.
FURTHER RESOLVED, that any and all action taken by any proper officer of
the Corporation prior to the date this Consent is actually executed in effecting
the purposes of the foregoing resolutions is hereby ratified, approved,
confirmed, and adopted in all respects.
IN WITNESS WHEREOF, the undersigned directors of the Corporation have
executed this Consent as of the date first above written.
/s/ Joseph A. Liemandt
--------------------------
Joseph A. Liemandt
/s/ B. Wade Monroe
-------------------------
B. Wade Monroe
/s/ Dennis R. Cassell
------------------------
Dennis R. Cassell
-3-
<PAGE>
[NUMBER] [LOGO OF CONQUER, INC. APPEARS HERE] [SHARES]
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CONQUER, INC.
THE CORPORATION IS AUTHORIZED TO ISSUE 1,000 COMMON SHARES - PAR VALUE $.01 EACH
THIS CERTIFIES THAT SPECIMEN is the owner of ___________________________
-------------
fully paid and non-assessable Shares of the above Corporation transferable only
on the books of the Corporation by the holder hereof in person or by duly
authorized Attorney upon surrender of this Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and to be sealed with the Seal of the
Corporation.
Dated _______________
<PAGE>
EXHIBIT 10.2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the 1st
day of November, 1996, by and between pcOrder.com, Inc., a Delaware corporation
(the "Employer") and Ross A. Cooley (the "Employee").
-------- --------
The Employer desires to employ the Employee, and Employee desires to be
employed by the Employer, in accordance with the terms and conditions set forth
herein.
1. Employment. The Employer hereby employs Employee for the Employment
----------
Period specified in Section 2 below as Chairman of the Board and Chief
Executive Officer of the Employer, or in such other capacity as the Employer and
the Employee may agree from time to time. The Employee hereby accepts such
employment upon the terms and conditions set forth herein and agrees to devote
his full business time and efforts to the performance of his duties hereunder,
provided, however, that Employee may serve as a member of the board of directors
- -------- -------
of businesses other than Employer so long as such service does not interfere
with the performance of Employee's duties hereunder and is not competitive with
the business of Employer or its parent, Trilogy Development Group, Inc. Employee
will be elected as a member of the board of directors and as Chairman of the
Board and Chief Executive Officer of the Employer, effective on the date of
commencement of the Employment Period.
2. Employment Period. The period of the Employee's employment under this
-----------------
Agreement (the "Employment Period") shall commence on November 1, 1996 and shall
-----------------
end upon the earlier of the fourth anniversary of this Agreement or the
termination of this Agreement as contemplated by Section 9 below.
3. Duties. Employee shall have those duties and responsibilities which
------
are assigned to him by the board of directors of the Employer during the
Employment Period. Employee agrees to perform faithfully the duties assigned to
him to the best of his ability.
4. Compensation. As compensation for all services rendered and to be
------------
rendered pursuant to this Agreement, the Employer agrees to pay the Employee an
annual salary (the "Base Salary") of not less than $1.00. The Base Salary shall
accrue and be payable in accordance with the payroll practices of the Employer
as in effect from time to time. Employee shall be entitled to participate in the
Employer's management incentive compensation plan as may be in effect from time
to time. The Employer shall have the right to deduct from any compensation paid
to Employee hereunder all taxes and other amounts which may be required to be
deducted or withheld by law (including, but not limited to, income tax
withholding and social security payments), whether such laws are now in effect
or become effective after the date of this Agreement.
-1-
<PAGE>
5. Stock Option. As additional consideration for services rendered or to
------------
be rendered hereunder or otherwise and for Employee's execution and delivery of
this Agreement, the Employer shall grant to Employee the right and option to
purchase from the Employer all or any part of an aggregate of 1,200,000 shares
of the Common Stock ("Common Stock"), $.01 par value, of the Employer at an
------------
exercise price of $3.00 per share, upon the terms and subject to the conditions
set forth in a stock option agreement to be entered into between the Employer
and Employee (the "Stock Option Agreement").
6. Expenses. The Employer shall promptly reimburse the Employee for all
--------
reasonable expenses incurred by the Employee on behalf of the Employer or in
connection with the Employee's performance of his duties hereunder.
7. Employment Benefits. During the Employment Period, Employee shall be
-------------------
entitled to such other benefits as are customarily accorded to the employees of
the Employer, including, but not limited to, the right to participate in
employee benefit programs maintained by the Employer such as group health, life,
and disability insurance. Employer shall take such action as may be necessary to
continue in effect Employee's current group insurance coverage until such time
as similar coverage provided by Employer has become effective.
8. Travel and Living Expenditures. For a period of 18 months following
------------------------------
the commencement of the Employment Period, Employer shall pay or reimburse
Employee upon presentation of written receipts therefor, amounts equal to all
reasonable expenses incurred by Employee in traveling from his home in Houston,
Texas to Austin, Texas (or such other locations as the Company shall direct) and
back home, as well as all reasonable living expenses incurred by Employee while
he is away from his home on the Employer's business.
9. Termination.
-----------
(a) This Agreement may be terminated by written notice prior to the
expiration of the Employment Period by (i) the Employer at any time or (ii)
by the Employee in the event a Change of Control (as such term is
hereinafter defined) shall have occurred. If such termination is by
Employer with Cause (as such term is hereinafter defined), all of the
Employee's rights to compensation and benefits under Sections 4 and 7 above
shall terminate upon such termination, except amounts accrued in respect of
periods prior to such termination. If such termination is by the Employer
without Cause or is by Employee as a result of a Change of Control, the
Employee shall not be entitled to any additional compensation under the
terms of this Agreement, but shall have such rights relating to the
exercise of then unexercised stock options as are provided in the Stock
Option Agreement. A "Change of Control" shall be deemed to have occurred if
-----------------
(i) any person, other than stockholders of the Employer as of the
commencement of the Employment Period, becomes the beneficial owner of
securities of the Employer representing fifty percent or
-2-
<PAGE>
more of the combined voting power of the Employer's then outstanding
securities, (ii) in a merger or consolidation, the Employer is not the
surviving entity, or (iii) the Employer sells all or substantially all of
its assets to a person other than an affiliate or associate of the
Employer. For purposes of this subsection, the term "person" or "persons"
------ -------
shall mean individuals, groups, corporations, partnerships, or other
entities. The term "Cause" shall mean (i) failure of Employee to achieve
-----
specific objectives as agreed to by Employer and Employee at the
commencement of each calendar year, (ii) a material breach by Employee of
any of his obligations under this Agreement, (iii) fraud or willful
misconduct on the part of the Employee, or (iv) conviction of the Employee
for fraud, misappropriation, embezzlement, or any felony.
(b) If the Employee shall die during the Employment Period, this
Agreement shall terminate, and no further compensation shall be payable to
Employee hereunder.
(c) If the Employee is unable to discharge his duties hereunder for a
period of six consecutive months by reason of physical or mental illness,
injury, or incapacity, the Employer may, by written notice to the Employee,
terminate this Agreement and no further compensation shall be payable to
Employee hereunder.
10. Proprietary Information and Restrictive Covenants.
-------------------------------------------------
(a) As used herein the term "Proprietary Information" means
-----------------------
information, knowledge or data not generally known in the relevant trade or
industry that was disclosed to or known by Employee as a consequence of or
through Employee's employment with the Employer (including, without
limitation, information conceived or developed by Employee), whether before
or after the date of this Agreement, about:
(i) The Employer's activities, services, products, formulas,
computer programs and systems, trade secrets, manufacturers,
compositions, inventions, discoveries, customer records, processes,
information relating to research, development, inventions, work
performed or to be performed for Customers (as such term is
hereinafter defined), contractual agreements, lists of past, current
or prospective Customers, lists of employees and salary information,
marketing plans, strategies, and forecasts;
(ii) Customers' activities, plans, products, processes and
services including without limitation, information relating to
business operations, employee relations, finance, and product or
service marketing;
-3-
<PAGE>
(iii) Vendors' (as such term is hereinafter defined) activities,
plans, services, products and processes including, without limitation,
information relating to business operations, employee relations, finance,
and product or service marketing; and
(iv) All information which Employee has a reasonable basis to know
was created, modified or used and held secret by the Employer or that was
accepted by the Employer from any third party under an obligation of
confidentiality.
As used herein the term "Customer" means any person or entity for whom the
--------
Employer provided services or products on or within 12 months prior to the
termination of the Employment Period. As used herein the term "Vendor" means any
------
third party selling or licensing a product or service to a Customer or to the
Employer on or within 12 months prior to termination of the Employment Period.
(b) Employee acknowledges that the Employer has spent significant time,
effort, and money to develop the Proprietary Information, which the Employer
considers vital to its business and goodwill. Employee also acknowledges that
the Proprietary Information has been or will be communicated to or acquired by
Employee in the course of his training by and employment with the Employer
(whether before or after the date of this Agreement), and the Employer desires
to have the services of Employee only if, in doing so, it can protect its
Proprietary Information and goodwill.
(c) Employee agrees to hold all Proprietary Information in strict
confidence and trust that he shall not, at any time, disclose any Proprietary
Information to any person or entity, except in the course of Employee's duties
on behalf of the Employer, and shall not copy, publish, or use any Proprietary
Information for the benefit of anyone or any entity other than the Employer.
(d) In consideration, among other things, of the disclosure of the
Proprietary Information by Employer to Employee, Employee covenants and agrees
that he shall not (personally, nor will he direct any third party to do so),
during his employment by Employer, regardless of whether such employment is
during or subsequent to the Employment Period, and for an additional period of
two years immediately following termination of his employment by Employer,
regardless of whether such termination is during or subsequent to the Employment
Period, (the "Restriction Period"), (i) provide or offer to provide to any
------------------
Customer any product or service similar to that offered by the Employer at the
time of such termination of employment, or (ii) induce or attempt to induce any
Customer to withdraw, curtail or cancel its business with the Employer or in any
manner modify or fail to enter into any actual or potential business
relationship with the Employer.
-4-
<PAGE>
(c) In consideration, among other things, of the disclosure of the
Proprietary Information by Employer to Employee, Employee covenants and agrees
that he shall not (personally, nor will he direct any third party to do so),
during the Restriction Period, (i) recruit or otherwise solicit or induce any
person or entity who is, at the time of such termination or Employee's
employment or thereafter, an employee or Vendor of the Employer to terminate
their employment with, or otherwise cease their relationship with the Employer
or (ii) hire, recruit or otherwise solicit any person who, within the six months
immediately preceding such termination of Employee's employment had been an
employee or Vendor of the Employer.
(f) In consideration, among other things, of the disclosure of the
Proprietary Information by Employer to Employee, Employee covenants and agrees
that he shall not, during the Restriction Period, working alone or in
conjunction with one or more other persons or entities, for compensation or not,
permit Employee's name to be used by or engage in or carry on, directly or
indirectly, either for himself or as a member of a partnership or other entity
or as a stockholder, investor (other than as the holder of (i) 25% or less of
the voting capital stock of any corporation of which Employee is a stockholder
on the date of this Agreement and which has been identified by Employee and
approved by Employer or (ii) 1% or less of the voting capital stock of any other
corporation with a class of equity securities registered under Section 12 (b) or
12 (g) of the Securities Exchange Act of 1934, as amended) in any business
competing with the businesses of the Company or its subsidiaries as such
businesses exist or were being conducted during and upon the termination of the
Employee's employment, but only for as long as such business is carried on by
(i) the Employer or (ii) any person, corporation, partnership, trust or other
organization or entity deriving title from the Employer to the assets and
goodwill of the business being carried on by the Employer immediately prior to
such termination of Employee's employment by Employer, in any county of any
state of the United States, or in any country or political subdivision of the
world. The parties intend that the covenants contained in this Section 10 (f)
shall be deemed to be a series of separate covenants, one for each county in
each state of the United States and for each country and political subdivision
of the world, and except for geographic coverage, each such separate covenant
shall be identical in terms to the covenant contained in this Section 10 (f).
(g) If Employee violates any covenant contained in paragraphs (d), (e) or
(f) of this Section 10, then the term of such violated covenant shall be tolled
for the period commencing on the commencement of such violation and ending upon
the earlier of (i) such time as such violation shall be cured by Employee to the
reasonable satisfaction of the Employer or (ii) final adjudication (including
appeals) of any action filed for injunctive relief or damages arising out of
such violation.
-5-
<PAGE>
(h) If, in any judicial proceeding, the court shall refuse to enforce
any of the separate covenants contained in paragraphs (d), (e) or (f) of
this Section 10 because the time limit is too long, it is expressly
understood and agreed between the parties hereto that for purposes of such
proceeding such time limitation shall be deemed reduced to the extent
necessary to permit enforcement of such covenants. If, in any judicial
proceeding, the court shall refuse to enforce any of the separate covenants
contained in paragraphs (d), (e) or (f) of this Section 10 because they are
more extensive than necessary to protect the business and goodwill of the
Employer, it is expressly understood and agreed between the parties hereto
that for purposes of such proceeding such provisions shall be deemed
reduced to the extent necessary to permit enforcement of such covenants.
(i) Employee acknowledges that a breach of this Section 10 would
cause irreparable damage to the Employer, and in the event of Employee's
actual or threatened breach of the provisions of this Section 10, the
Employer shall be entitled to a temporary restraining order and injunction
restraining Employee from breaching such covenants without the necessity of
posting bond or proving irreparable harm, such being conclusively admitted
by Employee. Nothing herein shall be construed as prohibiting the Employer
from pursuing any other available remedies for such breach, including the
recovery of damages from Employee. Employee acknowledges that the
restrictions set forth in this Section 10 are ancillary to an otherwise
enforceable agreement and are reasonable in scope and duration, given the
nature of the business of the Employer. Employee agrees that issuance of an
injunction will not pose an unreasonable restriction on Employee's ability
to obtain employment or other work following termination of Employee's
employment by Employer.
11. Representations by Employee. Employee hereby represents and warrants
---------------------------
to the Employer that (i) the Employee's execution and delivery of this Agreement
and his performance of his duties and obligations hereunder will not conflict
with, or cause a default under, or give any party a right to damages under, or
to terminate, any other agreement to which Employee is a party or by which he is
bound, and (ii) there are no agreements or understandings that would make
unlawful Employee's execution or delivery of this Agreement or his employment
hereunder.
12. Notices. All notices, requests, demands, and other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given, made, and received only when personally delivered, sent by
electronically confirmed facsimile transmission, delivered by Federal Express or
other nationally recognized courier service, or two days after having been
deposited in the United States mail, certified mail, postage prepaid, return
receipt requested, addressed as set forth below:
-6-
<PAGE>
in the case of the Employer at:
pcOrder.com, Inc.
6034 West Courtyard Drive
Suite 130
Austin, Texas 78730
Attention: President
and, in the case of the Employee, at his residence at:
Ross A. Cooley
9618 Windrush Drive
Spring, Texas 77379
Either party may designate a different address by giving notice of change of
address in the manner provided above.
13. Waiver. No waiver or modification in whole or in part of this
------
Agreement, or any term or condition hereof, shall be effective against any
party unless in writing and duly signed by the party sought to be bound. Any
waiver or any breach of any provisions hereof or any right or power by any
party on one occasion shall not be construed as a waiver of, or a bar to, the
exercise of such right or power on any other occasion or as a waiver of any
subsequent breach.
14. Binding Effect; Successors. This Agreement shall be binding upon
--------------------------
and shall inure to the benefit of the Employer and its successors and assigns,
and shall inure to the benefit of and be binding upon the Employee and his
executors, administrators, heirs, and legal representatives. This Agreement
may not be transferred, sold or assigned by the Employer. Because the
Employee's duties and services hereunder are special, personal, and unique in
nature, the Employee may not transfer, sell or otherwise assign his rights,
obligations, or benefits under this Agreement.
15. Controlling Law. This Agreement shall be governed by and
---------------
construed in accordance with the laws of the State of Texas applicable to
contracts made and to be performed therein, exclusive of the conflict of laws
provisions thereof.
16. Severability. If any provision of this Agreement shall be held to
------------
be invalid or unenforceable, such invalidity or unenforeability shall not
affect or impair the validity or enforceability of the remaining provisions of
this Agreement, which shall remain in full force and effect and the parties
hereto shall continue to be bound thereby.
-7-
<PAGE>
17. Entire Agreement. This Agreement contains the entire agreement
----------------
between the parties relating to the subject matter hereof and shall supersede
all previous agreements between the parties, whether written or oral, with
respect to the subject matter hereof. This Agreement cannot be modified,
altered, or amended except by a writing signed by each of the parties hereto.
IN WITNESS WHEREOF, the Employer and the Employee have executed this
Agreement as of the day and year first above written.
EMPLOYER:
PCORDER.COM, INC.
By /s/ Christina C. Jones
--------------------------------
Title President
-----------------------------
EMPLOYEE:
/s/ Ross A. Cooley
----------------------------------
Ross A. Cooley
-8-
<PAGE>
FIRST AMENDMENT TO
EMPLOYMENT AND STOCK OPTION AGREEMENTS
THIS FIRST AMENDMENT TO EMPLOYMENT AND STOCK OPTION AGREEMENTS (this
"Amendment") is entered into as of the 1/st/ day of November, 1997, by and
---------
between pcOrder.com, Inc., a Delaware corporation (the "Employer") and Ross A.
--------
Cooley (the "Employee").
--------
RECITALS
--------
A. Employer and Employee entered into a certain Employment Agreement (the
"Employment Agreement) and Stock Option Agreement (the "Stock Option
-------------------- ------------
Agreement") each of which agreements was dated as of November 1, 1996.
---------
B. Employer and Employee have agreed that the terms of the Employment
Agreement and Employee's right to exercise the options to acquire shares of
the Employer's Common Stock as provided for under the terms of the Stock
Option Agreement will be amended.
AGREEMENTS
----------
NOW THEREFORE, in consideration of the premises, the parties hereto hereby
agree as follows:
Employment Agreement Amendments:
- -------------------------------
1. Section 1 of the Employment Agreement is hereby amended by deleting
the same in its entirety and substituting the following in lieu thereof:
1. Employment. The Employer hereby employs Employees for the Employment
----------
Period specified in Section 2 below as Chairman of the Board and Chief
Executive Officer of Employer. Employee will serve as a member of the Board
of Directors of Employer for such period of time as Employer and Employee
mutually agree.
2. Section 2 of the Employment Agreement is hereby amended by deleting
the same in its entirety and substituting the following in lieu thereof:
2. Employment Period. The period of the Employee's employment under this
-----------------
Agreement (the "Employment Period") shall commence on November 1, 1996 and
-----------------
shall end upon the earlier of (i) the fourth anniversary of this Agreement
(ii) the effective date stated in a notice by Employer or Employee of
Employer's election to terminate Employee's employment with Employer or
(iii) Employee's death.
-1-
<PAGE>
3. Section 3 of the Employment Agreement is hereby amended by deleting
the same in its entirety and substituting the following in lieu thereof:
3. Duties. Employee shall perform the following duties during the
------
Employment Period:
a. Provide general direction to the business and operations of
Employer.
b. Participate in the review and approval of Employer's annual and
quarterly business plans.
c. Participate in the review and approval of Employer's strategic
planning.
d. Participate in the establishment and operations of an Advisory
Board to the Employer as a precursor to the appointment of an
independent board of directors of Employer. Employer will serve
as Chairman of the Advisory Board.
e. Participate on an as available basis in all company and staff
meetings. Employee will attempt to be present for all meetings
and at least 25% of all staff meetings.
f. Participate on an as required basis in customer and new account
relationship activities.
g. Participate on an as required basis in investment banking
activities relating to an initial public offering of the stock of
the Employer.
h. Participate on an as available basis in media discussions.
4. Section 4 of the Employment Agreement is hereby amended by deleting
the third full sentence thereof.
5. Section 5 of the Employment Agreement is hereby amended by deleting
the number "1,2000,000" contained in the fourth line thereof, and substituting
the number "875,000" in lieu thereof.
6. Sections 8 and 9 (a) of the Employment Agreement are hereby deleted in
their entirety.
STOCK OPTION AGREEMENT AMENDMENTS:
- ----------------------------------
1. The Number of Shares set forth on the face of the Stock Option
Agreement is hereby reduced from "1,200,000" to "875,000".
2. The Exercise Schedule set forth on the face of the Stock Option
Agreement is hereby deleted in its entirety and the following Exercise Schedule
is substituted in lieu thereof:
-2-
<PAGE>
425,000 of the Number of Shares are exercisable immediately and an
additional 100,000 of the Number of Shares are exercisable upon each of
November 1, 1998, November 1, 1999 and November 1, 2000. The additional
150,000 shares shall be exercisable upon November 1, 2003 subject to the
terms hereof. In the event the Company shall have made a public offering of
its securities prior to November 1, 1998, the option to acquire 50,000 of
the 150,000 shares shall be accelerated to November 1, 1998, an additional
50,000 accelerated to November 1, 1999 and the final 50,000 shares
accelerated to November 1, 2000, in each case subject to the Employment
Period being in effect on such date. In the event the Company shall have
made a public offering of its securities after November 1, 1998 and prior
to November 1, 1999, the option to acquire 50,000 of the shares shall be
accelerated to November 1, 1999 and an additional 50,000 shares shall be
accelerated to November 1, 2000, in each case subject to the Employment
Period being in effect on such date. In the event the Company shall have
made a public offering of its securities after November 1, 1999 and prior
to November 1, 2000 and the Employment Period is still in effect, the
option to acquire 50,000 shares shall be accelerated to November 1, 2000.
3. Section I of the Stock Option Agreement is hereby amended by deleting
all of such section except the first four full sentences thereof.
4. Section III of the Stock Option Agreement is hereby amended by
deleting the second sentence and substituting the following sentence in lieu
thereof:
Any option held by the Holder which is exercisable pursuant to the terms
hereof on the date of Termination, shall continue to be exercisable by the
Holder or the estate or personal representative of the Holder for a period
of 180 days following the date upon which the Holder ceases to be a member
of the Board of Directors of the Company, without regard to such
Termination, but only to the extent of the Number of Shares for which such
option was exercisable at the date of Termination.
Except as expressly amended hereby, the Employment Agreement and the Stock
Option Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties thereto have caused this First Amendment to
Employment and Stock Option Agreements to be duly executed as of the day and
year first above written.
pcOrder.com, Inc.
By:_________________________________
Christina C. Jones, President
------------------------------------
Ross A. Cooley
-3-
<PAGE>
EXHIBIT 10.3
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the
first day of November, 1996 (the "Effective Date"), by and between PCORDER.COM,
--------------
INC., a Delaware corporation (the "Employer") and CHRISTINA C. JONES (the
--------
"Employee").
--------
The Employer desires to employ the Employee, and Employees desires to be
employed by the Employer, in accordance with the terms and conditions set forth
herein.
1. Employment. The Employer hereby employs Employee for the Employment
----------
Period specified in Section 2 below as President and Chief Operating Officer of
the Employer, or in such other capacity as the Employer and the Employee may
agree from time to time. The Employee hereby accepts such employment upon the
terms and conditions set forth herein and agrees to devote her full business
time and efforts to the performance of her duties hereunder, provided however,
-------- -------
that Employee may serve as a member of the board of directors of businesses
other than Employer so long as such service does not interfere with the
performance of Employees' duties hereunder and is not competitive with the
business of Employer or its parent, Trilogy Development Group, Inc ("Trilogy").
-------
2. Employment Period. The period of the Employee's employment under this
-----------------
Agreement (the "Employment Period") shall commence on the Effective Date and
-----------------
shall end upon the earlier of the fourth anniversary of the Effective Date or
the termination of this Agreement as contemplated by Section 8 below.
3. Duties. Employee shall have those duties and responsibilities which
------
are assigned to her by the Chairman of the Board and Chief Executive Officer of
the Employer or by the board of directors of the Employer during the Employment
Period. Employee agrees to perform faithfully the duties assigned to her to
the best of her ability.
4. Compensation. As compensation for all services rendered and to be
------------
rendered pursuant to this Agreement, the Employer agrees to pay the Employee an
annual salary (the "Base Salary") of not less than $100,000. The Base Salary
---- ------
shall accrue and be payable in accordance with the payroll practices of the
Employer as in effect from time to time. Employee shall be entitled to
participate in the Employer's management incentive compensation plan as may be
in effect from time to time. The Employer shall have the right to deduct from
any compensation paid to Employee hereunder all taxes and other amounts which
may be required to be deducted or withheld by law (including, but not limited
to, income tax withholding and social security payments), whether such laws are
now in effect or become effective after the date of this Agreement.
5. Stock Option. As additional consideration for services rendered or to
------------
be rendered hereunder or otherwise and for Employee's execution and delivery of
this Agreement, the Employer shall grant to Employee the right and option to
purchase from the Employer all or any part of an aggregate or 650,000 shares of
the Common Stock ("Common Stock"), $.01 par value, of the
------ -----
-1-
<PAGE>
Employer at an exercise price of $3.00 per share, upon the terms and subject to
the conditions set forth in a stock option agreement to be entered into between
the Employer and Employee (the "Stock Option Agreement"). The Employee agrees
----------------------
that as a condition of the granting of the above referenced stock option, the
Employee will enter into an Option Cancellation Agreement with Trilogy, under
the terms of which that certain Stock Option Agreement with Trilogy, under the
terms of which that certain Stock Option Agreement dated February 10, 1994
between Trilogy and the Employee pursuant to which Employee was granted the
right to acquire 35,000 shares of Trilogy Class B Common Stock at an exercise
price of $1.50 per share, will be canceled and will thereafter have no further
force or effect.
6. Expenses. The Employer shall promptly reimburse the Employee for all
--------
reasonable expenses incurred by the Employee on behalf of the Employer or in
connection with the Employee's performance of her duties hereunder.
7. Employment Benefits. During the Employment Period, Employee shall be
-------------------
entitled to such other benefits as are customarily accorded to the employees of
the Employer, including, but not limited to, the right to participate in
employee benefit programs maintained by the Employer such as group health, life,
and disability insurance.
8. Termination.
-----------
(a) This Agreement may be terminated by written notice prior to the
expiration of the Employment Period by (i) the Employer at any time or (ii)
by the Employee for Good Reason (as such term is hereinafter defined). If
such termination is by Employer with Cause (as such term is hereinafter
defined), all of the Employee's rights to compensation and benefits under
Sections 4 and 7 above shall terminate upon such termination, except
amounts accrued in respect of periods prior to such termination. If such
termination is by the Employer without Cause or is by Employee for Good
Reason, the Employer shall (i) continue to pay to the Employee a monthly
amount equal to one-twelfth of the then current Base Salary for twelve
months following the effective date of such termination and (ii) continue
to provide to Employee the employee benefits (through COBRA or otherwise)
as provided in Section 8 above during such twelve month period. The term
"Good Reason" shall mean a Change of Control of the Employer or a failure
-----------
of the Employer to comply with any material provision of this Agreement
which has not been cured within thirty (30) days after written notice of
such noncompliance has been given by Employee to the Employer. A "Change of
---------
Control" shall be deemed to have occurred if (i) any person, other than
-------
stockholders of the Employer as of the commencement of the Employment
Period, becomes the beneficial owner of securities of the Employer
representing fifty percent or more of the combined voting power of the
Employer's then outstanding securities, (ii) in a merger or consolidation,
the Employer is not the surviving entity, or (iii) the Employer sells all
or substantially all of its assets to a person other than an affiliate or
associate of the Employer. For purposes of this subsection, the term
"person" or "persons" shall mean individuals, groups, corporations,
------ -------
partnerships, or other entities. The term "Cause" shall mean (i) failure by
-----
Employee to perform her duties as President and Chief Operating Officer of
the Company in a manner consistent with such position and responsibilities,
(ii) a material breach by
-2-
<PAGE>
Employee of any of her obligations under this Agreement, (iii) fraud or
willful misconduct on the part of the Employee, or (iv) conviction of the
Employee for fraud, misappropriation, embezzlement, or any felony.
(b) If the Employee shall die during the Employment Period, this
Agreement shall terminate, and no further compensation shall be payable to
Employee hereunder.
(c) If the Employee is unable to discharge her duties hereunder for a
period of six consecutive months by reason of physical or mental illness,
injury, or incapacity, the Employer may, by written notice to the Employee,
terminate this Agreement and no further compensation shall be payable to
Employee hereunder.
9. Proprietary Information and Restrictive Covenants.
-------------------------------------------------
(a) As used herein the term "Proprietary Information" means
-----------------------
information, knowledge or data not generally known in the relevant trade or
industry that was disclosed to or known by Employee as a consequence of or
through Employee's employment with the Employer (including, without
limitation, information conceived or developed by Employee), whether before
or after the date of this Agreement, about:
(i) The Employer's activities, services, products,
formulas, computer programs and systems, trade secrets, manufacturers,
compositions, inventions, discoveries, customer records, processes,
information relating to research, development, inventions, work
performed or to be performed for Customers (as such term is
hereinafter defined), contractual agreements, lists of past, current
or prospective Customers, lists of employees and salary information,
marketing plans, strategies, and forecasts;
(ii) Customers' activities, plans, products, processes and
services including, without limitation, information relating to
business operations, employee relations, finance, and product or
service marketing;
(iii) Vendor's (as such term is hereinafter defined)
activities, plans, services, products and processes including, without
limitation, information relating to business operations, employee
relations, finance, and product or service marketing; and
(iv) All information which Employee has a reasonable basis
to know was created, modified or used and held secret by the Employer
or that was accepted by the Employer from any third party under an
obligation of confidentiality.
As used herein the term "Customer" means any person or entity for whom
--------
the Employer provided services or products on or within 12 months prior to the
termination of the Employment Period. As used herein the term "Vendor" means any
------
third party selling or
-3-
<PAGE>
licensing a product or service to a Customer or to the Employer on or within 12
months prior to termination of the Employment Period.
(b) Employee acknowledges that the Employer has spent significant time,
effort, and money to develop the Proprietary Information, which the Employer
considers vital to its business and goodwill. Employee also acknowledges that
the Proprietary Information has been or will be communicated to or acquired by
Employee in the course of her training by and employment with the Employer
(whether before or after the date of this Agreement), and the Employer desires
to have the services of Employee only if, in doing so, it can protect its
Proprietary Information and goodwill.
(c) Employee agrees to hold all Proprietary Information in strict
confidence and trust and that she shall not, at any time, disclose any
Proprietary Information to any person or entity, except in the course of
Employee's duties on behalf of the Employer, and shall not copy, publish, or
use any Proprietary Information for the benefit of anyone or any entity other
than the Employer.
(d) In consideration, among other things, of the disclosure of the
Proprietary Information by Employer to Employee, Employee covenants and agrees
that she shall not (personally, nor will she direct any third party to do so),
during her employment by Employer, regardless of whether such employment is
during or subsequent to the Employment Period, and for an additional period of
two years immediately following termination of her employment by Employer,
regardless of whether such termination is during or subsequent to the Employment
Period, (the "Restriction Period"), (i) provide or offer to provide to any
------------------
Customer any product or service similar to that offered by Trilogy, the
Employer, or their respective subsidiaries at the time of such termination of
employment, or (ii) induce or attempt to induce any Customer to withdraw,
curtail or cancel its business with Trilogy, the Employer, or their respective
subsidiaries or in any manner modify or fail to enter into any actual or
potential business relationship with Trilogy, the Employer, or their respective
subsidiaries.
(e) In consideration, among other things, of the disclosure of the
Proprietary Information by Employer to Employee, Employee covenants and agrees
that she shall not (personally, nor will she direct any third party to do so),
during the Restriction Period, (i) recruit or otherwise solicit or induce any
person or entity who is, at the time of such termination of Employee's
employment or thereafter, an employee or Vendor of Trilogy, the Employer, or
their respective subsidiaries to terminate their employment with, or otherwise
cease their relationship with Trilogy, the Employer, or their respective
subsidiaries or (ii) hire, recruit or otherwise solicit any person who, within
the six months immediately preceding such termination of Employee's employment
had been an employee or Vendor of Trilogy, the Employer, or their respective
subsidiaries.
(f) In consideration, among other things, of the disclosure of the
Proprietary Information by Employer to Employee, Employee covenants and agrees
that she shall not,
-4-
<PAGE>
during the Restriction Period, working alone or in conjunction with one or more
other persons or entities, for compensation or not, permit Employee's name to be
used by or engage in or carry on, directly or indirectly, either for herself or
as a member of a partnership or other entity or as a stockholder, investor
(other than as the holder of (i) 25% or less of the voting capital stock of any
corporation of which Employee is a stockholder on the date of this Agreement and
which has been identified by Employee and approved by Employer or (ii) 1% or
less of the voting capital stock of any other corporation with a class of equity
securities registered under Section 12 (b) or 12 (g) of the Securities Exchange
Act of 1934, as amended) in any business competing with the businesses of
Trilogy, the Employer, or their respective subsidiaries as such businesses exist
or were being conducted during and upon the termination of the Employee's
employment, but only for as long as such business is carried on by (i) Trilogy,
the Employer, or their respective subsidiaries or (ii) any person, corporation,
partnership, trust or other organization or entity deriving title from Trilogy,
the Employer, or their respective subsidiaries to the assets and goodwill of the
business being carried on by Trilogy, the Employer, or their respective
subsidiaries, as applicable, immediately prior to such termination of Employee's
employment by Employer, in any county of any state of the United States, or in
any country or political subdivision of the world. The parties intend that the
covenants contained in this Section 9 (f) shall be deemed to be a series of
separate covenants, one for each county in each state of the United States and
for each country and political subdivision of the world, and except for
geographic coverage, each such separate covenant shall be identical in terms to
the covenant contained in this Section 9(f).
(g) If Employee violates any covenant contained in paragraphs (d), (e) or
(f) of this Section 9, then the term of such violated covenant shall be tolled
for the period commencing on the commencement of such violation and ending upon
the earlier of (i) such time as such violation shall be cured by Employee to the
reasonable satisfaction of the Employer or (ii) final adjudication (including
appeals) of any action filed for injunctive relief or damages arising out of
such violation.
(h) If, in any judicial proceeding, the court shall refuse to enforce any
of the separate covenants contained in paragraphs (d), (e) or (f) of this
Section 9 because the time limit is too long, it is expressly understood and
agreed between the parties hereto that for purposes of such proceeding such time
limitation shall be deemed reduced to the extent necessary to permit enforcement
of such covenants. If, in any judicial proceeding, the court shall refuse to
enforce any of the separate covenants contained in paragraphs (d), (e) or (f) of
this Section 9 because they are more extensive than necessary to protect the
business and goodwill of the Employer, it is expressly understood and agreed
between the parties hereto that for purposes of such proceeding such provisions
shall be deemed reduced to the extent necessary to permit enforcement of such
covenants.
(i) Employee acknowledges that a breach of this Section 9 would cause
irreparable damage to the Employer, and in the event of Employee's actual or
threatened breach of the provisions of this Section 9, the Employer shall be
entitled to a temporary restraining order
-5-
<PAGE>
and injunction restraining Employee from breaching such covenants without
the necessity of posting bond or proving irreparable harm, such being
conclusively admitted by Employee. Nothing herein shall be construed as
prohibiting the Employer from pursuing any other available remedies for
such breach, including the recovery of damages from Employee. Employee
acknowledges that the restrictions set forth in this Section 9 are
ancillary to an otherwise enforceable agreement and are reasonable in
scope and duration, given the nature of the business of the Employer.
Employee agrees that issuance of an injunction will not pose an
unreasonable restriction on Employee's ability to obtain employment or
other work following termination of Employee's employment by Employer.
10. Representations by Employee. Employee hereby represents and warrants
---------------------------
to the Employer that (i) the Employee's execution and delivery of this Agreement
and her performance of her duties and obligations hereunder will not conflict
with, or cause a default under, or give any party a right to damages under, or
to terminate, any other agreement to which Employee is a party or by which she
is bound, and (ii) there are no agreements or understandings that would make
unlawful Employee's execution or delivery of this Agreement or her employment
hereunder.
11. Notices. All notices, requests, demands, and other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given, made, and received only when personally delivered, sent by
electronically confirmed facsimile transmission, delivered by Federal Express or
other nationally recognized courier service, or two days after having been
deposited in the United States mail, certified mail, postage prepaid, return
receipt requested, addressed as set forth below:
in the case of the Employer at:
pcOrder.com, Inc.
6034 West Courtyard Drive
Suite 130
Austin, Texas 78730
Attention: Chairman of the Board
and, in the case of the Employee, at her residence at:
Christina J. Jones
5811 Mesa Dr., Apt. 1414
Austin, Texas 78731
Either party may designate a different address by giving notice of change of
address in the manner provide above.
12. Waiver. No waiver or modification in whole or in part of this
------
Agreement, or any term or condition hereof, shall be effective against any party
unless in writing and duly signed by
-6-
<PAGE>
the party sought to be bound. Any waiver or any breach of any provisions hereof
or any right or power by any party on one occasion shall not be construed as a
waiver of, or a bar to, the exercise of such right or power on any other
occasion or as a waiver of any subsequent breach.
13. Binding Effect; Successors. This Agreement shall be binding upon and
--------------------------
shall inure to the benefit of the Employer and its successors and assigns, and
shall inure to the benefit of and be binding upon the Employee and her
executors, administrators, heirs, and legal representatives. This Agreement may
not be transferred, sold or assigned by the Employer. Because the Employee's
duties and services hereunder are special, personal, and unique in nature, the
Employee may not transfer, sell or otherwise assign her rights, obligations, or
benefits under this Agreement.
14. Controlling Law. This Agreement shall be governed by and construed in
---------------
accordance with the laws of the State of Texas applicable to contracts made and
to be performed therein, exclusive of the conflict of laws provisions thereof.
15. Severability. If any provision of this Agreement shall be held to be
-------------
invalid or unenforceable, such invalidity or unenforceability shall not affect
or impair the validity or enforceability of the remaining provisions of this
Agreement, which shall remain in full force and effect and the parties hereto
shall continue to be bound thereby.
16. Entire Agreement. This Agreement contains the entire agreement between
----------------
the parties relating to the subject matter hereof and shall supersede all
previous agreements between the parties, whether written or oral, with respect
to the subject matter hereof. This Agreement cannot be modified, altered, or
amended except by a writing signed by each of the parties hereto.
IN WITNESS WHEREOF, the Employer and the Employee have executed this
Agreement as of the day and year first above written.
EMPLOYEE: EMPLOYER:
PCORDER, COM, INC.
/s/ Christina C. Jones
- --------------------------
Christina C. Jones
By: /s/ Ross A. Cooley
-------------------------------------
Name: Ross A. Cooley
------------------------------------
Title: Chairman of the Board of Directors
----------------------------------
-7-
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the
12/th/ day of February, 1998 (the "Effective Date"), by and between PCORDER.COM,
--------------
INC, a Delaware corporation (the "Employer") and JAMES J. LUTTENBACHER (the
--------
"Employee").
--------
The Employer desires to employ the Employee, and Employee desires to be
employed by the Employer, in accordance with the terms and conditions set forth
herein.
1. Employment. The Employer hereby employs Employee for the Employment
----------
Period specified in Section 2 below as Vice President, Finance and Chief
Financial Officer of the Employer, or in such other capacity as the parties may
agree from time to time. The Employee hereby accepts such employment upon the
terms and conditions set forth herein and agrees to devote his full business
time and efforts to the performance of his duties hereunder.
2. Employment Period. The period of the Employee's employment under this
-----------------
Agreement (the "Employment Period") shall commence on the Effective Date and
-----------------
shall end upon the earlier of the fourth anniversary of this Agreement or the
termination of this Agreement as contemplated by Section 9 below. Employee will
commence his services hereunder on or about March 1, 1998.
3. Duties. Employee shall have those duties and responsibilities which
------
are assigned to him by the Chief Executive Officer or the board of directors of
the Employer during the Employment Period, Employee agrees to perform faithfully
the duties assigned to him to the best of his ability.
4. Compensation. As compensation for all services rendered and to be
------------
rendered pursuant to this Agreement, the Employer agrees to pay the Employee an
annual salary (the "Base Salary") of not less than $175,000. The Base Salary
---- ------
shall accrue and be payable in accordance with the payroll practices of the
Employer as in effect from time to time. Employer will pay Employee a bonus of
$5,000 upon the date Employee commences his services hereunder. In addition,
Employee shall be entitled to participate in the Employer's management incentive
compensation plan as may be in effect from time to time and shall be eligible
for incentive compensation thereunder of up to 50% of Employees then current
Base Salary. The Employer shall have the right to deduct from any compensation
paid to Employee hereunder all taxes and other amounts which may be required to
be deducted or withheld by law (including, but not limited to, income tax
withholding and social security payments), whether such laws are not in effect
or become effective after the date of this Agreement.
5. Stock Option. As additional consideration for services rendered or to
------------
be rendered hereunder or otherwise and for Employee's execution and delivery of
this Agreement, the Employer shall grant to Employee the right and option to
purchase from the Employer all or any part of an aggregate of 150,000 shares of
the Common Stock, $0.1 par value, of the Employer at an exercise
-1-
<PAGE>
price of $3.00 per share, upon the terms and subject to the conditions set forth
in a Stock Option Agreement to be entered into between the Employer and
Employee.
6. Expenses. The Employer shall promptly reimburse the Employee for all
--------
reasonable expenses incurred by the Employee on behalf of the Employer or in
connection with the Employee's performance of his duties hereunder.
7. Relocation Expenses. Employer will reimburse Employee on a "tax
-------------------
gross-up" basis for all reasonable and documented moving and relocation
expenses, including real estate commissions and closing costs relating to
Employee's move from Lake Oswego, Oregon and the Austin, Texas area. In
addition, between the Effective Date and the date Employee's family relocates to
the Austin, Texas area (in no event longer than September 30, 1998). Employer
will reimburse Employee for temporary housing costs and for the cost of
Employee's airfare for weekly trips between Austin, Texas and Lake Oswego,
Oregon. In the event Employee relocates to the Austin, Texas area prior to the
date Employee sells his current residence in Oswego, Oregon, and as a result
Employee is responsible for two mortgage payments each month, Employer will
reimburse Employee on a "tax gross-up" basis for the lower of the two mortgage
payments for a period of up to six months following the date of Employee's
relocation.
8. Employment Benefits. During the Employment Period, Employee shall be
-------------------
entitled to such other benefits as are customarily accorded to the employees of
the Employer, including, but not limited to, the right to participate in
employee benefit programs maintained by the Employer such as group health, life,
and disability insurance.
9. Termination.
-----------
(a) This Agreement may be terminated by written notice prior to the
expiration of the Employment Period by the Employer or the Employee at any
time. If such termination is by Employer with Cause (as such term is
hereinafter defined) or by Employee for reasons other than due to a Change
of Control (as such term is hereinafter defined), all of the Employee's
rights to compensation and benefits under Sections 4 and 8 above shall
terminate upon such termination, except amounts accrued in respect of
periods prior to such termination. If such termination is by the Employer
without Cause or is by Employee as a result of a Change of Control, the
Employer shall (i) continue to pay to the Employee a monthly amount equal
to one-twelfth of the then current Base Salary for six months following the
effective date of such termination and (ii) continue to provide to Employee
the employee benefits (through COBRA or otherwise) as provided in Section 8
above during such six month period. A "Change of Control" shall be deemed
-----------------
to have occurred if (i) any person, other than stockholders of the Employer
as of the commencement of the Employment Period, becomes the beneficial
owner of securities of the Employer representing fifty percent or more of
the combined voting power of the Employer's then outstanding securities,
(ii) in a merger or consolidation, the Employer is not the surviving
entity, or (iii) the Employer sells all or substantially all of its assets
to a person other than an affiliate or associate of the
-2-
<PAGE>
Employer. Purposes of this subsection, the term "person" or "persons"
------ -------
shall mean individuals, groups, corporations, partnerships, or other
entities. The term "Cause" shall mean (i) failure by Employee to perform
-----
his duties as Vice President, Finance and Chief Financial Officer in a
manner consistent with such position and responsibilities, (ii) a material
breach by Employee of any of his obligations under this Agreement, (iii)
fraud or willful misconduct on the part of the Employee, or (iv)
conviction of the Employee for fraud, misappropriation, embezzlement, or
any felony.
(b) If the Employee shall die during the Employment Period, this
Agreement shall terminate, and no further compensation shall be payable to
Employee hereunder.
(c) If the Employee is unable to discharge his duties hereunder for a
period of six consecutive months by reason of physical or mental illness,
injury, or incapacity, the Employer may, by written notice to the Employee,
terminate this Agreement and no further compensation shall be payable to
Employee hereunder.
10. Proprietary Information and Restrictive Covenants.
-------------------------------------------------
(a) As used herein the term "Proprietary Information" means
-----------------------
information, knowledge or data not generally known in the relevant trade or
industry that was disclosed to or known by Employee as a consequence of or
through Employee's employment with the Employer (including, without
limitation, information conceived or developed by Employee during the
course of his employment by Employer), whether before or after the date of
this Agreement, about:
(i) The Employer's activities, services, products, formulas,
computer programs and systems, trade secrets, manufacturers,
compositions, Inventions, discoveries, customer records, processes,
information relating to research, development, inventions, work
performed or to be performed for Customers (as such term is
hereinafter defined), contractual agreements, lists of past, current
or prospective Customers, lists of employees and salary information,
marketing plans, strategies, and forecasts;
(ii) Customers' activities, plans, products, processes, and
services including, without limitation, information relating to
business operations, employee relations, finance, and product or
service marketing.
(iii) Vendors' (as such term is hereinafter defined) activities,
plans, services, products and processes including, without limitation,
information relating to business operations, employee relations,
finance, and product or service marketing; and
-3-
<PAGE>
(iv) All information which Employee has a reasonable basis to
know was created, modified or used and held secret by the Employer or
that was accepted by the Employer from any third party under an
obligation of confidentiality.
As used herein the term "Customer" means any person or entity for
--------
whom the Employer provided services or products on or within 12 months
prior to the termination of the Employment Period. As used herein the term
"Vendor" means any third party selling or licensing a product or service to
------
a Customer or to the Employer on or within 12 months prior to termination
of the Employment Period.
(b) Employee acknowledges that the Employer has spent significant
time, effort, and money to develop the Proprietary Information, which the
Employer considers vital to its business and goodwill. Employee also
acknowledges that the Proprietary Information has been or will be
communicated to or acquired by Employee in the course of his training by
and employment with the Employer (whether before or after the date of this
Agreement), and the Employer desires to have the services of Employee only
if, in doing so, it can protect its Proprietary Information and goodwill.
(c) Employee agrees to hold all Proprietary Information in strict
confidence and trust and that he shall not, at any time, disclose any
Proprietary Information to any person or entity, except in the course of
Employee's duties on behalf of the Employer, and shall not copy, publish,
or use any Proprietary Information for the benefit of anyone or any entity
other than the Employer.
(d) In consideration, among other things, of the disclosure of the
Proprietary Information by Employer to Employee, Employee covenants and
agrees that he shall not (personally, nor will he direct any third party to
do so), during his employment by Employer, regardless of whether such
employment is during or subsequent to the Employment Period, and for an
additional period of two years immediately following termination of his
employment by Employer, regardless of whether such termination is during or
subsequent to the Employment Period, (the "Restriction Period"), (i)
------------------
provide or offer to provide to any Customer any product or service similar
to that offered by the Employer at the time of such termination of
employment, or (ii) induce or attempt to induce any Customer to withdraw,
curtail or cancel its business with the Employer or in any manner modify or
fail to enter into any actual or potential business relationship with the
Employer.
(e) In consideration, among other things, of the disclosure of the
Proprietary Information by Employer to Employee, Employee covenants and
agrees that he shall not (personally, nor will he direct any third party to
do so), during the Restriction Period, recruit or otherwise solicit or
induce any person or entity who is, at the time of such termination of
Employee's employment or thereafter, an employee or Vendor of the Employer
to terminate their employment with, or otherwise cease their relationship
with the Employer.
-4-
<PAGE>
(f) In consideration, among other things, of the disclosure of the
Proprietary Information by Employer to Employee, Employee covenants and agrees
that he shall not, during the Restriction Period, working alone or in
conjunction with one or more other persons or entities, for compensation or not,
permit Employee's name to be used by or engage in or carry on, directly or
indirectly, either for himself or as a member of a partnership or other entity
or as a stockholder, investor (other than as the holder of 1% or less of the
voting capital stock of any corporation with a class of equity securities
registered under Section 12 (b) or 12(g) of the Securities Exchange Act of 1934,
as amemded) in any business providing electronic commerce technology and
services to computer manufacturers, distributors, corporate resellers, or
retailers to facilitate the purchase and sale of their information technology
products, but only for as long as such business is carried on by (i) the
Employer or (ii) any person, corporation, partnership, trust or other
organization or entity deriving title from the Employer to the assets and
goodwill of the business being carried on by the Employer immediately prior to
such termination of Employee's employment by Employer, in any county of any
state of the United States, or in any country or political subdivision of the
world. The parties intend that the covenants contained in this Section 10(f)
shall be deemed to be a series of separate covenants, one for each county in
each state of the United States and for each country and political subdivision
of the world, and except for geographic coverage, each such separate covenant
shall be identical in terms to the covenant contained in this Section 10(f).
(g) If Employee violates any covenant contained in paragraphs (d), (e) or
(f) of this Section 10, then the term of such violated covenant shall be tolled
for the period commencing on the commencement of such violation and ending upon
the earlier of (i) such time as such violation shall be cured by Employee to the
reasonable satisfaction of the Employer or (ii) final adjudication (including
appeals) of any action filed for injunctive relief or damages arising out of
such violation.
(h) If, in any judicial proceeding, the court shall refuse to enforce any
of the separate covenants contained in paragraphs (d), (e) or (f) of this
Section 10 because the time limit is too long, it is expressly understood and
agreed between the parties hereto that for purposes of such proceeding such time
limitation shall be deemed reduced to the extent necessary to permit enforcement
of such covenants. If, in any judicial proceeding, the court shall refuse to
enforce any of the separate covenants contained in paragraphs (d, (c) or (f) of
this Section 10 because they are more extensive than necessary to protect the
business and goodwill of the Employer, it is expressly understood and agreed
between the parties hereto that for purposes of such proceeding such provisions
shall be deemed reduced to the extent necessary to permit enforcement of such
covenants.
(i) Employee acknowledges that a breach of this Section 10 would cause
irreparable damage to the Employer, and in the event of Employee's actual or
threatened breach of the provisions of this Section 10, the Employer shall be
entitled to a temporary restraining order and injuction restraining Employee
from breaching such covenants without the necessity
-5-
<PAGE>
of posting bond or proving irreparable harm, such being conclusively
admitted by Employee. Nothing herein shall be construed as prohibiting the
Employer from pursuing any other available remedies for such breach,
including the recovery of damages from Employee. Employee acknowledges that
the restrictions set forth in this Section 10 are ancillary to an otherwise
enforceable agreement and are reasonable in scope and duration, given the
nature of the business of the Employer, Employee agrees that issuance of an
injunction will not pose an unreasonable restriction on Employee's ability
to obtain employment or other work following termination of Employee's
employment by Employer.
11. Representations by Employee. Employee hereby represents and warrants
---------------------------
to the Employer that (i) the Employee's execution and delivery of this Agreement
and his performance of his duties and obligations hereunder will not conflict
with, or cause a default under, or give any party a right to damages under, or
to terminate, any other agreement to which Employee is a party or by which he is
bound, and (ii) there are no agreements or understandings that would make
unlawful Employee's execution or delivery of this Agreement or his employment
hereunder.
12. Notices. All notices, requests, demands and other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given, made, and received only when personally delivered, sent by
electronically confirmed facsimile transmission, delivered by Federal Express or
other nationally recognized courier service, or two days after having been
deposited in the United States mail, certified mail, postage prepaid, return
receipt requested, addressed as set forth below:
in the case of the Employer at:
pcOrder.com, Inc.
6034 West Courtyard Drive
Suite 130
Austin, Texas 78730
Attention: President
and, in case of the Employee, at his residence at:
James J. Luttenbacher
17380 Grand View Court
Lake Oswego, OR 97034
Either party may designate a different address by giving notice of change of
address in the manner provide above.
13. Waiver. No waiver or modification in whole or in part of this
------
Agreement, or any term or condition hereof, shall be effective against any party
unless in writing and duly signed by the party sought to be bound. Any waiver or
any breach of any provisions hereof or any right or power by any
-6-
<PAGE>
party on one occasion shall not be construed as a waiver of, or a bar to, the
exercise of such right or power on any other occasion or as a waiver of any
subsequent breach.
14. Binding Effect; Successors. This Agreement shall be binding upon and
--------------------------
shall inure to the benefit of the Employer and its successors and assigns, and
shall inure to the benefit of and be binding upon the Employee and his
executors, administrators, heirs, and legal representatives. This Agreement may
not be transferred, sold or assigned by the Employer. Because the Employee's
duties and services hereunder are special, personal, and unique in nature, the
Employee may not transfer, sell or otherwise assign his rights, obligations, or
benefits under this Agreement.
15. Controlling Law. This Agreement shall be governed by and construed in
---------------
accordance with the laws of the State of Texas applicable to contracts made and
to be performed therein, exclusive of the conflict of laws provisions thereof.
16. Severability. If any provision of this Agreement shall be held to be
------------
invalid or unenforceable, such invalidity or unenforceability shall not affect
or impair the validity or enforceability of the remaining provisions of this
Agreement, which shall remain in full force and effect and the parties hereto
shall continue to be bound thereby.
17. Entire Agreement. This Agreement contains the entire agreement between
----------------
the parties relating to the subject matter hereof and shall supersede all
previous agreements between the parties, whether written or oral, with respect
to the subject matter hereof. This Agreement cannot be modified, altered, or
amended except by a writing signed by each of the parties hereto.
IN WITNESS WHEREOF, the Employer and the Employee have executed this
Agreement as of the Effective Date.
EMPLOYER: EMPLOYEE:
PCORDER.COM, INC. /s/ James J. Luttenbacher 2/6/98
--------------------------------
James J. Luttenbacher
By: /s/ Christina C. Jones,
--------------------------------
Christina C. Jones, President
-7-
<PAGE>
EXHIBIT 10.8
TAX ALLOCATION AGREEMENT
------------------------
This Tax Allocation Agreement is entered into this 4th day of March, 1996
by and between Trilogy Development Group, Inc. ("Trilogy"), a Delaware
corporation, and pcOrder.com, Inc. ("pcOrder"), a Delaware corporation.
WHEREAS, the parties hereto are members of the Trilogy Group; and
WHEREAS, it is the intent and desire of the parties hereto that a method be
established for determining the rights and obligations among the parties as to
Tax liabilities, refunds and related administrative matters;
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
SECTION 1.
(a) Definitions. As used in this Agreement, the following terms, when
-----------
capitalized, shall have the following meanings:
(i) Agreement means this Tax Allocation Agreement, as amended from
---------
time to time.
(ii) Code means the Internal Revenue Code of 1986, as amended, or any
----
similar or successor statute.
(iii) pcOrder SubGroup means pcOrder and all other corporations that,
----------------
as of the date hereof, would be members of an affiliated group
of corporations (within the meaning of Section 1504(a) of the
Code) of which pcOrder would be the common parent if it were not
a subsidiary of Trilogy and any other corporation which may
become a member of such affiliated group;
(iv) pcOrder SubGroup Member means any corporation which is a member
-----------------------
of the pcOrder SubGroup.
(v) Composite Return means any state, local or foreign income Tax
----------------
return or other Tax return which has been or will be filed by
any Trilogy SubGroup Member or pcOrder SubGroup Member which
computes Taxes payable to a taxing jurisdiction in respect of
the income, operations or assets of two or more corporations
(including at least one pcOrder SubGroup Member and one Trilogy
SubGroup Member) (based on so-called "combined or consolidated
reporting" or apportionment of business income under the so-
called "unitary business" concept.
<PAGE>
(vi) Consolidated Federal Return shall mean a consolidated federal
---------------------------
income Tax return filed pursuant to Section 1502 of the Code by
Trilogy on behalf of the Trilogy Group.
(vii) Consolidated Return Year means any taxable year (or portion
------------------------
thereof) with respect to which any pcOrder SubGroup Member is
included in a Consolidated Federal Return or Composite Return.
(viii) Distribution means a distribution of the stock of pcOrder to the
------------
shareholders of Trilogy.
(ix) Final Determination means, with respect to any issue or item
-------------------
for any period, (A) in the context of federal income Taxes, (I)
a final, unappealable decision by a court of competent
jurisdiction, (II) the expiration of the time for assessment of
Taxes or riling a claim for refund or, if a refund claim has
been timely filed, the expiration of the time for instituting
suit in respect of such refund claim, if no further adjustment
to the items of income, gain, deduction, loss, or credit for
such period may thereafter be made, (III) the execution of a
closing agreement under Section 7121 of the Code, (IV) the
acceptance by the IRS or its counsel of a tender pursuant to an
offer in compromise pursuant to Section 7122 of the Code, (V)
the execution of a Form 870A, or (VI) any other final and
irrevocable determination of Taxes for any period, and (B) in
the context of other Taxes, any comparable, final, unappealable,
and irrevocable determination of Taxes for such period..
(x) IRS shall mean the United States Internal Revenue Service or any
---
successor hereto.
(xi) Regulations means the Treasury Regulations under the Code.
-----------
(xii) Reorganization means those transfers of assets and stock by
--------------
members of the Trilogy Group after ______________ and before
____________ in connection with the organization of the pcOrder
SubGroup.
(xiii) Trilogy SubGroup means Trilogy and each other corporation which
----------------
is a member of the Trilogy Group and is not a pcOrder SubGroup
Member.
(xiv) Trilogy SubGroup Member means any corporation which is a member
-----------------------
of the Trilogy SubGroup.
(xv) Trilogy Group means Trilogy and each corporation which is a
-------------
member of the affiliated group of which it is the common parent
within the meaning of Section 1504(a) of the Code.
2
<PAGE>
(xvi) SubGroup means either the pcOrder SubGroup or the Trilogy
--------
SubGroup.
(xvii) SubGroup Composite Tax Liability means, with respect to any
--------------------------------
Composite Return and SubGroup, the state, local or foreign Tax
liability for the related Consolidated Return Year properly
allocable to such SubGroup in accordance with principles
analogous to those applicable in determining SubGroup Federal
Tax Liability, provided that a Tax which is payable with respect
to such Composite Return, but which would not be so payable if
the income, operations or assets of a corporation were not taken
into account in determining such Tax, shall be treated as
allocable to such corporation and the SubGroup of which it is a
member.
(xviii) SubGroup Federal Tax Liability means, with respect to any
------------------------------
Consolidated Federal Return and SubGroup, the federal income Tax
liability of such SubGroup for the related Consolidated Return
Year computed as if the SubGroup had filed a separate
consolidated federal income Tax return for such year, subject to
adjustments in accordance with Section 1.1552-1(a)(2)(ii)(a)-(h)
- -
of the Regulations or any similar or successor provision (for
purposes of such adjustments only, treating all members as part
of a single consolidated group).
(xix) Tax shall mean any income or income-based tax (including federal
---
income tax, state or local income or franchise tax, and foreign
income tax) imposed under Subtitle A of the Code or similar laws
of any taxing authority, payroll and employee withholding taxes
(imposed under Chapters 21 through 24 of the Code) or any
similar or comparable payroll and employee withholding taxes
(including disability withholding taxes) imposed by the laws of
any taxing authority, other domestic and foreign withholding
taxes, sales and use taxes, excise taxes, real and personal
property taxes, and any other governmental imposition generally
referred to as or in the nature of a tax. Any reference in this
Agreement to a Tax (or refund thereof) shall also be deemed to
include any interest, additions to Tax, or penalties that may be
payable in respect thereof.
(b) Operating Rule. For all purposes herein, the pcOrder SubGroup shall be
--------------
deemed to have existed, and each pcOrder SubGroup Member shall be
deemed to have been a member of the pcOrder SubGroup, at all times
subject to this Agreement.
3
<PAGE>
SECTION 2. Returns and Controversies
-------------------------
(a) Consolidated Federal Returns
----------------------------
(i) Preparation and Filing of Returns. Trilogy shall have exclusive
---------------------------------
authority to file Consolidated Federal Returns. Subject to the
terms of this Agreement, Trilogy shall be responsible for the
timely filing of, and shall be liable, and shall indemnify each
pcOrder SubGroup Member, for any penalties or other damages
attributable to failure of Trilogy to make timely filings of
Consolidated Federal Returns or full and timely payment of all
amounts shown to be due thereon; provided, however, that pcOrder
shall be responsible for making timely payment to Trilogy of all
amounts due to Trilogy by pcOrder pursuant hereto and providing
Trilogy with all information reasonably required by Trilogy with
respect to the income, operations and assets of each pcOrder
SubGroup Member so as to permit Trilogy to prepare and file such
Consolidated Federal Returns and to make payments of the Tax
shown to be due thereon, including estimated payments, on a
timely basis. In calculating amounts to be shown as due on the
Consolidated Federal Return with respect to a Consolidated
Return Year during which a pcOrder SubGroup Member ceases to be
a member, all items of each pcOrder SubGroup Member (including
items triggered by reason of such corporation or corporations
ceasing to be a member of the Trilogy Group) shall be taken into
account in accordance with Regulations (S) 1.1502-76(b) and no
election shall be made under Regulations (S) 1.1502-76(b)(2)(ii)
or Regulations (S) 1.1502-76(b)(2)(iii).
(ii) Controversies. Trilogy shall have exclusive authority to
-------------
represent each pcOrder SubGroup Member before the IRS or any
other governmental agency or authority or any court regarding
all federal income Tax matters related to Consolidated Federal
Returns, including, but not limited to, (A) the exclusive
control of any response to any examination by the IRS or any
other taxing authority and (B) the exclusive control over any
contest of any issue through a Final Determination, including,
but not limited to whether and in what forum to conduct such
contest and whether and on what basis to settle such contest.
Trilogy shall timely notify pcOrder of any correspondence and
Tax controversies with any taxing authority relating to items of
any pcOrder SubGroup Member and will promptly provide pcOrder
with copies of all such correspondence. Subject to Trilogy's
exclusive authority as provided for herein, pcOrder shall have
the right to consult with Trilogy with respect to the handling
of any such correspondence
4
<PAGE>
or controversies. pcOrder shall exercise such right, if at all,
on a timely basis. Trilogy shall permit pcOrder to attend any
hearing or other proceedings relating to any such controversies
to the extent that the subject of such hearing or proceedings
relates to a pcOrder SubGroup Member.
(b) Composite Returns.
-----------------
(i) Tax Returns and Payments. Trilogy or a Trilogy SubGroup Member
------------------------
designated by Trilogy shall have exclusive authority to file
each Composite Return. Subject to the terms of this Agreement,
Trilogy shall be responsible for the timely filing of, and shall
be liable, and shall indemnify each pcOrder SubGroup Member, for
any penalties or other damages attributable to failure of
Trilogy or its designee to make timely filings of Composite
Returns or full and timely payment of all amounts shown to be
due thereon; provided, however, that pcOrder shall be
responsible for making timely payment to Trilogy of all amounts
due to Trilogy by pcOrder pursuant hereto and providing Trilogy
or its designee with all information reasonably required by
Trilogy or its designee with respect to the income, operations
and assets of any pcOrder SubGroup Member so as to permit
Trilogy or its designee to prepare and file such Composite
Returns and to make payments of the Tax shown to be due thereon,
including estimated Tax payments, on a timely basis.
(ii) Controversies. Trilogy or its designee shall have exclusive
-------------
authority to represent each pcOrder SubGroup Member before any
governmental agency or any court regarding Tax matters related
to any Composite Return, including, but not limited to, (A) the
exclusive control of any response to any examination by any
taxing authority, and (B) the exclusive control over any contest
of any issue therein through a Final Determination, including,
but not limited to whether and in what forum to conduct such
contest and whether and on what basis to settle such contest.
Trilogy or its designee shall timely notify pcOrder of any
correspondence and Tax controversies with any taxing authority
relating to items of any pcOrder SubGroup Member and will
promptly provide pcOrder with copies of all such correspondence.
Subject to Trilogy's exclusive authority as provided for herein,
pcOrder shall have the right to consult with Trilogy with
respect to the handling of any such correspondence or
controversies. pcOrder shall exercise such right, if at all, on
a timely basis. Trilogy or its delegee shall permit pcOrder to
attend any hearing or other proceedings relating to such
5
<PAGE>
controversies to the extent that the subject of such hearings or
proceeding relates to a pcOrder SubGroup Member.
(c) All Other Returns.
-----------------
(i) Preparation and Filing of Returns. Except as otherwise provided
---------------------------------
herein or as the parties may otherwise agree, Trilogy or a
Trilogy SubGroup Member designated by Trilogy shall have
exclusive authority to file all Tax returns (other than
Consolidated Federal Returns and Composite Returns) with respect
to the income, operations or assets of Trilogy SubGroup Members.
Subject to the terms of this Agreement, Trilogy shall be
responsible for the timely filing of, and shall be liable, and
shall indemnify each pcOrder SubGroup Member, for the full and
timely payment of all amounts shown to be due on such returns;
provided, however, that pcOrder shall be responsible for
providing Trilogy all information reasonably requested by
Trilogy with respect to the income, operations and assets of
each pcOrder SubGroup Member so as to permit Trilogy to prepare
and file such returns and to make payments of the Tax, including
payments of estimated Tax, shown to be due thereon on a timely
basis.
Except as otherwise provided herein or as the parties may
otherwise agree, pcOrder or a pcOrder SubGroup Member designated
by pcOrder shall have exclusive authority to file all Tax
returns (other than Consolidated Federal Returns and Composite
Returns) with respect to the income, operations or assets of
pcOrder SubGroup Members. Subject to the terms of this Agreement
pcOrder shall be responsible for the timely filing of, and shall
be liable, and shall indemnify each Trilogy SubGroup Member, for
the full and timely payment of all amounts shown to be due on
such returns; provided, however, that Trilogy shall be
responsible for providing pcOrder all information reasonably
required by pcOrder with respect to the income, operations and
assets of each Trilogy SubGroup Member so as to permit pcOrder
to prepare and file such returns and to make payments of the Tax
shown to be due thereon, including payments of estimated Tax, on
a timely basis.
(ii) Controversies. Except as otherwise provided herein or as the
-------------
parties may otherwise agree, each of Trilogy and pcOrder, at its
expense, shall have exclusive authority to represent itself and
the members of its respective SubGroup before the IRS or any
other taxing authority or any court regarding the Tax
consequences of the income, operations and assets of it or the
members of its respective SubGroup with respect to all Taxes
required to be shown on returns subject to Section 2(c)(i)
above.
6
<PAGE>
SECTION 3. Allocation of Tax Liabilities.
-----------------------------
(a) Federal Income Tax.
------------------
(i) Payments. With respect to each Consolidated Return Year, (A) if
--------
the SubGroup Federal Tax Liability of the pcOrder SubGroup is
greater than zero, pcOrder will pay such amount to Trilogy and
(B) if such SubGroup Federal Tax Liability is zero, Trilogy
shall pay to pcOrder the excess, if any, of (I) the SubGroup
Federal Tax Liability of the Trilogy Group for such Consolidated
Return Year over (II) the actual federal consolidated income tax
payable with respect to the Trilogy Group for such consolidated
return year. For purposes of determining payment obligations
under this Section 3(a), the SubGroup Federal Tax Liability of
the pcOrder SubGroup shall be decreased by the portion of such
liability attributable to the Reorganization or a Distribution,
and the SubGroup Federal Tax Liability of the Trilogy SubGroup
shall be increased by the same amount.
(ii) Estimated Tax. Trilogy will have the right to assess pcOrder
-------------
for an appropriate portion of any estimated consolidated federal
income Tax payments, determined in accordance with the
principles of Section 3(a)(i), at the time such payments are
required to be made. Any payments will be credited against the
amounts otherwise payable under Section 3(a)(i).
(iii) Earnings and Profits Allocation. The parties understand that the
-------------------------------
method of allocation of federal income Tax liabilities used for
the determination of earning and profits for federal income Tax
purposes under governing law may differ from the methods
prescribed herein for sharing of economic burdens of such Taxes.
To the extent permitted by governing law and not otherwise
inconsistent with the best interests of Trilogy, Trilogy agrees
to make an election or take any other action permitted under
governing law which would cause such method of allocation to
resemble as closely as practical the method of sharing the
economic burdens of such Tax hereunder.
(iv) Alternative Minimum Tax. If the Trilogy Group has a federal
-----------------------
alternative minimum Tax liability for any year, payments shall
be made between Trilogy and pcOrder so that the burden of such
Tax is borne by the parties in accordance with principles
analogous to those of Section 3(a)(i). For these purposes,
liability under Section 59A of the Code or any other federal Tax
imposed by reference to alternative minimum Tax principles will
be treated as a federal alternative minimum Tax liability.
7
<PAGE>
(v) Subsequent Adjustments. Trilogy shall be responsible and
----------------------
liable, and shall indemnify each pcOrder SubGroup Member, for
any and all increases in Taxes required to be shown on
Consolidated Federal Returns and shall be entitled to any refund
or credit attributable to any and all decreases in such Taxes,
provided that such increases or decreases have been determined
pursuant to a Final Determination and are allocable to any
Trilogy SubGroup Member. pcOrder shall be responsible and
liable, and shall indemnify each Trilogy SubGroup Member, for
any and all increases in such Taxes, and shall be entitled to
any refund or credit attributable to any and all decreases in
such Taxes, provided that such increases or decreases have been
determined pursuant to a Final Determination and are allocable
to any pcOrder SubGroup Member. For purposes of determining the
amount of any federal income Tax increases or decreases that are
allocable to any pcOrder SubGroup Member, on the one hand, or to
any Trilogy SubGroup Member, on the other hand, the amounts
computed under Section 3(a)(i) above shall be recomputed to take
into account all adjustments made in accordance with the Final
Determination.
(b) Composite Returns.
-----------------
(i) Payments. With respect to each Composite Return filed pursuant
--------
to Section 2(b) above and related Consolidated Return Year,
Trilogy or its designee shall compute the SubGroup Composite Tax
Liability of the pcOrder SubGroup and, if necessary, the
SubGroup Composite Tax Liability of the Trilogy SubGroup.
Trilogy shall notify pcOrder of each allocation of Tax to any
pcOrder SubGroup Member and the computations thereof. pcOrder
shall pay to Trilogy, or Trilogy shall pay to pcOrder, an amount
with respect to each Composite Return determined in accordance
with principles analogous to those of Section 3(a) above. For
purposes of determining payment obligations under this Section
3(b), the SubGroup Composite Tax Liability of the pcOrder
SubGroup shall be decreased by the portion of such liability
attributable to the Reorganization or a Distribution, and the
SubGroup Composite Tax Liability of the Trilogy SubGroup shall
be increased by the same amount.
(ii) Trilogy will have the right to assess pcOrder for an appropriate
portion of any estimated composite return payments determined in
accordance with principles analogous to those of Section 3(a)
above.
(iii) Subsequent Adjustments. Trilogy shall be responsible and liable,
----------------------
and shall indemnify each pcOrder SubGroup Member, for any and
all increases in Taxes required to be shown on Composite Returns
and shall be entitled to any refund or credit attributable to
any and all
8
<PAGE>
decreases in such Taxes, provided that such increases or
decreases have been determined pursuant to a Final Determination
and are allocable to any Trilogy SubGroup Member. pcOrder shall
be responsible and liable, and shall indemnify each Trilogy
SubGroup Member, for any and all increases in such Taxes and
shall be entitled to any refund or credit attributable to any
and all decreases in such Taxes, provided that such increases or
decreases have been determined pursuant to a Final Determination
and are allocable to any pcOrder SubGroup Member. For purposes
of determining the amount of any such Tax increases or decreases
that are allocable to any pcOrder SubGroup Member, on the one
hand, or to any Trilogy SubGroup Member, on the other hand,
Trilogy shall recompute the amount provided in Section 3(b)(i)
above to take into account all adjustments made in accordance
with the Final Determination.
(c) Other. Trilogy shall be responsible and liable for, and shall indemnify
-----
and hold each pcOrder SubGroup Member harmless from, any increases in,
and shall be entitled to any refund or credit resulting from or
attributable to any decreases in, any and all Taxes of any Trilogy
SubGroup Member described in Section 2(c)(i) above. pcOrder shall be
responsible and liable for, and shall indemnify and hold each Trilogy
SubGroup Member harmless from, any increases in, and shall be entitled
to any refund or credit resulting from or attributable to any decreases
in, any and all Taxes of any pcOrder SubGroup Member described in
Section 2(c)(i) above.
(d) Distribution. If at the time of any Distribution any Tax attribute of
------------
any pcOrder SubGroup Member (including without limitation any Tax
credit, net operating loss or net capital loss) shall have been taken
into account, and shall have resulted in a reduction in Tax required to
be shown, on a Consolidated Federal Return or a Composite Return, but
shall not have been taken into account in determining the payment
obligations of the parties pursuant to Section 3 hereof, Trilogy shall
pay to pcOrder the actual Tax savings realized as a result of such Tax
attribute. If at the time of any Distribution, any pcOrder SubGroup
Member shall have available to it for future benefit in connection with
any Consolidated Federal Return or any Composite Return, a Tax
attribute (including without limitation any Tax credit, net operating
loss or net capital loss) which shall have been taken into account in
determining the payment obligations of the parties pursuant to Section
3 hereof, pcOrder shall pay to Trilogy the actual Tax savings realized
as a result of such Tax attribute at the time such savings are
realized.
9
<PAGE>
SECTION 4. Administrative Matters.
----------------------
(a) General. The provisions of this Agreement will be administered by
-------
Trilogy. Except as otherwise expressly governed by the terms of this
Agreement, Trilogy or its designee may use any reasonable method in
making any computations or allocations hereunder, and such calculations
will be conclusive unless a written objection is provided to Trilogy by
pcOrder within one year of such calculations to pcOrder. If written
objection is timely made by pcOrder, and if the parties are unable to
agree upon the correct calculations, the disputed issue shall be
submitted to Ernst & Young LLP or another Big Six accounting firm
selected by Trilogy in its reasonable discretion, whose determination
will be final.
(b) Power of Attorney. In order to carry out the purposes and intent of
-----------------
this Agreement, pcOrder hereby grants, and agrees that it will cause
each pcOrder SubGroup Member to grant, to Trilogy and to appropriate
officers of Trilogy a power of attorney to undertake in the name of the
appropriate pcOrder SubGroup Members any action contemplated herein,
including without limitation the filing of returns and claims for
refund, making of elections, handling of controversies, and receipt of
refunds provided that subsequent to any Distribution such power of
attorney shall relate only to Consolidated Federal Returns or Composite
Returns. To the extent that such power of attorney is not recognized or
respected, pcOrder agrees to take, and to cause each pcOrder SubGroup
Member to take, such further actions, including grants to Trilogy of
additional powers of attorney or execution of returns or other
documents, as may be reasonably requested by Trilogy to carry out the
provisions of this Agreement.
(c) Payments. Any amount to be paid by either party to the Agreement to the
--------
other pursuant to Section 3(a) or Section 3(b) shall be paid not less
than 5 days before the applicable Tax return is due. Amounts owed by
either party hereto in respect of Tax refunds or credits received by
such party to which the other party is entitled hereunder shall be paid
by the party receiving the refund to the other party within 5 days
after the receipt or credit of such refund, and amounts owed by either
party hereto in respect of Tax increases shall be paid by such party to
the other party within 30 days after the Final Determination with
respect thereto. If not timely paid, any amounts payable hereunder will
bear interest from the date due at 1% in excess of the prime lending
rate (however designated) of the First National Bank of Boston as in
effect from time to time. Trilogy is hereby authorized to offset
amounts payable to it hereunder against any pcOrder SubGroup Member,
whether such sums are in the possession of Trilogy or of another
member.
10
<PAGE>
(d) Records. Trilogy and pcOrder agree that all records, including but not
-------
limited to, returns, supporting schedules, workpapers, correspondence
and other documents within the possession of either, and relating to
the Tax liabilities or refunds of either, shall be retained by each for
as long as they may be material to the determination of such
liabilities or refunds and shall be made reasonably available to either
party upon request.
(e) Return Preparation and Defense.
------------------------------
(i) In General. Each party hereto agrees that it will cooperate with
----------
the other, and its representatives, in a prompt and timely manner,
in connection with (A) the preparation and filing of, and (B) any
administrative or judicial proceeding involving, any Consolidated
Federal Return, Composite Return or other Tax return filed or
required to be filed by Trilogy, pcOrder or members of their
respective SubGroups. Such cooperation shall include, but not be
limited to, the making available to the other party, during normal
business hours, of all books, records (including, but not limited
to, workpapers and schedules), information, officers, and
employees (without substantial interruption of employment)
reasonably requested and necessary or useful in connection with
any Tax filing, inquiry, audit, investigation, dispute,
litigation, or other matter. Notwithstanding the foregoing,
neither party shall be required to furnish to the other Tax
returns or drafts thereof (except as otherwise expressly provided
herein or as is reasonably necessary to implement the provisions
of Section 4(e)(ii) below), except that Trilogy or its designee
shall furnish to pcOrder the portions of such Tax returns
reporting the operations of pcOrder and any pcOrder SubGroup
Member and the relevant portions of all reports relating to the
examination by the IRS or any other governmental agency or taxing
authority of such Tax returns.
(ii) Draft Returns. Provided that pcOrder shall have timely provided
-------------
the information required to be provided by it pursuant to Section
2(a) and Section 2(b) above, Trilogy shall prepare and, not less
than 5 days before filing, furnish to pcOrder drafts of those
portions of Consolidated Federal Returns and Composite Returns
which report the income, operations and assets of each pcOrder
SubGroup Member. Such draft Tax returns shall be prepared without
regard to the items of income, gain, deduction, loss, or credit of
any Trilogy SubGroup Member. Except as Trilogy may otherwise
determine after consulting with pcOrder, all items of income,
gain, deduction, loss, and credit of each pcOrder SubGroup Member
shall be reported on a basis consistent with the reporting of such
items (or substantially similar items) of the pcOrder SubGroup
Members for prior periods unless applicable law or a change in
factual circumstances requires otherwise.
11
<PAGE>
(iii) Consistency. In filing any Consolidated Federal Return or
-----------
Composite Return, Trilogy shall make all computations of taxable
amounts and Tax on a basis consistent with the computations of
such amounts in prior Tax returns for the respective taxing
jurisdictions except to the extent otherwise required by the laws,
rules, or regulations of the respective taxing jurisdictions or
other applicable authority or as a result of a change in factual
circumstances. In determining how to treat any matter for which
there is no precedent in prior returns or controlling legal
authority, Trilogy shall in good faith take into account the
reasonable interests of pcOrder after due consultation with
pcOrder.
(f) Carrybacks. Deductions, losses, or credits of any pcOrder SubGroup
----------
Member arising in a period in which such pcOrder SubGroup Member is not
included in a Consolidated Federal Return or a Composite Return
pursuant to Section 2 hereof may, under applicable law, be available
for carryback to a period in which such pcOrder SubGroup Member was so
included. To the extent applicable law allows such a carryback to be
waived, pcOrder shall have the exclusive authority to determine whether
or not to waive such carryback. To the extent the carryback is not
waivable or is not waived, Trilogy shall be entitled to the benefits of
such carryback, but shall pay to pcOrder an amount equal to the
reduction in Taxes of any Trilogy SubGroup Member attributable to such
carryback. To the extent any such carryback causes any Trilogy SubGroup
Member to incur any additional Tax, pcOrder shall pay to Trilogy an
amount equal to such additional Tax.
(g) Deemed Payment. For purposes of determining the payment obligations of
--------------
the parties pursuant to Section 3 above, Trilogy and pcOrder each shall
be deemed to have made payments to the other in amounts sufficient to
satisfy their respective obligations with respect to all taxable
periods ending on or before September 30, 1995 on the basis of returns
filed or to be filed with respect thereto and adjustments thereto with
respect to which there has been a Final Determination on the date
thereof.
SECTION 5. Miscellaneous.
-------------
(a) Sole Remedy. Except as explicitly provided in this Agreement, no
-----------
pcOrder SubGroup Member will have any claim against any Trilogy
SubGroup Member for payment of Taxes or for compensation for use of
such pcOrder SubGroup Member's Tax attributes, including losses, and no
Trilogy SubGroup Member will have any claim against any pcOrder
SubGroup Member for payment of Taxes or for compensation for use of
such Trilogy SubGroup Member's Tax attributes, including losses.
12
<PAGE>
(b) Term. This Agreement will apply to all taxable years (or portions
----
thereof) of any Trilogy SubGroup Member or any pcOrder SubGroup member
with respect to which the statutory period for assessments or refunds
under applicable law remains unexpired on the date of execution hereof,
subject to the provisions of Section 4(g) above. Unless otherwise
agreed in writing by the parties, this Agreement shall remain in force
and be binding so long as the statutory period for assessments or
refunds under applicable law remains unexpired for any taxable period
as to which either party may have a claim against the other under this
Agreement.
(c) Expenses. Unless otherwise expressly provided in this Agreement, each
--------
party shall bear any and all expenses that arise from their respective
obligations and rights under this Agreement. In the case of expenses
(including professional fees) incurred by Trilogy or its designee in
connection with the preparation or audit of Consolidated Federal
Returns or Composite Returns, or contests or controversies related to
such returns, Trilogy shall make an appropriate allocation of such
expenses between Trilogy and pcOrder, and pcOrder shall reimburse
Trilogy for its allocable share of such costs.
(d) Successors and Assigns. This Agreement will bind and inure to the
----------------------
benefit of the respective successors and assigns of the parties hereto;
but no assignment will relieve any party of its obligations hereunder
without the written consent of the other parties.
(e) Notices. All notices and other communications hereunder shall be in
-------
writing and shall be delivered by hand or mailed by registered or
certified mail (return receipt requested) to the parties at the
following addresses (or at such other addresses for a party as shall be
specified by like notice) and shall be deemed given on the date on
which such notice is received:
To Trilogy or any member of the Trilogy SubGroup:
6034 W. Courtyard Drive
Suite 300
Austin, Texas 78730
Attn: Controller
To pcOrder or any member of the pcOrder SubGroup:
6034 W. Courtyard Drive
Suite 300
Austin, Texas 78730
Attn: Controller
13
<PAGE>
(f) Governing Law. This Agreement will be construed and enforced in
-------------
accordance with the laws of the State of Texas, without giving effect
to the principles of conflict of laws. The parties consent to the
jurisdiction of any court in Dallas County, Texas with subject matter
jurisdiction for any action arising out of matter related to this
Agreement, and waive the right to commence any action arising out of
matters related to this Agreement in any court outside Dallas County,
Texas.
IN WITNESS THEREOF, the parties hereto have caused their names to be
subscribed and executed by their respective authorized officers on the dates
indicated.
TRILOGY DEVELOPMENT GROUP, INC.,
a Delaware corporation
By:
---------------------------------------------
pcORDER.COM, INC.,
a Delaware corporation
By:
---------------------------------------------
Date: ________________
14
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 11, 1998, except for Note 10, as to which
the date is September 4, 1998, in the Registration Statement (Form S-1) and
related Prospectus of pcOrder.com, Inc. for the registration of shares of its
common stock.
/s/ Ernst & Young LLP
Austin, Texas
September 4, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains Summary Financial information extracted from six months
ended June 30, 1998 and year ended December 31, 1997 and is qualified in its
entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 DEC-31-1997
<CASH> 6,583 2,207
<SECURITIES> 0 0
<RECEIVABLES> 7,540 2,558
<ALLOWANCES> 412 281
<INVENTORY> 0 0
<CURRENT-ASSETS> 13,711 4,484
<PP&E> 3,062 1,375
<DEPRECIATION> 1,266 881
<TOTAL-ASSETS> 15,507 4,978
<CURRENT-LIABILITIES> 17,055 5,973
<BONDS> 0 0
0 0
0 0
<COMMON> 129 128
<OTHER-SE> (1,677) (1,123)
<TOTAL-LIABILITY-AND-EQUITY> 15,507 4,978
<SALES> 9,583 10,589
<TOTAL-REVENUES> 9,583 10,589
<CGS> 3,184 3,576
<TOTAL-COSTS> 3,184 3,576
<OTHER-EXPENSES> 7,424 7,714
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (980) (701)
<INCOME-TAX> 0 427
<INCOME-CONTINUING> (980) (1,128)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (980) (1,128)
<EPS-PRIMARY> (0.08) (0.09)
<EPS-DILUTED> (0.08) (0.09)
</TABLE>
