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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number: 0-25447
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PCORDER.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2720849
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5000 Plaza on the Lake
Austin, Texas
(512) 684-1100 78746
---------------------- -----
(Address of principal executive offices (Zip Code)
and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
--- ---
As of May 11, 1999, there were 2,771,315 shares of the Registrant's Class A
Common Stock outstanding and 12,757,000 shares of the Registrant's Class B
Common Stock outstanding.
1
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INDEX
PCORDER.COM, INC.
Page No.
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BALANCE SHEETS AS OF MARCH 31, 1999 (UNAUDITED) AND 3
DECEMBER 31, 1998
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS 4
ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS 5
ENDED MARCH 31, 1999 AND 1998 (UNAUDITED)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 9
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 32
Item 2. CHANGES IN SECURITIES 32
Item 3. DEFAULTS UPON SENIOR SECURITIES 33
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 33
Item 5. OTHER INFORMATION 33
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 33
SIGNATURES 34
EXHIBIT INDEX 35
2
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PCORDER.COM, INC.
CONDENSED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 49,481 $ 4,726
Accounts receivable, net 7,015 4,775
Prepaid expenses 208 150
Receivable from Trilogy, net 484 -
------------ ------------
Total current assets 57,188 9,651
Property and equipment, net 1,943 1,938
Other assets - 665
------------ ------------
Total assets $ 59,131 $ 12,254
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,148 $ 612
Accrued liabilities 5,569 3,150
Payable to Trilogy, net - 4,506
Deferred revenue 13,988 10,428
------------ ------------
Total current liabilities 20,705 18,696
Deferred revenue 1,845 2,103
Commitments and contingencies (Note 7)
Stockholders' equity (deficit)
Common stock, par value $.01 per share 50,000,000 shares
authorized; 15,528,037 and 12,948,602 issued and outstanding
in 1999 and 1998, respectively 155 129
Additional paid-in capital 51,930 4,024
Deferred stock compensation (1,732) (1,726)
Accumulated deficit (13,772) (10,972)
------------ ------------
Total stockholders' equity (deficit) 36,581 (8,545)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 59,131 $ 12,254
============ ============
</TABLE>
See notes to condensed financial statements
3
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PCORDER.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------ ------------------
<S> <C> <C>
Revenues:
Software and subscriptions $ 3,944 $ 2,397
Content and services 3,716 2,108
------------------ ------------------
Total revenues 7,660 4,505
Costs of revenues:
Software and subscriptions 875 366
Software and subscriptions - affiliated royalty fee 326 214
------------------ ------------------
Total software and subscriptions 1,201 580
Content and services 2,743 946
------------------ ------------------
Total cost of revenues 3,944 1,526
------------------ ------------------
Gross profit 3,716 2,979
Operating expenses:
Research and development 1,231 810
Selling and marketing 3,975 1,553
General and administrative 1,417 636
Amortization of deferred stock compensation 373 -
------------------ ------------------
Total operating expenses 6,996 2,999
Operating loss (3,280) (20)
Interest income 237 7
------------------ ------------------
Loss before income taxes (3,043) (13)
Income tax benefit (243) -
------------------ ------------------
Net loss $ (2,800) $ (13)
================== ==================
Basic and diluted net loss per share $ (0.20) $ (0.001)
================== ==================
Weighted average shares outstanding 13,907 12,800
================== ==================
</TABLE>
See notes to condensed financial statements
4
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PCORDER.COM, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------ ------------------
<S> <C> <C>
Operating activities
Net loss $(2,800) $ (13)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation 601 156
Amortization of deferred stock compensation 373 -
Changes in operating assets and liabilities:
Accounts receivable, net (2,240) (5,785)
Prepaid expenses and other assets 607 -
Accounts payable 536 (37)
Accrued liabilities 2,419 420
Receivable/Payable from/to Trilogy, net (4,825) 2,450
Deferred revenue 3,302 3,755
------------------ ------------------
Net cash provided by (used in) operating activities (2,027) 946
Investing activities
Purchase of property and equipment (606) (806)
------------------ ------------------
Net cash used in investing activities (606) (806)
Financing activities
Proceeds from the issuance of common stock, net 47,239 -
Proceeds from the exercise of stock options 149 -
------------------ ------------------
Net cash provided by financing activities 47,388 -
------------------ ------------------
Increase in cash and cash equivalents 44,755 140
Cash and cash equivalents at beginning of period 4,726 2,207
------------------ ------------------
Cash and cash equivalents at end of period $ 49,481 $ 2,347
================== ==================
</TABLE>
See notes to condensed financial statements
5
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PCORDER.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Business
pcOrder.com, Inc., (the "Company") is a majority 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.
Effective February 26, 1999, the Company completed its initial public offering
of 2,530,000 shares at $21 per share. Offering proceeds, net of aggregate
expenses to the Company (including underwriters' discount) totaled approximately
$47 million.
2. Basis of Presentation
The quarterly financial information presented herein should be read in
conjunction with the Company's annual financial statements for the year ended
December 31, 1998, which can be found in the Company's registration statement
filed on form S-1, as amended (Registration No. 333-62985). The accompanying
unaudited interim financial statements reflect all adjustments (which include
only normal, recurring adjustments) that are, in the opinion of management,
necessary to state fairly the results for the periods presented. The results
for such periods are not necessarily indicative of the results to be expected
for the full fiscal year.
3. Related Party Transactions
The Company and Trilogy have entered into a number of agreements that govern the
business activities between the two companies. Pursuant to such agreements, the
Company is required to pay Trilogy for the continuing use of Trilogy's
technology and for services performed by Trilogy on behalf of the Company. For
the quarters ended March 31, 1999 and 1998, the Company incurred royalty fees
due to Trilogy in the amounts of $326,000 and $214,000, respectively.
Additionally, the Company was charged approximately $65,000 and $104,000 for the
quarters ended March 31, 1999 and 1998, respectively, for certain management
services performed by Trilogy on behalf of the Company.
During the quarter ended March 31, 1999, the Company paid Trilogy approximately
$5.4 million to satisfy amounts due to Trilogy pursuant to the intercompany
agreements discussed above. Such amount had accumulated over several quarters
and was paid in part with proceeds generated by the Company's initial public
offering. As of March 31, 1999, approximately $0.5
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million was owed to the Company by Trilogy, and was comprised primarily of
accumulated federal tax benefits generated by the Company and that will be
utilized by Trilogy in its consolidated tax return.
4. Net Loss per Share
For the quarter ended March 31, 1999 approximately 1,777,000 common stock
equivalents were excluded from the diluted earnings per share calculation as
they were anti-dilutive. For the quarter ended March 31, 1998, there were no
common stock equivalents. Accordingly, the diluted net loss per share amounts
were the same as the basic net loss per share amounts for both periods.
5. Stockholders' Equity
On February 2, 1999, the authorized capital stock of the Company was
reclassified as set forth in the Amendment to the Certificate of Incorporation
and consists of 37,243,000 shares of Class A common stock, par value of $.01 per
share, 12,757,000 shares of Class B common stock, par value of $.01 per share,
and 10,000,000 shares of preferred stock, par value $.01 per share. Each share
of common stock of the Company not owned by Trilogy was reclassified into one
share of Class A common stock and each share of common stock owned by Trilogy
was reclassified into one share of Class B common stock. The Class A common
stock and Class B common stock have substantially identical rights other than as
described below.
The Class B common stock entitles its holders to eight votes per share while the
Class A common stock entitles its holders to one vote per share on all matters
submitted to a vote or for the consent of stockholders. The shares of Class B
common stock are convertible at any time prior to a tax free spin-off at the
option of the holder into shares of Class A common stock on a share-for-share
basis. Each outstanding share of Class B common stock will automatically be
converted into a share of Class A common stock upon any transfer of such share,
if after the transfer, such share is not owned by Trilogy, an affiliate of
Trilogy, or a non-affiliate of Trilogy which acquires more than 50% of the then
outstanding Class B common stock in a single transaction. In addition, subject
to certain conditions, then outstanding shares of Class B common stock will
automatically convert, after the fifth anniversary of the first transfer of
Class B common stock in a tax-free spin-off. The effect of this
reclassification has been reflected for all periods presented in the
accompanying financial statements.
6. Income Taxes
The Company's operations are included in the consolidated income tax returns
filed by Trilogy. Furthermore, the Company and Trilogy have entered into an
intercompany tax allocation agreement. Accordingly, the current income tax
benefit included in the accompanying condensed statements of operations has been
computed based on the amount of the benefit to the consolidated group expected
to be obtained through utilization of the Company's net operating losses and
other tax attributes. Deferred taxes are computed as if the Company had not
been included in the consolidated tax group of Trilogy.
7
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7. Commitments and Contingencies
The Company has filed a lawsuit against a former employee, and the former
employee has filed a separate lawsuit against the Company regarding commissions
owed to the former employee by the Company. While the ultimate result of this
matter cannot be currently predicted, management does not expect it to have a
material adverse effect on the Company's financial condition or results of
operations. However, litigation is subject to inherent uncertainties and,
therefore, there can be no assurance that this action will not have a material
adverse effect on the Company's financial condition or results of operations.
8. Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP 98-1"), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires that
entities capitalize certain costs related to internal-use software once certain
criteria are met. The Company adopted SOP 98-1 effective January 1, 1999. Such
adoption did not have a material impact on the Company's financial condition or
results of operations.
Effective December 15, 1998, the AICPA issued SOP 98-9, Modification of SOP
97-2, "Software Revenue Recognition", With Respect to Certain Transactions. SOP
98-9 amends SOP 97-2 and 98-4 extending the deferral of the application of
certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning
on or before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company does not believe that the adoption of SOP 98-9 will have a material
effect on the Company's financial condition or results of operations.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities and
Exchange Act of 1934 including statements relating to the Company's belief that
its existing cash and cash equivalents will be sufficient to fund its
anticipated cash needs for working capital and capital expenditures for the next
12 months, the Company's anticipated expenditures relating to its research and
development and selling and marketing efforts, and anticipated revenues from
ContentSource/TM/. These statements involve risks and uncertainties, including
the risk that existing cash and cash equivalents may not be sufficient to fund
the Company's operations, that the Company will not be able to access capital as
needed, or on terms acceptable to the Company, that the Company will not devote
currently anticipated resources to research and development and selling and
marketing efforts, that anticipated revenues from ContentSource/TM/ will not be
realized, and other risks detailed below (see "Risk Factors That May Affect
Results of Operations and Financial Condition"). Actual results could differ
materially from the results discussed in the forward-looking statements. All
forward-looking statements included in this report are made as of the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements beyond such date.
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 derives the majority of its revenues from software and subscription
fees and related content and service fees. Software and subscription fees
consist of subscription-based and perpetual license arrangements. Currently,
the Company derives the majority of its software and subscription fees from
subscription-based arrangements, but may from time to time grant perpetual
licenses to accommodate individual customer needs. Content fees are charged for
access, entry, updating and maintenance of computer product data and are
generally contracted for on a subscription basis. The Company's service fees
consist of providing integration, customization and training services to the
Company's customers. 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.
Historically, the Company's content services have been sold in conjunction with
the Company's software applications. However, during the quarter ended March
31, 1999, the Company launched ContentSourceTM, a subscription-based data
service that provides potential customers the opportunity to subscribe to the
Company's content services without purchasing the Company's software. Such
service is primarily targeted towards Internet retail sites, channel e-commerce
sites and portal engines. No revenues from this subscription-based data service
were
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recognized during the quarter ended March 31, 1999. However, such revenues are
expected to increase during the year ending December 31, 1999.
Revenue from perpetual licenses and software subscriptions is recognized when
persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed or determinable and collectibility is probable. In
the case of perpetual licenses, revenue is recognized immediately upon
achievement of the above criteria. In the case of subscriptions, revenue
recognition commences upon achievement of the above criteria, but 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 generally recognized ratably
over the applicable subscription period.
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 Company's deferred revenue balance on March
31, 1999 was $15.8 million. Approximately $14.0 million of this deferred
revenue is expected to be recognized as revenue within the following twelve
months, with the remaining amount expected to be recognized in subsequent
periods. The deferred revenue balance generally results from billings to and
collections from customers in advance of receipt of products or performance of
services. 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.
Deferred revenue is not indicative of the Company's contract backlog or future
revenues. The Company derives the majority of its revenues from subscription-
based arrangements which may have pre-payment terms resulting in deferred
revenue and which require renewal for license access and service beyond the
contract period.
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 is subject to a tax allocation agreement with Trilogy.
See Note 3 and Note 6 of the Notes to Condensed Financial Statements.
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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>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------ ------------------
<S> <C> <C>
Revenues:
Software and subscriptions 51% 53%
Content and services 49 47
------------------ ------------------
Total revenues 100 100
Cost of revenues:
Software and subscriptions 16 13
Content and services 36 21
------------------ ------------------
Total cost of revenues 52 34
------------------ ------------------
Gross profit 48 66
Operating expenses:
Research and development 16 18
Selling and marketing 52 35
General and administrative 18 14
Amortization of deferred stock compensation 5 -
------------------ ------------------
Total operating expenses 91 67
Operating loss (43) (1)
Interest income 3 -
------------------ ------------------
Loss before income taxes (40) (1)
Income tax benefit 3 -
------------------ ------------------
Net loss (37)% (1)%
================== ==================
</TABLE>
Revenues
Total revenues increased 70% to $7.7 million for the quarter ended March 31,
1999 from $4.5 million for the quarter ended March 31, 1998, reflecting an
increase in the Company's customer base for its software applications, content
services and related software integration, customization and training services.
Software and Subscriptions. Software and subscription revenues increased 65% to
$3.9 million for the quarter ended March 31, 1999 from $2.4 million for the
quarter ended March 31, 1998, representing 51% and 53% of total revenues,
respectively. The increase in absolute dollars was due primarily to higher
subscription revenues related to the Company's expanded customer base and higher
perpetual license revenues period to period. Software and subscription revenues
decreased as a percentage of total revenues primarily due to a higher relative
increase in content and service revenues related to additional content fees,
software integration, customization and training services associated with the
Company's increased customer base.
Software and subscription revenues recognized under perpetual licenses were $0.6
million and $0.2 million for the quarters ended March 31, 1999 and 1998,
respectively, representing 7% and 3% of total revenues, respectively. The
increase in absolute dollars and as a percentage of total
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revenues was due primarily to a perpetual license agreement executed during the
first quarter of 1999.
Content and Services. Content and service revenues increased 76% to $3.7
million for the quarter ended March 31, 1999 from $2.1 million for the quarter
ended March 31, 1998, representing 49% and 47% of total revenues, respectively.
The increase in absolute dollars and as a percentage of total revenues was due
primarily to additional content fees and software integration, customization and
training services associated with the Company's increased customer base.
Cost of Revenues
Software and Subscriptions. Cost of software and subscription revenues consists
primarily of royalties paid to Trilogy and the cost of providing software
maintenance. Cost of software and subscription revenues increased 107% to $1.2
million for the quarter ended March 31, 1999 from $0.6 million for the quarter
ended March 31, 1998, representing 30% and 24% of software and subscription
revenues, respectively. The increase in cost of software and subscription
revenues in absolute dollars was due primarily to (i) an increase in customer
support headcount and the related operating expenses and, to a lesser extent,
(ii) an increase in royalties paid to Trilogy on software applications as a
result of increased total revenues. The increase in cost of software and
subscription revenues as a percentage of software and subscription revenues was
due primarily to the increased personnel and other costs associated with
providing software maintenance services to a greater number of customers.
Content and Services. Cost of content and service revenues consists primarily
of the cost of providing access, entry, update and maintenance services for
computer product information services and the cost of in-house and contract
personnel providing software integration, customization and training services.
Cost of content and service revenues increased 190% to $2.7 million for the
quarter ended March 31, 1999 from $0.9 million for the quarter ended March 31,
1998, representing 74% and 45% of content and service revenues, respectively.
The increase in cost of content and service revenues in absolute dollars and as
a percentage of content and service revenues was due primarily to (i) an
increase in headcount and related costs within the Company's content management
group ("PC Labs"), and (ii) increased personnel and other costs associated with
providing increased software integration, customization and training services to
the Company's software customers. Additionally, revenue under a fixed fee
arrangement was recognized during the first quarter of 1998 for which the
majority of the associated costs were expensed in the fourth quarter of 1997,
thus further impacting the period to period percentage change.
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Operating Expenses
Research and Development. Research and development expenses consist primarily
of personnel costs to support the Company's product development efforts.
Research and development expenses increased 52% to $1.2 million for the quarter
ended March 31, 1999 from $0.8 million for the quarter ended March 31, 1998,
representing 16% and 18% of total revenues, respectively. The increase in
absolute dollars was primarily due to an increase in internal development
personnel and related costs period to period. 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 in future periods.
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 156% to
$4.0 million for the quarter ended March 31, 1999 from approximately $1.6
million for the quarter ended March 31, 1998, representing 52% and 35% of total
revenues, respectively. The increase in absolute dollars and as a percentage of
total revenues 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 in future periods as it continues to
expand 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 123% to $1.4 million for the quarter ended
March 31, 1999 from $0.6 million for the quarter ended March 31, 1998,
representing 18% 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.
Amortization of Deferred Stock Compensation. The Company records deferred stock
compensation expense for 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. Such amount is amortized over the vesting periods of
the underlying options. During the quarter ended March 31, 1999, such
amortization totaled approximately $0.4 million. Of this amount, approximately
$53,000 related to options that were granted during the quarter ended March 31,
1999, with the remainder of the amortization amount being related to options
granted during 1998. There were no compensatory option grants made during or
prior to the quarter ended March 31, 1998. Accordingly, there was no
amortization of deferred stock compensation recorded for such period.
Income Taxes. The Company is included in the consolidated income tax return of
and has 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 be subject to the tax sharing
agreement. See Note 6 of the Notes to Condensed Financial Statements.
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The Company's effective tax rate was 8% and 0% for the quarters ended March 31,
1999 and 1998, respectively. The primary differences between the effective tax
rates for such periods resulted from increases to the valuation allowance for
the Company's deferred tax assets. Had the Company filed separate income tax
returns, the Company's effective tax rate would have been 0% for the quarters
ended March 31, 1999 and 1998, reflecting the uncertain future utilization of
the Company's deferred tax assets.
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 March
31, 1999, the Company had approximately $49.5 million in cash and cash
equivalents, reflecting the proceeds received by the Company from its recent
initial public offering. As of March 31, 1999, 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 the aforementioned anticipated growth in
operations, infrastructure and personnel.
Cash used in operations was $2.0 million for the quarter ended March 31, 1999
and cash provided by operations was $0.9 million for the quarter ended March 31,
1998. Cash used in operations for the quarter ended March 31, 1999 resulted
primarily from a net loss of $2.8 million and the payment of approximately $5.4
million to Trilogy to pay off existing intercompany indebtedness, offset by
increases in the Company's accrued liabilities and deferred revenue accounts.
Cash provided by operations for the quarter ended March 31, 1998 resulted
primarily from favorable changes in the Company's operating assets and
liabilities, primarily increases in deferred revenue and the payable to Trilogy.
Net cash used in investing activities of $0.6 million and $0.8 million for the
quarters ended March 31, 1999 and 1998, respectively, was primarily related to
purchases of equipment. In 1998, the Company also had expenditures for
leasehold improvements related to the move into its current facility.
For the quarter ended March 31, 1999, cash provided by financing activities
totaled $47.4 million and was almost entirely attributable to the Company's
initial public offering. There was no cash flow from financing activities for
the quarter ended March 31, 1998. In February 1999, the Company completed its
initial public offering of 2,530,000 shares of Class A common stock with net
proceeds totaling approximately $47.2 million. The Company believes that its
existing cash and cash equivalents will be sufficient to fund its anticipated
cash needs for working capital and capital expenditures for the next 12 months.
However, there can be no assurances 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.
Year 2000 Compliance
The Company uses a number of computer software programs and operating systems
and its proprietary solutions include source code which must address the Year
2000 issue. However, the Company believes that its Year 2000 issues are limited
to information technology ("IT") systems
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(i.e., software programs and computer operating systems) and that because its
business is not solely dependent on the use of non-IT systems (i.e., embedded
systems such as devices used to control, monitor or assist the operation of
equipment and machinery), the failure of any such non-IT systems as a result of
Year 2000 issues would not have a material adverse effect on the Company's
operations.
The Company relies, in part, on Trilogy's internal computer systems. The
Company has been informed by Trilogy that Trilogy's internal computer systems
are Year 2000 compliant. The Company has completed a limited review of its IT
systems and the products for which the Company currently provides maintenance
and support, which involved testing and verification as described below. Based
on such review, the Company believes its own IT systems and the products for
which the Company currently provides maintenance and support are Year 2000
compliant. The Company's Year 2000 compliance effort consisted of verifying and
testing the ability of the products for which the Company currently provides
maintenance and support to successfully handle the date change from December 31,
1999 to January 1, 2000, date changes from February 28 to February 29 and
arbitrary dates ranging from 2000 to 2037. The Company has no plans to conduct
further review of its currently supported products or IT systems. The Company
has not historically made any material expenditures in readying its IT systems
or currently supported products for the Year 2000 and does not believe it will
be necessary in the future to expend any material amounts in connection with
Year 2000 compliance.
Notwithstanding the foregoing, 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 on the Company's business, financial condition and results of
operations. The Company does not have, and currently has no plan to make, a
contingency plan for the remediation of Year 2000 problems that may effect the
Company's IT systems and products, or the third-party equipment and software
utilized by the Company, and it will be necessary for the Company to make the
necessary expenditures to assess and remedy such problems in the event they
arise in the future, which expenditures, if any, cannot currently be estimated
by the Company. There can be no assurance that such expenditures, if required,
would not have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's solutions also utilize and depend on third-party equipment and
software that may not be Year 2000 compliant. The Company contacted certain
third-party vendors in order to ascertain their Year 2000 compliance. Based on
information supplied by such third-party vendors, the Company's officially
supported products developed using Visual Basic 5, Visual C++ or Java can be
certified Year 2000 compliant only through December 31, 2036, the last date
which the Company tested and verified. The Company estimates that such
certification applies to 90% to 95% of the Company's total products. Many of
the Company's products also use or rely on Microsoft's SQL Server product, which
has been certified Year 2000 compliant through December 31, 9999. The Company
believes that approximately 1.0% of the Company's products use or rely on third-
party vendor software which may be subject to Year 2000 issues and for which the
Company has received no assurance of Year 2000 compliance. To the extent any of
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the Company's products are customized, whether by the Company or a third party,
there can be no assurance that any such customized product will continue to 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. In
addition, to the extent the Company's products are installed on customers'
systems which rely on other software, firmware or hardware which may not be Year
2000 compliant, problems in communications among industry participants could
result in a delay in the Company's products achieving market acceptance.
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 products manufacturers, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
Risk Factors That May Affect Results of Operations and Financial Condition
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.
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 March 31, 1999, the Company had an
accumulated deficit of $13.8 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 products
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 and services that offer
greater functionality
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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.
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.
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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
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 Company's
common stock.
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
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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.
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 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 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.
Customer Concentration; Risks Associated with Reliance on Certain Contracts
Historically, the Company's top five customers have accounted for a significant
percentage of the Company's total revenues. 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. In addition,
revenues from contracts with these customers are not equally distributed over
the term of the contracts, and there can be no assurance that total revenues
will not decline because of decreased revenues from these customers in future
periods. 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.
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.
For example, the Company entered into an agreement with Ingram Micro in
September of 1998 in
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connection with subscriptions to, and related services supporting, various
products of the Company, including Prime Access Web Storefront and Customer
Desktop. pcOrder retains ownership of all software licensed under the agreement.
The Company agreed to indemnify Ingram Micro Inc. ("Ingram Micro") in the event
of a claim that any software licensed to Ingram Micro by the Company infringes
the intellectual property of a third party. Additionally, pursuant to the
agreement with Ingram Micro, the source code for software licensed to Ingram
Micro will be deposited in escrow. The initial term of the agreement is through
December 2003, unless terminated earlier by either party upon prior notice in
the event of a payment default, material breach, termination of business or
breach of confidentiality. The agreement may be renewed for additional one-year
periods upon the agreement of the parties prior to the end of the current term.
Because of the Company's limited experience with contract renewals in general,
there can be no assurance the Company will be successful in renewing the Ingram
Micro contract or other 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.
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
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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.
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
Company has historically experienced a lengthy cycle for sales of its products
to resellers, and longer sales cycles for sales of its products to manufacturers
and distributors. There can be no assurance that the Company will not continue
to experience lengthy 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.
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 have a material
adverse effect on the Company's business, results of operations and financial
condition.
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 product
SKUs from over 1,000 manufacturers. Currently, this information is primarily
used to support the Company's software applications and the Company seeks to
provide users with timely access to current,
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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 affected 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
As of March 31, 1999, Trilogy owned 12,757,000 shares of Class B common stock of
the Company representing approximately 82% of the total outstanding common stock
of the Company, and approximately 97% of the total voting power of the common
stock. Accordingly, Trilogy has the voting power to determine the outcome of
any matter submitted for the vote or consent of pcOrder stockholders, except
where a separate vote of the holders of Class A common stock is required by
Delaware law. Since each share of Class B common stock entitles its holder to
eight votes while each share of Class A common stock entitles its holder to one
vote, Trilogy will retain this voting power even while it holds less than a
majority of the Company's outstanding common stock. For example, Trilogy will
be able to direct the election of all directors of the Company, to cause the
amendment of the Company's Certificate of Incorporation, Bylaws and other
documents, and generally to 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 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 prevent, delay or cause a change in control of the Company and could
take other actions that might be favorable to Trilogy but not necessarily
favorable to other stockholders of the Company. There can be no assurance that
conflicts, disagreements or other disputes between the Company and Trilogy will
not arise, or that such disputes will be resolved in a manner that does not
adversely affect the business, financial condition or results of operations of
the Company. There can be no assurance that Trilogy's ownership of the
Company's Class B common stock or its other relationships with the Company will
not have a material adverse effect on the Company's business, financial
condition or results of operations, on its other stockholders or on the market
price of the Company's Class A common stock.
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Trilogy could elect to sell all or a substantial portion of its equity interest
in the Company to a third party, which could represent a controlling or
substantial interest in the Company, without offering to other stockholders of
the Company the opportunity to participate in such a transaction. Under the
terms of the Company's Certificate of Incorporation, a single transaction
resulting in the transfer of greater than 50% of Trilogy's equity interest in
the Class B common stock to a non-affiliate of Trilogy will result in such non-
affiliate having the disproportionate per share voting rights currently held by
Trilogy. In the event of a sale of Trilogy's interest to a third party, such
third party may be able to control the Company in the manner that Trilogy is
currently able to control the Company, including with respect to the election of
all of the members of the Company's Board of Directors. Such a sale may
adversely affect the Company's other stockholders and the market price of the
Class A common stock and may adversely affect the Company's business, financial
condition and results of operations.
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. Pursuant to the terms of a Technology,
Services and License Agreement, (the "Technology Agreement"), 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. Further, the Company believes that similar technology
is not currently available from any third party and, if the license from Trilogy
were terminated, there can be no assurance that the Company could successfully
internally develop similar technology or license similar technology from a third
party. As a result, any termination of the license from Trilogy would have a
material adverse effect on the Company's business, financial condition and
results of operations. Additionally, Trilogy is prohibited from competing with
the Company only through June 1, 1999. There can be no assurance that Trilogy
will not compete directly with the Company after June 1, 1999, and that such
competition would not have a material adverse effect on the Company's business,
financial condition and results of operations. Further, Trilogy has joint
ownership rights in technology jointly developed by the Company and Trilogy
during the term of the Technology Agreement, and there can be no assurance that
Trilogy will not utilize such technology in competition with the Company after
June 1, 1999 or license its technology to competitors of the Company, which
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. However, Trilogy has
little or no obligation to continue to provide such assistance to the Company on
an ongoing basis. To the extent Trilogy no longer provides such services to the
Company, 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. The Company estimates that the cost of such
development and implementation will be material to the Company. Any failure to
successfully develop and implement such systems and infrastructure would have a
material adverse effect on the Company's business, financial condition and
results of operations.
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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
and the exercise by Trilogy of its ability to control the management and affairs
of the Company. The Company and Trilogy have not established any formal
procedures to address or resolve these potential conflicts. 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 previously discussed, 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. In addition, in the event of a tax free spin-off, the
shares of Class B common stock held by Trilogy's transferee will not be
convertible into Class A common stock for a period of five years following such
tax free spin- off. Accordingly, following a tax free spin-off, a transferee or
group of transferees of such Class B common stock could hold the voting power to
affect or determine the outcome of matters submitted to the vote or consent of
pcOrder stockholders, which could have a material adverse effect on the
Company's business, financial condition or results of operations.
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. The Company and Trilogy have not
established any formal procedures to address or resolve these potential
conflicts.
Possible Future Sales of Common Stock by Trilogy
Subject to applicable federal securities laws and the restrictions set forth in
the Certificate of Incorporation, Trilogy may sell any and all of the shares of
the Company's Class B common stock beneficially owned by it or shares of the
Class A common stock issuable upon conversion of the Class B common stock, or
distribute any or all of such shares of Class B common stock to its
stockholders. In general, prior to a tax free spin-off each share of Class B
common stock is convertible into one share of Class A common stock at the
election of the holder thereof, and each share of Class B common stock will be
converted automatically into one share of Class A common stock upon a transfer
if after the transfer such share is not owned by Trilogy, Trilogy Inc.
(Trilogy's parent), an affiliate of Trilogy, Inc. or a non-affiliate of Trilogy,
Inc. that acquires more than 50% of the then outstanding Class B common stock in
a single transaction. In addition, in the event of a tax-free spin-off, the
shares of Class B common stock held by Trilogy's transferee will not be
convertible into Class A common stock for a period of five years following such
tax-free spin-off. Accordingly, following a tax free spin-off, a transferee or
group of transferees of such Class B Common Stock would hold the voting power to
affect or determine the outcome of matters submitted to the vote or consent of
pcOrder stockholders, which could have a material adverse effect on the
Company's business, financial condition or results of operations. 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
24
<PAGE>
occur, could adversely affect the prevailing market prices for the Class A
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 Class B common stock (or shares of Class A common stock
issuable upon the conversion of such Class B common stock) with the exception of
the Trilogy Options, for a period of 180 days after the date of the Company
initial public offering without the prior written consent of Goldman, Sachs &
Co., the lead underwriter of the Company's initial public offering. No notice
will be given to stockholders of the Company if Goldman, Sachs & Co. grants such
written consent to Trilogy. As a result, there can be no assurance concerning
the period of time during which Trilogy will maintain its ownership of Class B
common stock (or shares of Class A common stock issuable upon the conversion of
such Class B common stock). Moreover, there can be no assurance that, in any
transfer by Trilogy of a controlling interest in the Company, any holders of
Class A common stock will be able to participate in such transaction or will
realize any premium or other amounts with respect to their shares of Class A
common stock. Trilogy has registration rights with respect to the shares of
Class B common stock owned by it and the shares of Class A common stock issuable
upon conversion thereof, which rights would facilitate any future disposition.
These registration rights are transferred automatically to any transferee of
shares of Class B common stock (or shares of Class A common stock issuable upon
the conversion of such Class B common stock).
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. In addition, the
Company may move to third-party hosting of its servers. There can be no
assurance that this transition, if undertaken, would be effected without
interruptions that could adversely affect the Company's business, results of
operations and financial condition. Further, such third-party host would be
subject to the same risks of system failure as the Company's current site.
Future Capital Needs; Uncertainty of Additional Financing
The Company requires substantial working capital to fund its business. The
Company currently believes that its existing capital resources 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
need 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.
25
<PAGE>
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 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".
Management of Growth
The Company's business has grown rapidly in the last three years, with total
revenues increasing from $5.9 million in 1996 to $21.7 million in 1998 and the
total number of employees increasing from 1 in July 1994 to 194 as of December
31, 1998. Furthermore, significant increases in the number of employees are
anticipated in 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 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.
New Products and Technological Changes; Risks Associated with Transition to New
Technology Platform
The market for the Company's e-commerce solutions 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
26
<PAGE>
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 in
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, Chief Operating Officer and founder, each of whom is a party to an
employment agreement with the Company. 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, executive management of new customer
and new account relationship activities and recruitment of senior management
personnel. 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 currently does not carry key person life insurance for
either Mr. Cooley or Ms. Jones. The Company believes that it depends
primarily on Mr. Cooley and Ms. Jones, the loss of either of whom would have a
material adverse effect on the
27
<PAGE>
Company. 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.
Risk of Changes in Accounting Standards
Effective December 15, 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-9, "Modification of SOP 97-
2, "Software Revenue Recognition', With Respect to Certain Transactions." SOP
98-9 amends SOP 97-2 and 98-4, "Deferral of the Effective Date of a Provision of
SOP 97-2," extending the deferral of the application of certain passages of SOP
97-2 provided by SOP 98-4 through fiscal years beginning on or before March 15,
1999. All other provisions of SOP 98-9 are effective for transactions entered
into in fiscal years beginning after March 15, 1999. Full implementation
guidelines for this standard have not yet been issued. Once available, the
Company's revenue accounting practices may need to change and there can be no
assurance that such change would not materially adversely affect the Company's
business, operating results and financial condition.
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, systems
integrators 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., 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 previously discussed, 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
28
<PAGE>
financial, technical, marketing and other resources than the Company. There can
be no assurance that the Company will be able to compete successfully with its
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.
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 been issued or is issued 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
29
<PAGE>
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 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.
International Sales Risks
Although the Company has had limited sales outside of the U.S. and Canada, the
Company expects to increase its sales in international markets. In order to
expand international sales, the Company must establish additional foreign
operations, hire additional personnel and establish relationships with
additional channel partners. This expansion will require significant management
attention and financial resources and could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, there can be no assurance that the Company will be able to maintain or
increase international market demand for the Company's products and services.
Although the Company's international sales are primarily denominated in U.S.
dollars, the Company expects to incur an increasing percentage of obligations
denominated in foreign currencies. A change in the value of the U.S. dollar
relative to foreign currencies could make the Company's products more expensive
and, therefore, potentially less competitive in those markets and could
otherwise adversely affect the Company's ability to meet its foreign-currency-
denominated obligations. Currently, the Company does not employ currency
hedging strategies to reduce this risk. In addition, the Company's
international business may be subject to a variety of risks, including
difficulties in collecting international accounts receivable or obtaining U.S.
export licenses, potentially longer payment cycles, increased costs associated
with maintaining international marketing efforts, the introduction of non-tariff
barriers and higher duty rates and difficulties in enforcement of contractual
obligations and intellectual property rights. There can be no assurance that
such factors will not have a
30
<PAGE>
material adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition or results of
operations.
Possible Volatility of Share Price
The market price of the Company's common stock has been and may continue to 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.
31
<PAGE>
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
In January 1999, the Company filed an action for declaratory judgement in the
345th Judicial District Court of Travis County, Texas, Case No. 99-00787 against
its former Vice President, Sales from July 1998 to December 1998, seeking to
have certain claims for sales commissions, other commissions and stock grants
invalid. In February 1999, the defendant in the Company's action filed a
complaint against the Company and Christina Jones, the Company's President and
Chief Operating Officer, in the County Court Law, for Dallas County Texas, Case
No. CC-99-01194d, requesting actual and punitive damages of not less than $3.0
million as a result of alleged failure of the Company to pay certain commissions
and stock grants, among other matters. The defendant filed a Motion to Abate
the Company's Travis County case, which was heard on April 19, 1999 and was
denied. The Company intends to contest the action vigorously and does not
believe that the resolution will have a material adverse effect on the Company's
financial condition or results of operations. However, litigation is subject to
inherent uncertainties and, therefore, there can be no assurance that this
action will not have a material adverse effect on the Company's financial
condition or results of operations.
Item 2. Changes in Securities
On February 2, 1999, the authorized capital stock of the Company was
reclassified as set forth in the Amendment to the Certificate of Incorporation
and consists of 37,243,000 shares of Class A common stock, par value of $.01 per
share, 12,757,000 shares of Class B common stock, par value of $.01 per share,
and 10,000,000 shares of preferred stock, par value $.01 per share. Each share
of common stock of the Company not owned by Trilogy was reclassified into one
share of Class A common stock and each share of common stock owned by Trilogy
was reclassified into one share of Class B common stock. The Class A common
stock and Class B common stock have substantially identical rights other than as
described below.
The Class B common stock entitles its holders to eight votes per share while the
Class A common stock entitles its holders to one vote per share on all matters
submitted to a vote or for the consent of stockholders. The shares of Class B
common stock are convertible at any time prior to a tax free spin-off at the
option of the holder into shares of Class A common stock on a share- for-share
basis. Each outstanding share of Class B common stock will automatically be
converted into a share of Class A common stock upon any transfer of such share,
if after the transfer, such share is not owned by Trilogy, an affiliate of
Trilogy, or a non-affiliate of Trilogy which acquires more than 50% of the then
outstanding Class B common stock in a single transaction. In addition, subject
to certain conditions, the then outstanding shares of Class B common stock will
automatically convert, after the fifth anniversary of the first transfer of
Class B common stock in a tax-free spin- off. The effect of this
reclassification has been reflected for all periods presented in the
accompanying financial statements.
The Company's registration statement (Registration No. 333-62985) under the
Securities Act of 1933, as amended, for its initial public offering became
effective on February 26, 1999. Goldman, Sachs & Co., Credit Suisse First
Boston Corporation, and SG Cowen Securities Corporation were the managing
underwriters of the offering. In the offering, the total price to
32
<PAGE>
the public, underwriting discounts and commissions, and proceeds to the Company
were $53.1 million, $3.7 million, and $49.4 million, respectively. Offering
proceeds, net of aggregate expenses to the Company of approximately $2.2
million, were approximately $47.2 million. The Company has used a portion of the
proceeds in the repayment of $5.4 million in indebtedness to its parent company.
The remainder of the net proceeds has been used to purchase temporary
investments consisting of cash, cash equivalents, and short-term investments.
Except for the $5.4 million payment to Trilogy discussed above, none of the net
offering proceeds were paid directly or indirectly to directors, officers or
general partners of the Company or their associates, persons owning 10% or more
of any class of the Company's securities, or affiliates of the Company.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
In February 1999, prior to its initial public offering, the Company submitted
the following matters to a vote of its security holders through an action by
written consent. Each of the matters were approved by holders of the required
majority of the Company's outstanding common stock at that time.
1. To approve an amendment to Article Four of the Certificate of Incorporation
of the Company to reclassify the authorized capital stock of the Company
into 37,243,000 shares of Class A common stock, par value of $0.01 per
share, 12,757,000 shares of Class B common stock, par value $0.01 per
share, and 10,000,000 shares of preferred stock, par value $0.01 per share.
2. To approve and adopt the Company's 1999 Stock Option Plan and to initially
reserve a total of 1,500,000 shares of Class A common stock for issuance to
employees, directors and consultants of the Company and its related
entities.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
---------
The Exhibit Index attached hereto is hereby incorporated by reference
to this Item.
(b) Reports on Form 8-K:
--------------------
The Company did not file any reports on Form 8-K during the three
months ended March 31, 1999.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PCORDER.COM, INC.
Date: May 13, 1999 /s/ James J. Luttenbacher
---------------------------------------------------
Name: James J. Luttenbacher
Title: Vice President, Chief Financial
Officer and Secretary
34
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
Number Exhibit Title Page
- ------- ----------------------------------------------------- ------------
27 Financial Data Schedule 36
35
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED BALANCE SHEET (UNAUDITED) AS OF MARCH 31, 1999 AND
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH
31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 49,481
<SECURITIES> 0
<RECEIVABLES> 7,015
<ALLOWANCES> 425
<INVENTORY> 0
<CURRENT-ASSETS> 57,188
<PP&E> 4,614
<DEPRECIATION> 2,671
<TOTAL-ASSETS> 59,131
<CURRENT-LIABILITIES> 20,705
<BONDS> 0
0
0
<COMMON> 155
<OTHER-SE> 36,426
<TOTAL-LIABILITY-AND-EQUITY> 59,131
<SALES> 7,660
<TOTAL-REVENUES> 7,660
<CGS> 3,944
<TOTAL-COSTS> 3,944
<OTHER-EXPENSES> 6,996
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,043)
<INCOME-TAX> (243)
<INCOME-CONTINUING> (2,800)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,800)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
