<PAGE>
As filed with the Securities and Exchange Commission on February 9, 1999
Registration No. 333-62985
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2
To
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
----------------
PCORDER.COM, INC.
(Exact Name of Registrant as Specified in its Charter)
----------------
Delaware 5734 74-2720849
(State or Other (Primary Standard (I.R.S. Employer
Jurisdiction of Industrial Classification Identification Number)
Incorporation or Code Number)
Organization)
----------------
5000 Plaza on the Lake
Austin, TX 78746
(512) 684-1100
(Address and telephone number of principal executive offices and principal
place of business)
----------------
James J. Luttenbacher
Chief Financial Officer
5000 Plaza on the Lake
Austin, TX 78746
(512) 684-1100
(Name, Address, and Telephone Number of Agent for Service)
----------------
Copies to:
WILLIAM D. SHERMAN DONALD M. KELLER, JR.
DAVID C. WILSON GLEN R. VAN LIGTEN
JUSTIN L. BASTIAN MITCHELL S. ZUKLIE
ROCHELLE A. KRAUSE VIVIAN P. MORRIS
Morrison & Foerster LLP Venture Law Group
755 Page Mill Road A Professional Corporation
Palo Alto, CA 94304 2800 Sand Hill Road
Menlo Park, CA 94025
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+Information contained herein is subject to completion or amendment. A +
+registration statement relating to these securities has been filed with the +
+Securities and Exchange Commission. These securities may not be sold nor may +
+offers to buy be accepted prior to the time the registration statement +
+becomes effective. This prospectus shall not constitute an offer to sell or +
+the solicitation of an offer to buy nor shall there be any sale of these +
+securities in any State in which such offer, solicitation or sale would be +
+unlawful prior to registration or qualification under the securities laws of +
+any such State. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 9, 1999.
2,200,000 Shares
pcOrder.com, Inc.
[pcOrder.com, Inc. LOGO]
Class A Common Stock
(par value $0.01 per share)
-----------
All of the 2,200,000 shares of Class A Common Stock offered hereby are being
sold by pcOrder.com, Inc. ("pcOrder" or the "Company"). Prior to this offering,
there has been no public market for the Class A Common Stock of the Company. It
is currently estimated that the initial public offering price per share will be
between $11.00 and $13.00. For factors to be considered in determining the
initial public offering price, see "Underwriting".
The underwriters intend to make available up to 200,000 shares of Class A
Common Stock for sale at the initial public offering price to employees of the
Company and certain other purchasers.
See "Risk Factors" beginning on page 8 for certain considerations relevant to
an investment in the Class A Common Stock.
Application has been made for quotation of the Class A Common Stock on the
Nasdaq National Market under the symbol "PCOR".
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
<TABLE>
<CAPTION>
Initial Public Underwriting Proceeds to
Offering Price Discount(1) Company(2)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share............................... $ $ $
Total(3)................................ $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(2) Before deducting estimated expenses of $1,200,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 330,000 shares at the initial public offering price per
share, less the underwriting discount, solely to cover over-allotments, if
any. If such option is exercised in full, the total initial public offering
price, underwriting discount and proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting".
-----------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about , 1999, against payment therefor in immediately available
funds.
Goldman, Sachs & Co.
Credit Suisse First Boston
SG Cowen
-----------
The date of this Prospectus is , 1999.
<PAGE>
Inside Front Cover
Heading: Company logo
Subheading:"Moving the Computer Industry to the Web".
Graphic: Graphic illustrating computers connecting manufacturers,
distributors, corporate buyers and resellers/retailers.
Centered heading of Graphic: "powered by pcOrder.Com"
Graphic subheading: "pcOrder Is a Leading Provider of Internet-Based E-
Commerce Solutions that Enable the Computer Industry's Suppliers, Resellers
and End-Users to Buy and Sell Computer Products Online".
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH
THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
<PAGE>
Gatefold
Heading: "pcOrder.com Moving the Computer Industry to the Web"
Subheadings: "Software-Content-Community"
Software Graphic: Computer Screen illustrating product searches
Software Graphic Subheading: "Comprehensive E-Commerce
Software Solutions"
Software Graphic Text: "pcOrder's applications are designed
to allow computer industry participants to automate product
searches, comparisons, configurations, pricing, financing
and ordering. The Company believes that the flexibility of
pcOrder's applications enables computer industry companies
to build innovative e-commerce strategies."
Content Graphic: Computer screen illustrating utilization of pcOrder's content
database
Content Graphic Subheading: "Extensive Database of Computer
Product Information"
Content Graphic Text: "pcOrder's content database aggregates
product pricing and availability data for more than 600,000
product SKUs from over 1,000 manufacturers, including
compatibility and technical information. This standardized
data makes it easy to buy and sell customized computer
products online.
Community Graphic: Illustration of computers moving on a conveyor belt from
manufacturer to retail outlet. Includes Company logo
Community Graphic Subheading: "E-Commerce Community"
Community Graphic Text: "pcOrder's e-commerce solutions are
designed to connect the entire computer industry supply
chain, increasing efficiency and enabling new business
models. The Company believes that the value of the e-
commerce network grows with each computer industry member
linked to pcOrder's solution."
Graphic: Graphic illustrating computers connecting manufacturers,
distributors, corporate buyers and resellers/retailers.
Centered heading of Graphic: "powered by pcOrder.com."
Text: "pcOrder's E-commerce Solutions are Designed to Enable:
* Online Ordering and Sales
* Build to Order and Channel Assembly Strategies
* Efficient Inventory Management
* Industry Data Standardization
Heading: "Adoption by Market Leaders"
Logos of the following customers: CompUSA Inc., Hewlett-
Packard Company, Kingston Technology Corporation, CompuCom
Systems, Inc., Pinacor, Inc., GE Capital Corp., Nortel
Networks Inc., Tech Data Corporation, MicroAge Integration
Company, CMP Publications Inc., Comark Inc., PC Wholesale
and Ingram Micro Inc.
Text: "Other customers include Compaq Computer Corporation, IBM
Corporation, MCI Systemhouse Corporation and General
Electric Capital Information Technology Services."
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and the Financial Statements and
Notes thereto appearing elsewhere in this Prospectus, including information
under "Risk Factors". Except as otherwise noted, all information in this
Prospectus, including share and per share information, assumes no exercise of
the Underwriters' over-allotment option and assumes the reclassification of all
outstanding shares of Common Stock held by Trilogy into Class B Common Stock
and all other shares of Common Stock issued and outstanding or issuable
pursuant to previously granted options into Class A Common Stock, which became
effective on February 2, 1999. See "Description of Capital Stock" and
"Underwriting". As used herein, "Trilogy" refers to Trilogy Software, Inc. and
its predecessor entities, including Trilogy Development Group, Inc.
The Company
pcOrder is a leading provider of Internet-based electronic commerce solutions
that enable the computer industry's suppliers, resellers and end users to buy
and sell computer products online. The Company's solutions are designed to
increase the efficiency and effectiveness of the sales, marketing and
distribution of computer products and to enable members of the industry to take
advantage of the increasing adoption of e-commerce. Forrester Research
estimates that the business-to-business e-commerce market will grow from $43
billion in 1998 to $1.3 trillion by 2003. In addition, Forrester believes that
computer products (including wholesale and retail equipment, software,
semiconductors and manufacturing) is the largest and fastest growing segment,
by revenue, in business-to-business e-commerce.
The Company's comprehensive offering consists of software applications and
content databases which enable industry participants to buy and sell computer
products online by increasing the automation of product search, comparison,
configuration, pricing, financing, ordering and reseller selection. The Company
believes that it is uniquely positioned to deliver these solutions through its:
(i) ability to offer a broad set of advanced front-office and e-commerce
software applications, including configuration and pricing; (ii) position as a
leading content provider of computer product and compatibility information; and
(iii) experience in delivering industry-specific functionality and integrations
into business systems of computer industry participants.
The Company's solutions have been adopted by market leaders including Compaq
Computer Corporation, CompuCom Systems, Inc., CompUSA Inc., CMP Publications
Inc., GE Capital Corp., Hewlett-Packard Company, Ingram Micro Inc.,
International Business Machines Corporation, Kingston Technology Corporation,
Nortel Networks Inc., MCI Systemhouse Corp., MicroAge Integration Company, PC
Wholesale, Pinacor, Inc. and Tech Data Corporation. In 1998, over $3 billion of
quotes for computer products had been generated using the Company's solutions,
representing use by more than 3,500 sales representatives from over 500
resellers. Since 1996, the Company's revenues have grown from $5.9 million to
$21.7 million in 1998.
The Internet and Internet-related technologies are revolutionizing the way
businesses and consumers communicate, share information and conduct business.
Businesses are increasingly replacing paper-based transactions and
communications with e-commere solutions in an effort to reduce costs, decrease
inventories and shorten time-to-market. The Company believes that the computer
industry is particularly well-suited to the use of Internet-enabled e-commerce
solutions due to the large size and fragmented nature of the industry, its high
costs of sales and distribution, and its propensity to embrace technology for
automating processes. In addition, rapid technological change
3
<PAGE>
has resulted in the continuing decline of component prices and shorter life
cycles of computer products. Such pressures have heightened the importance for
industry participants to employ build-to-order and configure-to-order models in
order to reduce inventories, improve the ability to gauge and meet changing
customer demands, and shorten time-to-market by enabling just-in-time component
acquisition. The Company believes that a key capability required to address
these needs is real-time access to information, providing seamless
configuration and pricing at the point-of-sale.
The Company believes that there is a significant need for an independent,
industry-wide solution to enable the buying and selling of computer products
online. The Company leverages Internet technologies to provide comprehensive e-
commerce solutions designed to increase sales and marketing productivity, meet
end-user demand for online ordering, reduce costs and shorten order fulfillment
cycles for industry participants. The Company's solutions include software
applications that are designed to increase the automation of product search,
comparison, configuration, pricing, financing and ordering, combined with what
the Company believes is the industry's largest content database consisting of
detailed product, categorization, compatibility, pricing and availability
information on more than 600,000 active product SKUs from over 1,000
manufacturers.
The Company is a party to a technology license agreement with its parent
company, Trilogy, which provides pcOrder with the ability to leverage Trilogy's
front-office and e-commerce software applications, including one of the
industry's leading configuration and pricing engines. The Company has extended
these applications to support the specific configuration and pricing rules of
the computer industry in order to help industry sales representatives and end
users quickly and accurately build custom-configured systems across multiple
vendors.
In addition to its development of software applications and content
databases, the Company has integrated its software with the systems of leading
industry suppliers for such functions as order placement, pricing, inventory
and order status queries, financing and credit approval. Through these
integrations, pcOrder's customers can establish or enhance electronic links
with their business partners. Furthermore, the Company provides software
integration, customization, training and Web hosting services designed to
ensure the successful deployment of its solutions.
The Company believes that its position as an independent third-party
provider, combined with its industry focus and experience, has enabled it to
build product functionality, content and supplier integrations that address the
diverse requirements of manufacturers, distributors, resellers, retailers,
other industry participants and end users, including corporate buyers and
consumers. Accordingly, the Company believes that it is able to offer more
cost-effective and rapid time-to-market solutions for e-commerce than the
proprietary development efforts of industry participants. To the extent that
the Company continues to develop and enhance its software applications, content
databases and supplier integrations, pcOrder believes that the incentive for
companies to outsource these e-commerce services to the Company will increase.
Strategy
The Company's objective is to be the leading e-commerce technology and
content provider to the computer industry. The key elements of the Company's
strategy are as follows:
. Leverage Internet technologies to provide communication capability and
support complex transactions across a range of computer industry
participants;
. Broaden adoption of the Company's e-commerce solutions through
relationships with computer industry market leaders;
. Extend the Company's position as an industry-leading source of product
information;
4
<PAGE>
. Leverage the Company's position as an independent third-party solutions
provider to achieve broad market adoption; and
. Expand software applications functionality to increase automation of the
sales, marketing, and channel management functions of the industry.
Relationship with Trilogy
The Company was established as a separate business unit within Trilogy, its
parent corporation, on July 1, 1993, and was incorporated under the laws of
Delaware on July 18, 1994. The Company believes Trilogy is a leading provider
of sales, marketing and business-to-business e-commerce applications. Trilogy's
software solutions are designed to integrate each function in a company's sales
and marketing operation, including pricing management, product management,
sales, commissions, promotions, contract management and channel management. In
addition, Trilogy's software solutions are designed to enable companies to
engage in e-commerce as well as improve channel management processes. The
Company has customized the technology it licenses from Trilogy to create
solutions targeted at the computer industry. In addition, pcOrder's solutions
provide customers with configuration logic that is used to configure systems,
and provide customers with pricing and availability information on over 600,000
product SKUs from over 1,000 manufacturers.
The Company has a non-exclusive, worldwide, royalty-bearing license to
certain of Trilogy's front office automation software. The Company and Trilogy
have entered into a Technology, Services and License Agreement, a Management
Services Agreement and a Tax Allocation Agreement (the "Inter-Company
Agreements") which define the ongoing relationship between the two companies.
The Company believes that Trilogy does not currently compete directly with the
Company. However, Trilogy may in the future compete directly or indirectly with
the Company. For a description of the terms of the Inter-Company Agreements,
see "Relationship with Trilogy".
Following this offering, Trilogy will own 12,757,000 shares of Class B Common
Stock of the Company, representing approximately 84.0% of the outstanding
Common Stock of the Company (approximately 82.3% if the Underwriters' over-
allotment option is exercised in full) and approximately 97.7% of the total
voting power of the Common Stock. Trilogy has informed the Company that it does
not intend to sell any of its shares in the near future. However, other than an
agreement not to sell any shares for 180 days after the date of this Prospectus
without the prior consent of Goldman, Sachs & Co., Trilogy is not contractually
restricted from selling such shares.
The Company's principal executive offices are located at 5000 Plaza on the
Lake, Austin, Texas 78746. Its telephone number at that location is (512) 684-
1100.
pcOrder(R), pcOrder.com(R), pcOrder Labs(TM), CommerceStation(TM), VIPER(TM),
Channel Assembly Module(TM), Web Storefront(TM), Sales Desktop(TM), Customer
Desktop(TM), TechBuyer(TM), TechBuyer Customer Desktop(TM) and "Moving the
Computer Industry to the Web"(TM) are registered and unregistered trademarks,
service marks and trade names of the Company. This Prospectus also contains
trademarks, service marks and trade names other than those identified in this
paragraph, all of which are the property of their respective holders.
Information contained in the Company's Web site does not constitute a part of
this Prospectus.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Class A Common Stock offered
by the Company.............. 2,200,000 shares
Common Stock to be
outstanding after this
offering:
Class A Common Stock........ 2,391,602 shares(1)
Class B Common Stock........ 12,757,000 shares
Total Common Stock.......... 15,148,602 shares(1)
Relative rights of Class A
Common Stock and Class B The Class A Common Stock and Class B Common
Common Stock................ Stock have substantially identical rights other
than with respect to voting, conversion and
transfer. Except as otherwise required by the
Company's Certificate of Incorporation or
applicable law, 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. Except as otherwise required by
the Company's Certificate of Incorporation or
applicable law, the Class A Common Stock and
Class B Common Stock will vote together as a
single class on all matters submitted to a vote
or for the consent of stockholders. As of the
date of this Prospectus, Trilogy holds all of
the Company's outstanding shares of Class B
Common Stock. Prior to a distribution described
in Section 355 of the Internal Revenue Code by
Trilogy of its shares of Class B Common Stock (a
"tax free spin-off"), the shares of Class B
Common Stock are convertible at any time at the
option of the holder into shares of Class A
Common Stock on a one-for-one basis. Prior to a
tax free spin-off, each outstanding share of
Class B Common Stock will automatically be
converted into one share of Class A Common Stock
upon any transfer of such share, 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. which acquires more than 50% of the then
outstanding Class B Common Stock in a single
transaction. Upon a transfer of more than 50% of
the then outstanding Class B Common Stock held
by Trilogy to a non-affiliate in a single
transaction, any remaining shares of Class B
Common Stock held by Trilogy, Trilogy, Inc. or
an affiliate of Trilogy, Inc., shall
automatically be converted into an equal number
of shares of Class A Common Stock. In addition,
subject to certain conditions, each outstanding
share of Class B Common Stock will automatically
be converted into one share of Class A Common
Stock upon the fifth anniversary of the first
transfer of Class B Common Stock in a tax free
spin-off. However, after the tax free spin-off
and prior to such fifth anniversary, shares of
Class B Common Stock will not be convertible
into shares of Class A Common Stock, with the
exception of any shares of Class B Common Stock
held by Trilogy, Trilogy, Inc. or an affiliate
of Trilogy, Inc., which shares shall
automatically convert into an equal number of
shares of Class A Common Stock upon the tax free
spin-off. See "Description of Capital Stock".
Controlling stockholders..... Prior to this offering Trilogy owns 12,757,000
shares of Class B Common Stock or 98.3% of the
total outstanding Common Stock, representing
approximately 99.8% of the total voting power of
the Common Stock. After this offering, Trilogy's
ownership of the Class B Common Stock will
represent approximately 84.0% of the total
outstanding Common Stock and approximately 97.7%
of the total voting power of the Common Stock.
See "Risk Factors--Control by and Relationship
with Trilogy", "--Risks Associated with
Dependence on Trilogy; Limited Independent
Operating History; Potential Conflicts of
Interest", "--Possible Future Sales of Common
Stock by Trilogy" and "Principal Stockholders".
Use of proceeds.............. For general corporate purposes, including
capital expenditures and working capital. See
"Use of Proceeds".
Proposed Nasdaq National
Market symbol............... "PCOR"
</TABLE>
- --------
(1) Based on the number of shares outstanding as of December 31, 1998. Excludes
(i) 3,207,074 shares of Class A Common Stock issuable upon the exercise of
outstanding stock options under the Company's 1996 Stock Option Plan (the
"1996 Option Plan") at a weighted average exercise price of $4.00 per share
and (ii) an additional 144,324 shares of Class A Common Stock reserved for
future grant under the 1996 Option Plan. Also excludes the right under the
terms of an applications subscription agreement to require the Company to
grant to a customer an option to purchase up to 320,000 shares of Class A
Common Stock if one of specified certain events occurs, including an
initial public offering. As of December 31, 1998, no specified event had
occurred and the option was not outstanding. See "Management--1996 Stock
Option Plan", "--Agreement Regarding Grant of Options" and Note 8 of Notes
to Financial Statements.
6
<PAGE>
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
Statement of Operations Data: -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Software and subscriptions...... $ -- $ 1,836 $ 3,633 $ 6,475 $ 12,651
Content and services............ 515 1,887 2,249 4,114 9,063
-------- -------- -------- -------- --------
Total revenues................ 515 3,723 5,882 10,589 21,714
-------- -------- -------- -------- --------
Cost of revenues:
Software and subscriptions...... 148 818 822 1,023 3,242
Content and services............ 390 953 1,112 2,553 7,068
-------- -------- -------- -------- --------
Total cost of revenues........ 538 1,771 1,934 3,576 10,310
-------- -------- -------- -------- --------
Gross profit (loss).............. (23) 1,952 3,948 7,013 11,404
Operating expenses:
Research and development........ 106 660 1,168 1,129 4,292
Selling and marketing........... 72 577 2,555 4,793 12,151
General and administrative...... -- 116 726 1,792 3,689
Amortization of deferred stock
and stock compensation expense. -- -- -- -- 1,468
-------- -------- -------- -------- --------
Total operating expenses...... 178 1,353 4,449 7,714 21,600
-------- -------- -------- -------- --------
Operating income (loss).......... (201) 599 (501) (701) (10,196)
Interest income.................. -- -- -- -- 172
-------- -------- -------- -------- --------
Income (loss) before income
taxes........................... (201) 599 (501) (701) (10,024)
Income tax provision
(benefit)(1).................... (68) 207 (191) 427 (386)
-------- -------- -------- -------- --------
Net income (loss)(1)............. $ (133) $ 392 $ (310) $ (1,128) $ (9,638)
======== ======== ======== ======== ========
Basic and diluted net income
(loss) per share(1)............. $ (0.10) $ 0.03 $ (0.02) $ (0.09) $ (0.75)
======== ======== ======== ======== ========
Weighted average shares
outstanding..................... 1,280 12,800 12,800 12,800 12,861
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------------
Actual As Adjusted(2)
------- --------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................... $ 4,726 $28,494
Working capital (deficit)(3)............................ (9,045) 14,972
Total assets............................................ 12,254 35,357
Stockholders' equity (deficit).......................... (8,545) 14,807
</TABLE>
- --------
(1) The unaudited pro forma income tax benefit, unaudited pro forma net loss
and unaudited pro forma basic and diluted net loss per share for the year
ended December 31, 1998 computed as if the Company filed a separate income
tax return is $292,000, $9,732,000 and $.76 per share, respectively.
(2) Adjusted to give effect to the receipt by the Company of the net proceeds
from the sale of the 2,200,000 shares of Class A Common Stock offered by
the Company hereby at an assumed initial public offering price of $12.00
per share. See "Use of Proceeds" and "Capitalization".
(3) Working capital (deficit) at December 31, 1998 includes the effect of
deferred revenue of $10,428,000.
Risk of Reliance on Recent Publicity
The November 30, 1998 issue of Forbes magazine contains an article regarding
the Company. The Forbes article included statements resulting directly or
indirectly from interviews with Ross Cooley and Christina Jones, the Company's
Chief Executive Officer and President, respectively, with representatives of
Forbes magazine. The statements in the Forbes article were not intended to be
relied upon by potential investors in making an investment decision to purchase
the Class A Common Stock offered hereby. Furthermore, the Company disclaims all
the information contained in the Forbes article for purposes of this offering,
and prospective investors should not rely on such information or any other
information not contained in this Prospectus in making an investment decision
to purchase the Class A Common Stock offered hereby. For a more detailed
discussion of the Forbes article, see "Risk Factors--Risk of Reliance on Recent
Publicity".
7
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
purchasers of the Class A Common Stock offered hereby should carefully
consider the following factors in evaluating the Company and its business.
This Prospectus contains certain forward-looking statements. These statements
involve risks and uncertainties, and actual results could differ materially
from the results discussed in the forward-looking statements as a result of
certain of the risk factors set forth below and for the reasons described
elsewhere in this Prospectus. All forward-looking statements and reasons why
results may differ included in this Prospectus are made as of the date hereof,
and the Company assumes no obligation to update any such forward-looking
statement or reasons why actual results might differ.
Limited Operating History; History of Losses and Anticipated Continuing
Operating Losses
The Company was established as a separate business unit within Trilogy on
July 1, 1993, was incorporated on July 18, 1994 and began to recognize revenue
in April 1994. A majority of the Company's significant customers entered into
their agreements with the Company only since the third quarter of 1997.
Accordingly, the Company has only a limited operating history upon which an
evaluation of the Company and its prospects can be based and is subject to all
of the risks inherent in the establishment of a new business enterprise. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such
as the markets addressed by the Company. To address these risks, the Company
must, among other things, manage its growth, significantly expand its sales
and marketing organization, successfully develop new products and product
enhancements, achieve market acceptance of its products and services and
respond to competitive developments. There can be no assurance that the
Company will be successful in addressing these risks, that the Company's past
revenue growth will continue in the future or that the Company will achieve
profitability in the future or, if achieved, that the Company will maintain
profitability on a quarterly or annual basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Except for a small operating profit in 1995, the Company has incurred annual
losses from operations since its inception on July 1, 1993, and the Company
expects to continue to incur losses from operations on both a quarterly and an
annual basis for the foreseeable future. At December 31, 1998, the Company had
an accumulated deficit of $11.0 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 and have higher revenue potential.
In order to implement this strategy, the Company intends to significantly
expand its sales and marketing organization, which will require substantial
financial, personnel and management expenditures. In the event that these or
other initiatives undertaken by the Company do not result in significantly
increased revenues, the Company's business, financial condition and results of
operations would be materially and adversely affected. The Company's business
is still in an emerging stage, and revenue and income potential from the
Company's business is unproven, making an evaluation of the Company and its
prospects difficult. There can be no assurance that the Company's revenues
will increase or even continue at their current levels or that the Company
will achieve or maintain profitability or generate cash from operations in
future periods. See "--Significant Fluctuations in Future Operating Results",
"--Risks Associated with Emerging Market for E-Commerce; Unproven Business
Model" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
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Significant Fluctuations in Future Operating Results
The Company's revenues and operating results have in the past fluctuated
significantly and are expected to fluctuate significantly in the future due to
a combination of factors, many of which are outside of the Company's control.
Factors that may materially and adversely affect the Company's future revenues
and operating results include, but are not limited to, the Company's ability
to significantly expand its sales and marketing organization, the Company's
ability to successfully develop new and enhanced products, the Company's
ability to manage its growth, the level of demand for the Company's products,
the timing and amount of license payments from the Company's customers, the
Company's ability to retain existing customers and increase sales to such
customers, the timing and volume of new orders and the Company's capacity to
fulfill such orders, the Company's ability to maintain or increase current
rates of sales productivity, the level of product and price competition, the
announcement or introduction of new or enhanced products and services by the
Company or its competitors, the Company's ability to upgrade and develop its
internal control systems, the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business and sales and
marketing infrastructure, downtime of the Company's systems or Internet
capacity or reliability problems, risks associated with the Company's
relationship with Trilogy, the Company's ability to attract and retain key
technical, sales and managerial personnel, the growth in the use and
acceptance of, and activity on, the Internet, World Wide Web ("Web") and
Internet-related technologies, particularly by corporate, institutional and
government users for the purchase of computer products, the extent to which
unauthorized access and use of online information is perceived as a threat to
network security, customer budgets, seasonal trends in customer purchasing and
general economic conditions. In response to competitive pressures or new
product introductions, the Company may take certain pricing or marketing
actions that could materially and adversely affect the Company's operating
results. In addition, the timing and amount of revenues associated with
particular sales can vary significantly based upon (i) the number of products
that are accessed and the number of authorized users, and (ii) whether the
fees are perpetual or subscription-based. The Company has in the past
recognized, and may in the future be required to recognize, a significant
portion of revenue derived from license agreements with its customers in a
single fiscal quarter, which can cause significant variations in quarterly
revenues. Moreover, small delays in customer orders can cause significant
variability in the Company's revenues and results of operations for any
particular period. As a result, the timing of significant orders and the
recognition of revenue from such orders is unpredictable. Unfavorable changes
in any of the above factors could materially and adversely affect the
Company's revenues, gross margins and results of operations.
As a result of the Company's limited operating history and the emerging
nature of the e-commerce market in which the Company competes, there can be no
assurance that the Company will be able to accurately forecast its revenues.
The Company's current and future expense levels are based primarily on its
operating plans and estimates of future revenues and are to a large extent
fixed costs. The Company may be unable to adjust spending in a timely manner
to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in revenues would likely have an immediate material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, the Company currently intends to significantly expand
its sales and marketing organization, which would result in a substantial
increase in operating expenses. To the extent such expenses are incurred prior
to or do not result in increased revenues, the Company's operating losses in a
given quarter may be significantly greater than expected. Based upon all of
the foregoing, the Company believes that its quarterly and annual revenues,
expenses and operating results are likely to vary significantly in the future,
that period-to-period comparisons of the Company's results of operations are
not necessarily meaningful and that such comparisons should not be relied upon
as indications of 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
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below market analysts' expectations in some future quarters, which could
materially and adversely affect the market price of the Class A Common Stock.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Unaudited Quarterly Results of
Operations".
Dependence on Significant Growth of Sales and Marketing Organization
The Company believes that its future profitability and success will depend
in large part on, among other things, its ability to maintain and expand its
relationships with computer product manufacturers, distributors, resellers,
retailers and other industry participants, and its ability to enter into new
relationships with such participants. To date, the Company has achieved only
limited penetration of its current customers. A key element of the Company's
strategy is to increase its penetration of existing customer accounts. In
order to implement this strategy, the Company intends to significantly expand
its sales and marketing organization. However, competition for sales and
marketing personnel is intense. Moreover, the recruitment and hiring of such
individuals is typically a time-consuming and expensive process. There can be
no assurance that the Company will be able to attract, assimilate and retain
qualified sales and marketing personnel on a timely basis in the future, or at
all. The Company's failure to do so would have a material adverse effect on
the Company's business, financial condition and results of operations.
Risks Associated with Emerging Market for E-Commerce; Unproven Business Model
The market for software products such as those offered by the Company is
still emerging, and there can be no assurance that it will continue to grow or
that, even if the market does grow, the Company's products will achieve market
acceptance among computer product manufacturers, distributors, resellers,
retailers, other industry participants and end users, including corporate
buyers and consumers. Historically, these entities have purchased computer
products and accessories and exchanged information regarding such products
primarily through traditional means of commerce and communications. The
Company has expended, and will continue to expend, significant resources
educating potential customers about the Company's products and their
capabilities and benefits. There can be no assurance that these expenditures
will enable the Company's products to achieve market acceptance. If the market
for the Company's products fails to grow or grows more slowly than the Company
anticipates, or if the Company's products fail to achieve significant market
acceptance, the Company's business, results of operation and financial
condition would be materially and adversely affected.
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
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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
In 1996, 1997 and 1998, the Company's top five customers accounted for 89%,
64% and 62%, respectively, 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. See "Business--Products".
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 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
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<PAGE>
in the event that the Internet provides these entities with greater efficiency
and an improved arena of commerce and communication. Demand for and market
acceptance of commerce on the Internet are subject to a high level of
uncertainty and are dependent on a number of factors, including the growth in
commercial access to and acceptance of new interactive technologies, the
development of technologies that facilitate interactive communication between
organizations and targeted audiences and increases in user bandwidth. If the
Internet as a commercial or business medium fails to develop or develops more
slowly than expected, the Company's business, results of operations and
financial condition would be materially adversely affected. The recent growth
in the use of the Internet has caused frequent periods of performance
degradation, requiring the upgrade of routers and switches, telecommunications
links and other components forming the infrastructure of the Internet by
Internet service providers and other organizations with links to the Internet.
Any perceived degradation in the performance of the Internet as a whole could
undermine the benefits of the Company's products. The Company's ability to
increase the speed with which it provides services to customers and to
increase the scope of such services ultimately is limited by and reliant upon
the speed and reliability of the networks operated by third parties.
Consequently, the emergence and growth of the market for the Company's
products is dependent on improvements being made to the entire Internet
infrastructure to alleviate overloading and congestion. No assurance can be
given that these improvements will be made or that, if made, they will be made
in a sufficiently timely and cost-effective manner so as to facilitate market
acceptance of the Company's products.
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. See "--Significant Fluctuations in Future
Operating Results".
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
12
<PAGE>
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. This information is used to support the
Company's software applications and the Company seeks to provide users with
timely access to current, comprehensive information on product specifications,
availability and pricing. Certain of the Company's contracts obligate it to
maintain data accuracy at prescribed levels. Maintaining the Company's
databases is a highly manual process and the Company utilizes a combination of
highly trained internal personnel and contract personnel provided by third-
party service organizations. Furthermore, the Company's computer systems and
databases must be sufficiently scalable to process large amounts of complex
product specification and configuration data without significant degradation
in performance. In the past the Company has experienced periodic difficulties
with data accuracy. For example, in the second quarter of 1998, database
capacity constraints limited the Company's ability to accept daily pricing and
availability updates from distributors, which resulted in a temporary
disruption in the Company's ability to provide this data to certain reseller
customers, and failures to renew and delays of contract renewals by certain of
such customers. Although these difficulties have not in the past materially
adversely 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
The Company is currently a subsidiary of Trilogy. Upon completion of this
offering, Trilogy will own 12,757,000 shares of Class B Common Stock
representing approximately 84.0% of the total outstanding Common Stock of the
Company (82.3% if the Underwriters' over-allotment option is exercised in
full), and approximately 97.7% of the total voting power of the Common Stock.
Following this offering, as a result of its ownership of Class B Common Stock,
Trilogy will have 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
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<PAGE>
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.
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. See "--Possible
Future Sales of Common Stock by Trilogy". The Company and Trilogy have entered
into various agreements intended to define the relationship between them. See
"Relationship with Trilogy".
Risks Associated with Dependence on Trilogy; Limited Independent Operating
History; Potential Conflicts of Interest
The Company is dependent upon Trilogy to provide certain key technology and
management functions to the Company. 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. See "Relationship with Trilogy". 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. See "Relationship with
Trilogy".
The Company has historically relied on Trilogy to provide certain human
resource, finance, recruiting, legal and other services. Upon completion of
this offering, Trilogy will have no obligation to provide assistance to the
Company except as described in "Relationship with Trilogy". The Company will
be required to develop and implement the operational, administrative and other
systems and infrastructure necessary to support its current and future
business. 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. See "--Control By and Relationship with Trilogy" and "--Management
of Growth".
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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 following this offering 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
described in "Relationship with Trilogy", nothing in the Company's agreements
with Trilogy prohibits Trilogy from competing directly with the Company or
being acquired by a third party, either of which could have a material adverse
effect on the Company's business, financial condition or results of
operations. 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. See
"Relationship with Trilogy".
Ownership interests of directors or officers of the Company in the common
stock of Trilogy or service as both a director or officer of the Company and
an officer or employee of Trilogy could create or appear to create potential
conflicts of interest when directors and officers are faced with decisions
that could have different implications for the Company and Trilogy. Joseph A.
Liemandt, a director of the Company, is the Chairman and Chief Executive
Officer and a substantial stockholder of Trilogy. 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, after completion of this offering,
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 (which, after completion of this
offering, would represent approximately 84.0% of the outstanding Common Stock
combined) 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. See "Description of Capital Stock". Sales or distribution by
Trilogy of substantial amounts of Common Stock in the public market or to its
stockholders, or the perception that such sales or distribution could occur,
could adversely affect the prevailing market prices for the 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) for a
period of 180 days after the date of this Prospectus
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without the prior written consent of Goldman, Sachs & Co. See "Underwriting".
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) following this offering. Moreover,
there can be no assurance that, in any transfer by Trilogy of a controlling
interest in the Company, any holders of 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 may be
transferred by Trilogy to any transferee of its shares of Class B Common Stock
(or shares of Class A Common Stock issuable upon the conversion of such Class
B Common Stock). See "Relationship with Trilogy".
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. See "Business--Facilities".
Risk of Reliance on Recent Publicity
The November 30, 1998 issue of Forbes magazine contained an article
regarding the Company (the "Forbes Article"). The Forbes Article included
statements resulting directly or indirectly from interviews with Ross Cooley
and Christina Jones, the Company's Chief Executive Officer and President,
respectively, by representatives of Forbes magazine. Such statements include
the following: (i) "Last year pcOrder lost $1.1 million on revenues of $10.6
million; this year revenues should double while losses continue;" (ii) "The
grand vision is to have every single computer bought using pcOrder
technology;" (iii) "The software is too slow, users complained. And it doesn't
let them send quotes via E-mail. Some pcOrder customers still prefer printed
catalogs from PC makers. Perhaps with good reason, since pcOrder has had
trouble with data reliability;" (iv) "Jones insists that the problem [with
data reliability] has been fixed;" (v) "[pcOrder is] celebrating a deal
reported to be worth $30 million or so that pcOrder.com, Inc. just closed with
Ingram Micro Inc., the world's largest computer distributor;" (vi) "Trilogy
Software, Inc....now an estimated $100 million-plus company;" (vii) "[S]ome
companies just won't jump on board. But even if [Jones] gets most big players,
[Jones will] be able to gather data about buying habits and trends and use the
information to forecast demand. Stuff worth a gold mine to PC makers and
distributors;" (viii) "pcOrder is hardly a guaranteed winner. While the major
PC-makers and distributors are on board, only 5,500 salespeople actually use
the software, approximately 45,000 remain to be convinced that ordering PCs
over the Web beats doing business over the phones and faxes;" and
(ix) "pcOrder recently spent several hundred thousand dollars on a direct-mail
marketing campaign
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that flopped." These statements were not intended to be relied upon by
potential investors in making an investment decision to purchase the Class A
Common Stock offered hereby. Furthermore, the Company disclaims all the
information contained in the Forbes Article for purposes of this offering, and
prospective investors should not rely on such information or any other
information not contained in this Prospectus in making an investment decision
to purchase the Class A Common Stock offered hereby. Forecasts relating to
market position, revenues, data reliability and market acceptance of the
Company and its products, especially given the rapidly evolving market for the
Company's products and services, are forward-looking statements that involve
numerous risks and uncertainties. The Company's actual results could differ
materially from those stated in such forward-looking statements as a result of
numerous factors, including those set forth in these "Risk Factors" and
elsewhere in this Prospectus.
Future Capital Needs; Uncertainty of Additional Financing
The Company requires substantial working capital to fund its business and
expects to use a significant portion of the net proceeds of this offering to
fund its expected continuing operating losses. The Company currently believes
that its existing capital resources, combined with the net proceeds of this
offering, will be sufficient to meet its presently anticipated cash
requirements for at least the next 12 months. Thereafter, the Company may be
required to raise additional funds; provided, however, no assurance can be
given that the Company will not 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.
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.
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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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview".
New Products and Technological Changes; Risks Associated with Transition to
New Technology Platform
The market for the Company's 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 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
18
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agreement with the Company. See "Management--Employment Agreements." 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 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. See
"Management".
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., SMART
Technologies, Inc., Open Market, Inc. and BroadVision, Inc. Furthermore, there
are a number of significantly larger companies with which the Company does not
currently compete that do not presently offer the same or similar e-commerce
solutions offered by the Company but that could with limited barriers to entry
compete directly with the Company in the future. In addition, except as
described in "Relationship with Trilogy", nothing in the Company's agreements
with Trilogy prohibits Trilogy from competing directly or indirectly with the
Company. The Company believes that the principal competitive factors for
companies seeking to provide e-commerce enabling solutions are price,
functionality, product performance, content, reliability and customer service.
Increased competition could result in price reductions, reduced margins and
loss of market share, any of which
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would materially and adversely affect the Company's business, operating
results and financial condition. Many of the Company's current and potential
competitors have significantly longer operating histories and significantly
greater financial, technical, marketing and other resources than the Company.
There can be no 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. See
"Business--Competition".
Uncertain Protection Of Intellectual Property
The Company's success depends in part on its ability to protect its
proprietary software and other intellectual property. To protect its
proprietary rights, the Company relies generally on copyright, trademark and
trade secret laws, confidentiality agreements with employees and third parties
and license agreements with consultants, vendors and customers, although the
Company has not signed such agreements in every case. Despite such
protections, a third party could, without authorization, copy or otherwise
obtain and use the Company's products or technology, or develop similar
technology. There can be no assurance that the Company's agreements with
employees, consultants and others who participate in product development
activities will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's software or trade secrets will not
otherwise become known or independently developed by competitors.
Many of the Company's current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a blocking patent has 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 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
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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. See "Business--Product Development".
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 material adverse effect on the Company's future international sales
and, consequently, on the Company's business, financial condition or results
of operations.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. This could result in system failures or miscalculations,
causing disruptions of operations including, among other things, a temporary
inability to process transactions, send invoices or engage in other normal
business activities. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" requirements. The Company 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
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("IT") systems (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 support 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 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Year 2000
Compliance".
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. To the extent any of 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
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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.
No Prior Market for the Common Stock; Possible Volatility of Share Price
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop upon completion of this offering or, if it does develop, that such
market will be sustained. The initial public offering price of the Common
Stock will be determined by negotiation between the Company and the
representatives of the Underwriters, and may not be representative of the
price that will prevail in the open market. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.
The market price of the Common Stock after this offering may be
significantly affected by factors such as the announcement of new products or
product enhancements by the Company or its competitors, technological
innovations by the Company or its competitors, quarterly variations in the
Company's results of operations, and general market conditions or market
conditions specific to particular industries. In particular, the stock prices
for many companies in the technology and emerging growth sector have
experienced wide fluctuations which have often been unrelated to the operating
results of such companies. Such fluctuations may adversely affect the market
price of the Common Stock. Furthermore, in the past, following periods of
volatility in the market price of a company's securities, securities class
action claims have been brought against the issuing company. There can be no
assurance that such litigation will not occur in the future with respect to
the Company. Such litigation could result in substantial costs and a diversion
of management's attention and resources, even if ultimately determined in
favor of the Company, and any adverse determination in such litigation could
also subject the Company to significant liabilities, any or all of which could
have a material adverse effect on the Company's business, operating results
and financial condition.
Shares Eligible for Future Sale; Registration Rights
Sales of substantial amounts of Class A Common Stock in the public market
after this offering (including by optional or automatic conversion of shares
of Class B Common Stock into Class A Common Stock), or the anticipation of
such sales, could have a material adverse effect on then-prevailing market
prices. Upon completion of the offering, the Company will have 2,422,945
shares of Class A Common Stock outstanding and 12,757,000 shares of Class B
Common Stock outstanding (assuming no exercise of the Underwriters' over-
allotment option and no exercise of currently outstanding options or
warrants). After this offering, Trilogy will beneficially own all of the
12,757,000 shares of Class B Common Stock, representing approximately 84.0% of
the outstanding Common Stock. Shares of Class B Common Stock are convertible
into Class A Common Stock on a share-for-share basis at the election of the
holder or automatically upon certain transfers thereof. The 2,200,000 shares
of Class A Common Stock sold in this offering (plus any additional shares sold
upon exercise of the Underwriters' over-allotment option) will be freely
transferable without restriction under the Securities Act of 1933, as amended
(the "Securities Act"), unless they are held by "affiliates" of the Company as
that term is used under the Securities Act and the regulations promulgated
thereunder ("Affiliates"). The remaining 222,945 shares of Class A Common
Stock and the 12,757,000 shares of Class A Common Stock issuable upon
conversion of the Class B Common Stock (including the shares of Class A Common
Stock issuable upon certain transfers of the Class B Common Stock or at the
option of the holder thereof) held by Trilogy are "restricted securities" as
that term is defined in Rule 144 of the Securities Act (the "Restricted
Shares"). Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule
144 or Rule 701 under the Securities Act. As a result of contractual
restrictions and the provisions of Rules 144 and 701, additional shares will
be available for sale in the public market as follows: (i) no Restricted
Shares will be eligible for immediate sale on the effective date of this
offering; (ii) approximately 76,970 Restricted Shares will
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be eligible for sale 90 days after the date of this offering; (iii)
approximately 77,975 Restricted Shares will be eligible for sale without
restriction and 25,000 Restricted Shares will be eligible for sale subject to
volume limitations, in each case 180 days after the effective date of this
offering upon the expiration of a contractual lock-up agreement with the
Company and the representatives of the Underwriters and (iv) and approximately
43,000 of the Restricted Shares will be eligible for sale from time to time
thereafter upon expiration of their respective holding periods under Rule 144.
In addition, the 12,757,000 shares of Class A Common Stock issuable upon
conversion of Class B Common Stock will be eligible for sale 180 days after
the date of this offering upon the expiration of contractual lock-up
agreements. The Company's officers and directors and Trilogy have agreed not
to sell any of their shares of Common Stock for 180 days after the date of
this Prospectus without the prior written consent of the representatives of
the Underwriters. Goldman, Sachs & Co., on behalf of the Underwriters, may, in
its sole discretion and at any time without notice, release all or any portion
of securities subject to the lock-up agreement with the Underwriters.
In general, under Rule 144 as currently in effect, beginning 90 days after
the offering, a person (or persons whose shares are aggregated) who owns
shares that were purchased from the Company (or any Affiliate) at least one
year previously, including any person who may be deemed an Affiliate of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
the Common Stock, or (ii) the average weekly trading volume of the Common
Stock on the Nasdaq National Market during the four calendar weeks preceding
the date on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. Any person (or persons whose
shares are aggregated) who is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who owns
Restricted Shares under Rule 144 that were purchased from the Company (or any
Affiliate) at least two years previously, would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers prior to the date the
issuer becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written
compensatory benefit plans or written contracts relating to the compensation
of such persons. In addition, the Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject
to the reporting requirements of the Exchange Act, along with the shares
acquired upon exercise of such options (including exercises after the date of
this Prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this Prospectus, may be sold (i) by
persons other than Affiliates, subject only to the manner of sale provisions
of Rule 144, and (ii) by Affiliates under Rule 144 without compliance with its
one-year holding period requirement.
The Company has agreed not to offer, sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or any rights to acquire Common Stock for a
period of 180 days after the date of this Prospectus, without the prior
written consent of the representatives of the Underwriters, subject to certain
limited exceptions. See "Underwriting".
Trilogy has the right in certain circumstances to require the Company to
register its shares of Class B Common Stock and the shares of Class A Common
Stock issuable upon conversion of such Class B Common Stock under the
Securities Act for resale to the public. These registration rights are subject
to certain conditions and limitations, among them the right of the
underwriters, if any, of an
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<PAGE>
offering to limit the number of shares included in such registration. If the
Company were required to include in a Company-initiated registration shares
held by Trilogy, such registration or sales of stock may have a material
adverse effect on the market price for the Company's Class A Common Stock and
on the Company's ability to raise new capital. In addition, the Company
intends to file a registration statement under the Securities Act covering
approximately 4,857,428 shares of Class A Common Stock reserved for issuance
under the Option Plans. See "Management--1996 Stock Option Plan" and
"Management--1999 Stock Incentive Plan". Such registration statement is
expected to be filed within 90 days after the date of this Prospectus and will
automatically become effective upon filing. Following such filing, shares
registered under such registration statement will, subject to the Lock-Up
Agreements, Rule 144 volume limitations applicable to Affiliates and the
lapsing of the Company's repurchase rights, be available for sale in the open
market upon the exercise of vested options 90 days after the effective date of
this Prospectus. At December 31, 1998, options to purchase 3,207,074 shares
were issued and outstanding under the 1996 Plan. See "Shares Eligible for
Future Sale".
Effect of Certain Charter Provisions; Anti-Takeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law
The Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), and Bylaws, as amended and restated ("Bylaws"), contain
certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals that a stockholder might consider favorable. These provisions
include the right of the holders of Class B Common Stock to eight votes per
share, versus one vote per share for the holders of Class A Common Stock, and
provide that stockholders may not call special meetings. In addition, upon
completion of this offering, the Company's Certificate of Incorporation will
authorize the Board of Directors to issue without stockholder approval "blank
check" preferred stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of
the holders of Common Stock of the Company. In addition, certain provisions of
Delaware law may also have the effect of discouraging, delaying or preventing
a change in control of the Company or unsolicited acquisition proposals. The
anti-takeover effect of these provisions may also have an adverse effect on
the public trading price of the Company's Class A Common Stock. See
"Management--Stock Plans", "Description of Capital Stock--Preferred Stock" and
"--Certain Anti-Takeover, Limited Liability and Indemnification Provisions;
Section 203 of the Delaware General Corporation Law".
Legal Proceedings
The Company is from time to time involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. In January 1999,
the Company filed an action for declaratory judgment 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 declared
invalid. On February 5, 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, requesting actual and punitive damages of not less
than $3.0 million as a result of the alleged failure of the Company to pay
certain commissions and make certain stock grants, among other matters. The
Company intends to contest the action vigorously and does not believe that
resolution of this action will have a material adverse effect on the Company's
financial condition. 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 business, results of operations or
financial condition. See "Business--Legal Proceedings".
25
<PAGE>
Immediate and Substantial Dilution
The initial public offering price is substantially higher than the book
value per share of all of the outstanding classes of Common Stock. As a
result, investors purchasing Class A Common Stock in this offering will incur
immediate and substantial dilution. To the extent outstanding options to
purchase Class A Common Stock are exercised, there will be further dilution to
such investors. See "Dilution" and "Shares Eligible for Future Sale".
Uncertainty as to Use of Proceeds
The principal purposes of this offering are to increase the Company's
working capital, to create a public market for the Company's Class A Common
Stock and to facilitate future access to public equity markets. The Company
currently has no specific plans for the use of the net proceeds from this
offering other than for general corporate purposes, including working capital
and capital expenditures. Accordingly, the Company's management will retain
broad discretion as to the allocation of a substantial portion of the net
proceeds from this offering. Pending any such uses, the Company plans to
invest the net proceeds in investment-grade, interest-bearing securities. See
"Use of Proceeds" and "Certain Transactions".
26
<PAGE>
USE OF PROCEEDS
Based on an assumed initial public offering price of $12.00 per share, the
net proceeds to the Company from the sale of the 2,200,000 shares of Class A
Common Stock to be sold by the Company hereby will be approximately
$23,352,000 (approximately $27,034,800 if the Underwriters exercise their
over-allotment option in full), after deduction of underwriting discounts and
commissions and estimated offering expenses payable by the Company.
The principal purposes of this offering are to increase the Company's
working capital, to create a public market for the Company's Class A Common
Stock, to facilitate future access by the Company to public equity markets,
and to provide increased visibility and credibility to the Company. The
Company presently has no specific plans for use of the net proceeds of this
offering. The Company intends to use the net proceeds primarily for general
corporate purposes, including working capital to fund anticipated operating
losses arising in part from substantial investment in expanding the Company's
sales and marketing organization, and capital expenditures. The Company may,
when and if the opportunity arises, use an unspecified portion of the net
proceeds to acquire or invest in complementary businesses, products and
technologies. The Company has no present understandings, commitments or
agreements with respect to any material acquisition of, or investment in,
third parties. The Company believes that its existing capital resources,
combined with the net proceeds of this offering, will be sufficient to meet
its presently anticipated cash requirements through at least the next 12
months. There can be no assurance that the Company will not be required to
raise additional financing prior to such time, that additional financing will
be available when needed or that, if available, such financing will be
available on terms favorable to the Company and its stockholders. Pending use
of the net proceeds for the above purposes, the Company intends to invest such
funds in interest- bearing, investment-grade securities. See "Risk Factors--
Future Capital Needs; Uncertainty of Additional Financing".
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends on its Class A Common
Stock or Class B Common Stock in the foreseeable future.
27
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1998, the cash position
and capitalization of the Company (i) on an actual basis, and (ii) on an as
adjusted basis to give effect to the sale by the Company of the 2,200,000
shares of Class A Common Stock offered by the Company hereby at an assumed
initial public offering price of $12.00 per share and the receipt by the
Company of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
December 31, 1998
--------------------
Actual As Adjusted
------- -----------
(in thousands,
except share
amounts)
<S> <C> <C>
Cash and cash equivalents................................. $ 4,726 $28,494
======= =======
Long-term obligations, less current portion............... $ -- $ --
Stockholders' equity (deficit):
Preferred Stock, $.01 par value per share; 10,000,000
shares authorized; no shares issued or outstanding
(actual and as adjusted)............................... -- --
Class A Common Stock, $.01 par value per share;
37,243,000 shares authorized; 191,602 shares issued and
outstanding (actual)(1); and 2,391,602 shares issued
and outstanding (as adjusted)(1)....................... 1 23
Class B Common Stock, $.01 par value per share;
12,757,000 authorized; 12,757,000 shares issued and
outstanding (actual and as adjusted)................... 128 128
Additional paid-in capital.............................. 4,024 27,354
Deferred stock compensation............................. (1,726) (1,726)
Accumulated deficit..................................... (10,972) (10,972)
------- -------
Total stockholders' equity (deficit).................. (8,545) 14,807
------- -------
Total capitalization.................................. $(8,545) $14,807
======= =======
</TABLE>
- --------
(1) Based on the number of shares outstanding as of December 31, 1998.
Excludes (i) 3,207,074 shares of Class A Common Stock issuable upon the
exercise of outstanding stock options under the Company's 1996 Stock
Option Plan (the "1996 Option Plan") at a weighted average exercise price
of $4.00 per share and (ii) an additional 144,324 shares of Class A Common
Stock reserved for future grant under the 1996 Option Plan. Also excludes
the right under the terms of an applications subscription agreement to
require the Company to grant to a customer an option to purchase up to
320,000 shares of Class A Common Stock if one of specified certain events
occurs, including an initial public offering. As of December 31, 1998, no
specified event had occurred and the option was not outstanding. See
"Management--1996 Stock Option Plan", "--Agreement Regarding Grant of
Options" and Note 8 of Notes to Financial Statements.
28
<PAGE>
DILUTION
At December 31, 1998, the net tangible book value of the Company was a
deficit of $9,210,000, or $0.71 per share of Common Stock. Net tangible book
value (deficit) per share represents the amount of total tangible assets of
the Company reduced by the amount of its total liabilities, divided by the
number of shares of Common Stock outstanding. After giving effect to the sale
by the Company of the 2,200,000 shares of Class A Common Stock offered by the
Company hereby at an assumed initial public offering price of $12.00 per share
and the receipt by the Company of the estimated net proceeds therefrom, the
pro forma net tangible book value of the Company as of December 31, 1998 would
have been $14,807,000, or $0.98 per share of Common Stock. This represents an
immediate increase in pro forma net tangible book value of $1.69 per share to
existing stockholders and an immediate dilution of $11.02 per share to new
investors purchasing shares of Class A Common Stock in this offering. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $12.00
Net tangible book deficit per share as of December 31, 1998... $(0.71)
Increase per share attributable to new investors.............. 1.69
------
As adjusted net tangible book value per share after this
offering....................................................... 0.98
------
Dilution per share to new investors............................. $11.02
======
</TABLE>
The following table sets forth, on an as adjusted basis as of December 31,
1998, with respect to existing stockholders and new investors in this
offering, a comparison of the number of shares of Common Stock acquired from
the Company, the percentage ownership of such shares, the total cash
consideration paid, the percentage of total cash consideration paid and the
average price per share paid assuming the sale by the Company of the 2,200,000
shares of Class A Common Stock offered by the Company hereby at an assumed
initial public offering price of $12.00 per share and the receipt by the
Company of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 12,948,602 85.5% $ 446,000 1.7% $ 0.03
New investors.................. 2,200,000 14.5 26,400,000 98.3 $12.00
---------- ----- ----------- -----
Total........................ 15,148,602 100.0% $26,846,000 100.0%
========== ===== =========== =====
</TABLE>
The preceding table assumes no exercise of any outstanding stock options. As
of December 31, 1998, there were options outstanding to purchase a total of
3,207,074 shares of Class A Common Stock at a weighted average exercise price
of $4.00 per share and 144,324 additional shares reserved for future grant.
Also excludes the right under the terms of an applications subscription
agreement to require the Company to grant to a customer an option to purchase
up to 320,000 shares of Class A Common Stock if one of specified certain
events occurs, including an initial public offering. As of December 31, 1998,
no specified event had occurred and the option was not outstanding. To the
extent outstanding options are exercised or shares reserved for future grant
are issued, there will be further dilution to new investors. See "Management--
1996 Stock Option Plan" and Note 8 of Notes to Financial Statements.
29
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and with the Financial Statements and Notes thereto which are
included elsewhere in this Prospectus. The statement of operations data for
the fiscal years ended December 31, 1996, 1997 and 1998 and the balance sheet
data at December 31, 1997 and 1998 are derived from the audited Financial
Statements included elsewhere in this Prospectus. The statement of operations
data for the years ended December 31, 1994 and 1995, and the balance sheet
data at December 31, 1994, 1995 and 1996 are derived from audited financial
statements not included in this Prospectus. Historical results are not
necessarily indicative of results in the future. See "Risk Factors--
Significant Fluctuations in Future Operating Results" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Software and subscriptions..... $ -- $ 1,836 $ 3,633 $ 6,475 $ 12,651
Content and services........... 515 1,887 2,249 4,114 9,063
-------- -------- -------- -------- --------
Total revenues................ 515 3,723 5,882 10,589 21,714
-------- -------- -------- -------- --------
Cost of revenues:
Software and subscriptions..... 148 818 822 1,023 3,242
Content and services........... 390 953 1,112 2,553 7,068
-------- -------- -------- -------- --------
Total cost of revenues........ 538 1,771 1,934 3,576 10,310
-------- -------- -------- -------- --------
Gross profit (loss)............. (23) 1,952 3,948 7,013 11,404
Operating expenses:
Research and development....... 106 660 1,168 1,129 4,292
Selling and marketing.......... 72 577 2,555 4,793 12,151
General and administrative..... -- 116 726 1,792 3,689
Amortization of deferred stock
and stock compensation
expense....................... -- -- -- -- 1,468
-------- -------- -------- -------- --------
Total operating expenses...... 178 1,353 4,449 7,714 21,600
-------- -------- -------- -------- --------
Operating income (loss)......... (201) 599 (501) (701) (10,196)
Interest income................. -- -- -- -- 172
-------- -------- -------- -------- --------
Income (loss) before income
taxes.......................... (201) 599 (501) (701) (10,024)
Income tax provision
(benefit)(1)................... (68) 207 (191) 427 (386)
-------- -------- -------- -------- --------
Net income (loss)(1)............ $ (133) $ 392 $ (310) $ (1,128) $ (9,638)
======== ======== ======== ======== ========
Basic and diluted net income
(loss) per share(1)............ $ (0.10) $ 0.03 $ (0.02) $ (0.09) $ (0.75)
======== ======== ======== ======== ========
Weighted average shares
outstanding.................... 1,280 12,800 12,800 12,800 12,861
======== ======== ======== ======== ========
<CAPTION>
December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents(2).... $ -- $ -- $ -- $ 2,207 $ 4,726
Working capital (deficit)(3).... (291) 255 (253) (1,489) (9,045)
Total assets.................... 1,088 1,492 3,435 4,978 12,254
Stockholders' equity (deficit).. (287) 442 132 (995) (8,545)
</TABLE>
- --------
(1) The unaudited pro forma income tax benefit, unaudited pro forma net loss
and unaudited pro forma basic and diluted net loss per share for the year
ended December 31, 1998 computed as if the Company filed a separate income
tax return is $292,000, $9,732,000 and $.76 per share, respectively.
(2) Prior to 1997, the Company relied on Trilogy for all of its cash
management requirements.
(3) Working capital (deficit) at December 31, 1996, 1997 and 1998 includes the
effect of deferred revenue of $2,162,000, $4,212,000 and $10,428,000,
respectively.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the more detailed information and the Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this Prospectus.
Overview
pcOrder is a leading provider of Internet-based e-commerce solutions that
are designed to enable the computer industry's suppliers, resellers and end
users to buy and sell computer products online. The Company leverages Internet
technologies to provide comprehensive e-commerce solutions designed to
increase sales and marketing productivity, meet end-user demand for online
ordering, reduce costs and shorten order fulfillment cycles for industry
participants. The Company's solutions include software applications that
automate product search, comparison, configuration, pricing, financing and
ordering, combined with what the Company believes is the industry's largest
content database consisting of detailed product, categorization,
compatibility, pricing and availability information.
The Company was established as a separate business unit within Trilogy on
July 1, 1993, and was incorporated on July 18, 1994. The Company began to
recognize revenue in April 1994, and has periodically released new products
and enhancements to its existing products since that date. In late 1996, Ross
A. Cooley joined the Company as Chairman and Chief Executive Officer and
brought significant computer industry experience and long-term relationships
with computer industry participants to the Company. Since that time, the
Company's e-commerce solutions for the computer industry have gained broader
acceptance, and have been adopted by market leaders including Compaq Computer
Corporation ("Compaq"), CompuCom Systems, Inc. ("CompuCom"), CompUSA Inc.
("CompUSA"), CMP Publications, Inc. ("CMP Publications"), GE Capital Corp.
("GE Capital"), Hewlett-Packard Company ("HP"), Ingram Micro, International
Business Machines Corporation ("IBM"), Kingston Technology Corporation
("Kingston"), Nortel Networks Inc. ("Nortel Networks"), MCI Systemhouse Corp.
("MCI Systemhouse"), MicroAge Integration Company, PC Wholesale, Pinacor, Inc.
("Pinacor") and Tech Data Corporation ("Tech Data"). In addition, over 500
resellers use the Company's solution. The Company's revenues have grown from
$5.9 million in 1996 to $21.7 million in 1998.
The Company derives 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. Prior to 1997, the
Company's software and subscription fees had been derived primarily from
perpetual licenses of the Company's products. In late 1996, the Company
commenced a transition of its pricing model to subscription-based
arrangements. Currently, the Company derives the majority of its software 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.
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
31
<PAGE>
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 maintenance period, which generally commences upon
initial content entry.
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
December 31, 1998 was $12.5 million. Approximately $10.4 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 subsequent
to December 31, 1999. The deferred revenue balance generally results from
contractual commitments made by customers to pay amounts to the Company in
advance of receipt of products or 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. Fluctuations in
deferred revenue result in similar fluctuations in the Company's cash flow
from operations.
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was
issued in October 1997 by the American Institute of Certified Public
Accountants ("AICPA") and amended by SOP 98-4, "Deferral of the Effective Date
of a Provision of SOP 97-2". The Company adopted SOP 97-2 and SOP 98-4
effective January 1, 1998. 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
final adoption of SOP 98-9 will have a material effect on the Company's
financial condition or results of operations.
Pursuant to an intercompany license agreement with Trilogy, the Company is
obligated to pay Trilogy royalties based on fees generated from perpetual
license agreements, software maintenance and subscription-based licenses.
Also, the Company has entered into certain agreements with Trilogy pursuant to
which Trilogy provides certain administrative and corporate support services
to the Company, including certain tax administration, payroll, payroll
accounting, banking, corporate finance, recruiting and employee training
services. In addition, the Company has entered into a tax allocation agreement
with Trilogy. See Notes 2 and 4 of Notes to Financial Statements.
Except for a small profit in 1995, the Company has incurred annual losses
from operations from its inception in July 1993 to date, and the Company
expects to continue to incur losses from operations on both a quarterly and an
annual basis for the foreseeable future. The Company had an accumulated
deficit of $11.0 million at December 31, 1998. Furthermore, the Company
intends to invest significantly in its sales and marketing organization,
programs and activities to increase sales of its products and services to its
existing customers and to new customers. However, historically the Company has
experienced a lengthy cycle for sales of its products to resellers and longer
sales cycles for sales of its products to manufacturers and distributors.
Consequently, even if the Company achieves increased sales of its products and
services as a result of its investments in its salesforce, such increases
likely will not be recognized in the quarter in which such investments are
made.
32
<PAGE>
Because the market for the Company's products has only recently emerged, and
based on other factors described in this Prospectus, the Company believes that
its quarterly and annual revenues, expenses and operating results are likely
to vary significantly in the future, that period-to-period comparisons of the
Company's results of operations are not necessarily meaningful and that such
comparisons should not be relied upon as indications of future performance.
Moreover, although the Company's revenues have increased in recent periods,
there can be no assurance that the Company's revenues will grow in future
periods, that they will grow at past rates or that the Company will achieve
profitability on a quarterly or annual basis in the future. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the early stage of development,
particularly companies in new and rapidly evolving markets. There can be no
assurance that the Company will be successful in addressing such risks and
difficulties or that the Company will achieve or sustain profitability in the
future.
Results of Operations
The following table sets forth the results of operations for the Company
expressed as a percentage of total revenues. The Company's historical
operating results are not necessarily indicative of the results for any future
period.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues:
Software and subscriptions.................................. 62% 61% 58%
Content and services........................................ 38 39 42
--- --- ---
Total revenues............................................ 100 100 100
--- --- ---
Cost of revenues:
Software and subscriptions................................... 14 10 15
Content and services........................................ 19 24 33
--- --- ---
Total cost of revenues.................................... 33 34 48
--- --- ---
Gross profit................................................. 67 66 52
Operating expenses:
Research and development.................................... 20 11 20
Selling and marketing....................................... 43 45 56
General and administrative.................................. 12 17 17
Amortization of deferred stock and stock compensation
expense.................................................... -- -- 6
--- --- ---
Total operating expenses.................................. 75 73 99
--- --- ---
Operating loss............................................... (8) (7) (47)
Interest income.............................................. -- -- 1
--- --- ---
Loss before income taxes..................................... (8) (7) (46)
Income tax provision (benefit)............................... (3) 4 (2)
--- --- ---
Net loss..................................................... (5)% (11)% (44)%
=== === ===
</TABLE>
33
<PAGE>
Comparison of 1997 and 1998
Revenues
Total revenues increased 105% from $10.6 million in 1997 to $21.7 million in
1998. The Company's top five customers in 1997 accounted for 64% of total
revenues during the year, and the Company's top five customers in 1998
accounted for 62% of total revenues during the year.
Software and Subscriptions. Software and subscription revenues increased 95%
from $6.5 million in 1997 to $12.7 million in 1998, representing 61% and 58%
of total revenues, respectively. The increase in absolute dollars was due
primarily to the addition of subscription-based and perpetual license
customers and increased subscription-based arrangements for additional
authorized users for existing customers. Software 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
$744,000 and $3.2 million in 1997 and 1998, respectively, representing 7% and
15% of total revenues, respectively. The increase in absolute dollars and as a
percentage of total revenues was due primarily to a perpetual license
agreement executed during 1998.
Content and Services. Content and service revenues increased 120% from $4.1
million in 1997 to $9.1 million in 1998, representing 39% and 42% 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
217% from $1.0 million during 1997 to $3.2 million during 1998, representing
16% and 26% of software and subscription revenues, respectively. The increase
in cost of software and subscription revenues in absolute dollars was due
primarily to (i) the increase in customer support headcount and the related
operating expenses and (ii) the increase in royalties paid to Trilogy on
software applications as a result of increased total revenues. The increase in
cost of software 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 177% from
$2.6 million in 1997 to $7.1 million in 1998, representing 62% and 78% 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) the increase in headcount within the
Company's content management group ("PC Labs") and the depreciation related to
additional computer equipment for PC Labs purchased during 1998 and (ii) the
increased personnel and other costs associated with providing software
integration, customization and training services to a greater number of
customers. Additionally, the increase in cost of content and service revenues
as a percentage of total revenues for 1998 was offset primarily by the
recognition of revenue under a fixed fee arrangement for which the majority of
the associated costs were expensed in the fourth quarter of 1997.
34
<PAGE>
Operating Expenses
Research and Development. Research and development expenses consist
primarily of personnel costs to support product development. Research and
development expenses increased 280% from $1.1 million in 1997 to $4.3 million
in 1998, representing 11% and 20% of total revenues, respectively. These
increases were due primarily to an increase in internal development personnel.
The Company believes that continued investment in research and development is
critical to attaining its strategic objectives and, as a result, expects
research and development costs in absolute dollars to increase significantly
in future periods.
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 154% from
$4.8 million in 1997 to $12.2 million in 1998, representing 45% and 56% of
total revenues, respectively. The increase in absolute dollars was due
primarily to an increase in personnel and the Company's increased marketing
campaign expenditures. The Company believes that such expenses will increase
in absolute dollars and as a percentage of revenues in future periods as it
expands its sales and marketing organization and activities.
General and Administrative. General and administrative expenses consist
primarily of personnel costs, recruiting and professional legal and accounting
services, as well as management fees paid to Trilogy. General and
administrative expenses increased 106% from $1.8 million in 1997 to $3.7
million in 1998, representing 17% of total revenues in both periods. The
increase in absolute dollars was due primarily to increased personnel and
facility expenses necessary to support the Company's growth. The Company
believes general and administrative expenses will increase in absolute dollars
as the Company expands its personnel and infrastructure to support its growth
and assumes the responsibilities of a public company.
Amortization of Deferred Stock and Stock Compensation Expense. In 1998, the
Company recorded total deferred stock compensation of $2.8 million in
connection with stock options granted during 1998. Such amount is being
amortized over the vesting periods of the applicable options, resulting in
amortization of $1.1 million for 1998. These amounts represent the difference
between the exercise price of certain stock option grants and the deemed fair
value of the Company's Common Stock at the time of such grants. Additionally,
the Company recorded approximately $383,000 in stock compensation expense
which represents the fair value of options granted to certain non-employees
during the year.
Income Taxes
The Company is included in the consolidated income tax return of Trilogy.
The Company has also entered into a tax sharing agreement with Trilogy. Should
Trilogy's ownership interest fall below 80% of the outstanding shares, the
Company will no longer be included in the consolidated group or subject to the
tax sharing agreement. See Note 2 of Notes to Financial Statements.
The Company's effective tax rate was 61.0% and (3.9)% for 1997 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. The pro forma income tax provision reflects the income
tax benefit for 1998 as if the Company had filed a separate income tax return.
Comparison of 1996 and 1997
Revenues
The Company's total revenues increased 80% from $5.9 million in 1996 to
$10.6 million in 1997. The Company's top five customers for 1996 accounted for
approximately 89% of total revenues in 1996, and the Company's top five
customers for 1997 accounted for 64% of total revenues in 1997.
Software and Subscriptions. Software and subscription revenues increased 78%
from $3.6 million in 1996 to $6.5 million in 1997, representing 62% and 61% of
total revenues, respectively.
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The increase in absolute dollars was due primarily to the increase in revenues
from subscription-based arrangements, partially offset by the decrease in
revenues from perpetual licenses, as customer demand shifted from perpetual
licenses to subscription-based arrangements. Software and subscription
revenues recognized under perpetual licenses were $2.0 million and $744,000 in
1996 and 1997, respectively, representing 33% and 7% of total revenues,
respectively. Revenues from subscription-based arrangements increased due
primarily to additional subscription- based customers.
Content and Services. Content and service revenues increased 83% from $2.2
million in 1996 to $4.1 million in 1997, representing 38% and 39% of total
revenues, respectively. The increase was due primarily to an increase in
content fees associated with new content customers and software integration,
customization and training services associated with an increase in the number
of software and subscription customers.
Cost of Revenues
Software and Subscriptions. Cost of software and subscription revenues
increased from $822,000 in 1996 to $1.0 million in 1997, representing 23% and
16% of software and subscription revenues, respectively. The decrease in cost
of software and subscription revenues as a percentage of such revenues was due
primarily to higher deployment costs incurred in 1996 as compared to 1997.
Content and Services. Cost of content and service revenues increased from
$1.1 million in 1996 to $2.6 million in 1997, representing 49% and 62% of
content and service revenues, respectively. The increase in cost of content
and service revenues in absolute dollars was due primarily to an increase in
personnel and other costs associated with providing these services to a
greater number of customers. Cost of content and service revenues increased as
a percentage of content and service revenues due primarily to an increase in
headcount in PC Labs and an increase in service personnel to handle the
Company's increased content and software customer base, and the incurrence of
costs associated with deployment of a fixed fee consulting arrangement in 1997
with the recognition of related revenues in 1998.
Operating Expenses
Research and Development. Research and development expenses decreased
marginally from $1.2 million in 1996 to $1.1 million in 1997, representing 20%
and 11% of total revenues, respectively. The decrease as a percentage of
revenues was due primarily to the completion of the development of certain of
the Company's products as such products became available for sale and
deployment in 1997. As a result, research and development expenses in absolute
dollars remained relatively flat from 1996 to 1997.
Selling and Marketing. Selling and marketing expenses increased 88% from
$2.6 million in 1996 to $4.8 million in 1997, representing 43% and 45% of
total revenues, respectively. The increase in absolute dollars was due
primarily to increases in personnel and expenditures relating to the Company's
sales and marketing organization and activities.
General and Administrative. General and administrative expenses increased
147% from $726,000 in 1996 to $1.8 million in 1997, representing 12% and 17%
of total revenues, respectively. The increase in absolute dollars and as a
percentage of total revenues was due primarily to increased personnel and
facility expenses necessary to support the Company's growth.
Income Taxes
The Company is included in the consolidated income tax return of Trilogy. An
income tax provision was recorded by the Company using an effective tax rate
of 38% and 61% for the years ended December 31, 1996 and 1997, respectively.
The increase in the effective rate for 1997 resulted from the establishment of
a valuation allowance to reduce the Company's net deferred tax assets to zero.
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<PAGE>
Unaudited Quarterly Results Of Operations
The following table sets forth certain unaudited quarterly statement of
operations data for the eight quarters ended December 31, 1998. In the opinion
of management, this information has been prepared substantially on the same
basis as the audited Financial Statements appearing elsewhere in this
Prospectus, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results of operations. The quarterly data should be
read in conjunction with the audited Financial Statements of the Company and
the Notes thereto appearing elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of the operating
results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Software and
subscriptions......... $1,259 $1,382 $1,717 $2,117 $2,397 $3,075 $ 3,264 $ 3,915
Content and services... 872 1,001 1,099 1,142 2,108 2,003 2,312 2,640
------ ------ ------ ------ ------ ------ ------- -------
Total revenues....... 2,131 2,383 2,816 3,259 4,505 5,078 5,576 6,555
------ ------ ------ ------ ------ ------ ------- -------
Cost of revenues:
Software and
subscriptions......... 182 194 232 415 580 634 983 1,045
Content and services... 389 586 740 838 946 1,417 1,780 2,925
------ ------ ------ ------ ------ ------ ------- -------
Total cost of
revenues............ 571 780 972 1,253 1,526 2,051 2,763 3,970
------ ------ ------ ------ ------ ------ ------- -------
Gross profit............ 1,560 1,603 1,844 2,006 2,979 3,027 2,813 2,585
Operating expenses:
Research and
development........... 283 221 320 305 810 975 1,148 1,359
Selling and marketing.. 988 1,183 1,270 1,352 1,553 2,170 4,601 3,827
General and
administrative........ 261 305 404 822 636 660 1,160 1,233
Amortization of
deferred stock and
stock compensation
expense............... -- -- -- -- -- 227 727 514
------ ------ ------ ------ ------ ------ ------- -------
Total operating
expenses............ 1,532 1,709 1,994 2,479 2,999 4,032 7,636 6,933
------ ------ ------ ------ ------ ------ ------- -------
Operating income
(loss)................. 28 (106) (150) (473) (20) (1,005) (4,823) (4,348)
Interest income......... -- -- -- -- 7 38 62 65
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) before
income taxes........... 28 (106) (150) (473) (13) (967) (4,761) (4,283)
Income tax provision
(benefit).............. (18) 65 93 287 -- -- (203) (183)
------ ------ ------ ------ ------ ------ ------- -------
Net income (loss)....... $ 46 $ (171) $ (243) $ (760) $ (13) $ (967) $(4,558) $(4,100)
====== ====== ====== ====== ====== ====== ======= =======
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of Total
Revenues:
Revenues:
Software and
subscriptions......... 59% 58% 61% 65% 53% 61% 59% 60%
Content and services... 41 42 39 35 47 39 41 40
------ ------ ------ ------ ------ ------ ------- -------
Total revenues....... 100 100 100 100 100 100 100 100
------ ------ ------ ------ ------ ------ ------- -------
Cost of revenues:
Software and
subscriptions......... 9 8 8 13 13 12 18 16
Content and services... 18 25 27 25 21 28 32 45
------ ------ ------ ------ ------ ------ ------- -------
Total cost of
revenues............ 27 33 35 38 34 40 50 61
------ ------ ------ ------ ------ ------ ------- -------
Gross profit............ 73 67 65 62 66 60 50 39
Operating expenses:
Research and
development........... 13 9 11 9 18 19 20 21
Selling and marketing.. 47 50 45 42 35 43 82 58
General and
administrative........ 12 12 15 25 14 13 21 19
Amortization of
deferred stock and
stock compensation
expense............... -- -- -- -- -- 5 13 7
------ ------ ------ ------ ------ ------ ------- -------
Total operating
expenses............ 72 71 71 76 67 80 136 105
------ ------ ------ ------ ------ ------ ------- -------
Operating income
(loss)................. 1 (4) (6) (14) (1) (20) (86) (66)
Interest income......... -- -- -- -- -- 1 1 1
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) before
income taxes........... 1 (4) (6) (14) (1) (19) (85) (65)
Income tax provision
(benefit).............. (1) 3 3 9 -- -- (3) (2)
------ ------ ------ ------ ------ ------ ------- -------
Net income (loss)....... 2% (7)% (9)% (23)% (1)% (19)% (82)% (63)%
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
The Company's total revenues and software and subscription revenues
increased quarter to quarter during each of the eight quarters ended December
31, 1998 due primarily to increasing market acceptance of the Company's
products, and increases in its installed base of customers. Content and
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<PAGE>
service revenues have generally increased quarter to quarter due primarily to
additional content fees, software integration, customization and training
services associated with an increase in the number of software applications
and content customers. Content and service revenues decreased as a percentage
of total revenues in the fourth quarter of 1997 and increased significantly in
absolute dollars and as a percentage of total revenues for the quarter ended
March 31, 1998 due primarily to the recognition of revenues from a significant
fixed fee arrangement in the quarter ended March 31, 1998 for which work began
in the quarter ended December 31, 1997. Cost of software and subscription
revenues increased in absolute dollars quarter to quarter with the increase in
software and subscription revenues. Cost of content and service revenues have
generally increased in absolute dollars and as a percentage of content and
service revenues quarter to quarter, with the exception of the quarter ended
March 31, 1998, due primarily to an increase in personnel and other costs
associated with providing these services to a greater number of customers. The
decrease in the quarter ended March 31, 1998, is due primarily to the fixed
fee arrangement discussed above.
Research and development expenses in absolute dollars and as a percentage of
total revenues were relatively constant through the four quarters ended
December 31, 1997. Commencing in the quarter ended March 31, 1998, research
and development expenses increased significantly in both absolute dollars and
as a percentage of revenues due to significant increases in research and
development personnel and related costs to fund development of new products,
data models and tools.
Selling and marketing expenses have increased in absolute dollars quarter to
quarter during each of the eight quarters ended December 31, 1998, reflecting
the increase in growth of the Company's sales and marketing organizations and
activities. Selling and marketing expenses increased in the third quarter of
1998 due primarily to increased marketing efforts focused on acquiring
regional resellers and corporate buyers, and remained relatively constant in
the fourth quarter of 1998.
With the exception of the quarter ended December 31, 1997, general and
administrative expenses generally increased quarter to quarter in absolute
dollars and remained relatively constant as a percentage of total revenues
through June 30, 1998. General and administrative expenses increased
significantly in the third and fourth quarters of 1998 due primarily to
increased personnel and facility expenses necessary to support the Company's
growth. The increase in the quarter ended December 31, 1997 was a result of an
increase in accrued management bonuses and allowance for bad debts.
Factors Affecting Operating Results
The Company's revenues and operating results have in the past fluctuated
significantly and are expected to fluctuate significantly in the future due to
a combination of factors, many of which are outside of the Company's control.
In addition, the timing and amount of revenues associated with particular
sales can vary significantly based upon (i) the number of products that are
accessed and the number of authorized users, and (ii) whether the fees are
perpetual or subscription-based. The Company has in the past recognized, and
may in the future be required to recognize, a significant portion of revenue
derived from license agreements with its customers in a single fiscal quarter,
which can cause significant variations in quarterly revenues. Moreover, small
delays in customer orders can cause significant variability in the Company's
total revenues and results of operations for any particular period. As a
result, the timing of significant orders and the recognition of revenue from
such orders is unpredictable. Unfavorable changes in any of the above factors
could materially and adversely affect the Company's revenues, gross margins
and results of operations in future periods.
As a result of the Company's limited operating history and the emerging
nature of the e-commerce market in which the Company competes, there can be no
assurance that the Company will be able to 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
38
<PAGE>
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall in
revenues would likely have an immediate material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Significant Fluctuation in Future Operating Results". Based upon all
of the foregoing, the Company believes that its quarterly and annual revenues,
expenses and operating results are likely to vary significantly in the future,
that period-to-period comparisons of the Company's results of operations are
not necessarily meaningful and that such comparisons should not be relied upon
as indications of future performance. Moreover, although the Company's
revenues have increased in recent periods, there can be no assurance that the
Company's revenues will grow in future periods, that they will grow at past
rates or that the Company will achieve profitability on a quarterly or annual
basis in the future. Due to the foregoing as well as other factors, it is
likely that the Company's operating results will be below market analysts'
expectations in some future quarters, which could materially and adversely
affect the market price of the Common Stock.
Historically, the Company has received a significant portion of its revenues
from a limited number of customer agreements. The Company believes that a
customer's decision to purchase its products or license its technology is
relatively discretionary and, especially for large-scale users, generally
involves a significant commitment of capital resources. Therefore, any
downturn in the economy or in the business of customers or potential customers
could have a material adverse effect on the Company's revenues and quarterly
results of operations. See "Risk Factors--Significant Fluctuations in Future
Operating Results".
Due to the foregoing factors, it is likely that in some future quarters the
Company's operating results will fall below the expectations of securities
analysts and investors, which would likely have a material adverse effect on
the trading price of the Common Stock.
Liquidity and Capital Resources
From inception through 1996, the Company financed its operations primarily
through advances from its parent, Trilogy. Since 1997, the Company has
primarily financed its operations from cash provided by operations. As of
December 31, 1998, the Company had $4.7 million of cash and cash equivalents.
As of December 31, 1998, the Company's principal commitments consisted of
obligations outstanding under operating leases. Although the Company has no
material commitments for capital expenditures, management anticipates a
substantial increase in its capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure and
personnel.
Cash used by operations was $647,000 in 1996, and cash provided by
operations was $3.1 million and $4.7 million in 1997 and 1998, respectively.
Cash used in operations in 1996 resulted primarily from a net loss of $310,000
and an increase in accounts receivable of $2.2 million, largely offset by
increases in deferred revenue of $1.1 million and accounts payable and accrued
expenses of $618,000. Net cash provided by operations of $3.1 million in 1997
resulted primarily from an increase in deferred revenue of $2.1 million and
other favorable working capital changes, offset by a net loss of $1.1 million.
Net cash provided by operations of $4.7 million for the year ended
December 31, 1998 was primarily attributable to an increase in deferred
revenue of $8.3 million, an increase in the payable to Trilogy of $4.2
million, largely offset by a net loss of $9.6 million, net of the amortization
of deferred stock and stock compensation expense of $1.5 million.
Net cash used in investing activities of $359,000, $662,000, and $2.6
million for 1996, 1997 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 their current facility and
software and computers for additional employees.
39
<PAGE>
Cash provided by financing activities of $1.0 million in 1996 and cash used
in financing activities of $254,000 in 1997 was primarily attributable to the
net increase and decrease, respectively, in amounts payable to Trilogy for
advances received or repaid. Cash provided by financing activities of $445,000
for 1998, was attributable to proceeds received from the exercise of stock
options.
Since its inception, the Company has significantly increased its operating
expenses. The Company currently anticipates that it will continue to
experience significant growth in its operating expenses for the foreseeable
future and that its operating expenses will be a material use of the Company's
cash resources. The Company believes that its existing capital resources,
combined with the net proceeds of this offering, will be sufficient to meet
its presently anticipated cash requirements through at least the next 12
months. There can be no assurance that the Company will not be required to
raise additional financing prior to such time, that additional financing will
be available when needed or that, if available, such financing will be
available on terms favorable to the Company and its stockholders.
Recently Issued Accounting Pronouncements
See Note 2 of Notes to Financial Statements for recently adopted and
recently issued accounting standards.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. This could result in system failures or miscalculations,
causing disruptions of operations including, among other things, a temporary
inability to process transactions, send invoices or engage in other normal
business activities. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" requirements. The Company 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 (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 support 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
40
<PAGE>
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 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. To the extent any of 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.
41
<PAGE>
BUSINESS
Industry Background
Growth of Internet Usage and E-Commerce
The Internet and Internet-related technologies are revolutionizing the way
businesses and consumers communicate, share information and conduct business.
As the number of Internet users and the sophistication of Internet-enabled
content and development tools have increased, the Internet's functionality has
expanded from a medium primarily for publishing information to enabling
complex business-to-business and business-to-consumer communications and
commerce. At the same time, businesses across many industries are faced with
increasing competitive pressures to lower costs, decrease inventories, and
improve sales and marketing productivity and time-to-market. To address these
challenges, businesses are increasingly replacing paper-based transactions
with e-commerce solutions that provide enhanced accuracy and secure exchange
of time-sensitive business information. Forrester Research, Inc. ("Forrester")
estimates that the business-to-business e-commerce market will grow from $43
billion in 1998 to $1.3 trillion by 2003, representing a compound annual
growth rate of over 98%. In addition, Forrester believes that computer
products (including wholesale and retail equipment, software, semiconductors
and manufacturing) is the largest and fastest growing segment, by revenue, in
business-to-business e-commerce. Moreover, the Company believes that the
computer industry is particularly well-suited to the use of Internet-enabled
e-commerce solutions due to: (i) the large size and fragmented nature of the
industry, (ii) the high costs of sales and distribution, (iii) the challenges
in managing the volume and complexity of product, pricing, and configuration
information resulting from a wide array of products, short product life cycles
and increased demand for custom configured solutions, and (iv) its propensity
to embrace technology for automating processes.
Need to Enhance Efficiencies in the Sales, Marketing and Distribution of
Computer Products
According to International Data Corporation ("IDC"), the North American
computer products market, including PCs, servers, workstations, related
storage devices, peripherals and data communications equipment totaled $129
billion in 1997 and is expected to reach $178 billion by 2002. Furthermore,
purchases of computer products often involve purchases of related software
applications.
As the market for computer products has developed, the diverse group of
industry participants has grown both in size and complexity. These
participants include (i) computer hardware, software, peripheral and component
manufacturers, (ii) distribution channel participants, including distributors,
resellers, systems integrators and retailers, and (iii) end users, including
both corporate buyers and consumers. The computer industry supply chain
consists of various sales and distribution models, including direct-to-the-
end-user and indirect 2-tier and 3-tier models. Industry participants
frequently employ hybrids of these models and multiple industry participants
are typically involved in the sale and fulfillment of a transaction. For
example, national resellers and integrators may buy directly from
manufacturers or indirectly through multiple distributors. In addition,
manufacturers may choose to configure and ship directly to end users for
orders placed through resellers or they may utilize their distributor and
reseller channel partners to configure and fulfill orders. Direct
manufacturers may contract with distributors, resellers and integrators in
order to provide multi-vendor fulfillment or local service and support. As a
result of these numerous interrelationships, the industry faces challenges in
the timely and accurate sharing of information about customers, products,
configuration, pricing, inventory and ordering.
42
<PAGE>
[Graphic depicting the flow of commerce from (i) manufacturers to direct end-
users, (ii) manufacturers to corporate resellers and retailers, and corporate
resellers and retailers to end-users, and (iii) manufacturers to distributors,
distributors to VARs, Integrators and retailers, and VARs, integrators and
retailers to end-users.]
The relative success of the direct-to-the-end-user and build-to-order models
has put additional pressure on computer industry participants to improve
information flows within the channel in order to improve time-to-market,
reduce costs and compete more effectively. Rapid technological change has
resulted in the continuing decline of component prices and shorter life cycles
of computer products. Such pressures have heightened the need for industry
participants to employ build-to-order and configure-to-order models in order
to reduce inventories, improve the ability to gauge and meet changing customer
demands and improve time-to-market by enabling just-in-time component
acquisitions.
The increasing complexity of computer product distribution and the increase
in customers' demands for time-efficient ordering processes has forced
industry participants to increase the productivity and responsiveness of their
salesforces. Additionally, the substantial pricing pressure throughout the
industry has required manufacturers and distributors to reduce operating costs
and improve the efficiency and effectiveness of their sales and marketing
investments. The wide array of products, short product life cycles and high
volume of new product introductions make it difficult for sales
representatives and end users to remain current with changing product and
compatibility information. These difficulties have underscored the need for
tools and a central repository of current product information in order to
increase productivity and accuracy of sales representatives and enable end
users to independently select, configure and order computer products.
Both business-to-business and business-to-consumer e-commerce transactions
can offer better access to critical information affecting the purchase
decision, including product compatibility and availability, demand/supply data
and detailed end-user preferences. However, because the sale of computer
products frequently involves multiple industry participants, industry-wide
standardization and acceptance is required in order to provide a comprehensive
e-commerce solution for the industry. Past efforts to accomplish this have
been largely proprietary, point-to-point solutions and have required
significant investments to develop and maintain the required IT
infrastructure, including software applications, content databases and
integrations with partners' systems. Additionally, many of these systems have
lacked the ability to scale to meet industry requirements. It has also been
difficult for these systems to achieve widespread adoption because competition
amongst industry participants makes it difficult to reach agreement on a
single standard. The Company believes that many participants seek the benefits
of a robust and scalable system, but have not been able to justify the
associated costs of building such a system independently.
43
<PAGE>
The pcOrder Opportunity
The Company believes there is a significant need for an independent,
industry-wide solution for enabling the computer industry's suppliers,
resellers and end users to buy and sell computer products online. The Company
leverages Internet technologies to provide a comprehensive e-commerce solution
designed to increase sales and marketing productivity, meet end-user demand
for online ordering, reduce costs and shorten order fulfillment cycles for
industry participants.
The pcOrder Solution
pcOrder is a leading provider of Internet-based e-commerce solutions that
are designed to enable the computer industry's suppliers, resellers and end
users to buy and sell computer products online. The Company's solutions are
designed to increase the efficiency and effectiveness of the sales, marketing
and distribution of computer products and enable members of the industry to
take advantage of increasing adoption of e-commerce. The Company believes that
it is uniquely positioned to deliver these solutions through its: (i) ability
to offer a broad set of advanced front-office and e-commerce software
applications, including configuration and pricing; (ii) position as a leading
content provider of computer product and compatibility information; and, (iii)
experience in delivering industry-specific functionality and integrations into
business systems of computer industry participants. To date, the Company's
e-commerce solutions have been adopted by industry leaders such as Compaq,
CompuCom, CompUSA, CMP Publications, GE Capital, HP, IBM, Ingram Micro,
Kingston, Nortel Networks, MCI Systemhouse, MicroAge Integration Company, PC
Wholesale, Pinacor and Tech Data, as part of their overall e-commerce
strategy.
The Company's e-commerce solutions include software applications that are
designed to increase the automation of product search, comparison,
configuration, pricing, financing and ordering, and leverage the Company's
content databases. The Company's content databases contain more than 600,000
product SKUs from over 1,000 manufacturers, which the Company believes is the
industry's largest aggregation of product content, including detailed product,
categorization, compatibility, pricing and availability information. The
Company believes that its position as an independent, industry-leading
provider of product information has enabled it to offer a more cost-effective
and robust product database to industry participants than internally developed
solutions.
The Company is a party to a technology license agreement with its parent
company, Trilogy, which provides pcOrder the ability to leverage Trilogy's
front-office and e-commerce software applications, including what the Company
believes is one of the industry's leading configuration and pricing engines.
The Company has extended these applications to support the specific
configuration and pricing rules of the computer industry in order to help
industry sales representatives and end-users quickly and accurately build and
order custom-configured solutions across multiple vendors.
In addition to its development of applications and content, the Company has
integrated its solution with the systems of leading industry suppliers for
such functions as order placement, pricing and inventory queries, order status
queries, financing and credit approval. pcOrder customers can use these
integrations to establish or enhance electronic links with their business
partners. Furthermore, the Company provides software integration,
customization, training and Web hosting services designed to ensure the
successful deployment of its solutions.
pcOrder's solutions are designed to provide its customers with the following
benefits:
Meet Customer Demand for Online Ordering. The Company believes that end
users are increasingly demanding the ability to customize and purchase
computer products and services online. The Company's solutions are designed to
provide its customers the ability to offer online product configuration,
pricing, selection and ordering capabilities. This provides end users with the
ability to order computer products and support services from a manufacturer
providing fulfillment through the
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channel, or from a reseller providing products through a distributor or
manufacturer, all in a manner transparent to end users.
Increase Effectiveness and Reduce Costs of Sales and Marketing Efforts. The
Company's offering provides customers with a robust solution that is designed
to enhance the productivity and effectiveness of sales and marketing efforts.
The Company believes that its solutions enable computer industry participants
to increase salesforce productivity by providing a centralized, comprehensive
source for product data, and, in turn, enabling sales representatives to
rapidly respond to customer needs with accurate and complete information
regarding product, compatibility, pricing and availability. The Company's
electronic configuration and ordering technology is also designed to reduce
costs by producing more accurate multi-vendor product configurations and
enable online ordering.
Reduce Inventory Costs by Facilitating Build-to-Order, Configure-to-Order
and Channel Assembly. Rapidly declining prices in the computer industry have
increased the importance of time-to-market. By providing direct communication
links and product data to computer industry participants, the Company believes
that its solutions enhance industry efforts to increase inventory turns
through the automation and coordination of configuration, pricing, selection
and ordering. The Company believes that this, in turn, enables the Company's
customers to expand their build-to-order and channel assembly efforts,
decreasing the risk of product obsolescence and improving the industry's
ability to meet individual end-user demand. The Company further believes that
reducing order fulfillment cycles offers customers the opportunity to achieve
higher average selling prices and margins by enabling the sale and delivery of
commodity-based products earlier in their product life cycles.
Reduce Costs, Risks, and Time-to-Market of Establishing E-Commerce
Capabilities. The Company's position as an independent third-party solutions
provider, combined with its industry focus and experience, has enabled it to
build product functionality, content and supplier integrations that are
designed to support the diverse requirements of manufacturers, distributors,
resellers, retailers and other industry participants. Accordingly, the Company
believes that it is able to offer a more cost-effective and rapid time-to-
market solution for conducting e-commerce than internally developed solutions.
To the extent the Company continues to develop and enhance its applications,
content and supplier integrations, the Company believes that the incentives
will increase for companies to outsource these e-commerce services to the
Company.
Improve Industry Coordination by Increasing Accuracy, Availability and
Timeliness of Information. The Company's applications and content databases
are designed to enable multi-vendor search, comparison, configuration,
pricing, financing, ordering and reseller selection. The Company believes that
because of its status as an independent third-party provider of standardized
product information and applications, industry participants are more willing
to use pcOrder's applications and contribute product information to the
Company's databases. As more industry participants adopt pcOrder's
applications and content, the Company believes that its customers will derive
greater benefit from the increased opportunity to engage in business
electronically with more participants.
Strategy
The Company's objective is to be the leading e-commerce technology and
content provider to the computer industry. The Company's strategy to achieve
this objective includes the following key elements:
Leverage Internet Technology. pcOrder leverages Internet technology to
provide communication capability and support complex transactions across a
range of computer industry participants, regardless of participants' legacy
computing environments. Unlike traditional proprietary solutions focusing on
point-to-point solutions with narrowly defined functionality, Internet
technology
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enables the Company to electronically link computer industry participants,
including manufacturers, distributors, resellers, retailers, other industry
participants and end users, including corporate buyers and consumers, with the
objective of enhancing sales and marketing efficiency and effectiveness,
reducing costs, shortening the product fulfillment cycle and improving time-
to-market.
Broaden Adoption Through Relationships with Computer Industry Market
Leaders. The Company aggressively pursues relationships with leading computer
industry manufacturers, distributors, resellers, retailers and other industry
participants in order to increase adoption of its solutions. To date, the
Company has established relationships with GE Capital, Compaq, CompuCom,
CompUSA, HP, IBM, Ingram Micro, Kingston, Nortel Networks, MCI Systemhouse,
MicroAge, PC Wholesale, Pinacor and Tech Data. The Company's objective is to
cooperate with its customers through direct and indirect marketing initiatives
to broaden adoption of the Company's solutions by resellers and end users.
Extend Position as an Industry Leading Source of Product Information. The
Company has built and maintains content databases containing more than 600,000
product SKUs from over 1,000 manufacturers and seeks to add to or modify its
product information on an ongoing basis. The Company seeks to extend its
position as an industry leading product information source by continually
broadening and deepening its product data.
Leverage Position as Independent Third-Party Solutions Provider. The Company
plans to continue to leverage its position as an independent third-party
solutions provider in order to offer broad solutions to its customers. The
Company believes that its ability to offer standardized e-commerce solutions
to the computer industry creates the opportunity to gain economies of scale by
leveraging the Company's investment in content, technology and functionality
across a wide range of customers. The Company believes that this will enable
it to offer robust solutions more cost-effectively than individual industry
participants, making its e-commerce solutions increasingly attractive to
industry participants. The Company further believes that its position as an
independent third-party solutions provider may allow it to act as a
significant aggregator of sales order transaction and market demand data for
the computer industry.
Expand Application Functionality to Increase Automation of Additional Sales,
Marketing and Channel Management Functions. The Company intends to continue to
invest in the development of additional applications and services to meet the
e-commerce needs of the computer industry. The Company plans to execute this
strategy by working closely with its customers to understand and address their
needs and by further automating the critical processes in the sales, marketing
and distribution of computer products. In addition, the Company intends to
enhance its products with additional functionality, such as the Company's
lease financing product developed in conjunction with GE Capital. The Company
believes that by leveraging the knowledge gained from its relationships with a
broad range of industry participants, it is well-positioned to define and add
new functionality to its solutions. The Company further believes that by
helping to make its customers more competitive, it will become an increasingly
important part of its customers' businesses and participate in a higher
percentage of its customers' commerce volume.
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<PAGE>
Customers
pcOrder has established a customer base of manufacturers, distributors,
resellers, integrators, retailers and other industry participants. During
1998, MicroAge, Nortel Networks and HP each represented more than 10% of total
revenues. The customers set forth in the table below represent 88% of total
revenues in 1998.
<TABLE>
<CAPTION>
Resellers, Integrators &
Suppliers Distributors Retailers Financing Companies
--------- ------------ ------------------------ -------------------
<S> <C> <C> <C>
Compaq Ingram Micro CompuCom GE Capital (Vendor
Hewlett- PC Wholesale CompUSA Financial Services)
Packard
Company
IBM Pinacor GE Capital IT Solutions
Kingston Tech Data MCI Systemhouse
Nortel MicroAge Integration Company
Networks
</TABLE>
In partnership with its major customers, the Company has deployed its
solutions to over 500 small and medium resellers. The Company's suite of
products and services are designed to automate and enhance its customers'
sales, marketing and inventory management capabilities.
pcOrder Platform
pcOrder provides an integrated platform consisting of application, content
databases, industry integrations and related services that leverages Internet
and Internet-related technologies. The Company's solutions are designed to
meet the specific needs of each industry segment, including manufacturers,
distributors, resellers, integrators, retailers, other industry participants
and end users, including corporate buyers and consumers.
[Graphic depicting the Company's platform consisting of applications, content
and integrations. Applications are shown as applications Sales Desktop, Web
Storefront, Customer Desktop, Commerce-Station. Subcategories of these
applications are catalog, configuration, pricing, order, referral, finance and
promotion. Content database is shown as integrations and reseller,
distributor, manufacturer and finance company.]
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<PAGE>
Software Applications. The Company offers a suite of software applications
that are designed to increase the automation of sales, marketing and
distribution functions. Revenues from the licensing of, and subscriptions to,
software applications accounted for approximately 61.2% and 58.3% of the
Company's total revenues during 1997 and 1998, respectively. The Company's
software applications are modular in nature, enabling customers to purchase
and add specific functionality as needed. The Company's applications are built
upon various combinations of the following core modules:
Catalog. The Catalog Module is designed to enable users to easily search,
browse, compare, and view product datasheets from the Company's content
databases. For example, users can perform searches such as "show all laptop
computers with hard drives larger than 1 gigabyte."
Configuration. The Configuration Module is designed to enable users to more
efficiently configure valid systems. Users request desired features through
a needs analysis interface, which then interacts with Trilogy's
configuration engine to select components. This interface shields the user
from technical details of the components while preventing invalid
configurations.
Pricing. The Pricing Module is designed to allow users to access customized
pricing information. Utilizing Trilogy's SC Pricer engine, the Company has
developed a multi-tiered, channel-specific pricing module. For example,
end-user prices can be quoted as a function of the reseller's cost from the
distributor, thus providing seamless, dynamic pricing through the channel.
Order. The Order Module is designed to enable online ordering and order
confirmation. Manufacturers, distributors and resellers can access pricing
and availability information from multiple legacy systems and provide such
real-time information to their potential customers. Links between the
Company's offering and the customer's ordering system takes the form of EDI
transactions, direct API calls to the ordering system or direct database
integration.
Referral. The Referral Module is designed to enable industry participants
to refer customers to resellers based on location or other characteristics.
In addition, the Referral Module delivers, processes, and tracks referrals
in order to connect end users with the appropriate channel partners. This
allows manufacturers to work constructively with their resellers with the
obligation of ensuring that customer needs are met.
Finance. The Finance Module is designed to allow users to quote lease
rates, electronically submit credit applications and maintain lease data,
as well as customize finance settings, select from multiple financing
options and specify optional financing terms.
Promotion. The Promotion Module is designed to provide the capability to
deliver and manage targeted promotions across multiple tiers in the
channel. The Promotion Module is designed to dynamically suggest
alternative or add-on products at the point of sale. For example, the
Program Module is designed to allow a component vendor to coordinate with a
reseller to offer the reseller's online customers pre-packaged alternatives
at the point of sale, in order to maximize reseller margins and dispose of
the vendor's excess inventory.
These modules may be accessed either through the Company's packaged software
applications or through customer-specific, custom developed applications.
The Company's software applications are specifically designed to meet the
needs of each industry segment, and may be integrated into customers' legacy
transaction and decision-support systems, thus preserving customers'
technology investments. The table below sets forth descriptions of the
Company's software applications and certain of the key benefits of such
products.
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<PAGE>
<TABLE>
<CAPTION>
Software Applications Target Market Segment Description Benefits
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CommerceStation Manufacturers . Accepts customer orders on Enables
a website and facilitates manufacturers to
electronic transfer of display product,
orders to the appropriate pricing and
channel partner for availability
fulfillment. information and to
. Provides reseller-specific accept orders
pricing. directly from end
. Provides channel partners users that are
with requests for product fulfilled through
information, referrals or existing channel
leads. partners.
- ----------------------------------------------------------------------------------------------------
Web Storefront Distributors, . Accepts orders directly Enables Web-based
Resellers from customers via a Web sales, marketing
site. and ordering for
. Provides end users with distributors and
direct access to product resellers.
catalog, configuration,
pricing and availability
information.
. Provides promotion
capability through delivery
of targeted marketing
messages.
- ----------------------------------------------------------------------------------------------------
Sales Desktop Distributors, . Sales productivity tool Designed to help
Resellers, for sales representatives. distributors,
Integrators, . Provides instant access to resellers,
Retailers information on over 600,000 integrators and
product SKUs from over retailers to
1,000 manufacturers. increase sales
. Automates quote and order force productivity
generation. and order accuracy.
- ----------------------------------------------------------------------------------------------------
Customer Desktop Manufacturers, . Procurement management Designed to help
Resellers and software including support suppliers to
Integrators for custom catalogs, enhance customer
(indirect to end-users) contract pricing and loyalty by
purchase order approval providing
routing. electronic link
. Creates Internet-based between end-users'
link directly to suppliers' procurement
Web Storefront. processes and
suppliers' Web
Storefronts.
- ----------------------------------------------------------------------------------------------------
VIP Program Manufacturers . Provides manufacturer Designed to help
(VIPER) information, such as manufacturers to
product images and detailed enhance their
product specifications to presence at the
the Sales Desktop point of sale by
application. providing timely
. Enables manufacturers to information to end-
enter and maintain their users and channel
own product information partner
within the Company's representatives.
database.
- ----------------------------------------------------------------------------------------------------
Channel Assembly Module Manufacturers, . Delivers channel assembly Supplies
Distributors product, pricing, manufacturers and
configuration and other distributors with
business rules to channel timely and accurate
partners at the point of information to help
sale. increase efficiency
and flexibility of
supply chain.
- ----------------------------------------------------------------------------------------------------
Configuration & Distributors . Provides validation of Enables
Validation multi-vendor systems within distributors and
the on-line quoting and resellers to
ordering systems of provide private
distributors. label and custom
configured systems.
</TABLE>
Content. The Company's industry content databases contain product
information on more than 600,000 product SKUs from over 1,000 manufacturers.
These databases provide the user access to current product information,
including compatibility, necessary to consummate a sale. Revenues from content
fees accounted for approximately 22.6% and 15.4% of the Company's total
revenues during
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<PAGE>
1997 and 1998, respectively. The Company receives updates and additions of
product data on a regular basis from manufacturers, distributors, and
resellers, and supplements the data in three ways:
Categorization/Classification. The Company's categorization and
classification processes are designed to create and populate standardized
product groupings across the industry and enable convenient access to a
broad array of products from multiple suppliers. For example, an end-user
can specify all monitors of a certain size and pick from a list of monitors
made by several manufacturers and/or available from multiple suppliers.
Data and logic modeling. The Company's data and logic modeling processes
are designed to enable accurate multi-vendor configuration. For example,
the Company's systems specify that a particular computer accepts SDRAM but
not EDO RAM, thereby helping the user to order the correct upgrade package.
The Company continually develops and enhances its Computer Industry Model
(CIM), a repository of much of the modeling and expertise that enables the
Company's applications to configure multi-vendor computer systems.
Data sheet creation. The Company creates data sheets designed to give
customers detailed product data in a standardized format, thus enabling
attribute-based searching and side-by-side comparisons of functionality
differences between two or more products. For example, a user deciding
between two otherwise identical laptop computers would be able to see that
one comes with a fax modem and more RAM, but the other is lighter and
smaller.
The Company has developed a detailed process for receiving, processing, and
verifying the accuracy of the content in its databases. In addition, the
Company has invested in creating advanced tools to enable pcLabs, the
Company's content management unit, to enter, maintain, and test component
data. pcLabs has developed and currently maintains extensive product and
pricing information on over 600,000 product SKUs from over 1,000
manufacturers. The Company receives electronic updates from many of its
manufacturers, distributors and reseller customers on a daily basis. After a
normalization process which assigns supplier codes and a master product SKU
number, the information is imported into the Company's databases. pcLabs
places each product SKU into the appropriate class and category, and then
performs extensive secondary research for content modeling and data sheet
creation. pcOrder maintains a staff of configuration modelers whose function
is to research new systems and components to determine the rules that govern
how they can be configured. The modelers convert this information into a
programming language with a configuration-specific syntax, which is then used
to update the CIM. For example, a laptop requires over 90 technical
specifications and allows for up to 40 marketing attributes. Throughout the
content creation process, the information undergoes rigorous quality assurance
testing. In order to manage data quality, the Company has implemented a
comprehensive Data Quality process which involves an automated regression test
and analysis of over 34,000 validation test cases. See "Risk Factors--Risks
Associated with Maintaining Databases".
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<PAGE>
[Graphic depicting flow of electronic pricing information (SKU) through
normalization, classification, quality assurance, regression testing to
production.]
Integrations. The Company has completed mission-critical integrations to
the systems of leading industry suppliers for such functions as order
placement, pricing and inventory queries, order status queries, financing
and credit approval. These integrations can be leveraged by pcOrder
customers that wish to establish or enhance electronic links with their
business partners. For example, a manufacturer can quote pricing and
inventory available through its channel partners on its Web site, and then
transfer the order to a channel partner for delivery. Alternatively, a
reseller can access information about its suppliers, inventories in
addition to its own, and then display the combined total to its customers
through its Web Storefront.
Services. In order to provide a comprehensive platform, the Company offers a
range of services to speed integration and adoption of the Company's solutions
at the customer site. Revenues from services accounted for approximately 16.2%
and 26.3% of the Company's total revenues during 1997 and 1998, respectively.
Software Integration, Customization and Training. Several of the
Company's solutions, particularly higher-end installations, require a
significant amount of professional services. These services may include
the development of interfaces for integration with the customer's legacy
systems, the customization of the Company's software to meet the specific
needs and situation of the customer, or the training of the customer's
employees in the operation of the software application. The Company
provides all of these services through a dedicated consulting and
training force. Customers typically pay for consulting and training
services on a time-and-materials basis.
Web Hosting. While some of the Company's customers host their Web sites
internally, a substantial number of customers utilize the Company's
hosting services. The Company maintains a Web hosting facility including
multiple servers and connectivity through dedicated T-1 lines from its
Austin location. The Company may in the future outsource its hosting
services to a third party.
Sales and Marketing
The Company sells and markets its software applications, content and
services primarily through its sales and marketing organization.
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<PAGE>
Sales. The Company's sales force consists of technical presale consultants,
account developers, field sales representatives and telemarketers. The Company
deploys sales teams consisting of both sales and technical professionals to
provide customized proposals, presentations and demonstrations to potential
customers. The primary decision makers in the Company's customers'
organizations typically include members of such customers' management
executives such as the chief executive officer, the chief financial officer,
vice presidents of marketing, vice presidents of sales and chief information
officers.
Marketing. The Company's marketing efforts are directed at establishing a
market leadership position and, therefore, the Company is investing heavily in
an expansion of its marketing organization and activities. Targeted at
executives in the computer industry, pcOrder's marketing programs are focused
on creating awareness and generating interest in the pcOrder solution. The
Company engages in a variety of co-marketing activities with certain of its
key customers designed to leverage and strengthen the Company's relationship
with its customers. The Company is an active participant in industry
conferences and expositions. It has sponsored several industry conferences in
the past, and believes that exposure of this nature has contributed to the
Company's visibility within the computer industry. The Company's marketing
personnel engage in a variety of marketing activities, including managing and
maintaining the pcOrder Web site, issuing newsletters, making direct mailings,
placing advertisements, conducting public relations and establishing and
maintaining close relationships with industry analysts.
Client Services
The Company implements its customer support, software integration,
customization and training services primarily through its client services
organization. The organization's goal is to ensure successful and rapid
deployment and high levels of customer satisfaction by facilitating open
communications to quickly identify, analyze and solve problems. The Company's
participation in the customer's implementation may include planning and
requirements definition, project management, custom integration, unit and
system tests and support procedures design. The Company believes that
providing a high level of customer service and technical support is necessary
to achieve timely product implementation. The Company provides ongoing product
support services to its customers in the form of telephone, e-mail and Web-
based support, documentation and software updates and error corrections. All
product updates are available to customers for downloading from the Company's
Web site. A team of dedicated engineers provides product, technical and
product registration support from 7:00 a.m. to 7:00 p.m., Central time, on
business days, from the Company's support offices. The Company also makes
training available to its customers.
Technology
The Company's solutions are based on open industry standards and are
designed to be fully modular and extensible. The architecture is designed to
allow new modules to be added to the backbone, and replaced when newer
versions become available. The Company's software applications and content
databases are made available through both thin client (Web browser/HTML) and
Win32 client-server interfaces. Both interfaces access the same application
layer, which provides functionality such as configuration, pricing, product
information data sheets, financing and online ordering.
The Company's software applications have been implemented through the use of
industry standard technologies, including HTTP/HTML, C++, COM/DCOM, CORBA,
Windows NT and ODBC. The Company believes this implementation provides timely
systems integration, ease of implementation, broad connectivity and the
ability to leverage technological advancements.
The Company has a non-exclusive, worldwide, royalty-bearing license to use,
make, reproduce and prepare derivative works of certain of Trilogy's front
office automation software. See "Relationship with Trilogy". The Company
customizes application modules licensed to it by Trilogy for the specific
52
<PAGE>
needs and situations of its customers. Examples of this customization include
industry-specific configuration and pricing modules. The Company creates its
own application modules that specifically address the functionality needs of
computer industry participants. An example of one of these modules is
CommerceStation, a computer industry-specific application that allows
manufacturers to accept orders directly from end users and fulfill them
through existing channel partners.
Research and Development
The Company's research and development efforts include software application
development and customization, data modeling and tools development. The
Company's software application development teams are dedicated to identifying
and developing software solutions to meet the unique needs of computer
industry participants. This includes both the development of original software
applications as well as customizing Trilogy's applications. The Company's
database content research and development efforts are primarily focused on the
development of data models and tools that enhance the Company's content
management and maintenance capabilities.
Research and development expenses were $1.1 million and $4.3 million in 1997
and 1998, respectively. The Company intends to continue to make substantial
investments in research and development and related activities to maintain and
enhance its product lines. The Company believes that its future success will
depend in large part on its ability to support current and future releases of
software applications, to maintain and extend its content databases and to
timely develop new products that achieve market acceptance. Any failure by the
Company to do so would have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors--New
Products and Technological Changes; Risks Associated with Transition to New
Technology Platform".
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., SMART
Technologies, Inc., Open Market, Inc. and BroadVision, Inc. Furthermore, there
are a number of significantly larger companies with which the Company does not
currently compete that do not presently offer the same or similar e-commerce
solutions offered by the Company but that could with limited barriers to entry
compete directly with the Company in the future. In addition, except as
described in "Relationship with Trilogy", nothing in the Company's agreements
with Trilogy prohibits Trilogy from competing directly or indirectly with the
Company. The Company believes that the principal competitive factors for
companies seeking to provide e-commerce enabling solutions are price,
functionality, product performance, content, reliability and customer service.
The Company believes its e-commerce solution differs from approaches taken by
its competitors primarily because of the content database the Company
provides. Increased competition could result in price reductions, reduced
margins and loss of market share, any of which would materially and adversely
affect the Company's business, operating results and financial condition. Many
of the Company's current and potential competitors have significantly longer
operating histories and significantly greater financial, technical, marketing
and other resources than the Company.
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<PAGE>
Employees
As of December 31, 1998, the Company had 194 full-time employees, including
48 in sales and marketing, 26 in research and development, 41 in content
management, 29 in customer support, 27 in professional services and 23 in
administration. In addition, the Company also employed 44 part-time and
contract employees in content management and client support. All of these
employees are located in the United States. The Company believes that its
future success is dependent on attracting and retaining highly skilled
engineering, sales and marketing, and senior management personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will continue to be able to attract and retain qualified employees. The
Company's employees are not represented by any collective bargaining unit. The
Company has never experienced a work stoppage and considers its relations with
its employees to be good.
Facilities
The Company's principal facility occupies an aggregate of approximately
22,000 square feet in Austin, Texas, pursuant to leases that expire in March
1999, December 1999 and March 2003, respectively, and pcOrder believes that
its existing principal facility is adequate for its current requirements. The
Company further believes that additional space can be obtained to meet its
future growth requirements.
Legal Proceedings
The Company is from time to time involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. In January 1999,
the Company filed an action for declaratory judgment 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 declared
invalid. On February 5, 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 at 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 the alleged failure of the Company to pay certain
commissions and make certain stock grants, among other matters. The Company
intends to contest the action vigorously and does not believe that resolution
of this action will have a material adverse effect on the Company's financial
condition. 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 business, results of operations or financial
condition. See "Risk Factors--Legal Proceedings".
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<PAGE>
RELATIONSHIP WITH TRILOGY
The Company was established as a separate business unit within Trilogy on
July 1, 1993, and was incorporated on July 18, 1994. As of December 31, 1998,
Trilogy owned 98.5% of the outstanding shares of Common Stock of the Company.
Mr. Liemandt, a director of the Company, is Chairman and Chief Executive
Officer and a substantial stockholder of Trilogy. Upon completion of this
offering, Trilogy will beneficially own approximately 84.0% of the outstanding
shares of Common Stock (82.3% if the Underwriters' over-allotment option is
exercised in full) and approximately 97.7% of the total voting power of the
Common Stock. For as long as Trilogy continues to beneficially own more than
50% of the outstanding shares of the Company's Common Stock, Trilogy will be
able to direct the election of all of the members of the Company's Board of
Directors and exercise a controlling influence over the business and affairs
of the Company, including any determinations with respect to mergers or other
business combinations involving the Company, the acquisition or disposition of
assets by the Company, the incurrence of indebtedness by the Company, the
issuance of any additional Common Stock or other equity securities of the
Company, and the payment of dividends with respect to the Common Stock.
Similarly, Trilogy will have the power to determine matters submitted to a
vote of the Company's stockholders without the consent of the Company's other
stockholders, will have the power to prevent a change in control of the
Company and could take other actions that might be favorable to Trilogy. See
"Risk Factors-- Control By and Relationship with Trilogy".
Trilogy has advised the Company that its current intent is to continue to
hold all of the Common Stock beneficially owned by it following this offering.
However, Trilogy is not subject to any contractual obligation to retain its
controlling interest, except that Trilogy has agreed not to sell or otherwise
dispose of any shares of Common Stock of the Company for a period of 180 days
after the date of this Prospectus without the prior written consent of
Goldman, Sachs & Co. See "Underwriting". As a result, there can be no
assurance concerning the period of time during which Trilogy will maintain its
beneficial ownership of Common Stock owned by it following this offering. Any
disposition by Trilogy of any of the shares of Common Stock it owns following
this offering may be effected in one or more transactions, including a public
offering, a distribution by Trilogy of such Common Stock to its stockholders,
an offer by Trilogy to exchange such Common Stock for outstanding Trilogy
common stock, or other transaction. Beneficial ownership of at least 80% of
the total voting power of the Company and 80% of each class of nonvoting
capital stock of the Company is required in order for Trilogy to be able to
effect a tax free spin off of the shares of Common Stock or certain other tax
free transactions. See "Risk Factors--Risks Associated with Dependence on
Trilogy; Limited Independent Operating History; Potential Conflicts of
Interest" and "Risk Factors--Possible Future Sales of Common Stock by
Trilogy".
In June 1996, the Company and Trilogy entered into certain agreements for
the purpose of clarifying the ongoing relationship with between the two
companies. Because these agreements were entered into at a time when the
Company was a wholly-owned subsidiary of Trilogy, they may not be the result
of arms'-length negotiations between the parties. In August 1996, the Company
and Trilogy entered into an Asset Transfer Agreement, as amended in August
1998 (the "Asset Transfer Agreement"), pursuant to which Trilogy transferred
the assets and liabilities of its pcOrder.com division to the Company. In
exchange for the transferred assets, the Company issued to Trilogy 900 shares
of the Company's common stock, $0.01 par value per share, establishing the
Company as a wholly-owned subsidiary of Trilogy (such shares were subsequently
split into 11,520,000 shares of Common Stock). Pursuant to the Asset Transfer
Agreement, the parties made customary representations and warranties regarding
their businesses and operations, and each agreed to indemnify the other in the
event of any damages arising from the other's breach of any such
representation or warranty. In addition, Trilogy agreed not to engage in,
directly or indirectly, any business directly in competition with the Company
for a period of three years after the effective date of the Asset Transfer
Agreement. Further, during such three year period, Trilogy also agreed not to
hire or recruit any person who was,
55
<PAGE>
at the effective date of the Asset Transfer Agreement or within the 12 month
period preceding such effective date, an employee of the pcOrder.com division
of Trilogy. Trilogy has the right, and to the extent Trilogy transfers the
shares held by it, transferees of these shares will have the right, on no more
than five occasions after this offering, to require the Company to register
the shares of Common Stock held by it within 180 days of such request. In
addition, Trilogy has the right under certain circumstances, including the
filing of the registration statement to which this Prospectus is a part, to
require the Company to include shares held by Trilogy in a registration
statement registering other shares of Common Stock of the Company. These
registration rights are subject to certain conditions and limitations,
including a right of the Company not to effect a requested registration under
certain conditions. The Company has agreed to indemnify Trilogy and any
transferees of the shares of Common Stock currently held by Trilogy against,
and provide contribution with respect to, certain liabilities under the
Securities Act in connection with such registration. Trilogy's registration
rights expire eight years after the effective date of the Asset Transfer
Agreement. Trilogy has waived its right to include any of its shares in this
offering.
The Technology, Services and License Agreement, the Management Services
Agreement and the Tax Allocation Agreement described below, have each been
filed as exhibits to the Registration Statement of which this Prospectus forms
a part and such summaries are qualified in their entirety by this reference to
the full text of such agreements. Because the Company was greater than a 95%
subsidiary of Trilogy at the time these agreements were entered into, they may
not be the result of arms'-length negotiations between the parties.
Technology, Services and License Agreement
In September 1998, the Company and Trilogy entered into a Technology,
Services and License Agreement (the "Technology Agreement"), which amended and
superseded a Master Software License Agreement and a Reseller Agreement
previously entered into by the parties, pursuant to which Trilogy has licensed
certain intellectual property rights to the Company, and the Company has
agreed to license certain intellectual property rights to Trilogy. Each party
has granted the other access to, and a nonexclusive, irrevocable, perpetual,
worldwide, license to internally use, make, reproduce and/or prepare
derivative works of the products of the other party as of September 1, 1998,
in the form as of that date, and any updates, changes to, and new releases of
those products, subject to the happening of a Trigger Event (as defined below)
(as applicable, the "Trilogy Intellectual Property" or the "pcOrder
Intellectual Property"), or to sublicense any third party to do so, subject to
certain confidentiality and other restrictions. Trilogy also granted the
Company a nonexclusive, irrevocable, perpetual, worldwide right and license
under the Trilogy Intellectual Property to make, use, reproduce, prepare
derivative works based upon, license, offer to license, import, export,
publish, distribute, perform, display, advertise, market, promote, service and
or support those of pcOrder's products that are network based e-commerce
products for enabling sales, purchasing, marketing or distribution within the
computer products market ("Computer E-Commerce Products"), and to sublicense
any third party to do so, subject to the payment of royalties as described
below. The Company also granted Trilogy a nonexclusive, irrevocable,
perpetual, worldwide right and license to use pcOrder Intellectual Property to
make, use reproduce, prepare derivative works based upon, license, export,
publish, distribute, perform, display, advertise, market, promote, service and
support Trilogy Products (as defined in the Technology Agreement) and to
sublicense any third party to do so, subject to the payment of royalties
described below. However, following a change in control of Trilogy or such
time as Trilogy is no longer required by generally accepted accounting
principles to be consolidated with pcOrder for financial reporting purposes
(in either case, a "Trigger Event"), Trilogy shall not, until the later of
September 1, 2008 or the expiration of five years following such Trigger
Event, have any license to the pcOrder Intellectual Property with respect to
any Computer E-Commerce Product that utilizes pcOrder's product content or
certain tools developed by pcOrder. Following a Trigger Event, any Trilogy
license to pcOrder Intellectual Property, which license was granted pursuant
to the terms of the Technology
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<PAGE>
Agreement prior to the happening of such Trigger Event, shall continue
indefinitely, subject to continued royalty payments. Pursuant to the
Technology Agreement, neither party is restricted from entering into or having
similar agreements with third parties or doing any activity relating to
competitive products and services (involving none of the other party's
information or intellectual property). Following a Trigger Event, pcOrder's
access to Trilogy products and its right to receive updates, changes and new
releases of Trilogy Intellectual Property shall continue until the later to
occur of five years after a Trigger Event or September 1, 2008.
Notwithstanding the foregoing, to the extent that any of the Trilogy
Intellectual Property (including Trilogy products based on such intellectual
property) is not of a same, similar, replacement or equivalent general type as
Trilogy Intellectual Property available prior to a Trigger Event, pcOrder will
not have rights to such Trilogy Intellectual Property. The Technology
Agreement further provides that where at least one employee and/or contractor
of the Company in conjunction with at least one employee and/or contractor of
Trilogy cooperate toward jointly creating, inventing or discovering new
material qualifying for either patent or copyright protection, the parties
shall negotiate in good faith on a project-by-project basis to determine to
what extent such newly developed material should be jointly owned. In the
event of joint ownership, the parties shall have an equal, undivided interest
in such patent, copyright or other intellectual property. The Company and
Trilogy are each obligated to pay to the other monthly royalties based on a
percentage of license fees derived from sales of products that incorporate,
and/or data maintenance services related to, the other party's technology; of
software maintenance fees other than data maintenance services in connection
with products that incorporate the other party's technology; and of on-line
subscription service fees from products that incorporate the other party's
technology. The Technology Agreement provides that each party will defend,
indemnify and hold harmless the other party for any claim against such other
party by any third party to the extent based on an actual or alleged: (i)
failure by a party to perform its obligations under the Technology Agreement;
(ii) breach of any one or more of a party's representations or warranties;
(iii) failure by a party to comply with government laws and regulations;
(iv) intentional or grossly negligent acts or omissions on the part of a
party, and (v) to the extent a party delivers Material (as defined in the
Technology Agreement) to the other party, (1) failure by the delivering party
to either own or have sufficient rights to deliver such Material to the other
party, (2) failure by a party to either own or have sufficient rights to grant
to the other party the license it has granted under the Technology Agreement,
(3) infringement (or violation) by such delivered Material of a third party's
intellectual property rights, or (4) failure to be Year 2000 compliant. Such
indemnification obligations are subject to the condition that the indemnified
party: (a) promptly provides notice of any claim to the indemnifying party;
(b) allows the indemnifying party to control the defense of the claim and
settlement negotiations; and (c) fully cooperates with the indemnifying party
in such defense and settlement negotiations. The Technology Agreement provides
that upon either party's request, the parties shall negotiate in good faith
regarding the terms and conditions upon which either party will perform
consulting services reasonably requested by the other party; provided,
however, that such obligation shall expire on the later of seven years
following a Trigger Event or September 1, 2010. The Technology, Services and
License Agreement has a perpetual term, unless terminated earlier by either
party upon 31 days prior notice of an uncured breach by the other party,
subject to extension for special circumstances, or the bankruptcy of either of
the parties.
Management Services Agreement
The Company and Trilogy entered into a Management Services Agreement,
effective as of July 1, 1998, which amended and superseded a Services
Agreement previously entered into by the parties, pursuant to which Trilogy
will provide certain administrative and corporate support services to the
Company. Trilogy has agreed to provide to the Company certain services
("Mandatory Services") including tax administration, payroll, payroll
accounting, banking, corporate finance, recruiting and employee training
services to the Company. In addition, Trilogy has agreed to provide the
Company certain additional services ("Optional Services"), including hardware
purchasing, shipping and
57
<PAGE>
receiving, purchase order database administration, network administration,
audit services, human resources administration, legal services and customer
training. The provision of Mandatory Services may not be unilaterally
terminated by either party during the effectiveness of the Management Services
Agreement. The provision of Optional Services may be terminated by either
party upon 90 days notice. The Management Services Agreement provides that
Trilogy will use the same level of care in rendering services to the Company
that Trilogy uses in rendering services to itself or any of its other
subsidiaries, which will be at least equal to the care, that Trilogy has used
in the past in rendering such services to the Company. However, the selection
of personnel to perform the various services will be within the sole control
of Trilogy. Specifically, Trilogy may, without the consent or approval of the
Company, subcontract any service to be provided under the Management Services
Agreement. The Management Services Agreement terminates on June 30, 1999, and
thereafter is subject to successive one-year renewal terms upon consent of the
parties. The Management Services Agreement may be terminated: (i) by either
party within 30 days of an uncured material breach by the other party; (ii) by
either party upon the liquidation or dissolution of the other party; (iii) by
Trilogy immediately upon notice to the Company if the Company fails to pay the
amount due to Trilogy under such agreement by the tenth day after notice of
nonpayment is given; or (iv) within 30 days of the date at which Trilogy
ceases to own a majority of the Company's Common Stock.
Tax Allocation Agreement
The Company is currently, and, as long as Trilogy beneficially owns at least
80% of the total voting power and value of the Company's outstanding Common
Stock, will continue to be, included in Trilogy's consolidated federal income
tax group, and the Company's federal income tax liability will be included in
the consolidated federal income tax liability of Trilogy. The Company and
Trilogy have entered into a Tax Allocation Agreement pursuant to which the
Company and Trilogy will make payments between them such that, with respect to
any period, the amount of taxes to be paid or received by the Company, subject
to certain adjustments, will be determined as though the Company were to file
separate federal, state and local income tax returns (including, except as
provided below, any amounts determined to be due as a result of a
redetermination of the tax liability of Trilogy arising from an auditor or
otherwise) rather than as a consolidated subsidiary of Trilogy with respect to
federal, state and local income taxes. Under the terms of the Tax Allocation
Agreement, the Company, in computing its stand alone tax liability or tax
refund, will be able to utilize certain tax items, such as net operating
losses, foreign tax credits and other tax credits (collectively, "Tax
Attributes"). In addition, with respect to Tax Attributes of the Company that
come into existence after the execution of the Tax Allocation Agreement, and
under the terms of the Tax Allocation Agreement, Trilogy will be required to
make any payment to the Company as such Tax Attributes of the Company are
utilized by the Trilogy consolidated federal income tax group. Pursuant to the
Tax Allocation Agreement, Trilogy's obligation to make any payment to the
Company relating to the Company's Tax Attributes will apply only to tax
periods during which the Company (or its affiliated subsidiaries) is a member
of Trilogy consolidated federal income tax group.
Trilogy will continue to have all the rights of a parent of a consolidated
group (and similar rights provided for by applicable state and local law with
respect to a parent of a combined, consolidated or unitary group), will be the
sole and exclusive agent for the Company in any and all matters relating to
the income, franchise and similar liabilities of the Company, will have sole
and exclusive responsibility for the preparation and filing of consolidated
federal and consolidated or combined state and local income tax returns (or
amended returns), and will have the power, in its sole discretion, to contest
or compromise any asserted tax adjustment or deficiency and to file, litigate
or compromise any claim for refund on behalf of the Company. In addition,
Trilogy has agreed to undertake to provide the aforementioned services with
respect to the Company's separate state and local returns and the Company's
foreign returns.
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<PAGE>
The Tax Allocation Agreement will remain in effect until the expiration of
any open years for which pcOrder has filed as a member of the Trilogy
consolidated group. In general, the Company will be included in Trilogy's
consolidated group for federal income tax purposes for so long as Trilogy
beneficially owns at least 80% of the total voting power and value of the
outstanding Common Stock. Each member of a consolidated group is jointly and
severally liable for the federal income tax liability of each other member of
the consolidated group. Accordingly, although the Tax Allocation Agreement
allocates tax liabilities between the Company and Trilogy, during the period
in which the Company is included in Trilogy's consolidated group, the Company
could be liable in the event that any federal tax liability is incurred, but
not discharged, by any other member of Trilogy's consolidated group. Pursuant
to the Tax Allocation Agreement, however, Trilogy is obligated to indemnify
the Company for any tax liabilities, including any liability resulting from a
distribution of the Company's stock to Trilogy's stockholders provided that it
has paid its allocated share of such liabilities to Trilogy.
59
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information concerning the executive
officers and directors of the Company as of September 1, 1998.
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Ross A. Cooley.................. 57 Chairman and Chief Executive Officer
Christina C. Jones.............. 29 President and Chief Operating Officer
James J. Luttenbacher........... 43 Vice President, Chief Financial Officer and
Secretary
Joseph A. Liemandt (2).......... 30 Director
Peter J. Barris (1)(2).......... 46 Director
Linwood A. Lacy, Jr. (1)........ 52 Director
Robert W. Stearns (1)........... 47 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Each director holds office until the next annual meeting of stockholders and
until his successor is elected and qualified or until his earlier resignation
or removal. Each officer serves at the discretion of the Board of Directors
(the "Board"). There are no family relationships among the directors or
executive officers of the Company.
Ross A. Cooley has been Chairman and Chief Executive Officer of the Company
since November 1996. From 1984 to 1996, Mr. Cooley was employed by Compaq,
most recently as Senior Vice President and General Manager responsible for all
North American business and operations. Mr. Cooley is a member of the
RosettaNet Board of Directors, the computer industry's e-commerce standards
effort, and a member of its Executive Committee. During his 18-year career at
IBM, Mr. Cooley completed the Harvard Business Senior Executive Program.
Mr. Cooley holds an A.A.S. from Broome Community College.
Christina C. Jones founded the Company and has been its President and Chief
Operating Officer since June 1996. In 1989, Ms. Jones co-founded Trilogy.
Prior to founding the Company, Ms. Jones was Director of Marketing of Trilogy.
Ms. Jones holds a B.A. in Economics from Stanford University.
James J. Luttenbacher has been the Company's Vice President and Chief
Financial Officer since March 1998. In August 1998, Mr. Luttenbacher was
appointed Secretary of the Company. From 1992 to 1998, Mr. Luttenbacher was
employed at Mentor Graphics Corporation, most recently as division manager for
a software product division focused on integrated circuit test and physical
verification applications. Mr. Luttenbacher holds a B.A. in Accounting from
the University of Michigan and a Masters of Management in finance and
operations from Kellogg Graduate School of Management at Northwestern
University.
Joseph A. Liemandt has been a director of the Company since its inception.
From July 1994 to June 1996, Mr. Liemandt was President of the Company.
Mr. Liemandt founded Trilogy in 1989. Since that time, Mr. Liemandt has served
as the President, Chief Executive Officer and Chairman of Trilogy.
Peter J. Barris has been a director of the Company since June 17, 1998.
Since 1992, Mr. Barris has been a partner, and, in 1994, was appointed a
General Partner of New Enterprise Associates, a firm that manages venture
capital investments. Mr. Barris is also a member of the Board of Directors of
Mobius Management Systems, Inc. Mr. Barris holds a B.S.E.E. from Northwestern
University and an M.B.A. from the Amos Tuck School at Dartmouth College.
60
<PAGE>
Linwood A. Lacy, Jr. has been a director of the Company since August 1998.
In November 1997, Mr. Lacy retired from Micro Warehouse Incorporated where he
had served as President and Chief Executive Officer since October 1996. From
1989 to May 1996, Mr. Lacy served as the Co-Chairman and Chief Executive
Officer of Ingram Micro, Inc., a microcomputer products distributor and a then
wholly-owned subsidiary of Ingram Industries, Inc. From December 1993 to June
1995, Mr. Lacy was also President of Ingram Industries Inc. From June 1995
until April 1996, he was President and Chief Executive Officer of Ingram
Industries Inc., and from April 1996 to May 1996 served as its Vice Chairman.
Mr. Lacy serves as a director of Ingram Industries Inc., Entex Information
Services, Inc. and Earthlink Network, Inc. Mr. Lacy holds a B.S.ChE from the
University of Virginia and an M.B.A. in Business from the Darden Graduate
School of Business Administration at the University of Virginia.
Robert W. Stearns has been a director of the Company since September 1998.
Mr. Stearns is currently a venture capitalist and management consultant. From
January 1996 to August 1998 Mr. Stearns served as the Senior Vice President,
Technology and Corporate Development of Compaq. He joined Compaq as Vice
President of Corporate Development in July 1993. Prior to his arrival at
Compaq, he was employed as a management consultant with McKinsey & Co.,
focusing on high technology clients. Mr. Stearns serves as a director of the
Houston Advanced Research Center and the Cynthia Woods Mitchell Pavilion. In
November 1996 Mr. Stearns was appointed to the Texas Science and Technology
Council and in March 1998 he became a fellow of the Aspen Institute and a
member of the Brookings Council of the Brookings Institute. Mr. Stearns holds
a B.S. in Chemistry from Brown University and a Master of Science from the
Massachusetts Institute of Technology.
Board Composition
The Company currently has authorized five directors. Each director is
elected for a period of one year at the Company's annual meeting of
stockholders and serves until the next annual meeting or until his successor
is duly elected and qualified. The executive officers serve at the discretion
of the Board of Directors. There are no family relationships among any of the
directors or executive officers of the Company.
Board Committees
In August 1998, the Board established the Audit Committee and Compensation
Committee. The Audit Committee of the Board of Directors reviews and monitors
the corporate financial reporting and the internal and external audits of the
Company, including, among other things, the Company's control functions, the
results and scope of the annual audit and other services provided by the
Company's independent accountants, and the Company's compliance with legal
matters that have a significant impact on the Company's financial condition.
The Audit Committee also consults with the Company's management and the
Company's independent accountants prior to the presentation of financial
statements to stockholders and, as appropriate, initiates inquiries into
aspects of the Company's financial affairs. In addition, the Audit Committee
has the responsibility to consider and recommend the appointment of, and to
review fee arrangements with, the Company's independent accountants. The
current members of the Audit Committee are Messrs. Barris, Liemandt and
Stearns.
The Compensation Committee of the Board of Directors reviews and makes
recommendations to the Board regarding the Company's compensation policies and
all forms of compensation to be provided to executive officers and directors
of the Company, including, among other things, annual salaries and bonuses and
stock option and other incentive compensation arrangements of the Company. In
addition, the Compensation Committee reviews bonus and stock compensation
arrangements for all other employees of the Company. The current members of
the Compensation Committee are Messrs. Barris and Liemandt.
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<PAGE>
Director Compensation and Other Arrangements
The Company does not currently compensate its outside directors for
attending Board of Directors or committee meetings, but reimburses directors
for their reasonable travel expenses incurred in connection with attending
such meetings. On November 1, 1996, the Company granted to Mr. Liemandt an
option to purchase 100 shares of the Company's Class A Common Stock at an
exercise price of $3.00 per share. Upon joining the Board of Directors,
Messrs. Barris, Lacy and Stearns received options to acquire 10,000 shares at
$6.40 per share, 30,000 shares at $8.00 per share and 15,000 shares at $9.00
per share of Class A Common Stock, respectively.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee of the Board of Directors
has served at any time as an officer or employee of the Company. Prior to the
establishment of the Compensation Committee, all decisions relating to
executive compensation were made by the Board of Directors. No executive
officer of the Company serves as a member of the Board of Directors or
Compensation Committee of any entity which has one or more executive officers
serving as a member of the Board of Directors or Compensation Committee.
Trilogy is the parent corporation of the Company. Mr. Liemandt, a member of
the Company's Compensation Committee, beneficially owns more than 5.0% of the
Class B Common Stock of the Company.
Executive Compensation
The following table provides certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and certain other
executive officers of the Company (collectively, the "Named Executive
Officers") whose salary and bonus exceeded $100,000 for services rendered in
all capacities to the Company and its subsidiaries during the fiscal years
ended December 31, 1997 and 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------- ------------
Number of
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus(1) Options(2) Compensation
- --------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Ross A. Cooley............. 1998 $ 1 -- -- --
Chairman and Chief
Executive Officer 1997 1 -- --
Christina C. Jones......... 1998 100,908(3) $ 500 125,000 --
President and Chief
Operating Officer 1997 100,908(3) -- -- --
James J. Luttenbacher(4)... 1998 145,362 5,000 150,000 $59,571(5)
Vice President, Chief
Financial Officer and
Secretary................ 1997 -- -- -- --
</TABLE>
- --------
(1) Reflects Bonus amount earned and paid in fiscal year.
(2) Securities Underlying Options represents shares of the Company's Class A
Common Stock.
(3) Includes $900 of reimbursement for excess amounts paid toward the
Company's standard employee medical benefit plan.
(4) Mr. Luttenbacher joined the Company in March 1998.
(5) Amount represents relocation expenses reimbursed by the Company.
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<PAGE>
Stock Option Grants in Last Fiscal Year
The following table sets forth certain information regarding stock option
grants made to each of the Named Executive Officers in Fiscal Year 1998. No
stock appreciation rights were granted to the Named Executive Officers during
such year.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term(3)
---------------------------------------------- ----------------------
Number of Percent of
Securities Total Granted Per Share
Underlying to Exercise
Options Employees in Base Expiration
Name Granted(1) Fiscal Year(2) Price Date 5% 10%
---- ---------- -------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ross A. Cooley(4)....... -- -- -- -- -- --
Christina C. Jones(5)... 125,000 4.8% $3.00 6/18/08 $ 235,836 $ 597,653
James J.
Luttenbacher(6)........ 150,000 5.8% 3.00 2/11/08 282,905 716,879
</TABLE>
- --------
(1) The options in this table are granted under the Company's 1996 Stock
Option Plan (the "1996 Plan") and have exercise prices equal to the fair
market value of the Company's Class A Common Stock on the date of grant.
All such options have 10-year terms and vest over a period of four years.
(2) Based on options to purchase an aggregate of 2,590,076 shares of Class A
Common Stock granted pursuant to the 1996 Plan during fiscal 1998.
(3) Potential realizable value is based on an assumption that the price per
share of Class A Common Stock appreciates annually at the rate shown
(compounded annually) from the date of grant until the end of the
respective option term. Potential realizable value is shown net of
exercise price. These rates of appreciation are derived from the
regulations promulgated by the Commission and do not represent the
Company's estimate or projection of future stock price growth.
(4) For the material terms of Mr. Cooley's stock option grant, including the
vesting thereof, see "Cooley Employment Agreement".
(5) Ms. Jones' stock option grant vests at the rate of 25% annually over four
years from the date of grant.
(6) For the material terms of Mr. Luttenbacher's stock option grant, including
the vesting thereof, see "Luttenbacher Employment Agreement".
Aggregate Option Exercised Year-End Option Values
The following table sets forth the options exercised by each of the Named
Executive Officers during fiscal year 1998 and the number and value of the
securities underlying unexercised options that were held by each Named
Executive Officer as of December 31, 1998.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1998 at December 31, 1998(1)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ross A. Cooley.......... -- -- 525,000 350,000 $4,200,000 $2,800,000
Christina C. Jones...... -- -- 406,300 368,800 3,250,400 2,950,400
James J. Luttenbacher... 25,000 $ 0 -- 125,000 0 1,000,000
</TABLE>
- --------
(1) Based on the estimated fair market value as of December 31, 1998 of $11.00
per share for the Company's Class A Common Stock, as determined by the
Company's Board of Directors.
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<PAGE>
Employment Agreements
The Company has entered into employment agreements with Ross A. Cooley, the
Company's Chairman and Chief Executive Officer, Christina C. Jones, the
Company's President and Chief Operating Officer, and James J. Luttenbacher,
the Company's Vice President, Chief Financial Officer and Secretary. Each of
these agreements has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part, and the following summaries are qualified
in their entirety by this reference to the full text of such agreements.
Cooley Employment Agreement. The Company and Ross A. Cooley are parties to
an employment agreement dated November 1, 1996 and an amendment effective
November 1, 1997 (the "Cooley Agreement"), which provides for an employment
period of four years at an annual salary of not less than $1.00. In addition,
Mr. Cooley is eligible to participate in the Company's management incentive
compensation plan as may be in effect from time to time. Mr. Cooley, in his
capacity as the Company's Chairman of the Board and Chief Executive Officer,
currently performs various executive and leadership functions, including
development of the Company's strategic and operational plans, strategic
planning, executive management of new customer and new account relationship
activities and recruitment of senior management personnel. Pursuant to the
Cooley Agreement, Mr. Cooley has been granted a stock option of 875,000 shares
of the Company's Class A Common Stock at an exercise price of $3.00 per share,
of which 425,000 shares became exercisable at the time the Cooley Agreement
was entered into 100,000 of such shares became exercisable on November 1, 1998
and an additional 100,000 shares shall become exercisable upon November 1,
1999 and November 1, 2000. The remaining 150,000 shares under such stock
option grant shall become exercisable upon November 1, 2003, provided that the
Cooley Agreement is in effect on such date. Under the terms of the Company's
1996 Stock Option Plan, in the event of a Change of Control (as defined in
such Plan), all unvested shares under such option become immediately
exercisable. The Cooley Agreement may be terminated by the Company or Mr.
Cooley at any time. If the Cooley Agreement is terminated by the Company for
Cause (as defined therein) or by Mr. Cooley for reasons other than as a result
of a Change in Control (as defined therein) of the Company, no further rights
to compensation or benefits shall accrue to Mr. Cooley. If the Cooley
Agreement is terminated by the Company without Cause or by Mr. Cooley as a
result of a Change of Control of the Company, Mr. Cooley shall not be entitled
to any additional compensation under the terms of the Cooley Agreement, but
shall have such rights relating to the exercise of then unexercised stock
options as are provided in his Stock Option Agreement. During his employment
by the Company and for a period of two years following the Company's
termination of his employment, Mr. Cooley shall not (i) solicit any customers
of the Company, (ii) induce or attempt to induce any Customer or withdraw,
curtail or cancel its business with the Company or in any manner modify or
fail to enter into any actual or potential business relationship with the
Company, (iii) recruit or solicit any employee or vendor of the Company to
cease his, her or its relationship with the Company or (iv) permit his name to
be used by or engage in any business competing with the business of the
Company.
Jones Employment Agreement. The Company and Christina C. Jones are parties
to an employment agreement dated November 1, 1996 (the "Jones Agreement"),
which provides for an employment period of four years at an annual salary of
not less than $100,000. In addition, Ms. Jones is eligible to participate in
any management incentive compensation plan which the Company may have from
time to time. Pursuant to the Jones Agreement, Ms. Jones has been granted a
stock option to purchase up to 650,000 shares of the Company's Class A Common
Stock at an exercise price of $3.00 per share (the "Option"). As a condition
to the grant of the Option, Ms. Jones entered into a Option Cancellation
Agreement with Trilogy which terminated a Stock Option Agreement dated
February 10, 1994 between Trilogy and Ms. Jones pursuant to which Ms. Jones
had been granted a stock option to purchase shares of Trilogy Class B Common
Stock at an exercise price of $1.50 per share. Under the terms of the
Company's 1996 Stock Option Plan, in the event of a Change of Control (as
defined in such Plan), all unvested shares under the Option become immediately
exercisable. The
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Jones Agreement may be terminated by the Company at any time and by Ms. Jones
for Good Reason (as defined therein). The definition of Good Reason includes,
among other things, a Change of Control (as defined therein) of the Company.
If the Jones Agreement is terminated by the Company for Cause (as defined
therein), no further rights to compensation or benefits shall accrue to Ms.
Jones. If the Jones Agreement is terminated by the Company without Cause or by
Ms. Jones for Good Reason, including upon a Change of Control, Ms. Jones shall
continue to receive employee benefits and monthly payments equal to one-
twelfth of her then-current annual salary for a period of twelve months
following the effective date of such termination. During her employment by the
Company and for a period of two years following the Company's termination of
her employment, Ms. Jones shall not (i) solicit any customers of the Company,
(ii) induce or attempt to induce any Customer to withdraw, curtail or cancel
its business with the Company or in any manner modify or fail to enter into
any actual or potential business relationship with the Company, (iii) recruit
or solicit any employee or vendor of the Company or Trilogy to cease his, her
or its relationship with the Company or with Trilogy or (iv) permit her name
to be used by or engage in any business competing with the business of the
Company.
Luttenbacher Employment Agreement. The Company and James J. Luttenbacher are
parties to an employment agreement dated February 12, 1998 (the "Luttenbacher
Agreement"), which provides for an employment period of four years at an
annual salary of not less than $175,000. In addition, Mr. Luttenbacher is
eligible to participate in any management incentive compensation plan which
the Company may have from time to time for an amount up to 50% of his then-
current annual salary. Mr. Luttenbacher received a bonus of $5,000 upon
commencement of his employment with the Company. Pursuant to the Luttenbacher
Agreement, Mr. Luttenbacher has been granted a stock option to purchase up to
150,000 shares of the Company's Class A Common Stock at an exercise price of
$3.00 per share. Under the terms of the Company's 1996 Stock Option Plan, in
the event of a Change of Control (as defined in such Plan), all unvested
shares under such option become immediately exercisable. The Luttenbacher
Agreement may be terminated by the Company or Mr. Luttenbacher at any time. If
the Luttenbacher Agreement is terminated by the Company for Cause (as defined
therein) or by Mr. Luttenbacher for reasons other than as a result of a Change
in Control (as defined therein) of the Company, no further rights to
compensation or benefits shall accrue to Mr. Luttenbacher. If the Luttenbacher
Agreement is terminated by the Company without Cause or by Mr. Luttenbacher as
a result of a Change in Control (as defined therein) of the Company, Mr.
Luttenbacher shall continue to receive employee benefits and monthly payments
equal to one-twelfth of his then-current annual salary for a period of six
months following the effective date of such termination. During his employment
by the Company and for a period of two years following the Company's
termination of his employment, Mr. Luttenbacher shall not (i) solicit any
customers of the Company, (ii) induce or attempt to induce any Customer to
withdraw, curtail or cancel its business with the Company or in any manner
modify or fail to enter into any actual or potential business relationship
with the Company, (iii) recruit or solicit any employee or vendor of the
Company to cease his, her or its relationship with the Company or (iv) permit
his name to be used by or engage in any business competing with the business
of the Company.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware provides that a
director of a corporation will not be personally liable for monetary damages
for breach of such individual's fiduciary duties as a director except for
liability (i) for any breach of such director's duty of loyalty to the Company
or to its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases as provided in
Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which a director derives an improper personal benefit.
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The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers, and may indemnify its officers, employees and other
agents, to the full extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross
negligence on the part of an indemnified party. The Company's Bylaws also
permit the Company to advance expenses incurred by an indemnified party in
connection with the defense of any action or proceeding arising out of such
party's status or service as a director, officer or employee or other agent of
the Company. Such indemnified party shall repay such advances if it is
ultimately determined that such party is not entitled to indemnification. The
Company believes that its Certificate of Incorporation and Bylaw provisions
and indemnification agreements are necessary to attract and retain qualified
persons as directors and officers. The Company also maintains directors' and
officers' liability insurance.
At present the Company is not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of the Company in which
indemnification will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Plan") was approved by the
Board of Directors and stockholders in September 1996. The 1996 Plan provides
for the grant of options intended to qualify as "incentive stock options"
under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and nonqualified stock options. A total of 3,500,000 shares of Class
A Common Stock have been reserved for issuance under the 1996 Plan. As of
December 31, 1998, 148,602 shares of Class A Common Stock has been issued upon
exercise of options granted under the 1996 Plan, 3,207,074 shares remained
reserved for future issuance upon the exercise of outstanding options, and
144,324 shares remained available for future grant.
The Board of Directors or a committee designated by the Board has the power,
subject to the limitations contained in the 1996 Plan, to prescribe the terms
and conditions of any option granted under the 1996 Plan, including the total
number of share to be offered to each optionee. The maximum term of any stock
option granted under the 1996 Plan is ten years, except that with respect to
incentive stock options granted to a person possessing more than 10% of the
combined voting power of the Company (a "10% Stockholder"), the term of such
stock options shall be for no more than five years. The exercise price of
incentive stock options granted under the 1996 Plan must be at least 100% of
the fair market value of the Class A Common Stock on the grant date except
that the exercise price of incentive stock options granted to a 10%
Stockholder must be at least 110% of such fair market value on the date of
grant. The aggregate fair market value on the date of grant of the Class A
Common Stock for which incentive stock options are exercisable for the first
time by an employee during any calendar year may not exceed $100,000.
Nonqualified stock options may be granted in exchange for previously granted
stock options having an exercise price higher than the options received in
such exchange. In the event of a Change of Control (as defined in the 1996
Plan), all of the options granted under the 1996 Plan shall become immediately
exercisable. The Board may amend the 1996 Plan at any time, except that
certain amendments require stockholder approval. The 1996 Plan will terminate
in September 2006, unless earlier terminated by the Board of Directors. From
and after the offering, all further option grants will be made solely under
the 1999 Plan.
1999 Plan
The Company's 1999 Plan (the "1999 Plan") was adopted by the Board of
Directors and approved by the stockholders of the Company in February 1999. A
total of 1,500,000 shares of Class A Common Stock is initially reserved for
issuance under the 1999 Plan. In addition, the 1999 Plan authorizes an annual
increase in the number of shares of Class A Common Stock issuable under the
1999 Plan
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equal to five percent (5%) of the total number of shares of Class A Common
Stock and Class B Common Stock outstanding on the first day of each fiscal
year of the Company, beginning fiscal 2000. The 1999 Plan also provides that
the aggregate number of shares of Class A Common Stock available for grant as
Incentive Stock Options shall not exceed 1,500,000 shares, plus an annual
increase to be added on the first day of each fiscal year beginning in fiscal
2000 equal to the lesser of (i) 500,000 shares of Class A Common Stock, (ii)
two percent (2%) of the number of shares of Class A Common Stock outstanding
as of such date, or (iii) a lesser number of shares of Class A Common Stock
determined by the Administrator. The shares to be issued pursuant to 1999 Plan
may be authorized but unissued or reacquired Class A Common Stock.
The purpose of the 1999 Plan is to attract and retain the best available
personnel, to provide additional incentive to employees, directors and
consultants of the Company and its related entities and to promote the success
of the Company's business. The 1999 Plan provides for the granting to
employees of Incentive Stock Options and the granting of nonstatutory stock
options, stock appreciation rights, dividend equivalent rights, restricted
stock, performance units, performance shares, and other equity-based rights
("1999 Awards") to employees, directors and consultants of the Company and its
related entities.
With respect to 1999 Awards granted to directors or officers, the 1999 Plan
is administered by the Board of Directors or a committee designated by the
Board of Directors constituted to permit such 1999 Awards to be exempt from
Section 16(b) of the Exchange Act in accordance with Rule 16b-3 thereunder.
With respect to 1999 Awards granted to other participants, the 1999 Plan is
administered by the Board of Directors or a committee designated by the Board
of Directors. In each case, the respective plan administrator shall determine
the provisions, terms and conditions of each 1999 Award, including, but not
limited to, the 1999 Award vesting schedule, repurchase provisions, rights of
first refusal, forfeiture provisions, form of payment upon settlement of the
1999 Award, payment contingencies and satisfaction of any performance
criteria.
Incentive Stock Options are not transferable by the optionee other than by
will or the laws of descent or distribution, and each Incentive Stock Option
is exercisable during the lifetime of the grantee only by such grantee. Other
1999 Awards shall be transferable to the extent provided in the agreement
evidencing the 1999 Award.
The per share exercise price of Incentive Stock Options granted pursuant to
the 1999 Plan must be at least equal to the per share fair market value of the
Class A Common Stock on the date of grant, and the term of the option must not
exceed ten years. The term of other 1999 Awards will be determined by the
respective plan administrator. With respect to an employee who owns stock
representing more than 10% of the voting power of the Company's outstanding
capital stock, the per share exercise price of any Incentive Stock Option must
equal at least 110% of the per share fair market value of the Class A Common
Stock on the date of grant and the term of the option must not exceed five
years. The exercise price or purchase price, if any, of other 1999 Awards will
be determined by the respective plan administrator, but shall not be less than
100% of the fair market value of the stock granted thereunder. The
consideration to be paid upon exercise or purchase of the shares of Class A
Common Stock pursuant to a 1999 Award will be determined by the respective
plan administrator and may include cash, check, promissory note, shares of
Class A Common Stock, or the assignment of part of the proceeds from the sale
of shares acquired upon exercise or purchase of the 1999 Award.
Where the 1999 Award agreement permits the exercise or purchase of a 1999
Award for a certain period of time following the recipient's termination of
service with the Company, disability, or death, such 1999 Award will terminate
to the extent not exercised or purchased on the last day of the specified
period or the last day of the original term of such 1999 Award, whichever
occurs first.
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The Administrator may at any time offer to buy out for a payment in cash or
Class A Common Stock, an Award previously granted, based on such terms and
conditions as the respective administrator shall establish and communicate to
the grantee at the time that such offer is made.
In the event of a merger of the Company in which the Company does not
survive, a sale of substantially all of the Company's assets in connection
with the liquidation or dissolution of the Company, a person acquiring more
than 50% of the voting power of the Company or upon an acquisition of
beneficial ownership of securities possessing more than 50% of the voting
power of the Company's stockholders, subject to the 1999 Plan administrator's
determination that any such acquisition shall be deemed not to be a "Corporate
Transaction" (as such term is defined in the 1999 Plan), and immediately prior
to the effective time of any such foregoing transaction, one half of the then
unvested shares subject to outstanding 1999 Awards will vest, such 1999 Awards
will become immediately exercisable as to such shares and the repurchase or
forfeiture rights as to such shares will terminate. Upon consummation of such
transaction all outstanding 1999 Awards will terminate, unless they are
assumed by the successor company. In the event of a hostile takeover of the
Company or a change in the majority of the Board of Directors through one or
more contested elections, the vesting of all outstanding 1999 Awards will
accelerate as described above, but the outstanding 1999 Awards will remain
exercisable according to their terms.
Unless terminated sooner, the 1999 Plan will terminate automatically in
2009. The Board has the authority to amend, suspend or terminate the 1999 Plan
subject to stockholder approval of certain amendments and provided no such
action may affect 1999 Awards previously granted under the 1999 Plan unless
agreed to by the affected grantees.
Agreement Regarding Grant of Options
Pursuant to an agreement (the "GE Agreement") between the Company and
General Electric Capital Information Technology Solutions ("GE Capital"), GE
Capital has the right (the "Right") to require the Company to grant GE Capital
an option to purchase up to 320,000 shares of restricted Class A Common Stock
of the Company at the initial price to the public. The Right is triggered upon
the happening of certain events, including an initial public offering by the
Company of its Class A Common Stock. In the event GE Capital exercises such
Right, the GE Option will expire at 11:59 pm on the first date of such public
offering. If GE Capital is granted and exercises the GE Option, the shares of
Class A Common Stock issued pursuant to the exercise of the GE Option will be
restricted stock and will not be subject to any registration rights.
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CERTAIN TRANSACTIONS
Agreements with Executive Officers
The Company has entered into employment agreements with Mr. Cooley, Ms.
Jones and Mr. Luttenbacher. See "Management--Employment Agreements".
Agreements Between the Company and Trilogy
Asset Transfer Agreement
In August 1996, the Company and Trilogy entered into an Asset Transfer
Agreement, as amended in August 1998 (the "Asset Transfer Agreement"),
pursuant to which Trilogy transferred the assets and liabilities of its
pcOrder.com division to the Company. In exchange for the transferred assets,
the Company issued to Trilogy 900 shares of the Company's common stock, $0.01
par value per share, establishing the Company as a wholly-owned subsidiary of
Trilogy (such shares were subsequently split into 11,520,000 shares of Common
Stock and in February 1999 reclassified as Class B Common Stock). Pursuant to
the Asset Transfer Agreement, the parties made customary representations and
warranties regarding their businesses and operations, and each agreed to
indemnify the other in the event of any damages arising from the other's
breach of any such representation or warranty. In addition, Trilogy agreed not
to engage in, directly or indirectly, any business directly in competition
with the Company for a period of three years after the effective date of the
Asset Transfer Agreement. Further, during such three year period, Trilogy also
agreed not to hire or recruit any person who was, at the effective date of the
Asset Transfer Agreement or within the 12 month period preceeding such
effective date, an employee of the pcOrder.com division of Trilogy. Trilogy
has the right, and to the extent Trilogy transfers the shares held by it,
other holders of these shares have the right, on no more than five occasions
after this offering, to require the Company to register the shares of Common
Stock held by such stockholders within 180 days of such request. The Company
is obligated to indemnify such stockholders and underwriters, if any, against
liability due to information in the registration statement furnished by the
Company. Trilogy's registration rights expire eight years after the effective
date of the Asset Transfer Agreement. Additionally, holders of the transferred
shares have the right to sell any shares held by such stockholder in this
offering. Trilogy has waived its registration rights in connection with this
offering.
Technology, Services and License Agreement
In September 1998, the Company and Trilogy entered into a Technology,
Services and License Agreement (the "Technology Agreement"), which amended and
superseded a Master Software License Agreement and a Reseller Agreement
previously entered into by the parties, pursuant to which Trilogy has licensed
certain intellectual property rights to the Company, and the Company has
agreed to license certain intellectual property rights to Trilogy. Each party
has granted the other access to, and a nonexclusive, irrevocable, perpetual,
worldwide, license to internally use, make, reproduce and/or prepare
derivative works of the products of the other party as of September 1, 1998,
in the form as of that date, and any updates, changes to, and new releases of
those products, subject to the happening of a Trigger Event (as defined below)
(as applicable, the "Trilogy Intellectual Property" or the "pcOrder
Intellectual Property"), or to sublicense any third party to do so, subject to
certain confidentiality and other restrictions. Trilogy also granted the
Company a nonexclusive, irrevocable, perpetual, worldwide right and license
under the Trilogy Intellectual Property to make, use, reproduce, prepare
derivative works based upon, license, offer to license, import, export,
publish, distribute, perform, display, advertise, market, promote, service and
or support those of pcOrder's products that are network based e-commerce
products for enabling sales, purchasing, marketing or distribution within the
computer products market ("Computer E-Commerce Products"), and to sublicense
any third party to do so, subject to the payment of royalties as described
below. The Company also granted Trilogy a nonexclusive, irrevocable,
perpetual, worldwide right and license to use pcOrder Intellectual Property
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to make, use reproduce, prepare derivative works based upon, license, export,
publish, distribute, perform, display, advertise, market, promote, service and
support Trilogy Products (as defined in the Technology Agreement) and to
sublicense any third party to do so, subject to the payment of royalties
described below. However, following a change in control of Trilogy or such
time as Trilogy is no longer required by generally accepted accounting
principles to be consolidated with pcOrder for financial reporting purposes
(in either case, a "Trigger Event"), Trilogy shall not, until the later of
September 1, 2008 or the expiration of five years following such Trigger
Event, have any license to the pcOrder Intellectual Property with respect to
any Computer E-Commerce Product that utilizes pcOrder's product content or
certain tools developed by pcOrder. Following a Trigger Event, any Trilogy
license to pcOrder Intellectual Property, which license was granted pursuant
to the terms of the Technology Agreement prior to the happening of such
Trigger Event, shall continue indefinitely, subject to continued royalty
payments. Pursuant to the Technology Agreement, neither party is restricted
from entering into or having similar agreements with third parties or doing
any activity relating to competitive products and services (involving none of
the other party's information or intellectual property). Following a Trigger
Event, pcOrder's access to Trilogy products and its right to receive updates,
changes and new releases of Trilogy Intellectual Property shall continue until
the later to occur of five years after a Trigger Event or September 1, 2008.
Notwithstanding the foregoing, to the extent that any of the Trilogy
Intellectual Property (including Trilogy products based on such intellectual
property) is not of a same, similar, replacement or equivalent general type as
Trilogy Intellectual Property available prior to a Trigger Event, pcOrder will
not have rights to such Trilogy Intellectual Property. The Technology
Agreement further provides that where at least one employee and/or contractor
of the Company in conjunction with at least one employee and/or contractor of
Trilogy cooperate toward jointly creating, inventing or discovering new
material qualifying for either patent or copyright protection, the parties
shall negotiate in good faith on a project-by-project basis to determine to
what extent such newly developed material should be jointly owned. In the
event of joint ownership, the parties shall have an equal, undivided interest
in such patent, copyright or other intellectual property. The Company and
Trilogy are each obligated to pay to the other monthly royalties based on a
percentage of license fees derived from sales of products that incorporate,
and/or data maintenance services related to, the other party's technology; of
software maintenance fees other than data maintenance services in connection
with products that incorporate the other party's technology; and of on-line
subscription service fees from products that incorporate the other party's
technology. The Technology Agreement provides that each party will defend,
indemnify and hold harmless the other party for any claim against such other
party by any third party to the extent based on an actual or alleged: (i)
failure by a party to perform its obligations under the Technology Agreement;
(ii) breach of any one or more of a party's representations or warranties;
(iii) failure by a party to comply with government laws and regulations;
(iv) intentional or grossly negligent acts or omissions on the part of a
party, and (v) to the extent a party delivers Material (as defined in the
Technology Agreement) to the other party, (1) failure by the delivering party
to either own or have sufficient rights to deliver such Material to the other
party, (2) failure by a party to either own or have sufficient rights to grant
to the other party the license it has granted under the Technology Agreement,
(3) infringement (or violation) by such delivered Material of a third party's
intellectual property rights, or (4) failure to be Year 2000 compliant. Such
indemnification obligations are subject to the condition that the indemnified
party: (a) promptly provides notice of any claim to the indemnifying party;
(b) allows the indemnifying party to control the defense of the claim and
settlement negotiations; and (c) fully cooperates with the indemnifying party
in such defense and settlement negotiations. The Technology Agreement provides
that upon either party's request, the parties shall negotiate in good faith
regarding the terms and conditions upon which either party will perform
consulting services reasonably requested by the other party; provided,
however, that such obligation shall expire on the later of seven years
following a Trigger Event or September 1, 2010. The Technology, Services and
License Agreement has a perpetual term, unless terminated earlier by either
party's 31 days prior notice of an uncured breach, subject to extension for
special circumstances, or the bankruptcy of either of the parties.
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Management Services Agreement
The Company and Trilogy entered into a Management Services Agreement,
effective as of July 1, 1998, which amended and superseded a Services
Agreement previously entered into by the parties, pursuant to which Trilogy
will provide certain administrative and corporate support services to the
Company. Trilogy has agreed to provide to the Company certain services
("Mandatory Services") including tax administration, payroll, payroll
accounting, banking, corporate finance, recruiting and employee training
services to the Company. In addition, Trilogy has agreed to provide the
Company certain additional services ("Optional Services"), including hardware
purchasing, shipping and receiving, purchase order database administration,
network administration, audit services, human resources administration, legal
services and customer training. The provision of Mandatory Services may not be
unilaterally terminated by either party during the effectiveness of the
Management Services Agreement. The provision of Optional Services may be
terminated by either party upon 90 days notice. The Management Services
Agreement provides that Trilogy will use the same level of care in rendering
services to the Company that Trilogy uses in rendering services to itself or
any of its other subsidiaries, which will be at least equal to the care, that
Trilogy has used in the past in rendering such services to the Company.
However, the selection of personnel to perform the various services will be
within the sole control of Trilogy. Specifically, Trilogy may, without the
consent or approval of the Company, subcontract any service to be provided
under the Management Services Agreement. The Management Services Agreement
terminates on June 30, 1999, and thereafter is subject to successive one-year
renewal terms upon consent of the parties. The Management Services Agreement
may be terminated: (i) by either party within 30 days of an uncured material
breach by the other party; (ii) by either party upon the liquidation or
dissolution of the other party; (iii) by Trilogy immediately upon notice to
the Company if the Company fails to pay the amount due to Trilogy under such
agreement by the tenth day after notice of nonpayment is given; or (iv) within
30 days of the date at which Trilogy ceases to own a majority of the Company's
Common Stock.
Tax Allocation Agreement
The Company is currently, and after the offering will be, included in
Trilogy's consolidated federal income tax group, and the Company's federal
income tax liability will be included in the consolidated federal income tax
liability of Trilogy. The Company and Trilogy have entered into a Tax
Allocation Agreement pursuant to which the Company and Trilogy will make
payments between them such that, with respect to any period, the amount of
taxes to be paid or received by the Company, subject to certain adjustments,
will be determined as though the Company were to file separate federal, state
and local income tax returns (including, except as provided below, any amounts
determined to be due as a result of a redetermination of the tax liability of
Trilogy arising from an auditor or otherwise) rather than as a consolidated
subsidiary of Trilogy with respect to federal, state and local income taxes.
Under the terms of the Tax Allocation Agreement, the Company, in computing its
stand alone tax liability or tax refund, will be able to utilize certain tax
items, such as net operating losses, foreign tax credits and other tax credits
(collectively, "Tax Attributes"). In addition, with respect to Tax Attributes
of the
Company that come into existence after the execution of the Tax Allocation
Agreement, and under the terms of the Tax Allocation Agreement, Trilogy will
be required to make any payment to the Company as such Tax Attributes of the
Company are utilized by the Trilogy consolidated federal income tax group.
Pursuant to the Tax Allocation Agreement, Trilogy's obligation to make any
payment to the Company relating to the Company's Tax Attributes will apply
only to tax periods during which the Company (or its affiliated subsidiaries)
is a member of Trilogy consolidated federal income tax group.
Trilogy will continue to have all the rights of a parent of a consolidated
group (and similar rights provided for by applicable state and local law with
respect to a parent of a combined, consolidated or unitary group), will be the
sole and exclusive agent for the Company in any and all matters relating to
the income, franchise and similar liabilities of the Company, will have sole
and exclusive responsibility for the preparation and filing of consolidated
federal and consolidated or combined state and local
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income tax returns (or amended returns), and will have the power, in its sole
discretion, to contest or compromise any asserted tax adjustment or deficiency
and to file, litigate or compromise any claim for refund on behalf of the
Company. In addition, Trilogy has agreed to undertake to provide the
aforementioned services with respect to the Company's separate state and local
returns and the Company's foreign returns.
The Tax Allocation Agreement will remain in effect until the expiration of
any open years for which pcOrder has filed as a member of the Trilogy
consolidated group. In general, the Company will be included in Trilogy's
consolidated group for federal income tax purposes for so long as Trilogy
beneficially owns at least 80% of the total voting power and value of the
outstanding Common Stock. Each member of a consolidated group is jointly and
severally liable for the federal income tax liability of each other member of
the consolidated group. Accordingly, although the Tax Allocation Agreement
allocates tax liabilities between the Company and Trilogy, during the period
in which the Company is included in Trilogy's consolidated group, the Company
could be liable in the event that any federal tax liability is incurred, but
not discharged, by any other member of Trilogy's consolidated group. Pursuant
to the Tax Allocation Agreement, however, Trilogy is obligated to indemnify
the Company for any tax liabilities, including any liability resulting from a
distribution of the Company's stock to Trilogy's stockholders provided that it
has paid its allocated share of such liabilities to Trilogy.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Class A Common Stock as of February 2, 1999, and as adjusted
to reflect the sale of shares offered hereby, by (i) each person who is known
by the Company to own beneficially more than five percent of the Class A
Common Stock, (ii) each of the Company's Named Officers and directors, and
(iii) all current officers and directors as a group.
<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially
Owned(1)
-----------------
5% Beneficial Owners, Directors Number of Shares Before After
& Named Executive Officers Beneficially Owned(1) Offering Offering
- ------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Trilogy, Inc.(2)....................... 12,757,000 98.3% 84.0%
6034 West Courtyard Drive
Austin, TX 78730
Joseph A. Liemandt(3).................. 12,757,050 98.3 84.0
6034 West Courtyard Drive
Austin, TX 78730
Ross A. Cooley(4)...................... 525,000 3.9 3.3
Christina C. Jones(5).................. 406,300 3.0 2.6
James J. Luttenbacher.................. 56,250 * *
Peter J. Barris........................ -- * *
Linwood A. Lacy, Jr. .................. -- * *
Robert W. Steans....................... -- * *
All Directors and Officers as a Group
(7 persons)(6)........................ 13,744,600 98.6% 85.1%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options held by that person
that are currently exercisable or exercisable within 60 days of February
2, 1999 are deemed outstanding. Percentage of beneficial ownership is
calculated assuming all shares of Class B Common Stock have been
converted into shares of Class A Common Stock of the Company, or
12,979,945 shares prior to this offering and 15,179,945 shares after this
offering, as of February 2, 1999 (assuming no exercise of the
Underwriters' overallotment option or the GE Option). To the Company's
knowledge, except as set forth in the footnotes to this table and subject
to applicable community property laws, each person named in the table has
sole voting and investment power with respect to the shares set forth
opposite such person's name.
(2) Shares beneficially owned by Trilogy, Inc. are registered in the name of
Trilogy Software, Inc., a wholly owned subsidiary of Trilogy, Inc.
(3) Through his ownership of securities of Trilogy, Inc., Mr. Liemandt has
the right to cause to be elected a majority of the Board of Directors of
Trilogy, Inc. As a result, Mr. Liemandt is, under the rules of the
Securities and Exchange Commission, deemed to be the beneficial owner of
the 12,757,000 owned indirectly by Trilogy, Inc. In addition, Mr.
Liemandt's ownership includes 50 shares issuable upon exercise of stock
options exercisable within 60 days of February 2, 1999.
(4) Includes 525,000 shares issuable upon exercise of stock options
exercisable within 60 days of February 2, 1999.
(5) Includes 406,300 shares issuable upon exercise of stock options
exercisable within 60 days of February 2, 1999.
(6) Includes (i) 962,600 shares issuable upon exercise of stock options
exercisable within 60 days of February 2, 1999 and (ii) 12,757,000 shares
owned by Trilogy (see footnote 2).
73
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
The authorized capital stock of the Company consists of 60,000,000 shares of
Common Stock, par value $0.01 per share, consisting of 37,243,000 shares of
Class A Common Stock and 12,757,000 shares of Class B Common Stock and
10,000,000 shares of Preferred Stock, par value $0.01 per share. Upon
consummation of this offering, no shares of Preferred Stock, 2,422,945 shares
of Class A Common Stock (2,752,945 shares if the Underwriters' overallotment
option is exercised in full) and 12,757,000 shares of Class B Common Stock
will be outstanding. The following summary is qualified in its entirety by
this reference to the Company's Certificate of Incorporation and Bylaws,
copies of which are filed as exhibits to the Registration Statement of which
this Prospectus is a part.
Reclassification
On February 2, 1999, all then outstanding shares of Common Stock held by
Trilogy were reclassified into Class B Common Stock on a one-for-one basis and
all shares of then outstanding Common Stock not held by Trilogy were
reclassified into shares of Class A Common Stock on a one-for-one basis.
Common Stock
Immediately prior to this offering, there were 12,979,945 shares of Common
Stock outstanding of which 222,945 shares were Class A Common Stock held by
individuals and 12,757,000 were Class B Common Stock held by Trilogy. The
Class A Common Stock and Class B Common Stock have substantially identical
rights other than with respect to voting, conversion and transfer, as further
described below. Except as required by the Company's Certificate of
Incorporation or applicable law, 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. Except as required by the Company's Certificate of Incorporation
or by applicable law, the Class A Common Stock and Class B Common Stock will
vote together as a single class on all matters submitted to a vote or for the
consent of stockholders. Additionally, the Common Stock votes on a non-
cumulative basis. The holders of Common Stock are entitled to receive ratably
such noncumulative dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor. In the event
of liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive rights or
other subscription rights. The Class A Common Stock has no conversion rights.
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 one-for-one basis. Prior to a tax free spin-off 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, Trilogy, Inc. (Trilogy's parent), an affiliate
of Trilogy, Inc. or a non-affiliate of Trilogy, Inc. which acquires more than
50% of the then outstanding Class B Common Stock in a single transaction. In
addition, unless the Company received an opinion of counsel that such
conversion would adversely affect the tax free nature of such spin-off, upon
the fifth anniversary of the first transfer of Class B Common Stock pursuant
to a tax free spin-off, all of the then outstanding shares of Class B Common
Stock will convert on a one-for-one basis into shares of Class A Common Stock.
In the event the Company does receive an opinion of counsel that such
conversion would adversely affect the tax free nature of the spin-off, the
matter of conversion of such shares will be submitted to the stockholders of
the Company, upon whose approval such shares of Class B Common Stock shall
automatically convert into an equal number of shares of Class A Common Stock.
However, after a tax free spin-off and prior to such fifth anniversary, such
shares of Class B Common Stock will generally not be convertible into shares
of Class A Common Stock with the exception of any shares of Class B Common
Stock held by Trilogy, Trilogy, Inc. or an affiliate of
74
<PAGE>
shares shall automatically convert into an equal number of shares of Class A
Common Stock upon the tax free spin-off. Pursuant to the Company's Certificate
of Incorporation, the Company shall at all times reserve and keep available
out of its authorized but unissued Class A Common Stock, such number of shares
of Class A Common Stock necessary for conversion of all then outstanding
shares of Class B Common Stock. There are no redemption or sinking fund
provisions applicable to the Common Stock. The Class B Common Stock may only
be transferred pursuant to the restrictions contained in the Certificate
Trilogy, Inc., which of Incorporation. All outstanding shares of Common Stock
are fully paid and nonassessable, and the shares of Class A Common Stock to be
issued upon completion of this offering will be fully paid and nonassessable.
Preferred Stock
The Board of Directors has the authority, without further action by the
stockholders, to issue the Preferred Stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any series of Preferred Stock or the designation of such
series, without further vote or action by the stockholders. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders
and may adversely affect the voting and other rights of the holders of Common
Stock. The issuance of Preferred Stock with voting and conversion rights may
have the effect of decreasing the market price of the Common Stock, and may
adversely affect the voting power of the holders of Common Stock, including
the loss of voting control to others. At present, the Company has no plans to
issue any shares of Preferred Stock.
Certain Anti-Takeover, Limited Liability and Indemnification Provisions;
Section 203 of the Delaware General Corporation Law
The Company's Certificate of Incorporation provides for the reclassification
of the capital stock of the Company outstanding immediately prior to February
2, 1999, the effective date of such reclassification, into Class A Common
Stock or Class B Common Stock. The Class B Common Stock has disproportionate
voting rights and, following this offering, the outstanding Class B Common
Stock will represent 97.7% of the total voting power of the stockholders of
the Company. Trilogy will hold all of the 12,757,000 shares of Class B Common
Stock and thus control the outcome of any matter presented to the stockholders
for a vote. In addition, 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. The overall effect of the disproportionate voting rights of the Class B
Common Stock may be to discourage a potential purchaser of a majority interest
of the Class A Common Stock.
The Company is subject to Section 203 of the Delaware General Corporation
Law, as amended ("Section 203"), which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years following the date
that such stockholder became an interested stockholder, unless (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
that
75
<PAGE>
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer, or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 defines business combinations to include (i) any merger or
consolidation involving the corporation or any majority-owned subsidiary of
the corporation and any other person or entity, (ii) subject to certain
exceptions, any sale, transfer, pledge or other disposition of 10% or more of
the assets of the corporation or any majority-owned subsidiary of the
corporation involving the interested stockholder, (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation or any majority-owned subsidiary of the corporation of any stock
of the corporation to the interested stockholder, (iv) any transaction
involving the corporation or any majority-owned subsidiary of the corporation
that has the effect of increasing the proportionate share of the stock of any
class or series of the corporation or any majority-owned subsidiary of the
corporation beneficially owned by the interested stockholder, or (v) the
receipt by the interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the
corporation or any majority-owned subsidiary of the corporation. In general,
Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more or the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Limitation of Director Liability
The Certificate of Incorporation of the Company limits the liability of
directors of the Company (in their capacity as directors but not in their
capacity as officers) to the Company or its stockholders to the fullest extent
permitted by Delaware law. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of a director's fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, which relates to unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (iv) for any transaction from which the
director derived an improper personal benefit.
Indemnification
The Bylaws of the Company provide that the directors and officers of the
Company shall be indemnified and provide for the advancement to any such
indemnified director or officer of expenses in connection with actual or
threatened proceedings and claims arising out of their status as director or
officer of the Company as such to the fullest extent permitted by the Delaware
General Corporation Law.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Class A Common Stock is American
Stock Transfer & Trust Company. The Transfer Agent's address is 40 Wall
Street, New York, New York 10005 and telephone number is (718) 921-8207.
76
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Class A Common Stock in the public market
after this offering (including by optional or automatic conversion of shares
of Class B Common Stock into Class A Common Stock), or the anticipation of
such sales, could have a material adverse effect on then-prevailing market
prices. Upon completion of the offering, the Company will have 2,422,945
shares of Class A Common Stock outstanding and 12,757,000 shares of Class B
Common Stock outstanding (assuming no exercise of the Underwriters' over-
allotment option and no exercise of currently outstanding options or
warrants). After this offering, Trilogy will beneficially own all of the
12,757,000 shares of Class B Common Stock representing approximately 84.0% of
the outstanding Common Stock. Shares of Class B Common Stock are convertible
into Class A Common Stock on a share-for-share basis at the election of the
holder or automatically upon certain transfers thereof. The 2,200,000 shares
of Class A Common Stock sold in this offering (plus any additional shares sold
upon exercise of the Underwriters' over-allotment option) will be freely
transferable without restriction under the Securities Act of 1933, as amended
(the "Securities Act"), unless they are held by "affiliates" of the Company as
that term is used under the Securities Act and the regulations promulgated
thereunder ("Affiliates"). The remaining 222,945 of Class A Common Stock and
the 12,757,000 shares of Class A Common Stock issuable upon conversion of the
Class B Common Stock (including the shares of Class A Common Stock issuable
upon certain transfers of the Class B Common Stock or at the option of the
holder thereof) held by Trilogy are "restricted securities" as that term is
defined in Rule 144 of the Securities Act (the "Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701
under the Securities Act. As a result of contractual restrictions and the
provisions of Rules 144 and 701, additional shares will be available for sale
in the public market as follows: (i) no Restricted Shares will be eligible for
immediate sale on the effective date of this offering; (ii) approximately
76,970 Restricted Shares will be eligible for sale 90 days after the date of
this offering; (iii) approximately 77,975 Restricted Shares will be eligible
for sale without restriction and 25,000 Restricted Shares will be eligible for
sale subject to volume limitations, in each case 180 days after the effective
date of this offering upon the expiration of a contractual lock-up agreement
with the Company and the representatives of the Underwriters and (iv) and
approximately 43,000 of the Restricted Shares will be eligible for sale from
time to time thereafter upon expiration of their respective holding periods
under Rule 144. In addition, the 12,757,000 shares of Class A Common Stock
issuable upon conversion of Class B Common Stock will be eligible for sale
180 days after the date of this offering upon the expiration of contractual
lock-up agreements. Goldman, Sachs & Co., on behalf of the Underwriters, may,
in its sole discretion and at any time without notice, release all or any
portion of securities subject to the lock-up agreement with the Underwriters.
In general, under Rule 144 as currently in effect, beginning 90 days after
the offering, a person (or persons whose shares are aggregated) who owns
shares that were purchased from the Company (or any Affiliate) at least one
year previously, including that person who may be deemed an Affiliate of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
the Common Stock or (ii) the average weekly trading volume of the Common Stock
on the Nasdaq National Market during the four calendar weeks preceding the
date on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. Any person (or persons whose
shares are aggregated) who is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who owns
Restricted Shares under Rule 144 that were purchased from the Company (or any
Affiliate) at least two years previously, would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
77
<PAGE>
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers prior to the date the
issuer becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written
compensatory benefit plans or written contracts relating to the compensation
of such persons. In addition, the Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject
to the reporting requirements of the Exchange Act, along with the shares
acquired upon exercise of such options (including exercises after the date of
this Prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this Prospectus, may be sold (i) by
persons other than Affiliates, subject only to the manner of sale provisions
of Rule 144, and (ii) by Affiliates under Rule 144 without compliance with its
one-year holding period requirement.
The Company has agreed not to offer, sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or any rights to acquire Common Stock for a
period of 180 days after the date of this Prospectus, without the prior
written consent of the representatives of the Underwriters, subject to certain
limited exceptions. See "Underwriting".
Trilogy has the right in certain circumstances to request the Company to
register its shares of Class B Common Stock and shares of the Class A Common
Stock issuable upon conversion of such Class B Common Stock under the
Securities Act for resale to the public. These registration rights are subject
to certain conditions and limitations, among them the right of the
underwriters, if any, of an offering to limit the number of shares included in
such registration. If the Company were required to include in a Company-
initiated registration shares held by Trilogy, such registration or sales of
stock may have a material adverse effect on the market price for the Company's
Class A Common Stock and on the Company's ability to raise new capital. In
addition, the Company intends to file a registration statement under the
Securities Act covering approximately 4,857,428 shares of Common Stock
reserved for issuance under the Option Plan. See "Management--1996 Stock
Option Plan" and "Management--1999 Stock Incentive Plan". Such registration
statement is expected to be filed within 90 days after the date of this
Prospectus and will automatically become effective upon filing. Following such
filing, shares registered under such registration statement will, subject to
the Lock-Up Agreements, Rule 144 volume limitations applicable to Affiliates
and the lapsing of the Company's repurchase rights, be available for sale in
the open market upon the exercise of vested options 90 days after the
effective date of this Prospectus. At December 31, 1998, options to purchase
3,207,074 shares were issued and outstanding under the 1996 Plan. See "Risk
Factors--Shares Eligible for Future Sale".
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Morrison & Foerster LLP, Palo Alto, California. Certain legal
matters in connection with this offering will be passed upon for the
Underwriters by Venture Law Group, A Professional Corporation, Menlo Park,
California.
78
<PAGE>
EXPERTS
The financial statements of the Company at December 31, 1997 and 1998, and
for each of the three years in the period ended December 31, 1998, appearing
in this Prospectus and the Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby
(the "Registration Statement"). This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules to the Registration Statement. For further information with respect
to the Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedules filed as a part of the
Registration Statement. Statements contained in this Prospectus concerning the
contents of any contract or any other document are not necessarily complete;
reference is made in each instance to the copy of such contract or any other
document filed as an exhibit to the Registration Statement. Each such
statement is qualified in all respects by such reference to such exhibit. The
Registration Statement, including exhibits and schedules thereto, may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World
Trade Center, 13th Floor, New York, New York 10048 after payment of fees
prescribed by the Commission. The Commission also maintains a Web site which
provides online access to reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
at the address http://www.sec.gov.
79
<PAGE>
Index to Financial Statements
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity (Deficit)................................ F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders of
pcOrder.com, Inc.
We have audited the accompanying balance sheets of pcOrder.com, Inc. (the
Company), a subsidiary of Trilogy Software, Inc. and its predecessor entities
including Trilogy Development Group, Inc., as of December 31, 1997 and 1998,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of pcOrder.com, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Austin, Texas
February 5, 1999
F-2
<PAGE>
pcOrder.com, Inc.
Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 2,207 $ 4,726
Accounts receivable, net of allowance of $281 in 1997 and
$350 in 1998.............................................. 2,277 4,775
Other current assets....................................... -- 150
------- --------
Total current assets..................................... 4,484 9,651
Property and equipment, net................................. 494 1,938
Other assets................................................ -- 665
------- --------
Total assets............................................. $ 4,978 $ 12,254
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................... $ 37 $ 612
Accrued expenses........................................... 781 2,260
Accrued payroll and related liabilities.................... 511 890
Payable to Trilogy......................................... 432 4,506
Deferred revenue........................................... 4,212 10,428
------- --------
Total current liabilities................................ 5,973 18,696
Deferred revenue............................................ -- 2,103
Commitments and contingencies
Stockholders' equity (deficit):
Preferred Stock, $.01 par value; 10,000,000 shares
authorized; no shares issued or outstanding............... -- --
Class A Common Stock, $.01 par value; 37,243,000 shares
authorized; 43,225 and 191,602 shares issued and
outstanding in 1997 and 1998, respectively................ -- 1
Class B Common Stock, $.01 par value; 12,757,000 shares
authorized, issued and outstanding in 1997 and 1998....... 128 128
Additional paid-in capital................................. 211 4,024
Deferred stock compensation................................ -- (1,726)
Accumulated deficit........................................ (1,334) (10,972)
------- --------
Total stockholders' equity (deficit)..................... (995) (8,545)
------- --------
Total liabilities and stockholders' equity (deficit)..... $ 4,978 $ 12,254
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
pcOrder.com, Inc.
Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Revenues:
Software and subscriptions...................... $ 3,633 $ 6,475 $ 12,651
Content and services............................ 2,249 4,114 9,063
------- -------- --------
Total revenues................................ 5,882 10,589 21,714
------- -------- --------
Costs of revenues:
Software and subscriptions...................... 510 440 2,170
Software and subscriptions--affiliated royalty
fee............................................ 312 583 1,072
------- -------- --------
Total software and subscriptions............... 822 1,023 3,242
Content and services............................ 1,112 2,553 7,068
------- -------- --------
Total cost of revenues........................ 1,934 3,576 10,310
------- -------- --------
Gross profit...................................... 3,948 7,013 11,404
Operating expenses:
Research and development........................ 1,168 1,129 4,292
Selling and marketing........................... 2,555 4,793 12,151
General and administrative...................... 726 1,792 3,689
Amortization of deferred stock and stock
compensation
expense........................................ -- -- 1,468
------- -------- --------
Total operating expenses...................... 4,449 7,714 21,600
------- -------- --------
Operating loss.................................... (501) (701) (10,196)
Interest income................................... -- -- 172
------- -------- --------
Loss before income taxes.......................... (501) (701) (10,024)
Income tax provision (benefit).................... (191) 427 (386)
------- -------- --------
Net loss.......................................... $ (310) $ (1,128) $ (9,638)
======= ======== ========
Basic and diluted net loss per share.............. $ (0.02) $ (0.09) $ (0.75)
======= ======== ========
Weighted average shares outstanding............... 12,800 12,800 12,861
======= ======== ========
Unaudited pro forma information:
Historical loss before income taxes............. $(10,024)
Pro forma income tax benefit.................... (292)
--------
Pro forma net loss.............................. $ (9,732)
========
Pro forma basic and diluted net loss per share.. $ (0.76)
========
</TABLE>
See accompanying notes.
F-4
<PAGE>
pcOrder.com, Inc.
Statements of Stockholders' Equity (Deficit)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional Deferred Retained
-------------- ----------------- Paid-In Stock Earnings
Shares Amount Shares Amount Capital Compensation (Deficit) Total
------- ------ ---------- ------ ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 43,000 $ -- 12,757,000 $128 $ 210 $ -- $ 104 $ 442
Net loss................ -- -- -- -- -- -- (310) (310)
------- ---- ---------- ---- ------ -------- --------- --------
Balance at December 31,
1996................... 43,000 -- 12,757,000 128 210 -- (206) 132
Exercise of stock
options................ 225 -- -- -- 1 -- -- 1
Net loss................ -- -- -- -- -- -- (1,128) (1,128)
------- ---- ---------- ---- ------ -------- --------- --------
Balance at December 31,
1997................... 43,225 -- 12,757,000 128 211 -- (1,334) (995)
Exercise of stock
options................ 148,377 1 -- -- 444 -- -- 445
Income tax benefit from
stock options
exercised.............. -- -- -- -- 175 -- -- 175
Deferred stock
compensation related to
stock options.......... -- -- -- -- 2,811 (2,811) -- --
Amortization of deferred
stock and stock
compensation expense... -- -- -- -- 383 1,085 -- 1,468
Net loss................ -- -- -- -- -- -- (9,638) (9,638)
------- ---- ---------- ---- ------ -------- --------- --------
Balance at December 31,
1998................... 191,602 $ 1 12,757,000 $128 $4,024 $ (1,726) $ (10,972) $ (8,545)
======= ==== ========== ==== ====== ======== ========= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
pcOrder.com, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Operating activities
Net loss........................................... $ (310) $(1,128) $(9,638)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation..................................... 346 459 1,189
Amortization of deferred stock and stock
compensation expense............................ -- -- 1,468
Changes in operating assets and liabilities:
Accounts receivable............................. (2,194) 172 (2,498)
Other assets.................................... (4) 4 (815)
Deferred tax assets............................. (483) 691 --
Accounts payable................................ 226 (36) 575
Accrued expenses................................ 392 86 1,479
Accrued payroll and related liabilities......... 268 393 379
Payable to Trilogy.............................. -- 432 4,249
Deferred revenue................................ 1,112 2,050 8,319
------- ------- -------
Net cash provided by (used in) operating
activities........................................ (647) 3,123 4,707
Investing activities
Purchase of property and equipment................. (359) (662) (2,633)
------- ------- -------
Net cash used in investing activities.............. (359) (662) (2,633)
Financing activities
Change in payable to Trilogy....................... 1,006 (255) --
Proceeds from exercise of stock options............ -- 1 445
------- ------- -------
Net cash provided by (used in) financing
activities........................................ 1,006 (254) 445
------- ------- -------
Increase in cash and cash equivalents.............. -- 2,207 2,519
Cash and cash equivalents at beginning of year..... -- -- 2,207
------- ------- -------
Cash and cash equivalents at end of year........... $ -- $ 2,207 $ 4,726
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements
December 31, 1998
1. Business
pcOrder.com, Inc., (the "Company") is a substantially wholly-owned
subsidiary of Trilogy Software, Inc. and its predecessor entities including
Trilogy Development Group, Inc. ("parent" or "Trilogy"). The Company commenced
operations as a separate business unit within Trilogy on July 1, 1993 and was
incorporated as a separate entity on July 18, 1994. The Company provides
electronic commerce technology and tailored solutions to the manufacturers,
distributors and resellers of computer products primarily in the U.S. The
Company's products include software applications and support for those
applications. The software applications consist of an integrated application
suite that includes cataloging, quoting, pricing, availability, and product
configuration. Content for these applications in the form of detailed product
databases containing configuration, pricing, availability and specifications
are also provided and updated by the Company. Customers can choose to have the
Company host the software applications or install them at their site. In
addition, the Company provides consulting services to help customers build and
integrate electronic commerce capabilities to meet their specified needs.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences may be material to the financial statements.
Revenue Recognition
The Company adopted Statement of Position ("SOP") 97-2, Software Revenue
Recognition, and SOP 98-4, Deferral of the Effective Date of a Provision of
SOP 97-2 as of January 1, 1998. SOP 97-2 and 98-4 provide guidance for
recognizing revenue on software transactions and supersede SOP 91-1, Software
Revenue Recognition. The adoption of SOP 97-2 and 98-4 did not have a material
impact on the Company's financial results.
Software and subscription revenues consist of subscription based or
perpetual licensing fees under arrangements which provide customers with the
right to use the respective product(s) and software maintenance fees. The
Company generally sells the right to use its products under subscription based
license arrangements which provide the customer with unlimited access to any
new versions or releases and technical support at no additional charge over
the term of the arrangement. Revenue for subscription based arrangements is
recognized ratably over the term of the agreement and recognition commences
when persuasive evidence of an agreement exists, delivery of the product has
occurred, the fee is fixed and determinable and collectibility is probable.
The Company may also sell the right to use its products under a perpetual
license arrangement. Revenue from perpetual licenses is recognized when
persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed and determinable, and collectibility is probable.
Revenue recognized from perpetual license arrangements represented 33%, 7% and
15% of total revenues in 1996, 1997 and 1998, respectively. The Company also
sells software maintenance which provides technical support and the right to
unspecified upgrades on an if-and-when available basis. Revenue from software
maintenance arrangements is recognized ratably over the term of the agreement
and commences once implementation of the product has occurred.
F-7
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
Content revenues consist of fees charged for content access, entry, updates
and maintenance services (collectively, "content maintenance"). Content
maintenance provides the customer with constantly updated information within
the catalog database, especially information that is specific to the
customer's product offerings. Content fees are recognized ratably over the
term of the arrangement generally commencing upon initial content entry.
Service fees consist of integration, customization and training and are
generally recognized as the services are performed, upon completion of
specific contractual events or based on an estimated percentage of completion
as work progresses. Services generally occur at the inception of a
subscription or license arrangement to provide installation, integration,
and/or customization to deploy the software products as well as training of
customer personnel.
Customer advances and billed amounts due from customers in excess of revenue
recognized are recorded as deferred revenue. Amounts recorded as deferred
revenue that are not expected to be recognized as revenue within the following
twelve months are classified as long-term.
Effective December 15, 1998, the American Institute of Certified Public
Accountants ("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.
Product Development and Database Maintenance Cost
The Company's policy is to capitalize eligible computer software costs upon
achievement of technological feasibility, which the Company has defined as
completion of a working model, subject to net realizable value considerations.
As of December 31, 1998, no significant costs have met this criteria and,
accordingly, the Company has charged all software development costs to expense
as incurred in the accompanying statements of operations.
Research and development expenses are expensed as incurred.
Costs to maintain the Company's proprietary database are expensed as
incurred and are included as a cost of content and service revenues.
Net Loss per Share
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") 128, Earnings Per Share. Basic net loss per share is
computed by dividing net loss available to Common Stockholders by the weighted
average number of common shares outstanding during the period. Diluted net
loss per share is calculated using the weighted average number of outstanding
shares of Common Stock plus dilutive common stock equivalents. For the years
ended December 31, 1996, 1997, and 1998, there was no impact from common stock
equivalents under the treasury stock method. For the year ended December 31,
1998, approximately 1,200,000 common equivalent shares are excluded from the
diluted calculation as they are anti-dilutive. Accordingly, basic and diluted
net loss per share are the same for all periods presented.
In February 1998, the SEC issued Staff Accounting Bulletin ("SAB") 98 which
requires issuances of common stock, options and warrants for nominal
consideration in periods preceding an initial public offering to be included
in the calculations of earnings per share as if they were outstanding
F-8
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
for all periods presented. To date, the Company has had no issuances of common
stock, options or warrants for nominal consideration.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, Reporting Comprehensive Income. The Company adopted SFAS 130 during the
year ended December 31, 1998. There was no impact to the Company as a result
of the adoption of SFAS 130, as there were no differences between net loss and
comprehensive loss for all periods presented.
Cash and Cash Equivalents
Cash equivalents consist primarily of cash deposits and money market
investments with original maturities of ninety days or less when purchased.
Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is computed using the straight-line method over the estimated useful
lives of 18 months to 5 years.
Segments
In June 1997, the FASB issued SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. The Company adopted SFAS 131 during the
year ended December 31, 1998. Such adoption did not have a material effect on
the Company's financial disclosures as the Company continues to consider its
business activities as a single segment.
Internally Used Computer Software
In March 1998, the AICPA issued 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 have been met. The Company is required to implement SOP 98-1
for the year ending December 31, 1999. Adoption of SOP 98-1 is not expected to
have a material impact on the Company's financial condition or results of
operations.
Income Taxes
The liability method is used for accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
The Company has entered into a tax allocation agreement with Trilogy.
Accordingly, the Company's operations are included in the consolidated income
tax returns filed by Trilogy. The current income tax provision (benefit) in
the accompanying financial statements has been computed as follows:
In the case of a current income tax provision, the Company recognizes the
amount of expense as if the Company had filed separate income tax returns
with the liability shown as a payable to Trilogy.
In the case of a current income tax benefit, the Company recognizes the
amount of benefit the consolidated group obtained through utilization of
net operating losses and other tax attributes, resulting in a reduction in
the payable to Trilogy.
Deferred tax expense (benefit) is computed as if the Company had not been
included in the consolidated tax group of Trilogy.
The pro forma disclosure on the statements of operations reflects adjustments
to the 1998 income tax benefit as if the Company had filed a separate income
tax return.
F-9
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
Financial Presentation
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
3. Concentration of Credit Risk and Significant Customers
Cash and accounts receivable potentially expose the Company to
concentrations of credit risk, as defined by SFAS 105, Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk. Excess cash is
placed with highly rated financial institutions. The Company provides credit,
in the normal course of business, to a number of customers geographically
dispersed throughout the U.S. The Company performs ongoing credit evaluations
of its customers and maintains allowances for potential credit losses. The
Company generally requires certain up-front payments from customers, and
customers can be denied access to the product in the event of non-payment.
The following table summarizes the changes in the allowance for doubtful
accounts for 1996, 1997, and 1998 (in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1995........................................... $ 40
Additions charged to costs and expenses.............................. 165
Write-off of uncollectible accounts.................................. (92)
----
Balance at December 31, 1996........................................... 113
Additions charged to costs and expenses.............................. 315
Write-off of uncollectible accounts.................................. (147)
----
Balance at December 31, 1997........................................... 281
Additions charged to costs and expenses.............................. 112
Write-off of uncollectible accounts.................................. (43)
----
Balance at December 31, 1998........................................... $350
====
</TABLE>
Sales to individual customers constituting 10% or more of total revenues for
each year were as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Customer No. 1..................................... $ 958 $ -- $ --
Customer No. 2..................................... 935 -- --
Customer No. 3..................................... 1,397 4,070 3,833
Customer No. 4..................................... 1,588 -- --
Customer No. 5..................................... -- -- 3,523
Customer No. 6..................................... -- -- 2,975
</TABLE>
4. Related Party Transactions
Effective September 1, 1998, the Company and Trilogy entered into a
technology, services and license agreement that amended a master license
agreement signed in 1994. Under the new agreement, each party granted the
other a nonexclusive, irrevocable, perpetual, worldwide, fully paid-up license
to internally use, make, reproduce and/or prepare derivative works of the
products of the other party, or to sublicense any non-party to do so, subject
to certain confidentiality restrictions. The Company and Trilogy are each
obligated to pay to the other monthly royalties on (i) license fees derived
from sales of products that incorporate, and/or data maintenance services
related to, the other
F-10
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
party's technology; (ii) software maintenance fees other than data maintenance
services in connection with products that incorporate the other party's
technology; and (iii) on-line subscription service fees from products that
incorporate the other party's technology. The rights granted to Trilogy by the
Company are subject to change of control provisions as described in the
agreement. For each of the three years in the period ended December 31, 1998,
the Company committed to pay royalties annually to Trilogy pursuant to the
applicable agreements in effect at that time, as follows:
. 20% of the license fees derived from sales of the Company's products.
. 9% of software maintenance fees related to the Company's products.
. 6% of subscription fees from sales of the Company's products.
Such royalties amounted to approximately $312,000, $583,000 and $1,072,000
in the years ended December 31, 1996 and 1997 and 1998, respectively.
The Company operates under a services agreement with Trilogy whereby Trilogy
provides certain services on behalf of the Company as follows:
. Management services in the form of on-going support in business
operations.
. Financial services support in the form of insurance and risk management,
tax reporting assistance and payroll processing.
. Human resources support in the form of advice and assistance with respect
to compensation, employee benefits and other employee matters.
. Certain administrative services.
The above services agreement may be modified as deemed necessary, upon
mutual consent between Trilogy and the Company.
Prior to 1998, the Company subleased its office space from Trilogy in
accordance with a facility agreement.
In consideration of receipt of the above services and facilities, the
Company must reimburse Trilogy for its pro rata share of the total cost of
such services and facilities based upon its pro rata share of total full-time
equivalent employees and its pro rata share of total space occupied,
respectively. The Company was charged by Trilogy for such services and
facilities approximately $455,000, $443,000 and $294,000 in the years ended
December 31, 1996, 1997 and 1998, respectively.
In addition to the above fees and services, during 1998 the Company also
committed to pay Trilogy approximately $1,240,000 for technical new hire
recruiting and training services performed by Trilogy on behalf of the
Company. Such amount has been allocated to various departments within the
Company that have directly benefited from these services.
See also Notes 2, 6 and 8.
F-11
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
5. Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------ -------
<S> <C> <C>
Furniture and fixtures...................................... $ -- $ 275
Equipment................................................... 1,375 3,306
Software.................................................... -- 135
Leasehold improvements...................................... -- 292
------ -------
1,375 4,008
Accumulated depreciation.................................... (881) (2,070)
------ -------
Net property and equipment.................................. $ 494 $ 1,938
====== =======
</TABLE>
6. Income Taxes
Significant components of the provision for income tax expense (benefit)
attributable to continuing operations are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Current:
Federal............................................... $ 269 $(239) $(361)
State................................................. 23 (25) (25)
----- ----- -----
292 (264) (386)
Deferred:
Federal............................................... (427) 627 --
State................................................. (56) 64 --
----- ----- -----
(483) 691 --
----- ----- -----
$(191) $ 427 $(386)
===== ===== =====
</TABLE>
A current tax benefit has been recorded for the years ended December 31,
1997 and 1998, resulting from utilization of the Company's net operating
losses and tax credits within the Trilogy consolidated income tax return. The
recorded benefits are reimbursed to the Company under the provisions of the
intercompany tax allocation agreement.
F-12
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying values of assets and liabilities for financial reporting
purposes and the values used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
----- ------
<S> <C> <C>
Deferred tax assets:
Deferred revenue............................................ $ 257 $3,084
Stock option compensation, net of exercises................. -- 564
Accrued wages and other..................................... 128 136
Depreciation and related amounts............................ 98 195
Bad debt and other non-deductible allowances................ 201 250
----- ------
Total deferred tax assets..................................... 684 4,229
Valuation allowance for deferred tax assets................... (684) (4,229)
----- ------
Net deferred taxes............................................ $ -- $ --
===== ======
</TABLE>
A valuation allowance has been provided to offset the deferred tax assets at
December 31, 1998 due to uncertainties regarding the future realization of
such deferred tax assets. The valuation allowance increased by $684,000 in the
year ended December 31, 1997. A deferred tax asset has not been recorded for
any net operating losses and other tax attributes as they have been utilized
in the Trilogy consolidated tax return, as previously discussed.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense
(benefit) is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Tax at U.S. statutory
rate................... (34.0)% (35.0)% (35.0)%
State taxes--net of
federal benefit........ (2.8) (3.0) (3.6)
Non-deductible expenses
and other.............. 2.4 5.6 0.4
Change in valuation
allowance.............. -- 97.7 35.5
Other................... (3.7) (4.3) (1.2)
----- ----- -----
(38.1)% 61.0 % (3.9)%
===== ===== =====
</TABLE>
The exercise of certain stock options which have been granted under the
Company's stock option plan resulted in compensation which is includable in
the taxable income of the applicable option holder and deductible by the
Company for federal and state income tax purposes.
7. Employee Benefit Plan
Trilogy sponsors a defined contribution plan in accordance with Section
401(k) of the Internal Revenue Code. The Plan is available to all full-time
employees of the Company on the first day of the month following employment.
The Plan is funded through employee contributions. The Company's only expenses
relating to the Plan are administrative costs, which are not significant.
F-13
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
8. 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.
Asset Transfer Agreement
Effective June 1, 1996, the Company entered into an asset transfer agreement
with Trilogy whereby the Company received title to certain property and
equipment in consideration for the issuance of 11,520,000 shares of the
Company's Class B Common Stock to Trilogy. In connection with the agreement,
Trilogy effectively forgave all amounts owed by the Company to Trilogy for the
purchase of such property and equipment, resulting in contributed capital of
approximately $337,000. The effect of this transaction has been reflected as
of December 31, 1995. See also Note 4.
Stock Option Plans
The Company's 1996 Stock Option Plan ("1996 Plan") provides for the grant
for up to 3,500,000 shares of Class A Common Stock of incentive and
nonqualified options to employees. The stock options vest over various terms,
generally with 0% to 25% exercisable immediately, and an additional 18.75% to
40% exercisable each year thereafter until the option is fully exercisable.
The term of each option is 10 years from the date of grant.
F-14
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
The Company has elected to follow the Accounting Principles Board Opinion
("APB") 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its employee stock options. Under APB 25,
when the exercise price of the Company's employee stock options equals the
estimated market price of the underlying stock on the date of grant, no
compensation expense is recognized. In connection with certain options granted
during 1998, the Company is recognizing compensation expense totaling
approximately $2,811,000 over the vesting period. This amount represents the
difference between the exercise prices and the deemed fair values of stock
option grants for 941,142 shares of Class A Common Stock. The exercise prices
and the deemed fair values for such grants ranged from $3.00 to $10.00 per
share and $6.40 to $11.00 per share, respectively, during the period in which
such options were granted. At December 31, 1998, the Company had a total of
approximately $1,726,000 remaining to be amortized over the corresponding
vesting period of each respective option, generally four years. A deferred tax
benefit is recorded for the amortized compensation expense if and when the
Company realizes the associated tax benefits of the options. As of December
31, 1998, such deferred tax benefits have been fully reserved by a valuation
allowance due to their uncertain future utilization.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, Accounting for Stock Based Compensation, which also requires that
the information be determined as if the Company had accounted for its employee
stock options granted under the fair value method prescribed by SFAS 123. The
fair value for these options was estimated at the date of grant using a
minimum value option pricing model (0% volatility) for options granted prior
to the Company's initial filing on Form S-1 dated September 4, 1998. The fair
value for options granted subsequent to the initial filing date were estimated
at the date of grant using the Black-Scholes pricing model and a volatility of
40%. The fair value of options was estimated under both pricing models with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate.............................. 5.8% 6.4% 5.0%
Dividend yield....................................... 0% 0% 0%
Weighted-average expected life of options............ 5 years 5 years 5 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma compensation expense and net loss for 1996, 1997 and 1998
are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1997 1998
------ ------- --------
<S> <C> <C> <C>
Net loss (in thousands):
As reported.................................... $ (310) $(1,128) $ (9,638)
Pro forma...................................... $ (351) $(1,401) $(10,408)
Basic and diluted net loss per share:
As reported.................................... $(0.02) $ (0.09) $ (0.75)
Pro forma...................................... $(0.03) $ (0.11) $ (0.81)
</TABLE>
During 1998, the Company granted a total of 160,000 options to certain non-
employees which vested immediately. In connection with such grants, the
Company recorded stock compensation expense of $383,000 in 1998 based on the
Black-Scholes pricing model, using a volatility factor of 40%, a risk-free
interest rate of 5.6% and a dividend yield of 0%.
F-15
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
A summary of changes in common stock options is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Price Price
Shares Per Share Per Share
---------- ------------ ---------
<S> <C> <C> <C>
Options outstanding December 31, 1995
Granted................................. 2,040,300 $ 3.00 $3.00
Exercised............................... -- -- --
Surrendered............................. -- -- --
---------- ------------ -----
Options outstanding December 31, 1996..... 2,040,300 $ 3.00 $3.00
Granted................................. 158,500 $ 3.00 $3.00
Exercised............................... (225) $ 3.00 $3.00
Surrendered............................. (7,750) $ 3.00 $3.00
---------- ------------ -----
Options outstanding December 31, 1997..... 2,190,825 $ 3.00 $3.00
Granted................................. 2,590,076 $3.00-$10.00 $4.31
Exercised............................... (148,377) $ 3.00 $3.00
Surrendered............................. (1,425,450) $3.00-$ 8.00 $3.13
---------- ------------ -----
Options outstanding December 31, 1998..... 3,207,074 $3.00-$10.00 $4.00
========== ============ =====
</TABLE>
At December 31, 1998, there were 144,324 options available for grant under
the 1996 Plan. At December 31, 1998, the Company had reserved 3,351,398 shares
of common stock for issuance in connection with the exercise of stock options
granted pursuant to the 1996 Plan.
The following table summarizes information concerning outstanding options as
of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------- ------------------------
Range of Weighted- Weighted-
Exercise Weighted-Average Average Average
Prices Number Remaining Contractual Life Exercise Price Number Exercise Price
- ------------ --------- -------------------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.00 2,604,190 8.90 years $3.00 1,043,263 $3.00
$6.40-$10.00 602,884 9.70 years $8.34 160,000 $8.00
--------- ---------
$3.00-$10.00 3,207,074 9.05 years $4.00 1,203,263 $3.66
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Weighted-average deemed fair value of stock
options granted during the year:
Exercise price equal to fair value of stock
on date of grant.......................... $0.76 $0.82 $1.22
Exercise price less than fair value of
stock on date of grant.................... -- -- $4.73
Weighted-average remaining contractual life
of options.................................. 9.83 years 8.88 years 8.73 years
</TABLE>
In March 1997, under the terms of an applications subscription arrangement,
the Company gave the right to require the Company to grant to a customer an
option to purchase up to 320,000 shares of common stock of the Company if one
of certain specified events occurs, including an initial public offering. As
of December 31, 1998, no specified event had occurred and the option was not
F-16
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
outstanding. At the time the option is issued, the exercise price will be set
as the fair market value of the underlying stock. The number of shares subject
to the option shall be adjusted for any dilutive event which occurs between
March 1997 and the date of issuance of the option.
On February 3, 1999, the Company adopted the 1999 Stock Incentive Plan
("1999 Plan"). Under the 1999 Plan, the eligible individuals are: employees,
non-employee members of the Board of Directors and consultants. The types of
awards that may be made under the 1999 Plan include, but are not limited to,
options to purchase shares of the Company's Class A Common Stock, stock
appreciation rights, restricted shares, dividend equivalent rights,
performance units and performance shares. The Company has reserved 1,500,000
shares for issuance under the 1999 Plan, plus an annual increase beginning
January 1, 2000 equal to the lesser of (i) 500,000 shares, (ii) two percent of
the number of shares of Class A Common Stock outstanding as of such date, or
(iii) a lesser number of shares as determined by the Plan Administrator.
9. Commitments and Contingencies
Lease Arrangements
The Company leases office facilities under various operating leases expiring
from 1999 to 2003. Future lease commitments for office facilities as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................... 484
2000................................................................... 44
2001................................................................... 36
2002................................................................... 35
2003................................................................... 8
</TABLE>
Rent expense for the year ended December 31, 1998 was approximately
$563,000. Prior to 1998, the Company leased its office facilities from
Trilogy. See Note 4.
Litigation
The Company has filed a lawsuit against a former employee, and the former
employee has filed a separate lawsuit 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 financial position of the Company.
The Company is involved in various other lawsuits and legal proceedings
which have arisen in the normal course of business. While the ultimate results
of these other matters cannot be predicted with certainty, management does not
expect them to have a material adverse effect on the financial position of the
Company.
F-17
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each
of such Underwriters, for whom Goldman, Sachs & Co., Credit Suisse First
Boston Corporation and SG Cowen Securities Corporation are acting as
representatives, has severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
Number of
Shares of
Underwriter Common Stock
----------- ------------
<S> <C>
Goldman, Sachs & Co.............................................
Credit Suisse First Boston Corporation..........................
SG Cowen Securities Corporation.................................
---------
Total......................................................... 2,200,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Class A Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of the Prospectus to purchase up to an aggregate of 330,000
additional shares of Class A Common Stock solely to cover over-allotments, if
any. If the Underwriters exercise their over-allotment option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
2,200,000 shares of Class A Common Stock offered.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 180 days after the
date of this Prospectus, it will not offer, sell, contract to sell or
otherwise dispose of any securities of the Company (other than pursuant to
employee stock option plans existing on the date of this Prospectus) which are
substantially similar to the shares of Class A Common Stock or which are
convertible into or exchangeable for securities which are substantially
similar to the shares of Class A Common Stock, without the prior written
consent of the representatives, except for the shares of Class A Common Stock
offered in connection with the offering.
In connection with the offering, the Underwriters may purchase and sell the
Class A Common Stock in the open market. These transactions may include over-
allotment and stabilizing transactions and purchases to cover syndicate short
positions created in connection with the offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or
retarding a decline in the market price of the Class A Common Stock; and
syndicate short positions involve the sale by the Underwriters of a greater
number of shares of Class A Common Stock than they are required to
U-1
<PAGE>
purchase from the Company in the offering. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the securities sold in the offering for their
account may be reclaimed by the syndicate if such shares of Class A Common
Stock are repurchased by the syndicate in stabilizing or covering
transactions. These activities may stabilize, maintain or otherwise affect the
market price of the Class A Common Stock which may be higher than the price
that might otherwise prevail in the open market; and these activities, if
commenced, may be discontinued at any time. These transactions may be effected
on the Nasdaq National Market, in the over-the-counter market or otherwise.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Class A Common Stock offered by them.
Prior to this offering, there has been no public market for the Company's
Class A Common Stock. The initial public offering price will be negotiated
among the Company and the representatives. Among the factors considered in
determining the initial public offering price of the Class A Common Stock, in
addition to prevailing market conditions, will be the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of
the above factors in relation to market valuation of companies in related
businesses.
Up to percent of the shares of Class A Common Stock offered hereby may
be reserved for sale at the initial public offering price to the Company's
employees, directors and other individuals with direct business relationships
with the Company. The number of shares available for sale to the general
public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as other shares offered
hereby.
Application has been made for quotation of the Class A Common Stock on the
Nasdaq National Market under the symbol "PCOR".
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act. In addition,
Trilogy has agreed to indemnify the Underwriters against certain liabilities
including liabilities under the Securities Act, arising from certain
information included in this Prospectus that relates to Trilogy.
U-2
<PAGE>
Inside Back Cover
Company Logo
"Moving the Computer Industry to the Web".
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No person has been authorized to give any information or to make any repre-
sentations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having
been authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy
such securities in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the infor-
mation contained herein is correct as of any time subsequent to its date.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 27
Dividend Policy........................................................... 27
Capitalization............................................................ 28
Dilution.................................................................. 29
Selected Financial Data................................................... 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 31
Business.................................................................. 42
Relationship with Trilogy................................................. 55
Management................................................................ 60
Certain Transactions...................................................... 69
Principal Stockholders.................................................... 73
Description of Capital Stock.............................................. 74
Shares Eligible for Future Sale........................................... 77
Legal Matters............................................................. 78
Experts................................................................... 79
Additional Information.................................................... 79
Index to Financial Statements............................................. F-1
Underwriting.............................................................. U-1
</TABLE>
Through and including , 1999 (the 25th day after the date of this
Prospectus), all dealers effecting transactions in the Common Stock, whether
or not participating in this distribution, may be required to deliver a Pro-
spectus. This is in addition to the obligation of dealers to deliver a Pro-
spectus when acting as Underwriters and with respect to their unsold allot-
ments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,200,000 Shares
pcOrder.com, Inc.
Class A Common Stock
(par value $0.01 per share)
-------------------------
[pcOrder.com, Inc. Logo]
-------------------------
Goldman, Sachs & Co.
Credit Suisse First Boston
SG Cowen
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses to be paid by the Registrant in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are as follows:
<TABLE>
<CAPTION>
Amount*
----------
<S> <C>
Securities and Exchange Commission Filing Fee.................... $ 10,325
NASD Filing Fee.................................................. 3,750
Nasdaq National Market Listing Fee............................... 48,750
Accounting Fees and Expenses..................................... 475,000
Blue Sky Fees and Expenses....................................... 25,000
Legal Fees and Expenses.......................................... 375,000
Transfer Agent and Registrar Fees and Expenses................... 5,000
Printing Expenses................................................ 200,000
Miscellaneous Expenses........................................... 57,175
----------
Total.......................................................... $1,200,000
==========
</TABLE>
- --------
* All amounts are estimates except the Securities and Exchange Commission
filing fee, the NASD filing fee and the Nasdaq National Market listing fee.
Item 14. Indemnification of Directors and Officers
Under Section 145 of the General Corporate Law of the State of Delaware, the
Registrant has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Bylaws (Exhibit 3.4 hereto) also provide for mandatory indemnification of its
directors and executive officers, and permissive indemnification of its
employees and agents, to the fullest extent permissible under Delaware law.
The Registrant's Certificate of Incorporation (Exhibit 3.2 hereto) provides
that the liability of its directors for monetary damages shall be eliminated
to the fullest extent permissible under Delaware law. Pursuant to Delaware
law, this includes elimination of liability for monetary damages for breach of
the directors' fiduciary duty of care to the Registrant and its stockholders.
These provisions do not eliminate the directors' duty of care and, in
appropriate circumstances, equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant, for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for any transaction from which the director derived an improper personal
benefit, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
Prior to the effective date of the Registration Statement, the Registrant
will have entered into agreements with its directors and certain of its
executive officers that require the Registrant to indemnify such persons
against expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any such person
may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person
reasonably believed to be in
II-1
<PAGE>
or not opposed to the best interests of the Registrant and, with respect to
any criminal proceeding, had no reasonable cause to believe his or her conduct
was unlawful. The indemnification agreements also set forth certain procedures
that will apply in the event of a claim for indemnification thereunder.
The Registrant intends to obtain in conjunction with the effectiveness of
the Registration Statement a policy of directors' and officers' liability
insurance that insures the Company's directors and officers against the cost
of defense, settlement or payment of a judgment under certain circumstances.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act or otherwise.
Item 15. Recent Sales of Unregistered Securities
For the three year period from February 9, 1996 to February 9, 1999, the
Registrant has issued and sold the following unregistered securities:
1. During the period, the Registrant granted stock options to employees,
directors and consultants under its 1996 Plan covering an aggregate of
4,978,351 shares of the Registrant's Class A Common Stock, at exercise
prices ranging from $3.00 to $10.00 with a weighted average price of $3.95.
2. During the period, the Registrant issued and sold an aggregate of
179,945 shares of its Class A Common Stock to 76 employees for cash in the
aggregate amount of $560,663 upon exercise of stock options granted
pursuant to the Registrant's 1996 Plan.
3. During the period, the Registrant issued and sold 11,520,000 shares of
its Class B Common Stock to Trilogy in exchange for certain assets having a
total value of $337,000.
4. During the period, the Registrant entered into an agreement with GE
Capital pursuant to which GE Capital has the right to require the
Registrant to grant to GE Capital an option to purchase up to 320,000
shares of restricted Class A Common Stock upon certain events including an
initial public offering by the Registrant.
The sale and issuance of securities in the transactions described in
paragraphs 1 and 2 above were deemed to be exempt from registration under the
Securities Act by virtue of Rule 701 promulgated thereunder in that they were
offered and sold either pursuant to written compensatory benefit plans or
pursuant to a written contract relating to compensation, as provided by Rule
701.
The sale and issuance of securities in the transaction described in
paragraph 3 above were deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of such Securities Act as a
transaction by an issuer not involving a public offering.
Appropriate legends were affixed to the stock certificates issued in the
above transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. No Underwriters were employed in any
of the above transactions.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
The exhibits are as set forth in the Exhibit Index.
(b) Financial Statement Schedules
All schedules have been omitted since they are not required or are not
applicable or the required information is shown in the financial statements or
related notes.
II-2
<PAGE>
Item 17. Undertakings
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations
and registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Austin, state of Texas on the 8th day of February, 1999.
pcOrder.com, Inc.
By: *
-----------------------------------
Ross A. Cooley
Chairman, Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman and Chief February 8, 1999
______________________________________ Executive Officer
Ross A. Cooley (Principal Executive
Officer)
* President and Chief February 8, 1999
______________________________________ Operating Officer
Christina C. Jones (Principal Executive
Officer)
/s/ James J. Luttenbacher Vice President, Chief February 8, 1999
______________________________________ Financial Officer and
James J. Luttenbacher Secretary
(Principal Financial
Officer and Accounting
Officer)
* Director February 8, 1999
______________________________________
Joseph A. Liemandt
* Director February 8, 1999
______________________________________
Peter J. Barris
* Director February 8, 1999
______________________________________
Linwood A. Lacy, Jr.
* Director February 8, 1999
______________________________________
Robert W. Stearns
/s/ James J. Luttenbacher February 8, 1999
*By: _________________________________
James J. Luttenbacher
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1* Certificate of Incorporation of the Registrant, as currently in
effect.
3.2 Certificate of Amendment to the Certificate of Incorporation of the
Registrant.
3.3* Bylaws of the Registrant, as currently in effect.
3.4** Amended and Restated Bylaws of the Registrant.
4.1 Reference is made to Exhibits 3.1 and 3.2.
5.1 Opinion of Morrison & Foerster, LLP as to the legality of the Common
Stock being registered.
10.1** Form of Indemnification Agreement between the Company and each of its
Officers and Directors.
10.2* Cooley Employment Agreement.
10.3* Jones Employment Agreement.
10.4* Luttenbacher Employment Agreement.
10.5 1996 Stock Option Plan.
10.5.1 1999 Stock Option Plan.
10.6+** Technology, Services and License Agreement.
10.7+** Management Services Agreement.
10.8* Tax Allocation Agreement.
10.9 Asset Transfer Agreement.
10.10 Amendment to Asset Transfer Agreement.
23.1 Consent of Morrison & Foerster, LLP. Reference is made to Exhibit 5.1.
23.2 Consent of Ernst & Young LLP, Independent Auditors.
24.1* Powers of Attorney.
27.1 Financial Data Schedule
</TABLE>
- --------
+ Confidential treatment requested as to portions of this exhibit.
* Previously filed.
** To be filed by amendment.
<PAGE>
Exhibit 1.1
pcOrder.com, Inc.
Class A Common Stock
($.01 Par Value)
_______________
Underwriting Agreement
----------------------
February __, 1999
Goldman, Sachs & Co.,
Credit Suisse First Boston Corporation,
SG Cowen Securities,
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004
Ladies and Gentlemen:
pcOrder.com, Inc., a Delaware corporation (the "Company"), proposes,
subject to the terms and conditions stated herein, to issue and sell to the
Underwriters named in Schedule I hereto (the "Underwriters") an aggregate of
2,200,000 shares and, at the election of the Underwriters, up to 330,000
additional shares of the Company's Class A Common Stock, $.01 par value
("Stock") of the Company. The aggregate of 2,200,000 shares to be sold by the
Company is herein called the "Firm Shares" and the aggregate of up to 330,000
additional shares to be sold by the Company is herein called the "Optional
Shares". The Firm Shares and the Optional Shares which the Underwriters elect
to purchase pursuant to Section 2 hereof are herein collectively called the
"Shares."
1. (a) The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-62985) (the
"Initial Registration Statement") in respect of the Shares has been filed
with the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in
the form heretofore delivered, and excluding exhibits thereto, to you for
each of the other Underwriters, have been declared effective by the
Commission in such form; other than a registration statement, if any,
increasing the size of the offering (a "Rule 462(b) Registration
Statement"), filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended (the "Act"), which became effective upon filing, no other
document with respect to the Initial Registration Statement has heretofore
been filed with the Commission; and no stop order suspending the
effectiveness of the Initial Registration Statement, any post-effective
amendment thereto or the Rule 462(b) Registration Statement, if any, has
been issued and to the Company's knowledge, no
<PAGE>
proceeding for that purpose has been initiated or threatened by the
Commission (any preliminary prospectus included in the Initial Registration
Statement or filed with the Commission pursuant to Rule 424(a) of the rules
and regulations of the Commission under the Act, is hereinafter called a
"Preliminary Prospectus"; the various parts of the Initial Registration
Statement and the Rule 462(b) Registration Statement, if any, including all
exhibits thereto and including the information contained in the form of
final prospectus filed with the Commission pursuant to Rule 424(b) under
the Act in accordance with Section 5(a) hereof and deemed by virtue of Rule
430A under the Act to be part of the Initial Registration Statement at the
time it was declared effective, each as amended at the time such part of
the registration statement became effective, and such part of the Rule
462(b) Registration Statement, if any, that became or hereafter becomes
effective, are hereinafter collectively called the "Registration
Statement"; and such final prospectus, in the form first filed pursuant to
Rule 424(b) under the Act, is hereinafter called the "Prospectus").
(ii) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary
Prospectus, at the time of filing thereof, conformed in all material
respects to the requirements of the Act and the rules and regulations of
the Commission thereunder, and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that this representation and warranty shall not apply to any
statements or omissions made in reliance upon and in conformity with
information furnished in writing to the Company by an Underwriter through
Goldman, Sachs & Co. expressly for use therein;
(iii) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of
the Act and the rules and regulations of the Commission thereunder and do
not and will not, as of the applicable effective date as to the
Registration Statement and any amendment thereto and as of the applicable
filing date as to the Prospectus and any amendment or supplement thereto,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that this representation and
warranty shall not apply to any statements or omissions made in reliance
upon and in conformity with information furnished in writing to the Company
by an Underwriter through Goldman, Sachs & Co. expressly for use therein;
(iv) The Company has not sustained since the date of the latest
audited financial statements included in the Prospectus any material loss
or interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the
Prospectus, there has not been any change in the capital stock or long-term
debt of the Company other than options granted pursuant to the Company's
1996 Stock Option Plan and shares issued upon exercise of such options or
any material adverse change, or any development involving a prospective
material adverse change, in or affecting the general affairs, management,
financial position, stockholders' equity other than options granted
pursuant to the Company's 1996 Stock Option Plan or results of operations
of the Company, otherwise than as set forth or contemplated in the
Prospectus;
-2-
<PAGE>
(v) The Company has good and marketable title in fee simple to all
real property and good and marketable title to all personal property owned
by it, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not materially
affect the value of such property and do not materially interfere with the
use made and proposed to be made of such property by the Company; and any
real property and buildings held under lease by the Company are held by it
under valid, subsisting and enforceable leases with such exceptions as are
not material and do not materially interfere with the use made and proposed
to be made of such property and buildings by the Company;
(vi) The operations of the Company are, and at all times have been, in
compliance with all federal, regional, state, county or local laws,
statutes, ordinances, decisional law, rules, regulations, codes, orders,
decrees, directives and judgments relating to public health or safety,
pollution, damage to or protection of the environment ("Environmental
Laws") then applicable to the Company's business or any real property owned
or leased by the Company in all material respects. The Company has not
received any notice that it, or any of the real property owned or leased by
it: (A) is in violation of the requirements of any Environmental Laws; (B)
is the subject of any suit, claim, proceeding, demand, order, investigation
or request or demand for information arising under any Environment Laws; or
(C) has actual or potential liability under any Environmental Laws.
(vii) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus, and has been duly
qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it owns
or leases properties or conducts any business so as to require such
qualification, or is subject to no material liability or disability by
reason of the failure to be so qualified in any such jurisdiction;
(viii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid
and non-assessable and conform to the description of the Stock contained in
the Prospectus;
(ix) The Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when
issued and delivered against payment therefor as provided herein, will be
duly and validly issued and fully paid and non-assessable and will conform
to the description of the Stock contained in the Prospectus;
(x) The issue and sale of the Shares to be sold by the Company and the
compliance by the Company with all of the provisions of this Agreement and
the consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other material agreement or material instrument to which
the Company is a party or by which the Company is bound or to which any of
the property or assets of the Company is subject, nor will such action
result in any violation of the provisions of the Certificate of
Incorporation or By-laws of the Company or any statute or any order, rule
or regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its properties, except
-3-
<PAGE>
where the violation of such statute, order, rule or regulation would not
have a material adverse effect on the Company or any of its properties; and
no consent, approval, authorization, order, registration or qualification
of or with any such court or governmental agency or body is required for
the issue and sale of the Shares or the consummation by the Company of the
transactions contemplated by this Agreement, except the registration under
the Act of the Shares and such consents, approvals, authorizations, orders,
registrations or qualifications as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters and except where the failure to obtain or make
such consent, approval, authorization, order, registration or qualification
would not have a material adverse effect on the Company;
(xi) The Company is not in violation of its Certificate of
Incorporation or By-laws or in default in the performance or observance of
any material obligation, agreement, covenant or condition contained in any
indenture, mortgage, deed of trust, loan agreement, lease or other material
agreement or material instrument to which it is a party or by which it or
any of its properties may be bound;
(xii) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock, and under the caption "Underwriting",
insofar as they purport to describe the provisions of the laws and
documents referred to therein, are accurate, complete and fair;
(xiii) Other than as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company is a party or of
which any property of the Company is the subject which, if determined
adversely to the Company, would individually or in the aggregate have a
material adverse effect on the current or future financial position,
stockholders' equity or results of operations of the Company; and, to the
best of the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others;
(xiv) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company", as such terms are defined in the
Investment Company Act of 1940, as amended (the "Investment Company Act");
(xv) Neither the Company nor, to the Company's knowledge, any of its
affiliates does business with the government of Cuba or with any person or
affiliate located in Cuba within the meaning of Section 517.075, Florida
Statutes;
(xvi) Ernst & Young, LLP, who have certified certain financial
statements of the Company, are independent public accountants as required
by the Act and the rules and regulations of the Commission thereunder;
(xvii) The Company owns, or possesses adequate rights to use, all
material trademarks, service marks, trade names, trademark registrations,
service mark registrations, domain names and copyrights necessary for the
conduct of its business and nothing has come to the Company's attention
that causes it to believe that the conduct of its business will conflict
with, and has not received any notice of any claim of conflict with any
such rights of others except as would not have a material adverse effect on
the business, financial condition, results of operations or prospects of
the Company; and, to the best of the Company's knowledge after reasonable
investigation, the Company has not infringed and is not infringing any
trademarks, services marks, trade names, trademark
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registrations, service mark registrations, domain names or copyrights,
which infringement could reasonably be expected to have a material adverse
effect on the business, financial condition, results of operations or
prospects of the Company;
(xviii) The Company owns, or possesses adequate rights to use, all
material patents necessary for the conduct of its business; no valid United
States patent is, or to the knowledge of the Company would be, infringed by
the activities of the Company, except as would not have a material adverse
effect on the business, financial condition, results of operations or
prospects of the Company; there are no actions, suits or judicial
proceedings pending relating to patents or proprietary information to which
the Company is a party or of which any property of the Company is subject,
and, to the knowledge of the Company, no actions, suits or judicial
proceedings are threatened by governmental authorities or, except as set
forth in the Prospectus, others, in each case except as would not have a
material adverse effect on the business, financial condition, results of
operations or prospects of the Company; except as set forth or incorporated
by reference in the Prospectus or as would not have a material adverse
effect on the business, financial condition, results of operations or
prospects of the Company, the Company is not aware of any claim by others
that the Company is infringing or otherwise violating the patents or other
intellectual property of others and is not aware of any rights of third
parties to any of the Company's patent applications, licensed patents or
licenses which could affect materially the use thereof by the Company;
(xix) The Company carries, or is covered by, insurance as is
customary for companies similarly situated and engaged in similar
businesses in similar industries;
(xx) There are no contracts or other documents which are required to
be described in the Prospectus or to be filed as exhibits to the Initial
Registration Statement by the Act which are not so described or filed; and
(xxi) No labor disturbance by the employees of the Company exists or,
to the knowledge of the Company, is imminent which might be expected to
have a material adverse effect on the business, financial condition,
results of operations or prospects of the Company.
2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to sell to each of the Underwriters, and each of the Underwriters agrees,
severally and not jointly, to purchase from the Company, at a purchase price per
share of $_______________, the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto, and (b) in the event and to the extent
that the Underwriters shall exercise the election to purchase Optional Shares as
provided below, the Company agrees to sell to each of the Underwriters, and each
of the Underwriters agrees, severally and not jointly, to purchase from the
Company at the purchase price per share set forth in clause (a) of this Section
2, that portion of the number of Optional Shares as to which such election shall
have been exercised (to be adjusted by you so as to eliminate fractional shares)
determined by multiplying such number of Optional Shares by a fraction the
numerator of which is the maximum number of Optional Shares which such
Underwriter is entitled to purchase as set forth opposite the name of such
Underwriter in Schedule I hereto and the denominator of which is the maximum
number of Optional Shares that all of the Underwriters are entitled to purchase
hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to ___________________ Optional Shares, at the purchase price
per share set forth in the paragraph above, for the sole purpose of covering
overallotments in the sale of the Firm Shares. Any such election
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to purchase Optional Shares may be exercised only by written notice from you to
the Company, given within a period of 30 calendar days after the date of this
Agreement and setting forth the aggregate number of Optional Shares to be
purchased and the date on which such Optional Shares are to be delivered, as
determined by you but in no event earlier than the First Time of Delivery (as
defined in Section 4 hereof) or, unless you and the Company otherwise agree in
writing, earlier than two or later than ten business days after the date of such
notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in such
names as Goldman, Sachs & Co. may request upon at least forty-eight hours' prior
notice to the Company shall be delivered by or on behalf of the Company to
Goldman, Sachs & Co. through the facilities of the Depository Trust Company
("DTC"), for the account of such Underwriter, against payment by or on behalf of
such Underwriter of the purchase price therefor by wire transfer of Federal
(same-day) funds, payable to the order of the Company, to the account specified
by the Company to Goldman, Sachs & Co. at least forty-eight hours in advance.
The Company will cause the certificates representing the Shares to be made
available for checking and packaging at least twenty-four hours prior to the
Time of Delivery (as defined below) with respect thereto at the office of DTC or
its designated custodian (the "Designated Office"). The time and date of such
delivery and payment shall be, with respect to the Firm Shares, 9:30 a.m., New
York time, on ______________, 1999 or such other time and date as Goldman, Sachs
& Co. and the Company may agree upon in writing, and, with respect to the
Optional Shares, 9:30 a.m., New York time, on the date specified by Goldman,
Sachs & Co. in the written notice given by Goldman, Sachs & Co. of the
Underwriters' election to purchase such Optional Shares, or such other time and
date as Goldman, Sachs & Co. and the Company may agree upon in writing. Such
time and date for delivery of the Firm Shares is herein called the "First Time
of Delivery", such time and date for delivery of the Optional Shares, if not the
First Time of Delivery, is herein called the "Second Time of Delivery", and each
such time and date for delivery is herein called a "Time of Delivery."
(b) The documents to be delivered at each Time of Delivery by or on
behalf of the parties hereto pursuant to Section 7 hereof, including the cross
receipt for the Shares and any additional documents requested by the
Underwriters pursuant to Section 7(l) hereof, will be delivered at the offices
of Morrison & Foerster LLP, 755 Page Mill Road, Palo Alto, California 94304 (the
"Closing Location"), and the Shares will be delivered at the Designated Office,
all at such Time of Delivery. A meeting will be held at the Closing Location at
5:00 p.m., New York City time, on the New York Business Day next preceding such
Time of Delivery, at which meeting the final drafts of the documents to be
delivered pursuant to the preceding sentence will be available for review by the
parties hereto. For the purposes of this Section 4, "New York Business Day"
shall mean each Monday, Tuesday, Wednesday, Thursday and Friday which is not a
day on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company, and Trilogy Software, Inc. ("Trilogy") with respect to
Section 5(e), agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to file
such Prospectus pursuant to Rule 424(b) under the Act not later than the
Commission's close of business on the second business day following the
execution and delivery of this
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Agreement, or, if applicable, such earlier time as may be required by Rule
430A(a)(3) under the Act; to make no further amendment or any supplement to
the Registration Statement or Prospectus which shall be disapproved by you
promptly after reasonable notice thereof; to advise you, promptly after it
receives notice thereof, of the time when any amendment to the Registration
Statement has been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish you with
copies thereof; to advise you, promptly after it receives notice thereof,
of the issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or
Prospectus, of the suspension of the qualification of the Shares for
offering or sale in any jurisdiction, of the initiation or threatening of
any proceeding for any such purpose, or of any request by the Commission
for the amending or supplementing of the Registration Statement or
Prospectus or for additional information; and, in the event of the issuance
of any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or Prospectus or suspending any such qualification,
promptly to use its best efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply with
such laws so as to permit the continuance of sales and dealings therein in
such jurisdictions for as long as may be necessary to complete the
distribution of the Shares, provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction;
(c) Prior to 10:00 a.m., New York City time, on the New York Business
Day next succeeding the date of this Agreement and from time to time, to
furnish the Underwriters with copies of the Prospectus in New York City in
such quantities as you may reasonably request, and, if the delivery of a
prospectus is required at any time prior to the expiration of nine months
after the time of issue of the Prospectus in connection with the offering
or sale of the Shares and if at such time any events shall have occurred as
a result of which the Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made when such Prospectus
is delivered, not misleading, or, if for any other reason it shall be
necessary during such period to amend or supplement the Prospectus in order
to comply with the Act, to notify you and upon your request to prepare and
furnish without charge to each Underwriter and to any dealer in securities
as many copies as you may from time to time reasonably request of an
amended Prospectus or a supplement to the Prospectus which will correct
such statement or omission or effect such compliance, and in case any
Underwriter is required to deliver a prospectus in connection with sales of
any of the Shares at any time nine months or more after the time of issue
of the Prospectus, upon your request but at the expense of such
Underwriter, to prepare and deliver to such Underwriter as many copies as
you may request of an amended or supplemented Prospectus complying with
Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company (which need not be
audited) complying with Section 11(a) of the Act and the
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rules and regulations of the Commission thereunder (including, at the
option of the Company, Rule 158);
(e) During the period beginning from the date hereof and continuing to
and including the date 180 days after the date of the Prospectus, (i) not
to offer, sell, contract to sell or otherwise dispose of, except as
provided hereunder, any securities of the Company that are substantially
similar to the Shares, including but not limited to any securities that are
convertible into or exchangeable for, or that represent the right to
receive, Stock or any such substantially similar securities (other than
options granted pursuant to the Company's 1996 Stock Option Plan, the
Company's 1999 Stock Option Plan, an option to acquire up to 320,000 shares
of the Company's Class A Common Stock granted to GE Capital Corporation,
and shares issued upon exercise of such options or upon the conversion or
exchange of convertible or exchangeable securities outstanding as of the
date of this Agreement), and (ii) not to release any securityholder of the
Company from its obligations under any agreement pursuant to which such
securityholder has agreed not to offer, sell, contract to sell or otherwise
dispose of any securities of the Company, in either of the above cases,
without the prior written consent of Goldman, Sachs & Co.;
(f) To furnish to its stockholders as soon as practicable after the
end of each fiscal year an annual report (including a balance sheet and
statements of income, stockholders' equity and cash flows of the Company
certified by independent public accountants) and, as soon as practicable
after the end of each of the first three quarters of each fiscal year
(beginning with the fiscal quarter ending after the effective date of the
Registration Statement), summary financial information of the Company for
such quarter in reasonable detail;
(g) During a period of five years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to
deliver to you (i) as soon as they are available, copies of any reports
and financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to
time reasonably request (such financial statements to be on a basis to
the extent the accounts of the Company are in reports furnished to its
stockholders generally or to the Commission);
(h) To use the net proceeds received by it from the sale of the Shares
pursuant to this Agreement in the manner specified in the Prospectus under
the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on the
National Association of Securities Dealers Automated Quotations National
Market System ("NASDAQ");
(j) If the Company elects to rely upon Rule 462(b), the Company shall
file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) by 10:00 p.m. Washington, D.C. time, on the date of this
Agreement, and the Company shall at the time of filing either pay to the
Commission the filing fee for the Rule 462(b) Registration Statement or
give irrevocable instructions for the payment of such fee pursuant to Rule
111(b) under the Act; and
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<PAGE>
(k) To make such disclosure as may be required by Rule 463 under the
Act.
6. The Company covenants and agrees with the several Underwriters that (a)
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the reasonable fees and disbursements of counsel for the
Underwriters in connection with such qualification and in connection with the
Blue Sky survey; (iv) all fees and expenses in connection with listing the
Shares on NASDAQ; (v) the filing fees incident to, and the reasonable fees and
disbursements of counsel for the Underwriters in connection with, securing any
required review by the National Association of Securities Dealers, Inc. of the
terms of the sale of the Shares; (vi) the cost of preparing stock certificates;
(vii) the cost and charges of any transfer agent or registrar; and (vii) all
other costs and expenses incident to the performance of its obligations
hereunder which are not otherwise specifically provided for in this Section.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission pursuant
to Rule 424(b) within the applicable time period prescribed for such filing
by the rules and regulations under the Act and in accordance with Section
5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule
462(b) Registration Statement shall have become effective by 10:00 p.m.,
Washington, D.C. time, on the date of this Agreement; no stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have been issued and no proceeding for that purpose shall
have been initiated or threatened by the Commission; and all requests for
additional information on the part of the Commission shall have been
complied with to your reasonable satisfaction;
(b) Venture Law Group, A Professional Corporation, counsel for the
Underwriters, shall have furnished to you such opinion or opinions (a draft
of such opinion or opinions is attached as Annex II(a) hereto), dated such
Time of Delivery, with respect to the matters covered in paragraphs (i),
(ii), (vii), (xi) and (xiii) of subsection (c) below as well as such other
related matters as you may reasonably request, and such counsel shall have
received such papers and information as they may reasonably request to
enable them to pass upon such matters;
(c) Morrison & Foerster LLP, counsel for the Company, shall have
furnished to you their written opinion (a draft of such opinion is attached
as Annex II(b) hereto), dated such Time of Delivery, in form and substance
reasonably satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as
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a corporation in good standing under the laws of the State of
Delaware, with corporate power and corporate authority to own its
properties and conduct its business as described in the Prospectus;
(ii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the
Company (including the Shares being delivered at such Time of
Delivery) have been duly and validly authorized and issued and are
fully paid and non-assessable; and the Shares conform to the
description of the Stock contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in the United States in
which it owns or leases properties or conducts any business so as to
require such qualification, or is subject to no material liability or
disability by reason of failure to be so qualified in any such
jurisdiction (such counsel being entitled to rely in respect of the
opinion in this clause upon opinions of local counsel, certificates of
public officials and in respect of matters of fact upon certificates
of officers of the Company, provided that such counsel shall state
that they believe that both you and they are justified in relying upon
such opinions and certificates);
(iv) To the best of such counsel's knowledge, the Company does
not own any real property. Any real property and buildings held under
lease by the Company are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property
and buildings by the Company (in giving the opinion in this clause,
such counsel may state that no examination of record titles for the
purpose of such opinion has been made, and that they are relying upon
a general review of the titles of the Company, upon opinions of local
counsel and abstracts, reports and policies of title companies
rendered or issued at or subsequent to the time of acquisition of such
property by the Company, upon opinions of counsel to the lessors of
such property and, in respect of matters of fact, upon certificates of
officers of the Company, provided that such counsel shall state that
they believe that both you and they are justified in relying upon such
opinions, abstracts, reports, policies and certificates);
(v) To the best of such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company is a party or of which any
property of the Company is the subject which, if determined adversely
to the Company, would individually or in the aggregate have a material
adverse effect on the current or future financial position,
stockholders' equity or results of operations of the Company; and, to
the best of such counsel's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened
by others;
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issue and sale of the Shares being delivered at such
Time of Delivery to be sold by the Company and the compliance by the
Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not conflict
with or result in a breach or violation of any of the
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terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company is a party or by
which the Company is bound or to which any of the property or assets
of the Company is subject, which is filed as an exhibit to the
Registration Statement, nor will such action result in any violation
of the provisions of the Certificate of Incorporation or By-laws of
the Company or any material statute or any order, rule or regulation
known to such counsel of any court or governmental agency or body
having jurisdiction over the Company or any of its properties;
(viii) No consent, approval, authorization, order, registration
or qualification of or with any such court or governmental agency or
body is required on the part of the Company for the issue and sale of
the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act
and the Exchange Act of the Shares, and such consents, approvals,
authorizations, orders, registrations or qualifications as may be
required under state securities or Blue Sky laws in connection with
the purchase and distribution of the Shares by the Underwriters;
(ix) The Company is not in violation of its Certificate of
Incorporation or By-laws or in default in the performance or
observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement, or lease or agreement or other material instrument to which
it is a party or by which it or any of its properties may be bound
which is filed as an exhibit to the Registration Statement;
(x) The statements set forth in the Prospectus under the caption
"Description of Capital Stock," insofar as they purport to constitute
a summary of the terms of the Stock, and under the caption
"Underwriting," insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and
fair;
(xi) The Company is not an "investment company" as such terms are
defined in the Investment Company Act;
(xii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company prior
to such Time of Delivery (other than the financial statements and
related schedules therein and other statements of a financial or
accounting nature therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the
requirements of the Act and the rules and regulations thereunder; and
they do not know of any amendment to the Registration Statement
required to be filed or of any contracts or other documents of a
character required to be filed as an exhibit to the Registration
Statement or required to be described in the Registration Statement or
the Prospectus which are not filed or described as required; and
(xiii) To the best of such counsel's knowledge, the Company has
no subsidiaries.
Such counsel shall further state that:
Although they do not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration
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Statement or the Prospectus, except for those referred to in the
opinion in subsection (xi) of this Section 7(c), nothing has come to
their attention that causes them to believe that, as of its effective
date, the Registration Statement or any further amendment thereto made
by the Company prior to such Time of Delivery (other than the
financial statements and related schedules therein and other
statements of a financial or accounting nature therein, as to which
such counsel need express no opinion) contained an untrue statement of
a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading or that, as of its date, the Prospectus or any further
amendment or supplement thereto made by the Company prior to such Time
of Delivery (other than the financial statements and related schedules
therein and other statements of a financial or accounting nature
therein, as to which such counsel need express no opinion) contained
an untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading or that, as
of such Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by the
Company prior to such Time of Delivery (other than the financial
statements and related schedules therein, and other statements of a
financial or accounting nature therein, as to which such counsel need
express no opinion) contains an untrue statement of a material fact or
omits to state a material fact necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading.
(d) On the date of the Prospectus at a time prior to the execution of
this Agreement, at 9:30 a.m., New York City time, on the effective date of
any post-effective amendment to the Registration Statement filed subsequent
to the date of this Agreement and also at each Time of Delivery, Ernst &
Young, LLP shall have furnished to you a letter or letters, dated the
respective dates of delivery thereof, in form and substance satisfactory to
you, to the effect set forth in Annex I hereto (the executed copy of the
letter delivered prior to the execution of this Agreement is attached as
Annex 1(a) hereto and a draft of the form of letter to be delivered on the
effective date of any post-effective amendment to the Registration
Statement and as of each Time of Delivery is attached as Annex 1(b)
hereto);
(e)(i) The Company shall not have sustained since the date of the
latest audited financial statements included in the Prospectus any loss or
interference with its business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree, otherwise than as set forth
or contemplated in the Prospectus, and (ii) since the respective dates as
of which information is given in the Prospectus there shall not have been
any change in the capital stock (other than options granted pursuant to the
Company's 1996 Stock Option Plan and shares issued upon exercise of such
options) or long-term debt of the Company or any change, or any development
involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity (other than options
granted pursuant to the Company's 1996 Stock Option Plan and shares issued
upon exercise of such options) or results of operations of the Company,
otherwise than as set forth or contemplated in the Prospectus, the effect
of which, in any such case described in Clause (i) or (ii), is in the
judgment of the Representatives so material and adverse as to make it
impracticable or inadvisable to proceed with the public offering or the
delivery of the
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Shares being delivered at such Time of Delivery on the terms and in the
manner contemplated in the Prospectus;
(f) On or after the date hereof (i) no downgrading shall have occurred
in the rating accorded the Company's debt securities, if any, or preferred
stock, if any, by any "nationally recognized statistical rating
organization", as that term is defined by the Commission for purposes of
Rule 436(g)(2) under the Act, and (ii) no such organization shall have
publicly announced that it has under surveillance or review, with possible
negative implications, its rating of any of the Company's debt securities,
if any or preferred stock, if any;
(g) On or after the date hereof there shall not have occurred any of
the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities on
NASDAQ; (iii) a general moratorium on commercial banking activities
declared by either Federal, New York or California State authorities; or
(iv) the outbreak or escalation of hostilities involving the United States
or the declaration by the United States of a national emergency or war, if
the effect of any such event specified in this Clause (iv) in the judgment
of the Representatives makes it impracticable or inadvisable to proceed
with the public offering or the delivery of the Shares being delivered at
such Time of Delivery on the terms and in the manner contemplated in the
Prospectus;
(h) The Shares at such Time of Delivery shall have been duly listed,
subject to notice of issuance, for quotation on NASDAQ;
(i) The Company shall have obtained and delivered to the Underwriters
executed copies of an agreement from each (i) officer, (ii) director, (iii)
stockholder holding more than 10,000 shares of the Company's Class A or
Class B Common Stock as of the date hereof, and (iv) optionholder holding
options exercisable within 180 days from the date hereof to acquire more
than 10,000 shares of the Company's Class A Common Stock, substantially to
the effect set forth in Subsection 5(e) hereof in form and substance
satisfactory to you;
(j) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New York
Business Day next succeeding the date of this Agreement; and
(k) The Company shall have furnished or caused to be furnished to you
at such Time of Delivery certificates of officers of the Company,
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as to
the performance by the Company of all of its obligations hereunder to be
performed at or prior to such Time of Delivery, and as to such other
matters as you may reasonably request, and the Company shall have furnished
or caused to be furnished certificates as to the matters set forth in
subsections (a) and (e) of this Section.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for
-13-
<PAGE>
any legal or other expenses reasonably incurred by such Underwriter in
connection with investigating or defending any such action or claim as such
expenses are incurred; provided, however, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in any Preliminary Prospectus, the
Registration Statement or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through Goldman, Sachs & Co. expressly for use
therein.
(b) Each Underwriter will indemnify and hold harmless the Company
against any losses, claims, damages or liabilities to which the Company may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon an untrue statement or alleged untrue statement of a material fact
contained in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in any
Preliminary Prospectus, the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon and in conformity with written
information furnished to the Company by such Underwriter through Goldman, Sachs
& Co. expressly for use therein; and will reimburse the Company for any legal or
other expenses reasonably incurred by the Company in connection with
investigating or defending any such action or claim as such expenses are
incurred.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written
consent of the indemnified party, effect the settlement or compromise of, or
consent to the entry of any judgment with respect to, any pending or threatened
action or claim in respect of which indemnification or contribution may be
sought hereunder (whether or not the indemnified party is an actual or potential
party to such action or claim) unless such settlement, compromise or judgment
(i) includes an unconditional release of the indemnified party from all
liability arising out of such action or claim and (ii) does not include a
statement as to or an admission of fault, culpability or a failure to act, by or
on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of
-14-
<PAGE>
any losses, claims, damages or liabilities (or actions in respect thereof)
referred to therein, then each indemnifying party shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law or if the indemnified party failed to give the
notice required under subsection (c) above, then each indemnifying party shall
contribute to such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative benefits but also
the relative fault of the Company on the one hand and the Underwriters on the
other in connection with the statements or omissions which resulted in such
losses, claims, damages or liabilities (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other shall be deemed
to be in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the Underwriters on the other and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this subsection (d) were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above in this subsection (d). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this subsection (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages which such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this subsection (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company (including any
person who, with his or her consent, is named in the Registration Statement as
about to become a director of the Company) and to each person, if any, who
controls the Company within the meaning of the Act.
9. (a) Trilogy will indemnify and hold harmless each Underwriter against
any losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in
-15-
<PAGE>
respect thereof) arise out of or are based upon an untrue statement or alleged
untrue statement of a material fact contained of any Preliminary Prospectus, the
Registration Statement or the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in those sections of the Preliminary Prospectus,
the Registration Statement or the Prospectus or any amendment or supplement
thereto, listed on Exhibit A attached hereto; and will reimburse each
---------
Underwriter for any legal or other expenses reasonably incurred by such
Underwriter in connection with investigating or defending any such action or
claim as such expenses are incurred; provided, however, that Trilogy shall not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus or any such amendment or supplement
in reliance upon and in conformity with written information furnished to the
Company by any Underwriter through Goldman, Sachs & Co. expressly for use
therein.
(b) Each Underwriter will indemnify and hold harmless Trilogy against
any losses, claims, damages or liabilities to which Trilogy may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to participate
therein and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party be counsel to the indemnifying party), and,
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal expenses of
other counsel or any other expenses, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof other than reasonable
costs of investigation. No indemnifying party shall, without the written
consent of the indemnified party, effect the settlement or compromise of, or
consent to the entry of any judgment with respect to, any pending or threatened
action or claim in respect of which indemnification or contribution may be
sought
-16-
<PAGE>
hereunder (whether or not the indemnified party is an actual or potential party
to such action or claim) unless such settlement, compromise or judgment (i)
includes an unconditional release of the indemnified party from all liability
arising out of such action or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act, by or on behalf of
any indemnified party.
(d) If the indemnification provided for in this Section 9 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of Trilogy on the one hand and the
Underwriters on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by Trilogy on
the one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. Trilogy and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this subsection (d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions in respect thereof)
referred to above in this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of Trilogy under this Section 9 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 9 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company (including any
person who, with his or her consent, is named in the Registration Statement as
about to become a director of the Company) and to each person, if any, who
controls the Company within the meaning of the Act.
10. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six hours after
such default by any Underwriter you do not arrange for the purchase of such
Shares, then the Company shall be entitled to a further period of thirty-six
hours within which
-17-
<PAGE>
to procure another party or other parties satisfactory to you to purchase such
Shares on such terms. In the event that, within the respective prescribed
periods, you notify the Company that you have so arranged for the purchase of
such Shares, or the Company notifies you that it has so arranged for the
purchase of such Shares, you or the Company shall have the right to postpone a
Time of Delivery for a period of not more than seven days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees to file promptly any amendments to the Registration Statement or the
Prospectus which in your opinion may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
Shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the aggregate number of all of the
Shares to be purchased at such Time of Delivery, or if the Company shall not
exercise the right described in subsection (b) above to require non-defaulting
Underwriters to purchase Shares of a defaulting Underwriter or Underwriters,
then this Agreement (or, with respect to the Second Time of Delivery, the
obligations of the Underwriters to purchase and of the Company to sell the
Optional Shares) shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company, except for the expenses to be borne
by the Company and the Underwriters as provided in Section 6 hereof and the
indemnity and contribution agreements in Section 8 and Section 9 hereof; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
11. The respective indemnities, agreements, representations, warranties and
other statements of the Company and the several Underwriters, as set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company and shall
survive delivery of and payment for the Shares.
12. If this Agreement shall be terminated pursuant to Section 10 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason any Shares are
not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the purchase,
sale and delivery of the Shares not so delivered, but the Company shall then be
under no further liability to any
-18-
<PAGE>
Underwriter in respect of the Shares not so delivered except as provided in
Sections 6 and 8 hereof.
13. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 9th Floor, New York, New York 10004, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Chief Financial Officer; provided, however,
that any notice to an Underwriter pursuant to Section 8(c) hereof shall be
delivered or sent by mail, telex or facsimile transmission to such Underwriter
at its address set forth in its Underwriters' Questionnaire or telex
constituting such Questionnaire, which address will be supplied to the Company
by you on request. Any such statements, requests, notices or agreements shall
take effect upon receipt thereof.
14. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and, to the extent provided in Sections 8 and
11 hereof, the officers and directors of the Company and each person who
controls the Company, or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
15. Time shall be of the essence of this Agreement. As used herein, the
term "business day" shall mean any day when the Commission's office in
Washington, D.C. is open for business.
16. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
17. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
-19-
<PAGE>
If the foregoing is in accordance with your understanding, please sign and
return to us one for the Company and each of the Representatives plus one for
each counsel counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement among each of the Underwriters and the Company.
It is understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company for
examination, upon request, but without warranty on your part as to the authority
of the signers thereof.
Very truly yours,
pcOrder.com, Inc.
By:
------------------------------
Name:
Title:
Trilogy Software, Inc.
By:
------------------------------
Name:
Title:
Accepted as of the date hereof at ,
-------
------------------------------
Goldman, Sachs & Co.
Credit Suisse First Boston Corporation
SG Cowen Securities Corporation
By:
-------------------------------------
(Goldman, Sachs & Co.)
On behalf of each of the
Underwriters
-20-
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Optional
Shares to be
Total Number of Purchased if
Firm Shares Maximum Option
Underwriter to be Purchased Exercised
----------- --------------- ------------------
<S> <C> <C>
Goldman, Sachs & Co. .......................................................
Credit Suisse First Boston Corporation .....................................
SG Cowen Securities Corporation ............................................
Total ..............................................................
</TABLE>
-21-
<PAGE>
ANNEX I
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect to
the Company within the meaning of the Act and the applicable rules and
regulations adopted by the Commission;
(ii) In their opinion, the financial statements and any supplementary
financial information and schedules (and, if applicable, financial
forecasts and/or pro forma financial information) examined by them and
included in the Prospectus or the Registration Statement comply as to form
in all material respects with the applicable accounting requirements of the
Act and the related rules and regulations adopted by the Commission; and,
if applicable, they have made an examination or a review in accordance with
standards established by the American Institute of Certified Public
Accountants of the unaudited interim financial statements, selected
financial data, pro forma financial information, financial forecasts,
management's discussion and analysis and/or condensed financial statements
derived from audited financial statements of the Company for the periods
specified in such letter, as indicated in their reports thereon, copies of
which have been furnished to the representatives of the Underwriters (the
"Representatives");
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited statements of income, balance sheets and statements of cash
flows included in the Prospectus as indicated in their reports thereon, if
applicable, copies of which have been furnished to the Representatives, and
on the basis of specified procedures including inquiries of officials of
the Company who have responsibility for financial and accounting matters
regarding whether the unaudited condensed financial statements referred to
in paragraph (vi)(A)(i) below comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
rules and regulations adopted by the Commission, nothing came to their
attention that caused them to believe that the unaudited condensed
financial statements do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the related rules and
regulations adopted by the Commission;
(iv) The unaudited selected financial information with respect to the
results of operations and financial position of the Company for the five
most recent fiscal years included in the Prospectus agrees with the
corresponding amounts (after restatements where applicable) in the audited
financial statements for such five fiscal years, copies of which have been
furnished to the Representatives;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and on
the basis of limited procedures specified in such letter nothing came to
their attention as a result of the foregoing procedures that caused them to
believe that this information does not conform in all material respects
with the disclosure requirements of Items 301, 302, 402 and 503(d),
respectively, of Regulation S-K;
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company, inspection of the minute books of the
Company since the
<PAGE>
date of the latest audited financial statements included in the Prospectus,
inquiries of officials of the Company responsible for financial and
accounting matters and such other inquiries and procedures as may be
specified in such letter, nothing came to their attention that caused them
to believe that:
(A) (i) any unaudited statements of income, balance
sheets and statements of cash flows included in the Prospectus do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and the related rules and
regulations adopted by the Commission, or (ii) any material
modifications should be made to the unaudited condensed statements of
income, balance sheets and statements of cash flows included in the
Prospectus for them to be in conformity with generally accepted
accounting principles;
(B) any other unaudited income statement data and balance sheet
items included in the Prospectus do not agree with the corresponding
items in the unaudited financial statements from which such data and
items were derived, and any such unaudited data and items were not
determined on a basis substantially consistent with the basis for the
corresponding amounts in the audited financial statements included in
the Prospectus;
(C) any unaudited financial statements which were not included in
the Prospectus but from which were derived any unaudited condensed
financial statements referred to in Clause (A) and any unaudited
income statement data and balance sheet items included in the
Prospectus and referred to in Clause (B) were not determined on a
basis substantially consistent with the basis for the audited
financial statements included in the Prospectus;
(D) any unaudited pro forma financial statements included in the
Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and the rules and
regulations adopted by the Commission or the pro forma adjustments
have not been properly applied to the historical amounts in the
compilation of those statements;
(E) as of a specified date not more than five days prior to the
date of such letter, there have been any changes in the capital stock
(other than issuances of capital stock upon exercise of options and
stock appreciation rights, upon earn-outs of performance shares and
upon conversions of convertible securities, in each case which were
outstanding on the date of the latest financial statements included in
the Prospectus) or any increase in the long-term debt of the Company,
or any decreases in net current assets or stockholders' equity or
other items specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in the Prospectus,
except in each case for changes, increases or decreases which the
Prospectus discloses have occurred or may occur or which are described
in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date referred
to in Clause (E) there were any decreases in net revenues or
operating profit or the total or per share amounts of net income or
F-2
<PAGE>
other items specified by the Representatives, or any increases in any
items specified by the Representatives, in each case as compared with
the comparable period of the preceding year and with any other period
of corresponding length specified by the Representatives, except in
each case for decreases or increases which the Prospectus discloses
have occurred or may occur or which are described in such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and
(vi) above, they have carried out certain specified procedures, not
constituting an examination in accordance with generally accepted auditing
standards, with respect to certain amounts, percentages and financial
information specified by the Representatives, which are derived from the
general accounting records of the Company, which appear in the Prospectus,
or in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared certain of
such amounts, percentages and financial information with the accounting
records of the Company and have found them to be in agreement.
F-3
<PAGE>
EXHIBIT A
A. Prospectus Summary:
------------------
Sentences reading:
"As used herein, "Trilogy" refers to Trilogy Software, Inc. and its
predecessor entities, including Trilogy Development Group, Inc."
"The Company is a party to a technology license agreement with its parent
company, Trilogy, which provides pcOrder the ability to leverage Trilogy's
front-office and e-commerce software applications, including one of the
industry's leading configuration and pricing engines. The Company has extended
these applications to support the specific configuration and pricing rules of
the computer industry in order to help industry sales representatives and end-
users quickly and accurately build custom configured systems across multiple
vendors."
"The Company was established as a separate business unit within Trilogy,
its parent corporation, on July 1, 1993, and was incorporated under the laws of
Delaware on July 18, 1994. The Company believes Trilogy is a leading provider
of sales, marketing and business-to-business e-commerce applications. Trilogy's
software solutions are designed to integrate each function in a company's sales
and marketing operation, including pricing management, product management,
sales, commissions, promotions, contract management and channel management. In
addition, Trilogy's software solutions are designed to enable companies to
engage in e-commerce as well as improve channel management processes."
"Following this offering, Trilogy will own approximately __% of the Common
Stock of the Company. Trilogy has informed the Company that it does not intend
to sell any of its shares in the near future. However, other than an agreement
not to sell any of its shares for 180 days after the date of this Prospectus
without the prior consent of the representatives of the Underwriters, Trilogy is
not contractually restricted from selling such shares."
B. Risk Factors:
------------
Control By and Relationship With Trilogy. Entire Section.
----------------------------------------
Risks Associated with Dependence on Trilogy; Limited Independent Operating
--------------------------------------------------------------------------
History; Potential Conflicts of Interest. Entire Section.
- ----------------------------------------
Possible Future Sales of Common Stock By Trilogy. Entire Section.
------------------------------------------------
Competition. Sentence reading: "Except as disclosed in Relationship with
-----------
Trilogy, nothing in the Company's agreements with Trilogy prohibits Trilogy from
competing directly or indirectly with the Company."
Year 2000 Compliance. Sentence reading: "The Company has been informed by
--------------------
Trilogy that Trilogy believes its internal computer systems and products are
Year 2000 compliant, and, based on a preliminary review, the Company believes
its own internal computer systems and products are Year 2000 compliant."
<PAGE>
Shares Eligible for Future Sales. Sentence reading: "The officers,
--------------------------------
directors and Trilogy have agreed not to sell any of their shares of Common
Stock for 180 days after the date of this Prospectus without the prior written
consent of the representatives of the Underwriters."
C. Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------
Operations:
- ----------
Overview. Sentence reading: "The Company was established as a separate
--------
business unit within Trilogy on July 1, 1993, and was incorporated on July 18,
1994.
"Pursuant to an intercompany license agreement with Trilogy, the Company is
obligated to pay Trilogy royalties based on fees generated from perpetual
license agreements, software maintenance and subscription-based licenses. Also,
the Company has entered into certain agreements with Trilogy pursuant to which
Trilogy provides certain administrative and corporate support services to the
Company, including certain tax administration, payroll, payroll accounting,
banking, corporate finance, recruiting and employee training services. In
addition, the Company has entered into a tax allocation agreement with Trilogy.
See Notes 2 and 4 of Notes to Financial Statements."
Liquidity and Capital Resources. Sentence reading: "From inception through
-------------------------------
1996, the Company financed its operations primarily through advances from its
parent, Trilogy."
Year 2000 Compliance. Sentence reading: "The Company has been informed by
--------------------
Trilogy that Trilogy believes its internal computer systems and products are
Year 2000 compliant, and, based on a preliminary review, the Company believes
its own internal computer systems and products are Year 2000 compliant."
D. Business:
--------
The pcOrder Solution. Sentence reading: "The Company is a party to a
--------------------
technology licenses agreement with its parent company, Trilogy, which provides
pcOrder the ability to leverage Trilogy's front-office and e-commerce software
applications, including one of the industry's leading configuration and pricing
engines."
Technology. Sentence reading: "The Company has a nonexclusive, worldwide,
----------
royalty-bearing license to use, make, reproduce and prepare derivative works of
certain of Trilogy's format office automation software."
E. Shares Eligible for Future Sale: Sentence reading: "The officers, directors
-------------------------------
and Trilogy have agreed not to sell any of their shares of Common Stock for 180
days after the date of this Prospectus without the prior written consent of the
representatives of the Underwriters."
F. Relationship with Trilogy:
-------------------------
Entire Section.
H. Certain Transactions:
--------------------
F-2
<PAGE>
Entire Section.
I. Notes to Financial Statements: Section 7 "Employee Benefit Plan"
-----------------------------
Entire Section.
F-3
<PAGE>
EXHIBIT 3.2
Certificate of Amendment
to the
Certificate of Incorporation
of
pcOrder.com, Inc.
(Pursuant to Section 242 of the General Corporation Law of the State of
Delaware)
Christina C. Jones and James J. Luttenbacher, being the President and
Secretary, respectively, of pcOrder,com, Inc., a corporation organized and
existing under and by virtue of the laws of the State of Delaware (the
"Corporation") do each hereby certify as follows:
FIRST: Article Four of the Certificate of Incorporation of the
Corporation (the "Certificate") be, and hereby is, amended in its entirety to
read as follows:
ARTICLE FOUR
(A) Authorized Stock. The total number of shares of stock which the
Corporation shall have authority to issue is sixty million (60,000,000) shares,
consisting of (i) consisting of thirty-seven million two hundred forty three
thousand (37,243,000) shares of Class A Common Stock, par value $.01 per share
(hereinafter referred to as "Class A Common Stock"), and twelve million seven
hundred fifty-seven thousand (12,757,000) shares of Class B Common Stock, par
value $.01 per share (hereinafter referred to as "Class B Common Stock") (the
Class A Common Stock and the Class B Common Stock being hereinafter collectively
referred to as the "Common Stock"), and (ii) ten million (10,000,000) shares of
Preferred Stock, par value $.01 per share (hereinafter referred to as "Preferred
Stock").
(B) Common Stock. The following is a statement of the relative powers,
preferences and participating, optional or other special rights, and the
qualifications, limitations and restrictions of the Class A Common Stock and the
Class B Common Stock of the Corporation:
(i) Except as otherwise set forth in this Article Four, the relative
powers, preferences and participating, optional or other special rights,
and the qualifications, limitations and restrictions of the Class A Common
Stock and the Class B Common Stock shall be identical in all respects.
<PAGE>
(ii) Subject to the rights of holders of Preferred Stock, and subject
to any other provisions of this Certificate of Incorporation, holders of
Class A Common Stock and Class B Common Stock shall be entitled to receive
such dividends and other distributions in cash, stock or property of the
Corporation as may be declared thereon by the Board of Directors from time
to time out of assets or funds of the Corporation legally available
therefor. If any dividend or other distribution in cash or other property
is paid with respect to Class A Common Stock or with respect to Class B
Common Stock (other than dividends or other distributions payable in shares
of Common Stock), a like dividend or other distribution in cash or other
property shall also be paid with respect to shares of the other class of
Common Stock, in an amount equal per share. In the case of dividends or
other distributions payable in Common Stock, including without limitation
distributions pursuant to stock splits or divisions of Common Stock of the
Corporation, only shares of Class A Common Stock shall be paid or
distributed with respect to Class A Common Stock and only shares of Class B
Common Stock shall be paid or distributed with respect to Class B Common
Stock, The number of shares of Class A Common Stock and Class B Common
Stock so distributed shall be equal in number on a per share basis, Neither
the shares of Class A Common Stock nor the shares of Class B Common Stock
may be reclassified, subdivided or combined unless such reclassification,
subdivision or combination occurs simultaneously and in the same proportion
for each class.
(iii) (a) At each meeting of the stockholders of the Corporation,
each holder of Class A Common Stock shall be entitled to one (1) vote
in person or by proxy for each share of Class A Common Stock standing
in his or her name on the transfer books of the Corporation, and each
holder of Class B Common Stock shall be entitled to eight (8) votes in
person or by proxy for each share of Class B Common Stock standing in
his or her name on the transfer books of the Corporation, in
connection with the election of directors and all other matters
submitted to a vote of stockholders; provided, however, that with
respect to any proposed conversion of the shares of Class B Common
Stock into shares of Class A Common Stock pursuant to paragraph
(B)(v)(b) below, each holder of a share of Common Stock, irrespective
of class, shall have one vote in person or by proxy for each share of
Common Stock standing in his or her name on the transfer books of the
Corporation. Except as may be otherwise required by law or by this
Article Four, the holders of Class A Common Stock and Class B Common
Stock shall vote together as a single class, subject to any voting
rights which may be granted to holders of Preferred Stock, on all
matters submitted to a vote of stockholders of the Corporation.
-2-
<PAGE>
(b) Except as otherwise provided by law, and subject to any rights
of the holders of Preferred Stock, the provisions of this Certificate
of Incorporation shall not be modified, revised, altered or amended,
repealed or rescinded in whole or in part, without the approval of a
majority of the votes entitled to be cast by the holders of the Class A
Common Stock and the Class B Common Stock, voting together as a single
class; provided, however, that with respect to any proposed amendment
of this Certificate of Incorporation which would alter or change the
powers, preferences or special rights of the shares of Class A Common
Stock or Class B Common Stock so as to affect them adversely, the
approval of a majority of the votes entitled to be cast by the holders
of the shares affected by the proposed amendment, voting separately as
a class, shall be obtained in addition to the approval of a majority of
the votes entitled to be cast by the holders of the Class A Common
Stock and the Class B Common Stock voting together as a single class as
hereinbefore provided. Any increase in the authorized number of shares
of any class or classes of stock of the Corporation or creation,
authorization or issuance of any securities convertible into, or
warrants, options or similar rights to purchase, acquire or receive,
shares of any such class or classes of stock shall be deemed not to
affect adversely the powers, preferences or special rights of the
shares of Class A Common Stock or Class B Common Stock.
(c) Each reference in this Certificate of Incorporation to a
majority or other proportion of shares of Common Stock, Class A Common
Stock or Class B Common Stock shall refer to such majority or other
proportion of the votes to which such shares of Common Stock, Class A
Common Stock or Class B Common Stock, as applicable, are entitled.
(iv) In the event of any dissolution, liquidation or winding up of the
affairs of the Corporation, whether voluntary or involuntary, after payment
in full of the amounts required to be paid to the holders of Preferred
Stock, the remaining assets and funds of the Corporation shall be
distributed pro rata to the holders of Class A Common Stock and Class B
Common Stock (and, for the avoidance of doubt, such distribution shall be
irrespective of the difference in voting rights between such classes of
stock). For purposes of this paragraph (B)(iv), the voluntary sale,
conveyance, lease, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the assets
of the Corporation or a consolidation or merger of the Corporation with one
or more other corporations or other Persons (whether or not the Corporation
is the corporation surviving such
-3-
<PAGE>
consolidation or merger) shall not be deemed to be a liquidation,
dissolution or winding up, voluntary or involuntary.
(v) (a) Prior to the date on which shares of Class B Common Stock
are transferred to (1) Trilogy, Inc. or (2) the holders of shares of common
stock, par value $.000002 per share ("Trilogy Parent Common Stock") of
Trilogy, Inc. or holders of stock of the Class B Transferee (as defined in
paragraph (B)(v)(b) below) in a Tax-Free Spin-Off (as defined in paragraph
(B)(v)(b) below), each record holder of shares of Class B Common Stock may
from time to time convert any or all of such shares into an equal number of
shares of Class A Common Stock by surrendering the certificates for such
shares, accompanied by any required tax transfer stamps and by a written
notice by such record holder to the Corporation stating that such record
holder desires to convert such shares of Class B Common Stock into the same
number of shares of Class A Common Stock and requesting that the
Corporation issue all of such shares of Class A Common Stock to Persons
named therein, setting forth the number of shares of Class A Common Stock
to be issued to each such Person and the denominations in which the
certificates therefor are to be issued. To the extent permitted by law,
such voluntary conversion shall be deemed to have been effected at the
close of business on the date of such surrender. Following a Tax-Free Spin-
Off, shares of Class B Common Stock shall no longer be convertible into
shares of Class A Common Stock except as set forth in paragraph (B)(v)(b)
below.
(b) Prior to a Tax-Free Spin-Off, each share of Class B Common
Stock shall automatically convert into one share of Class A Common
Stock upon the transfer of such share if, after such transfer, such
share is not beneficially owned by Trilogy Software, Inc., Trilogy,
Inc., any affiliate of Trilogy, Inc. or, as set forth below in this
paragraph (B)(v)(b), by the Class B Transferee or any subsidiary of
the Class B Transferee. Shares of Class B Common Stock shall not
convert into shares of Class A Common Stock (1) in any transfer
effected in connection with a distribution of Class B Common Stock as
a spin-off, split-up or split-off to holders of Trilogy Parent Common
Stock or to holders of stock of the Class B Transferee intended to be
on a tax-free basis under the Internal Revenue Code of 1986, as
amended from time to time (the "Code") (a "Tax-Free Spin-Off") or (2)
except as otherwise set forth below in this paragraph (B)(v)(b), in
any transfer after a Tax-Free Spin-Off. For purposes of this paragraph
(B)(v), a Tax-Free Spin-Off shall be deemed to have occurred at the
time shares are first transferred to holders of Trilogy Parent Common
Stock or to holders of stock of the Class B
-4-
<PAGE>
Transferee, as the case may be, following receipt of an affidavit
described in clauses (6) or (7) of the first sentence of paragraph
(B)(v)(d) below. Prior to a Tax-Free Spin-Off, shares of Class B
Common Stock representing more than a 50 percent of the then
outstanding shares of Class B Common Stock transferred by Trilogy
Software, Inc., Trilogy, Inc. or any affiliate of Trilogy, Inc. in a
single transaction to one Person who is not an affiliate of Trilogy,
Inc. (together with its successors, the "Class B Transferee") or any
subsidiary of the Class B Transferee shall not automatically convert
to Class A Common Stock upon the transfer of such shares. Any shares
of Class B Common Stock retained by Trilogy Software, Inc., Trilogy,
Inc. or an affiliate of Trilogy, Inc. following any such transfer of
shares of Class B Common Stock to the Class B Transferee shall
automatically convert into shares of Class A Common Stock upon such
transfer.
In the event of a Tax-Free Spin-Off, shares of Class B Common
Stock shall automatically convert into shares of Class A Common Stock
on the fifth anniversary of the date on which shares of Class B Common
Stock are first transferred to holders of Trilogy Parent Common Stock
or of the Class B Transferee, as the case may be, in a Tax-Free Spin-
Off unless, prior to such Tax-Free Spin-Off, Trilogy Software, Inc. or
the Class B Transferee, as the case may be, delivers to the Corporation
an opinion of counsel, reasonably satisfactory to the Corporation, to
the effect that such conversion could adversely affect the ability of
Trilogy Software, Inc. or the Class B Transferee, as the case may be,
to obtain a favorable ruling from the Internal Revenue Service (the
"IRS") that the distribution would be a Tax-Free Spin-Off under the
Code. If such an opinion is received, approval of such conversion shall
be submitted to a vote of the holders of the Common Stock as soon as
practicable after the fifth anniversary of the Tax-Free Spin-Off unless
Trilogy Software, Inc. or the Class B Transferee, as the case may be,
delivers to the Corporation an opinion of counsel, reasonably
satisfactory to the Corporation, prior to such anniversary to the
effect that such vote could adversely affect the status of the Tax-Free
Spin-Off (including without limitation the ability to obtain a
favorable ruling from the IRS); if such opinion is so delivered, such
vote shall not be held and the shares of Class B Common Stock shall not
convert into shares of Class A Common Stock until approval of such
conversion can be submitted to a vote of the holders of the Common
Stock without adversely affect the ability of Trilogy Software, Inc. or
the Class B Transferee, as the case may be, to obtain a favorable
ruling from the IRS that the distribution would be a Tax-Free Spin-Off
under the Code. At the meeting of stockholders called for such purpose,
each holder
-5-
<PAGE>
of Common Stock shall be entitled to one vote (irrespective of the
voting rights provided for such shares under paragraph (B)(iii)(a)) in
person or by proxy for each share of Common Stock standing in his or
her name on the transfer books of the Corporation. Approval of such
conversion shall require the approval of a majority of the votes, on
the per share voting basis provided in the preceding sentence, entitled
to be cast by the holders of the Class A Common Stock and the Class B
Common Stock present and voting, voting together as a single class, and
the holders of the Class B Common Stock shall not be entitled to a
separate class vote. Such conversion shall be effective on the date on
which such approval is given at a meeting of stockholders called for
such purpose.
The Corporation will provide notice of any automatic
conversion of all outstanding shares of Class B Common Stock to all
holders of record of the Common Stock as soon as practicable following
such conversion; provided, however, that the Corporation may satisfy
such notice requirement by providing such notice prior to such
conversion. Such notice shall be provided by mailing notice of such
conversion, first class postage prepaid, to each holder of record of
the Common Stock at such holder's address as it appears on the
transfer books of the Corporation; provided, further, that no failure
to give such notice nor any defect therein shall affect the validity
of the automatic conversion of any shares of Class B Common Stock.
Each such notice shall state, as appropriate, the following:
(1) the automatic conversion date;
(2) that all outstanding shares of Class B Common Stock are
automatically converted;
(3) the place or places where certificates for such shares
are to be surrendered for conversion; and
(4) that no dividends will be declared on the shares of
Class B Common Stock converted after such conversion date.
Immediately upon such conversion, the rights of the holders
of shares of Class B Common Stock as such shall cease and such holders
shall be treated for all purposes as having become the record owners of
the shares of Class A Common Stock issuable upon such conversion;
provided, however, that such Persons shall be entitled to receive when
paid dividends,
-6-
<PAGE>
if any, declared on the Class B Common Stock as of a record date
preceding the time of such conversion and unpaid as of the time of such
conversion, subject to paragraph (B)(v)(f) below.
(c) Prior to a Tax-Free Spin-Off, holders of shares of Class B
Common Stock may (1) sell or otherwise dispose of or transfer any or
all of such shares held by them, respectively, only in connection with
a transfer which meets the qualifications of paragraph (B)(v)(d)
below, and under no other circumstances, or (2) convert any or all of
such shares into shares of Class A Common Stock as provided in
paragraph (B)(v)(a) above. Prior to a Tax-Free Spin-Off, no one other
than those Persons in whose names shares of Class B Common Stock
become registered on the original stock ledger of the Corporation by
reason of their record ownership of shares of Common Stock of the
Corporation which are reclassified into shares of Class B Common
Stock, or transferees or successive transferees who receive shares of
Class B Common Stock in connection with a transfer which meets the
qualifications set forth in paragraph (B)(v)(d) below, shall by virtue
of the acquisition of a certificate for shares of Class B Common Stock
have the status of an owner or holder of shares of Class B Common
Stock or be recognized as such by the Corporation or be otherwise
entitled to enjoy for his or her own benefit the special rights and
powers of a holder of shares of Class B Common Stock,
Holders of shares of Class B Common Stock may at any and all
times transfer to any Person the shares of Class A Common Stock
issuable upon conversion of such shares of Class B Common Stock.
(d) Prior to a Tax-Free Spin-Off, shares of Class B Common Stock
shall be transferred on the books of the Corporation and a new
certificate therefor issued, upon presentation at the office of the
Secretary of the Corporation (or at such additional place or places as
may from time to time be designated by the Secretary of the
Corporation) of the certificate for such shares, in proper form for
transfer and accompanied by all requisite stock transfer tax stamps,
only if such certificate when so presented shall also be accompanied
by any one of the following:
(1) an affidavit from Trilogy Software, Inc. or Trilogy,
Inc., as the case may be, stating that such certificate is
being presented to effect a transfer of such shares to an
affiliate of Trilogy, Inc.; or
-7-
<PAGE>
(2) an affidavit from Trilogy Software, Inc. or Trilogy,
Inc., as the case may be, stating that such certificate is
being presented to effect a transfer by any affiliate of
Trilogy, Inc. of such shares to Trilogy Software, Inc.,
Trilogy, Inc. or another affiliate of Trilogy, Inc.; or
(3) an affidavit from Trilogy Software, Inc. or Trilogy,
Inc., as the case may be, stating that such certificate is
being presented to effect a transfer by Trilogy Software,
Inc., Trilogy, Inc. or any affiliate of Trilogy, Inc. of
such shares to the Class B Transferee or a subsidiary of the
Class B Transferee as contemplated by paragraph (B)(v)(b);
or
(4) an affidavit from the Class B Transferee stating that
such certificate is being presented to effect a transfer by
the Class B Transferee of such shares to a subsidiary of the
Class B Transferee; or
(5) an affidavit from the Class B Transferee stating that
such certificate is being presented to effect a transfer by
any Subsidiary of the Class B Transferee of such shares to
the Class B Transferee or another subsidiary of the Class B
Transferee; or
(6) an affidavit from Trilogy, Inc. stating that such
certificate is being presented to effect a transfer by
Trilogy, Inc. of such shares to the holders of Trilogy
Parent Common Stock in connection with a Tax-Free Spin-Off;
or
(7) an affidavit from the Class B Transferee stating that
such certificate is being presented to effect a transfer by
the Class B Transferee of such shares to the stockholders of
the Class B Transferee in connection with a Tax-Free Spin-
Off.
Each affidavit of a record holder furnished pursuant to this
paragraph (B)(v)(d) shall be verified as of a date not earlier than
five days prior to the date of delivery thereof, and, where such
record holder is a corporation or partnership, shall be verified by an
officer of the corporation or by a general partner of the partnership,
as the case may be.
-8-
<PAGE>
If a record holder of shares of Class B Common Stock shall
deliver a certificate for such shares, endorsed by him or her for
transfer or accompanied by an instrument of transfer signed by him or
her, to a Person who receives such shares in connection with a
transfer which does not meet the qualifications set forth in this
paragraph (B)(v)(d), then such Person or any successive transferee of
such certificate may treat such endorsement or instrument as
authorizing him or her on behalf of such record holder to convert such
shares in the manner above provided for the purpose of the transfer to
himself or herself, of the shares of Class A Common Stock issuable
upon such conversion, and to give on behalf of such record holder the
written notice of conversion above required, and may convert such
shares of Class B Common Stock accordingly.
If such shares of Class B Common Stock shall improperly have
been registered in the name of such a Person (or in the name of any
successive transferee of such certificate) and a new certificate
therefor issued, such Person or transferee shall surrender such new
certificate for cancellation, accompanied by the written notice of
conversion above required, in which case (1) such Person or transferee
shall be deemed to have elected to treat the endorsement on (or
Instrument of transfer accompanying) the certificate so delivered by
such former record holder as authorizing such Person or transferee on
behalf of such former record holder so to convert such shares and so
to give such notice, (2) the shares of Class B Common Stock registered
in the name of such former record holder shall be deemed to have been
surrendered for conversion for the purpose of the transfer to such
Person or transferee of the shares of Class A Common Stock issuable
upon conversion, and (3) the appropriate entries shall be made on the
books of the Corporation to reflect such action.
In the event that the Board of Directors of the Corporation
(or any committee of the Board of Directors, or any officer of the
Corporation, designated for the purpose by the Board of Directors)
shall determine, upon the basis of facts not disclosed in any affidavit
or other document accompanying the certificate for shares of Class B
Common Stock when presented for transfer, that such shares of Class B
Common Stock have been registered in violation of the provisions of
paragraph (B)(v), or shall determine that a Person is enjoying for his
or her own benefit the special rights and powers of shares of Class B
Common Stock in violation of such provisions, then the Corporation
shall take such action at law or in equity as is appropriate under the
circumstances. Without limiting the generality of the
-9-
<PAGE>
preceding sentence, an unforeclosed pledge made to secure a bona fide
obligation shall not be deemed to violate such provisions,
(e) Prior to the occurrence of a Tax-Free Spin-Off, each
certificate for shares of Class B Common Stock shall bear a legend on
the face thereof reading as follows:
"The shares of Class B Common Stock represented by this
certificate may not be transferred to any person or entity in
connection with a transfer that does not meet the qualifications
set forth in paragraph (B)(v)(d) of Article Four of the
Certificate of Incorporation of this corporation and no person
who receives such shares in connection with a transfer which does
not meet the qualifications prescribed by paragraph (B)(v)(d) of
said Article Four is entitled to own or to be registered as the
record holder of such shares of Class B Common Stock, but the
record holder of this certificate may at any time convert such
shares of Class B Common Stock into the same number of shares of
Class A Common Stock. Each holder of this certificate, by
accepting the same, accepts and agrees to all of the foregoing."
Upon and after the transfer of shares in a Tax-Free Spin-
Off, shares of Class B Common Stock shall no longer bear the legend
set forth above in this paragraph (B)(v)(e).
(f) Upon any conversion of shares of Class B Common Stock into
shares of Class A Common Stock pursuant to the provisions of this
paragraph (B)(v), any dividend, for which the record date or payment
date shall be subsequent to such conversion, which may have been
declared on the shares of Class B Common Stock so converted shall be
deemed to have been declared, and shall be payable, with respect to
the shares of Class A Common Stock into or for which such shares of
Class B Common Stock shall have been so converted, and any such
dividend shall be deemed to have been declared, and shall be payable,
in shares of Class A Common Stock.
(g) The Corporation shall not reissue or resell any shares of
Class B Common Stock which shall have been converted into shares of
Class A
-10-
<PAGE>
Common Stock pursuant to or as permitted by the provisions of this
paragraph (B)(v), or any shares of Class B Common Stock which shall
have been acquired by the Corporation in any other manner. The
Corporation shall, from time to time, take such appropriate action as
may be necessary to retire such shares and to reduce the authorized
amount of Class B Common Stock accordingly.
The Corporation shall at all times reserve and keep
available, out of its authorized but unissued Common Stock, such
number of shares of Class A Common Stock as would become issuable upon
the conversion of all shares of Class B Common Stock then outstanding.
(h) In connection with any transfer or conversion of any stock of
the Corporation pursuant to or as permitted by the provisions of this
paragraph (B)(v) or in connection with the making of any determination
referred to in this paragraph (B)(v):
(1) the Corporation shall be under no obligation to make any
investigation of facts unless an officer, employee or agent
of the Corporation responsible for making such transfer or
determination or issuing Class A Common Stock pursuant to
such conversion has substantial reason to believe, or unless
the Board of Directors (or a committee of the Board of
Directors designated for the purpose) determines that there
is substantial reason to believe, that any affidavit or
other document is incomplete or incorrect in a material
respect or that an investigation would disclose facts upon
which any determination referred to in paragraph (B)(v)(f)
above should be made, in either of which events the
Corporation shall make or cause to be made such
investigation as it may deem necessary or desirable in the
circumstances and have a reasonable time to complete such
investigation; and
(2) neither the Corporation nor any director, officer,
employee or agent of the Corporation shall be liable in any
manner for any action taken or omitted in good faith.
(i) The Corporation will not be required to pay any documentary,
stamp or similar issue or transfer taxes payable in respect of the
issue or delivery of shares of Class A Common Stock on the conversion
of shares of
-11-
<PAGE>
Class B Common Stock pursuant to this paragraph (B)(v), and no such
issue or delivery shall be made unless and until the Person requesting
such issue has paid to the Corporation the amount of any such tax or
has established, to the satisfaction of the Corporation, that such tax
has been paid.
(vii) All rights to vote and all voting power (including, without
limitation thereto, the right to elect directors) shall be vested
exclusively in the holders of Common Stock, voting together as a single
class, except as otherwise expressly provided in this Certificate of
Incorporation, In a Preferred Stock Designation or as otherwise expressly
required by applicable law.
(viii) No stockholder shall be entitled to exercise any right of
cumulative voting.
(ix) Immediately upon the effectiveness of this Restated Certificate
of Incorporation, each share of common stock of the Corporation not owned
by Trilogy Software, Inc., par value $.01 per share, issued and outstanding
immediately prior to such effectiveness shall be changed into and
reclassified as one share of Class A Common Stock and each share of common
stock of the Corporation owned by Trilogy Software, Inc., par value $.01
per share, issued and outstanding immediately prior to such effectiveness
shall be changed into and reclassified as one share of Class B Common
Stock. Promptly after such effectiveness, each record holder of a
certificate that, immediately prior to such effectiveness, represented
common stock of the Corporation, par value $.01 per share, shall be
entitled to receive in exchange for such certificate, upon surrender of
such certificate to the Corporation, a certificate for the number of shares
of Class A Common Stock or Class B Common Stock, as the case may be, to
which such holder is entitled as a result of the changes in the common
stock effected by the preceding sentence (the "Reclassification"). Until
surrendered and exchanged in accordance herewith, each certificate that,
immediately prior to such effectiveness, represented common stock shall
represent the number of shares of Class A Common Stock or Class B Common
Stock, as the case may be, to which the holder is entitled as a result of
the Reclassification.
(C) Preferred Stock. The Preferred Stock may be issued from time to time
in one or more series. The Board of Directors is hereby authorized to provide by
resolution or resolutions from time to time for the issuance of shares of
Preferred Stock in one or more series and, by filing a certificate pursuant to
the applicable law of the State of Delaware (hereinafter, along with any similar
designation relating to any other class or series of stock which may hereafter
be authorized, referred to as a "Preferred Stock
-12-
<PAGE>
Designation," each of which shall be part of this Certificate of Incorporation),
to establish from time to time the number of shares to be included in each such
series, and to fix the designation, powers, preferences and rights of the shares
of each such series and the qualifications, limitations and restrictions
thereof. The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
(i) The designation of the series, which may be by distinguishing
number, letter or title.
(ii) The number of shares of the series, which number the Board of
Directors may thereafter (except where otherwise provided in the
Preferred Stock Designation) increase or decrease (but not below the
number of shares thereof then outstanding).
(iii) Whether dividends, if any, shall be cumulative or noncumulative
and the dividend rate of the series.
(iv) The conditions upon which and dates at which dividends, if any,
shall be payable, and the relation which such dividends, if any, shall
bear to the dividends payable on any other class or classes of stock.
(v) The redemption rights and price or prices, if any, for shares of
the series.
(vi) The terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series.
(vii) The amounts payable on and the preferences, if any, of shares
of the series in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the
Corporation.
(viii) Whether the shares of the series shall be convertible into
shares of any class or series, or any other security, of the
Corporation or any other corporation, and, if so, the specification of
such other class or series of such other security, the conversion
price or prices or rate or rates, any adjustments thereof, the date or
dates at which such shares shall be convertible and all other terms
and conditions upon which such conversion may be made.
-13-
<PAGE>
(ix) Restrictions on the issuance (or reissuance) of shares of the
same series or of any other class or series.
(x) The voting rights, if any, of the holders of shares of the series.
(D) Record Holders. The Corporation shall be entitled to treat the person
or entity in whose name any share of its stock is registered as the owner
thereof for all purposes and shall not be bound to recognize any equitable or
other claim to, or interest in, such share on the part of any other person or
entity, whether or not the Corporation shall have notice thereof, except as
expressly provided by applicable law.
(E) No Preemptive Rights. No stockholder of the Corporation shall have any
preemptive or preferential right, nor be entitled as such as a matter of right,
to subscribe for or purchase any part of any new or additional issue of stock of
the Corporation of any class or series, whether now or hereafter authorized, and
whether issued for money or for consideration other than money, or of any issue
of securities convertible into stock of the Corporation.
SECOND: The Board approved the foregoing amendment(s) by written
consent pursuant to the provisions of Sections 141 and 242 of the General
Corporation Law of the State of Delaware and directed that such amendment(s) be
submitted to the stockholders of the Corporation entitled to vote thereon for
their consideration, approval and adoption thereof.
THIRD: The stockholders of the Corporation entitled to vote thereon
approved the foregoing amendment(s) by written consent pursuant to the
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware.
-14-
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the President and the Secretary
of the Corporation, for the purpose of amending the Certificate of Incorporation
of the Corporation, pursuant to the General Corporation Law of the State of
Delaware, under penalties of perjury, do each hereby declare and certify that
this act and deed of the Corporation, and the facts stated herein are true and
accordingly have hereunto signed this Certificate of Amendment to the
Certificate of Incorporation as of this 28th of January, 1999.
pcOrder, com, Inc.
By: /s/ Christina C. Jones
_____________________________
Name: Christina C. Jones
Title: President
Attest:
By: /s/ James J. Luttenbacher
______________________________
Name: James J. Luttenbacher
Title: Secretary
-15-
<PAGE>
Exhibit 5.1
[LETTERHEAD OF MORRISON & FOERSTER LLP]
February 9, 1999
pcOrder.com, Inc.
5000 Plaza on the Lake
Austin, TX 78746
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 initially
filed by pcOrder.com, Inc., a Delaware corporation (the "Company"), with the
Securities and Exchange Commission on September 4, 1998 (Registration No. 333-
62985) and Amendments Nos. 1 and 2 thereto filed on December 9, 1998 and
February 9, 1999, respectively (collectively the "Registration Statement"),
relating to the registration under the Securities Act of 1933, as amended, of
up to 2,530,000 authorized but unissued shares of the Company's Class A Common
Stock, $0.01 par value per share (the "Shares"), being offered by the Company
(including up to 330,000 shares that may be issued upon exercise of the
underwriters' over-allotment option). The Shares are to be sold to the
underwriters named in the Registration Statement for resale to the public.
As counsel to the Company, we have examined the proceedings taken by
the Company in connection with the issuance and sale by the Company of up to
2,530,000 Shares.
We are of the opinion that the Shares to be offered and sold by the
Company have been duly authorized and, when issued and sold by the Company in
the manner described in the Registration Statement and in accordance with the
resolutions adopted by the Board of Directors of the Company, will be legally
issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to all references to us in the
Registration Statement, the prospectus constituting a part thereof and any
amendments thereto.
Very truly yours,
/s/ Morrison & Foerster LLP
<PAGE>
EXHIBIT 10.5
Annex 1
pcOrder.com, Inc.
1996 STOCK OPTION PLAN
1. Purpose. The purpose of this 1996 Stock Option Plan (the "Plan") is to
-------
advance the interests of pcOrder.com, Inc., a Delaware corporation, (the
"Company") by encouraging certain employees of the Company and its parent and
subsidiaries and non-employee directors of the Company and its parent and
subsidiaries to acquire a proprietary interest in the Company through ownership
of the Common Stock, par value $.01 per share, of the Company ("Common Stock").
Such ownership will encourage the optionees to remain with the Company or its
parent or subsidiaries and will help attract other qualified persons to become
employees and directors thereof.
2. Administration. The Plan may be administered by a Committee (the
--------------
"Committee") appointed by the Board of Directors of the Company (the "Board")
which shall be composed of not less than two directors of the Company. No member
of the Committee shall be an officer or employee of the Company or its parent or
subsidiaries nor have any interest in any transaction or other business
relationship for which disclosure would be required pursuant to Item 404(a) or
Item 404(b) of Regulation S-K promulgated by the Securities and Exchange
Commission, as amended. Subject to the provisions of the Plan and the approval
of the Board, the Committee may be authorized to grant options under the Plan
and to interpret the Plan and such options, to prescribe, amend, and rescind
rules and regulations relating to the Plan and the options, and to make other
determinations necessary or advisable for the administration of the Plan, all of
which determinations shall be conclusive. In addition, in determining the terms
and conditions of the options granted hereunder, the Committee shall be entitled
in its discretion to permit the term of any option granted hereunder to extend
beyond the date of termination of an optionee's employment, irrespective of the
provisions of paragraph 8(e) hereof. The Committee shall act pursuant to a
majority vote or by unanimous written consent.
3. Types of Options. Options granted pursuant to the Plan may be either
----------------
incentive stock options ("Incentive Stock Options") under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or options not
qualifying under that section of the Code ("Non-Qualified Stock Options"). It is
the intent of the Company that Non-Qualified Stock Options granted under the
Plan not be classified as Incentive Stock Options, that Incentive Stock Options
granted under the Plan be consistent with and contain or be deemed to contain
all provisions required under Section 422 and the other appropriate provisions
of the Code and any implementing regulations (and any successor provisions
thereof), and that any ambiguities in construction be interpreted in order to
effectuate such intent.
1
<PAGE>
4. Eligibility. Options shall be granted under the Plan to such
-----------
employees, officers, and directors of the Company, its parent, or any of its
subsidiaries as the Committee or the Board shall determine from time to time.
5. Stock Subject to Options. The aggregate number of shares that may be
------------------------
issued or sold under options granted pursuant to the Plan (the "Shares") shall
not exceed 3,000,000 shares of Common Stock. The Shares shall be either
authorized but unissued shares of Common Stock or issued shares of Common Stock
that shall have been reacquired by the Company. The aggregate number of Shares
may be adjusted under paragraph 8(f) below. If any outstanding option under the
Plan expires or is terminated for any reason, the Shares allocated to the
unexercised portion of such option may again be subjected to an option or
options under the Plan.
6. Non-transferability of Incentive Stock Options. No Incentive Stock
----------------------------------------------
Option shall be transferable by the optionee otherwise than by will or the laws
of descent and distribution, and each Incentive Stock Option shall be
exercisable, during the optionee's lifetime, only by the optionee or by his
guardian or legal representative. Subject to the provisions of the Plan, the
Committee or the Board, as applicable, shall determine the transferability and
corresponding restrictions on exercise of Non-Qualified Stock Options.
7. Fair Market Value. For purposes of this Plan, "Fair Market Value"
-----------------
shall be (i) the good faith determination by the Board of the fair market value
of the Common Stock, on the applicable day and (ii) after the effectiveness of a
Registration Statement filed with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended, relating to the Common
Stock, the applicable day's closing sales price of the Common Stock, as reported
for consolidated transactions of the principal exchange on which such stock is
traded; or, if there are no sales on that date, the price on the most recent
trading day prior thereto; or, if the Common Stock is not traded on an exchange,
the average of the bid and ask prices reported in the over-the-counter market at
the close of business on the applicable day, or, if the Common Stock is not
publicly traded, the good faith determination by the Board of the fair market
value of the Common Stock on the applicable day.
8. Terms and Conditions of Options. The Committee (or, if one has not
-------------------------------
been appointed by the Board, the Board) shall have the power, subject to the
limitations contained in the Plan, to prescribe the terms and conditions of any
option granted hereunder. Each such option shall be evidenced by an agreement in
such form as the Committee (or the Board, as applicable) shall from time to time
determine, which agreement shall prescribe the following terms and conditions
and such other terms and conditions as the Committee (or the Board, as
applicable) may deem necessary or advisable:
(a) Allotment of Shares; Option Price. The Committee or the Board
---------------------------------
shall determine the total number of Shares to be offered to each optionee
under the Plan. The Shares shall be offered from time to time under the
Plan at such price as shall be determined by the Committee or the Board,
which price shall not be less than the par value of the Common Stock
subject to the option. The exercise price per share with respect to
Incentive
2
<PAGE>
Stock Options shall not be less than the Fair Market Value on the date of
grant of the Shares subject to the option, nor less than 110 percent of
such Fair Market Value in the case of any Incentive Stock Option granted to
an individual who, at the time the option is granted, owns stock possessing
more than 10 percent of the total combined voting power of all classes of
stock of the Company or its subsidiaries.
(b) Duration of Options. Except as otherwise set forth herein,
-------------------
options granted under the Plan shall be exercisable for such period of time
as the Committee or the Board shall determine. No option shall be
exercisable after the expiration of ten years from the date of grant;
provided, however, that any Incentive Stock Option granted to an individual
who, at the time the option is granted, owns stock possessing more than 10
percent of the total combined voting power of all classes of stock of the
Company or its subsidiaries shall by its terms not be exercisable after the
expiration of five years from the date of grant.
(c) Exercise of Options. Each option granted under the Plan shall be
-------------------
exercisable from time to time over such period as the Committee or the
Board shall determine. In addition to any other limitations set forth
herein, the aggregate Fair Market Value of the Shares with respect to which
Incentive Stock Options are exercisable for the first time by an optionee
in any calender year (under all plans of the Company and its subsidiaries
and its parent) shall not exceed $100,000. Notwithstanding anything herein
to the contrary but subject to any contrary determination of the Committee
or Board with respect to any particular option or options, in the event of
a "Change of Control," as hereinafter defined, all options granted
hereunder shall become immediately exercisable. A "Change of Control" for
the purposes hereof, unless defined otherwise by the Committee or Board for
any particular option or options, shall be deemed to have occurred if (i)
at any time all of the voting capital stock of the Company then issued and
outstanding shall be sold; (ii) in a merger or consolidation, the Company
is not the surviving Corporation and, with respect to an individual
optionee, such optionee's employment with the Company shall have been
terminated within six months thereafter, or (iii) the Company sells all or
substantially all of its assets to a person other than an affiliate or
associate of the Company. For purposes of this subsection, the term
"persons" shall mean individuals, groups, corporations, partnerships, or
other entities. Any person shall be deemed to be the beneficial owner of
any shares of voting capital stock of the Company:
(1) that such person owns directly, whether or not of record; or
(2) that such person has the right to acquire pursuant to any
agreement or understanding or upon exercise of conversion rights,
warrants or options, or otherwise; or
(3) that are beneficially owned, directly or indirectly (including
shares deemed owned through application of clause (2) above), by
an "affiliate" or associate
3
<PAGE>
(as defined in the rules of the Securities and Exchange
Commission under the Securities Act of 1933) of that person; or
(4) that are beneficially owned, directly or indirectly (including
shares deemed owned through application of clause (2) above), by
any other person with which that person or his affiliate or
associate has any agreement, arrangement, or understanding for
the purpose of acquiring, holding, voting, or disposing of the
voting capital stock of the Company.
(d) Payment for Shares. The purchase price of each Share purchased
------------------
upon the exercise of any option granted hereunder shall be paid in full at
the time of such purchase, and a stock certificate or certificates
representing Shares so purchased shall be delivered to the person entitled
thereto. Until the stock certificate or certificates for such Shares are
issued in his name, an optionee shall have none of the rights of a
stockholder. Payment may be made in whole or in part in cash or, if the
Committee or the Board so permits, in Common Stock of the Company owned by
the option holder, such stock to be valued at its Fair Market Value on the
date preceding the date the option is exercised. If certificates
representing shares of Common Stock are used to pay all or part of the
purchase price of an option, separate certificates shall be delivered by
the Company representing the same number of shares as each certificate so
used and an additional certificate shall be delivered representing the
additional shares to which the option holder is entitled as a result of
exercise of the option. It shall be a condition to the performance of the
Company's obligation to issue or transfer Shares upon exercise of an option
or options that the optionee pay, or make provision satisfactory to the
Company for the payment of, any taxes (other than stock transfer upon such
exercise. The Committee or the Board may provide the option holder with the
right to satisfy federal or state tax obligations by delivery of previously
owned shares of Common Stock or electing the withholding of Shares
otherwise issuable upon exercise of a Non-Qualified Stock Option, the Fair
Market Value of which shares does not exceed the amount to cover any
federal or state tax obligations (including FICA) incurred in connection
with the exercise of such option.
(e) Termination of Options. Upon the termination of an optionee's
----------------------
employment with the Company, a subsidiary, or parent, other than as a
result of retirement, disability, or death, any option held by the
optionee, to the extent not previously exercised, shall forthwith
terminate. In the event of termination of such employment by reason of
retirement, disability, or death, any option shall be exercisable at any
time within three months after such retirement or within one year after
such disability (within the meaning of Section 422 of the Code) or death,
but only to the extent of the number of Shares for which such option was
exercisable at the date of such termination of employment. The transfer of
an optionee between the Company, a subsidiary, or its parent shall not be
deemed a termination of employment. Cessation of any corporation's
relationship with the Company as a subsidiary or parent shall constitute a
"termination of an optionee's employment" hereunder as to individuals
employed
4
<PAGE>
by that corporation, and options held by such individuals shall be
terminated in accordance with this subsection.
(f) Adjustment of Options. In the event of a stock dividend, stock
---------------------
split or combination of shares, recapitalization, reclassification, merger,
or other similar capital or corporate structure change, the number and kind
of Shares at the time of such change remaining subject to the Plan and to
any option granted or to be granted pursuant to the Plan, the option
exercise price, and any other relevant provisions shall be appropriately
adjusted by the Committee or the Board, whose determination shall be
binding on all persons.
(g) Exchange of Options. Non-Qualified Stock Options may be granted
-------------------
in exchange for previously granted stock options having an exercise price
higher than the options received in such exchange.
9. Effective Date; Stockholder Approval; Term. The Plan shall become
------------------------------------------
effective on the date of the last to occur of the (i) adoption of the Plan by
the Board and (ii) approval of the Plan within 12 months of such adoption, by
the holders of a majority of the Company's capital stock outstanding and
entitled to vote at a duly held stockholders' meeting. No option hereunder shall
be granted after the date that occurs 10 years after the Plan's effective date (
or, if earlier, 10 years after the adoption of the Plan in the case of an
Incentive Stock Option) or the earlier suspension or termination of the Plan in
accordance with its terms. The Plan shall terminate on the date that occurs 10
years after the Plan's effective date or on such earlier date as it may be
suspended or terminated under the provisions of Section 10 below or as of which
all Shares subject to options authorized to be granted under the Plan shall have
been acquired by exercise of such options.
10. Amendment or Discontinuance of the Plan. The Board of Directors of the
---------------------------------------
Company may, insofar as permitted by law and subject to the limitations
contained in the Plan, at any time or from time to time, suspend or terminate
the Plan or revise or amend it in any respect whatsoever.
11. Applicable Laws or Regulations and Notification of Disposition. The
--------------------------------------------------------------
Company's obligation to sell and deliver Shares under an option is subject to
such compliance as the Company deems necessary or advisable with federal and
state laws, rules, and regulations applying to the authorization, issuance,
listing, or sale of securities. The Company may also require in connection with
any exercise of the Incentive Stock Option that the optionee agree to notify the
Company when making any disposition of the Shares, whether by sale, gift, or
otherwise, within two years of the date of grant or within one year of the date
of exercise.
12. No Employment Right. No Obligation to Exercise Option. Nothing
-----------------------------------------------------
contained in the Plan, or in any option granted under it, shall confer upon any
optionee any right to continued employment by the Company, any of its
subsidiaries or its parent or to continued membership on the Board or limit in
any way the right of the Company, any of its subsidiaries, or its parent, to
terminate the optionee's employment at any time. The granting of any option
hereunder shall impose no obligation upon the optionee to exercise such option.
5
<PAGE>
- --------------------------------------------------------------------------------
pcOrder.com, Inc.
STOCK OPTION
Number of Shares: Date of Grant:
THIS CERTIFIES THAT
Price per Share: Expiration Date:
("Holder")
has the right to purchase the Number of Shares of Common Stock of pcOrder.com,
Inc. ("Company") for the Price per Share on or before the Expiration Date, all
as set forth above; subject, however, to the terms and conditions on the reverse
side of this certificate.
WITNESS the signature of the Company's President and the Company's seal.
EXERCISE SCHEDULE
Holder's Address:
pcOrder.com, Inc.
Holder's Social Security No.
By__________________________
Joseph A. Liemandt,
Chairman of the Board
- --------------------------------------------------------------------------------
<PAGE>
INCENTIVE STOCK OPTION
TERMS & CONDITIONS
I. Shares Optioned. Option Price and Time of Exercise. The Company hereby
--------------------------------------------------
grants to Holder, subject to the terms and conditions set forth hereinafter and
in the Company's 1996 Stock Option Plan (the "Plan") the right and option to
purchase all or any part of the Number of Shares set forth on the reverse side
of this certificate of the presently authorized but unissued Common Stock, or
issued shares of Common Stock that have been issued by the Company, par value
$.01 per share of the Company, at the Price per Share set out on the reverse
side of this certificate. No rights under this option may be exercised after the
Expiration Date set out on the reverse side of this certificate, and before that
time, this option may be terminated as hereinafter provided. If Holder does not
purchase the full number of shares to which he or she is entitled in any one
year, he or she may purchase such shares in the next year specified in the
Exercise Schedule, in addition to the shares which he or she is otherwise
entitled to purchase in the next year. No partial exercise of such option may be
for less than 25 full shares, unless the remaining shares so purchasable are
fewer than 25 shares. In no event shall the Company be required to issue
fractional shares.
II. Payment For and Delivery of Stock. The purchase price of the shares as to
---------------------------------
which an option is exercised shall be paid in full at the time of the exercise.
Such purchase price shall be payable in cash, or at the option of the Holder of
each option, in Common Stock theretofore owned by such Holder or, in a
combination of cash and Common Stock. For purposes of determining the amount, if
any, of the purchase price satisfied by payment in Common Stock, such Common
Stock shall be valued at its fair market value on the date of exercise in
accordance with Paragraph 7 of the Plan. Any Common Stock delivered in
satisfaction of all or a portion of the purchase price shall be appropriately
endorsed for transfer and assignment to the Company. The rights of the Holder to
make payment of all or any portion of the purchase price of the shares with
other shares of Common Stock shall be of no force and effect, and shares of
Common Stock may not be used for such purpose, if the payment of all or any
portion of the purchase price in such manner would result in any charge to the
Company's earnings in the opinion of the Company's independent accountants.
III. Termination of Option. Upon termination of Holder's employment with the
---------------------
Company or any of its subsidiaries, other than as a result of retirement,
disability or death, any option held by the Holder, to the extent previously
exercised, shall forthwith terminate. In the event of termination of such
employment by reason of retirement, disability or death, any option shall be
exercisable at any time within three months after such retirement or within one
year after such disability (within the meaning of Section 422 of the Code as
defined in the Plan) or death, but only to the extent of the number of shares
for which such option was exercisable at the date such termination of
employment. Cessation of any corporation's relationship with the Company as a
subsidiary shall constitute a "termination of a Holder's employment" hereunder
as to individuals employed by the corporation, and options held by such
individuals shall be terminated in accordance with this section. In no event may
the option granted herein be exercisable to any extent by anyone after the
Expiration Date specified on the reverse side of this certificate. It is
expressly agreed that, anything contained herein to the contrary
notwithstanding, this option shall not constitute or be evidence of any
agreement or understanding, expressed or implied, that the Company will employ
Holder for any period of time or in any position or at any particular rate of
compensation.
IV. Non-Assignability of Option: Right of First Refusal: Purchase Option.
--------------------------------------------------------------------
Options may be exercised solely by Holder or his or her guardian or legal
representative during his or her lifetime or after his or her death the personal
representative of Holder's estate or the person or persons entitled thereto
under his or her will or under the laws of descent and distribution. The option
shall not be assignable or otherwise transfectable except by will or the laws of
descent and distribution. Upon any attempt to sell, assign or transfer, this
option or any right or privilege conferred hereby, this option shall immediately
terminate and thereupon become null and void. If holder seeks to sell or dispose
of all or any part of his or her shares to a third party he or she shall notify
the Company in writing of such proposed sale or disposition at least thirty days
prior to the date of proposed sale or disposition. The notion shall contain the
date of the proposed sale or disposition, the identity of the proposed
purchaser, and the terms and price of the proposed sale or disposition. The
Company shall have has the right to purchase such shares from Holder upon the
same terms and at the same price as such third party purchaser is prepared to
pay. If the Company has not exercised its right to so purchase such shares
within 30 days after notice, Holder may sell or dispose of such shares to the
proposed purchaser upon the same proposed terms and price. If at any time prior
to the date on which the Company makes a public offering of the Company's Common
Stock, the Holder shall cease for any reason to be employed by the Company, its
parent, or one of its subsidiaries, the Company may, at the Company's election
exercised by written notice sent to Holder or the Holder's personal
representative, at any time or times prior to the Expiration Date, require the
Holder or the personal representative of the Holder to sell to the Company for a
purchase price per share equal to the Price per Share set forth on the reverse
side of this certificate, any or all of the Number of Shares which the Holder or
the Holder's personal representative may have purchased under the terms of this
option.
V. Compliance With Governmental and Other Regulations. The Company shall take
--------------------------------------------------
such steps as may be required by law and applicable regulations, including rules
and regulations of the Secretary of State of the ????? and any applicable stock
exchange or national market system, in connection with the issuance and sale of
any shares purchased upon the exercise of this option or the listing of said
shares on said exchange.
VI. Rights of Holder in Stock. Neither Holder nor his or her executor,
-------------------------
administrator, heirs or Legatees shall have any rights or privileges of a
stockholder of the Company in respect to the shares issuable upon exercise of
this option, unless and until certificates representing such shares shall have
been issued by the Company and delivered to Holder.
VII. Non-Disclosure and Non-Competition. Holder acknowledges that in the course
----------------------------------
of his employment with the Company, Holder will receive special training and
will become familiar with the Company's trade secrets and other confidential
information concerning the Company. The Holder recognizes that such trade
secrets and confidential information have special, unique and extraordinary
value to the Company and agrees not to disclose the name to any unauthorized
person or use the same for Holder's own account. In consideration of the
disclosure of such trade secrets and confidential information, the Holder agrees
that during Holder's employment the Company or any of its subsidiaries and for
two years thereafter, the Holder will not directly or indirectly own, manage,
control, participate in, consult with, render services for, or in any manner
engage in any business competing with the businesses of the Company or its
parent or subsidiaries as such businesses exist or are in process during and
upon the expiration of the Holder's employment, within any geographical area in
which the Company or its parent or subsidiaries engage in such business. If, at
any time of enforcement of this provision, a court shall hold that the duration,
scope or area restrictions stated herein are unreasonable under circumstances
then existing, the parties agree that the maximum duration, scope or area
reasonable under such circumstances shall be substituted for the stated
duration, scope or area and that the court shall be allowed to review
restrictions contained herein to cover the maximum period, scope and area
permitted by law.
VIII.Investment Representation. The shares as to which this option is
-------------------------
exercised have not been registered under the Securities Act of 1933, as amended
(hereinafter the "Act"). Accordingly, upon exercise of this option and if the
shares have not been registered under the Act, Holder shall represent and agree
in writing that he or she is acquiring the shares for the purpose of investment
and not with a view to distribution thereof, and that (i) Holder knows any
shares to be sold to him or her hereunder have not been registered under the Act
or any state securities law, (ii) Holder understands that he or she must bear
the economic risk of said proposed investment for an indefinite period of time
until the shares are registered under the Act or an exemption from registration
is available, and (iii) Holder will hold the shares for Investment for his or
her own account and not with a view to the resale or distribution of all or any
portion of the shares and will not solicit any offer to buy, purchase or
otherwise acquire all or any portion of the shares otherwise than (a) pursuant
to an opinion of counsel reasonably satisfactory to the Company, or pursuant to
a no-action letter from the Securities and Exchange Commission, that
registration under the Act is not required, or (b) pursuant to an effective
registration statement under the Act.
IX. Notices. Any notice to be given hereunder shall be addressed to the
-------
Company, in care of its President, 6034 West Courtyard Drive, Suite 130, Austin,
Texas, 78730, and any notice to be given to the Holder's shall be addressed to
the address designated on the reverse side of this certificate, or at such other
address either party may hereafter designate in writing to the other. Any such
notice shall have been deemed duly given when enclosed in a properly sealed
envelope, addressed as aforesaid, registered or certified, and deposited
(postage and registry or certificate fee prepaid) in the United States Mail.
X. Succressors or Assigns of the Company. This option shall be binding upon
-------------------------------------
and shall insure to the benefit of any successor or assign of the Company.
This Incentive Stock Option is hereby accepted and agreed to in all
respects by Holder as of the Date of Grant, subject to the terms and provisions
of the 1996 Stock Option Plan of pcOrder.com, Inc. under which the option has
been granted.
_________________________
<PAGE>
- --------------------------------------------------------------------------------
pcOrder.com, Inc.
STOCK OPTION
Number of Shares: Date of Grant:
THIS CERTIFIES THAT
Price per Share: Expiration Date:
("Holder")
has the right to purchase the Number of Shares of Common Stock of pcOrder.com,
Inc. ("Company") for the Price per Share on or before the Expiration Date, all
as set forth above; subject, however, to the terms and conditions on the reverse
side of this certificate.
WITNESS the signature of the Company's President and the Company's seal.
EXERCISE SCHEDULE
Holder's Address:
pcOrder.com, Inc.
Holder's Social Security No.
By__________________________
Joseph A. Liemandt,
Chairman of the Board
- --------------------------------------------------------------------------------
<PAGE>
NON-QUALIFIED STOCK OPTION
TERMS & CONDITIONS
I. Shares Optioned, Option Price and Time of Exercise. The Company hereby
---------------------------------------------------
grants to Holder, subject to the terms and conditions set forth hereinafter and
in the Company's 1996 Stock Option Plan (the "Plan"), the right and option to
purchase all or any part of the Number of Shares set forth on the reverse side
of this certificate of the presently authorized but unissued Common Stock, or
issued shares of Common Stock that have been reacquired by the Company, par
value $.01 per share of the Company, at the Price per Share set out on the
reverse side of this certificate. No rights under this option may be exercised
after the Expiration Date set out on the reverse side of this certificate, and
before that time, this option may be terminated as hereinafter provided. If
Holder does not purchase the full number of shares to which he or she is
entitled in any one year, he or she may purchase such shares in any subsequent
year prior to the Expiration Date. No partial exercise of such option may be
for less than 25 full shares, unless the remaining shares so purchasable are
fewer than 25 shares. In no event shall the Company be required to issue
fractional shares. This option shall become immediately exercisable upon a
Change of Control as that term is defined in the Plan.
II. Payment For and Delivery of Stock. The purchase price of the shares as to
----------------------------------
which an option is exercised shall be paid in full at the time of the exercise.
Such purchase price shall be payable in cash, or at the option of Holder of such
option, in Common Stock theretofore owned by such Holder or, in a combination of
cash and such Common Stock. For purposes of determining the amount, if any, of
the purchase price satisfied by payment in Common Stock, such Stock shall be
valued at its fair market value on the date of exercise in accordance with
Paragraph 7 of the Plan. Any Common Stock delivered in satisfaction of all or a
portion of the purchase price shall be appropriately endorsed for transfer and
assignment to the Company. The rights of Holder to make payment of all or any
portion of the purchase price of the shares with other shares of Common Stock
shall be of no force and effect, and shares of Common Stock may not be used for
such purpose, if the payment of all or any portion of the purchase price in such
manner would result in any charge to the Company's earnings in the opinion of
the Company's independent accountants.
III. Termination of Option. Upon termination of Holder's employment with the
----------------------
Company or any of its parents or subsidiaries, other than as a result of
retirement, disability or death, any option held by Holder, to the extent not
previously exercised, shall forthwith terminate. In the event of termination of
such employment by reason of retirement, disability or death, any option shall
be exercisable at any time within three months after such retirement or within
one year after such disability (within the meaning of Section 422 of the Code as
defined in the Plan) or death, but only to the extent of the number of shares
for which such option was exercisable at the date of such termination of
employment. Cessation of any corporation's relationship with the Company as a
parent or subsidiary shall constitute a "termination of a Holder's employment"
hereunder as to individuals employed by that corporation, and options held by
such individuals shall be terminated in accordance with this section. In no
event may the option granted herein be exercisable to any extent by anyone after
the Expiration Date specified on the reverse side of this certificate. It is
expressly agreed that, anything contained herein to the contrary notwithstanding
this option shall not constitute or be evidence of any agreement or
understanding, expressed or implied, that the Company will employ Holder for any
period of time or in any position or at any particular rate of compensation.
IV. Non-Assignability of Option: Right of First Refusal: Purchase Option.
---------------------------------------------------------------------
Except as otherwise determined by the Company's Board of Directors or a duly-
appointed committee of the Board of Directors, this option shall not be
assignable or otherwise transferable. Upon any attempt to sell, assign or
transfer, this option, or any right or privilege conferred hereby, this option
shall immediately terminate and thereupon become null and void. If Holder seeks
to sell or dispose of all or any part of his or her shares to a third party
prior to the date on which the Company makes a public offering of the Company's
Common Stock, he or she shall notify the Company in writing of such proposed
sale or disposition at least thirty days prior to the date of the proposed sale
or disposition. The notice shall contain the date of the proposed sale or
disposition, the identity of the proposed purchaser, and the terms and price of
the proposed sale or disposition. The Company shall have the right to purchase
such shares from Holder upon the same terms and at the same price as such third
party purchaser is prepared to pay. If the Company has not exercised its right
to so purchase such shares within 30 days after notice, Holder may sell or
dispose of such shares to the proposed purchaser upon the same proposed terms
and price. If at any time prior to the date on which the Company makes a public
offering of the Company's Common Stock, Holder shall cease for any reason to be
employed by the Company or one of its parents or subsidiaries and (i) Holder
misuses or makes an unauthorized disclosure of any of the Company's trade
secrets or confidential information as determined by the Company in its sole
discretion, (ii) Holder's ownership of Common Stock purchased pursuant to the
exercise of this option would cause the Company to file a Form 10 (or any
similar form as may hereafter be adopted for the same or similar purpose)
pursuant to Section 12 of the Securities Exchange Act of 1934 (a "Form 10"), or
(iii) Holder violates the provisions of Section VII of this option, the Company
may, at the Company's election exercised by written notice sent to Holder or
Holder's personal representative at any time or times prior to the Expiration
Date, require Holder or the personal representative of Holder to sell to the
Company for a purchase price per Share equal to the price per Share used by the
Company in calculating the withholding tax obligation on the date such Shares
were purchased by Holder, any or all of the Number of Shares which Holder or
Holder's personal representative may have purchased under the terms of this
option. It is expressly agreed and understood that, if Holder has ceased to be
employed by the Company or one of its parents or subsidiaries, the Company may
require a sale by Holder or Holder's personal representative pursuant to Section
IV(ii) of this option to allow the exercise by a current employee of the Company
or one of its parents or subsidiaries of an option issued by the Company if such
exercise would cause the Company to file a Form 10 without such required sale.
In the case of any required sale pursuant to Section IV(ii) of this option, the
Company shall, prior to requiring such a sale by Holder or Holder's personal
representative, require the sale of all Common Stock held by each optionee under
the Plan (or such optionee's personal representative) who has ceased to be
employed by the Company or one of its parents or subsidiaries and first became a
holder of Common Stock by the exercise of an option with a date of grant
subsequent to the Date of Grant set forth on the reverse side of this
certificate.
V. Compliance With Governmental and Other Regulations. The Company shall take
---------------------------------------------------
such steps as may be required by law and applicable regulations, including rules
and regulations of the Secretary of State of the State of Delaware and any
applicable stock exchange or national market system, in connection with the
issuance and sale of any shares purchased upon the exercise of this option or
the listing of said shares on said exchange.
VI. Rights of Holder in Stock. Neither Holder nor his or her transferees,
--------------------------
executor, administrator, heirs or legatees shall have any rights or privileges
of a stockholder of the Company in respect to the shares issuable upon exercise
of this option, unless and until certificates representing such shares shall
have been issued by the Company and delivered to Holder.
VII. Non-Disclosure and Non-Competition. Holder acknowledges that in the
-----------------------------------
course of his employment with the Company, Holder will receive special training
and will become familiar with the Company's trade secrets and other confidential
information concerning the Company. Holder recognizes that such trade secrets
and confidential information have special, unique and extraordinary value to the
Company and agrees not to disclose the same to any unauthorized person or use
the same for Holder's own account. In consideration of the disclosure of such
trade secrets and confidential information, Holder agrees that during Holder's
employment by the Company or any of its parents or subsidiaries and for two
years thereafter. Holder will not directly or indirectly own, manage, control,
participate in, consult with, render services for, or in any manner engage in
any business competing with the businesses of the Company or its parents or
subsidiaries as such businesses exist or are in process during and upon the
expiration of Holder's employment, within any geographical area in which the
Company or its parents or subsidiaries engage in such business. If at any time
of enforcement of this provision, a court shall hold that the duration, scope or
area restrictions stated herein are unreasonable under circumstances then
existing, the parties agree that the maximum duration, scope or area reasonable
under such circumstances shall be substituted for the stated duration, scope or
area and that the court shall be allowed to revise the restrictions contained
herein to cover the maximum period, scope and area permitted by law.
VIII. Investment Representation. The shares as to which this option is
--------------------------
exercised have not been registered under the Securities Act of 1933, as amended
(hereinafter the "Act"). Accordingly, upon exercise of this option, and if the
shares have not been registered under the Act, Holder shall represent and agree
in writing that he or she is acquiring the shares for the purpose of investment
and not with a view to distribution thereof, and that: (i) Holder knows any
shares to be sold to him or her hereunder have not been registered under the Act
or any state securities laws, (ii) Holder understands that he or she must bear
the economic risk of said prospective investment for an indefinite period of
time until the shares are registered under the Act or an exemption from
registration as available, and (iii) Holder will hold the shares for investment
for his or her own account and not with a view to the resale or distribution of
all or any portion of the shares and will not solicit any offer to buy, purchase
or otherwise acquire all or any portion of the shares otherwise than (a)
pursuant to an opinion of counsel reasonably satisfactory to the Company, or
pursuant to a no-action letter from the Securities and Exchange Commission, that
registration under the Act is not required, or (b) pursuant to an effective
registration statement under the Act.
IX. Notices. Any notice to be given hereunder shall be addressed to the
--------
Company, in care of its President, 5000 Plaza on the Lake, Suite 100, Austin,
Texas, 78746, and any notice to be given to Holder shall be addressed to the
address designated on the reverse side of this certificate, or at such other
address either party may hereafter designate in writing to the other. Any such
notice shall have been deemed duly given when enclosed in a properly sealed
envelope, addressed as aforesaid, registered or certified, and deposited
(postage and registry and certificate fee prepaid) in the United State Mail.
X. Successors or Assigns of the Company. This option shall be binding upon
-------------------------------------
and shall inure to the benefit of any successor or assign of the Company.
This Non-Qualified Stock Option is hereby accepted and agreed to in all
respects by Holder as of the Date of Grant, subject to the terms and
provisions of the 1996 Stock Option Plan of pcOrder.com, Inc. under which the
option has been granted.
<PAGE>
Exhibit 10.5.1
pcOrder.com, Inc.
1999 STOCK INCENTIVE PLAN
1. Purposes of the Plan. The purposes of this Stock Incentive Plan are to
--------------------
attract and retain the best available personnel, to provide additional incentive
to Employees, Directors and Consultants and to promote the success of the
Company's business.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of the Committees appointed
-------------
to administer the Plan.
(b) "Affiliate" and "Associate" shall have the respective meanings
--------- ---------
ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.
(c) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock incentive plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to Awards granted to residents therein.
(d) "Award" means the grant of an Option, SAR, Dividend Equivalent
-----
Right, Restricted Stock, Performance Unit, Performance Share, or other right or
benefit under the Plan.
(e) "Award Agreement" means the written agreement evidencing the grant
---------------
of an Award executed by the Company and the Grantee, including any amendments
thereto.
(f) "Board" means the Board of Directors of the Company.
-----
(g) "Cause" means, with respect to the termination by the Company or a
-----
Related Entity of the Grantee's Continuous Service, that such termination is for
"Cause" as such term is expressly defined in a then-effective written agreement
between the Grantee and the Company or such Related Entity, or in the absence of
such then-effective written agreement and definition, is based on, in the
determination of the Administrator, the Grantee's: (i) refusal or failure to act
in accordance with any specific, lawful direction or order of the Company or a
Related Entity; (ii) unfitness or unavailability for service or unsatisfactory
performance (other than as a result of Disability); (iii) performance of any act
or failure to perform any act in bad faith and to the detriment of the Company
or a Related Entity; (iv) dishonesty, intentional misconduct or material breach
of any agreement with the Company or a Related Entity; or (v) commission of a
crime involving dishonesty, breach of trust, or physical or emotional harm to
any person. At least 30 days prior to the termination of the Grantee's
Continuous Service pursuant to (i) or (ii) above, the Administrator shall
provide the Grantee with notice of the Company's or such Related Entity's intent
to terminate, the reason therefor, and an opportunity for the Grantee to cure
such defects in his or her service to the Company's or such Related Entity's
satisfaction. During this
1
<PAGE>
30 day (or longer) period, no Award issued to the Grantee under the Plan may be
exercised or purchased.
(h) "Change in Control" means a change in ownership or control of the
-----------------
Company effected through either of the following transactions:
(i) the direct or indirect acquisition by any person or related
group of persons (other than an acquisition from or by the Company or by a
Company-sponsored employee benefit plan or by a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities pursuant to
a tender or exchange offer made directly to the Company's stockholders which a
majority of the Continuing Directors who are not Affiliates or Associates of the
offeror do not recommend such stockholders accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who are
Continuing Directors.
(i) "Class A Common Stock" means the class A common stock of the
--------------------
Company.
(j) "Code" means the Internal Revenue Code of 1986, as amended.
----
(k) "Committee" means any committee appointed by the Board to
---------
administer the Plan.
(l) "Company" means pcOrder.com, Inc., a Delaware corporation.
-------
(m) "Consultant" means any person (other than an Employee or, solely
----------
with respect to rendering services in such person's capacity as a Director) who
is engaged by the Company or any Related Entity to render consulting or advisory
services to the Company or such Related Entity.
(n) "Continuing Directors" means members of the Board who either (i)
--------------------
have been Board members continuously for a period of at least thirty-six (36)
months or (ii) have been Board members for less than thirty-six (36) months and
were elected or nominated for election as Board members by at least a majority
of the Board members described in clause (i) who were still in office at the
time such election or nomination was approved by the Board.
(o) "Continuous Service" means that the provision of services to the
------------------
Company or a Related Entity in any capacity of Employee, Director or Consultant,
is not interrupted or terminated. Continuous Service shall not be considered
interrupted in the case of (i) any approved leave of absence, (ii) transfers
between locations of the Company or among the
2
<PAGE>
Company, any Related Entity, or any successor, in any capacity of Employee,
Director or Consultant, or (iii) any change in status as long as the individual
remains in the service of the Company or a Related Entity in any capacity of
Employee, Director or Consultant (except as otherwise provided in the Award
Agreement). An approved leave of absence shall include sick leave, military
leave, or any other authorized personal leave. For purposes of Incentive Stock
Options, no such leave may exceed ninety (90) days, unless reemployment upon
expiration of such leave is guaranteed by statute or contract.
(p) "Corporate Transaction" means any of the following transactions:
---------------------
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated;
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the capital stock of
the Company's subsidiary corporations) in connection with the complete
liquidation or dissolution of the Company;
(iii) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such securities
immediately prior to such merger; or
(iv) an acquisition by any person or related group of persons
(other than the Company or by a Company-sponsored employee benefit plan) of
beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of
securities possessing more than fifty percent (50%) of the total combined voting
power of the Company's outstanding securities (whether or not in a transaction
also constituting a Change in Control), but excluding any such transaction that
the Administrator determines shall not be a Corporate Transaction.
(q) "Director" means a member of the Board or the board of directors
--------
of any Related Entity.
(r) "Disability" means that a Grantee is permanently unable to carry
----------
out the responsibilities and functions of the position held by the Grantee by
reason of any medically determinable physical or mental impairment. A Grantee
will not be considered to have incurred a Disability unless he or she furnishes
proof of such impairment sufficient to satisfy the Administrator in its
discretion.
(s) "Dividend Equivalent Right" means a right entitling the Grantee to
-------------------------
compensation measured by dividends paid with respect to Class A Common Stock.
(t) "Effective Termination" means the occurrence after a Corporate
---------------------
Transaction, Change in Control or a Related Entity Disposition of any of the
following events or conditions:
3
<PAGE>
(i) (A) a change in the Grantee's status, title, position or
responsibilities which represents an adverse change from the Grantee's status,
title, position or responsibilities as in effect at any time within six (6)
months preceding the date of a Corporate Transaction, Change in Control or
Related Entity Disposition or at any time thereafter or (B) the assignment to
the Grantee of any duties or responsibilities which are inconsistent with the
Optionee's status, title, position or responsibilities as in effect at any time
within six (6) months preceding the date of a Corporate Transaction, Change in
Control or Related Entity Disposition or at any time thereafter;
(ii) reduction in the Grantee's base salary to a level below that
in effect at any time within six (6) months preceding the date of a Corporate
Transaction, Change in Control or Related Entity Disposition or at any time
thereafter; or
(iii) requiring the Grantee to be based at any place outside a
50-mile radius from the Grantee's job location or residence prior to the
Corporate Transaction, Change in Control or Related Entity Disposition, except
for reasonably required travel on business which is not materially greater than
such travel requirements prior to the Corporate Transaction, Change in Control
or Related Entity Disposition.
(u) "Employee" means any person, including an Officer or Director, who
--------
is an employee of the Company or any Related Entity. The payment of a director's
fee by the Company or a Related Entity shall not be sufficient to constitute
"employment" by the Company.
(v) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(w) "Fair Market Value" means, as of any date, the value of Class A
-----------------
Common Stock determined as follows:
(i) Where there exists a public market for the Class A Common
Stock, the Fair Market Value shall be (A) the closing price for a Share for the
last market trading day prior to the time of the determination (or, if no
closing price was reported on that date, on the last trading date on which a
closing price was reported) on the stock exchange determined by the
Administrator to be the primary market for the Class A Common Stock or the
Nasdaq National Market, whichever is applicable or (B) if the Class A Common
Stock is not traded on any such exchange or national market system, the average
of the closing bid and asked prices of a Share on the Nasdaq Small Cap Market
for the day prior to the time of the determination (or, if no such prices were
reported on that date, on the last date on which such prices were reported), in
each case, as reported in The Wall Street Journal or such other source as the
Administrator deems reliable; or
(ii) In the absence of an established market for the Class A
Common Stock of the type described in (i), above, the Fair Market Value thereof
shall be determined by the Administrator in good faith.
(x) "Grantee" means an Employee, Director or Consultant who receives
-------
an Award pursuant to an Award Agreement under the Plan.
4
<PAGE>
(y) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(z) "Non-Qualified Stock Option" means an Option not intended to
--------------------------
qualify as an Incentive Stock Option.
(aa) "Officer" means a person who is an officer of the Company or a
-------
Related Entity within the meaning of Section 16 of the Exchange Act and the
rules and regulations promulgated thereunder.
(bb) "Option" means an option to purchase Shares pursuant to an Award
------
Agreement granted under the Plan.
(cc) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(dd) "Performance Shares" means Shares or an Award denominated in
------------------
Shares which may be earned in whole or in part upon attainment of performance
criteria established by the Administrator.
(ee) "Performance Units" means an Award which may be earned in whole or
-----------------
in part upon attainment of performance criteria established by the Administrator
and which may be settled for cash, Shares or other securities or a combination
of cash, Shares or other securities as established by the Administrator.
(ff) "Plan" means this 1999 Stock Incentive Plan.
----
(gg) "Registration Date" means the first to occur of (i) the closing of
-----------------
the first sale to the general public of (A) the Class A Common Stock or (B) the
same class of securities of a successor corporation (or its Parent) issued
pursuant to a Corporate Transaction in exchange for or in substitution of the
Class A Common Stock, pursuant to a registration statement filed with and
declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended; and (ii) in the event of a Corporate
Transaction, the date of the consummation of the Corporate Transaction if the
same class of securities of the successor corporation (or its Parent) issuable
in such Corporate Transaction shall have been sold to the general public
pursuant to a registration statement filed with and declared effective by, on or
prior to the date of consummation of such Corporate Transaction, the Securities
and Exchange Commission under the Securities Act of 1933, as amended.
(hh) "Related Entity" means any Parent, Subsidiary and any business,
--------------
corporation, partnership, limited liability company or other entity in which the
Company, a Parent or a Subsidiary holds a substantial ownership interest,
directly or indirectly.
(ii) "Related Entity Disposition" means the sale, distribution or other
--------------------------
disposition by the Company, a Parent or a Subsidiary of all or substantially all
of the interests of the Company, a Parent or a Subsidiary in any Related Entity
effected by a sale, merger or
5
<PAGE>
consolidation or other transaction involving that Related Entity or the sale of
all or substantially all of the assets of that Related Entity.
(jj) "Restricted Stock" means Shares issued under the Plan to the
----------------
Grantee for such consideration, if any, and subject to such restrictions on
transfer, rights of first refusal, repurchase provisions, forfeiture provisions,
and other terms and conditions as established by the Administrator.
(kk) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act
----------
or any successor thereto.
(ll) "SAR" means a stock appreciation right entitling the Grantee to
---
Shares or cash compensation, as established by the Administrator, measured by
appreciation in the value of Class A Common Stock.
(mm) "Share" means a share of the Class A Common Stock.
-----
(nn) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan.
-------------------------
(a) Subject to the provisions of Section 10, below, the maximum
aggregate number of Shares which may be issued pursuant to all Awards (including
Incentive Stock Options) is 1,500,000 Shares, plus an annual increase to be
added on the first day of the Company's fiscal year beginning in 2000 equal to
five percent (5%) of the number of shares of all classes of common stock of the
company outstanding as of such date or a lesser number of Shares determined by
the Administrator. Notwithstanding the foregoing, subject to the provisions of
Section 10, below, of the number of Shares specified above, the maximum
aggregate number of Shares available for grant of Incentive Stock Options shall
be 1,500,000 Shares, plus an annual increase to be added on the first day of the
Company's fiscal year beginning in 2000 equal to the lesser of (i) 500,000
Shares, (ii) two percent (2%) of the number of Shares outstanding as of such
date, or (iii) a lesser number of Shares determined by the Administrator. The
Shares to be issued pursuant to Awards may be authorized, but unissued, or
reacquired Class A Common Stock.
(b) Any Shares covered by an Award (or portion of an Award) which is
forfeited or canceled, expires or is settled in cash, shall be deemed not to
have been issued for purposes of determining the maximum aggregate number of
Shares which may be issued under the Plan. If any unissued Shares are retained
by the Company upon exercise of an Award in order to satisfy the exercise price
for such Award or any withholding taxes due with respect to such Award, such
retained Shares subject to such Award shall become available for future issuance
under the Plan (unless the Plan has terminated). Shares that actually have been
issued under the Plan pursuant to an Award shall not be returned to the Plan and
shall not become available for future issuance under the Plan, except that if
unvested Shares are forfeited, or repurchased by the Company at their original
purchase price, such Shares shall become available for future grant under the
Plan.
6
<PAGE>
4. Administration of the Plan.
--------------------------
(a) Plan Administrator.
------------------
(i) Administration with Respect to Directors and Officers. With
-----------------------------------------------------
respect to grants of Awards to Directors or Employees who are also Officers or
Directors of the Company, the Plan shall be administered by (A) the Board or (B)
a Committee designated by the Board, which Committee shall be constituted in
such a manner as to satisfy the Applicable Laws and to permit such grants and
related transactions under the Plan to be exempt from Section 16(b) of the
Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board.
(ii) Administration With Respect to Consultants and Other
----------------------------------------------------
Employees. With respect to grants of Awards to Employees or Consultants who are
- ---------
neither Directors nor Officers of the Company, the Plan shall be administered by
(A) the Board or (B) a Committee designated by the Board, which Committee shall
be constituted in such a manner as to satisfy the Applicable Laws. Once
appointed, such Committee shall continue to serve in its designated capacity
until otherwise directed by the Board. The Board may authorize one or more
Officers to grant such Awards and may limit such authority as the Board
determines from time to time.
(iii) Administration Errors. In the event an Award is granted in
---------------------
a manner inconsistent with the provisions of this subsection (a), such Award
shall be presumptively valid as of its grant date to the extent permitted by the
Applicable Laws.
(b) Powers of the Administrator. Subject to Applicable Laws and the
---------------------------
provisions of the Plan (including any other powers given to the Administrator
hereunder), and except as otherwise provided by the Board, the Administrator
shall have the authority, in its discretion:
(i) to select the Employees, Directors and Consultants to whom
Awards may be granted from time to time hereunder;
(ii) to determine whether and to what extent Awards are granted
hereunder;
(iii) to determine the number of Shares or the amount of other
consideration to be covered by each Award granted hereunder;
(iv) to approve forms of Award Agreements for use under the Plan;
(v) to determine the terms and conditions of any Award granted
hereunder;
(vi) to amend the terms of any outstanding Award granted under the
Plan, provided that any amendment that would adversely affect the Grantee's
rights under an outstanding Award shall not be made without the Grantee's
written consent;
7
<PAGE>
(vii) to construe and interpret the terms of the Plan and Awards
granted pursuant to the Plan, including without limitation, any notice of Award
or Award Agreement, granted pursuant to the Plan;
(viii) to establish additional terms, conditions, rules or
procedures to accommodate the rules or laws of applicable foreign jurisdictions
and to afford Grantees favorable treatment under such laws; provided, however,
that no Award shall be granted under any such additional terms, conditions,
rules or procedures with terms or conditions which are inconsistent with the
provisions of the Plan; and
(ix) to take such other action, not inconsistent with the terms of
the Plan, as the Administrator deems appropriate.
(c) Effect of Administrator's Decision. All decisions, determinations
and interpretations of the Administrator shall be conclusive and binding on all
persons.
5. Eligibility. Awards other than Incentive Stock Options may be granted
-----------
to Employees, Directors and Consultants. Incentive Stock Options may be granted
only to Employees of the Company, a Parent or a Subsidiary. An Employee,
Director or Consultant who has been granted an Award may, if otherwise eligible,
be granted additional Awards. Awards may be granted to such Employees, Directors
or Consultants who are residing in foreign jurisdictions as the Administrator
may determine from time to time.
6. Terms and Conditions of Awards.
------------------------------
(a) Type of Awards. The Administrator is authorized under the Plan to
--------------
award any type of arrangement to an Employee, Director or Consultant that is not
inconsistent with the provisions of the Plan and that by its terms involves or
might involve the issuance of (i) Shares, (ii) an Option, a SAR or similar right
with a fixed or variable price related to the Fair Market Value of the Shares
and with an exercise or conversion privilege related to the passage of time, the
occurrence of one or more events, or the satisfaction of performance criteria or
other conditions, or (iii) any other security with the value derived from the
value of the Shares. Such awards include, without limitation, Options, SARs,
sales or bonuses of Restricted Stock, Dividend Equivalent Rights, Performance
Units or Performance Shares, and an Award may consist of one such security or
benefit, or two (2) or more of them in any combination or alternative.
(b) Designation of Award. Each Award shall be designated in the Award
--------------------
Agreement. In the case of an Option, the Option shall be designated as either an
Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding
such designation, to the extent that the aggregate Fair Market Value of Shares
subject to Options designated as Incentive Stock Options which become
exercisable for the first time by a Grantee during any calendar year (under all
plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess
Options, to the extent of the Shares covered thereby in excess of the foregoing
limitation, shall be treated as Non-Qualified Stock Options. For this purpose,
Incentive Stock Options shall be
8
<PAGE>
taken into account in the order in which they were granted, and the Fair Market
Value of the Shares shall be determined as of the date the Option with respect
to such Shares is granted.
(c) Conditions of Award. Subject to the terms of the Plan, the
-------------------
Administrator shall determine the provisions, terms, and conditions of each
Award including, but not limited to, the Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, Shares, or other consideration) upon settlement of the Award, payment
contingencies, and satisfaction of any performance criteria. The performance
criteria established by the Administrator may be based on any one of, or
combination of, increase in share price, earnings per share, total stockholder
return, return on equity, return on assets, return on investment, net operating
income, cash flow, revenue, economic value added, personal management
objectives, or other measure of performance selected by the Administrator.
Partial achievement of the specified criteria may result in a payment or vesting
corresponding to the degree of achievement as specified in the Award Agreement.
(d) Acquisitions and Other Transactions. The Administrator may issue
-----------------------------------
Awards under the Plan in settlement, assumption or substitution for, outstanding
awards or obligations to grant future awards in connection with the Company or a
Related Entity acquiring another entity, an interest in another entity or an
additional interest in a Related Entity whether by merger, stock purchase, asset
purchase or other form of transaction.
(e) Deferral of Award Payment. The Administrator may establish one or
-------------------------
more programs under the Plan to permit selected Grantees the opportunity to
elect to defer receipt of consideration upon exercise of an Award, satisfaction
of performance criteria, or other event that absent the election would entitle
the Grantee to payment or receipt of Shares or other consideration under an
Award. The Administrator may establish the election procedures, the timing of
such elections, the mechanisms for payments of, and accrual of interest or other
earnings, if any, on amounts, Shares or other consideration so deferred, and
such other terms, conditions, rules and procedures that the Administrator deems
advisable for the administration of any such deferral program.
(f) Award Exchange Programs. The Administrator may establish one or
-----------------------
more programs under the Plan to permit selected Grantees to exchange an Award
under the Plan for one or more other types of Awards under the Plan on such
terms and conditions as determined by the Administrator from time to time.
(g) Separate Programs. The Administrator may establish one or more
-----------------
separate programs under the Plan for the purpose of issuing particular forms of
Awards to one or more classes of Grantees on such terms and conditions as
determined by the Administrator from time to time.
(h) Early Exercise. The Award Agreement may, but need not, include a
--------------
provision whereby the Grantee may elect at any time while an Employee, Director
or Consultant to exercise any part or all of the Award prior to full vesting of
the Award. Any unvested Shares received pursuant to such exercise may be subject
to a repurchase right in favor of the Company or a Related Entity or to any
other restriction the Administrator determines to be appropriate.
9
<PAGE>
(i) Term of Award. The term of each Award shall be the term stated in
-------------
the Award Agreement, provided, however, that the term of an Incentive Stock
Option shall be no more than ten (10) years from the date of grant thereof.
However, in the case of an Incentive Stock Option granted to a Grantee who, at
the time the Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the term of the Incentive Stock Option shall be five (5) years
from the date of grant thereof or such shorter term as may be provided in the
Award Agreement.
(j) Transferability of Awards. Incentive Stock Options may not be
-------------------------
sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Grantee, only by the Grantee; provided,
however, that the Grantee may designate a beneficiary of the Grantee's Incentive
Stock Option in the event of the Grantee's death on a beneficiary designation
form provided by the Administrator. Other Awards shall be transferable to the
extent provided in the Award Agreement.
(k) Time of Granting Awards. The date of grant of an Award shall for
-----------------------
all purposes be the date on which the Administrator makes the determination to
grant such Award, or such other date as is determined by the Administrator.
Notice of the grant determination shall be given to each Employee, Director or
Consultant to whom an Award is so granted within a reasonable time after the
date of such grant.
7. Award Exercise or Purchase Price, Consideration, Taxes and Reload
-----------------------------------------------------------------
Options.
- -------
(a) Exercise or Purchase Price. The exercise or purchase price, if
--------------------------
any, for an Award shall be as follows:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of the grant of
such Incentive Stock Option owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be not less than one hundred ten
percent (110%) of the Fair Market Value per Share on the date of grant; or
(B) granted to any Employee other than an Employee described
in the preceding paragraph, the per Share exercise price shall be not less than
one hundred percent (100%) of the Fair Market Value per Share on the date of
grant.
(ii) In the case of other Awards, such price as is determined by
the Administrator.
(iii) Notwithstanding the foregoing provisions of this Section
7(a), in the case of an Award issued pursuant to Section 6(d), above, the
exercise or purchase price for the Award shall be determined in accordance with
the principles of Section 424(a) of the Code.
10
<PAGE>
(b) Consideration. Subject to Applicable Laws, the consideration to be
-------------
paid for the Shares to be issued upon exercise or purchase of an Award including
the method of payment, shall be determined by the Administrator (and, in the
case of an Incentive Stock Option, shall be determined at the time of grant). In
addition to any other types of consideration the Administrator may determine,
the Administrator is authorized to accept as consideration for Shares issued
under the Plan the following, provided that the portion of the consideration
equal to the par value of the Shares must be paid in cash or other legal
consideration permitted by the Delaware General Corporation Law:
(i) cash;
(ii) check;
(iii) delivery of Grantee's promissory note with such recourse,
interest, security, and redemption provisions as the Administrator determines as
appropriate;
(iv) if the exercise or purchase occurs on or after the
Registration Date, surrender of Shares or delivery of a properly executed form
of attestation of ownership of Shares as the Administrator may require
(including withholding of Shares otherwise deliverable upon exercise of the
Award) which have a Fair Market Value on the date of surrender or attestation
equal to the aggregate exercise price of the Shares as to which said Award shall
be exercised (but only to the extent that such exercise of the Award would not
result in an accounting compensation charge with respect to the Shares used to
pay the exercise price unless otherwise determined by the Administrator);
(v) with respect to Options, if the exercise occurs on or after
the Registration Date, payment through a broker-dealer sale and remittance
procedure pursuant to which the Grantee (A) shall provide written instructions
to a Company designated brokerage firm to effect the immediate sale of some or
all of the purchased Shares and remit to the Company, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased Shares and (B) shall provide written
directives to the Company to deliver the certificates for the purchased Shares
directly to such brokerage firm in order to complete the sale transaction; or
(vi) any combination of the foregoing methods of payment.
(c) Taxes. No Shares shall be delivered under the Plan to any Grantee
-----
or other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of any foreign, federal,
state, or local income and employment tax withholding obligations, including,
without limitation, obligations incident to the receipt of Shares or the
disqualifying disposition of Shares received on exercise of an Incentive Stock
Option. Upon exercise of an Award, the Company shall withhold or collect from
Grantee an amount sufficient to satisfy such tax obligations.
(d) Reload Options. In the event the exercise price or tax withholding
--------------
of an Option is satisfied by the Company or the Grantee's employer withholding
Shares otherwise
11
<PAGE>
deliverable to the Grantee, the Administrator may issue the Grantee an
additional Option, with terms identical to the Award Agreement under which the
Option was exercised, but at an exercise price as determined by the
Administrator in accordance with the Plan.
8. Exercise of Award.
-----------------
(a) Procedure for Exercise; Rights as a Stockholder.
-----------------------------------------------
(i) Any Award granted hereunder shall be exercisable at such
times and under such conditions as determined by the Administrator under the
terms of the Plan and specified in the Award Agreement.
(ii) An Award shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Award by the person entitled to exercise the Award and full payment for the
Shares with respect to which the Award is exercised, including, to the extent
selected, use of the broker-dealer sale and remittance procedure to pay the
purchase price as provided in Section 7(b)(v). Until the issuance (as evidenced
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a stockholder shall
exist with respect to Shares subject to an Award, notwithstanding the exercise
of an Option or other Award. The Company shall issue (or cause to be issued)
such stock certificate promptly upon exercise of the Award. No adjustment will
be made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in the Award Agreement
or Section 10, below.
(b) Exercise of Award Following Termination of Continuous Service.
-------------------------------------------------------------
(i) An Award may not be exercised after the termination date of
such Award set forth in the Award Agreement and may be exercised following the
termination of a Grantee's Continuous Service only to the extent provided in the
Award Agreement.
(ii) Where the Award Agreement permits a Grantee to exercise an
Award following the termination of the Grantee's Continuous Service for a
specified period, the Award shall terminate to the extent not exercised on the
last day of the specified period or the last day of the original term of the
Award, whichever occurs first.
(iii) Any Award designated as an Incentive Stock Option to the
extent not exercised within the time permitted by law for the exercise of
Incentive Stock Options following the termination of a Grantee's Continuous
Service shall convert automatically to a Non-Qualified Stock Option and
thereafter shall be exercisable as such to the extent exercisable by its terms
for the period specified in the Award Agreement.
(c) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Award previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Grantee at the time that such offer is made.
12
<PAGE>
9. Conditions Upon Issuance of Shares.
----------------------------------
(a) Shares shall not be issued pursuant to the exercise of an Award
unless the exercise of such Award and the issuance and delivery of such Shares
pursuant thereto shall comply with all Applicable Laws, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) As a condition to the exercise of an Award, the Company may
require the person exercising such Award to represent and warrant at the time of
any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any
Applicable Laws.
10. Adjustments Upon Changes in Capitalization. Subject to any required
------------------------------------------
action by the shareholders of the Company, the number of Shares covered by each
outstanding Award, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or which
have been returned to the Plan, the exercise or purchase price of each such
outstanding Award, as well as any other terms that the Administrator determines
require adjustment shall be proportionately adjusted for (i) any increase or
decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Shares, or
any similar transaction affecting the Shares, (ii) any other increase or
decrease in the number of issued Shares effected without receipt of
consideration by the Company, or (iii) as the Administrator may determine in its
discretion, any other transaction with respect to Class A Common Stock to which
Section 424(a) of the Code applies or a similar transaction; provided, however
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Administrator and its determination shall be final, binding and
conclusive. Except as the Administrator determines, no issuance by the Company
of shares of stock of any class, or securities convertible into shares of stock
of any class, shall affect, and no adjustment by reason hereof shall be made
with respect to, the number or price of Shares subject to an Award.
11. Corporate Transactions/Changes in Control/Related Entity Dispositions.
---------------------------------------------------------------------
Except as may be provided in an Award Agreement:
(a) In the event of any Corporate Transaction, each Award which is at
the time outstanding under the Plan automatically shall become vested and
exercisable and be released from any restrictions on transfer (other than
transfer restrictions applicable to Incentive Stock Options) and repurchase or
forfeiture rights, immediately prior to the specified effective date of such
Corporate Transaction, as to one half ( 1/2) of the then unvested Shares at the
time represented by such Award. Effective upon the consummation of the Corporate
Transaction, all outstanding Awards under the Plan shall terminate. However, all
such Awards shall not terminate if the Awards are, in connection with the
Corporate Transaction, assumed by the successor corporation or Parent thereof.
In addition, an outstanding Award under the Plan shall not so partially vest and
be exercisable and released from such limitations if and to the extent:
13
<PAGE>
(i) such Award is, in connection with the Corporate Transaction, either assumed
by the successor corporation or Parent thereof or replaced with a comparable
Award with respect to shares of the capital stock of the successor corporation
or Parent thereof or (ii) such Award is to be replaced with a cash incentive
program of the successor corporation which preserves the compensation element of
such Award existing at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
such Award; provided, however, that such Award (if assumed), the replacement
Award (if replaced), or the cash incentive program automatically shall become
vested, exercisable and payable and be released from any restrictions on
transfer (other than transfer restrictions applicable to Incentive Stock
Options) and repurchase or forfeiture rights as to one half ( 1/2) of the then
unvested shares (or cash payments) at the time represented by such Award
immediately upon the Grantee incurring an Effective Termination or upon
termination of the Grantee's Continuous Service (substituting the successor
employer corporation for "Company or Related Entity" for the definition of
"Continuous Service") if such Continuous Service is terminated by the successor
company without Cause or the Grantee incurs such Effective Termination within
twelve (12) months of the Corporate Transaction. The determination of Award
comparability above shall be made by the Administrator, and its determination
shall be final, binding and conclusive.
(b) Following a Change in Control (other than a Change in Control
which also is a Corporate Transaction) and (i) upon the termination of the
Continuous Service of a Grantee if such Continuous Service is terminated by the
Company or Related Entity without Cause within twelve (12) months of a Change in
Control or (ii) upon the Grantee incurring an Effective Termination within
twelve (12) months of a Change in Control, each Award of such Grantee which is
at the time outstanding under the Plan automatically shall become vested and
exercisable and be released from any restrictions on transfer (other than
transfer restrictions applicable to Incentive Stock Options) and repurchase or
forfeiture rights as to one half ( 1/2) of the then unvested Shares at the time
represented by such Award, immediately upon the termination of such Continuous
Service or the date on which the Grantee incurs an Effective Termination.
(c) Effective upon the consummation of a Related Entity Disposition,
for purposes of the Plan and all Awards, the Continuous Service of each Grantee
who is at the time engaged primarily in service to the Related Entity involved
in such Related Entity Disposition shall be deemed to terminate and each Award
of such Grantee which is at the time outstanding under the Plan automatically
shall become vested and exercisable and be released from any restrictions on
transfer (other than transfer restrictions applicable to Incentive Stock
Options) and repurchase or forfeiture rights as to one half ( 1/2) of the
unvested Shares at the time represented by such Award and be exercisable in
accordance with the terms of the Award Agreement evidencing such Award. However,
such Continuous Service shall be not be deemed to terminate if such Award is, in
connection with the Related Entity Disposition, assumed by the successor entity
or its Parent. In addition, such Continuous Service shall not be deemed to
terminate and an outstanding Award under the Plan shall not so partially vest
and be exercisable and released from such limitations if and to the extent: (i)
such Award is, in connection with the Related Entity Disposition, either to be
assumed by the successor entity or its parent or to be replaced with a
comparable Award with respect to interests in the successor entity or its parent
or (ii) such
14
<PAGE>
Award is to be replaced with a cash incentive program of the successor entity
which preserves the compensation element of such Award existing at the time of
the Related Entity Disposition and provides for subsequent payout in accordance
with the same vesting schedule applicable to such Award; provided, however, that
such Award (if assumed), the replacement Award (if replaced), or the cash
incentive program automatically shall become vested, exercisable and payable and
be released from any restrictions on transfer (other than transfer restrictions
applicable to Incentive Stock Options) and repurchase or forfeiture rights as to
one half ( 1/2) of the then unvested shares (or cash payments) at the time
represented by such Award immediately upon the Grantee incurring an Effective
Termination or upon termination of the Grantee's Continuous Service
(substituting the successor employer entity for "Company or Related Entity" for
the definition of "Continuous Service") if such Continuous Service is terminated
by the successor entity without Cause or the Grantee incurs such Effective
Termination within twelve (12) months of the Related Entity Disposition. The
determination of Award comparability above shall be made by the Administrator,
and its determination shall be final, binding and conclusive.
(d) The portion of any Incentive Stock Option accelerated under this
Section 11 in connection with a Corporate Transaction, Change in Control or
Related Entity Disposition shall remain exercisable as an Incentive Stock Option
under the Code only to the extent the $100,000 dollar limitation of Section
422(d) of the Code is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated excess portion of such Option shall be exercisable as
a Non-Qualified Stock Option.
12. Effective Date and Term of Plan. The Plan shall become effective
-------------------------------
upon the earlier to occur of its adoption by the Board or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated. Subject to Section 17, below, and Applicable
Laws, Awards may be granted under the Plan upon its becoming effective.
13. Amendment, Suspension or Termination of the Plan.
------------------------------------------------
(a) The Board may at any time amend, suspend or terminate the Plan.
To the extent necessary to comply with Applicable Laws, the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a degree
as required.
(b) No Award may be granted during any suspension of the Plan or
after termination of the Plan.
(c) Any amendment, suspension or termination of the Plan (including
termination of the Plan under Section 12, above) shall not affect Awards already
granted, and such Awards shall remain in full force and effect as if the Plan
had not been amended, suspended or terminated, unless mutually agreed otherwise
between the Grantee and the Administrator, which agreement must be in writing
and signed by the Grantee and the Company.
14. Reservation of Shares.
---------------------
15
<PAGE>
(a) The Company, during the term of the Plan, will at all times
reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
(b) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
15. No Effect on Terms of Employment/Consulting Relationship. The Plan
--------------------------------------------------------
shall not confer upon any Grantee any right with respect to the Grantee's
Continuous Service, nor shall it interfere in any way with his or her right or
the Company's right to terminate the Grantee's Continuous Service at any time,
with or without cause.
16. No Effect on Retirement and Other Benefit Plans. Except as
-----------------------------------------------
specifically provided in a retirement or other benefit plan of the Company or a
Related Entity, Awards shall not be deemed compensation for purposes of
computing benefits or contributions under any retirement plan of the Company or
a Related Entity, and shall not affect any benefits under any other benefit plan
of any kind or any benefit plan subsequently instituted under which the
availability or amount of benefits is related to level of compensation. The Plan
is not a "Retirement Plan" or "Welfare Plan" under the Employee Retirement
Income Security Act of 1974, as amended.
17. Stockholder Approval. The grant of Incentive Stock Options under the
--------------------
Plan shall be subject to approval by the stockholders of the Company within
twelve (12) months before or after the date the Plan is adopted excluding
Incentive Stock Options issued in substitution for outstanding Incentive Stock
Options pursuant to Section 424(a) of the Code. Such stockholder approval shall
be obtained in the degree and manner required under Applicable Laws. The
Administrator may grant Incentive Stock Options under the Plan prior to approval
by the stockholders, but until such approval is obtained, no such Incentive
Stock Option shall be exercisable. In the event that stockholder approval is not
obtained within the twelve (12) month period provided above, all Incentive Stock
Options previously granted under the Plan shall be exercisable as Non-Qualified
Stock Options.
16
<PAGE>
Exhibit 10.9
ASSET TRANSFER AGREEMENT
This Asset Transfer Agreement (the "Agreement") is entered into effective
---------
as of June 1, 1996 (the "Effective Date"), by and between Trilogy Development
--------------
Group, Inc., a Delaware corporation ("Transferor"), and Conquer, Inc., a
----------
Delaware corporation, to be known as pcOrder.com, Inc. ("Transferee").
----------
WHEREAS, the parties desire that Transferor transfer to Transferee in a
tax-free transfer pursuant to Section 351 of the Internal Revenue Code of 1986,
as amended, those assets and liabilities of Transferor comprising Transferor's
pcOrder.com Division (the "pcOrder.com Division"), upon the terms and subject to
--------------------
the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises, the parties hereto hereby
agree as follows:
1. Definitions. The following terms have the meanings set forth below
-----------
when used herein and identified with capital letters:
"Affected Employees" shall have the meaning ascribed to such term in
------------------
paragraph 5.6.1 hereof.
"Assets" shall have the meaning ascribed to such term in paragraph
------
2.1.1 hereof.
"Claim" shall have the meaning ascribed to such term in paragraph 5.3
-----
hereof.
"Commission" shall mean the Securities and Exchange Commission, or any
----------
other federal agency at the time administering the Securities Act.
"Common Stock" shall have the meaning ascribed to such term in
------------
paragraph 2.2 hereof.
"pcOrder.com Division" shall have the meaning ascribed to such term in
--------------------
the recital to this Agreement.
"Effective Date" shall have the meaning ascribed to such term in the
--------------
preamble of this Agreement.
"Holder" shall mean any person who is the owner of record of any of
------
the Transferee Shares.
"Indemnified Party" shall have the meaning ascribed to such term in
-----------------
paragraph 5.3 hereof.
-1-
<PAGE>
"Indemnifying Party" shall have the meaning ascribed to such term in
------------------
paragraph 5.3 hereof.
"Liabilities" shall have the meaning ascribed to such term in
-----------
paragraph 2.3 hereof.
"Registration Statement" shall mean a registration statement filed or
----------------------
to be filed by Transferee to register under the Securities Act a sale
of any of the Transferee Shares by or for the account of any Holder.
Such term includes any prospectus included in the Registration
Statement.
"Securities Act" shall mean the Securities Act of 1933 or any similar
--------------
federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Third Party Claim" shall have the meaning ascribed to such term in
-----------------
paragraph 5.3.1 hereof.
"Transfer" shall mean any sale or other disposition of any Transferee
--------
Shares which would constitute a sale thereof under the Securities Act.
"Transferee" shall have the meaning ascribed to such term in the
----------
preamble of this Agreement.
"Transferee Shares" shall mean the shares of Common Stock issued by
-----------------
Transferee pursuant to Section 2.2 of this Agreement and any other
securities that may be issued by Transferee, or any successor of
Transferee, as a distribution upon or in exchange for such shares or
any such other securities.
"Transferor" shall have the meaning ascribed to such term in the
----------
preamble of this Agreement.
2. Transfer of Assets; Assumption of Liabilities.
---------------------------------------------
2.1 Transfer of Assets.
------------------
2.1.1 Upon the terms and subject to the conditions set forth in
this Agreement and upon the representations and warranties made herein
by each of the parties to the other, except to the extent the same are
excluded in Section 2.1.2 hereinbelow, Transferor hereby grants,
conveys, assigns, transfers and delivers to Transferee, and Transferee
hereby acquires from Transferor, all of the assets and properties used
exclusively by the pcOrder.com Division of every kind, nature and
description (wherever located), as the same shall exist on the
Effective Date (said
-2-
<PAGE>
assets and properties being hereinafter collectively referred to as
the "Assets"), including without limitation:
------
(a) all tangible property, accounts receivable, notes
receivable, inventories, spare parts, prepayments, deferred
items, work in process, supplies, leaseholds, leasehold
improvements, tools, fixtures, machinery, equipment, furniture,
office furnishings and fixtures used exclusively by the
pcOrder.com Division;
(b) all trademarks and trade names, trademark and trade
name registrations, service marks and service mark
registrations, copyrights, copyright registrations, the
applications therefor and the licenses thereto used exclusively
by the pcOrder.com Division, together with the goodwill and the
business appurtenant thereto;
(c) all drawings, blueprints, specifications, designs
and data used exclusively by the pcOrder.com Division;
(d) all catalogues, brochures, sales literature,
promotional material and other selling material used
exclusively by the pcOrder.com Division;
(e) all books and records and all files, documents,
papers, agreements, books of account and other records
pertaining to the Assets or to the business of the pcOrder.com
Division which are located at the offices, plants, warehouses
or other locations which relate exclusively to the pcOrder.com
Division and are used in connection with the Assets;
(f) all rights of Transferor under all contracts,
agreements, licenses, leases, sales orders, purchase orders and
other commitments Transferee will assume pursuant to Section 2.3
hereof;
(g) all computer software owned by Transferor and used
exclusively by the pcOrder.com Division, the exclusive worldwide
rights to market and service such computer software, all trade
secrets and processes relating to such computer software, all
current, previous, enhanced and developmental versions of the
source and object codes and any variations thereof, and all
documentation related thereto, all design specifications
therefor, all maintenance and installation job control language,
all copyrights pertaining to such computer software, the
operators' manuals, the user documentation, the systems'
documentation and manuals (including all flowcharts, systems'
procedures and program component descriptions), all procedures
for the modification and preparation for the release of enhanced
-3-
<PAGE>
versions of such computer software, and all available testing
data relative to the installation and checkout of such programs;
and
(h) all other assets and rights of every kind and nature,
real or personal, tangible or intangible, which are owned by
Transferor and used exclusively in conducting the business of the
pcOrder.com Division.
Without limiting the generality of the foregoing, the Assets
shall include all assets set forth in Exhibit "A" hereto.
-----------
2.1.2 Anything herein contained to the contrary notwithstanding,
the following assets and properties of Transferor are specifically
excluded from the Assets and shall be retained by Transferor:
(a) all cash on hand, including bank accounts and
temporary cash investments;
(b) claims for refunds of taxes and other governmental
charges for periods ending on or prior to the Effective Date;
(c) claims or rights against third parties relating to
liabilities or obligations which are not assumed by Transferee
hereunder;
(d) rights under insurance policies, including rights to
any cancellation value on the Effective Date, except that
Transferor shall assign to Transferee rights under product
liability policies (or make the proceeds available) with
respect to claims arising out of transactions prior to the
Effective Date for which Transferee shall have agreed to be
responsible hereunder;
(e) all accounts receivable representing obligations of
any of Transferor's subsidiaries, divisions, stockholders,
directors, officers, employees or affiliates: and
(f) all computer software and other intellectual property
rights of Transferor which are not used exclusively in
conducting the business of the pcOrder.com Division.
2.1.3 Nothing in this Agreement shall be construed as an
attempt or agreement to assign (i) any contract, agreement, license,
lease, sales order, purchase order or other commitment which is
nonassignable without the consent of the other party or parties
thereto unless such consent shall have been given or (ii) any contract
or claim as to which all the remedies for the enforcement thereof
enjoyed by
-4-
<PAGE>
Transferor would not pass to Transferee as an incident of the
assignments provided for by this Agreement. In order, however, that
the full value of every contract and claim of the character
described in clauses (i) and (ii) above and all claims and demands
on such contracts may be realized, Transferor shall, by itself or by
its agents, at the request and under the direction of Transferee, in
the name of Transferor or otherwise as Transferee shall specify and
as shall be permitted by law, take all such action and do or cause
to be done all such things as shall in the opinion of Transferee be
necessary or proper (x) in order that the rights and obligations of
Transferor under such contracts shall be preserved and (y) for, and
to facilitate, the collection of the monies due and payable, and to
become due and payable, to Transferor in and under every such
contract and claim and in respect of every such claim and demand,
and Transferor shall hold the same for the benefit of and shall pay
the same over promptly to Transferee.
2.2 Issuance of Shares. Upon the terms and subject to the conditions
------------------
set forth in this Agreement, in reliance upon the representations,
warranties, covenants and agreements of Transferor contained herein, and in
exchange for the Assets, Transferee has issued to Transferor 900 shares of
Transferee's common stock, $0.01 par value per share (the "Common Stock").
2.3 Assumption of Liabilities. As additional consideration for the
-------------------------
grant, conveyance, assignment, transfer and delivery of the Assets,
subject, however, to Section 2.4 below, Transferee hereby assumes and
agrees to pay, perform and discharge when due all liabilities and
obligations of Transferor relating exclusively to the pcOrder.com Division,
of every kind or nature, whether absolute, contingent, accrued or otherwise
(the "Liabilities").
-----------
Without limiting the generality of the foregoing, the Liabilities
shall include all liabilities set forth in Exhibit "B" hereto.
-----------
2.4 Non-Assumption of Certain Liabilities. Transferee is not
-------------------------------------
assuming, and shall not be deemed to have assumed, any liabilities or
obligations of Transferor of any kind or nature whatsoever, except as
expressly provided in Section 2.3 hereof. Anything in Section 2.3 hereof
or elsewhere in this Agreement to the contrary notwithstanding and without
limiting the generality of the foregoing, it is hereby agreed that
Transferee is not assuming, and shall not be deemed to have assumed, any
liability and shall not have any obligation for or with respect to any
liability or obligation of Transferor (i) under any employee benefit plan
of Transferor, (ii) in respect of (x) any sales, use or excise taxes,
income taxes, taxes based on or measured by income or franchise taxes
attributable to periods or events prior to or ending on the Effective Date
(other than federal, state or local payroll taxes on current payroll) or
(y) any of the foregoing or any other taxes, legal, accounting, brokerage,
finder's fees, or other expenses of whatsoever kind or nature incurred by
Transferor or any affiliate, stockholder, director, employee or officer of
Transferor as a
-5-
<PAGE>
result of the consummation of the transactions contemplated by this
Agreement, or (iii) arising out of any action, suit or proceeding based
upon an event occurring or a claim arising (x) prior to the Effective
Date or (y) after the Effective Date in the case of claims in respect of
products sold by Transferor prior to the Effective Date and attributable
to acts performed or omitted by Transferor prior to the Effective Date.
3. Representations and Warranties of Transferor. Transferor represents
--------------------------------------------
and warrants to Transferee as follows:
3.1 Existence; Good Standing; Corporate Authority; Compliance With
--------------------------------------------------------------
Law. Transferor is a corporation duly incorporated, validly existing and
---
in good standing under the laws of its jurisdiction of incorporation.
Transferor is duly licensed or qualified to do business as a foreign
corporation and is in good standing under the laws of any other
jurisdictions in which the character of the properties owned or leased by
it therein or in which the transaction of its business makes such
qualification necessary. Transferor has all requisite corporate power and
authority to own its properties and carry on its business as now conducted.
Transferor is not in default with respect to any order of any court,
governmental authority or arbitration board or tribunal to which Transferor
is a party or is subject, and Transferor is not in material violation of
any laws, ordinances, governmental rules or regulations to which it is
subject. Transferor has obtained all licenses, permits and other
authorizations and has taken all actions required by applicable laws or
governmental regulations in connection with its business as now conducted.
3.2 Authorization; Validity and Effect of Agreements. The execution
------------------------------------------------
and delivery of this Agreement and all agreements and documents
contemplated hereby by Transferor, and the consummation by it of the
transactions contemplated hereby, have been duly authorized by all
requisite corporate action. This Agreement constitutes, and all agreements
and documents contemplated hereby when executed and delivered pursuant
hereto for value received will constitute, the valid and legally binding
obligations of Transferor enforceable in accordance with their terms,
except that enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, fraudulent transfer, moratorium, bulk sales,
preference, equitable subordination, marshalling or other similar laws of
general application now or hereafter in effect relating to the enforcement
of creditors' rights generally and except that the remedies of specific
performance, injunction and other forms of equitable relief are subject to
certain tests of equity jurisdiction, equitable defenses and the discretion
of the court before which any proceeding therefor may be brought. The
execution and delivery of this Agreement by Transferor does not, and the
consummation of the transactions contemplated hereby by Transferor will
not, (i) require the consent, approval or authorization of, or declaration,
filing or registration with, any governmental or regulatory authority or
any third party; (ii) result in the breach of any term or provision of, or
constitute a default under, or result in the acceleration of or entitle any
party to accelerate (whether after the giving of notice or the lapse of
time or both) any obligation under, or result in the creation or imposition
of any lien, charge, pledge, security interest or other encumbrance
-6-
<PAGE>
upon any part of the property of Transferor pursuant to any provision of,
any order, judgment, arbitration award, injunction, decree, indenture,
mortgage, lease, license, lien, or other agreement or instrument to which
Transferor is a party or by which it is bound; or (iii) violate or
conflict with any provision of the by-laws or certificate of
incorporation of Transferor as amended to the date of this Agreement.
3.3 Taxes. Transferor (i) has duly and timely filed or caused to be
-----
filed all federal, state, local and foreign tax returns (including, without
limitation, consolidated and combined tax returns) required to be filed by
it prior to the Effective Date which relate to Transferor or with respect
to which Transferor or the Assets are liable or otherwise in any way
subject, (ii) has paid or fully accrued for all taxes shown to be due and
payable on such returns (which taxes are all the taxes due and payable
under the laws and regulations pursuant to which such returns were filed),
and (iii) has properly accrued for all such taxes accrued in respect of
Transferor or the Assets for periods subsequent to the periods covered by
such returns. No deficiency in payment of taxes for any period has been
asserted by any taxing body and remains unsettled at the Effective Date.
3.4 Title to the Assets. Transferor has good and marketable title to
-------------------
the Assets, free and clear of all security interests, mortgages,
encumbrances, liens, charges or adverse claims of any kind or character.
3.5 List of Contracts and Other Data. Schedule 3.5 sets forth the
-------------------------------- -------------
following:
3.5.1 (i) all patents and registrations for trademarks, trade
names, service marks and copyrights which are unexpired as of the
Effective Date and which are used exclusively in connection with the
operation of the pcOrder.com Division's business, as well as all
applications pending on said date for patents or for trademark, trade
name, service mark or copyright registrations, and all other
proprietary rights, owned or held by Transferor, or owned or held by
any of Transferor's stockholders, directors, officers, employees or
affiliates exclusively for use in connection with the business of the
pcOrder.com Division of Transferor, and (ii) all licenses granted by
or to Transferor or any of Transferor's stockholders, directors,
officers, employees or affiliates and all other agreements to which
Transferor or any of Transferor's stockholders, directors, officers,
employees or affiliates is a party which relate to any items of the
categories mentioned in (i) above or to other proprietary rights of
any of Transferor's stockholders, directors, officers, employees or
affiliates or of Transferor which are used exclusively in conducting
the business of the pcOrder.com Division of Transferor whether owned
by Transferor or any of Transferor's stockholders, directors,
officers, employees or affiliates or otherwise;
3.5.2 all collective bargaining agreements, employment and
consulting agreements, executive compensation plans, bonus plans,
profit-sharing plans, deferred compensation agreements, employee
pension or retirement plans, employee
-7-
<PAGE>
stock purchase and stock option plans, group life insurance,
hospitalization insurance or other plans or arrangements providing
for benefits to employees of the pcOrder.com Division of Transferor;
3.5.3 all contracts, understandings and commitments to which
Transferor is a party exclusively relating to the business and
operations of the pcOrder.com Division, or to which it or any of the
Assets are subject and which are not specifically referred to in
Sections 3.5.1 or 3.5.2 above.
True and complete copies of all documents referred to in Schedule 3.5
------------
have been provided or made available to Transferee and its counsel.
3.6 Litigation. Except as set forth in Schedule 3.6, there are no
---------- ------------
actions, suits or proceedings with respect to Transferor involving claims
by or against the pcOrder.com Division of Transferor or the Assets which
are pending or threatened against Transferor or the Assets, at law or in
equity, or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality. No basis
for any such action, suit or proceeding exists, and there are no orders,
judgments, injunctions or decrees of any court or governmental agency with
respect to which Transferor or the Assets have been named or to which
Transferor is a party, which apply, in whole or in part, to the business of
the pcOrder.com Division, or to the Assets or which would result in any
material adverse change in the business or prospects of Transferor.
3.7 Investment Representation. Transferor understands that (i) the
-------------------------
Common Stock being issued to Transferor pursuant to this Agreement has not
been registered under the Securities Act and is being issued in reliance
upon the exemption afforded by Section 4(2) thereof for transactions by an
issuer not involving any public offering, (ii) such Common Stock must be
held indefinitely unless a subsequent disposition thereof is registered
under the Securities Act or is exempt from such registration, (iii) such
Common Stock will bear a legend to such effect, and (iv) Transferee will
make a notation on its transfer books to such effect. Transferor further
represents that (i) such Common Stock is being acquired for investment and
without any present view toward distribution thereof to any other person,
(ii) it will not sell or otherwise dispose of such Common Stock except in
compliance with the registration requirements or exemption provision under
the Securities Act the rules and regulations thereunder, and as otherwise
set forth by the Commission, (iii) it has such knowledge and experience in
financial and business matters and that it is capable of evaluating the
risks and merits of an investment in such Common Stock, (iv) it has
consulted with counsel, to the extent deemed necessary, as to all matters
covered by this Agreement and has not relied upon Transferee for any
explanation of the application of the various federal or state securities
laws with regard to the acquisition of such Common Stock, (v) it has
investigated and is familiar with the affairs, financial condition and
prospects of Transferee, and has been given sufficient access to and has
acquired sufficient information
-8-
<PAGE>
about Transferee to reach an informed and knowledgeable decision to
acquire such Common Stock, and (vi) it is able to bear the economic risks
of such an investment.
4. Representations and Warranties of Transferee. Transferee represents
--------------------------------------------
and warrants to Transferor as follows:
4.1 Existence; Good Standing; Corporate Authority; Compliance With
--------------------------------------------------------------
Law. Transferee is a corporation duly incorporated, validly existing and
---
in good standing under the laws of its jurisdiction of incorporation.
Transferee is duly licensed or qualified to do business as a foreign
corporation and is in good standing under the laws of all other
jurisdictions in which the character of the properties owned or leased by
it therein or in which the transaction of its business makes such
qualification necessary. Transferee has all requisite corporate power and
authority to own its properties and carry on its business as now conducted.
Transferee is not in default with respect to any order of any court,
governmental authority or arbitration board or tribunal to which Transferee
is a party or is subject, and Transferee is not in material violation of
any laws, ordinances, governmental rules or regulations to which it is
subject. Transferee has obtained all licenses, permits and other
authorizations and has taken all actions required by applicable laws or
governmental regulations in connection with its business as now conducted.
4.2 Authorization; Validity and Effect of Agreements. The execution
------------------------------------------------
and delivery of this Agreement and all agreements and documents
contemplated hereby by Transferee, and the consummation by it of the
transactions contemplated hereby, have been duly authorized by all
requisite corporate action. This Agreement constitutes, and all agreements
and documents contemplated hereby when executed and delivered pursuant
hereto for value received will constitute, the valid and legally binding
obligations of Transferee enforceable in accordance with their terms,
except that enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, fraudulent transfer, moratorium, bulk sales,
preference, equitable subordination, marshalling or other similar laws of
general application now or hereafter in effect relating to the enforcement
of creditors' rights generally and except that the remedies of specific
performance, injunction and other forms of equitable relief are subject to
certain tests of equity jurisdiction, equitable defenses and the discretion
of the court before which any proceeding therefor may be brought. The
execution and delivery of this Agreement by Transferee does not, and the
consummation of the transactions contemplated hereby will not, (i) require
the consent, approval or authorization of, or declaration, filing or
registration with, any governmental or regulatory authority or any third
party, (ii) result in the breach of any term or provision of, or constitute
a default under, or result in the acceleration of or entitle any party to
accelerate (whether after the giving of notice or the lapse of time or
both) any obligation under, or result in the creation or imposition of any
lien, charge, pledge, security interest or other encumbrance upon any part
of the property of Transferee pursuant to any provision of any order,
judgment, arbitration award, injunction, decree, indenture, mortgage,
lease, license, lien, or other agreement or instrument to which Transferee
is a party or by which it is bound, and (iii)
-9-
<PAGE>
violate or conflict with any provision of the by-laws or certificate of
incorporation of Transferee as amended to the date of this Agreement.
4.3 No Prior Activities. Except for obligations or liabilities
-------------------
incurred in connection with its incorporation or organization or the
negotiation, preparation, execution and performance of this Agreement and
the transactions contemplated hereby or except as otherwise previously
disclosed in writing to Transferor, Transferee has not incurred any
obligations or liabilities nor engaged in any business or activities of any
type or kind whatsoever or entered into any agreements or arrangements with
any person or entity.
4.4 Capitalization. Transferee has authorized capital stock
--------------
consisting solely of 10,000 shares of common stock, $0.01 par value per
share, 900 of which are presently issued and outstanding. There are no
outstanding rights, warrants, options, subscriptions, agreements or
commitments giving anyone any right to require the Transferee to sell or
issue any capital stock or other securities.
4.5 Authorization and Validity of Shares. The Common Stock is duly
------------------------------------
authorized, validly issued, fully paid and nonassessable. The Common Stock
is subject to no restrictions with respect to transferability and
Transferor has received good and marketable title to all of the Common
Stock, free and clear of all security interests, liens, encumbrances,
charges, assessments, restrictions and adverse claims.
5. Other Covenants and Agreements.
------------------------------
5.1 Indemnification by Transferor. Upon the terms and subject to
-----------------------------
the conditions set forth in Section 5.3 hereof and this Section 5.1,
Transferor agrees to indemnify and hold Transferee harmless against, and
will reimburse Transferee on demand for, any payment, loss, cost or expense
(including reasonable attorney's fees and reasonable costs of investigation
incurred in defending against such payment, loss, cost or expense or claim
therefor) made or incurred by or asserted against Transferee at any time
after the Effective Date in respect of any omission, misrepresentation,
breach of warranty, or nonfulfillment of any term, provision, covenant or
agreement on the part of Transferor contained in this Agreement, or from
any misrepresentation in, or omission from, any certificate or other
instrument furnished or to be furnished to Transferee pursuant to this
Agreement.
5.2 Indemnification by Transferee. Upon the terms and subject to the
-----------------------------
conditions set forth in Section 5.3 hereof and this Section 5.2, Transferee
agrees to indemnify and hold Transferor harmless against, and will
reimburse Transferor on demand for, any payment, loss, cost or expense
(including reasonable attorney's fees and reasonable costs of investigation
incurred in defending against such payment, loss, cost or expense or claim
therefor) made or incurred by or asserted against Transferor at any time
after the Effective Date in respect of any omission, misrepresentation,
breach of warranty, or nonfulfillment of any term, provision, covenant or
agreement on the part of Transferee contained in this
-10-
<PAGE>
Agreement, or from any misrepresentation in, or omission from, any
certificate or other instrument furnished or to be furnished to
Transferor pursuant to this Agreement.
5.3 Conditions of Indemnification. With respect to any actual or
-----------------------------
potential claim, any written demand, the commencement of any action, or the
occurrence of any other event which involves any matter or related series
of matters (a "Claim") against which a party hereto is indemnified (the
-----
"Indemnified Party") by the other party (the "Indemnifying Party") under
------------------ ------------------
Section 5.1 or 5.2 hereof:
5.3.1 Promptly after the Indemnified Party first receives
written documents pertaining to the Claim, or if such Claim does not
involve a third party Claim (a "Third Party Claim"), promptly after
-----------------
the Indemnified Party first has actual knowledge of such Claim, the
Indemnified Party shall give notice to the Indemnifying Party of such
Claim in reasonable detail and stating the amount involved, if known
together with copies of any such written documents.
5.3.2 The Indemnifying Party shall have no obligation to
indemnify the Indemnified Party with respect to any Claim if (i) the
Indemnified Party fails to give the notice with respect thereto in
accordance with Section 5.3.1 hereof, or (ii) the notice with respect
thereto is not given on or before the third anniversary of the
Effective Date.
5.3.3 If the Claim involves a Third Party Claim, then the
Indemnifying Party shall have the right, at its sole cost, expense
and ultimate liability regardless of the outcome, and through counsel
of its choice (which counsel shall be reasonably satisfactory to the
Indemnified Party), to litigate, defend, settle or otherwise attempt
to resolve such Third Party Claim; provided, however, that if in the
Indemnified Party's reasonable judgment a conflict of interest may
exist between the Indemnified Party and the Indemnifying Party with
respect to such Third Party Claim, then the Indemnified Party shall be
entitled to select counsel of its own choosing, reasonably
satisfactory to the Indemnifying Party, in which event the
Indemnifying Party shall be obligated to pay the fees and expenses of
such counsel. Notwithstanding the preceding sentence, the Indemnified
Party may elect, at any time and at the Indemnified Party's sole cost,
expense and ultimate liability, regardless of the outcome, and through
counsel of its choice, to litigate, defend, settle or otherwise
attempt to resolve such Third Party Claim. If the Indemnified Party
so elects (for reasons other than the Indemnifying Party's failure or
refusal to provide a defense to such Third Party Claim), then the
Indemnifying Party shall have no obligation to indemnify the
Indemnified Party with respect to such Third Party Claim, but such
disposition will be without prejudice to any other right the
Indemnified Party may have to indemnification under Section 5.1 or 5.2
hereof, regardless of the outcome of such Third Party Claim. If the
Indemnifying Party fails or refuses to provide a defense to any Third
Party Claim, then the Indemnified Party shall have the right to
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<PAGE>
undertake the defense, compromise or settlement of such Third Party
Claim, through counsel of its choice, on behalf of and for the account
and at the risk of the Indemnifying Party, and the Indemnifying Party
shall be obligated to pay the costs, expenses and attorney's fees
incurred by the Indemnified Party in connection with such Third Party
Claim. In any event, Transferee and Transferor shall fully cooperate
with each other and their respective counsel in connection with any
such litigation, defense, settlement or other attempted resolution.
5.4 Noncompetition.
--------------
5.4.1 Upon the terms and subject to the conditions set forth in
this Section 5.4, Transferor covenants and agrees that, as a material
consideration running to Transferee for the issuance of the Common
Stock, for a period of three years from and after the Effective Date,
Transferor will neither permit Transferor's name to be used by nor
engage in or carry on, directly or indirectly, either for itself or as
a member of a partnership or as a stockholder, investor, agent,
associate or consultant of any person, partnership or corporation
(other than Transferee or a subsidiary or affiliate of Transferee),
any business directly in competition with Transferee (except as
expressly contemplated under the Reseller Agreement between the
parties or as otherwise agreed to by Transferee) but only for as long
as such business is carried on by Transferee or any subsidiary or
affiliate of Transferee, in any county in which Transferee or any
subsidiary or affiliate of Transferee conducts business, or in any
other county in any state of the United States, or in any country or
political subdivision of the world. The parties intend that the
covenants contained in this Section 5.4.1 shall be deemed to be a
series of separate covenants, one for each county in each state of the
United States and for each country and political subdivision of the
world and, except for geographic coverage, each such separate covenant
shall be identical in terms to the covenant contained in this Section
5.4.1. Transferor further covenants and agrees that for a period of
three years from and after the Effective Date Transferor will not
recruit, hire, assist others in recruiting or hiring, discuss
employment with, or refer to others concerning employment, any person
who is, or within the twelve-month period immediately prior to the
Effective Date was, an employee of the pcOrder.com Division.
5.4.2 The term of the covenants contained in Section 5.4.1
hereof shall be tolled for the period commencing on the date any
successful action is filed for injunctive relief or damages arising
out of a breach by Transferor of Section 5.4.1 hereof and ending upon
final adjudication (including appeals) of such action.
5.4.3 If, in any judicial proceeding, the court shall refuse to
enforce all of the separate covenants contained in Section 5.4.1
hereof because the time limit is too long, it is expressly understood
and agreed between the parties hereto that for purposes of such
proceeding such time limitation shall be deemed reduced to the
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<PAGE>
extent necessary to permit enforcement of such covenants. If, in any
judicial proceeding, the court shall refuse to enforce all of the
separate covenants contained in Section 5.4.1 hereof because it is
more extensive (whether as to geographic area, scope of business or
otherwise) than necessary to protect the business and goodwill of
Transferee, it is expressly understood and agreed between the
parties hereto that for purposes of such proceeding the geographic
area, scope of business or other aspect shall be deemed reduced to
the extent necessary to permit enforcement of such covenants.
5.4.4 Transferor acknowledges that a breach of Section 5.4.1
hereof would cause irreparable damage to Transferee, and in the event
of Transferor's actual or threatened breach of the provisions of
Section 5.4.1 hereof, Transferee shall be entitled to a temporary
restraining order and an injunction restraining Transferor from
breaching such covenants without the necessity of posting bond or
proving irreparable harm, such being conclusively admitted by
Transferor. Nothing shall be construed as prohibiting Transferee from
pursuing any other available remedies for such breach or threatened
breach, including the recovery of damages from Transferor. Transferor
acknowledges that the restrictions set forth in this Agreement are
reasonable in scope and duration, given the nature of the business of
Transferee.
5.5 Registration Rights.
-------------------
5.5.1 Restrictive Legend. Each certificate representing any
------------------
Transferee Shares and, except as otherwise provided in Section 5.5.2
hereof, each certificate issued upon exchange or transfer of any
Transferee Shares (whether or not such exchange or transfer shall
constitute a Transfer) shall be stamped or otherwise imprinted with a
legend substantially in the following form:
"THE SHARES EVIDENCED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER ANY SECURITIES
LAWS AND MAY ONLY BE SOLD IN COMPLIANCE WITH
ANY APPLICABLE SECURITIES LAWS. IN PARTICULAR,
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE TRANSFERRED OR
OTHERWISE DISPOSED OF (1) UNLESS A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, WITH RESPECT TO SUCH SHARES SHALL THEN
BE IN EFFECT OR UNLESS THE COMPANY SHALL HAVE
RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT ANY
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<PAGE>
PROPOSED TRANSFER OR DISPOSITION OF SUCH SHARES
IS EXEMPT FROM REGISTRATION UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, AND (2) EXCEPT IN
ACCORDANCE WITH THE ASSET TRANSFER AGREEMENT DATED
EFFECTIVE JUNE 1, 1996 BETWEEN THE COMPANY AND
TRILOGY DEVELOPMENT GROUP, INC, A COPY OF WHICH IS
ON FILE WITH THE COMPANY AT ITS PRINCIPAL OFFICE."
5.5.2 Notice of Proposed Transfer. Prior to any proposed
---------------------------
Transfer of any Transferee Shares (other than under the
circumstances described in Sections 5.5.3 or 5.5.4 hereof), the
Holder thereof shall give written notice to Transferee of the
intention to effect such Transfer. Each such notice shall describe
the manner of the proposed Transfer and shall be accompanied by an
opinion of counsel satisfactory to Transferee to the effect that the
proposed transfer of the Transferee Shares may be effected without
registration under the Securities Act and under applicable state
securities or blue sky laws. Upon confirmation that such opinion is
satisfactory to Transferee, the Holder of such Transferee Shares
shall be entitled to transfer such Transferee Shares in accordance
with the terms of its notice. Each certificate for Transferee Shares
transferred as above provided shall bear the legend set forth in
Section 5.5.1 hereof except that such certificate shall not bear
such legend if (i) such Transfer is in accordance with provisions of
Rule 144 (or any other rule permitting public sale without
registration under the Securities Act) or (ii) the opinion of
counsel referred to above is to the further effect that the
transferee and any subsequent transferee (other than an affiliate of
Transferee) would be entitled to Transfer such securities in a
public sale without registration under the Securities Act.
5.5.3 Required Registration.
---------------------
(a) If Transferee, on no more than two occasions at any
time after the completion of an initial public offering of the
common stock of Transferee and before the third anniversary of
the Effective Date, receives a written request for registration
from one or more Holders, then as soon as practical but not
later than 180 days after receipt of such request the
Transferee, subject to the limitations set forth in this
Section 5.5, shall file a Registration Statement with the
Commission to register the Transferee Shares contemplated to be
sold. Upon receiving any such request, Transferee shall give
written notice to all other Holders that such sales are
contemplated. If Transferee, within 20 days after giving such
notice, receives a written request for registration from any
such other Holder, then Transferee, subject to the limitations
set forth in this Section 5.5, shall include in the same
Registration
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<PAGE>
Statement the number of additional Transferee Shares to be sold
by or for the account of such other Holder as shall have been
specified in its request.
(b) After filing the Registration Statement, the
Transferee shall use its best efforts and shall take all
appropriate actions to cause the Registration Statement to
become effective as soon as practical. After the Registration
Statement becomes effective Transferee shall use its best
efforts and shall take all appropriate actions to maintain the
effectiveness of the Registration Statement for such reasonable
period, not exceeding six months, as the Holders participating
in such registration may require to complete their contemplated
sales in compliance with the Securities Act. So long as the
Registration Statement remains in effect, Transferee shall
furnish to the Holders participating in such registration and
their underwriters such quantities of each prospectus included
in the Registration Statement as they may reasonably request.
(c) If the Transferee Shares to be registered are to be
sold by the Holders in an underwritten public offering, the
Holders in their request for registration shall name the
managing underwriter or underwriters that the majority in
interest of such Holders propose to engage. Unless otherwise
agreed by Transferee, any managing underwriter proposed by the
Holders shall be an investment banking firm of recognized
national standing that has experience in managing national
distributions of equity securities of issuers having operations
similar to those of Transferee and that is capable, in the
judgment of the Transferee, of managing a distribution of
equity securities on a nationwide basis. If Transferee
reasonably objects to any managing underwriter proposed by the
Holders, a majority in interest of the Holders shall propose a
substitute acceptable to Transferee. If a majority in interest
of the Holders selling Transferee Shares included in a
Registration Statement filed pursuant to this Section 5.5.3
sell their Transferee Shares in an underwritten public
offering, the right of any other Holder to have Transferee
Shares included in the same Registration Statement shall be
conditioned upon the inclusion of such Holder's Transferee
Shares in the same underwriting. All Holders proposing to sell
their Transferee Shares in such underwriting shall enter into
an underwriting agreement in customary form with Transferee and
with the underwriter or underwriters selected in the manner set
forth above. Notwithstanding any other provision of this
Section 5.5.3, if the managing underwriter determines that
marketing factors require a limitation of the number of
Transferee Shares to be included in the underwriting, the
allowable number shall be allocated among all Holders desiring
to participate in proportion, as nearly as practical, to the
number of Transferee Shares for which each Holder requested
registration. No Transferee Shares excluded from an
underwriting by reason of such marketing limitation shall be
-15-
<PAGE>
included in the Registration Statement. If any Holder
disapproves of the terms of the underwriting, he may elect to
withdraw his Transferee Shares by giving written notice to
Transferee and the managing underwriter. After receiving any
such notice, Transferee shall withdraw those Transferee Shares
from the Registration Statement. If a withdrawal of Transferee
Shares makes it possible, within the marketing limitation set
by the managing underwriter, to include in the underwriting a
greater number of Transferee Shares held by other participating
Holders, then to the extent practical, without delaying the
underwriting, Transferee shall offer to all Holders who then
have Transferee Shares included in the underwriting an
opportunity to include additional Transferee Shares in the
proportion previously described in this Section 5.5.3(c).
(d) Notwithstanding the other provisions of this Section
5.5.3, the Transferee may postpone the filing of a Registration
Statement pursuant to Section 5.5.3(a) hereof for an additional
period of up to 180 days if (i) the postponement will avoid the
necessity of preparing audited financial statements as of a date
other than the end of a fiscal year or (ii) the Chairman of the
Board or Chief Executive Officer of Transferee determines in good
faith that the postponement is necessary to avoid serious
jeopardy to Transferee, any significant business prospect of
Transferee or the security holders of Transferee considered as a
group. Notwithstanding the other provisions of this Section
5.5.3, Transferee shall not be obligated to file any Registration
Statement pursuant to this Section 5.5.3 hereof:
(1) If Transferee delivers, to each of the Holders who
shall have requested registration pursuant to Section
5.5.3(a), an opinion of qualified counsel, selected by
Transferee, that under the circumstances in which such
Holders contemplate selling their Transferee Shares an
exemption from registration under the Securities Act,
including but not limited to the exemption provided by
assuming compliance with the conditions stated in Rule 144
(except paragraph (c) of Rule 144), is available. Each
Holder shall cooperate with Transferee and its counsel in
investigating and assessing the availability of any such
exemption.
(2) If for any reason Form S-3 (or if Form S-3 is no
longer in effect, the most closely analogous form then in
effect) cannot be used by Transferee to file the
Registration Statement.
(3) If Transferee has previously filed two Registration
Statements pursuant to this Section 5.5.3 during the 3
year period from the Effective Date provided that each
such Registration
-16-
<PAGE>
Statement either became effective or was withdrawn
before becoming effective at the request of a majority
in interest of the Holders who had included Transferee
Shares in such withdrawn Registration Statement.
(4) During the period commencing with the date of
filing of a registration statement under the Securities
Act pertaining to an underwritten public offering of
securities to be sold by or for the account of
Transferee and ending 180 days after the effective date
of such registration statement, provided that during
such period Transferee in good faith uses reasonable
efforts to cause such registration statement to become
effective and to complete the public offering covered by
such registration statement.
(5) During the period commencing with the date on
which Transferee, pursuant to Section 5.5.4 hereof,
shall notify the Holders of its intention to file a
registration statement pertaining to an underwritten
public offering of securities by or for the account of
Transferee or others (provided such date is not more
than 30 days following the date of the initial receipt
by Transferee of the request of Holders pursuant to
Section 5.5.3 (a) hereof) and ending with the earliest
of (i) the date of filing of such registration
statement, (ii) the date of abandonment by Transferee of
such intention to file (notice of which shall be given
promptly to the Holders) or (iii) the 180th day after
such notification of intention to file.
Nothing in this Section 5.5 shall prohibit Transferee from
including in any Registration Statement filed pursuant to Section
5.5.3 (a) hereof other outstanding securities of Transferee to be
sold by or for the account of any other security holder if
Transferee determines that it is obligated to do so.
5.5.4 Incidental Registration.
-----------------------
(a) If Transferee determines that it will file a
registration statement, at any time after the Effective Date but
before the third anniversary of the Effective Date, for any
public offering of securities of the same class as Transferee
Shares, either for its own account or the account of any security
holder, Transferee shall give written notice to each Holder, at
least 30 days in advance of filing such registration statement,
that such filing is expected to be made. Upon the written
request of any Holder received by Transferee at least 15 days in
advance of the filing, and subject to the limitations set forth
in this Section 5.5.4, Transferee shall include in such
registration statement (which as a result of the inclusion of
such Transferee Shares shall
-17-
<PAGE>
become a Registration Statement) Transferee Shares specified in
the Holder's request for the purpose of registering those
Transferee Shares for sale by or for the account of such
Holder. Transferee shall have exclusive control over the
filing, amending, withdrawal and other actions regarding such
Registration Statement. Transferee shall have no obligation to
give notice to any Holder with respect to the filing of, or to
include any Transferee Shares for any Holder in, any
registration statement on Form S-4 or Form S-8 or on any other
form that does not include substantially the same information
or is not in substantially the same format as would be required
for a Registration Statement for a sale of Transferee Shares by
a Holder.
(b) If the securities to be sold by Transferee pursuant
to a registration statement described in Section 5.5.4 (a)
hereof, or if none are to be sold by Transferee then if the
majority of the securities to be sold by others pursuant to any
such registration statement, are to be sold in any underwritten
public offering, the right of any Holder to have Transferee
Shares included in the same registration statement shall be
conditioned upon the inclusion of such Holder's Transferee
Shares in the same underwriting. Transferee, all Holders and
all other security holders proposing to sell securities in such
underwriting shall enter into an underwriting agreement in
customary form with the underwriter or underwriters selected by
Transferee. Notwithstanding any other provisions of this
Section 5.5.4, if the managing underwriter determines that
marketing factors require a limitation of the number of
securities to be included in the underwriting, the managing
underwriter and Transferee may limit the number of Transferee
Shares to be included in the underwriting for all Holders.
Transferee shall advise all Holders who shall have requested
inclusion of their Transferee Shares in the same underwriting
of the aggregate number of Transferee Shares that may be
included for all Holders. Such aggregate number shall be
allocated among all such Holders in proportion, as nearly as
practical, to the number of Transferee Shares for which each
Holder requested registration. No Transferee Shares excluded
from an underwriting by reason of such marketing limitation
shall be included in the Registration Statement. If any Holder
disapproves of the terms of the underwriting, he may elect to
withdraw his Transferee Shares by giving written notice to
Transferee and the managing underwriter. After receiving any
such notice, Transferee shall withdraw those Transferee Shares
from the Registration Statement. If a withdrawal of Transferee
Shares or any withdrawal of other securities (except a complete
withdrawal of all securities that were to be sold by
Transferee, in which case Transferee may withdraw the
registration statement in its entirety) makes it possible, with
the marketing limitation set by the managing underwriter and
Transferee, to include in the underwriting a greater number of
Transferee Shares held by other Holders participating in such
-18-
<PAGE>
underwriting, then to the extent practical, without delaying
the underwriting, Transferee shall offer to all Holders who
then have Transferee Shares included in the underwriting an
opportunity to include additional Transferee Shares in the
proportion previously described in this Section 5.5.4(b).
5.5.5 State Securities or Blue Sky Laws. In connection with the
---------------------------------
registration under the Securities Act of any sale of Transferee Shares
by or for the account of any Holder pursuant to Sections 5.5.3 or
5.5.4 hereof, Transferee shall file on a timely basis appropriate
applications or other instruments to register, qualify or obtain
exemptions for the sale under such state securities or blue sky laws
as the managing underwriter shall reasonably specify or, if the sale
is not to be an underwritten public offering, such state securities or
blue sky laws as the Holder may reasonably request. Transferee,
however, shall have no obligation to file any applications or other
instruments in any jurisdiction in which either (i) no such filing is
required with respect to the proposed sale of Transferee Shares by or
for the account of the Holder, in the opinion of qualified counsel
selected by Transferee, or (ii) Transferee would be required to
execute a general consent to service of process, to register as a
broker or dealer or to cause any officer or employee of Transferee to
register as a dealer, broker, or salesman or in any similar capacity.
Transferee shall use its best efforts in good faith to obtain and
maintain for a reasonable period, up to six months, an effective
registration, qualification or exemption under the applications or
other instruments filed by Transferee pursuant to this Section 5.5.5.
5.5.6 Registration Expenses. All expenses incurred in
---------------------
connection with the first such Registration Statement filed or
prepared for filing pursuant to Section 5.5.3 hereof and in connection
with all related state securities or blue sky applications or other
instruments, including without limitation all registration, filing and
qualification fees, printing expenses, fees and disbursements of
counsel for Transferee and fees and expenses of accountants incidental
to such Registration Statement, shall be borne by Transferee. All
expenses incurred in connection with the second such Registration
Statement filed or prepared for filing pursuant to Section 5.5.3
hereof and in connection with all related state securities or blue sky
applications or other instruments, including without limitation all
registration, filing and qualification fees, printing expenses, fees
and disbursements of counsel for Transferee and fees and expenses of
accountants incidental to such Registration Statement, shall be borne
by the Holders whose Transferee Shares are included in such
Registration Statement when it becomes effective, or if such
Registration Statement does not become effective then by all Holders
who originally requested the filing of such Registration Statement, in
the proportion that the number of Transferee Shares included for each
such Holder bears to the total number of Transferee Shares and other
securities of the same class, if any, that are included in such
Registration Statement. All expenses incurred in connection with any
Registration Statement filed or prepared for filing pursuant to
Section 5.5.4 hereof and in connection with
-19-
<PAGE>
all related state securities or blue sky applications or other
instruments that would not have been incurred if Transferee Shares
of one or more Holders had not been included in the Registration
Statement, as reasonably determined by Transferee, shall be borne by
each Holder whose Transferee Shares are included in the Registration
Statement when it becomes effective in the proportion that the
number of Transferee Shares included for such Holder bears to the
total number of Transferee Shares included for all Holders.
Notwithstanding any other provision of this Section 5.5, each Holder
shall bear the entire amount of any discount or commission allowed
or paid to any underwriter in connection with any sale of Transferee
Shares by or for the account of such Holder.
5.5.7 Indemnifications. In connection with any Registration
----------------
Statement filed pursuant to this Section 5.5, Transferee shall
indemnify and hold harmless each Holder whose Transferee Shares are
included in the Registration Statement, each underwriter who may
purchase from or sell any Transferee Shares for any such Holder and
each person who controls any such Holder or any such underwriter,
within the meaning of the Securities Act, from and against any and all
losses, claims, damages and liabilities caused by any untrue
statements or alleged untrue statement of a material fact contained in
the Registration Statement or any related state securities or blue sky
applications or other instruments or caused by any omission or alleged
omission to state in the Registration Statement or any related state
securities or blue sky applications or other instruments any material
fact required to be stated or necessary to make the statements which
are made not misleading, except insofar as such losses, claims,
damages or liabilities are caused by any untrue statement or alleged
untrue statement or omission or alleged omission based upon
information furnished to Transferee by such Holder, underwriter or
controlling person expressly for use in the Registration Statement or
any related state securities or blue sky applications or other
instruments. Each Holder whose Transferee Shares are included in any
Registration Statement filed pursuant to this Section 5.5 shall
indemnify Transferee, its directors, each officer signing the
Registration Statement, each other person (including each other
Holder) whose securities are included in the Registration Statement,
each underwriter who may purchase from or sell any securities for
Transferee or any other person pursuant to the Registration Statement
and each person, if any, who controls Transferee, any such other
person or any such underwriter, within the meaning of the Securities
Act, from and against any and all losses, claims, damages and
liabilities caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any
related state securities or blue sky applications or other instruments
or caused by any omission or alleged omission to state in the
Registration Statement or any related state securities or blue sky
applications or other instruments any material fact required to be
stated or necessary to make the statements which are made not
misleading, insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement or omission
or alleged omission based
-20-
<PAGE>
upon information furnished by the Holder from whom indemnification is
sought expressly for use in the Registration Statement or any related
state securities or blue sky applications or other instruments. To the
extent the provisions contained in this Section 5.5.7 are in conflict
with any indemnification provisions that are included in any
underwriting agreement entered into by Transferee and one or more
Holders with one or more underwriters in connection with any
underwritten public offering registered under any Registration
Statement filed pursuant to this Section 5.5, the provisions of the
underwriting agreement shall govern. The indemnities provided for in
this Section 5.5.7 shall be independent of and in addition to any
other indemnity provision of this Agreement.
5.5.8 Miscellaneous.
-------------
(a) Each Holder whose Transferee Shares are included in
any Registration Statement filed pursuant to this Section 5.5
shall furnish to Transferee such information regarding such
Holder and the sale proposed by such Holder as may be required
for inclusion in the Registration Statement or any related
state securities or blue sky applications or other instruments,
as may be necessary to provide supplemental information to the
Commission, the National Association of Securities Dealers,
Inc. or any administrator of any state securities or blue sky
law, or as Transferee or any underwriter may reasonably
request.
(b) The registration rights granted in this Section 5.5
are not assignable, in whole or in part, without the prior
written consent of Transferee, except such rights shall
transfer with the ownership of Transferee Shares.
(c) As a condition to having Transferee Shares included in
any Registration Statement filed pursuant to this Section 5.5,
each Holder may be required to agree, in a manner acceptable to
Transferee, that in selling Transferee Shares the Holder will
comply with all applicable laws and regulations including, but
not limited to, Rules 10b-2, 10b-6 and 10b-7 promulgated under
the Securities Exchange Act of 1934.
5.6 Employees.
---------
5.6.1 Employment. The Transferee will offer employment to all
----------
active on the job employees who are on the payroll of the pcOrder.com
Division on the Effective Date ("Affected Employees") at salary levels
------------------
and fringe benefits equal in measure and extent with their current
salary levels and fringe benefits and, to the extent it is reasonably
able to do so, in comparable positions of job responsibilities and
authority.
-21-
<PAGE>
5.6.2 Vacation Pay. On the Effective Date, Transferee shall
------------
assume in accordance with the terms of the vacation pay policies
maintained by Transferor for employees of the pcOrder.com Division,
the vacation pay accrued for the calendar year 1996 by the Affected
Employees.
5.6.3 Employee Benefit Plans. Transferor shall continue to
----------------------
provide employee benefits to the Affected Employees under
Transferor's employee benefit plans as provided in the Services
Agreement referenced in paragraph 6.2 herein below.
5.7 Execution of Additional Documents. Each party hereto will at any
---------------------------------
time, and from time to time after the Effective Date, upon request of the
other party hereto, execute, acknowledge and deliver all such further
deeds, assignments, transfers, conveyances, powers of attorney and
assurances, and take all such further action, as may be required to carry
out the intent of this Agreement, and to transfer and vest title to any
Asset being transferred hereunder, and to protect the right, title and
interest in and enjoyment of all of the Assets sold, granted, assigned,
transferred, delivered and conveyed pursuant to this Agreement; provided,
however, that this Agreement shall be effective regardless of whether any
such additional documents are executed.
6. Contemporaneous Documents. Contemporaneously with this Agreement,
-------------------------
Transferor and Transferee shall execute and deliver to each other the following
documents:
6.1 Master Software License Agreement. Under the terms of which
---------------------------------
Transferor has given Transferee a license to use certain intellectual
property owned by Transferor in connection with the business operations of
Transferee.
6.2 Services Agreement. Under the terms of which Transferor will
------------------
provide certain administrative services to Transferee.
6.3 Facility Agreement. Under the terms of which Transferor and
------------------
Transferee will share certain office facilities and furniture and
equipment.
6.4 Reseller Agreement. Pursuant to which Transferor is given the
------------------
right to market Transferee's software.
7. Miscellaneous.
-------------
7.1 Notices. Any notice, consent, approval, request, demand or other
-------
communication required or permitted hereunder must be in writing to be
effective and shall be deemed delivered and received (i) if personally
delivered or if delivered by telex or
-22-
<PAGE>
telecopy with electronic confirmation when actually received by the party
to whom sent, or (ii) if delivered by mail (whether actually received or
not), at the close of business on the third business day next following
the day when placed in the federal mail, postage prepaid, certified or
registered mail, return receipt requested, addressed as follows:
If to Transferee:
pcOrder.com, Inc.
6034 West Courtyard Drive
Austin, Texas 78730
Attention: President
If to Transferor:
Trilogy Development Group, Inc.
6034 West Courtyard Drive
Austin, Texas 78730
Attention: President
(or to such other address as any party shall specify by written notice so
given).
7.2 Binding Effect; Benefits. This Agreement shall be binding upon
------------------------
and shall inure to the benefit of the parties hereto and their
respective successors and assigns. Notwithstanding anything contained in
this Agreement to the contrary, nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties hereto
or their respective successors and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
7.3 Entire Agreement. This Agreement, together with the Exhibits,
----------------
Schedules and other documents contemplated hereby, constitute the final
written expression of all of the agreements between the parties, and is a
complete and exclusive statement of those terms. It supersedes all
understandings and negotiations concerning the matters specified herein.
Any representations, promises, warranties or statements made by any party
that differ in any way from the terms of this written Agreement, and the
Exhibits, Schedules and other documents contemplated hereby, shall be given
no force or effect. The parties specifically represent, each to the other,
that there are no additional or supplemental agreements between them
related in any way to the matters herein contained unless specifically
included or referred to herein. No addition to or modification of any
provision of this Agreement shall be binding upon any party unless made
in writing and signed by all parties.
7.4 Governing Law. THIS AGREEMENT, AND ALL QUESTIONS RELATING TO ITS
-------------
VALIDITY, INTERPRETATION, PERFORMANCE AND ENFORCEMENT, SHALL BE GOVERNED BY
AND CONSTRUED IN
-23-
<PAGE>
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS (EXCLUSIVE OF THE CONFLICT
OF LAW PROVISIONS THEREOF) APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY WITHIN SUCH STATE.
7.5 Survival. All of the terms, conditions, covenants, agreements,
--------
warranties and representations contained in this Agreement shall survive,
in accordance with their terms, delivery by Transferee of the consideration
to be given by it hereunder and delivery by Transferor of the consideration
to be given by them hereunder, and shall survive the execution hereof.
7.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which
shall constitute one and the same instrument; but in making proof of this
Agreement, it shall not be necessary to produce or account for more than
one such counterpart. It is not necessary that each party hereto execute
the same counterpart, so long as identical counterparts are executed by all
parties.
7.7 Headings. Headings of the Sections of this Agreement are for the
--------
convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
7.8 Waivers. Any party hereto may, by written notice to the other
-------
party hereto, (i) extend the time for the performance of any of the
obligations or other actions of the other party under this Agreement; (ii)
waive any inaccuracies in the representations or warranties of the other
party contained in this Agreement or in any document delivered pursuant to
this Agreement; (iii) waive compliance with any of the conditions or
covenants of the other party contained in this Agreement; or (iv) waive
performance of any of the obligations of the other party under this
Agreement. Except as provided in the preceding sentence, no action taken
pursuant to this Agreement, including without limitation any investigation
by or on behalf of any party, shall be deemed to constitute a waiver by the
party taking such action of compliance with any representations,
warranties, covenants or agreements contained in this Agreement. The
waiver by any party hereto of a breach of any provision hereunder shall not
operate or be construed as a waiver of any prior or subsequent breach of
the same or any other provision hereunder.
7.9 Merger of Documents. This Agreement and all agreements and
-------------------
documents contemplated hereby constitute one agreement and are
interdependent upon each other in all respects.
7.10 Incorporation of Exhibits and Schedules. All Exhibits and
---------------------------------------
Schedules attached hereto are by this reference incorporated herein and
made a part hereof for all purposes as if fully set forth herein.
-24-
<PAGE>
7.11 Severability. If for any reason whatsoever, any one or more of
------------
the provisions of this Agreement shall be held or deemed to be illegal,
inoperative, unenforceable or invalid as applied to any particular case or
in all cases, such circumstances shall not have the effect of rendering
such provision illegal, inoperative, unenforceable or invalid in any other
case or of rendering any of the other provisions of this Agreement illegal,
inoperative, unenforceable or invalid. Furthermore, in lieu of each
illegal, invalid, unenforceable or inoperative provision, there shall be
added automatically, as part of this Agreement, a provision similar in
terms of such illegal, invalid, unenforceable or inoperative provision as
may be possible and as shall be legal, valid, enforceable and operative.
7.12 Assignability. Neither this Agreement nor any of the parties'
-------------
rights hereunder shall be assignable by either party hereto without the
prior written consent of the other party hereto, which consent will not be
unreasonably withheld.
7.13 References. The use of the words "hereof," "herein,"
----------
"hereunder," and words of similar import shall refer to this entire
Agreement, and not to any particular article, section, subsection, clause,
or paragraph of this Agreement, unless the context clearly indicates
otherwise.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused the
same to be duly delivered on their behalf on the Effective Date.
Transferor:
Trilogy Development Group, Inc.
By: /s/ Joseph A. Liemandt
-------------------------------------
Name: Joseph A. Liemandt
-----------------------------------
Title: President & CEO
----------------------------------
Transferee:
pcOrder.com, Inc.
By: /s/ Christina Jones
-------------------------------------
Name: Christina Jones
-----------------------------------
Title: President
----------------------------------
-25-
<PAGE>
EXHIBIT 10.10
AMENDMENT TO ASSET TRANSFER AGREEMENT
This Amendment to Asset Transfer Agreement is entered into effective as of
August 21, 1998, by and between Trilogy Software, Inc., a Delaware corporation
formerly known as Trilogy Development Group, Inc. ("Transferor"), and
----------
pcOrder.com, Inc., a Delaware corporation formerly known as Conquer, Inc.
("Transferee").
- ------------
Recitals
--------
a. Transferor and Transferee entered into that certain Asset Transfer
Agreement, effective as of June 1, 1996 (the "Agreement").
---------
b. Transferor and Transferee now desire to amend the Agreement as set forth
herein.
Agreement
---------
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt of which is hereby acknowledged, Transferor
and Transferee hereby agree as follows.
1. The first sentence of Section 5.5.3(a) of the Agreement is amended to
read in its entirety as follows:
"If Transferee, on no more than five occasions at any time after the
completion of an initial public offering of the common stock of Transferee
and before the eighth anniversary of the Effective Date, receives a written
request for registration from one or more Holders, then as soon as
practical but not later than 180 days after receipt of such request the
Transferee, subject to the limitations set forth in this Section 5.5, shall
file a Registration Statement with the Commission to register the
Transferee Shares contemplated to be sold."
2. Clauses (2) and (3) of Section 5.5.3(d) of the Agreement are hereby
removed in their respective entireties, and clauses (4) and (5) of Section
5.5.3(d) of the Agreement are hereby respectively renumbered as clauses (2) and
(3).
IN WITNESS WHEREOF, the parties have executed this Amendment and caused the
same to be duly delivered as of the date first set forth above.
Trilogy Software, Inc. pcOrder.com, Inc.
By: /s/ Joseph A. Liemandt By: /s/ Christina C. Jones
------------------------------ ----------------------------
Joseph A. Liemandt Christina C. Jones
President President
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 5, 1999 in the Registration Statement
(Form S-1 No. 333-62985) and related Prospectus of pcOrder.com, Inc. for the
registration of shares of its common stock.
/s/ Ernst & Young LLP
Austin, Texas
February 5, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains Summary Financial information extracted from six months
ended June 30, 1998 and year ended December 31, 1997 and is qualified in its
entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 4,726 2,207
<SECURITIES> 0 0
<RECEIVABLES> 5,125 2,558
<ALLOWANCES> (350) 281
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,651 4,484
<PP&E> 4,008 1,375
<DEPRECIATION> 2,070 881
<TOTAL-ASSETS> 12,254 4,978
<CURRENT-LIABILITIES> 17,545 5,973
<BONDS> 0 0
0 0
0 0
<COMMON> 129 128
<OTHER-SE> (7,523) (1,123)
<TOTAL-LIABILITY-AND-EQUITY> 12,254 4,978
<SALES> 21,714 10,589
<TOTAL-REVENUES> 21,714 10,589
<CGS> 10,310 3,576
<TOTAL-COSTS> 10,310 3,576
<OTHER-EXPENSES> 21,600 7,714
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (10,024) (701)
<INCOME-TAX> (1,537) 427
<INCOME-CONTINUING> (8,487) (1,128)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,487) (1,128)
<EPS-PRIMARY> (0.66) (0.09)
<EPS-DILUTED> (0.66) (0.09)
</TABLE>
