<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number: 0-25447
-------
PCORDER.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2720849
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5001 Plaza on the Lake
Austin, Texas
(512) 684-1100 78746
------------------------ -----
(Address of principal executive offices (Zip Code)
and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of November 8, 1999, there were 3,329,162 shares of the Registrant's Class A
Common Stock outstanding and 12,659,650 shares of the Registrant's Class B
Common Stock outstanding.
1
<PAGE>
INDEX
PCORDER.COM, INC.
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 1999 (unaudited) and 3
December 31, 1998
Condensed Statements of Operations for the Three Months Ended 4
September 30, 1999 and 1998 (unaudited) and for the Nine Months
Ended September 30, 1999 and 1998 (unaudited)
Condensed Statements of Cash Flows for the Nine Months Ended 5
September 30, 1999 and 1998 (unaudited)
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and 10
Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
Item 3. Defaults Upon Senior Securities 31
Item 4. Submission of Matters to a Vote of Securities Holders 31
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
EXHIBIT INDEX 33
</TABLE>
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
pcOrder.com, Inc.
Condensed Balance Sheets
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------------- -------------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 44,580 $ 4,726
Short-term investments 18,565 -
Accounts receivable, net 10,540 4,775
Other current assets 647 150
------------------------- -------------------------
Total current assets 74,332 9,651
Property and equipment, net 2,729 1,938
Other assets 60 665
------------------------- -------------------------
Total assets $ 77,121 $ 12,254
========================= =========================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,833 $ 612
Accrued liabilities 8,733 3,150
Payable to Trilogy, net 3,628 4,506
Deferred revenue 26,974 10,428
------------------------- -------------------------
Total current liabilities 41,168 18,696
Deferred revenue 1,433 2,103
Commitments and contingencies (Note 9)
Stockholders' equity (deficit)
Common stock, par value $.01 per share 50,000,000 shares
authorized; 15,721,855 and 12,948,602 issued and outstanding in
1999 and 1998, respectively 157 129
Additional paid-in capital 52,937 4,024
Deferred stock compensation (1,131) (1,726)
Unrealized gain on investments 4 -
Accumulated deficit (17,447) (10,972)
------------------------- -------------------------
Total stockholders' equity (deficit) 34,520 (8,545)
------------------------- -------------------------
Total liabilities and stockholders' equity (deficit) $ 77,121 $ 12,254
========================= =========================
</TABLE>
See notes to condensed financial statements
3
<PAGE>
pcOrder.com, Inc.
Condensed Statements of Operations
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- -------------------------------------
1999 1998 1999 1998
--------------- ------------------- -------------- -------------------
Revenues:
<S> <C> <C> <C> <C>
Software and subscriptions $ 6,257 $ 3,264 $14,489 $ 8,736
Content and services 6,800 2,312 15,136 6,423
--------------- ------------------- -------------- -------------------
Total revenues 13,057 5,576 29,625 15,159
Cost of revenues:
Software and subscriptions 989 591 2,685 1,375
Software and subscriptions - affiliated royalty
fee 398 392 1,025 822
--------------- ------------------- -------------- -------------------
Total software and subscriptions 1,387 983 3,710 2,197
Content and services 5,066 1,780 11,166 4,143
--------------- ------------------- -------------- -------------------
Total cost of revenues 6,453 2,763 14,876 6,340
--------------- ------------------- -------------- -------------------
Gross profit 6,604 2,813 14,749 8,819
Operating expenses:
Research and development 1,959 1,148 4,727 2,933
Selling and marketing 4,388 4,601 13,086 8,324
General and administrative 1,503 1,160 4,306 2,456
Amortization of deferred stock and stock
compensation expense 259 727 953 954
--------------- ------------------- -------------- -------------------
Total operating expenses 8,109 7,636 23,072 14,667
Operating loss (1,505) (4,823) (8,323) (5,848)
Interest income 764 62 1,605 107
--------------- ------------------- -------------- -------------------
Loss before income taxes (741) (4,761) (6,718) (5,741)
Income tax benefit - (203) (243) (203)
--------------- ------------------- -------------- -------------------
Net loss $ (741) $(4,558) $(6,475) $(5,538)
=============== =================== ============== ===================
Basic and diluted net loss per share $(0.05) $(0.35) $(0.43) $(0.43)
=============== =================== ============== ===================
Weighted average shares outstanding 15,602 12,899 15,019 12,837
=============== =================== ============== ===================
</TABLE>
See notes to condensed financial statements
4
<PAGE>
pcOrder.com, Inc.
Condensed Statements of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------------------------------
1999 1998
------------------------ -------------------------
<S> <C> <C>
Operating activities
Net loss $(6,475) $(5,538)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation 1,660 754
Amortization of deferred stock and stock compensation expense 953 954
Changes in operating assets and liabilities:
Accounts receivable, net (5,765) (6,407)
Other assets 20 (558)
Accounts payable 1,221 411
Accrued liabilities 5,583 1,011
Payable to Trilogy, net (514) 2,386
Deferred revenue 15,876 8,949
------------------------ -------------------------
Net cash provided by operating activities 12,559 1,962
Investing activities
Purchases of short-term and long-term investments (21,277) -
Sales of short-term and long-term investments 2,737 -
Purchase of property and equipment (2,451) (2,246)
------------------------ -------------------------
Net cash used in investing activities (20,991) (2,246)
Financing activities
Proceeds from the issuance of common stock, net 47,239 -
Proceeds from the exercise of stock options 1,047 372
------------------------ -------------------------
Net cash provided by financing activities 48,286 372
------------------------ -------------------------
Increase in cash and cash equivalents 39,854 88
Cash and cash equivalents at beginning of period 4,726 2,207
------------------------ -------------------------
Cash and cash equivalents at end of period $ 44,580 $ 2,295
======================== =========================
</TABLE>
See notes to condensed financial statements
5
<PAGE>
pcOrder, Inc.
Notes to Condensed Financial Statements
(Unaudited)
1. Business
pcOrder.com, Inc., (the "Company") is a majority owned subsidiary of Trilogy
Software, Inc. and its predecessor entities including Trilogy Development Group,
Inc. ("parent" or "Trilogy"). The Company commenced operations as a separate
business unit within Trilogy on July 1, 1993 and was incorporated as a separate
entity on July 18, 1994. The Company provides electronic commerce technology
and tailored solutions to the manufacturers, distributors and resellers of
computer products primarily in the United States. The Company's products
include software applications and support for those applications. The software
applications consist of an integrated application suite that includes
cataloging, quoting, pricing, availability, and product configuration. Content
for these applications in the form of detailed product databases containing
configuration, pricing, availability and specifications are also provided and
updated by the Company. Customers can choose to have the Company host the
software applications or install them at their site. In addition, the Company
provides consulting services to help customers build and integrate electronic
commerce capabilities to meet their specified needs.
Effective February 26, 1999, the Company completed its initial public offering
of 2,530,000 shares at $21 per share. Offering proceeds, net of aggregate
expenses to the Company (including underwriters' discount), totaled
approximately $47.2 million.
On November 10, 1999, the Company filed a registration statement on Form S-1
with the Securities and Exchange Commission to offer 2,500,000 shares of Class A
Common Stock to the public. The proposed offering includes the sale of 500,000
new shares by the Company, 1,775,000 existing shares currently owned by Trilogy,
and 225,000 existing shares currently owned by other stockholders of the
Company. The principal purposes of the proposed offering are to raise cash for
working capital purposes and to increase the Company's public market float. The
Company will not receive any proceeds from the sale of the shares by Trilogy or
the other selling shareholders. These securities may not be sold nor may offers
to buy be accepted prior to the time the registration statement becomes
effective. This Form 10-Q shall not constitute an offer to sell or the
solicitation of an offer to buy. There shall not 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 law of any such state.
2. Basis of Presentation
The unaudited interim financial information presented herein should be read in
conjunction with the Company's annual financial statements for the year ended
December 31, 1998, which can be found in the Company's registration statement
filed on Form S-1, as amended (Registration No. 333-62985). The accompanying
unaudited interim financial statements reflect all adjustments (which include
only normal, recurring adjustments) that are, in the opinion of management,
necessary to state fairly the results for the periods presented. The results
for such periods are not necessarily indicative of the results to be expected
for the full fiscal year.
3. Investments
The Company's investments consist primarily of high-quality short-term
commercial paper, corporate notes, and money market funds. The investments are
classified as available-for-sale and
6
<PAGE>
are reported at fair value in the accompanying condensed balance sheets. As of
September 30, 1999, cumulative unrealized gains totaled approximately $4,000 and
were reported as a component of stockholders' equity within comprehensive
income. Unrealized losses are charged against income when a decline in fair
value is determined to be other than temporary.
4. Related Party Transactions
The Company and Trilogy have entered into a number of agreements that govern the
business activities between the two companies. Pursuant to such agreements, the
Company is required to pay Trilogy royalties for the use of Trilogy's technology
and management fees for services performed by Trilogy on behalf of the Company.
For the three months ended September 30, 1999 and 1998, the Company incurred
royalty fees due to Trilogy in the amounts of $398,000 and $392,000,
respectively. For the nine months ended September 30, 1999 and 1998, the
Company incurred royalty fees due to Trilogy in the amounts of $1.0 million and
$822,000, respectively. Additionally, the Company is required to pay for
certain management services performed by Trilogy on behalf of the Company. For
the three months ended September 30, 1999 and 1998, the Company was charged
approximately $64,500 and $61,300, respectively, for such services. For the
nine months ended September 30, 1999 and 1998, the Company was charged
approximately $193,500 and $229,400, respectively. Furthermore, the Company
incurred approximately $1.2 million for the three months ended September 30,
1999, for the use of Trilogy consulting personnel. For the nine months ended
September 30, 1999, such amount totaled $1.4 million. No Trilogy consulting
personnel were utilized by the Company during the three or nine-month periods
ended September 30, 1998.
In addition to the above costs, as of September 30, 1999, the Company has
committed to pay Trilogy approximately $1.8 million for college new hire
recruiting and training services performed by Trilogy on behalf of the Company
for the nine months ended September 30, 1999. Such amount has been allocated to
the various departments within the Company that have directly benefited from
these services.
The Company periodically makes payments to satisfy the amounts due to Trilogy
pursuant to the intercompany agreements discussed above. No such payment was
made during the three months ended September 30, 1999. However, during the nine
months ended September 30, 1999, the Company paid Trilogy approximately $5.4
million. Such amount had accumulated over several quarters and was paid in part
with proceeds generated by the Company's initial public offering. As of
September 30, 1999, the Company owed Trilogy approximately $3.6 million, which
was comprised primarily of the royalty, management, recruiting and consulting
fees discussed above.
5. Net Loss per Share
For the three months ended September 30, 1999 and 1998, common stock equivalents
totaling 1,689,621 and 841,448 shares, respectively, were excluded from the
diluted earnings per share calculation. For the nine months ended September 30,
1999 and 1998, such amounts totaled 1,703,680 and 97,390 shares, respectively.
The aforementioned shares were excluded from the diluted earnings per share
calculations for the three months and nine months ended September 30, 1999 and
1998, as they were anti-dilutive due to the Company's net losses for these
periods. Accordingly, the diluted net loss per share amounts were the same as
the basic net loss per share amounts for all periods presented.
7
<PAGE>
6. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130
established new rules for the reporting and display of comprehensive income and
its components. The components of comprehensive loss for the periods presented
in the accompanying statements of operations are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------ -----------------------------------
1999 1998 1999 1998
--------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Net Loss $(741) $(4,588) $(6,475) $(5,538)
Unrealized gain on investments 4 - 4 -
--------------- ----------------- --------------- ----------------
Comprehensive loss $(737) $(4,588) $(6,471) $(5,538)
=============== ================= =============== ================
</TABLE>
7. Stockholders' Equity
The Company's authorized capital stock 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. On February 2, 1999, 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 effect of this reclassification has been reflected for all periods presented
in the accompanying financial statements.
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.
In August and September 1999, a total of 97,350 shares of Class B common stock
owned by Trilogy were converted into the same number of shares of Class A common
stock and sold to certain employees of Trilogy. Such transaction did not have
an impact on pcOrder's capitalization, other than the conversion of Class B
common stock into Class A common stock, since the shares were owned directly by
Trilogy and sold to Trilogy employees.
8
<PAGE>
8. Income Taxes
Through August 25, 1999, the Company's operations were included in the
consolidated income tax returns filed by Trilogy and the two companies operated
under a consolidated tax sharing agreement. Under such agreement, the Company
would record a current income tax benefit amount equal to the income tax
benefits generated by the Company and expected to be utilized by the
consolidated tax group. For the three months ended September 30, 1998, the
Company recorded an income tax benefit of $203,000 under such agreement. For
the nine months ended September 30, 1999 and 1998, the Company recorded income
tax benefits totaling $243,000 and $203,000, respectively under the agreement.
Effective August 26, 1999, the Company's operations ceased to be included in the
consolidated tax return of Trilogy. Accordingly, from this date forward, the
Company's income taxes will be computed on a stand-alone basis. Because of the
uncertainties surrounding the future utilization of the Company's deferred tax
assets, no income tax benefit was recorded for the period subsequent to the tax
deconsolidation date.
9. Commitments and Contingencies
In September 1999, the Company settled an outstanding lawsuit with a former
employee regarding commissions allegedly owed to the former employee by the
Company. The settlement did not have a material effect on the Company's
financial condition or results of operations.
10. Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP 98-1"), Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 requires that
entities capitalize certain costs related to internal-use software once certain
criteria are met. The Company adopted SOP 98-1 effective January 1, 1999. Such
adoption did not have a material impact on the Company's financial condition or
results of operations.
Effective December 15, 1998, the AICPA issued SOP 98-9, Modification of SOP 97-
2, "Software Revenue Recognition", With Respect to Certain Transactions. SOP
98-9 amends SOP 97-2 and 98-4 extending the deferral of the application of
certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning
on or before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company does not believe that the final adoption of SOP 98-9 will have a
material effect on the Company's financial condition or results of operations.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Report on Form 10-Q includes forward-looking statements, including the
statements relating to the amount of deferred revenue estimated to be recognized
as revenue within the next 12 months, recognition of revenues from our
subscription-based services, our belief that existing cash and cash equivalents
and related investments will be sufficient to fund our anticipated cash needs
for working capital and capital expenditures for the next 12 months, and our
expectations regarding future expense levels. Any forward-looking statements we
make involve risks and uncertainties, including those described under "Risk
Factors That May Affect Results of Operations and Financial Condition" below.
Actual results may differ materially. All forward-looking statements included in
this report are made as of the date of this report, and we assume no obligation
to update these statements.
Overview
pcOrder is a leading provider of business-to-business software applications,
content and related services that are designed to enable the computer industry's
suppliers, resellers and end users to buy and sell products online. Our
tailored solutions are designed to enable computer industry participants to take
advantage of the increasing adoption of e-commerce to automate sales and
distribution functions such as product search, comparison, configuration,
quoting, pricing, financing, ordering and reseller selection. Our solutions are
designed to enable our customers to lower their cost of sales and marketing,
reduce inventory levels, and more efficiently interact with their business
partners and customers.
We derive our revenues from software and subscription fees and content and
related service fees. Software and subscription fees consist of subscription-
based and perpetual license software arrangements. Currently, we derive the
majority of our 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 on a subscription basis for
access to and maintenance of information stored in our product database. Our
service fees consist of providing integration, customization, training and Web-
hosting services to our customers. These fees are generally charged on a time
and materials basis. However, we have in the past and may from time to time in
the future provide these services on a fixed-price basis.
Historically, our content and related services have been sold in conjunction
with our software applications. However, in early 1999, we launched
ContentSource, a subscription-based service that allows customers to subscribe
solely to our content without purchasing our software. This service is
primarily targeted towards Internet retailers, corporate resellers,
distributors, and third parties that provide shopping services to Internet
portals. Revenues from this service began to be recognized during the quarter
ended September 30, 1999.
Revenue from perpetual licenses and software subscriptions is recognized when
persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed or determinable and collectibility is probable. In
the case of perpetual licenses, revenue is recognized immediately upon
achievement of the above criteria. In the case of subscriptions, which represent
a majority of our contracts, revenue recognition commences upon achievement of
the above criteria, but is generally recognized over the life of the
arrangement. Subscription contracts also require renewal features for continued
license access and services beyond the initial contract period. Software
maintenance fees
10
<PAGE>
relating to perpetual licenses are recognized over the term of the applicable
maintenance agreement. Content fees, including fees from ContentSource, are
generally recognized over the applicable service period, which generally
commences upon initial content entry or delivery.
Time and materials service fees are recognized as the services are performed. We
recognize revenue on fixed price service arrangements upon completion of
specific contractual events, or based on an estimated percentage of completion
as work progresses.
In June 1999, we expanded our customer relationship with Compaq Computer
Corporation. Under the new agreement, we agreed to provide a broader range of
software applications and services across more of Compaq's electronic commerce
initiatives and include international as well as domestic deployments. The
agreement is a multi-year subscription-based agreement, but can be terminated
earlier by either party upon prior notice in the event of a payment default,
material breach, failure of the Company to provide certain deliverables, and
termination of business. Revenues from this agreement began to be recognized
during the quarter ended September 30, 1999.
In October 1999, we entered into an agreement with E-Commerce Industries, Inc.
(eci/2/), a leading e-commerce company in the office products industry. The deal
is a multi-year subscription-based agreement that allows eci/2/ exclusive rights
to sublicense our core e-commerce technology in the office products industry.
Additionally, we and eci/2/ will share in the development of a comprehensive
office supply content database that will be distributed by both companies as
part of their overall e-commerce services. In connection with the strategic
relationship, we made a $3.2 million minority equity investment in eci/2/ and
Christina Jones, our President and Chief Operating Officer, joined the board of
directors of eci/2/. The investment will be accounted for under the cost method
of accounting.
We record cash advances and amounts billed in excess of revenue recognized as
deferred revenue. Our deferred revenue balance on September 30, 1999 was $28.4
million. Approximately $27.0 million of this deferred revenue is expected to be
recognized as revenue within the following 12 months, with the remaining amount
estimated to be recognized in later periods. The deferred revenue balance
generally results from billings to and collections from customers in advance of
receipt of products or performance of services. The timing and amount of cash
advances from customers can vary significantly depending on specific contract
terms and can therefore have a significant impact on the amount of deferred
revenue in any given period. Deferred revenue is not indicative of our contract
backlog or future revenues. Fluctuations in deferred revenue result in similar
fluctuations in our cash flow from operations.
In connection with an intercompany license agreement with Trilogy, we are
obligated to pay Trilogy royalties based on fees generated from perpetual
license agreements, software maintenance and subscription-based licenses. Also,
we have entered into some agreements with Trilogy for administrative,
operational and corporate support services, including some consulting, tax
administration, payroll, payroll accounting, banking, corporate finance,
recruiting and employee training services. In addition, through August 25,
1999, we were subject to a tax allocation agreement with Trilogy and were a
member of the Trilogy consolidated tax group. Effective August 26, 1999, we
became deconsolidated from the Trilogy consolidated tax group. See Notes 4 and
8 of the Notes to Condensed Financial Statements for more information on these
agreements.
11
<PAGE>
Results of Operations
The following table sets forth our results of operations expressed as a
percentage of total revenues. Our historical operating results are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------
1999 1998 1999 1998
--------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Software and subscriptions 48% 59% 49% 58%
Content and services 52 41 51 42
--------- ---------- -------- -------
Total revenues 100 100 100 100
Cost of revenues:
Software and subscriptions 10 18 12 15
Content and services 39 32 38 27
--------- ---------- -------- -------
Total cost of revenues 49 50 50 42
--------- ---------- -------- -------
Gross profit 51 50 50 58
Operating expenses:
Research and development 15 20 16 20
Selling and marketing 34 82 44 55
General and administrative 12 21 15 16
Amortization of deferred stock and stock
compensation expense 2 13 3 6
--------- ---------- -------- -------
Total operating expenses 63 136 78 97
Operating loss (12) (86) (28) (39)
Interest income 6 1 5 1
--------- ---------- -------- -------
Loss before income taxes (6) (85) (23) (38)
Income tax benefit - (3) (1) (1)
--------- ---------- -------- -------
Net loss (6)% (82)% (22)% (37)%
========= ========== ======== =======
</TABLE>
Revenues
Total revenues increased 134% to $13.1 million for the three months ended
September 30, 1999 from $5.6 million for the three months ended September 30,
1998. Total revenues increased by 95% to $29.6 million for the nine months
ended September 30, 1999 from $15.2 million for the nine months ended September
30, 1998. The overall increase in revenues for both periods is primarily
attributable to an increase in our software and content customer base, resulting
in higher software integration, customization, training and hosting fees and, to
a lesser degree, higher software and subscriptions and content fees.
Software and Subscriptions. Software and subscriptions revenues increased 92%
to $6.3 million for the three months ended September 30, 1999 from $3.3 million
for the three months ended September 30, 1998. Such amounts represented
approximately 48% of total revenues for the three months ended September 30,
1999 and approximately 59% of total revenues for the three months ended
September 30, 1998. Software and subscriptions revenues increased 66% to $14.5
million for the nine months ended September 30, 1999 from $8.7 million for the
nine months ended September 30, 1998. Such amounts represented approximately
49% of total revenues for the nine months ended September 30, 1999 and
approximately 58% of total revenues for the nine months ended September
12
<PAGE>
30, 1998. The increase in both periods in absolute dollars was due primarily to
higher subscription revenues related to new customer additions and an expansion
of the software solutions being provided to our existing customer base.
Additionally, revenues from perpetual licenses were higher for both periods
during 1999 when compared to the same periods in the prior year. Software and
subscriptions revenues decreased as a percentage of total revenues for both
periods primarily due to a higher relative increase in content and services
revenues.
Content and Services. Content and services revenues increased 194% to $6.8
million for the three months ended September 30, 1999 from $2.3 million for the
three months ended September 30, 1998. Such amounts represented approximately
52% of total revenues for the three months ended September 30, 1999 and
approximately 41% of total revenues for the three months ended September 30,
1998. Content and services revenues increased 136% to $15.1 million for the
nine months ended September 30, 1999 from $6.4 million for the nine months
ended September 30, 1998. Such amounts represented approximately 51% of total
revenues for the nine months ended September 30, 1999 and approximately 42% of
total revenues for the nine months ended September 30, 1998. The increase in
absolute dollars and as a percentage of total revenues for both periods was due
primarily to additional software integration, customization and training fees,
and to a lesser extent, higher content and hosting fees. These increases are
attributable to new customer additions, including content only customers, as
well as an increase in the level of services being provided to our existing
customer base. It is expected that the current level of content and services
revenues as a percentage of total revenues may increase slightly over the near
term.
Cost of Revenues
Software and Subscriptions. Cost of software and subscriptions revenues
consists primarily of royalties paid to Trilogy and the costs of providing
maintenance and support for our software customers. Cost of software and
subscriptions revenues increased 41% to $1.4 million for the three months ended
September 30, 1999 from $1.0 million for the three months ended September 30,
1998. Such amounts represented approximately 22% of software and subscriptions
revenues for the three months ended September 30, 1999 and approximately 30% of
software and subscriptions revenues for the three months ended September 30,
1998. Cost of software and subscriptions revenues increased 69% to $3.7 million
for the nine months ended September 30, 1999 from $2.2 million for the nine
months ended September 30, 1998. Such amounts represented approximately 26% of
software and subscriptions revenues for the nine months ended September 30, 1999
and approximately 25% of software and subscriptions revenues for the nine months
ended September 30, 1998. The increase in cost of software and subscriptions
revenues in absolute dollars for both periods was due primarily to an increase
in customer support costs. To a lesser extent, the increase was due to
additional royalties paid to Trilogy on specific software and subscriptions
revenues. The increase in royalties resulted from higher software and
subscriptions revenues and a higher proportion of perpetual license revenues
which carry a higher royalty rate.
Content and Services. Cost of content and services revenues consists primarily
of the cost of providing access, entry, update and maintenance services for our
product content services and the cost of in-house and contract personnel
providing software integration, customization and training services.
Additionally, the cost of providing hosting services to our customers is also
accounted for in this line. Cost of content and services revenues increased
185% to $5.1 million for the three months ended September 30, 1999 from $1.8
million for the three months ended September 30, 1998. Such amounts represented
approximately 75% of content and services revenues for the three
13
<PAGE>
months ended September 30, 1999 and approximately 77% of content and services
revenues for the three months ended September 30, 1998. Cost of content and
services revenues increased 170% to $11.2 million for the nine months ended
September 30, 1999 from $4.1 million for the nine months ended September 30,
1998. Such amounts represented approximately 74% of content and services
revenues for the nine months ended September 30, 1999 and approximately 65% of
content and services revenues for the nine months ended September 30, 1998. The
increase in cost of content and services revenues in absolute dollars for both
periods and as a percentage of content and services revenues for the nine months
ended September 30, 1999, was primarily due to an increase in headcount and
related costs within our content management group and increased personnel and
other costs associated with providing increased software integration,
customization, training and hosting services to our software customers. The
decrease in cost of content and services revenues as a percentage of content and
services revenues for the three months ended September 30, 1999, when compared
to the same period in the prior year, was primarily due to higher consulting
utilization rates period to period and incremental content revenues associated
with our ContentSource offering.
Operating Expenses
Research and Development. Research and development expenses consist primarily
of personnel costs to support our product development efforts. Research and
development expenses increased 71% to $2.0 million for the three months ended
September 30, 1999 from approximately $1.1 million for the three months ended
September 30, 1998. Such amounts represented approximately 15% of total
revenues for the three months ended September 30, 1999 and approximately 20% of
total revenues for the three months ended September 30, 1998. Research and
development expenses increased 61% to $4.7 million for the nine months ended
September 30, 1999 from $2.9 million for the nine months ended September 30,
1998. Such amounts represented approximately 16% of total revenues for the nine
months ended September 30, 1999 and approximately 20% of total revenues for the
nine months ended September 30, 1998. The increase in absolute dollars for both
periods was primarily due to an increase in internal development personnel and
related costs and higher outsourced development costs. Although quarterly
results may fluctuate, we believe that continued investment in research and
development is critical to attaining our strategic objectives and, as a result,
expect research and development costs in absolute dollars to increase in future
periods.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries and outsourced personnel costs, advertising, travel, tradeshows and
public relations expenses. Selling and marketing expenses decreased 5% to $4.4
million for the three months ended September 30, 1999 from approximately $4.6
million for the three months ended September 30, 1998. Such amounts represented
approximately 34% of total revenues for the three months ended September 30,
1999 and approximately 82% of total revenues for the three months ended
September 30, 1998. Selling and marketing expenses increased 57% to $13.1
million for the nine months ended September 30, 1999 from $8.3 million for the
nine months ended September 30, 1998. Such amounts represented approximately
44% of total revenues for the nine months ended September 30, 1999 and
approximately 55% of total revenues for the nine months ended September 30,
1998. The decrease in absolute dollars for the three months ended September 30,
1999, when compared to the same period in the prior year, was primarily due to
increased marketing efforts on acquiring regional resellers and corporate buyers
during the quarter ended September 30, 1998. The increase in absolute dollars
for the nine months ended September 30, 1999, when compared to the same period
in the prior year, was due primarily to an increase in selling and marketing
personnel, higher overall sales costs related to higher orders and increased
marketing campaign expenditures. Overall, selling
14
<PAGE>
and marketing expenses decreased as a percentage of total revenues for both
periods when compared to the prior year due to the high revenue growth achieved
in the current year periods. Although quarterly results may fluctuate, we
believe that selling and marketing expenses will increase in absolute dollars in
future periods as we continue to expand our 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 30% to $1.5 million for the three months ended
September 30, 1999 from $1.2 for the three months ended September 30, 1998.
Such amounts represented approximately 12% of total revenues for the three
months ended September 30, 1999 and approximately 21% of total revenues for the
three months ended September 30, 1998. General and administrative expenses
increased 75% to $4.3 million for the nine months ending September 30, 1999 from
$2.5 million for the nine months ended September 30, 1998. Such amounts
represented approximately 15% of total revenues for the nine months ended
September 30, 1999 and approximately 16% of total revenues for the nine months
ended September 30, 1998. The increase in absolute dollars for both periods was
primarily due to increased personnel and related costs and higher facility
expenses, all of which have been necessary to support our growth. Overall,
general and administrative expenses declined as a percentage of total revenues
for both periods, when compared to the prior year, due to the high revenue
growth achieved in the current year periods. Although quarterly results may
fluctuate, we believe that general and administrative expenses will increase in
absolute dollars in future periods as we continue to expand our personnel and
infrastructure to support our growth.
Amortization of Deferred Stock and Stock Compensation Expense. We record
deferred stock compensation expense for the difference between the exercise
price of certain stock option grants and the deemed fair value of the Company's
common stock at the time of such grants. Such amount is amortized over the
vesting periods of the underlying options. For the three months ended September
30, 1999 and 1998, such amortization totaled approximately $259,000 and
$358,000, respectively. For the nine months ended September 30, 1999 and 1998,
amortization of deferred stock compensation totaled approximately $953,000 and
$585,000, respectively. Additionally, during the three and nine months ended
September 30, 1998, we recorded approximately $369,000 in stock compensation
expense which represented the fair value of options granted to certain non-
employees during such periods.
Interest Income. Interest income represents income earned on cash and cash
equivalents and our short-term investments. Interest income increased
to approximately $764,000 for the three months ended September 30, 1999 from
approximately $62,000 for the three months ended September 30, 1998. Interest
income increased to approximately $1.6 million for the nine months ended
September 30, 1999 from approximately $107,000 for the nine months ended
September 30, 1998. The increase in interest income for both periods is due to
the increase in our cash and cash equivalents and short-term investments as a
result of our initial public offering in February 1999.
Income Taxes. From inception through August 25, 1999, we were included in the
consolidated income tax returns of Trilogy. Additionally, through this date, we
were party to a tax sharing agreement with Trilogy. Effective August 26, 1999,
we were no longer part of the consolidated tax group of Trilogy and,
accordingly, began accounting for our income taxes on a stand-alone basis.
Additionally, effective August 26, 1999, we were no longer subject to the
intercompany tax sharing
15
<PAGE>
agreement with Trilogy on a prospective basis. See Note 8 of the Notes to
Condensed Financial Statements for more information.
Our effective tax rate was approximately 4% for the three months ended September
30, 1998, and no income tax benefit was recorded for the three months ended
September 30, 1999. Our effective tax rate was 4% for the nine months ended
September 30, 1999 and 4% for the nine months ended September 30, 1998. The
income tax benefits recorded for all periods reflect the benefits that we were
able to realize under the consolidated tax sharing arrangement with Trilogy.
Had we filed separate income tax returns for the three and nine months ended
September 30, 1998, our effective tax rate would have been approximately 3% for
both periods versus 4% on a consolidated basis. The difference between the two
rates was due to us not being able to fully utilize certain income tax benefits
on a stand-alone basis. Had we filed separate income tax returns for the three
and nine months ended September 30, 1999, no income tax benefit would have been
recorded for either period due to a full valuation allowance having been
provided on our deferred tax assets as a result of their uncertain future
utilization.
Liquidity and Capital Resources
As September 30, 1999, we had approximately $44.6 million in cash and cash
equivalents and approximately $18.6 million in short-term investments, primarily
reflecting the proceeds received in our recent initial public offering. As of
September 30, 1999, our principal commitments consisted of obligations
outstanding under operating leases. Although we have no material commitments for
capital expenditures, we anticipate an increase in our capital expenditures and
lease commitments consistent with the aforementioned anticipated growth in
operations, infrastructure and personnel.
Net cash provided by operations was $12.6 million and $2.0 million for the nine
months ended September 30, 1999 and 1998, respectively. Cash provided by
operations for the nine months ended September 30, 1999 resulted primarily from
increases in deferred revenue and accrued liabilities, somewhat offset by an
increase in accounts receivable and the net loss generated during that period of
time. Cash provided by operations for the nine months ended September 30, 1998
resulted primarily from increases in deferred revenue and the payable to
Trilogy, offset by an increase in accounts receivable and the net loss generated
during that period of time.
Net cash used in investing activities was $21.0 million and $2.2 million for the
nine months ended September 30, 1999 and 1998, respectively. Cash used in
investing activities for the nine months ended September 30, 1999 was primarily
related to the use of cash to purchase interest-bearing, investment-grade
securities. Cash used in investing activities for the September 30, 1998 was
primarily related to the purchase of property and equipment.
Net cash provided by financing activities was $48.3 million for the nine months
ended September 30, 1999 and $372,000 for the nine months ended September 30,
1998. Cash provided by financing activities for the nine months ended September
30, 1999 was primarily due to the net proceeds received by us in connection with
our initial public offering of 2,530,000 shares of our Class A common stock in
February 1999. Such net proceeds totaled approximately $47.2 million. Cash
provided by financing activities for the nine months ended September 30, 1998
was entirely attributable to proceeds received from the exercise of employee
stock options.
16
<PAGE>
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, 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 to comply with the ''Year 2000'' requirements. We use a number of
computer software programs and operating systems and our proprietary solutions
include source code which must address the Year 2000 issue. However, we believe
that our Year 2000 issues are limited to information technology systems, such as
software programs and computer operating systems, and that because our business
is not solely dependent on the use of non-information technology systems, such
as embedded systems which can be devices used to control, monitor or assist the
operation of equipment and machinery, the failure of any of these non-
information technology systems as a result of Year 2000 issues would not have a
material adverse effect on our operations.
We rely, in part, on Trilogy's internal computer systems. We have been informed
by Trilogy that it believes that its internal computer systems are Year 2000
compliant. Trilogy is continuing to assure its Year 2000 compliance. We have
completed a review of our information technology systems and the products for
which we currently provide maintenance and support, which involved testing and
verification as described below. Based on this review, we believe our own
information technology systems and the products for which we currently provide
maintenance and support are Year 2000 compliant. Our Year 2000 compliance effort
consisted of verifying and testing the ability of the products for which we
currently provide 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. We have no plans to
conduct further review of our currently supported products or information
technology systems. We have not historically made any material expenditures in
readying our information technology systems or currently support products for
the Year 2000 and do not believe it will be necessary in the future to expend
any material amounts in connection with Year 2000 compliance.
Notwithstanding the foregoing, Year 2000 errors or defects may be discovered in
our current or future products. Any failure by us to make our products Year 2000
compliant, or if our products are not 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 our products, unanticipated expenses to address Year 2000
problems or significant liabilities resulting from losses suffered by our
customers due to these Year 2000 problems, any of which could have an adverse
effect on us. We have made limited contingency plans for the remediation of Year
2000 problems that may affect our information technology systems and products,
or the third-party equipment and software utilized by us, and it will be
necessary for us to make the necessary expenditures to assess and remedy these
problems in the event they arise in the future, which expenditures, if any, we
cannot estimate. These expenditures, if required, could have an adverse effect
on us.
Our solutions also utilize and depend on third-party equipment and software that
may not be Year 2000 compliant. We contacted the vendors of most of these
products to ascertain their Year 2000 compliance. Based on information supplied
by these third-party vendors, our officially supported
17
<PAGE>
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 we
tested and verified. We estimate that this certification applies to 90% to 95%
of our total products. Many of our products also use or rely on Microsoft's SQL
Server product, which has been certified Year 2000 compliant through December
31, 9999. We believe that approximately 1.0% of our products use or rely on
third-party vendor software which may be subject to Year 2000 issues and for
which we have received no assurance of Year 2000 compliance. To the extent any
of our products are customized, whether by us or a third party, there can be no
assurance that any customized product will continue to be Year 2000 compliant.
Failure of third-party equipment or software, or of systems maintained by our
suppliers, to operate properly with regard to the Year 2000 and thereafter could
require us to incur unanticipated expenses to remedy any problems, which could
have an adverse effect on us. In addition, to the extent our 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 our products achieving market
acceptance. Further, 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 us of computer
products manufacturers, which could have an adverse effect on us.
The information contained in this Report on Form 10-Q related to the Year 2000
constitutes Year 2000 Readiness Disclosure for purposes of the Year 2000
Information and Readiness Disclosure Act. That act does not limit liability
under the securities laws.
Risk Factors That May Affect Results of Operations and Financial Condition
Our future operations, financial performance, business and share price may be
affected by a number of factors, including the following, any of which could
cause actual results to vary materially from any forward-looking statements we
make in this Report on Form 10-Q or in other reports, press releases or other
statements issued from time to time.
A majority of our revenues come from a few customers.
Greater than 60% of our revenues came from our five largest customers in each of
the last three fiscal years and in the nine months ended September 30, 1999. If
we lose or fail to replace any of our large customers, our financial results and
stock price may be adversely affected. We plan to expand and diversify our
customer base. However, as a result of our limited operating history, we have
derived, and over the near term we expect to continue to derive, a significant
portion of our revenues from a limited number of large customers.
The volume of business with specific customers is likely to vary from year to
year, and a major customer in one year may not procure software, content or
services from us in a subsequent year. Our future growth is dependent in part on
our ability to renew existing contracts on terms favorable to us, as well as our
ability to penetrate further our existing customer accounts with additional
products and services. A decrease in business from one or more of our major
customers could have a material adverse effect on our financial results and
stock price.
We are dependent on the computer industry, and we may be negatively affected by
consolidation in the industry and financial difficulties of industry
participants.
18
<PAGE>
The recent decrease in the number of participants in the computer industry's
distribution channel, and the financial difficulties facing many of the
participants, could result in the loss of material customers for our solutions
or render us unable to increase the number of customers for our solutions. The
computer industry is sensitive to general economic, business and industry
conditions that can cause buyers of computer products to reduce or delay their
investments in computer systems. Any event or condition that results in
decreased spending on computer products, or consolidation within the computer
industry, could have a negative effect on our customers and negatively impact
our business. The number of participants in the channel of distribution of
computer products has decreased significantly during 1999. We believe this is
the result of consolidations among participants through mergers, acquisitions
and other business combinations, business failures, manufacturers aligning with
fewer distributors and retailers and other factors. Many of the current
participants face serious financial difficulties, or are undergoing significant
management or strategic changes, which can cause them to reduce, delay or
suspend investments in the type of products and services that we offer.
The sales and implementation cycles for our products and services are long,
which can delay the acquisition of new business and the receipt of revenues.
Our potential customers tend to engage in extensive internal reviews before
making purchase decisions. We spend a lot of time educating and providing
information to our prospective customers regarding the use and benefits of our
products and services. The purchase of our products and services for deployment
within a customer's organization often involves a significant commitment of
capital and other resources. The purchase of our products and services is
therefore subject to delays that are beyond our control, such as the customer's
internal procedures to approve large capital expenditures, budgetary constraints
and the testing and acceptance of new technologies that affect key operations.
We have historically experienced a lengthy cycle for sales to resellers, and
longer sales cycles for sales to manufacturers and distributors. We most likely
will continue to experience lengthy sales cycles in the future. The deployment
of our products and services within a customer's organization often takes an
extended period of time and requires us to work closely with the customer during
the process. Some of our customers have experienced difficulties or delays in
completing implementations of our products and services. Similar difficulties or
delays could occur in the future. Any of these difficulties or delays could
cause delays or non-receipt of related revenues, cause customers to reject our
solutions or lead to the delay or non-receipt of future orders for our products
and services.
We face significant competition and expect the competition to increase.
The market for software products that enable e-commerce is intensely
competitive, and we expect competition in our market segment to increase
substantially. Numerous companies provide e-commerce solutions, and several
competitors target the computer products industry. Our competitors include both
large companies with substantially greater resources and longer operating
histories, systems integrators and the internal information technology
departments of some of our customers and potential customers.
We believe that our principal sources of competition currently are systems
integrators and the internal information technology departments of our customers
and potential customers. These
19
<PAGE>
organizations may seek to develop e-commerce solutions through the use of tools
offered by our competitors primarily focused on providing e-commerce enabling
solutions to the computer industry. Our primary competitors include, but are not
limited to, BroadVision, Calico Commerce, C/NET, i2 Technologies, Open Market,
Selectica and TechnologyNet. In addition, there are a number of significantly
larger companies with which we do not currently compete that do not presently
offer the same or similar e-commerce solutions offered by us but that could,
with limited barriers to entry, compete directly with us. Also, Trilogy is not
prohibited from competing directly or indirectly with us. Increased competition
could result in price reductions, reduced margins and loss of market share, any
of which would adversely affect our business. Many of our current and potential
competitors have significantly longer operating histories and significantly
greater financial, technical, marketing and other resources than us. We may be
unable to compete successfully with our existing competitors or with new
competitors, and failure to do so may adversely affect our financial results and
stock price.
We must develop new products, services and features that incorporate
technological advances and are responsive to market requirements or risk
obsolescence.
The market for our 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. Our
success will depend on our ability to enhance our existing products. Our success
will also depend on our ability to develop and introduce, on a timely and cost-
effective basis, new products that keep pace with technological developments and
emerging industry standards and that address increasingly sophisticated customer
requirements. Our business would be adversely affected if we were to incur
difficulties or delays in developing new products or enhancements or if those
products or enhancements did not gain market acceptance. Specifically:
. we may not be successful in identifying, developing and marketing product
enhancements or new products that respond to technological change or
evolving industry standards;
. we may experience difficulties that could delay or prevent the successful
development, introduction and marketing of these products; and
. our new products and enhanced products may not adequately meet the
requirements of the marketplace and achieve market acceptance or may not
keep pace with advances made by our competitors.
20
<PAGE>
Our business model is evolving and unproven and we may fail to achieve broad
market acceptance.
If a significant number of computer industry participants do not adopt our
solutions, or if we fail to retain or fail to further penetrate our existing
customer accounts, we may not achieve the critical mass of users necessary to
enable the success of our solutions and services. We must attract a significant
number of manufacturers and channel partners from the computer industry and
expand our existing relationships. In particular, a fundamental element of our
business strategy is to enter into contractual relationships with manufacturers
and distributors that enable us to derive increasing revenues from those
customers to the extent that our e-commerce solutions are more broadly adopted
by market participants. In the past, these entities have purchased computer
products and accessories and exchanged information regarding these products
primarily through traditional means of commerce and communications. The market
for the types of products and services that we offer is still emerging and may
not continue to grow. Even if the market does continue to grow, our products
might not achieve market acceptance among computer product manufacturers,
distributors, resellers, retailers, other industry participants and end users,
including corporate buyers and consumers. If we are not successful in achieving
broad market acceptance of our third-party e-commerce products and services or
in achieving significant market share, our financial results and stock price may
be adversely affected.
Our business is dependent on our ability to manage our content database and
ensure the accuracy of that data.
Our business depends on our ability to update and maintain an extensive database
of technical and descriptive information on computer products, including over
600,000 SKUs from over 1,000 manufacturers. Inaccuracies in the data we maintain
could expose us to liabilities and could result in termination of customer
contracts.
In October 1999, we signed an agreement with eCommerce Industries, Inc.
("eci/2/") pursuant to which we have committed to collect and maintain content
on office products. We have no experience in creating an information database
for office products and may experience unanticipated costs and difficulties in
this effort.
Maintaining our databases is a highly manual process and we utilize a
combination of highly trained internal personnel and contract personnel provided
by third parties. In addition, our 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, we have experienced periodic difficulties with data accuracy. For example,
in the second quarter of 1998, database capacity constraints limited our ability
to accept daily pricing and availability updates from distributors, and
temporarily disrupted our ability to provide this data to some reseller
customers. These problems caused some of those customers to decline or delay
contract renewals.
We have a history of losses that we expect to continue in the future.
During the nine months ended September 30, 1999 and in each fiscal year since
inception, we have incurred losses from operations, except for a small operating
profit in 1995. At September 30, 1999, we had an accumulated deficit of $17.4
million. We expect operating losses to continue for the
21
<PAGE>
foreseeable future. Our ability to become profitable depends on our ability to
generate and sustain substantially higher net revenues while controlling expense
levels. Our future profitability and success, if any, will depend, among other
factors, on our ability to maintain and expand relationships with computer
industry participants and end users. Although our revenues have increased in
recent periods, there can be no assurance that our revenues will grow in future
periods or that we will achieve profitability on a quarterly or annual basis in
the future. Even if we do achieve profitability in future fiscal periods, we
cannot be sure that we would be able to sustain or increase profitability
because of the dynamic nature of our business and the industry in which we
compete.
Our operating results are volatile and may fluctuate significantly in future
fiscal periods.
Historically, our revenues and operating results have fluctuated significantly.
We expect that they will continue to fluctuate significantly on a quarterly and
annual basis due to a combination of factors. We have in the past recognized,
and may in the future be required to recognize, a significant portion of revenue
derived from perpetual license agreements with our customers in a single fiscal
quarter, which can cause significant variations in quarterly revenues. Since a
majority of our revenues come from a limited number of large customers, the
timing of significant orders and the recognition of revenue from these orders
are unpredictable and can cause large fluctuations in quarterly operating
results. Other factors that may cause our future revenues and operating results
to fluctuate include:
. our ability to expand significantly our sales, marketing and consulting
services organizations;
. our ability to develop successfully new and enhanced products;
. the level of demand for our products;
. the timing and amount of license payments from our customers;
. the diversion of our potential customers' resources to address internal
Year 2000 issues;
. our ability to retain existing customers and increase sales to those
customers;
. the timing and volume of new orders and our capacity to fulfill those
orders;
. the level of product and price competition;
. the announcement or introduction of new or enhanced products and services
by us or our competitors;
. the amount and timing of operating costs and capital expenditures relating
to expansion of our business and sales and marketing infrastructure;
. downtime of our systems or Internet capacity or reliability problems;
. the growth in the use and acceptance of, and activity on, the Internet,
Web and Internet-related technologies, particularly by corporate,
institutional and government users for the purchase of computer products;
22
<PAGE>
. the extent to which unauthorized access and use of online information is
perceived as a threat to network security;
. seasonal trends in customer purchasing; and
. general economic conditions.
It is likely that in some future quarter our revenues and operating results will
fall below the expectations of securities analysts and investors. In that event,
the trading price of our common stock may decline significantly.
Our stock price has been, and may continue to be, extremely volatile.
The trading prices of Internet stocks in general, and ours in particular, have
experienced extreme price fluctuations in recent months. These fluctuations
often have been unrelated or disproportionate to the operating performance of
these companies. The valuations of many Internet stocks, including ours, are
extraordinarily high based on conventional valuation standards such as price to
earnings and price to sales ratios. These trading prices and valuations may not
be sustained. Any negative change in the public's perception of the prospects of
Internet or e-commerce companies could depress our stock price regardless of our
results of operations. Other broad market and industry factors may decrease the
trading price of our common stock, regardless of our operating performance.
Market fluctuations, as well as general political and economic conditions such
as recession or interest rate or currency rate fluctuations, also may decrease
the trading price of our common stock. In addition, our stock price could be
subject to wide fluctuations in response to the following factors:
. actual or anticipated variations in our quarterly operating results;
. announcements of new products, product enhancements, technological
innovations or new services by us or our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet and online commerce industries;
. changes in the market valuations of other Internet or online service
companies;
. developments in Internet regulations;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. unscheduled system downtime;
. additions or departures of key personnel; and
. sales of our common stock or other securities in the open market.
23
<PAGE>
In the past, securities class-action lawsuits have often been instituted against
companies following stock price declines. Litigation of this type, if
instituted, could result in substantial costs and a diversion of our
management's attention and resources.
We have a limited operating history, which makes our future prospects difficult
to evaluate.
We were established as a separate business unit within Trilogy in 1993. We were
incorporated and began to recognize revenue in 1994. We entered into agreements
with a majority of our significant customers since only the third quarter of
1997. Our limited operating history makes an evaluation of our future prospects
very difficult. In particular, our prospects should be compared to the prospects
of companies in new and rapidly evolving markets and must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
their early stage of development. These risks include our ability to:
. expand our sales, marketing and consulting services organizations;
. expand our customer base and retain key customers;
. successfully deploy our products and services;
. develop and introduce new products and services;
. manage growing operations; and
. respond to a rapidly changing competitive environment.
We must expand our sales, marketing and consulting organizations; we are
dependent on retaining and attracting key personnel.
In order to grow our business, we must expand significantly our sales, marketing
and consulting organizations. Our future success also depends in significant
part upon our ability to retain and attract key management and technical
personnel. Competition for qualified personnel is intense, and we have in the
past experienced difficulty in recruiting qualified personnel. The loss of key
personnel or the inability to attract and retain additional qualified personnel,
may have an adverse effect on our business and stock price.
We particularly depend on the continued services and performance of Ross A.
Cooley, our Chairman and Chief Executive Officer, and Christina C. Jones, our
President, Chief Operating Officer and founder. Mr. Cooley, in his capacity as
our Chairman and Chief Executive Officer, currently performs various executive
and leadership functions, including executive management of new customer and new
account relationship activities and recruitment of senior management personnel.
Ms. Jones, in her capacity as our President and Chief Operating Officer, is
principally responsible for managing our daily operations and developing our
strategic and operational plans. We currently do not carry key person life
insurance for either Mr. Cooley or Ms. Jones.
24
<PAGE>
Trilogy has voting control over pcOrder and may exercise that control in a
manner that adversely affects the company or other stockholders.
Trilogy currently owns approximately 81% of our outstanding common stock. This
level of ownership provides Trilogy with the voting power to determine the
outcome of almost any matter submitted for the vote or consent of our
stockholders. For example, Trilogy can elect all of our directors, cause an
amendment of our Certificate of Incorporation, Bylaws and other documents, and
generally control the management of our business and affairs. In addition, the
shares of Class B common stock held by Trilogy entitle Trilogy to eight votes,
while each share of Class A common stock held by our other stockholders entitle
the holders to only one vote per share. Accordingly, Trilogy may retain the
ability to determine the outcome of matters submitted to a vote of our
stockholders even if it holds less than a majority of our outstanding common
stock. If Trilogy sells some or all of its pcOrder common stock to a third
party, the third party may be able to control us in the manner that Trilogy is
currently able to control us, including the election of all of the members of
our board of directors. A sale by Trilogy to a third party may adversely affect
our other stockholders, the trading price of our Class A common stock and our
business.
Similarly, Trilogy can prevent, delay or cause a change in control of pcOrder.
If Trilogy transfers a controlling interest in pcOrder, our other stockholders
may not be able to participate in the transaction or realize any premium or
other amounts for their shares of common stock. Trilogy can also take other
actions that might be favorable to Trilogy but not necessarily favorable to our
other stockholders.
We rely on Trilogy for the license of core technology and the provision of key
technical and management support; any conflicts that may arise between us and
Trilogy could harm our business.
We license core technology from Trilogy on a non-exclusive basis and with some
limitations. Our business would be disrupted by any termination of the license,
or reduction in the performance of the licensed technology, that requires us to
develop internally or license similar technology from a third party. We believe
that similar technology is not currently available from any third party. If the
license from Trilogy were terminated, we might not be able to develop
successfully similar technology on our own.
We have historically relied on Trilogy to provide significant human resource,
finance, recruiting, legal and other services. Since our initial public offering
in February 1999, we have begun to develop and implement the operational,
administrative and other systems and infrastructure necessary to support our
current and future business. To date, we have not completed this process. The
costs of the development and implementation will be significant. Any failure to
develop successfully and implement the systems and infrastructure may have an
adverse effect on our business.
Ownership interests of our directors or officers in Trilogy's common stock, or
service as both a director or officer of pcOrder 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 pcOrder and Trilogy. Joseph A. Liemandt, one of our directors,
is the Chairman and Chief Executive Officer and a substantial stockholder of
Trilogy.
25
<PAGE>
An agreement between us and Trilogy that prohibited Trilogy from competing with
us expired on June 1, 1999. While Trilogy does not currently compete directly
with us, Trilogy is free to do so. Direct competition with Trilogy could have an
adverse effect on our business. Further, Trilogy has joint ownership rights in
technology jointly developed by pcOrder and Trilogy during the term of our
license arrangement with Trilogy and also have access to technology that we
develop for the computer industry. Trilogy can utilize the technology in
competition with us or license the technology to our competitors or potential
customers, which could have an adverse effect on our business.
System failures could harm our business.
Our success depends largely upon the efficient and uninterrupted operation of
our computer and communication systems. The occurrence of any system failure or
similar event could have an adverse effect on our business. We have contracted
with some of our customers to provide server hosting and to maintain redundant
leased lines to ensure system availability. Our development and management
systems are located at a facility that we lease in Austin, Texas. In addition to
that facility, we outsource the hosting of some of our servers to third parties.
Our systems and operations, whether at our site or through our third-party
outsourcing, are vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, break-ins and similar events. The measures we
have taken to prevent a system failure may not be successful in the future. In
addition, we do not have a formal disaster recovery plan and do not carry
sufficient business interruption insurance to compensate us for losses that may
occur as a result of any system failure.
Our business is dependent on the further development and maintenance of the Web
infrastructure.
The emergence and growth of the market for our products is dependent on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion. These improvements might not be made or, if made,
they might not be made in a sufficiently timely and cost-effective manner to
facilitate market acceptance of our products. The recent growth in the use of
the Internet has caused frequent periods of performance degradation. Any
perceived degradation in the performance of the Internet as a whole could
undermine the benefits of our products. Our ability to increase the speed with
which we provide services to customers and to increase the scope of these
services ultimately is limited by, and reliant upon, the speed and reliability
of the networks operated by third parties.
There are many risks associated with international operations.
Although we have had limited sales outside of the U.S. and Canada, we expect to
increase our sales in international markets. To expand international sales, we
must establish additional foreign operations, build strategic relationships and
hire additional personnel. This expansion will require significant management
attention and financial resources and could have an adverse effect on our
business. In addition, we may be unable to maintain or increase international
market demand for our products and services. Although our international sales
are primarily denominated in U.S. dollars, we may incur an increasing percentage
of obligations denominated in foreign currencies in the future. A change in the
value of the U.S. dollar relative to foreign currencies could make our products
more expensive and, therefore, potentially less competitive in those markets and
could
26
<PAGE>
otherwise adversely affect our ability to meet our foreign-currency-denominated
obligations. Currently, we do not employ currency hedging strategies to reduce
this risk. Our international business may be subject to additional risks,
including the following:
. difficulties in collecting international accounts receivable;
. difficulties in obtaining 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.
We may encounter difficulties and unanticipated costs and liabilities in
acquiring and effectively integrating assets and businesses from third parties.
As part of our business strategy, we may acquire assets and businesses
principally relating to or complementary to our current operations. Any
acquisitions that we undertake will be accompanied by the risks commonly
encountered in business acquisitions. These risks include, among other things:
. potential exposure to unknown liabilities of acquired companies;
. the difficulty and expense of assimilating the operations and personnel of
acquired businesses;
. diversion of management time and attention and other resources;
. loss of key employees and customers as a result of changes in management;
. the incurrence of amortization expenses; and
. possible dilution to our stockholders.
In addition, geographic distances may make the integration of businesses more
difficult. We may not be successful in overcoming these risks or any other
problems encountered in connection with any acquisitions. As of the date of this
prospectus, we have no agreements or understandings regarding any future
acquisitions.
We may be unable to adequately protect or enforce our intellectual property
rights; we may infringe the intellectual property rights of third parties.
Our efforts to protect our intellectual property rights through copyright,
trademark, patent and trade secret laws may not be effective to prevent
misappropriation or infringement of our rights or create barriers to the
development of competitive products or services. Our success depends in part on
our
27
<PAGE>
ability to protect our proprietary software and other intellectual property. To
protect our proprietary rights, we rely generally on copyright, trademark,
patent and trade secret laws, confidentiality agreements with employees and
third parties and license agreements with consultants, vendors and customers.
However, we have not signed those agreements in every case. Despite those
protections, a third party could, without authorization, copy or otherwise
obtain and use our products or technology, or develop similar technology. Our
agreements with employees, consultants and others who participate in product
development activities may be breached, we may not have adequate remedies for
any breach, and our software or trade secrets may otherwise become known or
independently developed by competitors.
Many of our 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, we would need to either obtain a license or design around the patent.
There can be no assurance that we would be able to obtain a license on
acceptable terms, if at all, or to design around the patent. We pursue the
registration of some of our trademarks and service marks in the U.S. and in some
other countries, although we have not secured registration of all of our marks.
In addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as do the laws of the U.S. Effective copyright,
trademark and trade secret protection may not be available in those
jurisdictions. We license some of our proprietary rights to third parties. Those
licensees may not abide by compliance and quality control guidelines regarding
proprietary rights and the licensees may take actions that would adversely
affect our business.
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, we may need to pursue litigation to enforce and protect our intellectual
property rights or to defend against a claim of infringement or
misappropriation. We attempt to avoid infringing known proprietary rights of
third parties in our product development efforts. However, we have not conducted
and do not intend to conduct comprehensive patent searches to determine whether
the technology used in our 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, which generally are confidential when filed. Any claims against us
relating to the infringement or misappropriation of third-party proprietary
rights, even if not meritorious, could result in the expenditure of significant
financial and managerial resources and in injunctions preventing us from
distributing some products.
Our business substantially depends on the continued growth of e-commerce.
If the Internet as a commercial or business medium fails to develop or develops
more slowly than expected, our business would be adversely affected. The
increased use of the Internet for retrieving, sharing and transferring
information among computer industry participants has only recently developed.
Our success will depend in large part on continued growth in, and the use of,
the Internet for commerce, which depends on:
. growth in commercial access to, and acceptance of, new interactive
technologies;
. development of technologies that facilitate interactive communication
between organizations and targeted audiences; and
28
<PAGE>
. increases in user bandwidth.
Critical issues about commercial use of the Internet are unresolved, including
security, reliability, cost, ease of access, quality of service and necessary
increases in bandwidth availability. These issues are likely to affect the
development of the market for our products and services. The adoption of the
Internet for information retrieval and exchange, commerce and communications
generally will require the acceptance of a new and evolving medium of conducting
business and exchanging information. That acceptance is likely only if the
Internet provides greater efficiency and an improved arena of commerce and
communication.
Our failure to manage growth and enhance our organizational structure could
impair our business.
Our growth and new projects have placed significant demands on our management
and other resources. Our revenues increased from $5.9 million in 1996 to $29.6
million for the nine months ended September 30, 1999. Our staff increased from
one employee in June 1994 to 219 employees at September 30, 1999. This growth
has resulted in, and can be expected to continue to require, substantial
expansion of our infrastructure, including operating and financial systems and
controls and the geographic scope of our operations and customers. Recent rapid
growth has also resulted in new and increased responsibilities for management
personnel. The growth has placed and, if it continues, is expected to continue
to place, a significant strain on our management and operations. In addition, we
have historically relied on Trilogy to provide some human resource, finance,
recruiting, legal and other services. We are in the process of assuming
responsibility for many of those services. If we are unable to develop the
personnel and infrastructure necessary to manage an increased level of business
and operations, our financial performance and stock price may be adversely
affected.
We may experience unanticipated expenses and other problems related to Year 2000
issues.
Year 2000 problems are caused by computer systems that only use a two-digit year
value and, accordingly, will be subject to error or failure when the Year 2000
arrives. We have conducted evaluations to assess whether our business and our
products present Year 2000 risks as described under "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Year 2000
Compliance." However, the Year 2000 problem is pervasive and complex and there
is a risk that we have not identified all of the Year 2000 issues that may
affect us or that any remedial efforts we undertake will not adequately address
identified Year 2000 problems. We have made limited contingency plans for the
remediation of Year 2000 problems that may affect our information technology
systems and products, or the third-party equipment and software utilized by us.
Any significant Year 2000 problem that may arise in our business or in our
products, including products we license from Trilogy, may result in a disruption
in our business, require us to make large, unplanned expenditures or cause us to
lose customers.
Our business will suffer if our products contain errors or defects.
Our products may contain undetected errors or defects when first introduced or
as new versions are released. Our 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. We have in the past experienced
difficulties and delays in successfully installing our products at some customer
sites. Similar problems may
29
<PAGE>
occur in the future. We have recently transitioned our product architecture to a
more modular and flexible design. New customers may experience performance
problems with this new technology platform, whether in the form of bugs,
compatibility difficulties or otherwise. In addition, our existing customers
could experience problems in transitioning to our new technology platform. If we
fail to properly manage the transition by our existing customers to our new
technology platform, we could see cancellation of customer contracts, a decline
in our competitive position or reduced or delayed sales of our products. In
addition, defects or errors in our products may result in product liability
claims being brought against us. We currently have only limited insurance
coverage against product liability claims. We may be unable to renew our
insurance in the future and any insurance we have may be inadequate to cover any
claims brought against us.
We may be unable to meet our future capital requirements.
We need substantial working capital to fund our business. Although we currently
believe that our existing capital resources will be sufficient to meet our
presently anticipated cash requirements for at least the next 12 months, we may
need to raise additional financing before that time. We cannot be sure that
additional financing will be available to us on favorable terms when required,
or at all. If additional funds are raised through the issuance of equity
securities, our stockholders may experience significant dilution. In addition,
financing may not be available when needed or may not be available on acceptable
terms. If financing is not available when required or is not available on
acceptable terms, we may be unable to expand our sales and marketing
organization, develop new products and product enhancements, or take advantage
of business opportunities or respond to competitive pressures.
Future sales of common stock by Trilogy or insiders could adversely affect our
stock price.
Sales by Trilogy or our officers and directors of significant amounts of common
stock in the public market or the perception that these sales could occur, could
adversely affect our stock price. Trilogy has registration rights for its shares
of common stock, which rights could facilitate any future disposition.
Investors' ability to trade our common stock may be limited by trading volume
The trading volume in our common stock has been limited which may inhibit the
ability of stockholders to sell shares in pcOrder and of potential investors to
buy a stake in pcOrder.
30
<PAGE>
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
In January 1999, the Company filed an action for declaratory judgement in the
345th Judicial District Court of Travis County, Texas, Case No. 99-00787 against
its former Vice President, Sales from July 1998 to December 1998, seeking to
have certain claims for sales commissions and stock grants determined to be
invalid. In April 1999, the defendant in the Company's action filed a
counterclaim 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 alleged failure of the Company to pay certain
commissions and stock grants, among other matters. In September 1999, the
Company settled this lawsuit with the former employee. The settlement did not
have a material effect on the Company's financial condition or results of
operations.
Item 2. Changes in Securities
The Company's registration statement (Registration No. 333-62985) under the
Securities Act of 1933, as amended, for its initial public offering became
effective on February 26, 1999. Offering proceeds, net of aggregate expenses to
the Company of approximately $2.2 million, were approximately $47.2 million.
The Company has used a portion of the proceeds for the repayment of $5.4
million in indebtedness to its parent company. The remainder of the net
proceeds has been used to purchase temporary investments primarily consisting of
cash and cash equivalents and short-term investments.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
---------
The Exhibit Index attached hereto is hereby incorporated by reference
to this Item.
(b) Reports on Form 8-K:
--------------------
The Company did not file any reports on Form 8-K during the three
months ended September 30, 1999.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PCORDER.COM, INC.
Date: November 12, 1999 /s/ JAMES J. LUTTENBACHER
-------------------------------------
Name: James J. Luttenbacher
Title: Vice President and Chief Financial
Officer
32
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
- -------------- ----------------------------------------------------------
27 Financial Data Schedule
33
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED BALANCE SHEET (UNAUDITED) AS OF SEPTEMBER 30, 1999 AND
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 44,580
<SECURITIES> 18,565
<RECEIVABLES> 10,540
<ALLOWANCES> 500
<INVENTORY> 0
<CURRENT-ASSETS> 74,332
<PP&E> 6,196
<DEPRECIATION> 3,467
<TOTAL-ASSETS> 77,121
<CURRENT-LIABILITIES> 41,168
<BONDS> 0
0
0
<COMMON> 157
<OTHER-SE> 34,363
<TOTAL-LIABILITY-AND-EQUITY> 77,121
<SALES> 29,625
<TOTAL-REVENUES> 29,625
<CGS> 14,876
<TOTAL-COSTS> 14,876
<OTHER-EXPENSES> 23,072
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,718)
<INCOME-TAX> (243)
<INCOME-CONTINUING> (6,475)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,475)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
