<PAGE>
Filed pursuant to Rule 424(b)4
Registration No. 333-62985
2,200,000 Shares
pcOrder.com, Inc.
[pcOrder.com, Inc. LOGO]
Class A Common Stock
(par value $0.01 per share)
----------------
All of the 2,200,000 shares of Class A Common Stock offered hereby are being
sold by pcOrder.com, Inc. ("pcOrder" or the "Company"). Prior to this
offering, there has been no public market for the Class A Common Stock of the
Company. For factors to be considered in determining the initial public
offering price, see "Underwriting".
The underwriters have made available up to 200,000 shares of Class A Common
Stock for sale at the initial public offering price to employees of the
Company and certain other purchasers.
See "Risk Factors" beginning on page 8 for certain considerations relevant
to an investment in the Class A Common Stock.
The shares of Class A Common Stock have been approved for quotation on the
Nasdaq National Market under the symbol "PCOR".
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
<TABLE>
<CAPTION>
Initial Public Underwriting Proceeds to
Offering Price Discount(1) Company(2)
-------------- ------------ -----------
<S> <C> <C> <C>
Per Share............................... $21.00 $1.47 $19.53
Total(3)................................ $46,200,000 $3,234,000 $42,966,000
</TABLE>
- --------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(2) Before deducting estimated expenses of $1,200,000 payable by the Company.
(3) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional 330,000 shares at the initial public offering price
per share, less the underwriting discount, solely to cover over-
allotments, if any. If such option is exercised in full, the total initial
public offering price, underwriting discount and proceeds to Company will
be $53,130,000, $3,719,100 and $49,410,900, respectively. See
"Underwriting".
----------------
The shares offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that
certificates for the shares will be ready for delivery in New York, New York,
on or about March 3, 1999, against payment therefor in immediately available
funds.
Goldman, Sachs & Co.
Credit Suisse First Boston
SG Cowen
----------------
The date of this Prospectus is February 25, 1999.
<PAGE>
Inside Front Cover
Heading: Company logo
Subheading:"Moving the Computer Industry to the Web".
Graphic: Graphic illustrating computers connecting manufacturers,
distributors, corporate buyers and resellers/retailers.
Centered heading of Graphic: "powered by pcOrder.Com"
Graphic subheading: "pcOrder Is a Leading Provider of Internet-Based E-
Commerce Solutions that Enable the Computer Industry's Suppliers, Resellers
and End-Users to Buy and Sell Computer Products Online".
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS
IN SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH
THE OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
<PAGE>
Gatefold
Heading: "pcOrder.com Moving the Computer Industry to the Web"
Subheadings: "Software-Content-Community"
Software Graphic: Computer Screen illustrating product searches
Software Graphic Subheading: "Comprehensive E-Commerce
Software Solutions"
Software Graphic Text: "pcOrder's applications are designed
to allow computer industry participants to automate product
searches, comparisons, configurations, pricing, financing
and ordering. The Company believes that the flexibility of
pcOrder's applications enables computer industry companies
to build innovative e-commerce strategies."
Content Graphic: Computer screen illustrating utilization of pcOrder's content
database
Content Graphic Subheading: "Extensive Database of Computer
Product Information"
Content Graphic Text: "pcOrder's content database aggregates
product pricing and availability data for more than 600,000
product SKUs from over 1,000 manufacturers, including
compatibility and technical information. This standardized
data makes it easy to buy and sell customized computer
products online.
Community Graphic: Illustration of computers moving on a conveyor belt from
manufacturer to retail outlet. Includes Company logo
Community Graphic Subheading: "E-Commerce Community"
Community Graphic Text: "pcOrder's e-commerce solutions are
designed to connect the entire computer industry supply
chain, increasing efficiency and enabling new business
models. The Company believes that the value of the e-
commerce network grows with each computer industry member
linked to pcOrder's solution."
Graphic: Graphic illustrating computers connecting manufacturers,
distributors, corporate buyers and resellers/retailers.
Centered heading of Graphic: "powered by pcOrder.com."
Text: "pcOrder's E-commerce Solutions are Designed to Enable:
* Online Ordering and Sales
* Build to Order and Channel Assembly Strategies
* Efficient Inventory Management
* Industry Data Standardization
Heading: "Adoption by Market Leaders"
Logos of the following customers: CompUSA Inc., Hewlett-
Packard Company, Kingston Technology Corporation, CompuCom
Systems, Inc., Pinacor, Inc., GE Capital Corp., Nortel
Networks Inc., Tech Data Corporation, MicroAge Integration
Company, CMP Publications Inc., Comark Inc., PC Wholesale
and Ingram Micro Inc.
Text: "Other customers include Compaq Computer Corporation, IBM
Corporation, MCI Systemhouse Corporation and General
Electric Capital Information Technology Services."
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and the Financial Statements and
Notes thereto appearing elsewhere in this Prospectus, including information
under "Risk Factors". As used herein, "Trilogy" refers to Trilogy Software,
Inc. and its predecessor entities, including Trilogy Development Group, Inc. As
used herein, "Trilogy Options" refers to options to purchase an aggregate of
155,000 shares (the "Trilogy Option Shares") of the Company's Class A Common
Stock granted as of February 25, 1999 by Trilogy to certain of its employees,
which shares of Class A Common Stock underlying the Trilogy Options are
issuable to Trilogy upon conversion by Trilogy of the shares of Class B Common
Stock held by Trilogy. The Trilogy Options do not become exercisable prior to
180 days after the date of this Prospectus. Except as otherwise noted, all
information in this Prospectus, including share and per share information,
assumes no exercise of the Underwriters' over-allotment option, assumes the
reclassification of all outstanding shares of Common Stock held by Trilogy into
Class B Common Stock and all other shares of Common Stock issued and
outstanding or issuable pursuant to previously granted options into Class A
Common Stock, which became effective on February 2, 1999, and assumes no
exercise of the Trilogy Options. See "Description of Capital Stock" and
"Underwriting".
The Company
pcOrder is a leading provider of Internet-based electronic commerce solutions
that enable the computer industry's suppliers, resellers and end users to buy
and sell computer products online. The Company's solutions are designed to
increase the efficiency and effectiveness of the sales, marketing and
distribution of computer products and to enable members of the industry to take
advantage of the increasing adoption of e-commerce. Forrester Research, Inc.
estimates that the business-to-business e-commerce market will grow from $43
billion in 1998 to $1.3 trillion by 2003. In addition, Forrester believes that
computer products (including wholesale and retail equipment, software,
semiconductors and manufacturing) is the largest and fastest growing segment,
by revenue, in business-to-business e-commerce.
The Company's comprehensive offering consists of software applications and
content databases which enable industry participants to buy and sell computer
products online by increasing the automation of product search, comparison,
configuration, pricing, financing, ordering and reseller selection. The Company
believes that it is uniquely positioned to deliver these solutions through its:
(i) ability to offer a broad set of advanced front-office and e-commerce
software applications, including configuration and pricing; (ii) position as a
leading content provider of computer product and compatibility information; and
(iii) experience in delivering industry-specific functionality and integrations
into business systems of computer industry participants.
The Company's solutions have been adopted by market leaders including Compaq
Computer Corporation, CompuCom Systems, Inc., CompUSA Inc., CMP Publications
Inc., GE Capital Corp., Hewlett-Packard Company, Ingram Micro Inc.,
International Business Machines Corporation, Kingston Technology Corporation,
MCI Systemhouse Corp., MicroAge Integration Company, Nortel Networks Inc., PC
Wholesale, Pinacor, Inc. and Tech Data Corporation. In 1998, over $3 billion of
quotes for computer products had been generated using the Company's solutions,
representing use by more than 3,500 sales representatives from over 500
resellers. Since 1996, the Company's revenues have grown from $5.9 million to
$21.7 million in 1998.
The Internet and Internet-related technologies are revolutionizing the way
businesses and consumers communicate, share information and conduct business.
Businesses are increasingly
3
<PAGE>
replacing paper-based transactions and communications with e-commerce solutions
in an effort to reduce costs, decrease inventories and shorten time-to-market.
The Company believes that the computer industry is particularly well-suited to
the use of Internet-enabled e-commerce solutions due to the large size and
fragmented nature of the industry, its high costs of sales and distribution,
and its propensity to embrace technology for automating processes. In addition,
rapid technological change has resulted in the continuing decline of component
prices and shorter life cycles of computer products. Such pressures have
heightened the importance for industry participants to employ build-to-order
and configure-to-order models in order to reduce inventories, improve the
ability to gauge and meet changing customer demands, and shorten time-to-market
by enabling just-in-time component acquisition. The Company believes that a key
capability required to address these needs is real-time access to information,
providing seamless configuration and pricing at the point-of-sale.
The Company believes that there is a significant need for an independent,
industry-wide solution to enable the buying and selling of computer products
online. The Company leverages Internet technologies to provide comprehensive e-
commerce solutions designed to increase sales and marketing productivity, meet
end-user demand for online ordering, reduce costs and shorten order fulfillment
cycles for industry participants. The Company's solutions include software
applications that are designed to increase the automation of product search,
comparison, configuration, pricing, financing and ordering, combined with what
the Company believes is the industry's largest content database consisting of
detailed product, categorization, compatibility, pricing and availability
information on more than 600,000 product SKUs from over 1,000 manufacturers.
The Company is a party to a technology license agreement with its parent
company, Trilogy, which provides pcOrder with the ability to leverage Trilogy's
front-office and e-commerce software applications, including one of the
industry's leading configuration and pricing engines. The Company has extended
these applications to support the specific configuration and pricing rules of
the computer industry in order to help industry sales representatives and end
users quickly and accurately build custom-configured systems across multiple
vendors.
In addition to its development of software applications and content
databases, the Company has integrated its software with the systems of leading
industry suppliers for such functions as order placement, pricing, inventory
and order status queries, financing and credit approval. Through these
integrations, pcOrder's customers can establish or enhance electronic links
with their business partners. Furthermore, the Company provides software
integration, customization, training and Web hosting services designed to
ensure the successful deployment of its solutions.
The Company believes that its position as an independent third-party
provider, combined with its industry focus and experience, has enabled it to
build product functionality, content and supplier integrations that address the
diverse requirements of manufacturers, distributors, resellers, retailers,
other industry participants and end users, including corporate buyers and
consumers. Accordingly, the Company believes that it is able to offer more
cost-effective and rapid time-to-market solutions for e-commerce than the
proprietary development efforts of industry participants. To the extent that
the Company continues to develop and enhance its software applications, content
databases and supplier integrations, pcOrder believes that the incentive for
companies to outsource these e-commerce services to the Company will increase.
Strategy
The Company's objective is to be the leading e-commerce technology and
content provider to the computer industry. The key elements of the Company's
strategy are as follows:
. Leverage Internet technologies to provide communication capability and
support complex transactions across a range of computer industry
participants;
4
<PAGE>
. Broaden adoption of the Company's e-commerce solutions through
relationships with computer industry market leaders;
. Extend the Company's position as an industry-leading source of product
information;
. Leverage the Company's position as an independent third-party solutions
provider to achieve broad market adoption; and
. Expand software applications functionality to increase automation of the
sales, marketing, and channel management functions of the industry.
Relationship with Trilogy
The Company was established as a separate business unit within Trilogy, its
parent corporation, on July 1, 1993, and was incorporated under the laws of
Delaware on July 18, 1994. The Company believes Trilogy is a leading provider
of sales, marketing and business-to-business e-commerce applications. Trilogy's
software solutions are designed to integrate each function in a company's sales
and marketing operation, including pricing management, product management,
sales, commissions, promotions, contract management and channel management. In
addition, Trilogy's software solutions are designed to enable companies to
engage in e-commerce as well as improve channel management processes. The
Company has customized the technology it licenses from Trilogy to create
solutions targeted at the computer industry. In addition, pcOrder's solutions
provide customers with configuration logic that is used to configure systems,
and provide customers with pricing and availability information on over 600,000
product SKUs from over 1,000 manufacturers.
The Company has a non-exclusive, worldwide, royalty-bearing license to
certain of Trilogy's front office automation software. The Company and Trilogy
have entered into a Technology, Services and License Agreement, a Management
Services Agreement and a Tax Allocation Agreement (the "Inter-Company
Agreements") which define the ongoing relationship between the two companies.
The Company believes that Trilogy does not currently compete directly with the
Company. However, Trilogy may in the future compete directly or indirectly with
the Company. For a description of the terms of the Inter-Company Agreements,
see "Relationship with Trilogy".
Following this offering, Trilogy will own 12,757,000 shares of Class B Common
Stock of the Company, representing approximately 84.0% of the outstanding
Common Stock of the Company (approximately 82.3% if the Underwriters' over-
allotment option is exercised in full) and approximately 97.7% of the total
voting power of the Common Stock. Except with respect to the Trilogy Options,
Trilogy has informed the Company that it does not intend to sell any of its
shares in the near future. However, other than an agreement not to sell any
shares for 180 days after the date of this Prospectus without the prior consent
of Goldman, Sachs & Co., Trilogy is not contractually restricted from selling
such shares.
The Company's principal executive offices are located at 5000 Plaza on the
Lake, Austin, Texas 78746. Its telephone number at that location is (512) 684-
1100.
pcOrder(R), pcOrder.com(R), pcOrder Labs(TM), CommerceStation(TM), VIPER(TM),
Channel Assembly Module(TM), Web Storefront(TM), Sales Desktop(TM), Customer
Desktop(TM), TechBuyer(TM), TechBuyer Customer Desktop(TM) and "Moving the
Computer Industry to the Web"(TM) are registered and unregistered trademarks,
service marks and trade names of the Company. This Prospectus also contains
trademarks, service marks and trade names other than those identified in this
paragraph, all of which are the property of their respective holders.
Information contained in the Company's Web site does not constitute a part of
this Prospectus.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Class A Common Stock offered
by the Company.............. 2,200,000 shares
Common Stock to be
outstanding after this
offering:
Class A Common Stock........ 2,391,602 shares(1)
Class B Common Stock........ 12,757,000 shares
Total Common Stock.......... 15,148,602 shares(1)
Relative rights of Class A
Common Stock and Class B The Class A Common Stock and Class B Common
Common Stock................ Stock have substantially identical rights other
than with respect to voting, conversion and
transfer. Except as otherwise required by the
Company's Certificate of Incorporation or
applicable law, the Class B Common Stock
entitles its holders to eight votes per share
while the Class A Common Stock entitles its
holders to one vote per share on all matters
submitted to a vote or for the consent of
stockholders. Except as otherwise required by
the Company's Certificate of Incorporation or
applicable law, the Class A Common Stock and
Class B Common Stock will vote together as a
single class on all matters submitted to a vote
or for the consent of stockholders. As of the
date of this Prospectus, Trilogy holds all of
the Company's outstanding shares of Class B
Common Stock. Prior to a distribution described
in Section 355 of the Internal Revenue Code by
Trilogy of its shares of Class B Common Stock (a
"tax free spin-off"), the shares of Class B
Common Stock are convertible at any time at the
option of the holder into shares of Class A
Common Stock on a one-for-one basis. Prior to a
tax free spin-off, each outstanding share of
Class B Common Stock will automatically be
converted into one share of Class A Common Stock
upon any transfer of such share, if after the
transfer such share is not owned by Trilogy,
Trilogy, Inc. (Trilogy's parent), an affiliate
of Trilogy, Inc. or a non-affiliate of Trilogy,
Inc. which acquires more than 50% of the then
outstanding Class B Common Stock in a single
transaction. Upon a transfer of more than 50% of
the then outstanding Class B Common Stock held
by Trilogy to a non-affiliate in a single
transaction, any remaining shares of Class B
Common Stock held by Trilogy, Trilogy, Inc. or
an affiliate of Trilogy, Inc., shall
automatically be converted into an equal number
of shares of Class A Common Stock. In addition,
subject to certain conditions, each outstanding
share of Class B Common Stock will automatically
be converted into one share of Class A Common
Stock upon the fifth anniversary of the first
transfer of Class B Common Stock in a tax free
spin-off. However, after the tax free spin-off
and prior to such fifth anniversary, shares of
Class B Common Stock will not be convertible
into shares of Class A Common Stock, with the
exception of any shares of Class B Common Stock
held by Trilogy, Trilogy, Inc. or an affiliate
of Trilogy, Inc., which shares shall
automatically convert into an equal number of
shares of Class A Common Stock upon the tax free
spin-off. See "Description of Capital Stock".
Controlling stockholders..... Prior to this offering Trilogy owns 12,757,000
shares of Class B Common Stock or 98.3% of the
total outstanding Common Stock, representing
approximately 99.8% of the total voting power of
the Common Stock. After this offering, Trilogy's
ownership of the Class B Common Stock will
represent approximately 84.0% of the total
outstanding Common Stock and approximately 97.7%
of the total voting power of the Common Stock.
See "Risk Factors--Control by and Relationship
with Trilogy", "--Risks Associated with
Dependence on Trilogy; Limited Independent
Operating History; Potential Conflicts of
Interest", "--Possible Future Sales of Common
Stock by Trilogy" and "Principal Stockholders".
Use of proceeds.............. For general corporate purposes, including
capital expenditures and working capital. See
"Use of Proceeds".
Nasdaq National Market
symbol...................... "PCOR"
</TABLE>
- --------
(1) Based on the number of shares outstanding as of December 31, 1998. Excludes
(i) 3,207,074 shares of Class A Common Stock issuable upon the exercise of
outstanding stock options under the Company's 1996 Stock Option Plan (the
"1996 Option Plan") at a weighted average exercise price of $4.00 per share
and (ii) an additional 144,324 shares of Class A Common Stock reserved for
future grant under the 1996 Option Plan. Also excludes the right under the
terms of an applications subscription agreement to require the Company to
grant to a customer an option to purchase up to 320,000 shares of Class A
Common Stock if one of specified certain events occurs, including an
initial public offering. As of December 31, 1998, no specified event had
occurred and the option was not outstanding. See "Management--1996 Stock
Option Plan", "--Agreement Regarding Grant of Options" and Note 8 of Notes
to Financial Statements.
6
<PAGE>
Summary Financial Data
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
Statement of Operations Data: -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues:
Software and subscriptions...... $ -- $ 1,836 $ 3,633 $ 6,475 $ 12,651
Content and services............ 515 1,887 2,249 4,114 9,063
-------- -------- -------- -------- --------
Total revenues................ 515 3,723 5,882 10,589 21,714
-------- -------- -------- -------- --------
Cost of revenues:
Software and subscriptions...... 148 818 822 1,023 3,242
Content and services............ 390 953 1,112 2,553 7,068
-------- -------- -------- -------- --------
Total cost of revenues........ 538 1,771 1,934 3,576 10,310
-------- -------- -------- -------- --------
Gross profit (loss).............. (23) 1,952 3,948 7,013 11,404
Operating expenses:
Research and development........ 106 660 1,168 1,129 4,292
Selling and marketing........... 72 577 2,555 4,793 12,151
General and administrative...... -- 116 726 1,792 3,689
Amortization of deferred stock
and stock compensation expense. -- -- -- -- 1,468
-------- -------- -------- -------- --------
Total operating expenses...... 178 1,353 4,449 7,714 21,600
-------- -------- -------- -------- --------
Operating income (loss).......... (201) 599 (501) (701) (10,196)
Interest income.................. -- -- -- -- 172
-------- -------- -------- -------- --------
Income (loss) before income
taxes........................... (201) 599 (501) (701) (10,024)
Income tax provision
(benefit)(1).................... (68) 207 (191) 427 (386)
-------- -------- -------- -------- --------
Net income (loss)(1)............. $ (133) $ 392 $ (310) $ (1,128) $ (9,638)
======== ======== ======== ======== ========
Basic and diluted net income
(loss) per share(1)............. $ (0.10) $ 0.03 $ (0.02) $ (0.09) $ (0.75)
======== ======== ======== ======== ========
Weighted average shares
outstanding..................... 1,280 12,800 12,800 12,800 12,861
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------------
Actual As Adjusted(2)
------- --------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................... $ 4,726 $46,908
Working capital (deficit)(3)............................ (9,045) 33,386
Total assets............................................ 12,254 53,771
Stockholders' equity (deficit).......................... (8,545) 33,221
</TABLE>
- --------
(1) The unaudited pro forma income tax benefit, unaudited pro forma net loss
and unaudited pro forma basic and diluted net loss per share for the year
ended December 31, 1998 computed as if the Company filed a separate income
tax return is $292,000, $9,732,000 and $.76 per share, respectively.
(2) Adjusted to give effect to the receipt by the Company of the net proceeds
from the sale of the 2,200,000 shares of Class A Common Stock offered by
the Company hereby. See "Use of Proceeds" and "Capitalization".
(3) Working capital (deficit) at December 31, 1998 includes the effect of
deferred revenue of $10,428,000.
Risk of Reliance on Recent Publicity
The November 30, 1998 issue of Forbes magazine contains an article regarding
the Company. The Forbes article included statements resulting directly or
indirectly from interviews with Ross A. Cooley and Christina C. Jones, the
Company's Chief Executive Officer and President, respectively, with
representatives of Forbes magazine. The statements in the Forbes article were
not intended to be relied upon by potential investors in making an investment
decision to purchase the Class A Common Stock offered hereby. Furthermore, the
Company disclaims all the information contained in the Forbes article for
purposes of this offering, and prospective investors should not rely on such
information or any other information not contained in this Prospectus in making
an investment decision to purchase the Class A Common Stock offered hereby. For
a more detailed discussion of the Forbes article, see "Risk Factors--Risk of
Reliance on Recent Publicity".
7
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, prospective
purchasers of the Class A Common Stock offered hereby should carefully
consider the following factors in evaluating the Company and its business.
This Prospectus contains certain forward-looking statements. These statements
involve risks and uncertainties, and actual results could differ materially
from the results discussed in the forward-looking statements as a result of
certain of the risk factors set forth below and for the reasons described
elsewhere in this Prospectus. All forward-looking statements and reasons why
results may differ included in this Prospectus are made as of the date hereof,
and the Company assumes no obligation to update any such forward-looking
statement or reasons why actual results might differ.
Limited Operating History; History of Losses and Anticipated Continuing
Operating Losses
The Company was established as a separate business unit within Trilogy on
July 1, 1993, was incorporated on July 18, 1994 and began to recognize revenue
in April 1994. A majority of the Company's significant customers entered into
their agreements with the Company only since the third quarter of 1997.
Accordingly, the Company has only a limited operating history upon which an
evaluation of the Company and its prospects can be based and is subject to all
of the risks inherent in the establishment of a new business enterprise. The
Company's prospects must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in their early stage of
development, particularly companies in new and rapidly evolving markets such
as the markets addressed by the Company. To address these risks, the Company
must, among other things, manage its growth, significantly expand its sales
and marketing organization, successfully develop new products and product
enhancements, achieve market acceptance of its products and services and
respond to competitive developments. There can be no assurance that the
Company will be successful in addressing these risks, that the Company's past
revenue growth will continue in the future or that the Company will achieve
profitability in the future or, if achieved, that the Company will maintain
profitability on a quarterly or annual basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Except for a small operating profit in 1995, the Company has incurred annual
losses from operations since its inception on July 1, 1993, and the Company
expects to continue to incur losses from operations on both a quarterly and an
annual basis for the foreseeable future. At December 31, 1998, the Company had
an accumulated deficit of $11.0 million. The Company believes that its future
profitability and success, if any, will depend in large part on, among other
things, its ability to maintain and expand relationships with computer
products manufacturers, distributors, resellers, retailers, other industry
participants and end-users, including corporate buyers and consumers, and its
ability to successfully enter into new relationships with such participants.
To date, the Company has achieved only limited penetration of its current
customers. A key element of the Company's strategy is to increase its
penetration of existing customer accounts through the sale of its products and
services that offer greater functionality and have higher revenue potential.
In order to implement this strategy, the Company intends to significantly
expand its sales and marketing organization, which will require substantial
financial, personnel and management expenditures. In the event that these or
other initiatives undertaken by the Company do not result in significantly
increased revenues, the Company's business, financial condition and results of
operations would be materially and adversely affected. The Company's business
is still in an emerging stage, and revenue and income potential from the
Company's business is unproven, making an evaluation of the Company and its
prospects difficult. There can be no assurance that the Company's revenues
will increase or even continue at their current levels or that the Company
will achieve or maintain profitability or generate cash from operations in
future periods. See "--Significant Fluctuations in Future Operating Results",
"--Risks Associated with Emerging Market for E-Commerce; Unproven Business
Model" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
8
<PAGE>
Significant Fluctuations in Future Operating Results
The Company's revenues and operating results have in the past fluctuated
significantly and are expected to fluctuate significantly in the future due to
a combination of factors, many of which are outside of the Company's control.
Factors that may materially and adversely affect the Company's future revenues
and operating results include, but are not limited to, the Company's ability
to significantly expand its sales and marketing organization, the Company's
ability to successfully develop new and enhanced products, the Company's
ability to manage its growth, the level of demand for the Company's products,
the timing and amount of license payments from the Company's customers, the
Company's ability to retain existing customers and increase sales to such
customers, the timing and volume of new orders and the Company's capacity to
fulfill such orders, the Company's ability to maintain or increase current
rates of sales productivity, the level of product and price competition, the
announcement or introduction of new or enhanced products and services by the
Company or its competitors, the Company's ability to upgrade and develop its
internal control systems, the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business and sales and
marketing infrastructure, downtime of the Company's systems or Internet
capacity or reliability problems, risks associated with the Company's
relationship with Trilogy, the Company's ability to attract and retain key
technical, sales and managerial personnel, the growth in the use and
acceptance of, and activity on, the Internet, World Wide Web ("Web") and
Internet-related technologies, particularly by corporate, institutional and
government users for the purchase of computer products, the extent to which
unauthorized access and use of online information is perceived as a threat to
network security, customer budgets, seasonal trends in customer purchasing and
general economic conditions. In response to competitive pressures or new
product introductions, the Company may take certain pricing or marketing
actions that could materially and adversely affect the Company's operating
results. In addition, the timing and amount of revenues associated with
particular sales can vary significantly based upon (i) the number of products
that are accessed and the number of authorized users, and (ii) whether the
fees are perpetual or subscription-based. The Company has in the past
recognized, and may in the future be required to recognize, a significant
portion of revenue derived from license agreements with its customers in a
single fiscal quarter, which can cause significant variations in quarterly
revenues. Moreover, small delays in customer orders can cause significant
variability in the Company's revenues and results of operations for any
particular period. As a result, the timing of significant orders and the
recognition of revenue from such orders is unpredictable. Unfavorable changes
in any of the above factors could materially and adversely affect the
Company's revenues, gross margins and results of operations.
As a result of the Company's limited operating history and the emerging
nature of the e-commerce market in which the Company competes, there can be no
assurance that the Company will be able to accurately forecast its revenues.
The Company's current and future expense levels are based primarily on its
operating plans and estimates of future revenues and are to a large extent
fixed costs. The Company may be unable to adjust spending in a timely manner
to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in revenues would likely have an immediate material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, the Company currently intends to significantly expand
its sales and marketing organization, which would result in a substantial
increase in operating expenses. To the extent such expenses are incurred prior
to or do not result in increased revenues, the Company's operating losses in a
given quarter may be significantly greater than expected. Based upon all of
the foregoing, the Company believes that its quarterly and annual revenues,
expenses and operating results are likely to vary significantly in the future,
that period-to-period comparisons of the Company's results of operations are
not necessarily meaningful and that such comparisons should not be relied upon
as indications of future performance. Moreover, although the Company's
revenues have increased in recent periods, there can be no assurance that the
Company's revenues will grow in future periods, that they will grow at past
rates or that the Company will achieve profitability on a quarterly or annual
basis in the future. Due to the foregoing as well as other factors, it is
likely that the Company's operating results will be
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below market analysts' expectations in some future quarters, which could
materially and adversely affect the market price of the Class A Common Stock.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Unaudited Quarterly Results of
Operations".
Dependence on Significant Growth of Sales and Marketing Organization
The Company believes that its future profitability and success will depend
in large part on, among other things, its ability to maintain and expand its
relationships with computer product manufacturers, distributors, resellers,
retailers and other industry participants, and its ability to enter into new
relationships with such participants. To date, the Company has achieved only
limited penetration of its current customers. A key element of the Company's
strategy is to increase its penetration of existing customer accounts. In
order to implement this strategy, the Company intends to significantly expand
its sales and marketing organization. However, competition for sales and
marketing personnel is intense. Moreover, the recruitment and hiring of such
individuals is typically a time-consuming and expensive process. There can be
no assurance that the Company will be able to attract, assimilate and retain
qualified sales and marketing personnel on a timely basis in the future, or at
all. The Company's failure to do so would have a material adverse effect on
the Company's business, financial condition and results of operations.
Risks Associated with Emerging Market for E-Commerce; Unproven Business Model
The market for software products such as those offered by the Company is
still emerging, and there can be no assurance that it will continue to grow or
that, even if the market does grow, the Company's products will achieve market
acceptance among computer product manufacturers, distributors, resellers,
retailers, other industry participants and end users, including corporate
buyers and consumers. Historically, these entities have purchased computer
products and accessories and exchanged information regarding such products
primarily through traditional means of commerce and communications. The
Company has expended, and will continue to expend, significant resources
educating potential customers about the Company's products and their
capabilities and benefits. There can be no assurance that these expenditures
will enable the Company's products to achieve market acceptance. If the market
for the Company's products fails to grow or grows more slowly than the Company
anticipates, or if the Company's products fail to achieve significant market
acceptance, the Company's business, results of operation and financial
condition would be materially and adversely affected.
The Company's business model is evolving and unproven. The Company is
dependent on its ability to attract a significant number of customers and
channel partners from the computer industry and expand its existing
relationships. There can be no assurance that the Company will be successful
in achieving market acceptance of its independent third-party e-commerce
solutions and services or in achieving significant market share before
competitors offer products, applications or services with features similar or
superior to the Company's current or proposed offerings. If a significant
number of participants fail to adopt the Company's solutions or adopt such
solutions more slowly than anticipated, or if the Company fails to retain or
fails to further penetrate its existing customer accounts, the Company may not
achieve the critical mass of users it believes is necessary to enable the
success of its solutions and services. In particular, a fundamental element of
the Company's business strategy is to enter into contractual relationships
with manufacturers and distributors that enable the Company to derive
increasing revenues from such customers to the extent that the Company's e-
commerce solutions are more broadly adopted by market participants.
Accordingly, the Company intends to incur significant expenses during 1999 to
implement such strategy. There can be no assurance that the Company will be
successful in its efforts to increase the number of manufacturers,
distributors, resellers, retailers and other market participants that adopt
the Company's solutions. Any failure on the
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part of the Company to do so would have a material adverse effect on the
Company's business, financial condition and results of operations.
Customer Concentration; Risks Associated with Reliance on Certain Contracts
In 1996, 1997 and 1998, the Company's top five customers accounted for 89%,
64% and 62%, respectively, of the Company's total revenues. Generally,
contracts with these customers have terms ranging from one to five years and
may be terminated earlier in the event of an uncured breach or certain other
events. In addition, revenues from contracts with these customers are not
equally distributed over the term of the contracts, and there can be no
assurance that total revenues will not decline because of decreased revenues
from these customers in future periods. The Company expects that it will
continue to depend upon a relatively small number of contracts for a
substantial portion of its revenues for the foreseeable future. There can be
no assurance that the Company will derive any revenue from sales of products
pursuant to agreements with these customers in any given future period. In the
event that any such contracts are not renewed or are otherwise terminated, the
Company's business, financial condition and results of operations would be
materially and adversely affected. See "Business--Products".
A majority of the Company's significant customers have entered into their
agreements with the Company only since the third quarter of 1997. These
contracts generally have terms ranging from one to five years, and the Company
has only limited experience with renewing such contracts. The Company's future
growth is dependent in part on its ability to renew existing contracts on
terms favorable to the Company and to further penetrate its existing customer
accounts with products that offer greater functionality and higher revenue
potential. For example, the Company entered into an agreement with Ingram
Micro in September of 1998 in connection with subscriptions to, and related
services supporting, various products of the Company, including Prime Access
Web Storefront and Customer Desktop. pcOrder retains ownership of all software
licensed under the agreement. The Company agreed to indemnify Ingram Micro
Inc. ("Ingram Micro") in the event of a claim that any software licensed to
Ingram Micro by the Company infringes the intellectual property of a third
party. Additionally, pursuant to the agreement with Ingram Micro, the source
code for software licensed to Ingram Micro will be deposited in escrow. The
initial term of the agreement is through December 2003, unless terminated
earlier by either party upon prior notice in the event of a payment default,
material breach, termination of business or breach of confidentiality. The
agreement may be renewed for additional one year periods upon the agreement of
the parties prior to the end of the current term. Because of the Company's
limited experience with contract renewals in general, there can be no
assurance the Company will be successful in renewing the Ingram Micro contract
or other existing contracts, or if such contracts are renewed, that they will
be renewed on terms favorable to the Company. Any failure to do so on the part
of the Company would have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Growth of the Internet, Internet Infrastructure Development and
Internet Commerce
The increased use of the Internet for retrieving, sharing and transferring
information among manufacturers, distributors, resellers, retailers and end
users, including corporate buyers and consumers of computers and computer
products, has only recently begun to develop, and the Company's success will
depend in large part on continued growth in, and the use of, the Internet for
commerce. Critical issues remain unresolved concerning commercial use of the
Internet, including security, reliability, cost, ease of access, quality of
service and necessary increases in bandwidth availability, and these issues
are likely to affect the development of the market for the Company's products.
The adoption of the Internet for information retrieval and exchange, commerce
and communications, particularly by those enterprises that have historically
relied upon traditional means of commerce and communications, generally will
require the acceptance by these entities of a new and evolving medium of
conducting business and exchanging information. Such acceptance is likely only
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in the event that the Internet provides these entities with greater efficiency
and an improved arena of commerce and communication. Demand for and market
acceptance of commerce on the Internet are subject to a high level of
uncertainty and are dependent on a number of factors, including the growth in
commercial access to and acceptance of new interactive technologies, the
development of technologies that facilitate interactive communication between
organizations and targeted audiences and increases in user bandwidth. If the
Internet as a commercial or business medium fails to develop or develops more
slowly than expected, the Company's business, results of operations and
financial condition would be materially adversely affected. The recent growth
in the use of the Internet has caused frequent periods of performance
degradation, requiring the upgrade of routers and switches, telecommunications
links and other components forming the infrastructure of the Internet by
Internet service providers and other organizations with links to the Internet.
Any perceived degradation in the performance of the Internet as a whole could
undermine the benefits of the Company's products. The Company's ability to
increase the speed with which it provides services to customers and to
increase the scope of such services ultimately is limited by and reliant upon
the speed and reliability of the networks operated by third parties.
Consequently, the emergence and growth of the market for the Company's
products is dependent on improvements being made to the entire Internet
infrastructure to alleviate overloading and congestion. No assurance can be
given that these improvements will be made or that, if made, they will be made
in a sufficiently timely and cost-effective manner so as to facilitate market
acceptance of the Company's products.
Lengthy Sales and Implementation Cycle
Due in part to the significant departure from traditional means of commerce
and communications entailed by the adoption and use of the Company's products,
the Company is generally required to provide a significant level of education
regarding the use and benefits of its products, and potential customers tend
to engage in extensive internal reviews before making purchase decisions. In
addition, the purchase of the Company's products by its customers for
deployment within a customer's organization typically involves a significant
commitment of capital and other resources, and is therefore subject to delays
that are beyond the Company's control, such as the customers' internal
procedures to approve large capital expenditures, budgetary constraints and
the testing and acceptance of new technologies that affect key operations,
among other factors. The decision-making process can also be substantially
impacted by the sales practices of, and product introductions by, the
Company's competitors. The Company has historically experienced a lengthy
cycle for sales of its products to resellers, and longer sales cycles for
sales of its products to manufacturers and distributors. There can be no
assurance that the Company will not continue to experience lengthy sales
cycles in the future. Certain of the Company's customers have in the past
experienced difficulties or delays in completing implementations of the
Company's products. Although such difficulties and delays to date have not had
a material adverse effect on the Company, no assurances can be given that
similar difficulties or delays will not occur in the future. Any such
difficulties or delays could cause delays in the recognition of related
revenues, cause customers to reject the Company's solutions or lead to the
delay or non-receipt of future orders for the Company's products, any of which
could have a material adverse effect on the Company's business, operating
results and financial condition. See "--Significant Fluctuations in Future
Operating Results".
Dependence on Computer Industry
The Company derives substantially all of its revenues either directly or
indirectly from the computer industry, and the Company's future growth is
dependent on the computer industry. The computer industry is sensitive to
general economic, business and industry conditions that can cause buyers of
computers and computer products to reduce or delay their investments in
computer systems. Any event or condition that results in decreased spending on
computers or computer products, or consolidation within the computer industry,
could have a negative effect on the Company's customers
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and negatively impact the Company's business, operating results and financial
condition. Furthermore, certain of the Company's customers have recently been
acquired. Although to date such acquisitions have not had an adverse effect on
the Company' s relationships with these customers, there can be no assurance
that these acquisitions or other acquisitions of the Company's customers in
the future will not have a material adverse effect on the Company's business,
results of operations and financial condition.
Risks Associated with Maintaining Database
The Company updates and maintains an extensive database of technical and
descriptive information on computer products, including over 600,000 product
SKUs from over 1,000 manufacturers. This information is used to support the
Company's software applications and the Company seeks to provide users with
timely access to current, comprehensive information on product specifications,
availability and pricing. Certain of the Company's contracts obligate it to
maintain data accuracy at prescribed levels. Maintaining the Company's
databases is a highly manual process and the Company utilizes a combination of
highly trained internal personnel and contract personnel provided by third-
party service organizations. Furthermore, the Company's computer systems and
databases must be sufficiently scalable to process large amounts of complex
product specification and configuration data without significant degradation
in performance. In the past the Company has experienced periodic difficulties
with data accuracy. For example, in the second quarter of 1998, database
capacity constraints limited the Company's ability to accept daily pricing and
availability updates from distributors, which resulted in a temporary
disruption in the Company's ability to provide this data to certain reseller
customers, and failures to renew and delays of contract renewals by certain of
such customers. Although these difficulties have not in the past materially
adversely affected the Company, there can be no assurance that the Company
will not experience similar data maintenance and accuracy problems in future
periods, which could result in a loss of customers or have a material adverse
effect on the Company's business, financial condition and results of
operations. Furthermore, certain of the Company's customer contracts provide
for service level guarantees for data accuracy. To the extent the Company is
unable to maintain data accuracy at required levels, the Company could incur
significant liabilities and the applicable contracts could be terminated, any
of which would have a material adverse effect on the Company's business,
results of operations and financial condition.
Control By and Relationship with Trilogy
The Company is currently a subsidiary of Trilogy. Upon completion of this
offering, Trilogy will own 12,757,000 shares of Class B Common Stock
representing approximately 84.0% of the total outstanding Common Stock of the
Company (82.3% if the Underwriters' over-allotment option is exercised in
full), and approximately 97.7% of the total voting power of the Common Stock.
Following this offering, as a result of its ownership of Class B Common Stock,
Trilogy will have the voting power to determine the outcome of any matter
submitted for the vote or consent of pcOrder stockholders, except where a
separate vote of the holders of Class A Common Stock is required by Delaware
law. Since each share of Class B Common Stock entitles its holder to eight
votes while each share of Class A Common Stock entitles its holder to one
vote, Trilogy will retain this voting power even while it holds less than a
majority of the Company's outstanding Common Stock. For example, Trilogy will
be able to direct the election of all directors of the Company, to cause the
amendment of the Company's Certificate of Incorporation, Bylaws and other
documents, and generally to exercise a controlling influence over the business
and affairs of the Company, including any determinations with respect to
mergers or other business combinations involving the Company, the acquisition
or disposition of assets by the Company, future issuances of equity securities
by the Company, the incurrence of indebtedness by the Company and the payment
of dividends with respect to the Common Stock. Similarly, Trilogy will have
the power to prevent, delay or cause a change in control of the Company and
could take other actions that might be favorable to Trilogy but not
necessarily favorable to other stockholders of the Company. There can be no
assurance that conflicts, disagreements or other disputes between the Company
and Trilogy will not arise, or that such disputes will be resolved in a manner
that does not
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adversely affect the business, financial condition or results of operations of
the Company. There can be no assurance that Trilogy's ownership of the
Company's Class B Common Stock or its other relationships with the Company
will not have a material adverse effect on the Company's business, financial
condition or results of operations, on its other stockholders or on the market
price of the Company's Class A Common Stock.
Trilogy could elect to sell all or a substantial portion of its equity
interest in the Company to a third party, which could represent a controlling
or substantial interest in the Company, without offering to other stockholders
of the Company the opportunity to participate in such a transaction. Under the
terms of the Company's Certificate of Incorporation, a single transaction
resulting in the transfer of greater than 50% of Trilogy's equity interest in
the Class B Common Stock to a non-affiliate of Trilogy will result in such
non-affiliate having the disproportionate per share voting rights currently
held by Trilogy. In the event of a sale of Trilogy's interest to a third
party, such third party may be able to control the Company in the manner that
Trilogy is currently able to control the Company, including with respect to
the election of all of the members of the Company's Board of Directors. Such a
sale may adversely affect the Company's other stockholders and the market
price of the Class A Common Stock and may adversely affect the Company's
business, financial condition and results of operations. See "--Possible
Future Sales of Common Stock by Trilogy". The Company and Trilogy have entered
into various agreements intended to define the relationship between them. See
"Relationship with Trilogy".
Risks Associated with Dependence on Trilogy; Limited Independent Operating
History; Potential Conflicts of Interest
The Company is dependent upon Trilogy to provide certain key technology and
management functions to the Company. Pursuant to the terms of a Technology,
Services and License Agreement, (the "Technology Agreement"), the Company
licenses certain technology from Trilogy on a non-exclusive basis subject to
certain limitations. Any termination of such license, or reduction in the
performance of such licensed technology, that requires the Company to
internally develop or license similar technology from a third party would be
disruptive to the Company's business. Further, the Company believes that
similar technology is not currently available from any third party and, if the
license from Trilogy were terminated, there can be no assurance that the
Company could successfully internally develop similar technology or license
similar technology from a third party. As a result, any termination of the
license from Trilogy would have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, Trilogy
is prohibited from competing with the Company only through June 1, 1999. There
can be no assurance that Trilogy will not compete directly with the Company
after June 1, 1999, and that such competition would not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Relationship with Trilogy". Further, Trilogy has joint
ownership rights in technology jointly developed by the Company and Trilogy
during the term of the Technology Agreement, and there can be no assurance
that Trilogy will not utilize such technology in competition with the Company
after June 1, 1999 or license its technology to competitors of the Company,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Relationship with
Trilogy".
The Company has historically relied on Trilogy to provide certain human
resource, finance, recruiting, legal and other services. Upon completion of
this offering, Trilogy will have no obligation to provide assistance to the
Company except as described in "Relationship with Trilogy". The Company will
be required to develop and implement the operational, administrative and other
systems and infrastructure necessary to support its current and future
business. The Company estimates that the cost of such development and
implementation will be material to the Company. Any failure to successfully
develop and implement such systems and infrastructure would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Control By and Relationship with Trilogy" and "--Management
of Growth".
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Conflicts of interest may arise between the Company and Trilogy in a number
of areas relating to their past and ongoing relationships, including potential
competitive business activities, indemnity arrangements, tax and intellectual
property matters, potential acquisitions or financing transactions, sales or
other dispositions by Trilogy of shares of the Company's Common Stock held by
it following this offering and the exercise by Trilogy of its ability to
control the management and affairs of the Company. The Company and Trilogy
have not established any formal procedures to address or resolve these
potential conflicts. There can be no assurance that any conflicts that may
arise between the Company and Trilogy will be resolved in a manner that does
not have a material adverse effect on the Company or its other stockholders,
even if such result is not intended by Trilogy. In addition, except as
described in "Relationship with Trilogy", nothing in the Company's agreements
with Trilogy prohibits Trilogy from competing directly with the Company or
being acquired by a third party, either of which could have a material adverse
effect on the Company's business, financial condition or results of
operations. In addition, in the event of a tax free spin-off, the shares of
Class B Common Stock held by Trilogy's transferee will not be convertible into
Class A Common Stock for a period of five years following such tax free spin-
off. Accordingly, following a tax free spin-off, a transferee or group of
transferees of such Class B Common Stock could hold the voting power to affect
or determine the outcome of matters submitted to the vote or consent of
pcOrder stockholders, which could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Relationship with Trilogy".
Ownership interests of directors or officers of the Company in the common
stock of Trilogy or service as both a director or officer of the Company and
an officer or employee of Trilogy could create or appear to create potential
conflicts of interest when directors and officers are faced with decisions
that could have different implications for the Company and Trilogy. Joseph A.
Liemandt, a director of the Company, is the Chairman and Chief Executive
Officer and a substantial stockholder of Trilogy. The Company and Trilogy have
not established any formal procedures to address or resolve these potential
conflicts.
Possible Future Sales of Common Stock by Trilogy
Subject to applicable federal securities laws and the restrictions set forth
in the Certificate of Incorporation, after completion of this offering,
Trilogy may sell any and all of the shares of the Company's Class B Common
Stock beneficially owned by it or shares of the Class A Common Stock issuable
upon conversion of the Class B Common Stock (which, after completion of this
offering, would represent approximately 84.0% of the outstanding Common Stock
combined) or distribute any or all of such shares of Class B Common Stock to
its stockholders. In general, prior to a tax free spin-off each share of Class
B Common Stock is convertible into one share of Class A Common Stock at the
election of the holder thereof, and each share of Class B Common Stock will be
converted automatically into one share of Class A Common Stock upon a transfer
if after the transfer such share is not owned by Trilogy, Trilogy Inc.
(Trilogy's parent), an affiliate of Trilogy, Inc. or a non-affiliate of
Trilogy, Inc. that acquires more than 50% of the then outstanding Class B
Common Stock in a single transaction. In addition, in the event of a tax free
spin-off, the shares of Class B Common Stock held by Trilogy's transferee will
not be convertible into Class A Common Stock for a period of five years
following such tax free spin-off. Accordingly, following a tax free spin-off,
a transferee or group of transferees of such Class B Common Stock would hold
the voting power to affect or determine the outcome of matters submitted to
the vote or consent of pcOrder stockholders, which could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Description of Capital Stock". Sales or distribution by
Trilogy of substantial amounts of Common Stock in the public market or to its
stockholders, or the perception that such sales or distribution could occur,
could adversely affect the prevailing market prices for the Class A Common
Stock. Trilogy is not subject to any obligation to retain its controlling
interest in the Company, except that Trilogy has agreed not to sell or
otherwise dispose of any shares of Class B Common Stock (or shares of Class A
Common Stock issuable upon the conversion of such Class B Common Stock) with
the exception of the Trilogy Options, for a period of
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180 days after the date of this Prospectus without the prior written consent
of Goldman, Sachs & Co. See "Underwriting". No notice will be given to
stockholders of the Company if Goldman, Sachs & Co. grants such written
consent to Trilogy. As a result, there can be no assurance concerning the
period of time during which Trilogy will maintain its ownership of Class B
Common Stock (or shares of Class A Common Stock issuable upon the conversion
of such Class B Common Stock) following this offering. Moreover, there can be
no assurance that, in any transfer by Trilogy of a controlling interest in the
Company, any holders of Class A Common Stock will be able to participate in
such transaction or will realize any premium or other amounts with respect to
their shares of Class A Common Stock. Trilogy has registration rights with
respect to the shares of Class B Common Stock owned by it and the shares of
Class A Common Stock issuable upon conversion thereof, which rights would
facilitate any future disposition. These registration rights are transferred
automatically to any transferee of shares of Class B Common Stock (or shares
of Class A Common Stock issuable upon the conversion of such Class B Common
Stock) including, to the extent the Trilogy Options are exercised, holders of
Trilogy Option Shares. See "Relationship with Trilogy".
Risk of System Failure; Single Site
The Company's success depends largely upon the efficient and uninterrupted
operation of its communication systems. The Company has contracted with
certain of its customers to provide server hosting and to maintain redundant
leased lines to ensure system availability. All of the Company's development
and management systems are located at a single facility leased by the Company
in Austin, Texas. The Company's systems and operations are vulnerable to
damage or interruption from fire, flood, power loss, telecommunications
failure, break-ins and similar events. Although the Company has taken certain
steps to prevent a system failure, there can be no assurance that such
measures will be successful and that the Company will not experience system
failures in the future. Furthermore, the Company does not have a formal
disaster recovery plan and does not carry sufficient business interruption
insurance to compensate it for losses that may occur as a result of any system
failure. The occurrence of any system failure or similar event could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company may move to third-party
hosting of its servers. There can be no assurance that this transition, if
undertaken, would be effected without interruptions that could adversely
affect the Company's business, results of operations and financial condition.
Further, such third-party host would be subject to the same risks of system
failure as the Company's current site. See "Business--Facilities".
Risk of Reliance on Recent Publicity
The November 30, 1998 issue of Forbes magazine contained an article
regarding the Company (the "Forbes Article"). The Forbes Article included
statements resulting directly or indirectly from interviews with Ross A.
Cooley and Christina C. Jones, the Company's Chief Executive Officer and
President, respectively, by representatives of Forbes magazine. Such
statements include the following: (i) "Last year pcOrder lost $1.1 million on
revenues of $10.6 million; this year revenues should double while losses
continue;" (ii) "The grand vision is to have every single computer bought
using pcOrder technology;" (iii) "The software is too slow, users complained.
And it doesn't let them send quotes via E-mail. Some pcOrder customers still
prefer printed catalogs from PC makers. Perhaps with good reason, since
pcOrder has had trouble with data reliability;" (iv) "Jones insists that the
problem [with data reliability] has been fixed;" (v) "[pcOrder is] celebrating
a deal reported to be worth $30 million or so that pcOrder.com, Inc. just
closed with Ingram Micro Inc., the world's largest computer distributor;"
(vi) "Trilogy Software, Inc....now an estimated $100 million-plus company;"
(vii) "[S]ome companies just won't jump on board. But even if [Jones] gets
most big players, [Jones will] be able to gather data about buying habits and
trends and use the information to forecast demand. Stuff worth a gold mine to
PC makers and distributors;" (viii) "pcOrder is hardly a guaranteed winner.
While the major PC-makers and distributors are on board, only 5,500
salespeople actually use the software, approximately 45,000 remain to be
convinced that ordering PCs over the Web beats doing business over the phones
and faxes;" and (ix) "pcOrder recently spent several hundred thousand dollars
on a direct-mail marketing campaign
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that flopped." These statements were not intended to be relied upon by
potential investors in making an investment decision to purchase the Class A
Common Stock offered hereby. Furthermore, the Company disclaims all the
information contained in the Forbes Article for purposes of this offering, and
prospective investors should not rely on such information or any other
information not contained in this Prospectus in making an investment decision
to purchase the Class A Common Stock offered hereby. Forecasts relating to
market position, revenues, data reliability and market acceptance of the
Company and its products, especially given the rapidly evolving market for the
Company's products and services, are forward-looking statements that involve
numerous risks and uncertainties. The Company's actual results could differ
materially from those stated in such forward-looking statements as a result of
numerous factors, including those set forth in these "Risk Factors" and
elsewhere in this Prospectus.
Future Capital Needs; Uncertainty of Additional Financing
The Company requires substantial working capital to fund its business and
expects to use a significant portion of the net proceeds of this offering to
fund its expected continuing operating losses. The Company currently believes
that its existing capital resources, combined with the net proceeds of this
offering, will be sufficient to meet its presently anticipated cash
requirements for at least the next 12 months. Thereafter, the Company may be
required to raise additional funds; provided, however, no assurance can be
given that the Company will not need to raise additional financing prior to
such time. If additional funds are raised through the issuance of equity
securities, stockholders of the Company may experience significant dilution.
Furthermore, there can be no assurance that additional financing will be
available when needed or that, if available, such financing will be available
on terms acceptable to the Company and its stockholders. If such financing is
not available when required or is not available on acceptable terms, the
Company may be unable to expand its sales and marketing organization, develop
new products and product enhancements, take advantage of business
opportunities or respond to competitive pressures, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
Management of Growth
The Company's business has grown rapidly in the last three years, with total
revenues increasing from $5.9 million in 1996 to $21.7 million in 1998 and the
total number of employees increasing from 1 in July 1994 to 194 as of December
31, 1998. Furthermore, significant increases in the number of employees are
anticipated in future periods. In particular, the Company currently intends to
significantly expand the number of employees in its sales and marketing
organization and to expand the number of employees in its client services,
research and development and finance organizations. This growth has resulted
in, and can be expected to continue to require, substantial expansion of the
Company's infrastructure, including operating and financial systems and
controls and the geographic scope of its operations and customers. Recent
rapid growth has also resulted, and will continue to result, in new and
increased responsibilities for management personnel, and such growth has
placed and, if it continues, is expected to continue to place, a significant
strain on the Company's management and operations. The Company has recently
hired a significant number of executives to augment its management
infrastructure to manage the potential growth of its business, including its
Chief Financial Officer and certain key sales and marketing personnel. These
individuals have not previously worked together or with the Company's existing
management and are in the process of integrating as a management team. There
can be no assurance that they will be able to work together effectively. In
addition, the Company has historically relied on Trilogy to provide certain
human resource, finance, recruiting, legal and other services, and the Company
is in the process of assuming responsibility for such services and similar
services provided by outside sources. Furthermore, the Company's dependence on
outside sources to provide services previously performed by Trilogy will
likely increase.
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There can be no assurance that the Company will be able to manage any future
expansion successfully, and any inability to do so would have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview".
New Products and Technological Changes; Risks Associated with Transition to
New Technology Platform
The market for the Company's e-commerce solutions is characterized by
rapidly changing technology, evolving industry standards and frequent new
product introductions. The introduction of products embodying new technologies
or the emergence of new industry standards can render existing products
obsolete and unmarketable. The Company's success will depend upon its ability
to enhance its existing products and to develop and introduce, on a timely and
cost-effective basis, new products that keep pace with technological
developments and emerging industry standards and address increasingly
sophisticated customer requirements. There can be no assurance that the
Company will be successful in identifying, developing and marketing product
enhancements or new products that respond to technological change or evolving
industry standards, that the Company will not experience difficulties that
could delay or prevent the successful development, introduction and marketing
of these products, or that its new products and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance. The Company's business, operating results and financial condition
would be materially and adversely affected if the Company were to incur
difficulties or delays in developing new products or enhancements or if such
products or enhancements did not gain market acceptance.
Products as complex as those offered by the Company may contain undetected
errors or defects when first introduced or as new versions are released. There
can be no assurance that, despite testing by the Company and by current and
potential customers, errors will not be found in new products or product
enhancements after commencement of commercial shipments, resulting in loss of
or delay in market acceptance. The Company's introduction of new products or
product enhancements with reliability, quality or compatibility problems could
also result in reduced bookings, delays in collecting accounts receivable and
in additional service and warranty costs. The Company has in the past
experienced difficulties and delays in successfully installing its products at
certain customer sites. Although in each case the problems were remedied and
did not have a material adverse effect on the Company, no assurances can be
given that similar problems will not occur in the future or that such
problems, if they were to occur, would not have a material adverse effect on
the Company.
The Company is currently engaged in transitioning certain aspects of its
product architecture to a more modular and flexible design. There can be no
assurance that the Company or its new customers will not experience any
performance problems with this new technology platform, whether in the form of
bugs, compatibility difficulties or otherwise. In addition, there can be no
assurance that the Company's existing customers will be able to successfully
transition to this new technology platform. A failure of the Company's
products based on this new technology platform to perform satisfactorily or a
failure by the Company to properly manage the transition by its existing
customers to this new technology platform could result in cancellation of
customer contracts, a decline in the Company's competitive position or reduced
or delayed sales of its products, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
Dependence Upon Key Personnel
The Company's future success depends in significant part upon the continued
service of a relatively small number of key management, technical, sales and
marketing personnel, especially Ross A. Cooley, the Company's Chairman of the
Board and Chief Executive Officer, and Christina C. Jones, the Company's
President, Chief Operating Officer and founder, each of whom is a party to an
employment
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agreement with the Company. See "Management--Employment Agreements." Mr.
Cooley, in his capacity as the Company's Chairman of the Board and Chief
Executive Officer, currently performs various executive and leadership
functions, including development of the Company's strategic and operational
plans, executive management of new customer and new account relationship
activities and recruitment of senior management personnel. Ms. Jones, in her
capacity as the Company's President and Chief Operating Officer, is
principally responsible for managing the Company's daily operations. The
Company currently does not carry key person life insurance for either Mr.
Cooley or Ms. Jones. The Company believes that it depends primarily on Mr.
Cooley and Ms. Jones, the loss of either of whom would have a material adverse
effect on the Company. The Company's future success also depends on its
continuing ability to attract and retain other highly qualified management,
technical, sales and marketing personnel. Competition for such personnel is
intense, and the Company has at times in the past experienced difficulty in
recruiting qualified personnel. There can be no assurance that the Company
will retain its key management, technical, sales and marketing employees or
that it will be successful in attracting, assimilating and retaining other
highly qualified management, technical, sales and marketing personnel in the
future. The loss of any member of the Company's key management, technical,
sales and marketing personnel or the inability to attract and retain
additional qualified personnel would have a material adverse effect on the
Company's business, operating results and financial condition. See
"Management".
Risk of Changes in Accounting Standards
Effective December 15, 1998, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") 98-9, "Modification of SOP
97-2, "Software Revenue Recognition', With Respect to Certain Transactions."
SOP 98-9 amends SOP 97-2 and 98-4, "Deferral of the Effective Date of a
Provision of SOP 97-2," extending the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or
before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. Full
implementation guidelines for this standard have not yet been issued. Once
available, the Company's revenue accounting practices may need to change and
there can be no assurance that such change would not materially adversely
affect the Company's business, operating results and financial condition.
Competition
The market for software products that enable e-commerce is intensely
competitive, and the Company expects competition in its market segment to
increase substantially. Numerous companies provide e-commerce solutions, and
several competitors target the specific computer and computer related products
industry in which the Company competes. The Company's competitors include both
large companies with substantially greater resources than the Company, systems
integrators and the internal IT departments of certain of the Company's
customers and potential customers. The Company believes that its principal
sources of competition are systems integrators and the internal IT departments
of its customers and potential customers. These organizations may seek to
develop e-commerce solutions through the use of tools offered by the Company's
competitors primarily focused on providing e-commerce enabling solutions to
the computer industry such as Calico Software, Selectica, Inc., SMART
Technologies, Inc., Open Market, Inc. and BroadVision, Inc. Furthermore, there
are a number of significantly larger companies with which the Company does not
currently compete that do not presently offer the same or similar e-commerce
solutions offered by the Company but that could with limited barriers to entry
compete directly with the Company in the future. In addition, except as
described in "Relationship with Trilogy", nothing in the Company's agreements
with Trilogy prohibits Trilogy from competing directly or indirectly with the
Company. The Company believes that the principal competitive factors for
companies seeking to provide e-commerce enabling solutions are price,
functionality, product performance, content, reliability and customer service.
Increased competition could result in price reductions, reduced margins and
loss of market share, any of which
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would materially and adversely affect the Company's business, operating
results and financial condition. Many of the Company's current and potential
competitors have significantly longer operating histories and significantly
greater financial, technical, marketing and other resources than the Company.
There can be no assurance that the Company will be able to compete
successfully with its existing competitors or with new competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results and financial condition. See
"Business--Competition".
Uncertain Protection Of Intellectual Property
The Company's success depends in part on its ability to protect its
proprietary software and other intellectual property. To protect its
proprietary rights, the Company relies generally on copyright, trademark and
trade secret laws, confidentiality agreements with employees and third parties
and license agreements with consultants, vendors and customers, although the
Company has not signed such agreements in every case. Despite such
protections, a third party could, without authorization, copy or otherwise
obtain and use the Company's products or technology, or develop similar
technology. There can be no assurance that the Company's agreements with
employees, consultants and others who participate in product development
activities will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's software or trade secrets will not
otherwise become known or independently developed by competitors.
Many of the Company's current and potential competitors dedicate
substantially greater resources to protection and enforcement of intellectual
property rights, especially patents. If a blocking patent has been issued or
is issued in the future, the Company would need to either obtain a license or
design around the patent. There can be no assurance that the Company would be
able to obtain such a license on acceptable terms, if at all, or to design
around the patent. The Company pursues the registration of certain of its
trademarks and service marks in the United States and in certain other
countries, although it has not secured registration of all of its marks. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as do the laws of the United States, and
effective copyright, trademark and trade secret protection may not be
available in such jurisdictions. The Company licenses certain of its
proprietary rights to third parties, and there can be no assurance that such
licensees will abide by compliance and quality control guidelines with respect
to such proprietary rights or that such licensees will not take actions that
would materially and adversely affect the Company's business, financial
condition and results of operations.
There can be no assurance that the Company's efforts to protect its
intellectual property rights through copyright, trademark and trade secret
laws will be effective to prevent misappropriation of its technology or to
prevent the development by others of products or technologies similar to or
competitive with those developed by the Company. The Company's failure or
inability to protect its proprietary rights could materially and adversely
affect its business, financial condition and results of operations.
The computer software industry is characterized by frequent and substantial
intellectual property litigation that often is complex and expensive and
involves a significant diversion of resources and uncertainty of outcome. In
the future, the Company may need to pursue litigation to enforce and protect
its intellectual property rights or to defend against a claim of infringement
or invalidity. The Company attempts to avoid infringing known proprietary
rights of third parties in its product development efforts. However, the
Company has not conducted and does not intend to conduct comprehensive patent
searches to determine whether the technology used in its products infringes
patents held by third parties. In addition, it is difficult to proceed with
certainty in a rapidly evolving technological environment in which there may
be numerous patent applications pending, many of which are confidential when
filed. If the Company were to discover that its products violate third-party
proprietary rights, there can be no assurance that it would be able to obtain
licenses to continue offering such products, that any such licenses would be
available on commercially reasonable terms, if at all, or that litigation
regarding
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alleged infringement could be avoided or settled without substantial expense
and damage awards. Any claims against the Company relating to the infringement
of third-party proprietary rights, even if not meritorious, could result in
the expenditure of significant financial and managerial resources and in
injunctions preventing the Company from distributing certain products. Such
claims could materially and adversely affect the Company's business, financial
condition and results of operations.
Risk of Product Liability Claims
The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. However, the limitation of liability provisions contained in
the Company's license agreements may not be effective under the laws of
certain jurisdictions. Although the Company has not experienced any material
product liability claims to date, the sale and support of the Company's
products entails the risk of such claims. The Company currently has only
limited insurance coverage against product liability and errors and omissions
claims and there can be no assurance that such insurance will continue to be
available to the Company on commercially reasonable terms or at all. A product
liability claim brought against the Company could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Business--Product Development".
International Sales Risks
Although the Company has had limited sales outside of the U.S. and Canada,
the Company expects to increase its sales in international markets. In order
to expand international sales, the Company must establish additional foreign
operations, hire additional personnel and establish relationships with
additional channel partners. This expansion will require significant
management attention and financial resources and could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that the Company will be
able to maintain or increase international market demand for the Company's
products and services. Although the Company's international sales are
primarily denominated in U.S. dollars, the Company expects to incur an
increasing percentage of obligations denominated in foreign currencies. A
change in the value of the U.S. dollar relative to foreign currencies could
make the Company's products more expensive and, therefore, potentially less
competitive in those markets and could otherwise adversely affect the
Company's ability to meet its foreign-currency-denominated obligations.
Currently, the Company does not employ currency hedging strategies to reduce
this risk. In addition, the Company's international business may be subject to
a variety of risks, including difficulties in collecting international
accounts receivable or obtaining U.S. export licenses, potentially longer
payment cycles, increased costs associated with maintaining international
marketing efforts, the introduction of non-tariff barriers and higher duty
rates and difficulties in enforcement of contractual obligations and
intellectual property rights. There can be no assurance that such factors will
not have a material adverse effect on the Company's future international sales
and, consequently, on the Company's business, financial condition or results
of operations.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. This could result in system failures or miscalculations,
causing disruptions of operations including, among other things, a temporary
inability to process transactions, send invoices or engage in other normal
business activities. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" requirements. The Company uses a number of computer software programs
and operating systems and its proprietary solutions include source code which
must address the Year 2000 issue. However, the Company believes that its Year
2000 issues are limited to information technology
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("IT") systems (i.e., software programs and computer operating systems) and
that because its business is not solely dependent on the use of non-IT systems
(i.e., embedded systems such as devices used to control, monitor or assist the
operation of equipment and machinery), the failure of any such non-IT systems
as a result of Year 2000 issues would not have a material adverse effect on
the Company's operations.
The Company relies, in part, on Trilogy's internal computer systems. The
Company has been informed by Trilogy that Trilogy's internal computer systems
are Year 2000 compliant. The Company has completed a limited review of its IT
systems and the products for which the Company currently provides maintenance
and support, which involved testing and verification as described below. Based
on such review, the Company believes its own IT systems and the products for
which the Company currently provides maintenance and support are Year 2000
compliant. The Company's Year 2000 compliance effort consisted of verifying
and testing the ability of the products for which the Company currently
provides maintenance and support to successfully handle the date change from
December 31, 1999 to January 1, 2000, date changes from February 28 to
February 29 and arbitrary dates ranging from 2000 to 2037. The Company has no
plans to conduct further review of its currently supported products or IT
systems. The Company has not historically made any material expenditures in
readying its IT systems or currently support products for the Year 2000 and
does not believe it will be necessary in the future to expend any material
amounts in connection with Year 2000 compliance.
Notwithstanding the foregoing, there can be no assurance that Year 2000
errors or defects will not be discovered in the Company's current or future
products. Any failure by the Company to make its products Year 2000 compliant,
or of such products not to be Year 2000 compliant as a result of a failure of
Trilogy's products to be Year 2000 compliant, could result in a decrease in
sales of the Company's products, unanticipated expenses to address Year 2000
problems or significant liabilities resulting from losses suffered by the
Company's customers due to such Year 2000 problems, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company does not have, and currently has no plan to
make, a contingency plan for the remediation of Year 2000 problems that may
effect the Company's IT systems and products, or the third-party equipment and
software utilized by the Company, and it will be necessary for the Company to
make the necessary expenditures to assess and remedy such problems in the
event they arise in the future, which expenditures, if any, cannot be
estimated by the Company. There can be no assurance that such expenditures, if
required, would not have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Year 2000
Compliance".
The Company's solutions also utilize and depend on third-party equipment and
software that may not be Year 2000 compliant. The Company contacted certain
third-party vendors in order to ascertain their Year 2000 compliance. Based on
information supplied by such third-party vendors, the Company's officially
supported products developed using Visual Basic 5, Visual C++ or Java can be
certified Year 2000 compliant only through December 31, 2036, the last date
which the Company tested and verified. The Company estimates that such
certification applies to 90% to 95% of the Company's total products. Many of
the Company's products also use or rely on Microsoft's SQL Server product,
which has been certified Year 2000 compliant through December 31, 9999. The
Company believes that approximately 1.0% of the Company's products use or rely
on third-party vendor software which may be subject to Year 2000 issues and
for which the Company has received no assurance of Year 2000 compliance. To
the extent any of the Company's products are customized, whether by the
Company or a third party, there can be no assurance that any such customized
product will continue to be Year 2000 compliant. Failure of such third-party
equipment or software, or of systems maintained by the Company's suppliers, to
operate properly with regard to the Year 2000 and thereafter could require the
Company to incur unanticipated expenses to remedy any problems, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, to the extent the Company's products
are installed on customers' systems which rely on other
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software, firmware or hardware which may not be Year 2000 compliant, problems
in communications among industry participants could result in a delay in the
Company's products achieving market acceptance. Furthermore, the purchasing
patterns of customers or potential customers may be affected by Year 2000
issues as companies expend significant resources to correct their current
systems for Year 2000 compliance. These expenditures may result in reduced
funds available to purchase products from the Company of computer products
manufacturers, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
No Prior Market for the Common Stock; Possible Volatility of Share Price
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop upon completion of this offering or, if it does develop, that such
market will be sustained. The initial public offering price of the Common
Stock will be determined by negotiation between the Company and the
representatives of the Underwriters, and may not be representative of the
price that will prevail in the open market. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.
The market price of the Common Stock after this offering may be
significantly affected by factors such as the announcement of new products or
product enhancements by the Company or its competitors, technological
innovations by the Company or its competitors, quarterly variations in the
Company's results of operations, and general market conditions or market
conditions specific to particular industries. In particular, the stock prices
for many companies in the technology and emerging growth sector have
experienced wide fluctuations which have often been unrelated to the operating
results of such companies. Such fluctuations may adversely affect the market
price of the Common Stock. Furthermore, in the past, following periods of
volatility in the market price of a company's securities, securities class
action claims have been brought against the issuing company. There can be no
assurance that such litigation will not occur in the future with respect to
the Company. Such litigation could result in substantial costs and a diversion
of management's attention and resources, even if ultimately determined in
favor of the Company, and any adverse determination in such litigation could
also subject the Company to significant liabilities, any or all of which could
have a material adverse effect on the Company's business, operating results
and financial condition.
Shares Eligible for Future Sale; Registration Rights
Sales of substantial amounts of Class A Common Stock in the public market
after this offering (including by optional or automatic conversion of shares
of Class B Common Stock into Class A Common Stock), or the anticipation of
such sales, could have a material adverse effect on then-prevailing market
prices. Assuming no exercise of the Underwriters' over-allotment option, no
exercise of currently outstanding options or warrants and no exercise of the
Trilogy Options, upon completion of this offering, the Company will have
2,426,648 shares of Class A Common Stock outstanding and 12,757,000 shares of
Class B Common Stock outstanding and Trilogy will beneficially own all of the
12,757,000 shares of Class B Common Stock, representing approximately 84.0% of
the outstanding common stock. Shares of Class B Common Stock are convertible
into Class A Common Stock on a share-for-share basis at the election of the
holder or automatically upon certain transfers thereof. The 2,200,000 shares
of Class A Common Stock sold in this offering (plus any additional shares sold
upon exercise of the Underwriters' over-allotment option) will be freely
transferable without restriction under the Securities Act of 1933, as amended
(the "Securities Act"), unless they are held by "affiliates" of the Company as
that term is used under the Securities Act and the regulations promulgated
thereunder ("Affiliates"). The remaining 226,648 shares of Class A Common
Stock and the 12,757,000 shares of Class A Common Stock issuable upon
conversion of the Class B Common Stock (including the shares of Class A Common
Stock issuable upon certain transfers of the Class B Common Stock or at the
option of the holder thereof) held by Trilogy are "restricted securities" as
that term is defined in Rule
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144 of the Securities Act (the "Restricted Shares"). Restricted Shares may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or Rule 701 under the Securities
Act. As a result of contractual restrictions and the provisions of Rules 144
and 701, additional shares will be available for sale in the public market as
follows: (i) no Restricted Shares will be eligible for immediate sale on the
effective date of this offering; (ii) approximately 80,673 Restricted Shares
will be eligible for sale 90 days after the date of this offering; (iii)
approximately 77,975 Restricted Shares will be eligible for sale without
restriction and 25,000 Restricted Shares will be eligible for sale subject to
volume limitations, in each case 180 days after the effective date of this
offering upon the expiration of a contractual lock-up agreement with the
Company and the representatives of the Underwriters and (iv) and approximately
43,000 of the Restricted Shares will be eligible for sale from time to time
thereafter upon expiration of their respective holding periods under Rule 144.
In addition, assuming no exercise of the Trilogy Options, the 12,757,000
shares of Class A Common Stock issuable upon conversion of Class B Common
Stock will be eligible for sale by Trilogy 180 days after the date of this
offering upon the expiration of contractual lock-up agreements. In the event
the Trilogy Options are exercised, one year after such options are exercised,
the 155,000 Trilogy Option Shares will become eligible for sale pursuant to
Rule 144, subject to the volume limitations and other restrictions, which
generally is applicable to a transferee of shares sold by an Affiliate. The
Company's officers and directors and Trilogy have agreed not to sell any of
their shares of Common Stock for 180 days after the date of this Prospectus
without the prior written consent of Goldman, Sachs & Co. Goldman, Sachs &
Co., on behalf of the Underwriters, may, in its sole discretion and at any
time without notice, release all or any portion of securities subject to the
lock-up agreement with the Underwriters.
In general, under Rule 144 as currently in effect, beginning 90 days after
the offering, a person (or persons whose shares are aggregated) who owns
shares that were purchased from the Company (or any Affiliate) at least one
year previously, including any person who may be deemed an Affiliate of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
the Common Stock, or (ii) the average weekly trading volume of the Common
Stock on the Nasdaq National Market during the four calendar weeks preceding
the date on which notice of the sale is filed with the Securities and Exchange
Commission (the "Commission"). Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about the Company. Any person (or persons whose
shares are aggregated) who is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who owns
Restricted Shares under Rule 144 that were purchased from the Company (or any
Affiliate) at least two years previously, would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers prior to the date the
issuer becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written
compensatory benefit plans or written contracts relating to the compensation
of such persons. In addition, the Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject
to the reporting requirements of the Exchange Act, along with the shares
acquired upon exercise of such options (including exercises after the date of
this Prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this Prospectus, may be sold (i) by
persons other than Affiliates, subject only to the manner of sale provisions
of Rule 144, and (ii) by Affiliates under Rule 144 without compliance with its
one-year holding period requirement.
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The Company has agreed not to offer, sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or any rights to acquire Common Stock for a
period of 180 days after the date of this Prospectus, without the prior
written consent of Goldman, Sachs & Co., subject to certain limited
exceptions. See "Underwriting".
Trilogy and its transferees, including, to the extent the Trilogy Options
are exercised, the holders of Trilogy Option Shares, have the right in certain
circumstances to require the Company to register their shares of Class B
Common Stock and the shares of Class A Common Stock issuable upon conversion
of such Class B Common Stock under the Securities Act for resale to the
public. These registration rights are subject to certain conditions and
limitations, among them the right of the underwriters, if any, of an offering
to limit the number of shares included in such registration. If the Company
were required to include in a Company-initiated registration shares held by
Trilogy or its transferees, including, to the extent the Trilogy Options are
exercised, the holders of Trilogy Option Shares, such registration or sales of
stock may have a material adverse effect on the market price for the Company's
Class A Common Stock and on the Company's ability to raise new capital. In
addition, the Company intends to file a registration statement under the
Securities Act covering approximately 4,853,725 shares of Class A Common Stock
reserved for issuance under the Option Plans. See "Management--1996 Stock
Option Plan" and "Management--1999 Stock Incentive Plan". Such registration
statement is expected to be filed within 90 days after the date of this
Prospectus and will automatically become effective upon filing. Following such
filing, shares registered under such registration statement will, subject to
the Lock-Up Agreements, Rule 144 volume limitations applicable to Affiliates
and the lapsing of the Company's repurchase rights, be available for sale in
the open market upon the exercise of vested options 90 days after the
effective date of this Prospectus. At December 31, 1998, options to purchase
3,207,074 shares were issued and outstanding under the 1996 Plan. See "Shares
Eligible for Future Sale".
Effect of Certain Charter Provisions; Anti-Takeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law
The Company's Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), and Bylaws, as amended and restated ("Bylaws"), contain
certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals that a stockholder might consider favorable. These provisions
include the right of the holders of Class B Common Stock to eight votes per
share, versus one vote per share for the holders of Class A Common Stock, and
provide that stockholders may not call special meetings. In addition, upon
completion of this offering, the Company's Certificate of Incorporation will
authorize the Board of Directors to issue without stockholder approval "blank
check" preferred stock with voting, conversion and other rights and
preferences that could adversely affect the voting power or other rights of
the holders of Common Stock of the Company. In addition, certain provisions of
Delaware law may also have the effect of discouraging, delaying or preventing
a change in control of the Company or unsolicited acquisition proposals. The
anti-takeover effect of these provisions may also have an adverse effect on
the public trading price of the Company's Class A Common Stock. See
"Management--Stock Plans", "Description of Capital Stock--Preferred Stock" and
"--Certain Anti-Takeover, Limited Liability and Indemnification Provisions;
Section 203 of the Delaware General Corporation Law".
Legal Proceedings
The Company is from time to time involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. In January 1999,
the Company filed an action for declaratory judgment against its former Vice
President, Sales from July 1998 to December 1998, seeking to have certain
claims for sales commissions, other commissions and stock grants declared
invalid. On
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February 5, 1999, the defendant in the Company's action filed a complaint
against the Company and Christina C. Jones, the Company's President and Chief
Operating Officer, requesting actual and punitive damages of not less than
$3.0 million as a result of the alleged failure of the Company to pay certain
commissions and make certain stock grants, among other matters. The Company
intends to contest the action vigorously and does not believe that resolution
of this action will have a material adverse effect on the Company's financial
condition. However, litigation is subject to inherent uncertainties and,
therefore, there can be no assurance that this action will not have a material
adverse effect on the Company's business, results of operations or financial
condition. See "Business--Legal Proceedings".
Immediate and Substantial Dilution
The initial public offering price is substantially higher than the book
value per share of all of the outstanding classes of Common Stock. As a
result, investors purchasing Class A Common Stock in this offering will incur
immediate and substantial dilution. To the extent outstanding options to
purchase Class A Common Stock are exercised, there will be further dilution to
such investors. See "Dilution" and "Shares Eligible for Future Sale".
Uncertainty as to Use of Proceeds
The principal purposes of this offering are to increase the Company's
working capital, to create a public market for the Company's Class A Common
Stock and to facilitate future access to public equity markets. The Company
currently has no specific plans for the use of the net proceeds from this
offering other than for general corporate purposes, including working capital
and capital expenditures. Accordingly, the Company's management will retain
broad discretion as to the allocation of a substantial portion of the net
proceeds from this offering. Pending any such uses, the Company plans to
invest the net proceeds in investment-grade, interest-bearing securities. See
"Use of Proceeds" and "Certain Transactions".
26
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,200,000 shares of
Class A Common Stock to be sold by the Company hereby will be approximately
$41,766,000 (approximately $48,210,900 if the Underwriters exercise their
over-allotment option in full), after deduction of underwriting discounts and
commissions and estimated offering expenses payable by the Company.
The principal purposes of this offering are to increase the Company's
working capital, to create a public market for the Company's Class A Common
Stock, to facilitate future access by the Company to public equity markets,
and to provide increased visibility and credibility to the Company. The
Company presently has no specific plans for use of the net proceeds of this
offering. The Company intends to use the net proceeds primarily for general
corporate purposes, including working capital to fund anticipated operating
losses arising in part from substantial investment in expanding the Company's
sales and marketing organization, and capital expenditures. The Company may,
when and if the opportunity arises, use an unspecified portion of the net
proceeds to acquire or invest in complementary businesses, products and
technologies. The Company has no present understandings, commitments or
agreements with respect to any material acquisition of, or investment in,
third parties. The Company believes that its existing capital resources,
combined with the net proceeds of this offering, will be sufficient to meet
its presently anticipated cash requirements through at least the next 12
months. There can be no assurance that the Company will not be required to
raise additional financing prior to such time, that additional financing will
be available when needed or that, if available, such financing will be
available on terms favorable to the Company and its stockholders. Pending use
of the net proceeds for the above purposes, the Company intends to invest such
funds in interest- bearing, investment-grade securities. See "Risk Factors--
Future Capital Needs; Uncertainty of Additional Financing".
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends on its Class A Common
Stock or Class B Common Stock in the foreseeable future.
27
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1998, the cash position
and capitalization of the Company (i) on an actual basis, and (ii) on an as
adjusted basis to give effect to the sale by the Company of the 2,200,000
shares of Class A Common Stock offered by the Company hereby and the receipt
by the Company of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
December 31, 1998
--------------------
Actual As Adjusted
------- -----------
(in thousands,
except share
amounts)
<S> <C> <C>
Cash and cash equivalents................................. $ 4,726 $46,908
======= =======
Long-term obligations, less current portion............... $ -- $ --
Stockholders' equity (deficit):
Preferred Stock, $.01 par value per share; 10,000,000
shares authorized; no shares issued or outstanding
(actual and as adjusted)............................... -- --
Class A Common Stock, $.01 par value per share;
37,243,000 shares authorized; 191,602 shares issued and
outstanding (actual)(1); and 2,391,602 shares issued
and outstanding (as adjusted)(1)....................... 1 23
Class B Common Stock, $.01 par value per share;
12,757,000 authorized; 12,757,000 shares issued and
outstanding (actual and as adjusted)................... 128 128
Additional paid-in capital.............................. 4,024 45,768
Deferred stock compensation............................. (1,726) (1,726)
Accumulated deficit..................................... (10,972) (10,972)
------- -------
Total stockholders' equity (deficit).................. (8,545) 33,221
------- -------
Total capitalization.................................. $(8,545) $33,221
======= =======
</TABLE>
- --------
(1) Based on the number of shares outstanding as of December 31, 1998.
Excludes (i) 3,207,074 shares of Class A Common Stock issuable upon the
exercise of outstanding stock options under the Company's 1996 Stock
Option Plan (the "1996 Option Plan") at a weighted average exercise price
of $4.00 per share and (ii) an additional 144,324 shares of Class A Common
Stock reserved for future grant under the 1996 Option Plan. Also excludes
the right under the terms of an applications subscription agreement to
require the Company to grant to a customer an option to purchase up to
320,000 shares of Class A Common Stock if one of specified certain events
occurs, including an initial public offering. As of December 31, 1998, no
specified event had occurred and the option was not outstanding. See
"Management--1996 Stock Option Plan", "--Agreement Regarding Grant of
Options" and Note 8 of Notes to Financial Statements.
28
<PAGE>
DILUTION
At December 31, 1998, the net tangible book value of the Company was a
deficit of $9,210,000, or $0.71 per share of Common Stock. Net tangible book
value (deficit) per share represents the amount of total tangible assets of
the Company reduced by the amount of its total liabilities, divided by the
number of shares of Common Stock outstanding. After giving effect to the sale
by the Company of the 2,200,000 shares of Class A Common Stock offered by the
Company hereby and the receipt by the Company of the estimated net proceeds
therefrom, the pro forma net tangible book value of the Company as of December
31, 1998 would have been $33,221,000, or $2.19 per share of Common Stock. This
represents an immediate increase in pro forma net tangible book value of $2.90
per share to existing stockholders and an immediate dilution of $18.81 per
share to new investors purchasing shares of Class A Common Stock in this
offering. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $21.00
Net tangible book deficit per share as of December 31, 1998... $(0.71)
Increase per share attributable to new investors.............. 2.90
------
As adjusted net tangible book value per share after this
offering....................................................... 2.19
------
Dilution per share to new investors............................. $18.81
======
</TABLE>
The following table sets forth, on an as adjusted basis as of December 31,
1998, with respect to existing stockholders and new investors in this
offering, a comparison of the number of shares of Common Stock acquired from
the Company, the percentage ownership of such shares, the total cash
consideration paid, the percentage of total cash consideration paid and the
average price per share paid assuming the sale by the Company of the 2,200,000
shares of Class A Common Stock offered by the Company hereby and the receipt
by the Company of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 12,948,602 85.5% $ 446,000 1.0% $ 0.03
New investors.................. 2,200,000 14.5 46,200,000 99.0 $21.00
---------- ----- ----------- -----
Total........................ 15,148,602 100.0% $46,646,000 100.0%
========== ===== =========== =====
</TABLE>
The preceding table assumes no exercise of any outstanding stock options. As
of December 31, 1998, there were options outstanding to purchase a total of
3,207,074 shares of Class A Common Stock at a weighted average exercise price
of $4.00 per share and 144,324 additional shares reserved for future grant.
Also excludes the right under the terms of an applications subscription
agreement to require the Company to grant to a customer an option to purchase
up to 320,000 shares of Class A Common Stock if one of specified certain
events occurs, including an initial public offering. As of December 31, 1998,
no specified event had occurred and the option was not outstanding. To the
extent outstanding options are exercised or shares reserved for future grant
are issued, there will be further dilution to new investors. See "Management--
1996 Stock Option Plan" and Note 8 of Notes to Financial Statements.
29
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and with the Financial Statements and Notes thereto which are
included elsewhere in this Prospectus. The statement of operations data for
the fiscal years ended December 31, 1996, 1997 and 1998 and the balance sheet
data at December 31, 1997 and 1998 are derived from the audited Financial
Statements included elsewhere in this Prospectus. The statement of operations
data for the years ended December 31, 1994 and 1995, and the balance sheet
data at December 31, 1994, 1995 and 1996 are derived from audited financial
statements not included in this Prospectus. Historical results are not
necessarily indicative of results in the future. See "Risk Factors--
Significant Fluctuations in Future Operating Results" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Software and subscriptions..... $ -- $ 1,836 $ 3,633 $ 6,475 $ 12,651
Content and services........... 515 1,887 2,249 4,114 9,063
-------- -------- -------- -------- --------
Total revenues................ 515 3,723 5,882 10,589 21,714
-------- -------- -------- -------- --------
Cost of revenues:
Software and subscriptions..... 148 818 822 1,023 3,242
Content and services........... 390 953 1,112 2,553 7,068
-------- -------- -------- -------- --------
Total cost of revenues........ 538 1,771 1,934 3,576 10,310
-------- -------- -------- -------- --------
Gross profit (loss)............. (23) 1,952 3,948 7,013 11,404
Operating expenses:
Research and development....... 106 660 1,168 1,129 4,292
Selling and marketing.......... 72 577 2,555 4,793 12,151
General and administrative..... -- 116 726 1,792 3,689
Amortization of deferred stock
and stock compensation
expense....................... -- -- -- -- 1,468
-------- -------- -------- -------- --------
Total operating expenses...... 178 1,353 4,449 7,714 21,600
-------- -------- -------- -------- --------
Operating income (loss)......... (201) 599 (501) (701) (10,196)
Interest income................. -- -- -- -- 172
-------- -------- -------- -------- --------
Income (loss) before income
taxes.......................... (201) 599 (501) (701) (10,024)
Income tax provision
(benefit)(1)................... (68) 207 (191) 427 (386)
-------- -------- -------- -------- --------
Net income (loss)(1)............ $ (133) $ 392 $ (310) $ (1,128) $ (9,638)
======== ======== ======== ======== ========
Basic and diluted net income
(loss) per share(1)............ $ (0.10) $ 0.03 $ (0.02) $ (0.09) $ (0.75)
======== ======== ======== ======== ========
Weighted average shares
outstanding.................... 1,280 12,800 12,800 12,800 12,861
======== ======== ======== ======== ========
<CAPTION>
December 31,
-----------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents(2).... $ -- $ -- $ -- $ 2,207 $ 4,726
Working capital (deficit)(3).... (291) 255 (253) (1,489) (9,045)
Total assets.................... 1,088 1,492 3,435 4,978 12,254
Stockholders' equity (deficit).. (287) 442 132 (995) (8,545)
</TABLE>
- --------
(1) The unaudited pro forma income tax benefit, unaudited pro forma net loss
and unaudited pro forma basic and diluted net loss per share for the year
ended December 31, 1998 computed as if the Company filed a separate income
tax return is $292,000, $9,732,000 and $.76 per share, respectively.
(2) Prior to 1997, the Company relied on Trilogy for all of its cash
management requirements.
(3) Working capital (deficit) at December 31, 1996, 1997 and 1998 includes the
effect of deferred revenue of $2,162,000, $4,212,000 and $10,428,000,
respectively.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the more detailed information and the Financial
Statements and Notes thereto included elsewhere in this Prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including, but not limited to, those set forth under "Risk Factors"
and elsewhere in this Prospectus.
Overview
pcOrder is a leading provider of Internet-based e-commerce solutions that
are designed to enable the computer industry's suppliers, resellers and end
users to buy and sell computer products online. The Company leverages Internet
technologies to provide comprehensive e-commerce solutions designed to
increase sales and marketing productivity, meet end-user demand for online
ordering, reduce costs and shorten order fulfillment cycles for industry
participants. The Company's solutions include software applications that
automate product search, comparison, configuration, pricing, financing and
ordering, combined with what the Company believes is the industry's largest
content database consisting of detailed product, categorization,
compatibility, pricing and availability information.
The Company was established as a separate business unit within Trilogy on
July 1, 1993, and was incorporated on July 18, 1994. The Company began to
recognize revenue in April 1994, and has periodically released new products
and enhancements to its existing products since that date. In late 1996, Ross
A. Cooley joined the Company as Chairman and Chief Executive Officer and
brought significant computer industry experience and long-term relationships
with computer industry participants to the Company. Since that time, the
Company's e-commerce solutions for the computer industry have gained broader
acceptance, and have been adopted by market leaders including Compaq Computer
Corporation ("Compaq"), CompuCom Systems, Inc. ("CompuCom"), CompUSA Inc.
("CompUSA"), CMP Publications, Inc. ("CMP Publications"), GE Capital Corp.
("GE Capital"), Hewlett-Packard Company ("HP"), Ingram Micro, International
Business Machines Corporation ("IBM"), Kingston Technology Corporation
("Kingston"), Nortel Networks Inc. ("Nortel Networks"), MCI Systemhouse Corp.
("MCI Systemhouse"), MicroAge Integration Company, PC Wholesale, Pinacor, Inc.
("Pinacor") and Tech Data Corporation ("Tech Data"). In addition, over 500
resellers use the Company's solution. The Company's revenues have grown from
$5.9 million in 1996 to $21.7 million in 1998.
The Company derives its revenues from software and subscription fees and
related content and service fees. Software and subscription fees consist of
subscription-based and perpetual license arrangements. Prior to 1997, the
Company's software and subscription fees had been derived primarily from
perpetual licenses of the Company's products. In late 1996, the Company
commenced a transition of its pricing model to subscription-based
arrangements. Currently, the Company derives the majority of its software and
subscription fees from subscription-based arrangements, but may from time to
time grant perpetual licenses to accommodate individual customer needs.
Content fees are charged for access, entry, updating and maintenance of
computer product data and are generally contracted for on a subscription
basis. The Company's service fees consist of providing integration,
customization and training services to the Company's customers. Such fees are
generally charged on a time and materials basis; however, the Company has in
the past and may from time to time in the future provide such services on a
fixed price basis.
Revenue from perpetual licenses and software subscriptions is recognized
when persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed or determinable and collectibility is probable. In
the case of perpetual licenses, revenue is recognized immediately upon
31
<PAGE>
achievement of the above criteria. In the case of subscriptions, revenue
recognition commences upon achievement of the above criteria, but is generally
recognized ratably over the life of the arrangement. Software maintenance fees
relating to perpetual licenses are recognized ratably over the term of the
applicable maintenance agreement. Content fees are generally recognized
ratably over the applicable maintenance period, which generally commences upon
initial content entry.
Time and materials service fees are recognized as the services are
performed. The Company recognizes revenue on fixed price service arrangements
upon (i) the completion of specific contractual events, or (ii) based on an
estimated percentage of completion as work progresses.
The Company records cash advances and amounts billed in excess of revenue
recognized as deferred revenue. The Company's deferred revenue balance on
December 31, 1998 was $12.5 million. Approximately $10.4 million of this
deferred revenue is expected to be recognized as revenue within the following
twelve months, with the remaining amount expected to be recognized subsequent
to December 31, 1999. The deferred revenue balance generally results from
contractual commitments made by customers to pay amounts to the Company in
advance of receipt of products or services. The timing and amount of cash
advances from customers can vary significantly depending on specific contract
terms and can therefore have a significant impact on the amount of deferred
revenue in any given period. Deferred revenue is not indicative of the
Company's contract backlog or future revenues. The Company derives the
majority of its revenues from subscription-based arrangements which may have
pre-payment terms resulting in deferred revenue and which require renewal for
license access and service beyond the contract period. Fluctuations in
deferred revenue result in similar fluctuations in the Company's cash flow
from operations.
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" was
issued in October 1997 by the American Institute of Certified Public
Accountants ("AICPA") and amended by SOP 98-4, "Deferral of the Effective Date
of a Provision of SOP 97-2". The Company adopted SOP 97-2 and SOP 98-4
effective January 1, 1998. Effective December 15, 1998, the AICPA issued SOP
98-9, "Modification of SOP 97-2, "Software Revenue Recognition', With Respect
to Certain Transactions." SOP 98-9 amends SOP 97-2 and 98-4, extending the
deferral of the application of certain passages of SOP 97-2 provided by SOP
98-4 through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. The Company does not believe that the
final adoption of SOP 98-9 will have a material effect on the Company's
financial condition or results of operations.
Pursuant to an intercompany license agreement with Trilogy, the Company is
obligated to pay Trilogy royalties based on fees generated from perpetual
license agreements, software maintenance and subscription-based licenses.
Also, the Company has entered into certain agreements with Trilogy pursuant to
which Trilogy provides certain administrative and corporate support services
to the Company, including certain tax administration, payroll, payroll
accounting, banking, corporate finance, recruiting and employee training
services. In addition, the Company has entered into a tax allocation agreement
with Trilogy. See Notes 2 and 4 of Notes to Financial Statements.
Except for a small profit in 1995, the Company has incurred annual losses
from operations from its inception in July 1993 to date, and the Company
expects to continue to incur losses from operations on both a quarterly and an
annual basis for the foreseeable future. The Company had an accumulated
deficit of $11.0 million at December 31, 1998. Furthermore, the Company
intends to invest significantly in its sales and marketing organization,
programs and activities to increase sales of its products and services to its
existing customers and to new customers. However, historically the Company has
experienced a lengthy cycle for sales of its products to resellers and longer
sales cycles for sales of its products to manufacturers and distributors.
Consequently, even if the Company achieves increased sales of its products and
services as a result of its investments in its salesforce, such increases
likely will not be recognized in the quarter in which such investments are
made.
32
<PAGE>
Because the market for the Company's products has only recently emerged, and
based on other factors described in this Prospectus, the Company believes that
its quarterly and annual revenues, expenses and operating results are likely
to vary significantly in the future, that period-to-period comparisons of the
Company's results of operations are not necessarily meaningful and that such
comparisons should not be relied upon as indications of future performance.
Moreover, although the Company's revenues have increased in recent periods,
there can be no assurance that the Company's revenues will grow in future
periods, that they will grow at past rates or that the Company will achieve
profitability on a quarterly or annual basis in the future. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in the early stage of development,
particularly companies in new and rapidly evolving markets. There can be no
assurance that the Company will be successful in addressing such risks and
difficulties or that the Company will achieve or sustain profitability in the
future.
Results of Operations
The following table sets forth the results of operations for the Company
expressed as a percentage of total revenues. The Company's historical
operating results are not necessarily indicative of the results for any future
period.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Revenues:
Software and subscriptions.................................. 62% 61% 58%
Content and services........................................ 38 39 42
--- --- ---
Total revenues............................................ 100 100 100
--- --- ---
Cost of revenues:
Software and subscriptions................................... 14 10 15
Content and services........................................ 19 24 33
--- --- ---
Total cost of revenues.................................... 33 34 48
--- --- ---
Gross profit................................................. 67 66 52
Operating expenses:
Research and development.................................... 20 11 20
Selling and marketing....................................... 43 45 56
General and administrative.................................. 12 17 17
Amortization of deferred stock and stock compensation
expense.................................................... -- -- 6
--- --- ---
Total operating expenses.................................. 75 73 99
--- --- ---
Operating loss............................................... (8) (7) (47)
Interest income.............................................. -- -- 1
--- --- ---
Loss before income taxes..................................... (8) (7) (46)
Income tax provision (benefit)............................... (3) 4 (2)
--- --- ---
Net loss..................................................... (5)% (11)% (44)%
=== === ===
</TABLE>
33
<PAGE>
Comparison of 1997 and 1998
Revenues
Total revenues increased 105% from $10.6 million in 1997 to $21.7 million in
1998. The Company's top five customers in 1997 accounted for 64% of total
revenues during the year, and the Company's top five customers in 1998
accounted for 62% of total revenues during the year.
Software and Subscriptions. Software and subscription revenues increased 95%
from $6.5 million in 1997 to $12.7 million in 1998, representing 61% and 58%
of total revenues, respectively. The increase in absolute dollars was due
primarily to the addition of subscription-based and perpetual license
customers and increased subscription-based arrangements for additional
authorized users for existing customers. Software and subscription revenues
decreased as a percentage of total revenues primarily due to a higher relative
increase in content and service revenues related to additional content fees,
software integration, customization and training services associated with the
Company's increased customer base.
Software and subscription revenues recognized under perpetual licenses were
$744,000 and $3.2 million in 1997 and 1998, respectively, representing 7% and
15% of total revenues, respectively. The increase in absolute dollars and as a
percentage of total revenues was due primarily to a perpetual license
agreement executed during 1998.
Content and Services. Content and service revenues increased 120% from $4.1
million in 1997 to $9.1 million in 1998, representing 39% and 42% of total
revenues, respectively. The increase in absolute dollars and as a percentage
of total revenues was due primarily to additional content fees and software
integration, customization and training services associated with the Company's
increased customer base.
Cost of Revenues
Software and Subscriptions. Cost of software and subscription revenues
consists primarily of royalties paid to Trilogy and the cost of providing
software maintenance. Cost of software and subscription revenues increased
217% from $1.0 million during 1997 to $3.2 million during 1998, representing
16% and 26% of software and subscription revenues, respectively. The increase
in cost of software and subscription revenues in absolute dollars was due
primarily to (i) the increase in customer support headcount and the related
operating expenses and (ii) the increase in royalties paid to Trilogy on
software applications as a result of increased total revenues. The increase in
cost of software and subscription revenues as a percentage of software and
subscription revenues was due primarily to the increased personnel and other
costs associated with providing software maintenance services to a greater
number of customers.
Content and Services. Cost of content and service revenues consists
primarily of the cost of providing access, entry, update and maintenance
services for computer product information services and the cost of in-house
and contract personnel providing software integration, customization and
training services. Cost of content and service revenues increased 177% from
$2.6 million in 1997 to $7.1 million in 1998, representing 62% and 78% of
content and service revenues, respectively. The increase in cost of content
and service revenues in absolute dollars and as a percentage of content and
service revenues was due primarily to (i) the increase in headcount within the
Company's content management group ("PC Labs") and the depreciation related to
additional computer equipment for PC Labs purchased during 1998 and (ii) the
increased personnel and other costs associated with providing software
integration, customization and training services to a greater number of
customers. Additionally, the increase in cost of content and service revenues
as a percentage of total revenues for 1998 was offset primarily by the
recognition of revenue under a fixed fee arrangement for which the majority of
the associated costs were expensed in the fourth quarter of 1997.
34
<PAGE>
Operating Expenses
Research and Development. Research and development expenses consist
primarily of personnel costs to support product development. Research and
development expenses increased 280% from $1.1 million in 1997 to $4.3 million
in 1998, representing 11% and 20% of total revenues, respectively. These
increases were due primarily to an increase in internal development personnel.
The Company believes that continued investment in research and development is
critical to attaining its strategic objectives and, as a result, expects
research and development costs in absolute dollars to increase significantly
in future periods.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries and outsourced personnel costs, advertising, travel, tradeshows and
public relations expenses. Selling and marketing expenses increased 154% from
$4.8 million in 1997 to $12.2 million in 1998, representing 45% and 56% of
total revenues, respectively. The increase in absolute dollars was due
primarily to an increase in personnel and the Company's increased marketing
campaign expenditures. The Company believes that such expenses will increase
in absolute dollars and as a percentage of revenues in future periods as it
expands its sales and marketing organization and activities.
General and Administrative. General and administrative expenses consist
primarily of personnel costs, recruiting and professional legal and accounting
services, as well as management fees paid to Trilogy. General and
administrative expenses increased 106% from $1.8 million in 1997 to $3.7
million in 1998, representing 17% of total revenues in both periods. The
increase in absolute dollars was due primarily to increased personnel and
facility expenses necessary to support the Company's growth. The Company
believes general and administrative expenses will increase in absolute dollars
as the Company expands its personnel and infrastructure to support its growth
and assumes the responsibilities of a public company.
Amortization of Deferred Stock and Stock Compensation Expense. In 1998, the
Company recorded total deferred stock compensation of $2.8 million in
connection with stock options granted during 1998. Such amount is being
amortized over the vesting periods of the applicable options, resulting in
amortization of $1.1 million for 1998. These amounts represent the difference
between the exercise price of certain stock option grants and the deemed fair
value of the Company's Common Stock at the time of such grants. Additionally,
the Company recorded approximately $383,000 in stock compensation expense
which represents the fair value of options granted to certain non-employees
during the year.
Income Taxes
The Company is included in the consolidated income tax return of Trilogy.
The Company has also entered into a tax sharing agreement with Trilogy. Should
Trilogy's ownership interest fall below 80% of the outstanding shares, the
Company will no longer be included in the consolidated group or subject to the
tax sharing agreement. See Note 2 of Notes to Financial Statements.
The Company's effective tax rate was 61.0% and (3.9)% for 1997 and 1998,
respectively. The primary differences between the effective tax rates for such
periods resulted from increases to the valuation allowance for the Company's
deferred tax assets. The pro forma income tax provision reflects the income
tax benefit for 1998 as if the Company had filed a separate income tax return.
Comparison of 1996 and 1997
Revenues
The Company's total revenues increased 80% from $5.9 million in 1996 to
$10.6 million in 1997. The Company's top five customers for 1996 accounted for
approximately 89% of total revenues in 1996, and the Company's top five
customers for 1997 accounted for 64% of total revenues in 1997.
Software and Subscriptions. Software and subscription revenues increased 78%
from $3.6 million in 1996 to $6.5 million in 1997, representing 62% and 61% of
total revenues, respectively.
35
<PAGE>
The increase in absolute dollars was due primarily to the increase in revenues
from subscription-based arrangements, partially offset by the decrease in
revenues from perpetual licenses, as customer demand shifted from perpetual
licenses to subscription-based arrangements. Software and subscription
revenues recognized under perpetual licenses were $2.0 million and $744,000 in
1996 and 1997, respectively, representing 33% and 7% of total revenues,
respectively. Revenues from subscription-based arrangements increased due
primarily to additional subscription- based customers.
Content and Services. Content and service revenues increased 83% from $2.2
million in 1996 to $4.1 million in 1997, representing 38% and 39% of total
revenues, respectively. The increase was due primarily to an increase in
content fees associated with new content customers and software integration,
customization and training services associated with an increase in the number
of software and subscription customers.
Cost of Revenues
Software and Subscriptions. Cost of software and subscription revenues
increased from $822,000 in 1996 to $1.0 million in 1997, representing 23% and
16% of software and subscription revenues, respectively. The decrease in cost
of software and subscription revenues as a percentage of such revenues was due
primarily to higher deployment costs incurred in 1996 as compared to 1997.
Content and Services. Cost of content and service revenues increased from
$1.1 million in 1996 to $2.6 million in 1997, representing 49% and 62% of
content and service revenues, respectively. The increase in cost of content
and service revenues in absolute dollars was due primarily to an increase in
personnel and other costs associated with providing these services to a
greater number of customers. Cost of content and service revenues increased as
a percentage of content and service revenues due primarily to an increase in
headcount in PC Labs and an increase in service personnel to handle the
Company's increased content and software customer base, and the incurrence of
costs associated with deployment of a fixed fee consulting arrangement in 1997
with the recognition of related revenues in 1998.
Operating Expenses
Research and Development. Research and development expenses decreased
marginally from $1.2 million in 1996 to $1.1 million in 1997, representing 20%
and 11% of total revenues, respectively. The decrease as a percentage of
revenues was due primarily to the completion of the development of certain of
the Company's products as such products became available for sale and
deployment in 1997. As a result, research and development expenses in absolute
dollars remained relatively flat from 1996 to 1997.
Selling and Marketing. Selling and marketing expenses increased 88% from
$2.6 million in 1996 to $4.8 million in 1997, representing 43% and 45% of
total revenues, respectively. The increase in absolute dollars was due
primarily to increases in personnel and expenditures relating to the Company's
sales and marketing organization and activities.
General and Administrative. General and administrative expenses increased
147% from $726,000 in 1996 to $1.8 million in 1997, representing 12% and 17%
of total revenues, respectively. The increase in absolute dollars and as a
percentage of total revenues was due primarily to increased personnel and
facility expenses necessary to support the Company's growth.
Income Taxes
The Company is included in the consolidated income tax return of Trilogy. An
income tax provision was recorded by the Company using an effective tax rate
of 38% and 61% for the years ended December 31, 1996 and 1997, respectively.
The increase in the effective rate for 1997 resulted from the establishment of
a valuation allowance to reduce the Company's net deferred tax assets to zero.
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<PAGE>
Unaudited Quarterly Results Of Operations
The following table sets forth certain unaudited quarterly statement of
operations data for the eight quarters ended December 31, 1998. In the opinion
of management, this information has been prepared substantially on the same
basis as the audited Financial Statements appearing elsewhere in this
Prospectus, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results of operations. The quarterly data should be
read in conjunction with the audited Financial Statements of the Company and
the Notes thereto appearing elsewhere in this Prospectus. The operating
results for any quarter are not necessarily indicative of the operating
results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Software and
subscriptions......... $1,259 $1,382 $1,717 $2,117 $2,397 $3,075 $ 3,264 $ 3,915
Content and services... 872 1,001 1,099 1,142 2,108 2,003 2,312 2,640
------ ------ ------ ------ ------ ------ ------- -------
Total revenues....... 2,131 2,383 2,816 3,259 4,505 5,078 5,576 6,555
------ ------ ------ ------ ------ ------ ------- -------
Cost of revenues:
Software and
subscriptions......... 182 194 232 415 580 634 983 1,045
Content and services... 389 586 740 838 946 1,417 1,780 2,925
------ ------ ------ ------ ------ ------ ------- -------
Total cost of
revenues............ 571 780 972 1,253 1,526 2,051 2,763 3,970
------ ------ ------ ------ ------ ------ ------- -------
Gross profit............ 1,560 1,603 1,844 2,006 2,979 3,027 2,813 2,585
Operating expenses:
Research and
development........... 283 221 320 305 810 975 1,148 1,359
Selling and marketing.. 988 1,183 1,270 1,352 1,553 2,170 4,601 3,827
General and
administrative........ 261 305 404 822 636 660 1,160 1,233
Amortization of
deferred stock and
stock compensation
expense............... -- -- -- -- -- 227 727 514
------ ------ ------ ------ ------ ------ ------- -------
Total operating
expenses............ 1,532 1,709 1,994 2,479 2,999 4,032 7,636 6,933
------ ------ ------ ------ ------ ------ ------- -------
Operating income
(loss)................. 28 (106) (150) (473) (20) (1,005) (4,823) (4,348)
Interest income......... -- -- -- -- 7 38 62 65
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) before
income taxes........... 28 (106) (150) (473) (13) (967) (4,761) (4,283)
Income tax provision
(benefit).............. (18) 65 93 287 -- -- (203) (183)
------ ------ ------ ------ ------ ------ ------- -------
Net income (loss)....... $ 46 $ (171) $ (243) $ (760) $ (13) $ (967) $(4,558) $(4,100)
====== ====== ====== ====== ====== ====== ======= =======
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of Total
Revenues:
Revenues:
Software and
subscriptions......... 59% 58% 61% 65% 53% 61% 59% 60%
Content and services... 41 42 39 35 47 39 41 40
------ ------ ------ ------ ------ ------ ------- -------
Total revenues....... 100 100 100 100 100 100 100 100
------ ------ ------ ------ ------ ------ ------- -------
Cost of revenues:
Software and
subscriptions......... 9 8 8 13 13 12 18 16
Content and services... 18 25 27 25 21 28 32 45
------ ------ ------ ------ ------ ------ ------- -------
Total cost of
revenues............ 27 33 35 38 34 40 50 61
------ ------ ------ ------ ------ ------ ------- -------
Gross profit............ 73 67 65 62 66 60 50 39
Operating expenses:
Research and
development........... 13 9 11 9 18 19 20 21
Selling and marketing.. 47 50 45 42 35 43 82 58
General and
administrative........ 12 12 15 25 14 13 21 19
Amortization of
deferred stock and
stock compensation
expense............... -- -- -- -- -- 5 13 7
------ ------ ------ ------ ------ ------ ------- -------
Total operating
expenses............ 72 71 71 76 67 80 136 105
------ ------ ------ ------ ------ ------ ------- -------
Operating income
(loss)................. 1 (4) (6) (14) (1) (20) (86) (66)
Interest income......... -- -- -- -- -- 1 1 1
------ ------ ------ ------ ------ ------ ------- -------
Income (loss) before
income taxes........... 1 (4) (6) (14) (1) (19) (85) (65)
Income tax provision
(benefit).............. (1) 3 3 9 -- -- (3) (2)
------ ------ ------ ------ ------ ------ ------- -------
Net income (loss)....... 2% (7)% (9)% (23)% (1)% (19)% (82)% (63)%
====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
The Company's total revenues and software and subscription revenues
increased quarter to quarter during each of the eight quarters ended December
31, 1998 due primarily to increasing market acceptance of the Company's
products, and increases in its installed base of customers. Content and
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<PAGE>
service revenues have generally increased quarter to quarter due primarily to
additional content fees, software integration, customization and training
services associated with an increase in the number of software applications
and content customers. Content and service revenues decreased as a percentage
of total revenues in the fourth quarter of 1997 and increased significantly in
absolute dollars and as a percentage of total revenues for the quarter ended
March 31, 1998 due primarily to the recognition of revenues from a significant
fixed fee arrangement in the quarter ended March 31, 1998 for which work began
in the quarter ended December 31, 1997. Cost of software and subscription
revenues increased in absolute dollars quarter to quarter with the increase in
software and subscription revenues. Cost of content and service revenues have
generally increased in absolute dollars and as a percentage of content and
service revenues quarter to quarter, with the exception of the quarter ended
March 31, 1998, due primarily to an increase in personnel and other costs
associated with providing these services to a greater number of customers. The
decrease in the quarter ended March 31, 1998, is due primarily to the fixed
fee arrangement discussed above.
Research and development expenses in absolute dollars and as a percentage of
total revenues were relatively constant through the four quarters ended
December 31, 1997. Commencing in the quarter ended March 31, 1998, research
and development expenses increased significantly in both absolute dollars and
as a percentage of revenues due to significant increases in research and
development personnel and related costs to fund development of new products,
data models and tools.
Selling and marketing expenses have increased in absolute dollars quarter to
quarter during each of the eight quarters ended December 31, 1998, reflecting
the increase in growth of the Company's sales and marketing organizations and
activities. Selling and marketing expenses increased in the third quarter of
1998 due primarily to increased marketing efforts focused on acquiring
regional resellers and corporate buyers, and remained relatively constant in
the fourth quarter of 1998.
With the exception of the quarter ended December 31, 1997, general and
administrative expenses generally increased quarter to quarter in absolute
dollars and remained relatively constant as a percentage of total revenues
through June 30, 1998. General and administrative expenses increased
significantly in the third and fourth quarters of 1998 due primarily to
increased personnel and facility expenses necessary to support the Company's
growth. The increase in the quarter ended December 31, 1997 was a result of an
increase in accrued management bonuses and allowance for bad debts.
Factors Affecting Operating Results
The Company's revenues and operating results have in the past fluctuated
significantly and are expected to fluctuate significantly in the future due to
a combination of factors, many of which are outside of the Company's control.
In addition, the timing and amount of revenues associated with particular
sales can vary significantly based upon (i) the number of products that are
accessed and the number of authorized users, and (ii) whether the fees are
perpetual or subscription-based. The Company has in the past recognized, and
may in the future be required to recognize, a significant portion of revenue
derived from license agreements with its customers in a single fiscal quarter,
which can cause significant variations in quarterly revenues. Moreover, small
delays in customer orders can cause significant variability in the Company's
total revenues and results of operations for any particular period. As a
result, the timing of significant orders and the recognition of revenue from
such orders is unpredictable. Unfavorable changes in any of the above factors
could materially and adversely affect the Company's revenues, gross margins
and results of operations in future periods.
As a result of the Company's limited operating history and the emerging
nature of the e-commerce market in which the Company competes, there can be no
assurance that the Company will be able to accurately forecast its revenues.
The Company's current and future expense levels are based primarily on its
operating plans and estimates of future revenues and are to a large extent
fixed costs. The
38
<PAGE>
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall in
revenues would likely have an immediate material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors--Significant Fluctuation in Future Operating Results". Based upon all
of the foregoing, the Company believes that its quarterly and annual revenues,
expenses and operating results are likely to vary significantly in the future,
that period-to-period comparisons of the Company's results of operations are
not necessarily meaningful and that such comparisons should not be relied upon
as indications of future performance. Moreover, although the Company's
revenues have increased in recent periods, there can be no assurance that the
Company's revenues will grow in future periods, that they will grow at past
rates or that the Company will achieve profitability on a quarterly or annual
basis in the future. Due to the foregoing as well as other factors, it is
likely that the Company's operating results will be below market analysts'
expectations in some future quarters, which could materially and adversely
affect the market price of the Common Stock.
Historically, the Company has received a significant portion of its revenues
from a limited number of customer agreements. The Company believes that a
customer's decision to purchase its products or license its technology is
relatively discretionary and, especially for large-scale users, generally
involves a significant commitment of capital resources. Therefore, any
downturn in the economy or in the business of customers or potential customers
could have a material adverse effect on the Company's revenues and quarterly
results of operations. See "Risk Factors--Significant Fluctuations in Future
Operating Results".
Due to the foregoing factors, it is likely that in some future quarters the
Company's operating results will fall below the expectations of securities
analysts and investors, which would likely have a material adverse effect on
the trading price of the Common Stock.
Liquidity and Capital Resources
From inception through 1996, the Company financed its operations primarily
through advances from its parent, Trilogy. Since 1997, the Company has
primarily financed its operations from cash provided by operations. As of
December 31, 1998, the Company had $4.7 million of cash and cash equivalents.
As of December 31, 1998, the Company's principal commitments consisted of
obligations outstanding under operating leases. Although the Company has no
material commitments for capital expenditures, management anticipates a
substantial increase in its capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure and
personnel.
Cash used by operations was $647,000 in 1996, and cash provided by
operations was $3.1 million and $4.7 million in 1997 and 1998, respectively.
Cash used in operations in 1996 resulted primarily from a net loss of $310,000
and an increase in accounts receivable of $2.2 million, largely offset by
increases in deferred revenue of $1.1 million and accounts payable and accrued
expenses of $618,000. Net cash provided by operations of $3.1 million in 1997
resulted primarily from an increase in deferred revenue of $2.1 million and
other favorable working capital changes, offset by a net loss of $1.1 million.
Net cash provided by operations of $4.7 million for the year ended
December 31, 1998 was primarily attributable to an increase in deferred
revenue of $8.3 million, an increase in the payable to Trilogy of $4.2
million, largely offset by a net loss of $9.6 million, net of the amortization
of deferred stock and stock compensation expense of $1.5 million.
Net cash used in investing activities of $359,000, $662,000, and $2.6
million for 1996, 1997 and 1998, respectively, was primarily related to
purchases of equipment. In 1998, the Company also had expenditures for
leasehold improvements related to the move into their current facility and
software and computers for additional employees.
39
<PAGE>
Cash provided by financing activities of $1.0 million in 1996 and cash used
in financing activities of $254,000 in 1997 was primarily attributable to the
net increase and decrease, respectively, in amounts payable to Trilogy for
advances received or repaid. Cash provided by financing activities of $445,000
for 1998, was attributable to proceeds received from the exercise of stock
options.
Since its inception, the Company has significantly increased its operating
expenses. The Company currently anticipates that it will continue to
experience significant growth in its operating expenses for the foreseeable
future and that its operating expenses will be a material use of the Company's
cash resources. The Company believes that its existing capital resources,
combined with the net proceeds of this offering, will be sufficient to meet
its presently anticipated cash requirements through at least the next 12
months. There can be no assurance that the Company will not be required to
raise additional financing prior to such time, that additional financing will
be available when needed or that, if available, such financing will be
available on terms favorable to the Company and its stockholders.
Recently Issued Accounting Pronouncements
See Note 2 of Notes to Financial Statements for recently adopted and
recently issued accounting standards.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. This could result in system failures or miscalculations,
causing disruptions of operations including, among other things, a temporary
inability to process transactions, send invoices or engage in other normal
business activities. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" requirements. The Company uses a number of computer software programs
and operating systems and its proprietary solutions include source code which
must address the Year 2000 issue. However, the Company believes that its Year
2000 issues are limited to information technology ("IT") systems (i.e.,
software programs and computer operating systems) and that because its
business is not solely dependent on the use of non-IT systems (i.e., embedded
systems such as devices used to control, monitor or assist the operation of
equipment and machinery), the failure of any such non-IT systems as a result
of Year 2000 issues would not have a material adverse effect on the Company's
operations.
The Company relies, in part, on Trilogy's internal computer systems. The
Company has been informed by Trilogy that Trilogy's internal computer systems
are Year 2000 compliant. The Company has completed a limited review of its IT
systems and the products for which the Company currently provides maintenance
and support, which involved testing and verification as described below. Based
on such review, the Company believes its own IT systems and the products for
which the Company currently provides maintenance and support are Year 2000
compliant. The Company's Year 2000 compliance effort consisted of verifying
and testing the ability of the products for which the Company currently
provides maintenance and support to successfully handle the date change from
December 31, 1999 to January 1, 2000, date changes from February 28 to
February 29 and arbitrary dates ranging from 2000 to 2037. The Company has no
plans to conduct further review of its currently supported products or IT
systems. The Company has not historically made any material expenditures in
readying its IT systems or currently support products for the Year 2000 and
does not believe it will be necessary in the future to expend any material
amounts in connection with Year 2000 compliance.
Notwithstanding the foregoing, there can be no assurance that Year 2000
errors or defects will not be discovered in the Company's current or future
products. Any failure by the Company to make
40
<PAGE>
its products Year 2000 compliant, or of such products not to be Year 2000
compliant as a result of a failure of Trilogy's products to be Year 2000
compliant, could result in a decrease in sales of the Company's products,
unanticipated expenses to address Year 2000 problems or significant
liabilities resulting from losses suffered by the Company's customers due to
such Year 2000 problems, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company does not have, and currently has no plan to make, a contingency plan
for the remediation of Year 2000 problems that may effect the Company's IT
systems and products, or the third-party equipment and software utilized by
the Company, and it will be necessary for the Company to make the necessary
expenditures to assess and remedy such problems in the event they arise in the
future, which expenditures, if any, cannot be estimated by the Company. There
can be no assurance that such expenditures, if required, would not have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company's solutions also utilize and depend on third-party equipment and
software that may not be Year 2000 compliant. The Company contacted certain
third-party vendors in order to ascertain their Year 2000 compliance. Based on
information supplied by such third-party vendors, the Company's officially
supported products developed using Visual Basic 5, Visual C++ or Java can be
certified Year 2000 compliant only through December 31, 2036, the last date
which the Company tested and verified. The Company estimates that such
certification applies to 90% to 95% of the Company's total products. Many of
the Company's products also use or rely on Microsoft's SQL Server product,
which has been certified Year 2000 compliant through December 31, 9999. The
Company believes that approximately 1.0% of the Company's products use or rely
on third-party vendor software which may be subject to Year 2000 issues and
for which the Company has received no assurance of Year 2000 compliance. To
the extent any of the Company's products are customized, whether by the
Company or a third party, there can be no assurance that any such customized
product will continue to be Year 2000 compliant. Failure of such third-party
equipment or software, or of systems maintained by the Company's suppliers, to
operate properly with regard to the Year 2000 and thereafter could require the
Company to incur unanticipated expenses to remedy any problems, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, to the extent the Company's products
are installed on customers' systems which rely on other software, firmware or
hardware which may not be Year 2000 compliant, problems in communications
among industry participants could result in a delay in the Company's products
achieving market acceptance. Furthermore, the purchasing patterns of customers
or potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct their current systems for Year 2000
compliance. These expenditures may result in reduced funds available to
purchase products from the Company of computer products manufacturers, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
41
<PAGE>
BUSINESS
Industry Background
Growth of Internet Usage and E-Commerce
The Internet and Internet-related technologies are revolutionizing the way
businesses and consumers communicate, share information and conduct business.
As the number of Internet users and the sophistication of Internet-enabled
content and development tools have increased, the Internet's functionality has
expanded from a medium primarily for publishing information to enabling
complex business-to-business and business-to-consumer communications and
commerce. At the same time, businesses across many industries are faced with
increasing competitive pressures to lower costs, decrease inventories, and
improve sales and marketing productivity and time-to-market. To address these
challenges, businesses are increasingly replacing paper-based transactions
with e-commerce solutions that provide enhanced accuracy and secure exchange
of time-sensitive business information. Forrester Research, Inc. ("Forrester")
estimates that the business-to-business e-commerce market will grow from $43
billion in 1998 to $1.3 trillion by 2003, representing a compound annual
growth rate of over 98%. In addition, Forrester believes that computer
products (including wholesale and retail equipment, software, semiconductors
and manufacturing) is the largest and fastest growing segment, by revenue, in
business-to-business e-commerce. Moreover, the Company believes that the
computer industry is particularly well-suited to the use of Internet-enabled
e-commerce solutions due to: (i) the large size and fragmented nature of the
industry, (ii) the high costs of sales and distribution, (iii) the challenges
in managing the volume and complexity of product, pricing, and configuration
information resulting from a wide array of products, short product life cycles
and increased demand for custom configured solutions, and (iv) its propensity
to embrace technology for automating processes.
Need to Enhance Efficiencies in the Sales, Marketing and Distribution of
Computer Products
According to International Data Corporation ("IDC"), the North American
computer products market, including PCs, servers, workstations, related
storage devices, peripherals and data communications equipment totaled $129
billion in 1997 and is expected to reach $178 billion by 2002. Furthermore,
purchases of computer products often involve purchases of related software
applications.
As the market for computer products has developed, the diverse group of
industry participants has grown both in size and complexity. These
participants include (i) computer hardware, software, peripheral and component
manufacturers, (ii) distribution channel participants, including distributors,
resellers, systems integrators and retailers, and (iii) end users, including
both corporate buyers and consumers. The computer industry supply chain
consists of various sales and distribution models, including direct-to-the-
end-user and indirect 2-tier and 3-tier models. Industry participants
frequently employ hybrids of these models and multiple industry participants
are typically involved in the sale and fulfillment of a transaction. For
example, national resellers and integrators may buy directly from
manufacturers or indirectly through multiple distributors. In addition,
manufacturers may choose to configure and ship directly to end users for
orders placed through resellers or they may utilize their distributor and
reseller channel partners to configure and fulfill orders. Direct
manufacturers may contract with distributors, resellers and integrators in
order to provide multi-vendor fulfillment or local service and support. As a
result of these numerous interrelationships, the industry faces challenges in
the timely and accurate sharing of information about customers, products,
configuration, pricing, inventory and ordering.
42
<PAGE>
[Graphic depicting the flow of commerce from (i) manufacturers to direct end-
users, (ii) manufacturers to corporate resellers and retailers, and corporate
resellers and retailers to end-users, and (iii) manufacturers to distributors,
distributors to VARs, Integrators and retailers, and VARs, integrators and
retailers to end-users.]
The relative success of the direct-to-the-end-user and build-to-order models
has put additional pressure on computer industry participants to improve
information flows within the channel in order to improve time-to-market,
reduce costs and compete more effectively. Rapid technological change has
resulted in the continuing decline of component prices and shorter life cycles
of computer products. Such pressures have heightened the need for industry
participants to employ build-to-order and configure-to-order models in order
to reduce inventories, improve the ability to gauge and meet changing customer
demands and improve time-to-market by enabling just-in-time component
acquisitions.
The increasing complexity of computer product distribution and the increase
in customers' demands for time-efficient ordering processes has forced
industry participants to increase the productivity and responsiveness of their
salesforces. Additionally, the substantial pricing pressure throughout the
industry has required manufacturers and distributors to reduce operating costs
and improve the efficiency and effectiveness of their sales and marketing
investments. The wide array of products, short product life cycles and high
volume of new product introductions make it difficult for sales
representatives and end users to remain current with changing product and
compatibility information. These difficulties have underscored the need for
tools and a central repository of current product information in order to
increase productivity and accuracy of sales representatives and enable end
users to independently select, configure and order computer products.
Both business-to-business and business-to-consumer e-commerce transactions
can offer better access to critical information affecting the purchase
decision, including product compatibility and availability, demand/supply data
and detailed end-user preferences. However, because the sale of computer
products frequently involves multiple industry participants, industry-wide
standardization and acceptance is required in order to provide a comprehensive
e-commerce solution for the industry. Past efforts to accomplish this have
been largely proprietary, point-to-point solutions and have required
significant investments to develop and maintain the required IT
infrastructure, including software applications, content databases and
integrations with partners' systems. Additionally, many of these systems have
lacked the ability to scale to meet industry requirements. It has also been
difficult for these systems to achieve widespread adoption because competition
amongst industry participants makes it difficult to reach agreement on a
single standard. The Company believes that many participants seek the benefits
of a robust and scalable system, but have not been able to justify the
associated costs of building such a system independently.
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The pcOrder Opportunity
The Company believes there is a significant need for an independent,
industry-wide solution for enabling the computer industry's suppliers,
resellers and end users to buy and sell computer products online. The Company
leverages Internet technologies to provide a comprehensive e-commerce solution
designed to increase sales and marketing productivity, meet end-user demand
for online ordering, reduce costs and shorten order fulfillment cycles for
industry participants.
The pcOrder Solution
pcOrder is a leading provider of Internet-based e-commerce solutions that
are designed to enable the computer industry's suppliers, resellers and end
users to buy and sell computer products online. The Company's solutions are
designed to increase the efficiency and effectiveness of the sales, marketing
and distribution of computer products and enable members of the industry to
take advantage of increasing adoption of e-commerce. The Company believes that
it is uniquely positioned to deliver these solutions through its: (i) ability
to offer a broad set of advanced front-office and e-commerce software
applications, including configuration and pricing; (ii) position as a leading
content provider of computer product and compatibility information; and, (iii)
experience in delivering industry-specific functionality and integrations into
business systems of computer industry participants. To date, the Company's
e-commerce solutions have been adopted by industry leaders such as Compaq,
CompuCom, CompUSA, CMP Publications, GE Capital, HP, IBM, Ingram Micro,
Kingston, Nortel Networks, MCI Systemhouse, MicroAge Integration Company, PC
Wholesale, Pinacor and Tech Data, as part of their overall e-commerce
strategy.
The Company's e-commerce solutions include software applications that are
designed to increase the automation of product search, comparison,
configuration, pricing, financing and ordering, and leverage the Company's
content databases. The Company's content databases contain more than 600,000
product SKUs from over 1,000 manufacturers, which the Company believes is the
industry's largest aggregation of product content, including detailed product,
categorization, compatibility, pricing and availability information. The
Company believes that its position as an independent, industry-leading
provider of product information has enabled it to offer a more cost-effective
and robust product database to industry participants than internally developed
solutions.
The Company is a party to a technology license agreement with its parent
company, Trilogy, which provides pcOrder the ability to leverage Trilogy's
front-office and e-commerce software applications, including what the Company
believes is one of the industry's leading configuration and pricing engines.
The Company has extended these applications to support the specific
configuration and pricing rules of the computer industry in order to help
industry sales representatives and end-users quickly and accurately build and
order custom-configured solutions across multiple vendors.
In addition to its development of applications and content, the Company has
integrated its solution with the systems of leading industry suppliers for
such functions as order placement, pricing and inventory queries, order status
queries, financing and credit approval. pcOrder customers can use these
integrations to establish or enhance electronic links with their business
partners. Furthermore, the Company provides software integration,
customization, training and Web hosting services designed to ensure the
successful deployment of its solutions.
pcOrder's solutions are designed to provide its customers with the following
benefits:
Meet Customer Demand for Online Ordering. The Company believes that end
users are increasingly demanding the ability to customize and purchase
computer products and services online. The Company's solutions are designed to
provide its customers the ability to offer online product configuration,
pricing, selection and ordering capabilities. This provides end users with the
ability to order computer products and support services from a manufacturer
providing fulfillment through the
44
<PAGE>
channel, or from a reseller providing products through a distributor or
manufacturer, all in a manner transparent to end users.
Increase Effectiveness and Reduce Costs of Sales and Marketing Efforts. The
Company's offering provides customers with a robust solution that is designed
to enhance the productivity and effectiveness of sales and marketing efforts.
The Company believes that its solutions enable computer industry participants
to increase salesforce productivity by providing a centralized, comprehensive
source for product data, and, in turn, enabling sales representatives to
rapidly respond to customer needs with accurate and complete information
regarding product, compatibility, pricing and availability. The Company's
electronic configuration and ordering technology is also designed to reduce
costs by producing more accurate multi-vendor product configurations and
enable online ordering.
Reduce Inventory Costs by Facilitating Build-to-Order, Configure-to-Order
and Channel Assembly. Rapidly declining prices in the computer industry have
increased the importance of time-to-market. By providing direct communication
links and product data to computer industry participants, the Company believes
that its solutions enhance industry efforts to increase inventory turns
through the automation and coordination of configuration, pricing, selection
and ordering. The Company believes that this, in turn, enables the Company's
customers to expand their build-to-order and channel assembly efforts,
decreasing the risk of product obsolescence and improving the industry's
ability to meet individual end-user demand. The Company further believes that
reducing order fulfillment cycles offers customers the opportunity to achieve
higher average selling prices and margins by enabling the sale and delivery of
commodity-based products earlier in their product life cycles.
Reduce Costs, Risks, and Time-to-Market of Establishing E-Commerce
Capabilities. The Company's position as an independent third-party solutions
provider, combined with its industry focus and experience, has enabled it to
build product functionality, content and supplier integrations that are
designed to support the diverse requirements of manufacturers, distributors,
resellers, retailers and other industry participants. Accordingly, the Company
believes that it is able to offer a more cost-effective and rapid time-to-
market solution for conducting e-commerce than internally developed solutions.
To the extent the Company continues to develop and enhance its applications,
content and supplier integrations, the Company believes that the incentives
will increase for companies to outsource these e-commerce services to the
Company.
Improve Industry Coordination by Increasing Accuracy, Availability and
Timeliness of Information. The Company's applications and content databases
are designed to enable multi-vendor search, comparison, configuration,
pricing, financing, ordering and reseller selection. The Company believes that
because of its status as an independent third-party provider of standardized
product information and applications, industry participants are more willing
to use pcOrder's applications and contribute product information to the
Company's databases. As more industry participants adopt pcOrder's
applications and content, the Company believes that its customers will derive
greater benefit from the increased opportunity to engage in business
electronically with more participants.
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Strategy
The Company's objective is to be the leading e-commerce technology and
content provider to the computer industry. The Company's strategy to achieve
this objective includes the following key elements:
Leverage Internet Technology. pcOrder leverages Internet technology to
provide communication capability and support complex transactions across a
range of computer industry participants, regardless of participants' legacy
computing environments. Unlike traditional proprietary solutions focusing on
point-to-point solutions with narrowly defined functionality, Internet
technology enables the Company to electronically link computer industry
participants, including manufacturers, distributors, resellers, retailers,
other industry participants and end users, including corporate buyers and
consumers, with the objective of enhancing sales and marketing efficiency and
effectiveness, reducing costs, shortening the product fulfillment cycle and
improving time-to-market.
Broaden Adoption Through Relationships with Computer Industry Market
Leaders. The Company aggressively pursues relationships with leading computer
industry manufacturers, distributors, resellers, retailers and other industry
participants in order to increase adoption of its solutions. To date, the
Company has established relationships with GE Capital, Compaq, CompuCom,
CompUSA, HP, IBM, Ingram Micro, Kingston, Nortel Networks, MCI Systemhouse,
MicroAge, PC Wholesale, Pinacor and Tech Data. The Company's objective is to
cooperate with its customers through direct and indirect marketing initiatives
to broaden adoption of the Company's solutions by resellers and end users.
Extend Position as an Industry Leading Source of Product Information. The
Company has built and maintains content databases containing more than 600,000
product SKUs from over 1,000 manufacturers and seeks to add to or modify its
product information on an ongoing basis. The Company seeks to extend its
position as an industry leading product information source by continually
broadening and deepening its product data.
Leverage Position as Independent Third-Party Solutions Provider. The Company
plans to continue to leverage its position as an independent third-party
solutions provider in order to offer broad solutions to its customers. The
Company believes that its ability to offer standardized e-commerce solutions
to the computer industry creates the opportunity to gain economies of scale by
leveraging the Company's investment in content, technology and functionality
across a wide range of customers. The Company believes that this will enable
it to offer robust solutions more cost-effectively than individual industry
participants, making its e-commerce solutions increasingly attractive to
industry participants. The Company further believes that its position as an
independent third-party solutions provider may allow it to act as a
significant aggregator of sales order transaction and market demand data for
the computer industry.
Expand Application Functionality to Increase Automation of Additional Sales,
Marketing and Channel Management Functions. The Company intends to continue to
invest in the development of additional applications and services to meet the
e-commerce needs of the computer industry. The Company plans to execute this
strategy by working closely with its customers to understand and address their
needs and by further automating the critical processes in the sales, marketing
and distribution of computer products. In addition, the Company intends to
enhance its products with additional functionality, such as the Company's
lease financing product developed in conjunction with GE Capital. The Company
believes that by leveraging the knowledge gained from its relationships with a
broad range of industry participants, it is well-positioned to define and add
new functionality to its solutions. The Company further believes that by
helping to make its customers more competitive, it will become an increasingly
important part of its customers' businesses and participate in a higher
percentage of its customers' commerce volume.
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Customers
pcOrder has established a customer base of manufacturers, distributors,
resellers, integrators, retailers and other industry participants. During
1998, MicroAge, Nortel Networks and HP each represented more than 10% of total
revenues. The customers set forth in the table below represent 88% of total
revenues in 1998.
<TABLE>
<CAPTION>
Resellers, Integrators &
Suppliers Distributors Retailers Financing Companies
--------- ------------ ------------------------ -------------------
<S> <C> <C> <C>
Compaq Ingram Micro CompuCom GE Capital (Vendor
Hewlett- PC Wholesale CompUSA Financial Services)
Packard Pinacor GE Capital IT Solutions
Company Tech Data MCI Systemhouse
IBM MicroAge Integration Company
Kingston
Nortel
Networks
</TABLE>
In partnership with its major customers, the Company has deployed its
solutions to over 500 small and medium resellers. The Company's suite of
products and services are designed to automate and enhance its customers'
sales, marketing and inventory management capabilities.
The Company entered into an agreement with Ingram Micro in September of 1998
in connection with subscriptions to, and related services supporting, various
products of the Company, including Prime Access Web Storefront and Customer
Desktop. pcOrder retains ownership of all software licensed under the
agreement. The Company agreed to indemnify Ingram Micro in the event of a
claim that any software licensed to Ingram Micro by the Company infringes the
intellectual property of a third party. Additionally, pursuant to the
agreement with Ingram Micro, the source code for software licensed to Ingram
Micro will be deposited in escrow. The initial term of the agreement is
through December 2003, unless terminated earlier by either party upon prior
notice in the event of a payment default, material breach, termination of
business or breach of confidentiality. The agreement may be renewed for
additional one year periods upon the agreement of the parties prior to the end
of the current term. Although no revenues were recognized pursuant to the
Ingram Micro Agreement in 1998, the Company believes such revenues may
represent a significant portion of the Company's business in 1999.
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<PAGE>
pcOrder Platform
pcOrder provides an integrated platform consisting of application, content
databases, industry integrations and related services that leverages Internet
and Internet-related technologies. The Company's solutions are designed to
meet the specific needs of each industry segment, including manufacturers,
distributors, resellers, integrators, retailers, other industry participants
and end users, including corporate buyers and consumers.
[Graphic depicting the Company's platform consisting of applications, content
and integrations. Applications are shown as applications Sales Desktop, Web
Storefront, Customer Desktop, Commerce-Station. Subcategories of these
applications are catalog, configuration, pricing, order, referral, finance and
promotion. Content database is shown as integrations and reseller,
distributor, manufacturer and finance company.]
Software Applications. The Company offers a suite of software applications
that are designed to increase the automation of sales, marketing and
distribution functions. Revenues from the licensing of, and subscriptions to,
software applications accounted for approximately 61.2% and 58.3% of the
Company's total revenues during 1997 and 1998, respectively. The Company's
software applications are modular in nature, enabling customers to purchase
and add specific functionality as needed. The Company's applications are built
upon various combinations of the following core modules:
Catalog. The Catalog Module is designed to enable users to easily search,
browse, compare, and view product datasheets from the Company's content
databases. For example, users can perform searches such as "show all laptop
computers with hard drives larger than 1 gigabyte."
Configuration. The Configuration Module is designed to enable users to more
efficiently configure valid systems. Users request desired features through
a needs analysis interface, which then interacts with Trilogy's
configuration engine to select components. This interface shields the user
from technical details of the components while preventing invalid
configurations.
Pricing. The Pricing Module is designed to allow users to access customized
pricing information. Utilizing Trilogy's SC Pricer engine, the Company has
developed a multi-tiered, channel-specific pricing module. For example,
end-user prices can be quoted as a function of the reseller's cost from the
distributor, thus providing seamless, dynamic pricing through the channel.
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<PAGE>
Order. The Order Module is designed to enable online ordering and order
confirmation. Manufacturers, distributors and resellers can access pricing
and availability information from multiple legacy systems and provide such
real-time information to their potential customers. Links between the
Company's offering and the customer's ordering system takes the form of EDI
transactions, direct API calls to the ordering system or direct database
integration.
Referral. The Referral Module is designed to enable industry participants
to refer customers to resellers based on location or other characteristics.
In addition, the Referral Module delivers, processes, and tracks referrals
in order to connect end users with the appropriate channel partners. This
allows manufacturers to work constructively with their resellers with the
obligation of ensuring that customer needs are met.
Finance. The Finance Module is designed to allow users to quote lease
rates, electronically submit credit applications and maintain lease data,
as well as customize finance settings, select from multiple financing
options and specify optional financing terms.
Promotion. The Promotion Module is designed to provide the capability to
deliver and manage targeted promotions across multiple tiers in the
channel. The Promotion Module is designed to dynamically suggest
alternative or add-on products at the point of sale. For example, the
Program Module is designed to allow a component vendor to coordinate with a
reseller to offer the reseller's online customers pre-packaged alternatives
at the point of sale, in order to maximize reseller margins and dispose of
the vendor's excess inventory.
These modules may be accessed either through the Company's packaged software
applications or through customer-specific, custom developed applications.
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<PAGE>
The Company's software applications are specifically designed to meet the
needs of each industry segment, and may be integrated into customers' legacy
transaction and decision-support systems, thus preserving customers'
technology investments. The table below sets forth descriptions of the
Company's software applications and certain of the key benefits of such
products.
<TABLE>
<CAPTION>
Software Applications Target Market Segment Description Benefits
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CommerceStation Manufacturers . Accepts customer orders on Enables
a website and facilitates manufacturers to
electronic transfer of display product,
orders to the appropriate pricing and
channel partner for availability
fulfillment. information and to
. Provides reseller-specific accept orders
pricing. directly from end
. Provides channel partners users that are
with requests for product fulfilled through
information, referrals or existing channel
leads. partners.
- ----------------------------------------------------------------------------------------------------
Web Storefront Distributors, . Accepts orders directly Enables Web-based
Resellers from customers via a Web sales, marketing
site. and ordering for
. Provides end users with distributors and
direct access to product resellers.
catalog, configuration,
pricing and availability
information.
. Provides promotion
capability through delivery
of targeted marketing
messages.
- ----------------------------------------------------------------------------------------------------
Sales Desktop Distributors, . Sales productivity tool Designed to help
Resellers, for sales representatives. distributors,
Integrators, . Provides instant access to resellers,
Retailers information on over 600,000 integrators and
product SKUs from over retailers to
1,000 manufacturers. increase sales
. Automates quote and order force productivity
generation. and order accuracy.
- ----------------------------------------------------------------------------------------------------
Customer Desktop Manufacturers, . Procurement management Designed to help
Resellers and software including support suppliers to
Integrators for custom catalogs, enhance customer
(indirect to end-users) contract pricing and loyalty by
purchase order approval providing
routing. electronic link
. Creates Internet-based between end-users'
link directly to suppliers' procurement
Web Storefront. processes and
suppliers' Web
Storefronts.
- ----------------------------------------------------------------------------------------------------
VIP Program Manufacturers . Provides manufacturer Designed to help
(VIPER) information, such as manufacturers to
product images and detailed enhance their
product specifications to presence at the
the Sales Desktop point of sale by
application. providing timely
. Enables manufacturers to information to end-
enter and maintain their users and channel
own product information partner
within the Company's representatives.
database.
- ----------------------------------------------------------------------------------------------------
Channel Assembly Module Manufacturers, . Delivers channel assembly Supplies
Distributors product, pricing, manufacturers and
configuration and other distributors with
business rules to channel timely and accurate
partners at the point of information to help
sale. increase efficiency
and flexibility of
supply chain.
- ----------------------------------------------------------------------------------------------------
Configuration & Distributors . Provides validation of Enables
Validation multi-vendor systems within distributors and
the on-line quoting and resellers to
ordering systems of provide private
distributors. label and custom
configured systems.
</TABLE>
50
<PAGE>
Content. The Company's industry content databases contain product
information on more than 600,000 product SKUs from over 1,000 manufacturers.
These databases provide the user access to current product information,
including compatibility, necessary to consummate a sale. Revenues from content
fees accounted for approximately 22.6% and 15.4% of the Company's total
revenues during 1997 and 1998, respectively. The Company receives updates and
additions of product data on a regular basis from manufacturers, distributors,
and resellers, and supplements the data in three ways:
Categorization/Classification. The Company's categorization and
classification processes are designed to create and populate standardized
product groupings across the industry and enable convenient access to a
broad array of products from multiple suppliers. For example, an end-user
can specify all monitors of a certain size and pick from a list of monitors
made by several manufacturers and/or available from multiple suppliers.
Data and logic modeling. The Company's data and logic modeling processes
are designed to enable accurate multi-vendor configuration. For example,
the Company's systems specify that a particular computer accepts SDRAM but
not EDO RAM, thereby helping the user to order the correct upgrade package.
The Company continually develops and enhances its Computer Industry Model
(CIM), a repository of much of the modeling and expertise that enables the
Company's applications to configure multi-vendor computer systems.
Data sheet creation. The Company creates data sheets designed to give
customers detailed product data in a standardized format, thus enabling
attribute-based searching and side-by-side comparisons of functionality
differences between two or more products. For example, a user deciding
between two otherwise identical laptop computers would be able to see that
one comes with a fax modem and more RAM, but the other is lighter and
smaller.
The Company has developed a detailed process for receiving, processing, and
verifying the accuracy of the content in its databases. In addition, the
Company has invested in creating advanced tools to enable PC Labs, the
Company's content management unit, to enter, maintain, and test component
data. PC Labs has developed and currently maintains extensive product and
pricing information on over 600,000 product SKUs from over 1,000
manufacturers. The Company receives electronic updates from many of its
manufacturers, distributors and reseller customers on a daily basis. After a
normalization process which assigns supplier codes and a master product SKU
number, the information is imported into the Company's databases. pcLabs
places each product SKU into the appropriate class and category, and then
performs extensive secondary research for content modeling and data sheet
creation. pcOrder maintains a staff of configuration modelers whose function
is to research new systems and components to determine the rules that govern
how they can be configured. The modelers convert this information into a
programming language with a configuration-specific syntax, which is then used
to update the CIM. For example, a laptop requires over 90 technical
specifications and allows for up to 40 marketing attributes. Throughout the
content creation process, the information undergoes rigorous quality assurance
testing. In order to manage data quality, the Company has implemented a
comprehensive Data Quality process which involves an automated regression test
and analysis of over 34,000 validation test cases. See "Risk Factors--Risks
Associated with Maintaining Databases".
51
<PAGE>
[Graphic depicting flow of electronic pricing information (SKU) through
normalization, classification, quality assurance, regression testing to
production.]
Integrations. The Company has completed mission-critical integrations to
the systems of leading industry suppliers for such functions as order
placement, pricing and inventory queries, order status queries, financing
and credit approval. These integrations can be leveraged by pcOrder
customers that wish to establish or enhance electronic links with their
business partners. For example, a manufacturer can quote pricing and
inventory available through its channel partners on its Web site, and then
transfer the order to a channel partner for delivery. Alternatively, a
reseller can access information about its suppliers, inventories in
addition to its own, and then display the combined total to its customers
through its Web Storefront.
Services. In order to provide a comprehensive platform, the Company offers a
range of services to speed integration and adoption of the Company's solutions
at the customer site. Revenues from services accounted for approximately 16.2%
and 26.3% of the Company's total revenues during 1997 and 1998, respectively.
Software Integration, Customization and Training. Several of the
Company's solutions, particularly higher-end installations, require a
significant amount of professional services. These services may include
the development of interfaces for integration with the customer's legacy
systems, the customization of the Company's software to meet the specific
needs and situation of the customer, or the training of the customer's
employees in the operation of the software application. The Company
provides all of these services through a dedicated consulting and
training force. Customers typically pay for consulting and training
services on a time-and-materials basis.
Web Hosting. While some of the Company's customers host their Web sites
internally, a substantial number of customers utilize the Company's
hosting services. The Company maintains a Web hosting facility including
multiple servers and connectivity through dedicated T-1 lines from its
Austin location. The Company may in the future outsource its hosting
services to a third party.
Sales and Marketing
The Company sells and markets its software applications, content and
services primarily through its sales and marketing organization.
52
<PAGE>
Sales. The Company's sales force consists of technical presale consultants,
account developers, field sales representatives and telemarketers. The Company
deploys sales teams consisting of both sales and technical professionals to
provide customized proposals, presentations and demonstrations to potential
customers. The primary decision makers in the Company's customers'
organizations typically include members of such customers' management
executives such as the chief executive officer, the chief financial officer,
vice presidents of marketing, vice presidents of sales and chief information
officers.
Marketing. The Company's marketing efforts are directed at establishing a
market leadership position and, therefore, the Company is investing heavily in
an expansion of its marketing organization and activities. Targeted at
executives in the computer industry, pcOrder's marketing programs are focused
on creating awareness and generating interest in the pcOrder solution. The
Company engages in a variety of co-marketing activities with certain of its
key customers designed to leverage and strengthen the Company's relationship
with its customers. The Company is an active participant in industry
conferences and expositions. It has sponsored several industry conferences in
the past, and believes that exposure of this nature has contributed to the
Company's visibility within the computer industry. The Company's marketing
personnel engage in a variety of marketing activities, including managing and
maintaining the pcOrder Web site, issuing newsletters, making direct mailings,
placing advertisements, conducting public relations and establishing and
maintaining close relationships with industry analysts.
Client Services
The Company implements its customer support, software integration,
customization and training services primarily through its client services
organization. The organization's goal is to ensure successful and rapid
deployment and high levels of customer satisfaction by facilitating open
communications to quickly identify, analyze and solve problems. The Company's
participation in the customer's implementation may include planning and
requirements definition, project management, custom integration, unit and
system tests and support procedures design. The Company believes that
providing a high level of customer service and technical support is necessary
to achieve timely product implementation. The Company provides ongoing product
support services to its customers in the form of telephone, e-mail and Web-
based support, documentation and software updates and error corrections. All
product updates are available to customers for downloading from the Company's
Web site. A team of dedicated engineers provides product, technical and
product registration support from 7:00 a.m. to 7:00 p.m., Central time, on
business days, from the Company's support offices. The Company also makes
training available to its customers.
Technology
The Company's solutions are based on open industry standards and are
designed to be fully modular and extensible. The architecture is designed to
allow new modules to be added to the backbone, and replaced when newer
versions become available. The Company's software applications and content
databases are made available through both thin client (Web browser/HTML) and
Win32 client-server interfaces. Both interfaces access the same application
layer, which provides functionality such as configuration, pricing, product
information data sheets, financing and online ordering.
The Company's software applications have been implemented through the use of
industry standard technologies, including HTTP/HTML, C++, COM/DCOM, CORBA,
Windows NT and ODBC. The Company believes this implementation provides timely
systems integration, ease of implementation, broad connectivity and the
ability to leverage technological advancements.
The Company has a non-exclusive, worldwide, royalty-bearing license to use,
make, reproduce and prepare derivative works of certain of Trilogy's front
office automation software. See "Relationship with Trilogy". The Company
customizes application modules licensed to it by Trilogy for the specific
53
<PAGE>
needs and situations of its customers. Examples of this customization include
industry-specific configuration and pricing modules. The Company creates its
own application modules that specifically address the functionality needs of
computer industry participants. An example of one of these modules is
CommerceStation, a computer industry-specific application that allows
manufacturers to accept orders directly from end users and fulfill them
through existing channel partners.
Research and Development
The Company's research and development efforts include software application
development and customization, data modeling and tools development. The
Company's software application development teams are dedicated to identifying
and developing software solutions to meet the unique needs of computer
industry participants. This includes both the development of original software
applications as well as customizing Trilogy's applications. The Company's
database content research and development efforts are primarily focused on the
development of data models and tools that enhance the Company's content
management and maintenance capabilities.
Research and development expenses were $1.1 million and $4.3 million in 1997
and 1998, respectively. The Company intends to continue to make substantial
investments in research and development and related activities to maintain and
enhance its product lines. The Company believes that its future success will
depend in large part on its ability to support current and future releases of
software applications, to maintain and extend its content databases and to
timely develop new products that achieve market acceptance. Any failure by the
Company to do so would have a material adverse effect on the Company's
business, operating results and financial condition. See "Risk Factors--New
Products and Technological Changes; Risks Associated with Transition to New
Technology Platform".
Competition
The market for software products that enable e-commerce is intensely
competitive, and the Company expects competition in its market segment to
increase substantially. Numerous companies provide e-commerce solutions, and
several competitors target the specific computer and computer related products
industry in which the Company competes. The Company's competitors include both
large companies with substantially greater resources than the Company, systems
integrators and the internal IT departments of certain of the Company's
customers and potential customers. The Company believes that its principal
sources of competition are systems integrators and the internal IT departments
of its customers and potential customers. These organizations may seek to
develop e-commerce solutions through the use of tools offered by the Company's
competitors primarily focused on providing e-commerce enabling solutions to
the computer industry such as Calico Software, Selectica, Inc., SMART
Technologies, Inc., Open Market, Inc. and BroadVision, Inc. Furthermore, there
are a number of significantly larger companies with which the Company does not
currently compete that do not presently offer the same or similar e-commerce
solutions offered by the Company but that could with limited barriers to entry
compete directly with the Company in the future. In addition, except as
described in "Relationship with Trilogy", nothing in the Company's agreements
with Trilogy prohibits Trilogy from competing directly or indirectly with the
Company. The Company believes that the principal competitive factors for
companies seeking to provide e-commerce enabling solutions are price,
functionality, product performance, content, reliability and customer service.
The Company believes its e-commerce solution differs from approaches taken by
its competitors primarily because of the content database the Company
provides. Increased competition could result in price reductions, reduced
margins and loss of market share, any of which would materially and adversely
affect the Company's business, operating results and financial condition. Many
of the Company's current and potential competitors have significantly longer
operating histories and significantly greater financial, technical, marketing
and other resources than the Company.
54
<PAGE>
Employees
As of December 31, 1998, the Company had 194 full-time employees, including
48 in sales and marketing, 26 in research and development, 41 in content
management, 29 in customer support, 27 in professional services and 23 in
administration. In addition, the Company also employed 44 part-time and
contract employees in content management and client support. All of these
employees are located in the United States. The Company believes that its
future success is dependent on attracting and retaining highly skilled
engineering, sales and marketing, and senior management personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will continue to be able to attract and retain qualified employees. The
Company's employees are not represented by any collective bargaining unit. The
Company has never experienced a work stoppage and considers its relations with
its employees to be good.
Facilities
The Company's principal facility occupies an aggregate of approximately
22,000 square feet in Austin, Texas, pursuant to leases that expire in March
1999, December 1999 and March 2003, respectively, and pcOrder believes that
its existing principal facility is adequate for its current requirements. The
Company further believes that additional space can be obtained to meet its
future growth requirements.
Legal Proceedings
The Company is from time to time involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. In January 1999,
the Company filed an action for declaratory judgment in the 345th Judicial
District Court of Travis County, Texas, Case No. 99-00787 against its former
Vice President, Sales from July 1998 to December 1998, seeking to have certain
claims for sales commissions, other commissions and stock grants declared
invalid. On February 5, 1999, the defendant in the Company's action filed a
complaint against the Company and Christina Jones, the Company's President and
Chief Operating Officer, in the County Court at Law, for Dallas County Texas,
case no. CC-99-01194d, requesting actual and punitive damages of not less than
$3.0 million as a result of the alleged failure of the Company to pay certain
commissions and make certain stock grants, among other matters. The Company
intends to contest the action vigorously and does not believe that resolution
of this action will have a material adverse effect on the Company's financial
condition. However, litigation is subject to inherent uncertainties and,
therefore, there can be no assurance that this action will not have a material
adverse effect on the Company's business, results of operations or financial
condition. See "Risk Factors--Legal Proceedings".
55
<PAGE>
RELATIONSHIP WITH TRILOGY
The Company was established as a separate business unit within Trilogy on
July 1, 1993, and was incorporated on July 18, 1994. As of December 31, 1998,
Trilogy owned 98.5% of the outstanding shares of Common Stock of the Company.
Mr. Liemandt, a director of the Company, is Chairman and Chief Executive
Officer and a substantial stockholder of Trilogy. Upon completion of this
offering, Trilogy will beneficially own approximately 84.0% of the outstanding
shares of Common Stock (82.3% if the Underwriters' over-allotment option is
exercised in full) and approximately 97.7% of the total voting power of the
Common Stock. For as long as Trilogy continues to beneficially own more than
50% of the outstanding shares of the Company's Common Stock, Trilogy will be
able to direct the election of all of the members of the Company's Board of
Directors and exercise a controlling influence over the business and affairs
of the Company, including any determinations with respect to mergers or other
business combinations involving the Company, the acquisition or disposition of
assets by the Company, the incurrence of indebtedness by the Company, the
issuance of any additional Common Stock or other equity securities of the
Company, and the payment of dividends with respect to the Common Stock.
Similarly, Trilogy will have the power to determine matters submitted to a
vote of the Company's stockholders without the consent of the Company's other
stockholders, will have the power to prevent a change in control of the
Company and could take other actions that might be favorable to Trilogy. See
"Risk Factors-- Control By and Relationship with Trilogy".
With the exception of the Trilogy Options, Trilogy has advised the Company
that its current intent is to continue to hold all of the Common Stock
beneficially owned by it following this offering. However, Trilogy is not
subject to any contractual obligation to retain its controlling interest,
except that Trilogy has agreed not to sell or otherwise dispose of any shares
of Common Stock of the Company, with the exception of the Trilogy Options, for
a period of 180 days after the date of this Prospectus without the prior
written consent of Goldman, Sachs & Co. See "Underwriting". As a result, there
can be no assurance concerning the period of time during which Trilogy will
maintain its beneficial ownership of Common Stock owned by it following this
offering. Any disposition by Trilogy of any of the shares of Common Stock it
owns following this offering may be effected in one or more transactions,
including a public offering, a distribution by Trilogy of such Common Stock to
its stockholders, an offer by Trilogy to exchange such Common Stock for
outstanding Trilogy common stock, or other transaction. Beneficial ownership
of at least 80% of the total voting power of the Company and 80% of each class
of nonvoting capital stock of the Company is required in order for Trilogy to
be able to effect a tax free spin off of the shares of Common Stock or certain
other tax free transactions. See "Risk Factors--Risks Associated with
Dependence on Trilogy; Limited Independent Operating History; Potential
Conflicts of Interest" and "Risk Factors--Possible Future Sales of Common
Stock by Trilogy".
In June 1996, the Company and Trilogy entered into certain agreements for
the purpose of clarifying the ongoing relationship with between the two
companies. Because these agreements were entered into at a time when the
Company was a wholly-owned subsidiary of Trilogy, they may not be the result
of arms'-length negotiations between the parties. In August 1996, the Company
and Trilogy entered into an Asset Transfer Agreement, as amended in August
1998 (the "Asset Transfer Agreement"), pursuant to which Trilogy transferred
the assets and liabilities of its pcOrder.com division to the Company. In
exchange for the transferred assets, the Company issued to Trilogy 900 shares
of the Company's common stock, $0.01 par value per share, establishing the
Company as a wholly-owned subsidiary of Trilogy (such shares were subsequently
split into 11,520,000 shares of Common Stock). Pursuant to the Asset Transfer
Agreement, the parties made customary representations and warranties regarding
their businesses and operations, and each agreed to indemnify the other in the
event of any damages arising from the other's breach of any such
representation or warranty. In addition, Trilogy agreed not to engage in,
directly or indirectly, any business directly in competition with the Company
for a period of three years after the effective date of the Asset Transfer
Agreement. Further, during such three year period, Trilogy also agreed not to
hire or recruit any person who was,
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<PAGE>
at the effective date of the Asset Transfer Agreement or within the 12 month
period preceding such effective date, an employee of the pcOrder.com division
of Trilogy. Trilogy and its transferees, including, to the extent the Trilogy
Options are exercised, the holders of Trilogy Option Shares, have the right,
on no more than five occasions after this offering, to require the Company to
register the shares of Common Stock held by it within 180 days of such
request. In addition, Trilogy and its transferees, including, to the extent
the Trilogy Options are exercised, the holders of Trilogy Option Shares, have
the right under certain circumstances, including the filing of the
registration statement to which this Prospectus is a part, to require the
Company to include shares held by Trilogy and its transferees, including, to
the extent the Trilogy Options are exercised, the holders of Trilogy Option
Shares, in a registration statement registering other shares of Common Stock
of the Company. These registration rights are subject to certain conditions
and limitations, including a right of the Company not to effect a requested
registration under certain conditions. The Company has agreed to indemnify
Trilogy and its transferees, including, to the extent the Trilogy Options are
exercised, the holders of Trilogy Option Shares, currently held by Trilogy
against, and provide contribution with respect to, certain liabilities under
the Securities Act in connection with such registration. These registration
rights expire eight years after the effective date of the Asset Transfer
Agreement. Trilogy has waived its right to include any of its shares in this
offering.
The Technology, Services and License Agreement, the Management Services
Agreement and the Tax Allocation Agreement described below, have each been
filed as exhibits to the Registration Statement of which this Prospectus forms
a part and such summaries are qualified in their entirety by this reference to
the full text of such agreements. Because the Company was greater than a 95%
subsidiary of Trilogy at the time these agreements were entered into, they may
not be the result of arms'-length negotiations between the parties.
Technology, Services and License Agreement
In September 1998, the Company and Trilogy entered into a Technology,
Services and License Agreement (the "Technology Agreement"), which amended and
superseded a Master Software License Agreement and a Reseller Agreement
previously entered into by the parties, pursuant to which Trilogy has licensed
certain intellectual property rights to the Company, and the Company has
agreed to license certain intellectual property rights to Trilogy. Each party
has granted the other access to, and a nonexclusive, irrevocable, perpetual,
worldwide, license to internally use, make, reproduce and/or prepare
derivative works of the products of the other party as of September 1, 1998,
in the form as of that date, and any updates, changes to, and new releases of
those products, subject to the happening of a Trigger Event (as defined below)
(as applicable, the "Trilogy Intellectual Property" or the "pcOrder
Intellectual Property"), or to sublicense any third party to do so, subject to
certain confidentiality and other restrictions. Trilogy also granted the
Company a nonexclusive, irrevocable, perpetual, worldwide right and license
under the Trilogy Intellectual Property to make, use, reproduce, prepare
derivative works based upon, license, offer to license, import, export,
publish, distribute, perform, display, advertise, market, promote, service and
or support those of pcOrder's products that are network based e-commerce
products for enabling sales, purchasing, marketing or distribution within the
computer products market ("Computer E-Commerce Products"), and to sublicense
any third party to do so, subject to the payment of royalties as described
below. The Company also granted Trilogy a nonexclusive, irrevocable,
perpetual, worldwide right and license to use pcOrder Intellectual Property to
make, use reproduce, prepare derivative works based upon, license, export,
publish, distribute, perform, display, advertise, market, promote, service and
support Trilogy Products (as defined in the Technology Agreement) and to
sublicense any third party to do so, subject to the payment of royalties
described below. However, following a change in control of Trilogy or such
time as Trilogy is no longer required by generally accepted accounting
principles to be consolidated with pcOrder for financial reporting purposes
(in either case, a "Trigger Event"), Trilogy shall not, until the later of
September 1, 2008 or the expiration of five years following such Trigger
Event, have any license to the pcOrder
57
<PAGE>
Intellectual Property with respect to any Computer E-Commerce Product that
utilizes pcOrder's product content or certain tools developed by pcOrder.
Following a Trigger Event, any Trilogy license to pcOrder Intellectual
Property, which license was granted pursuant to the terms of the Technology
Agreement prior to the happening of such Trigger Event, shall continue
indefinitely, subject to continued royalty payments. Pursuant to the
Technology Agreement, neither party is restricted from entering into or having
similar agreements with third parties or doing any activity relating to
competitive products and services (involving none of the other party's
information or intellectual property). Following a Trigger Event, pcOrder's
access to Trilogy products and its right to receive updates, changes and new
releases of Trilogy Intellectual Property shall continue until the later to
occur of five years after a Trigger Event or September 1, 2008.
Notwithstanding the foregoing, to the extent that any of the Trilogy
Intellectual Property (including Trilogy products based on such intellectual
property) is not of a same, similar, replacement or equivalent general type as
Trilogy Intellectual Property available prior to a Trigger Event, pcOrder will
not have rights to such Trilogy Intellectual Property. The Technology
Agreement further provides that where at least one employee and/or contractor
of the Company in conjunction with at least one employee and/or contractor of
Trilogy cooperate toward jointly creating, inventing or discovering new
material qualifying for either patent or copyright protection, the parties
shall negotiate in good faith on a project-by-project basis to determine to
what extent such newly developed material should be jointly owned. In the
event of joint ownership, the parties shall have an equal, undivided interest
in such patent, copyright or other intellectual property. The Company and
Trilogy are each obligated to pay to the other monthly royalties based on a
percentage of license fees derived from sales of products that incorporate,
and/or data maintenance services related to, the other party's technology; of
software maintenance fees other than data maintenance services in connection
with products that incorporate the other party's technology; and of on-line
subscription service fees from products that incorporate the other party's
technology. The Technology Agreement provides that each party will defend,
indemnify and hold harmless the other party for any claim against such other
party by any third party to the extent based on an actual or alleged: (i)
failure by a party to perform its obligations under the Technology Agreement;
(ii) breach of any one or more of a party's representations or warranties;
(iii) failure by a party to comply with government laws and regulations;
(iv) intentional or grossly negligent acts or omissions on the part of a
party, and (v) to the extent a party delivers Material (as defined in the
Technology Agreement) to the other party, (1) failure by the delivering party
to either own or have sufficient rights to deliver such Material to the other
party, (2) failure by a party to either own or have sufficient rights to grant
to the other party the license it has granted under the Technology Agreement,
(3) infringement (or violation) by such delivered Material of a third party's
intellectual property rights, or (4) failure to be Year 2000 compliant. Such
indemnification obligations are subject to the condition that the indemnified
party: (a) promptly provides notice of any claim to the indemnifying party;
(b) allows the indemnifying party to control the defense of the claim and
settlement negotiations; and (c) fully cooperates with the indemnifying party
in such defense and settlement negotiations. The Technology Agreement provides
that upon either party's request, the parties shall negotiate in good faith
regarding the terms and conditions upon which either party will perform
consulting services reasonably requested by the other party; provided,
however, that such obligation shall expire on the later of seven years
following a Trigger Event or September 1, 2010. The Technology, Services and
License Agreement has a perpetual term, unless terminated earlier by either
party upon 31 days prior notice of an uncured breach by the other party,
subject to extension for special circumstances, or the bankruptcy of either of
the parties.
Management Services Agreement
The Company and Trilogy entered into a Management Services Agreement,
effective as of July 1, 1998, which amended and superseded a Services
Agreement previously entered into by the parties, pursuant to which Trilogy
will provide certain administrative and corporate support services to the
Company. Trilogy has agreed to provide to the Company certain services
("Mandatory Services")
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<PAGE>
including tax administration, payroll, payroll accounting, banking, corporate
finance, recruiting and employee training services to the Company. In
addition, Trilogy has agreed to provide the Company certain additional
services ("Optional Services"), including hardware purchasing, shipping and
receiving, purchase order database administration, network administration,
audit services, human resources administration, legal services and customer
training. The provision of Mandatory Services may not be unilaterally
terminated by either party during the effectiveness of the Management Services
Agreement. The provision of Optional Services may be terminated by either
party upon 90 days notice. The Management Services Agreement provides that
Trilogy will use the same level of care in rendering services to the Company
that Trilogy uses in rendering services to itself or any of its other
subsidiaries, which will be at least equal to the care, that Trilogy has used
in the past in rendering such services to the Company. However, the selection
of personnel to perform the various services will be within the sole control
of Trilogy. Specifically, Trilogy may, without the consent or approval of the
Company, subcontract any service to be provided under the Management Services
Agreement. The Management Services Agreement terminates on June 30, 1999, and
thereafter is subject to successive one-year renewal terms upon consent of the
parties. The Management Services Agreement may be terminated: (i) by either
party within 30 days of an uncured material breach by the other party; (ii) by
either party upon the liquidation or dissolution of the other party; (iii) by
Trilogy immediately upon notice to the Company if the Company fails to pay the
amount due to Trilogy under such agreement by the tenth day after notice of
nonpayment is given; or (iv) within 30 days of the date at which Trilogy
ceases to own a majority of the Company's Common Stock.
Tax Allocation Agreement
The Company is currently, and, as long as Trilogy beneficially owns at least
80% of the total voting power and value of the Company's outstanding Common
Stock, will continue to be, included in Trilogy's consolidated federal income
tax group, and the Company's federal income tax liability will be included in
the consolidated federal income tax liability of Trilogy. The Company and
Trilogy have entered into a Tax Allocation Agreement pursuant to which the
Company and Trilogy will make payments between them such that, with respect to
any period, the amount of taxes to be paid or received by the Company, subject
to certain adjustments, will be determined as though the Company were to file
separate federal, state and local income tax returns (including, except as
provided below, any amounts determined to be due as a result of a
redetermination of the tax liability of Trilogy arising from an auditor or
otherwise) rather than as a consolidated subsidiary of Trilogy with respect to
federal, state and local income taxes. Under the terms of the Tax Allocation
Agreement, the Company, in computing its stand alone tax liability or tax
refund, will be able to utilize certain tax items, such as net operating
losses, foreign tax credits and other tax credits (collectively, "Tax
Attributes"). In addition, with respect to Tax Attributes of the Company that
come into existence after the execution of the Tax Allocation Agreement, and
under the terms of the Tax Allocation Agreement, Trilogy will be required to
make any payment to the Company as such Tax Attributes of the Company are
utilized by the Trilogy consolidated federal income tax group. Pursuant to the
Tax Allocation Agreement, Trilogy's obligation to make any payment to the
Company relating to the Company's Tax Attributes will apply only to tax
periods during which the Company (or its affiliated subsidiaries) is a member
of Trilogy consolidated federal income tax group.
Trilogy will continue to have all the rights of a parent of a consolidated
group (and similar rights provided for by applicable state and local law with
respect to a parent of a combined, consolidated or unitary group), will be the
sole and exclusive agent for the Company in any and all matters relating to
the income, franchise and similar liabilities of the Company, will have sole
and exclusive responsibility for the preparation and filing of consolidated
federal and consolidated or combined state and local income tax returns (or
amended returns), and will have the power, in its sole discretion, to contest
or compromise any asserted tax adjustment or deficiency and to file, litigate
or compromise any claim for refund on behalf of the Company. In addition,
Trilogy has agreed to undertake to provide the aforementioned services with
respect to the Company's separate state and local returns and the Company's
foreign returns.
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<PAGE>
The Tax Allocation Agreement will remain in effect until the expiration of
any open years for which pcOrder has filed as a member of the Trilogy
consolidated group. In general, the Company will be included in Trilogy's
consolidated group for federal income tax purposes for so long as Trilogy
beneficially owns at least 80% of the total voting power and value of the
outstanding Common Stock. Each member of a consolidated group is jointly and
severally liable for the federal income tax liability of each other member of
the consolidated group. Accordingly, although the Tax Allocation Agreement
allocates tax liabilities between the Company and Trilogy, during the period
in which the Company is included in Trilogy's consolidated group, the Company
could be liable in the event that any federal tax liability is incurred, but
not discharged, by any other member of Trilogy's consolidated group. Pursuant
to the Tax Allocation Agreement, however, Trilogy is obligated to indemnify
the Company for any tax liabilities, including any liability resulting from a
distribution of the Company's stock to Trilogy's stockholders provided that it
has paid its allocated share of such liabilities to Trilogy.
60
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information concerning the executive
officers and directors of the Company as of September 1, 1998.
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Ross A. Cooley.................. 57 Chairman and Chief Executive Officer
Christina C. Jones.............. 29 President and Chief Operating Officer
James J. Luttenbacher........... 43 Vice President, Chief Financial Officer and
Secretary
Joseph A. Liemandt (2).......... 30 Director
Peter J. Barris (1)(2).......... 46 Director
Linwood A. Lacy, Jr. (1)........ 52 Director
Robert W. Stearns (1)........... 47 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Each director holds office until the next annual meeting of stockholders and
until his successor is elected and qualified or until his earlier resignation
or removal. Each officer serves at the discretion of the Board of Directors
(the "Board"). There are no family relationships among the directors or
executive officers of the Company.
Ross A. Cooley has been Chairman and Chief Executive Officer of the Company
since November 1996. From 1984 to 1996, Mr. Cooley was employed by Compaq,
most recently as Senior Vice President and General Manager responsible for all
North American business and operations. Mr. Cooley is a member of the
RosettaNet Board of Directors, the computer industry's e-commerce standards
effort, and a member of its Executive Committee. During his 18-year career at
IBM, Mr. Cooley completed the Harvard Business Senior Executive Program.
Mr. Cooley holds an A.A.S. from Broome Community College.
Christina C. Jones founded the Company and has been its President and Chief
Operating Officer since June 1996. In 1989, Ms. Jones co-founded Trilogy.
Prior to founding the Company, Ms. Jones was Director of Marketing of Trilogy.
Ms. Jones holds a B.A. in Economics from Stanford University.
James J. Luttenbacher has been the Company's Vice President and Chief
Financial Officer since March 1998. In August 1998, Mr. Luttenbacher was
appointed Secretary of the Company. From 1992 to 1998, Mr. Luttenbacher was
employed at Mentor Graphics Corporation, most recently as division manager for
a software product division focused on integrated circuit test and physical
verification applications. Mr. Luttenbacher holds a B.A. in Accounting from
the University of Michigan and a Masters of Management in finance and
operations from Kellogg Graduate School of Management at Northwestern
University.
Joseph A. Liemandt has been a director of the Company since its inception.
From July 1994 to June 1996, Mr. Liemandt was President of the Company.
Mr. Liemandt founded Trilogy in 1989. Since that time, Mr. Liemandt has served
as the President, Chief Executive Officer and Chairman of Trilogy.
Peter J. Barris has been a director of the Company since June 17, 1998.
Since 1992, Mr. Barris has been a partner, and, in 1994, was appointed a
General Partner of New Enterprise Associates, a firm that manages venture
capital investments. Mr. Barris is also a member of the Board of Directors of
Mobius Management Systems, Inc. Mr. Barris holds a B.S.E.E. from Northwestern
University and an M.B.A. from the Amos Tuck School at Dartmouth College.
61
<PAGE>
Linwood A. Lacy, Jr. has been a director of the Company since August 1998.
In November 1997, Mr. Lacy retired from Micro Warehouse Incorporated where he
had served as President and Chief Executive Officer since October 1996. From
1989 to May 1996, Mr. Lacy served as the Co-Chairman and Chief Executive
Officer of Ingram Micro, Inc., a microcomputer products distributor and a then
wholly-owned subsidiary of Ingram Industries, Inc. From December 1993 to June
1995, Mr. Lacy was also President of Ingram Industries Inc. From June 1995
until April 1996, he was President and Chief Executive Officer of Ingram
Industries Inc., and from April 1996 to May 1996 served as its Vice Chairman.
Mr. Lacy serves as a director of Ingram Industries Inc., Entex Information
Services, Inc. and Earthlink Network, Inc. Mr. Lacy holds a B.S.ChE from the
University of Virginia and an M.B.A. in Business from the Darden Graduate
School of Business Administration at the University of Virginia.
Robert W. Stearns has been a director of the Company since September 1998.
Mr. Stearns is currently a venture capitalist and management consultant. From
January 1996 to August 1998 Mr. Stearns served as the Senior Vice President,
Technology and Corporate Development of Compaq. He joined Compaq as Vice
President of Corporate Development in July 1993. Prior to his arrival at
Compaq, he was employed as a management consultant with McKinsey & Co.,
focusing on high technology clients. Mr. Stearns serves as a director of the
Houston Advanced Research Center and the Cynthia Woods Mitchell Pavilion. In
November 1996 Mr. Stearns was appointed to the Texas Science and Technology
Council and in March 1998 he became a fellow of the Aspen Institute and a
member of the Brookings Council of the Brookings Institute. Mr. Stearns holds
a B.S. in Chemistry from Brown University and a Master of Science from the
Massachusetts Institute of Technology.
Board Composition
The Company currently has authorized five directors. Each director is
elected for a period of one year at the Company's annual meeting of
stockholders and serves until the next annual meeting or until his successor
is duly elected and qualified. The executive officers serve at the discretion
of the Board of Directors. There are no family relationships among any of the
directors or executive officers of the Company.
Board Committees
In August 1998, the Board established the Audit Committee and Compensation
Committee. The Audit Committee of the Board of Directors reviews and monitors
the corporate financial reporting and the internal and external audits of the
Company, including, among other things, the Company's control functions, the
results and scope of the annual audit and other services provided by the
Company's independent accountants, and the Company's compliance with legal
matters that have a significant impact on the Company's financial condition.
The Audit Committee also consults with the Company's management and the
Company's independent accountants prior to the presentation of financial
statements to stockholders and, as appropriate, initiates inquiries into
aspects of the Company's financial affairs. In addition, the Audit Committee
has the responsibility to consider and recommend the appointment of, and to
review fee arrangements with, the Company's independent accountants. The
current members of the Audit Committee are Messrs. Barris, Liemandt and
Stearns.
The Compensation Committee of the Board of Directors reviews and makes
recommendations to the Board regarding the Company's compensation policies and
all forms of compensation to be provided to executive officers and directors
of the Company, including, among other things, annual salaries and bonuses and
stock option and other incentive compensation arrangements of the Company. In
addition, the Compensation Committee reviews bonus and stock compensation
arrangements for all other employees of the Company. The current members of
the Compensation Committee are Messrs. Barris and Liemandt.
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<PAGE>
Director Compensation and Other Arrangements
The Company does not currently compensate its outside directors for
attending Board of Directors or committee meetings, but reimburses directors
for their reasonable travel expenses incurred in connection with attending
such meetings. On November 1, 1996, the Company granted to Mr. Liemandt an
option to purchase 100 shares of the Company's Class A Common Stock at an
exercise price of $3.00 per share. Upon joining the Board of Directors,
Messrs. Barris, Lacy and Stearns received options to acquire 10,000 shares at
$6.40 per share, 30,000 shares at $8.00 per share and 15,000 shares at $9.00
per share of Class A Common Stock, respectively.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee of the Board of Directors
has served at any time as an officer or employee of the Company. Prior to the
establishment of the Compensation Committee, all decisions relating to
executive compensation were made by the Board of Directors. No executive
officer of the Company serves as a member of the Board of Directors or
Compensation Committee of any entity which has one or more executive officers
serving as a member of the Board of Directors or Compensation Committee.
Trilogy is the parent corporation of the Company. Mr. Liemandt, a member of
the Company's Compensation Committee, beneficially owns more than 5.0% of the
Class B Common Stock of the Company.
Executive Compensation
The following table provides certain summary information concerning the
compensation earned by the Company's Chief Executive Officer and certain other
executive officers of the Company (collectively, the "Named Executive
Officers") whose salary and bonus exceeded $100,000 for services rendered in
all capacities to the Company and its subsidiaries during the fiscal years
ended December 31, 1997 and 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------- ------------
Number of
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus(1) Options(2) Compensation
- --------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Ross A. Cooley............. 1998 $ 1 -- -- --
Chairman and Chief 1997 1 -- --
Executive Officer
Christina C. Jones......... 1998 100,908(3) $ 500 125,000 --
President and Chief 1997 100,908(3) -- -- --
Operating Officer
James J. Luttenbacher(4)... 1998 145,362 5,000 150,000 $59,571(5)
Vice President, Chief 1997 -- -- -- --
Financial Officer and
Secretary
</TABLE>
- --------
(1) Reflects Bonus amount earned and paid in fiscal year.
(2) Securities Underlying Options represents shares of the Company's Class A
Common Stock.
(3) Includes $900 of reimbursement for excess amounts paid toward the
Company's standard employee medical benefit plan.
(4) Mr. Luttenbacher joined the Company in March 1998.
(5) Amount represents relocation expenses reimbursed by the Company.
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<PAGE>
Stock Option Grants in Last Fiscal Year
The following table sets forth certain information regarding stock option
grants made to each of the Named Executive Officers in Fiscal Year 1998. No
stock appreciation rights were granted to the Named Executive Officers during
such year.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
Individual Grants for Option Term(3)
---------------------------------------------- ----------------------
Number of Percent of
Securities Total Granted Per Share
Underlying to Exercise
Options Employees in Base Expiration
Name Granted(1) Fiscal Year(2) Price Date 5% 10%
---- ---------- -------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ross A. Cooley(4)....... -- -- -- -- -- --
Christina C. Jones(5)... 125,000 4.8% $3.00 6/18/08 $ 235,836 $ 597,653
James J.
Luttenbacher(6)........ 150,000 5.8% 3.00 2/11/08 282,905 716,879
</TABLE>
- --------
(1) The options in this table are granted under the Company's 1996 Stock
Option Plan (the "1996 Plan") and have exercise prices equal to the fair
market value of the Company's Class A Common Stock on the date of grant.
All such options have 10-year terms and vest over a period of four years.
(2) Based on options to purchase an aggregate of 2,590,076 shares of Class A
Common Stock granted pursuant to the 1996 Plan during fiscal 1998.
(3) Potential realizable value is based on an assumption that the price per
share of Class A Common Stock appreciates annually at the rate shown
(compounded annually) from the date of grant until the end of the
respective option term. Potential realizable value is shown net of
exercise price. These rates of appreciation are derived from the
regulations promulgated by the Commission and do not represent the
Company's estimate or projection of future stock price growth.
(4) For the material terms of Mr. Cooley's stock option grant, including the
vesting thereof, see "Cooley Employment Agreement".
(5) Ms. Jones' stock option grant vests at the rate of 25% annually over four
years from the date of grant.
(6) For the material terms of Mr. Luttenbacher's stock option grant, including
the vesting thereof, see "Luttenbacher Employment Agreement".
Aggregate Option Exercised Year-End Option Values
The following table sets forth the options exercised by each of the Named
Executive Officers during fiscal year 1998 and the number and value of the
securities underlying unexercised options that were held by each Named
Executive Officer as of December 31, 1998.
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
at December 31, 1998 at December 31, 1998(1)
Shares Acquired Value ------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ross A. Cooley.......... -- -- 525,000 350,000 $4,200,000 $2,800,000
Christina C. Jones...... -- -- 406,300 368,800 3,250,400 2,950,400
James J. Luttenbacher... 25,000 $ 0 -- 125,000 0 1,000,000
</TABLE>
- --------
(1) Based on the estimated fair market value as of December 31, 1998 of $11.00
per share for the Company's Class A Common Stock, as determined by the
Company's Board of Directors.
64
<PAGE>
Employment Agreements
The Company has entered into employment agreements with Ross A. Cooley, the
Company's Chairman and Chief Executive Officer, Christina C. Jones, the
Company's President and Chief Operating Officer, and James J. Luttenbacher,
the Company's Vice President, Chief Financial Officer and Secretary. Each of
these agreements has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part, and the following summaries are qualified
in their entirety by this reference to the full text of such agreements.
Cooley Employment Agreement. The Company and Ross A. Cooley are parties to
an employment agreement dated November 1, 1996 and an amendment effective
November 1, 1997 (the "Cooley Agreement"), which provides for an employment
period of four years at an annual salary of not less than $1.00. In addition,
Mr. Cooley is eligible to participate in the Company's management incentive
compensation plan as may be in effect from time to time. Mr. Cooley, in his
capacity as the Company's Chairman of the Board and Chief Executive Officer,
currently performs various executive and leadership functions, including
development of the Company's strategic and operational plans, strategic
planning, executive management of new customer and new account relationship
activities and recruitment of senior management personnel. Pursuant to the
Cooley Agreement, Mr. Cooley has been granted a stock option of 875,000 shares
of the Company's Class A Common Stock at an exercise price of $3.00 per share,
of which 425,000 shares became exercisable at the time the Cooley Agreement
was entered into 100,000 of such shares became exercisable on November 1, 1998
and an additional 100,000 shares shall become exercisable upon November 1,
1999 and November 1, 2000. The remaining 150,000 shares under such stock
option grant shall become exercisable upon November 1, 2003, provided that the
Cooley Agreement is in effect on such date. Under the terms of the Company's
1996 Stock Option Plan, in the event of a Change of Control (as defined in
such Plan), all unvested shares under such option become immediately
exercisable. The Cooley Agreement may be terminated by the Company or Mr.
Cooley at any time. If the Cooley Agreement is terminated by the Company for
Cause (as defined therein) or by Mr. Cooley for reasons other than as a result
of a Change in Control (as defined therein) of the Company, no further rights
to compensation or benefits shall accrue to Mr. Cooley. If the Cooley
Agreement is terminated by the Company without Cause or by Mr. Cooley as a
result of a Change of Control of the Company, Mr. Cooley shall not be entitled
to any additional compensation under the terms of the Cooley Agreement, but
shall have such rights relating to the exercise of then unexercised stock
options as are provided in his Stock Option Agreement. During his employment
by the Company and for a period of two years following the Company's
termination of his employment, Mr. Cooley shall not (i) solicit any customers
of the Company, (ii) induce or attempt to induce any Customer or withdraw,
curtail or cancel its business with the Company or in any manner modify or
fail to enter into any actual or potential business relationship with the
Company, (iii) recruit or solicit any employee or vendor of the Company to
cease his, her or its relationship with the Company or (iv) permit his name to
be used by or engage in any business competing with the business of the
Company.
Jones Employment Agreement. The Company and Christina C. Jones are parties
to an employment agreement dated November 1, 1996 (the "Jones Agreement"),
which provides for an employment period of four years at an annual salary of
not less than $100,000. In addition, Ms. Jones is eligible to participate in
any management incentive compensation plan which the Company may have from
time to time. Pursuant to the Jones Agreement, Ms. Jones has been granted a
stock option to purchase up to 650,000 shares of the Company's Class A Common
Stock at an exercise price of $3.00 per share (the "Option"). As a condition
to the grant of the Option, Ms. Jones entered into a Option Cancellation
Agreement with Trilogy which terminated a Stock Option Agreement dated
February 10, 1994 between Trilogy and Ms. Jones pursuant to which Ms. Jones
had been granted a stock option to purchase shares of Trilogy Class B Common
Stock at an exercise price of $1.50 per share. Under the terms of the
Company's 1996 Stock Option Plan, in the event of a Change of Control (as
defined in such Plan), all unvested shares under the Option become immediately
exercisable. The
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Jones Agreement may be terminated by the Company at any time and by Ms. Jones
for Good Reason (as defined therein). The definition of Good Reason includes,
among other things, a Change of Control (as defined therein) of the Company.
If the Jones Agreement is terminated by the Company for Cause (as defined
therein), no further rights to compensation or benefits shall accrue to Ms.
Jones. If the Jones Agreement is terminated by the Company without Cause or by
Ms. Jones for Good Reason, including upon a Change of Control, Ms. Jones shall
continue to receive employee benefits and monthly payments equal to one-
twelfth of her then-current annual salary for a period of twelve months
following the effective date of such termination. During her employment by the
Company and for a period of two years following the Company's termination of
her employment, Ms. Jones shall not (i) solicit any customers of the Company,
(ii) induce or attempt to induce any Customer to withdraw, curtail or cancel
its business with the Company or in any manner modify or fail to enter into
any actual or potential business relationship with the Company, (iii) recruit
or solicit any employee or vendor of the Company or Trilogy to cease his, her
or its relationship with the Company or with Trilogy or (iv) permit her name
to be used by or engage in any business competing with the business of the
Company.
Luttenbacher Employment Agreement. The Company and James J. Luttenbacher are
parties to an employment agreement dated February 12, 1998 (the "Luttenbacher
Agreement"), which provides for an employment period of four years at an
annual salary of not less than $175,000. In addition, Mr. Luttenbacher is
eligible to participate in any management incentive compensation plan which
the Company may have from time to time for an amount up to 50% of his then-
current annual salary. Mr. Luttenbacher received a bonus of $5,000 upon
commencement of his employment with the Company. Pursuant to the Luttenbacher
Agreement, Mr. Luttenbacher has been granted a stock option to purchase up to
150,000 shares of the Company's Class A Common Stock at an exercise price of
$3.00 per share. Under the terms of the Company's 1996 Stock Option Plan, in
the event of a Change of Control (as defined in such Plan), all unvested
shares under such option become immediately exercisable. The Luttenbacher
Agreement may be terminated by the Company or Mr. Luttenbacher at any time. If
the Luttenbacher Agreement is terminated by the Company for Cause (as defined
therein) or by Mr. Luttenbacher for reasons other than as a result of a Change
in Control (as defined therein) of the Company, no further rights to
compensation or benefits shall accrue to Mr. Luttenbacher. If the Luttenbacher
Agreement is terminated by the Company without Cause or by Mr. Luttenbacher as
a result of a Change in Control (as defined therein) of the Company, Mr.
Luttenbacher shall continue to receive employee benefits and monthly payments
equal to one-twelfth of his then-current annual salary for a period of six
months following the effective date of such termination. During his employment
by the Company and for a period of two years following the Company's
termination of his employment, Mr. Luttenbacher shall not (i) solicit any
customers of the Company, (ii) induce or attempt to induce any Customer to
withdraw, curtail or cancel its business with the Company or in any manner
modify or fail to enter into any actual or potential business relationship
with the Company, (iii) recruit or solicit any employee or vendor of the
Company to cease his, her or its relationship with the Company or (iv) permit
his name to be used by or engage in any business competing with the business
of the Company.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware provides that a
director of a corporation will not be personally liable for monetary damages
for breach of such individual's fiduciary duties as a director except for
liability (i) for any breach of such director's duty of loyalty to the Company
or to its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchases as provided in
Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which a director derives an improper personal benefit.
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The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers, and may indemnify its officers, employees and other
agents, to the full extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross
negligence on the part of an indemnified party. The Company's Bylaws also
permit the Company to advance expenses incurred by an indemnified party in
connection with the defense of any action or proceeding arising out of such
party's status or service as a director, officer or employee or other agent of
the Company. Such indemnified party shall repay such advances if it is
ultimately determined that such party is not entitled to indemnification. The
Company believes that its Certificate of Incorporation and Bylaw provisions
and indemnification agreements are necessary to attract and retain qualified
persons as directors and officers. The Company also maintains directors' and
officers' liability insurance.
At present the Company is not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of the Company in which
indemnification will be required or permitted. The Company is not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Plan") was approved by the
Board of Directors and stockholders in September 1996. The 1996 Plan provides
for the grant of options intended to qualify as "incentive stock options"
under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and nonqualified stock options. A total of 3,500,000 shares of Class
A Common Stock have been reserved for issuance under the 1996 Plan. As of
December 31, 1998, 148,602 shares of Class A Common Stock has been issued upon
exercise of options granted under the 1996 Plan, 3,207,074 shares remained
reserved for future issuance upon the exercise of outstanding options, and
144,324 shares remained available for future grant.
The Board of Directors or a committee designated by the Board has the power,
subject to the limitations contained in the 1996 Plan, to prescribe the terms
and conditions of any option granted under the 1996 Plan, including the total
number of share to be offered to each optionee. The maximum term of any stock
option granted under the 1996 Plan is ten years, except that with respect to
incentive stock options granted to a person possessing more than 10% of the
combined voting power of the Company (a "10% Stockholder"), the term of such
stock options shall be for no more than five years. The exercise price of
incentive stock options granted under the 1996 Plan must be at least 100% of
the fair market value of the Class A Common Stock on the grant date except
that the exercise price of incentive stock options granted to a 10%
Stockholder must be at least 110% of such fair market value on the date of
grant. The aggregate fair market value on the date of grant of the Class A
Common Stock for which incentive stock options are exercisable for the first
time by an employee during any calendar year may not exceed $100,000.
Nonqualified stock options may be granted in exchange for previously granted
stock options having an exercise price higher than the options received in
such exchange. In the event of a Change of Control (as defined in the 1996
Plan), all of the options granted under the 1996 Plan shall become immediately
exercisable. The Board may amend the 1996 Plan at any time, except that
certain amendments require stockholder approval. The 1996 Plan will terminate
in September 2006, unless earlier terminated by the Board of Directors. From
and after the offering, all further option grants will be made solely under
the 1999 Plan.
1999 Plan
The Company's 1999 Plan (the "1999 Plan") was adopted by the Board of
Directors and approved by the stockholders of the Company in February 1999. A
total of 1,500,000 shares of Class A Common Stock is initially reserved for
issuance under the 1999 Plan. In addition, the 1999 Plan authorizes an annual
increase in the number of shares of Class A Common Stock issuable under the
1999 Plan
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equal to five percent (5%) of the total number of shares of Class A Common
Stock and Class B Common Stock outstanding on the first day of each fiscal
year of the Company, beginning fiscal 2000. The 1999 Plan also provides that
the aggregate number of shares of Class A Common Stock available for grant as
Incentive Stock Options shall not exceed 1,500,000 shares, plus an annual
increase to be added on the first day of each fiscal year beginning in fiscal
2000 equal to the lesser of (i) 500,000 shares of Class A Common Stock, (ii)
two percent (2%) of the number of shares of Class A Common Stock outstanding
as of such date, or (iii) a lesser number of shares of Class A Common Stock
determined by the Administrator. The shares to be issued pursuant to 1999 Plan
may be authorized but unissued or reacquired Class A Common Stock.
The purpose of the 1999 Plan is to attract and retain the best available
personnel, to provide additional incentive to employees, directors and
consultants of the Company and its related entities and to promote the success
of the Company's business. The 1999 Plan provides for the granting to
employees of Incentive Stock Options and the granting of nonstatutory stock
options, stock appreciation rights, dividend equivalent rights, restricted
stock, performance units, performance shares, and other equity-based rights
("1999 Awards") to employees, directors and consultants of the Company and its
related entities.
With respect to 1999 Awards granted to directors or officers, the 1999 Plan
is administered by the Board of Directors or a committee designated by the
Board of Directors constituted to permit such 1999 Awards to be exempt from
Section 16(b) of the Exchange Act in accordance with Rule 16b-3 thereunder.
With respect to 1999 Awards granted to other participants, the 1999 Plan is
administered by the Board of Directors or a committee designated by the Board
of Directors. In each case, the respective plan administrator shall determine
the provisions, terms and conditions of each 1999 Award, including, but not
limited to, the 1999 Award vesting schedule, repurchase provisions, rights of
first refusal, forfeiture provisions, form of payment upon settlement of the
1999 Award, payment contingencies and satisfaction of any performance
criteria.
Incentive Stock Options are not transferable by the optionee other than by
will or the laws of descent or distribution, and each Incentive Stock Option
is exercisable during the lifetime of the grantee only by such grantee. Other
1999 Awards shall be transferable to the extent provided in the agreement
evidencing the 1999 Award.
The per share exercise price of Incentive Stock Options granted pursuant to
the 1999 Plan must be at least equal to the per share fair market value of the
Class A Common Stock on the date of grant, and the term of the option must not
exceed ten years. The term of other 1999 Awards will be determined by the
respective plan administrator. With respect to an employee who owns stock
representing more than 10% of the voting power of the Company's outstanding
capital stock, the per share exercise price of any Incentive Stock Option must
equal at least 110% of the per share fair market value of the Class A Common
Stock on the date of grant and the term of the option must not exceed five
years. The exercise price or purchase price, if any, of other 1999 Awards will
be determined by the respective plan administrator, but shall not be less than
100% of the fair market value of the stock granted thereunder. The
consideration to be paid upon exercise or purchase of the shares of Class A
Common Stock pursuant to a 1999 Award will be determined by the respective
plan administrator and may include cash, check, promissory note, shares of
Class A Common Stock, or the assignment of part of the proceeds from the sale
of shares acquired upon exercise or purchase of the 1999 Award.
Where the 1999 Award agreement permits the exercise or purchase of a 1999
Award for a certain period of time following the recipient's termination of
service with the Company, disability, or death, such 1999 Award will terminate
to the extent not exercised or purchased on the last day of the specified
period or the last day of the original term of such 1999 Award, whichever
occurs first.
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The Administrator may at any time offer to buy out for a payment in cash or
Class A Common Stock, an Award previously granted, based on such terms and
conditions as the respective administrator shall establish and communicate to
the grantee at the time that such offer is made.
In the event of a merger of the Company in which the Company does not
survive, a sale of substantially all of the Company's assets in connection
with the liquidation or dissolution of the Company, a person acquiring more
than 50% of the voting power of the Company or upon an acquisition of
beneficial ownership of securities possessing more than 50% of the voting
power of the Company's stockholders, subject to the 1999 Plan administrator's
determination that any such acquisition shall be deemed not to be a "Corporate
Transaction" (as such term is defined in the 1999 Plan), and immediately prior
to the effective time of any such foregoing transaction, one half of the then
unvested shares subject to outstanding 1999 Awards will vest, such 1999 Awards
will become immediately exercisable as to such shares and the repurchase or
forfeiture rights as to such shares will terminate. Upon consummation of such
transaction all outstanding 1999 Awards will terminate, unless they are
assumed by the successor company. In the event of a hostile takeover of the
Company or a change in the majority of the Board of Directors through one or
more contested elections, the vesting of all outstanding 1999 Awards will
accelerate as described above, but the outstanding 1999 Awards will remain
exercisable according to their terms.
Unless terminated sooner, the 1999 Plan will terminate automatically in
2009. The Board has the authority to amend, suspend or terminate the 1999 Plan
subject to stockholder approval of certain amendments and provided no such
action may affect 1999 Awards previously granted under the 1999 Plan unless
agreed to by the affected grantees.
Agreement Regarding Grant of Options
Pursuant to an agreement (the "GE Agreement") between the Company and
General Electric Capital Information Technology Solutions ("GE Capital"), GE
Capital has the right (the "Right") to require the Company to grant GE Capital
an option to purchase up to 320,000 shares of restricted Class A Common Stock
of the Company at the initial price to the public. The Right is triggered upon
the happening of certain events, including an initial public offering by the
Company of its Class A Common Stock. In the event GE Capital exercises such
Right, the GE Option will expire at 11:59 pm on the first date of such public
offering. If GE Capital is granted and exercises the GE Option, the shares of
Class A Common Stock issued pursuant to the exercise of the GE Option will be
restricted stock and will not be subject to any registration rights.
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CERTAIN TRANSACTIONS
Agreements with Executive Officers
The Company has entered into employment agreements with Mr. Cooley, Ms.
Jones and Mr. Luttenbacher. See "Management--Employment Agreements".
Agreements Between the Company and Trilogy
Asset Transfer Agreement
In August 1996, the Company and Trilogy entered into an Asset Transfer
Agreement, as amended in August 1998 (the "Asset Transfer Agreement"),
pursuant to which Trilogy transferred the assets and liabilities of its
pcOrder.com division to the Company. In exchange for the transferred assets,
the Company issued to Trilogy 900 shares of the Company's common stock, $0.01
par value per share, establishing the Company as a wholly-owned subsidiary of
Trilogy (such shares were subsequently split into 11,520,000 shares of Common
Stock and in February 1999 reclassified as Class B Common Stock). Pursuant to
the Asset Transfer Agreement, the parties made customary representations and
warranties regarding their businesses and operations, and each agreed to
indemnify the other in the event of any damages arising from the other's
breach of any such representation or warranty. In addition, Trilogy agreed not
to engage in, directly or indirectly, any business directly in competition
with the Company for a period of three years after the effective date of the
Asset Transfer Agreement. Further, during such three year period, Trilogy also
agreed not to hire or recruit any person who was, at the effective date of the
Asset Transfer Agreement or within the 12 month period preceeding such
effective date, an employee of the pcOrder.com division of Trilogy. Trilogy
has the right, and to the extent Trilogy transfers the shares held by it,
other holders of these shares have the right, on no more than five occasions
after this offering, to require the Company to register the shares of Common
Stock held by such stockholders within 180 days of such request. The Company
is obligated to indemnify such stockholders and underwriters, if any, against
liability due to information in the registration statement furnished by the
Company. Trilogy's registration rights expire eight years after the effective
date of the Asset Transfer Agreement. Additionally, holders of the transferred
shares have the right to sell any shares held by such stockholder in this
offering. Trilogy has waived its registration rights in connection with this
offering.
Technology, Services and License Agreement
In September 1998, the Company and Trilogy entered into a Technology,
Services and License Agreement (the "Technology Agreement"), which amended and
superseded a Master Software License Agreement and a Reseller Agreement
previously entered into by the parties, pursuant to which Trilogy has licensed
certain intellectual property rights to the Company, and the Company has
agreed to license certain intellectual property rights to Trilogy. Each party
has granted the other access to, and a nonexclusive, irrevocable, perpetual,
worldwide, license to internally use, make, reproduce and/or prepare
derivative works of the products of the other party as of September 1, 1998,
in the form as of that date, and any updates, changes to, and new releases of
those products, subject to the happening of a Trigger Event (as defined below)
(as applicable, the "Trilogy Intellectual Property" or the "pcOrder
Intellectual Property"), or to sublicense any third party to do so, subject to
certain confidentiality and other restrictions. Trilogy also granted the
Company a nonexclusive, irrevocable, perpetual, worldwide right and license
under the Trilogy Intellectual Property to make, use, reproduce, prepare
derivative works based upon, license, offer to license, import, export,
publish, distribute, perform, display, advertise, market, promote, service and
or support those of pcOrder's products that are network based e-commerce
products for enabling sales, purchasing, marketing or distribution within the
computer products market ("Computer E-Commerce Products"), and to sublicense
any third party to do so, subject to the payment of royalties as described
below. The Company also granted Trilogy a nonexclusive, irrevocable,
perpetual, worldwide right and license to use pcOrder Intellectual Property
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to make, use reproduce, prepare derivative works based upon, license, export,
publish, distribute, perform, display, advertise, market, promote, service and
support Trilogy Products (as defined in the Technology Agreement) and to
sublicense any third party to do so, subject to the payment of royalties
described below. However, following a change in control of Trilogy or such
time as Trilogy is no longer required by generally accepted accounting
principles to be consolidated with pcOrder for financial reporting purposes
(in either case, a "Trigger Event"), Trilogy shall not, until the later of
September 1, 2008 or the expiration of five years following such Trigger
Event, have any license to the pcOrder Intellectual Property with respect to
any Computer E-Commerce Product that utilizes pcOrder's product content or
certain tools developed by pcOrder. Following a Trigger Event, any Trilogy
license to pcOrder Intellectual Property, which license was granted pursuant
to the terms of the Technology Agreement prior to the happening of such
Trigger Event, shall continue indefinitely, subject to continued royalty
payments. Pursuant to the Technology Agreement, neither party is restricted
from entering into or having similar agreements with third parties or doing
any activity relating to competitive products and services (involving none of
the other party's information or intellectual property). Following a Trigger
Event, pcOrder's access to Trilogy products and its right to receive updates,
changes and new releases of Trilogy Intellectual Property shall continue until
the later to occur of five years after a Trigger Event or September 1, 2008.
Notwithstanding the foregoing, to the extent that any of the Trilogy
Intellectual Property (including Trilogy products based on such intellectual
property) is not of a same, similar, replacement or equivalent general type as
Trilogy Intellectual Property available prior to a Trigger Event, pcOrder will
not have rights to such Trilogy Intellectual Property. The Technology
Agreement further provides that where at least one employee and/or contractor
of the Company in conjunction with at least one employee and/or contractor of
Trilogy cooperate toward jointly creating, inventing or discovering new
material qualifying for either patent or copyright protection, the parties
shall negotiate in good faith on a project-by-project basis to determine to
what extent such newly developed material should be jointly owned. In the
event of joint ownership, the parties shall have an equal, undivided interest
in such patent, copyright or other intellectual property. The Company and
Trilogy are each obligated to pay to the other monthly royalties based on a
percentage of license fees derived from sales of products that incorporate,
and/or data maintenance services related to, the other party's technology; of
software maintenance fees other than data maintenance services in connection
with products that incorporate the other party's technology; and of on-line
subscription service fees from products that incorporate the other party's
technology. The Technology Agreement provides that each party will defend,
indemnify and hold harmless the other party for any claim against such other
party by any third party to the extent based on an actual or alleged: (i)
failure by a party to perform its obligations under the Technology Agreement;
(ii) breach of any one or more of a party's representations or warranties;
(iii) failure by a party to comply with government laws and regulations;
(iv) intentional or grossly negligent acts or omissions on the part of a
party, and (v) to the extent a party delivers Material (as defined in the
Technology Agreement) to the other party, (1) failure by the delivering party
to either own or have sufficient rights to deliver such Material to the other
party, (2) failure by a party to either own or have sufficient rights to grant
to the other party the license it has granted under the Technology Agreement,
(3) infringement (or violation) by such delivered Material of a third party's
intellectual property rights, or (4) failure to be Year 2000 compliant. Such
indemnification obligations are subject to the condition that the indemnified
party: (a) promptly provides notice of any claim to the indemnifying party;
(b) allows the indemnifying party to control the defense of the claim and
settlement negotiations; and (c) fully cooperates with the indemnifying party
in such defense and settlement negotiations. The Technology Agreement provides
that upon either party's request, the parties shall negotiate in good faith
regarding the terms and conditions upon which either party will perform
consulting services reasonably requested by the other party; provided,
however, that such obligation shall expire on the later of seven years
following a Trigger Event or September 1, 2010. The Technology, Services and
License Agreement has a perpetual term, unless terminated earlier by either
party's 31 days prior notice of an uncured breach, subject to extension for
special circumstances, or the bankruptcy of either of the parties.
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Management Services Agreement
The Company and Trilogy entered into a Management Services Agreement,
effective as of July 1, 1998, which amended and superseded a Services
Agreement previously entered into by the parties, pursuant to which Trilogy
will provide certain administrative and corporate support services to the
Company. Trilogy has agreed to provide to the Company certain services
("Mandatory Services") including tax administration, payroll, payroll
accounting, banking, corporate finance, recruiting and employee training
services to the Company. In addition, Trilogy has agreed to provide the
Company certain additional services ("Optional Services"), including hardware
purchasing, shipping and receiving, purchase order database administration,
network administration, audit services, human resources administration, legal
services and customer training. The provision of Mandatory Services may not be
unilaterally terminated by either party during the effectiveness of the
Management Services Agreement. The provision of Optional Services may be
terminated by either party upon 90 days notice. The Management Services
Agreement provides that Trilogy will use the same level of care in rendering
services to the Company that Trilogy uses in rendering services to itself or
any of its other subsidiaries, which will be at least equal to the care, that
Trilogy has used in the past in rendering such services to the Company.
However, the selection of personnel to perform the various services will be
within the sole control of Trilogy. Specifically, Trilogy may, without the
consent or approval of the Company, subcontract any service to be provided
under the Management Services Agreement. The Management Services Agreement
terminates on June 30, 1999, and thereafter is subject to successive one-year
renewal terms upon consent of the parties. The Management Services Agreement
may be terminated: (i) by either party within 30 days of an uncured material
breach by the other party; (ii) by either party upon the liquidation or
dissolution of the other party; (iii) by Trilogy immediately upon notice to
the Company if the Company fails to pay the amount due to Trilogy under such
agreement by the tenth day after notice of nonpayment is given; or (iv) within
30 days of the date at which Trilogy ceases to own a majority of the Company's
Common Stock.
Tax Allocation Agreement
The Company is currently, and after the offering will be, included in
Trilogy's consolidated federal income tax group, and the Company's federal
income tax liability will be included in the consolidated federal income tax
liability of Trilogy. The Company and Trilogy have entered into a Tax
Allocation Agreement pursuant to which the Company and Trilogy will make
payments between them such that, with respect to any period, the amount of
taxes to be paid or received by the Company, subject to certain adjustments,
will be determined as though the Company were to file separate federal, state
and local income tax returns (including, except as provided below, any amounts
determined to be due as a result of a redetermination of the tax liability of
Trilogy arising from an auditor or otherwise) rather than as a consolidated
subsidiary of Trilogy with respect to federal, state and local income taxes.
Under the terms of the Tax Allocation Agreement, the Company, in computing its
stand alone tax liability or tax refund, will be able to utilize certain tax
items, such as net operating losses, foreign tax credits and other tax credits
(collectively, "Tax Attributes"). In addition, with respect to Tax Attributes
of the
Company that come into existence after the execution of the Tax Allocation
Agreement, and under the terms of the Tax Allocation Agreement, Trilogy will
be required to make any payment to the Company as such Tax Attributes of the
Company are utilized by the Trilogy consolidated federal income tax group.
Pursuant to the Tax Allocation Agreement, Trilogy's obligation to make any
payment to the Company relating to the Company's Tax Attributes will apply
only to tax periods during which the Company (or its affiliated subsidiaries)
is a member of Trilogy consolidated federal income tax group.
Trilogy will continue to have all the rights of a parent of a consolidated
group (and similar rights provided for by applicable state and local law with
respect to a parent of a combined, consolidated or unitary group), will be the
sole and exclusive agent for the Company in any and all matters relating to
the income, franchise and similar liabilities of the Company, will have sole
and exclusive responsibility for the preparation and filing of consolidated
federal and consolidated or combined state and local
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income tax returns (or amended returns), and will have the power, in its sole
discretion, to contest or compromise any asserted tax adjustment or deficiency
and to file, litigate or compromise any claim for refund on behalf of the
Company. In addition, Trilogy has agreed to undertake to provide the
aforementioned services with respect to the Company's separate state and local
returns and the Company's foreign returns.
The Tax Allocation Agreement will remain in effect until the expiration of
any open years for which pcOrder has filed as a member of the Trilogy
consolidated group. In general, the Company will be included in Trilogy's
consolidated group for federal income tax purposes for so long as Trilogy
beneficially owns at least 80% of the total voting power and value of the
outstanding Common Stock. Each member of a consolidated group is jointly and
severally liable for the federal income tax liability of each other member of
the consolidated group. Accordingly, although the Tax Allocation Agreement
allocates tax liabilities between the Company and Trilogy, during the period
in which the Company is included in Trilogy's consolidated group, the Company
could be liable in the event that any federal tax liability is incurred, but
not discharged, by any other member of Trilogy's consolidated group. Pursuant
to the Tax Allocation Agreement, however, Trilogy is obligated to indemnify
the Company for any tax liabilities, including any liability resulting from a
distribution of the Company's stock to Trilogy's stockholders provided that it
has paid its allocated share of such liabilities to Trilogy.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Class A Common Stock as of February 2, 1999, and as adjusted
to reflect the sale of shares offered hereby, by (i) each person who is known
by the Company to own beneficially more than five percent of the Class A
Common Stock, (ii) each of the Company's Named Officers and directors, and
(iii) all current officers and directors as a group.
<TABLE>
<CAPTION>
Percentage of
Shares
Beneficially
Owned(1)
-----------------
5% Beneficial Owners, Directors Number of Shares Before After
& Named Executive Officers Beneficially Owned(1) Offering Offering
- ------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Trilogy, Inc.(2)....................... 12,757,000 98.3% 84.0%
6034 West Courtyard Drive
Austin, TX 78730
Joseph A. Liemandt(3).................. 12,757,050 98.3 84.0
6034 West Courtyard Drive
Austin, TX 78730
Ross A. Cooley(4)...................... 525,000 3.9 3.3
Christina C. Jones(5).................. 406,300 3.0 2.6
James J. Luttenbacher(6)............... 56,250 * *
Peter J. Barris........................ -- * *
Linwood A. Lacy, Jr. .................. -- * *
Robert W. Stearns...................... -- * *
All Directors and Officers as a Group
(7 persons)(7)........................ 13,744,600 98.6% 85.1%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options held by that person
that are currently exercisable or exercisable within 60 days of February
2, 1999 are deemed outstanding. Percentage of beneficial ownership is
calculated assuming all shares of Class B Common Stock have been
converted into shares of Class A Common Stock of the Company, or
12,979,945 shares prior to this offering and 15,179,945 shares after this
offering, as of February 2, 1999 (assuming no exercise of the
Underwriters' overallotment option or the GE Option). To the Company's
knowledge, except as set forth in the footnotes to this table and subject
to applicable community property laws, each person named in the table has
sole voting and investment power with respect to the shares set forth
opposite such person's name.
(2) Shares beneficially owned by Trilogy, Inc. are registered in the name of
Trilogy Software, Inc., a wholly owned subsidiary of Trilogy, Inc. As of
February 25, 1999, Trilogy granted to certain of its employees options to
acquire an aggregate of 155,000 shares of Class A Common Stock. Such
options will become exercisable at least 180 days after the date of this
Prospectus at an exercise price of $5.00 per share.
(3) Through his ownership of securities of Trilogy, Inc., Mr. Liemandt has
the right to cause to be elected a majority of the Board of Directors of
Trilogy, Inc. As a result, Mr. Liemandt is, under the rules of the
Securities and Exchange Commission, deemed to be the beneficial owner of
the 12,757,000 owned indirectly by Trilogy, Inc. In addition, Mr.
Liemandt's ownership includes 50 shares issuable upon exercise of stock
options exercisable within 60 days of February 2, 1999.
(4) Includes 525,000 shares issuable upon exercise of stock options
exercisable within 60 days of February 2, 1999.
(5) Includes 406,300 shares issuable upon exercise of stock options
exercisable within 60 days of February 2, 1999.
(6) Includes 31,250 shares issuable upon exercise of stock options
exercisable within 60 days of February 2, 1999.
(7) Includes (i) 962,600 shares issuable upon exercise of stock options
exercisable within 60 days of February 2, 1999 and (ii) 12,757,000 shares
owned by Trilogy (see footnote 2).
74
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
The authorized capital stock of the Company consists of 60,000,000 shares of
Common Stock, par value $0.01 per share, consisting of 37,243,000 shares of
Class A Common Stock and 12,757,000 shares of Class B Common Stock and
10,000,000 shares of Preferred Stock, par value $0.01 per share. Upon
consummation of this offering, no shares of Preferred Stock, 2,426,648 shares
of Class A Common Stock (2,756,648 shares if the Underwriters' overallotment
option is exercised in full) and 12,757,000 shares of Class B Common Stock
will be outstanding. The following summary is qualified in its entirety by
this reference to the Company's Certificate of Incorporation and Bylaws,
copies of which are filed as exhibits to the Registration Statement of which
this Prospectus is a part.
Reclassification
On February 2, 1999, all then outstanding shares of Common Stock held by
Trilogy were reclassified into Class B Common Stock on a one-for-one basis and
all shares of then outstanding Common Stock not held by Trilogy were
reclassified into shares of Class A Common Stock on a one-for-one basis.
Common Stock
Immediately prior to this offering, there were 12,983,648 shares of Common
Stock outstanding of which 226,648 shares were Class A Common Stock held by
individuals and 12,757,000 were Class B Common Stock held by Trilogy. The
Class A Common Stock and Class B Common Stock have substantially identical
rights other than with respect to voting, conversion and transfer, as further
described below. Except as required by the Company's Certificate of
Incorporation or applicable law, the Class B Common Stock entitles its holders
to eight votes per share while the Class A Common Stock entitles its holders
to one vote per share on all matters submitted to a vote or for the consent of
stockholders. Except as required by the Company's Certificate of Incorporation
or by applicable law, the Class A Common Stock and Class B Common Stock will
vote together as a single class on all matters submitted to a vote or for the
consent of stockholders. Additionally, the Common Stock votes on a non-
cumulative basis. The holders of Common Stock are entitled to receive ratably
such noncumulative dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor. In the event
of liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive rights or
other subscription rights. The Class A Common Stock has no conversion rights.
The shares of Class B Common Stock are convertible at any time prior to a tax-
free spin-off at the option of the holder into shares of Class A Common Stock
on a one-for-one basis. Prior to a tax free spin-off each outstanding share of
Class B Common Stock will automatically be converted into a share of Class A
Common Stock upon any transfer of such share, if after the transfer, such
share is not owned by Trilogy, Trilogy, Inc. (Trilogy's parent), an affiliate
of Trilogy, Inc. or a non-affiliate of Trilogy, Inc. which acquires more than
50% of the then outstanding Class B Common Stock in a single transaction. In
addition, unless the Company received an opinion of counsel that such
conversion would adversely affect the tax free nature of such spin-off, upon
the fifth anniversary of the first transfer of Class B Common Stock pursuant
to a tax free spin-off, all of the then outstanding shares of Class B Common
Stock will convert on a one-for-one basis into shares of Class A Common Stock.
In the event the Company does receive an opinion of counsel that such
conversion would adversely affect the tax free nature of the spin-off, the
matter of conversion of such shares will be submitted to the stockholders of
the Company, upon whose approval such shares of Class B Common Stock shall
automatically convert into an equal number of shares of Class A Common Stock.
However, after a tax free spin-off and prior to such fifth anniversary, such
shares of Class B Common Stock will generally not be convertible into shares
of Class A Common Stock with the exception of any shares of Class B Common
Stock held by Trilogy, Trilogy, Inc. or an affiliate of
75
<PAGE>
shares shall automatically convert into an equal number of shares of Class A
Common Stock upon the tax free spin-off. Pursuant to the Company's Certificate
of Incorporation, the Company shall at all times reserve and keep available
out of its authorized but unissued Class A Common Stock, such number of shares
of Class A Common Stock necessary for conversion of all then outstanding
shares of Class B Common Stock. There are no redemption or sinking fund
provisions applicable to the Common Stock. The Class B Common Stock may only
be transferred pursuant to the restrictions contained in the Certificate
Trilogy, Inc., which of Incorporation. All outstanding shares of Common Stock
are fully paid and nonassessable, and the shares of Class A Common Stock to be
issued upon completion of this offering will be fully paid and nonassessable.
Preferred Stock
The Board of Directors has the authority, without further action by the
stockholders, to issue the Preferred Stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of
shares constituting any series of Preferred Stock or the designation of such
series, without further vote or action by the stockholders. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders
and may adversely affect the voting and other rights of the holders of Common
Stock. The issuance of Preferred Stock with voting and conversion rights may
have the effect of decreasing the market price of the Common Stock, and may
adversely affect the voting power of the holders of Common Stock, including
the loss of voting control to others. At present, the Company has no plans to
issue any shares of Preferred Stock.
Certain Anti-Takeover, Limited Liability and Indemnification Provisions;
Section 203 of the Delaware General Corporation Law
The Company's Certificate of Incorporation provides for the reclassification
of the capital stock of the Company outstanding immediately prior to February
2, 1999, the effective date of such reclassification, into Class A Common
Stock or Class B Common Stock. The Class B Common Stock has disproportionate
voting rights and, following this offering, the outstanding Class B Common
Stock will represent 97.7% of the total voting power of the stockholders of
the Company. Trilogy will hold all of the 12,757,000 shares of Class B Common
Stock and thus control the outcome of any matter presented to the stockholders
for a vote. In addition, Trilogy could elect to sell all or a substantial
portion of its equity interest in the Company to a third party, which could
represent a controlling or substantial interest in the Company, without
offering to other stockholders of the Company the opportunity to participate
in such a transaction. Under the terms of the Company's Certificate of
Incorporation, a single transaction resulting in the transfer of greater than
50% of Trilogy's equity interest in the Class B Common Stock to a non-
affiliate of Trilogy will result in such non-affiliate having the
disproportionate per share voting rights currently held by Trilogy. In the
event of a sale of Trilogy's interest to a third party, such third party may
be able to control the Company in the manner that Trilogy is currently able to
control the Company, including with respect to the election of all of the
members of the Company's Board of Directors. Such a sale may adversely affect
the Company's other stockholders and the market price of the Class A Common
Stock. The overall effect of the disproportionate voting rights of the Class B
Common Stock may be to discourage a potential purchaser of a majority interest
of the Class A Common Stock.
The Company is subject to Section 203 of the Delaware General Corporation
Law, as amended ("Section 203"), which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any business combination
with any interested stockholder for a period of three years following the date
that such stockholder became an interested stockholder, unless (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
that
76
<PAGE>
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer, or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 defines business combinations to include (i) any merger or
consolidation involving the corporation or any majority-owned subsidiary of
the corporation and any other person or entity, (ii) subject to certain
exceptions, any sale, transfer, pledge or other disposition of 10% or more of
the assets of the corporation or any majority-owned subsidiary of the
corporation involving the interested stockholder, (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation or any majority-owned subsidiary of the corporation of any stock
of the corporation to the interested stockholder, (iv) any transaction
involving the corporation or any majority-owned subsidiary of the corporation
that has the effect of increasing the proportionate share of the stock of any
class or series of the corporation or any majority-owned subsidiary of the
corporation beneficially owned by the interested stockholder, or (v) the
receipt by the interested stockholder of the benefit of any loans, advances,
guarantees, pledges or other financial benefits provided by or through the
corporation or any majority-owned subsidiary of the corporation. In general,
Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more or the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Limitation of Director Liability
The Certificate of Incorporation of the Company limits the liability of
directors of the Company (in their capacity as directors but not in their
capacity as officers) to the Company or its stockholders to the fullest extent
permitted by Delaware law. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of a director's fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Company or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, which relates to unlawful payments of dividends or unlawful stock
repurchases or redemptions, or (iv) for any transaction from which the
director derived an improper personal benefit.
Indemnification
The Bylaws of the Company provide that the directors and officers of the
Company shall be indemnified and provide for the advancement to any such
indemnified director or officer of expenses in connection with actual or
threatened proceedings and claims arising out of their status as director or
officer of the Company as such to the fullest extent permitted by the Delaware
General Corporation Law.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Class A Common Stock is American
Stock Transfer & Trust Company. The Transfer Agent's address is 40 Wall
Street, New York, New York 10005 and telephone number is (718) 921-8207.
77
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Class A Common Stock in the public market
after this offering (including by optional or automatic conversion of shares
of Class B Common Stock into Class A Common Stock), or the anticipation of
such sales, could have a material adverse effect on then-prevailing market
prices. Upon completion of the offering, the Company will have 2,226,648
shares of Class A Common Stock outstanding and 12,757,000 shares of Class B
Common Stock outstanding (assuming no exercise of the Underwriters' over-
allotment option, no exercise of currently outstanding options or warrants and
no exercise of the Trilogy Options). After this offering, Trilogy will
beneficially own all of the 12,757,000 shares of Class B Common Stock
representing approximately 84.0% of the outstanding Common Stock. Shares of
Class B Common Stock are convertible into Class A Common Stock on a share-for-
share basis at the election of the holder or automatically upon certain
transfers thereof. The 2,200,000 shares of Class A Common Stock sold in this
offering (plus any additional shares sold upon exercise of the Underwriters'
over-allotment option) will be freely transferable without restriction under
the Securities Act of 1933, as amended (the "Securities Act"), unless they are
held by "affiliates" of the Company as that term is used under the Securities
Act and the regulations promulgated thereunder ("Affiliates"). The remaining
226,648 of Class A Common Stock and the 12,757,000 shares of Class A Common
Stock issuable upon conversion of the Class B Common Stock (including the
shares of Class A Common Stock issuable upon certain transfers of the Class B
Common Stock or at the option of the holder thereof) held by Trilogy are
"restricted securities" as that term is defined in Rule 144 of the Securities
Act (the "Restricted Shares"). Restricted Shares may be sold in the public
market only if registered or if they qualify for an exemption from
registration under Rule 144 or Rule 701 under the Securities Act. As a result
of contractual restrictions and the provisions of Rules 144 and 701,
additional shares will be available for sale in the public market as follows:
(i) no Restricted Shares will be eligible for immediate sale on the effective
date of this offering; (ii) approximately 80,673 Restricted Shares will be
eligible for sale 90 days after the date of this offering; (iii) approximately
77,975 Restricted Shares will be eligible for sale without restriction and
25,000 Restricted Shares will be eligible for sale subject to volume
limitations, in each case 180 days after the effective date of this offering
upon the expiration of a contractual lock-up agreement with the Company and
the representatives of the Underwriters and (iv) and approximately 43,000 of
the Restricted Shares will be eligible for sale from time to time thereafter
upon expiration of their respective holding periods under Rule 144. In
addition, assuming no exercise of the Trilogy Options, the 12,757,000 shares
of Class A Common Stock issuable upon conversion of Class B Common Stock will
be eligible for sale by Trilogy 180 days after the date of this offering upon
the expiration of contractual lock-up agreements. In the event the Trilogy
Options are exercised, one year after such options are exercised, the 155,000
Trilogy Option Shares will become eligible for sale pursuant to Rule 144,
subject to the volume limitations and other restrictions, which generally is
applicable to a transferee of shares sold by an Affiliate. The Company's
officers and directors and Trilogy have agreed not to sell any of their shares
of Common Stock for 180 days after the date of this Prospectus without the
prior written consent of Goldman, Sachs & Co. Goldman, Sachs & Co., on behalf
of the Underwriters, may, in its sole discretion and at any time without
notice, release all or any portion of securities subject to the lock-up
agreement with the Underwriters.
In general, under Rule 144 as currently in effect, beginning 90 days after
the offering, a person (or persons whose shares are aggregated) who owns
shares that were purchased from the Company (or any Affiliate) at least one
year previously, including that person who may be deemed an Affiliate of the
Company, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of (i) 1% of the then outstanding shares of
the Class A Common Stock or (ii) the average weekly trading volume of the
Class A Common Stock on the Nasdaq National Market during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission (the "Commission"). Sales under Rule 144
are also subject to certain manner of sale provisions, notice requirements and
the availability of current public information about the
78
<PAGE>
Company. Any person (or persons whose shares are aggregated) who is not deemed
to have been an Affiliate of the Company at any time during the 90 days
preceding a sale, and who owns Restricted Shares under Rule 144 that were
purchased from the Company (or any Affiliate) at least two years previously,
would be entitled to sell such shares under Rule 144(k) without regard to the
volume limitations, manner of sale provisions, public information requirements
or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers prior to the date the
issuer becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), pursuant to written
compensatory benefit plans or written contracts relating to the compensation
of such persons. In addition, the Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject
to the reporting requirements of the Exchange Act, along with the shares
acquired upon exercise of such options (including exercises after the date of
this Prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this Prospectus, may be sold (i) by
persons other than Affiliates, subject only to the manner of sale provisions
of Rule 144, and (ii) by Affiliates under Rule 144 without compliance with its
one-year holding period requirement.
The Company has agreed not to offer, sell or otherwise dispose of any shares
of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or any rights to acquire Common Stock for a
period of 180 days after the date of this Prospectus, without the prior
written consent of Goldman, Sachs & Co., subject to certain limited
exceptions. See "Underwriting".
Trilogy and its transferees, including, to the extent the Trilogy Options
are exercised, the holders of Trilogy Option Shares, have the right in certain
circumstances to request the Company to register their shares of Class B
Common Stock and shares of the Class A Common Stock issuable upon conversion
of such Class B Common Stock under the Securities Act for resale to the
public. These registration rights are subject to certain conditions and
limitations, among them the right of the underwriters, if any, of an offering
to limit the number of shares included in such registration. If the Company
were required to include in a Company-initiated registration shares held by
Trilogy, or its transferees, including, the extent the Trilogy Options are
exercised, the holders of Trilogy Option Shares, such registration or sales of
stock may have a material adverse effect on the market price for the Company's
Class A Common Stock and on the Company's ability to raise new capital. In
addition, the Company intends to file a registration statement under the
Securities Act covering approximately 4,853,725 shares of Class A Common Stock
reserved for issuance under the Option Plan. See "Management--1996 Stock
Option Plan" and "Management--1999 Stock Incentive Plan". Such registration
statement is expected to be filed within 90 days after the date of this
Prospectus and will automatically become effective upon filing. Following such
filing, shares registered under such registration statement will, subject to
the Lock-Up Agreements, Rule 144 volume limitations applicable to Affiliates
and the lapsing of the Company's repurchase rights, be available for sale in
the open market upon the exercise of vested options 90 days after the
effective date of this Prospectus. At December 31, 1998, options to purchase
3,207,074 shares were issued and outstanding under the 1996 Plan. See "Risk
Factors--Shares Eligible for Future Sale".
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon
for the Company by Morrison & Foerster LLP, Palo Alto, California. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Venture Law Group, A Professional Corporation, Menlo Park,
California.
79
<PAGE>
EXPERTS
The financial statements of the Company at December 31, 1997 and 1998, and
for each of the three years in the period ended December 31, 1998, appearing
in this Prospectus and the Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Class A Common Stock offered
hereby (the "Registration Statement"). This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules to the Registration Statement. For further information with respect
to the Company and the Class A Common Stock offered hereby, reference is made
to the Registration Statement and the exhibits and schedules filed as a part
of the Registration Statement. Statements contained in this Prospectus
concerning the contents of any contract or any other document are not
necessarily complete; reference is made in each instance to the copy of such
contract or any other document filed as an exhibit to the Registration
Statement. Each such statement is qualified in all respects by such reference
to such exhibit. The Registration Statement, including exhibits and schedules
thereto, may be inspected without charge at the Commission's principal office
in Washington, D.C., and copies of all or any part thereof may be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661
and at 7 World Trade Center, 13th Floor, New York, New York 10048 after
payment of fees prescribed by the Commission. The Commission also maintains a
Web site which provides online access to reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission at the address http://www.sec.gov.
80
<PAGE>
Index to Financial Statements
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholders' Equity (Deficit)................................ F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders of
pcOrder.com, Inc.
We have audited the accompanying balance sheets of pcOrder.com, Inc. (the
Company), a subsidiary of Trilogy Software, Inc. and its predecessor entities
including Trilogy Development Group, Inc., as of December 31, 1997 and 1998,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of pcOrder.com, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Austin, Texas
February 5, 1999
F-2
<PAGE>
pcOrder.com, Inc.
Balance Sheets
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 2,207 $ 4,726
Accounts receivable, net of allowance of $281 in 1997 and
$350 in 1998.............................................. 2,277 4,775
Other current assets....................................... -- 150
------- --------
Total current assets..................................... 4,484 9,651
Property and equipment, net................................. 494 1,938
Other assets................................................ -- 665
------- --------
Total assets............................................. $ 4,978 $ 12,254
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................... $ 37 $ 612
Accrued expenses........................................... 781 2,260
Accrued payroll and related liabilities.................... 511 890
Payable to Trilogy......................................... 432 4,506
Deferred revenue........................................... 4,212 10,428
------- --------
Total current liabilities................................ 5,973 18,696
Deferred revenue............................................ -- 2,103
Commitments and contingencies
Stockholders' equity (deficit):
Preferred Stock, $.01 par value; 10,000,000 shares
authorized; no shares issued or outstanding............... -- --
Class A Common Stock, $.01 par value; 37,243,000 shares
authorized; 43,225 and 191,602 shares issued and
outstanding in 1997 and 1998, respectively................ -- 1
Class B Common Stock, $.01 par value; 12,757,000 shares
authorized, issued and outstanding in 1997 and 1998....... 128 128
Additional paid-in capital................................. 211 4,024
Deferred stock compensation................................ -- (1,726)
Accumulated deficit........................................ (1,334) (10,972)
------- --------
Total stockholders' equity (deficit)..................... (995) (8,545)
------- --------
Total liabilities and stockholders' equity (deficit)..... $ 4,978 $ 12,254
======= ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
pcOrder.com, Inc.
Statements of Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Revenues:
Software and subscriptions...................... $ 3,633 $ 6,475 $ 12,651
Content and services............................ 2,249 4,114 9,063
------- -------- --------
Total revenues................................ 5,882 10,589 21,714
------- -------- --------
Costs of revenues:
Software and subscriptions...................... 510 440 2,170
Software and subscriptions--affiliated royalty
fee............................................ 312 583 1,072
------- -------- --------
Total software and subscriptions............... 822 1,023 3,242
Content and services............................ 1,112 2,553 7,068
------- -------- --------
Total cost of revenues........................ 1,934 3,576 10,310
------- -------- --------
Gross profit...................................... 3,948 7,013 11,404
Operating expenses:
Research and development........................ 1,168 1,129 4,292
Selling and marketing........................... 2,555 4,793 12,151
General and administrative...................... 726 1,792 3,689
Amortization of deferred stock and stock
compensation
expense........................................ -- -- 1,468
------- -------- --------
Total operating expenses...................... 4,449 7,714 21,600
------- -------- --------
Operating loss.................................... (501) (701) (10,196)
Interest income................................... -- -- 172
------- -------- --------
Loss before income taxes.......................... (501) (701) (10,024)
Income tax provision (benefit).................... (191) 427 (386)
------- -------- --------
Net loss.......................................... $ (310) $ (1,128) $ (9,638)
======= ======== ========
Basic and diluted net loss per share.............. $ (0.02) $ (0.09) $ (0.75)
======= ======== ========
Weighted average shares outstanding............... 12,800 12,800 12,861
======= ======== ========
Unaudited pro forma information:
Historical loss before income taxes............. $(10,024)
Pro forma income tax benefit.................... (292)
--------
Pro forma net loss.............................. $ (9,732)
========
Pro forma basic and diluted net loss per share.. $ (0.76)
========
</TABLE>
See accompanying notes.
F-4
<PAGE>
pcOrder.com, Inc.
Statements of Stockholders' Equity (Deficit)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional Deferred Retained
-------------- ----------------- Paid-In Stock Earnings
Shares Amount Shares Amount Capital Compensation (Deficit) Total
------- ------ ---------- ------ ---------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 43,000 $ -- 12,757,000 $128 $ 210 $ -- $ 104 $ 442
Net loss................ -- -- -- -- -- -- (310) (310)
------- ---- ---------- ---- ------ -------- --------- --------
Balance at December 31,
1996................... 43,000 -- 12,757,000 128 210 -- (206) 132
Exercise of stock
options................ 225 -- -- -- 1 -- -- 1
Net loss................ -- -- -- -- -- -- (1,128) (1,128)
------- ---- ---------- ---- ------ -------- --------- --------
Balance at December 31,
1997................... 43,225 -- 12,757,000 128 211 -- (1,334) (995)
Exercise of stock
options................ 148,377 1 -- -- 444 -- -- 445
Income tax benefit from
stock options
exercised.............. -- -- -- -- 175 -- -- 175
Deferred stock
compensation related to
stock options.......... -- -- -- -- 2,811 (2,811) -- --
Amortization of deferred
stock and stock
compensation expense... -- -- -- -- 383 1,085 -- 1,468
Net loss................ -- -- -- -- -- -- (9,638) (9,638)
------- ---- ---------- ---- ------ -------- --------- --------
Balance at December 31,
1998................... 191,602 $ 1 12,757,000 $128 $4,024 $ (1,726) $ (10,972) $ (8,545)
======= ==== ========== ==== ====== ======== ========= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
pcOrder.com, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Operating activities
Net loss........................................... $ (310) $(1,128) $(9,638)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation..................................... 346 459 1,189
Amortization of deferred stock and stock
compensation expense............................ -- -- 1,468
Changes in operating assets and liabilities:
Accounts receivable............................. (2,194) 172 (2,498)
Other assets.................................... (4) 4 (815)
Deferred tax assets............................. (483) 691 --
Accounts payable................................ 226 (36) 575
Accrued expenses................................ 392 86 1,479
Accrued payroll and related liabilities......... 268 393 379
Payable to Trilogy.............................. -- 432 4,249
Deferred revenue................................ 1,112 2,050 8,319
------- ------- -------
Net cash provided by (used in) operating
activities........................................ (647) 3,123 4,707
Investing activities
Purchase of property and equipment................. (359) (662) (2,633)
------- ------- -------
Net cash used in investing activities.............. (359) (662) (2,633)
Financing activities
Change in payable to Trilogy....................... 1,006 (255) --
Proceeds from exercise of stock options............ -- 1 445
------- ------- -------
Net cash provided by (used in) financing
activities........................................ 1,006 (254) 445
------- ------- -------
Increase in cash and cash equivalents.............. -- 2,207 2,519
Cash and cash equivalents at beginning of year..... -- -- 2,207
------- ------- -------
Cash and cash equivalents at end of year........... $ -- $ 2,207 $ 4,726
======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements
December 31, 1998
1. Business
pcOrder.com, Inc., (the "Company") is a substantially wholly-owned
subsidiary of Trilogy Software, Inc. and its predecessor entities including
Trilogy Development Group, Inc. ("parent" or "Trilogy"). The Company commenced
operations as a separate business unit within Trilogy on July 1, 1993 and was
incorporated as a separate entity on July 18, 1994. The Company provides
electronic commerce technology and tailored solutions to the manufacturers,
distributors and resellers of computer products primarily in the U.S. The
Company's products include software applications and support for those
applications. The software applications consist of an integrated application
suite that includes cataloging, quoting, pricing, availability, and product
configuration. Content for these applications in the form of detailed product
databases containing configuration, pricing, availability and specifications
are also provided and updated by the Company. Customers can choose to have the
Company host the software applications or install them at their site. In
addition, the Company provides consulting services to help customers build and
integrate electronic commerce capabilities to meet their specified needs.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences may be material to the financial statements.
Revenue Recognition
The Company adopted Statement of Position ("SOP") 97-2, Software Revenue
Recognition, and SOP 98-4, Deferral of the Effective Date of a Provision of
SOP 97-2 as of January 1, 1998. SOP 97-2 and 98-4 provide guidance for
recognizing revenue on software transactions and supersede SOP 91-1, Software
Revenue Recognition. The adoption of SOP 97-2 and 98-4 did not have a material
impact on the Company's financial results.
Software and subscription revenues consist of subscription based or
perpetual licensing fees under arrangements which provide customers with the
right to use the respective product(s) and software maintenance fees. The
Company generally sells the right to use its products under subscription based
license arrangements which provide the customer with unlimited access to any
new versions or releases and technical support at no additional charge over
the term of the arrangement. Revenue for subscription based arrangements is
recognized ratably over the term of the agreement and recognition commences
when persuasive evidence of an agreement exists, delivery of the product has
occurred, the fee is fixed and determinable and collectibility is probable.
The Company may also sell the right to use its products under a perpetual
license arrangement. Revenue from perpetual licenses is recognized when
persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed and determinable, and collectibility is probable.
Revenue recognized from perpetual license arrangements represented 33%, 7% and
15% of total revenues in 1996, 1997 and 1998, respectively. The Company also
sells software maintenance which provides technical support and the right to
unspecified upgrades on an if-and-when available basis. Revenue from software
maintenance arrangements is recognized ratably over the term of the agreement
and commences once implementation of the product has occurred.
F-7
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
Content revenues consist of fees charged for content access, entry, updates
and maintenance services (collectively, "content maintenance"). Content
maintenance provides the customer with constantly updated information within
the catalog database, especially information that is specific to the
customer's product offerings. Content fees are recognized ratably over the
term of the arrangement generally commencing upon initial content entry.
Service fees consist of integration, customization and training and are
generally recognized as the services are performed, upon completion of
specific contractual events or based on an estimated percentage of completion
as work progresses. Services generally occur at the inception of a
subscription or license arrangement to provide installation, integration,
and/or customization to deploy the software products as well as training of
customer personnel.
Customer advances and billed amounts due from customers in excess of revenue
recognized are recorded as deferred revenue. Amounts recorded as deferred
revenue that are not expected to be recognized as revenue within the following
twelve months are classified as long-term.
Effective December 15, 1998, the American Institute of Certified Public
Accountants ("AICPA") issued SOP 98-9, Modification of SOP 97-2, "Software
Revenue Recognition", With Respect to Certain Transactions. SOP 98-9 amends
SOP 97-2 and 98-4 extending the deferral of the application of certain
passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or
before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company does not believe that the adoption of SOP 98-9 will have a material
effect on the Company's financial condition or results of operations.
Product Development and Database Maintenance Cost
The Company's policy is to capitalize eligible computer software costs upon
achievement of technological feasibility, which the Company has defined as
completion of a working model, subject to net realizable value considerations.
As of December 31, 1998, no significant costs have met this criteria and,
accordingly, the Company has charged all software development costs to expense
as incurred in the accompanying statements of operations.
Research and development expenses are expensed as incurred.
Costs to maintain the Company's proprietary database are expensed as
incurred and are included as a cost of content and service revenues.
Net Loss per Share
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") 128, Earnings Per Share. Basic net loss per share is
computed by dividing net loss available to Common Stockholders by the weighted
average number of common shares outstanding during the period. Diluted net
loss per share is calculated using the weighted average number of outstanding
shares of Common Stock plus dilutive common stock equivalents. For the years
ended December 31, 1996, 1997, and 1998, there was no impact from common stock
equivalents under the treasury stock method. For the year ended December 31,
1998, approximately 1,200,000 common equivalent shares are excluded from the
diluted calculation as they are anti-dilutive. Accordingly, basic and diluted
net loss per share are the same for all periods presented.
In February 1998, the SEC issued Staff Accounting Bulletin ("SAB") 98 which
requires issuances of common stock, options and warrants for nominal
consideration in periods preceding an initial public offering to be included
in the calculations of earnings per share as if they were outstanding
F-8
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
for all periods presented. To date, the Company has had no issuances of common
stock, options or warrants for nominal consideration.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, Reporting Comprehensive Income. The Company adopted SFAS 130 during the
year ended December 31, 1998. There was no impact to the Company as a result
of the adoption of SFAS 130, as there were no differences between net loss and
comprehensive loss for all periods presented.
Cash and Cash Equivalents
Cash equivalents consist primarily of cash deposits and money market
investments with original maturities of ninety days or less when purchased.
Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is computed using the straight-line method over the estimated useful
lives of 18 months to 5 years.
Segments
In June 1997, the FASB issued SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. The Company adopted SFAS 131 during the
year ended December 31, 1998. Such adoption did not have a material effect on
the Company's financial disclosures as the Company continues to consider its
business activities as a single segment.
Internally Used Computer Software
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company is required to implement SOP 98-1
for the year ending December 31, 1999. Adoption of SOP 98-1 is not expected to
have a material impact on the Company's financial condition or results of
operations.
Income Taxes
The liability method is used for accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
The Company has entered into a tax allocation agreement with Trilogy.
Accordingly, the Company's operations are included in the consolidated income
tax returns filed by Trilogy. The current income tax provision (benefit) in
the accompanying financial statements has been computed as follows:
In the case of a current income tax provision, the Company recognizes the
amount of expense as if the Company had filed separate income tax returns
with the liability shown as a payable to Trilogy.
In the case of a current income tax benefit, the Company recognizes the
amount of benefit the consolidated group obtained through utilization of
net operating losses and other tax attributes, resulting in a reduction in
the payable to Trilogy.
Deferred tax expense (benefit) is computed as if the Company had not been
included in the consolidated tax group of Trilogy.
The pro forma disclosure on the statements of operations reflects adjustments
to the 1998 income tax benefit as if the Company had filed a separate income
tax return.
F-9
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
Financial Presentation
Certain prior year amounts have been reclassified to conform to the 1998
presentation.
3. Concentration of Credit Risk and Significant Customers
Cash and accounts receivable potentially expose the Company to
concentrations of credit risk, as defined by SFAS 105, Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk. Excess cash is
placed with highly rated financial institutions. The Company provides credit,
in the normal course of business, to a number of customers geographically
dispersed throughout the U.S. The Company performs ongoing credit evaluations
of its customers and maintains allowances for potential credit losses. The
Company generally requires certain up-front payments from customers, and
customers can be denied access to the product in the event of non-payment.
The following table summarizes the changes in the allowance for doubtful
accounts for 1996, 1997, and 1998 (in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1995........................................... $ 40
Additions charged to costs and expenses.............................. 165
Write-off of uncollectible accounts.................................. (92)
----
Balance at December 31, 1996........................................... 113
Additions charged to costs and expenses.............................. 315
Write-off of uncollectible accounts.................................. (147)
----
Balance at December 31, 1997........................................... 281
Additions charged to costs and expenses.............................. 112
Write-off of uncollectible accounts.................................. (43)
----
Balance at December 31, 1998........................................... $350
====
</TABLE>
Sales to individual customers constituting 10% or more of total revenues for
each year were as follows (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1997 1998
-------- -------- -------
<S> <C> <C> <C>
Customer No. 1..................................... $ 958 $ -- $ --
Customer No. 2..................................... 935 -- --
Customer No. 3..................................... 1,397 4,070 3,833
Customer No. 4..................................... 1,588 -- --
Customer No. 5..................................... -- -- 3,523
Customer No. 6..................................... -- -- 2,975
</TABLE>
4. Related Party Transactions
Effective September 1, 1998, the Company and Trilogy entered into a
technology, services and license agreement that amended a master license
agreement signed in 1994. Under the new agreement, each party granted the
other a nonexclusive, irrevocable, perpetual, worldwide, fully paid-up license
to internally use, make, reproduce and/or prepare derivative works of the
products of the other party, or to sublicense any non-party to do so, subject
to certain confidentiality restrictions. The Company and Trilogy are each
obligated to pay to the other monthly royalties on (i) license fees derived
from sales of products that incorporate, and/or data maintenance services
related to, the other
F-10
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
party's technology; (ii) software maintenance fees other than data maintenance
services in connection with products that incorporate the other party's
technology; and (iii) on-line subscription service fees from products that
incorporate the other party's technology. The rights granted to Trilogy by the
Company are subject to change of control provisions as described in the
agreement. For each of the three years in the period ended December 31, 1998,
the Company committed to pay royalties annually to Trilogy pursuant to the
applicable agreements in effect at that time, as follows:
. 20% of the license fees derived from sales of the Company's products.
. 9% of software maintenance fees related to the Company's products.
. 6% of subscription fees from sales of the Company's products.
Such royalties amounted to approximately $312,000, $583,000 and $1,072,000
in the years ended December 31, 1996 and 1997 and 1998, respectively.
The Company operates under a services agreement with Trilogy whereby Trilogy
provides certain services on behalf of the Company as follows:
. Management services in the form of on-going support in business
operations.
. Financial services support in the form of insurance and risk management,
tax reporting assistance and payroll processing.
. Human resources support in the form of advice and assistance with respect
to compensation, employee benefits and other employee matters.
. Certain administrative services.
The above services agreement may be modified as deemed necessary, upon
mutual consent between Trilogy and the Company.
Prior to 1998, the Company subleased its office space from Trilogy in
accordance with a facility agreement.
In consideration of receipt of the above services and facilities, the
Company must reimburse Trilogy for its pro rata share of the total cost of
such services and facilities based upon its pro rata share of total full-time
equivalent employees and its pro rata share of total space occupied,
respectively. The Company was charged by Trilogy for such services and
facilities approximately $455,000, $443,000 and $294,000 in the years ended
December 31, 1996, 1997 and 1998, respectively.
In addition to the above fees and services, during 1998 the Company also
committed to pay Trilogy approximately $1,240,000 for technical new hire
recruiting and training services performed by Trilogy on behalf of the
Company. Such amount has been allocated to various departments within the
Company that have directly benefited from these services.
See also Notes 2, 6 and 8.
F-11
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
5. Property and Equipment
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------ -------
<S> <C> <C>
Furniture and fixtures...................................... $ -- $ 275
Equipment................................................... 1,375 3,306
Software.................................................... -- 135
Leasehold improvements...................................... -- 292
------ -------
1,375 4,008
Accumulated depreciation.................................... (881) (2,070)
------ -------
Net property and equipment.................................. $ 494 $ 1,938
====== =======
</TABLE>
6. Income Taxes
Significant components of the provision for income tax expense (benefit)
attributable to continuing operations are as follows (in thousands):
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Current:
Federal............................................... $ 269 $(239) $(361)
State................................................. 23 (25) (25)
----- ----- -----
292 (264) (386)
Deferred:
Federal............................................... (427) 627 --
State................................................. (56) 64 --
----- ----- -----
(483) 691 --
----- ----- -----
$(191) $ 427 $(386)
===== ===== =====
</TABLE>
A current tax benefit has been recorded for the years ended December 31,
1997 and 1998, resulting from utilization of the Company's net operating
losses and tax credits within the Trilogy consolidated income tax return. The
recorded benefits are reimbursed to the Company under the provisions of the
intercompany tax allocation agreement.
F-12
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying values of assets and liabilities for financial reporting
purposes and the values used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
----- ------
<S> <C> <C>
Deferred tax assets:
Deferred revenue............................................ $ 257 $3,084
Stock option compensation, net of exercises................. -- 564
Accrued wages and other..................................... 128 136
Depreciation and related amounts............................ 98 195
Bad debt and other non-deductible allowances................ 201 250
----- ------
Total deferred tax assets..................................... 684 4,229
Valuation allowance for deferred tax assets................... (684) (4,229)
----- ------
Net deferred taxes............................................ $ -- $ --
===== ======
</TABLE>
A valuation allowance has been provided to offset the deferred tax assets at
December 31, 1998 due to uncertainties regarding the future realization of
such deferred tax assets. The valuation allowance increased by $684,000 in the
year ended December 31, 1997. A deferred tax asset has not been recorded for
any net operating losses and other tax attributes as they have been utilized
in the Trilogy consolidated tax return, as previously discussed.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense
(benefit) is as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Tax at U.S. statutory
rate................... (34.0)% (35.0)% (35.0)%
State taxes--net of
federal benefit........ (2.8) (3.0) (3.6)
Non-deductible expenses
and other.............. 2.4 5.6 0.4
Change in valuation
allowance.............. -- 97.7 35.5
Other................... (3.7) (4.3) (1.2)
----- ----- -----
(38.1)% 61.0 % (3.9)%
===== ===== =====
</TABLE>
The exercise of certain stock options which have been granted under the
Company's stock option plan resulted in compensation which is includable in
the taxable income of the applicable option holder and deductible by the
Company for federal and state income tax purposes.
7. Employee Benefit Plan
Trilogy sponsors a defined contribution plan in accordance with Section
401(k) of the Internal Revenue Code. The Plan is available to all full-time
employees of the Company on the first day of the month following employment.
The Plan is funded through employee contributions. The Company's only expenses
relating to the Plan are administrative costs, which are not significant.
F-13
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
8. Stockholders' Equity
On February 2, 1999, the authorized capital stock of the Company was
reclassified as set forth in the Amendment to the Certificate of Incorporation
and consists of 37,243,000 shares of Class A Common Stock, par value of $.01
per share, 12,757,000 shares of Class B Common Stock, par value of $.01 per
share, and 10,000,000 shares of Preferred Stock, par value $.01 per share.
Each share of common stock of the Company not owned by Trilogy was
reclassified into one share of Class A Common Stock and each share of Common
Stock owned by Trilogy was reclassified into one share of Class B Common
Stock. The Class A Common Stock and Class B Common Stock have substantially
identical rights other than as described below.
The Class B Common Stock entitles its holders to eight votes per share while
the Class A Common Stock entitles its holders to one vote per share on all
matters submitted to a vote or for the consent of stockholders. The shares of
Class B Common Stock are convertible at any time prior to a tax free spin-off
at the option of the holder into shares of Class A Common Stock on a share-
for-share basis. Each outstanding share of Class B Common Stock will
automatically be converted into a share of Class A Common Stock upon any
transfer of such share, if after the transfer, such share is not owned by
Trilogy, an affiliate of Trilogy, or a non-affiliate of Trilogy which acquires
more than 50% of the then outstanding Class B Common Stock in a single
transaction. In addition, subject to certain conditions, then outstanding
shares of Class B Common Stock will automatically convert, after the fifth
anniversary of the first transfer of Class B Common Stock in a tax free spin-
off. The effect of this reclassification has been reflected for all periods
presented in the accompanying financial statements.
Asset Transfer Agreement
Effective June 1, 1996, the Company entered into an asset transfer agreement
with Trilogy whereby the Company received title to certain property and
equipment in consideration for the issuance of 11,520,000 shares of the
Company's Class B Common Stock to Trilogy. In connection with the agreement,
Trilogy effectively forgave all amounts owed by the Company to Trilogy for the
purchase of such property and equipment, resulting in contributed capital of
approximately $337,000. The effect of this transaction has been reflected as
of December 31, 1995. See also Note 4.
Stock Option Plans
The Company's 1996 Stock Option Plan ("1996 Plan") provides for the grant
for up to 3,500,000 shares of Class A Common Stock of incentive and
nonqualified options to employees. The stock options vest over various terms,
generally with 0% to 25% exercisable immediately, and an additional 18.75% to
40% exercisable each year thereafter until the option is fully exercisable.
The term of each option is 10 years from the date of grant.
The Company has elected to follow the Accounting Principles Board Opinion
("APB") 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for its employee stock options. Under APB 25,
when the exercise price of the Company's employee stock options equals the
estimated market price of the underlying stock on the date of grant, no
compensation expense is recognized. In connection with certain options granted
during 1998, the Company is recognizing compensation expense totaling
approximately $2,811,000 over the vesting period. This amount represents the
difference between the exercise prices and the deemed fair values of stock
option grants for 941,142 shares of Class A Common Stock. The exercise prices
and the deemed fair values for such grants ranged from $3.00 to $10.00 per
share and $6.40 to $11.00 per share, respectively, during the period in which
such options were granted. At December 31, 1998, the
F-14
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
Company had a total of approximately $1,726,000 remaining to be amortized over
the corresponding vesting period of each respective option, generally four
years. A deferred tax benefit is recorded for the amortized compensation
expense if and when the Company realizes the associated tax benefits of the
options. As of December 31, 1998, such deferred tax benefits have been fully
reserved by a valuation allowance due to their uncertain future utilization.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123, Accounting for Stock Based Compensation, which also requires that
the information be determined as if the Company had accounted for its employee
stock options granted under the fair value method prescribed by SFAS 123. The
fair value for these options was estimated at the date of grant using a
minimum value option pricing model (0% volatility) for options granted prior
to the Company's initial filing on Form S-1 dated September 4, 1998. The fair
value for options granted subsequent to the initial filing date were estimated
at the date of grant using the Black-Scholes pricing model and a volatility of
40%. The fair value of options was estimated under both pricing models with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate.............................. 5.8% 6.4% 5.0%
Dividend yield....................................... 0% 0% 0%
Weighted-average expected life of options............ 5 years 5 years 5 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma compensation expense and net loss for 1996, 1997 and 1998
are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1997 1998
------ ------- --------
<S> <C> <C> <C>
Net loss (in thousands):
As reported.................................... $ (310) $(1,128) $ (9,638)
Pro forma...................................... $ (351) $(1,401) $(10,408)
Basic and diluted net loss per share:
As reported.................................... $(0.02) $ (0.09) $ (0.75)
Pro forma...................................... $(0.03) $ (0.11) $ (0.81)
</TABLE>
During 1998, the Company granted a total of 160,000 options to certain non-
employees which vested immediately. In connection with such grants, the
Company recorded stock compensation expense of $383,000 in 1998 based on the
Black-Scholes pricing model, using a volatility factor of 40%, a risk-free
interest rate of 5.6% and a dividend yield of 0%.
F-15
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
A summary of changes in common stock options is as follows:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Price Price
Shares Per Share Per Share
---------- ------------ ---------
<S> <C> <C> <C>
Options outstanding December 31, 1995
Granted................................. 2,040,300 $ 3.00 $3.00
Exercised............................... -- -- --
Surrendered............................. -- -- --
---------- ------------ -----
Options outstanding December 31, 1996..... 2,040,300 $ 3.00 $3.00
Granted................................. 158,500 $ 3.00 $3.00
Exercised............................... (225) $ 3.00 $3.00
Surrendered............................. (7,750) $ 3.00 $3.00
---------- ------------ -----
Options outstanding December 31, 1997..... 2,190,825 $ 3.00 $3.00
Granted................................. 2,590,076 $3.00-$10.00 $4.31
Exercised............................... (148,377) $ 3.00 $3.00
Surrendered............................. (1,425,450) $3.00-$ 8.00 $3.13
---------- ------------ -----
Options outstanding December 31, 1998..... 3,207,074 $3.00-$10.00 $4.00
========== ============ =====
</TABLE>
At December 31, 1998, there were 144,324 options available for grant under
the 1996 Plan. At December 31, 1998, the Company had reserved 3,351,398 shares
of common stock for issuance in connection with the exercise of stock options
granted pursuant to the 1996 Plan.
The following table summarizes information concerning outstanding options as
of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------------- ------------------------
Range of Weighted- Weighted-
Exercise Weighted-Average Average Average
Prices Number Remaining Contractual Life Exercise Price Number Exercise Price
- ------------ --------- -------------------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 3.00 2,604,190 8.90 years $3.00 1,043,263 $3.00
$6.40-$10.00 602,884 9.70 years $8.34 160,000 $8.00
--------- ---------
$3.00-$10.00 3,207,074 9.05 years $4.00 1,203,263 $3.66
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Weighted-average deemed fair value of stock
options granted during the year:
Exercise price equal to fair value of stock
on date of grant.......................... $0.76 $0.82 $1.22
Exercise price less than fair value of
stock on date of grant.................... -- -- $4.73
Weighted-average remaining contractual life
of options.................................. 9.83 years 8.88 years 8.73 years
</TABLE>
In March 1997, under the terms of an applications subscription arrangement,
the Company gave the right to require the Company to grant to a customer an
option to purchase up to 320,000 shares of common stock of the Company if one
of certain specified events occurs, including an initial public offering. As
of December 31, 1998, no specified event had occurred and the option was not
F-16
<PAGE>
pcOrder.com, Inc.
Notes to Financial Statements--(Continued)
outstanding. At the time the option is issued, the exercise price will be set
as the fair market value of the underlying stock. The number of shares subject
to the option shall be adjusted for any dilutive event which occurs between
March 1997 and the date of issuance of the option.
On February 3, 1999, the Company adopted the 1999 Stock Incentive Plan
("1999 Plan"). Under the 1999 Plan, the eligible individuals are: employees,
non-employee members of the Board of Directors and consultants. The types of
awards that may be made under the 1999 Plan include, but are not limited to,
options to purchase shares of the Company's Class A Common Stock, stock
appreciation rights, restricted shares, dividend equivalent rights,
performance units and performance shares. The Company has reserved 1,500,000
shares for issuance under the 1999 Plan, plus an annual increase beginning
January 1, 2000 equal to five percent (5%) of the total number of shares of
Class A Common Stock and Class B Common Stock outstanding on the first day of
each fiscal year of the Company.
9. Commitments and Contingencies
Lease Arrangements
The Company leases office facilities under various operating leases expiring
from 1999 to 2003. Future lease commitments for office facilities as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................... 484
2000................................................................... 44
2001................................................................... 36
2002................................................................... 35
2003................................................................... 8
</TABLE>
Rent expense for the year ended December 31, 1998 was approximately
$563,000. Prior to 1998, the Company leased its office facilities from
Trilogy. See Note 4.
Litigation
The Company has filed a lawsuit against a former employee, and the former
employee has filed a separate lawsuit regarding commissions owed to the former
employee by the Company. While the ultimate result of this matter cannot be
currently predicted, management does not expect it to have a material adverse
effect on the financial position of the Company.
The Company is involved in various other lawsuits and legal proceedings
which have arisen in the normal course of business. While the ultimate results
of these other matters cannot be predicted with certainty, management does not
expect them to have a material adverse effect on the financial position of the
Company.
F-17
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each
of such Underwriters, for whom Goldman, Sachs & Co., Credit Suisse First
Boston Corporation and SG Cowen Securities Corporation are acting as
representatives, has severally agreed to purchase from the Company, the
respective number of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
Number of
Shares of
Underwriter Common Stock
----------- ------------
<S> <C>
Goldman, Sachs & Co............................................. 850,000
Credit Suisse First Boston Corporation.......................... 425,000
SG Cowen Securities Corporation................................. 425,000
BancBoston Robertson Stephens Inc. ............................. 76,000
Donaldson, Lufkin & Jenrette Securities Corporation............. 76,000
Edward D. Jones & Co., L.P. .................................... 76,000
Advest, Inc. ................................................... 34,000
J.C. Bradford & Co. ............................................ 34,000
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated....................... 34,000
Legg Mason Wood Walker, Incorporated............................ 34,000
Sands Brothers & Co., Ltd. ..................................... 34,000
SoundView Technology Group, Inc. ............................... 34,000
Stephens Inc. .................................................. 34,000
Wit Capital Corporation......................................... 34,000
---------
Total......................................................... 2,200,000
=========
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the shares offered
hereby, if any are taken.
The Underwriters propose to offer the shares of Class A Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at
such price less a concession of $0.85 per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $0.10 per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time
to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of the Prospectus to purchase up to an aggregate of 330,000
additional shares of Class A Common Stock solely to cover over-allotments, if
any. If the Underwriters exercise their over-allotment option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
2,200,000 shares of Class A Common Stock offered.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 180 days after the
date of this Prospectus, it will not offer, sell, contract to sell or
otherwise dispose of any securities of the Company (other than pursuant to
employee stock option plans existing on the date of this Prospectus) which are
substantially similar to the shares of Class A Common Stock or which are
convertible into or exchangeable for securities which are substantially
similar to the shares of Class A Common Stock, without the prior written
consent of the Goldman, Sachs & Co., except for the shares of Class A Common
Stock offered in connection with the offering.
U-1
<PAGE>
In connection with the offering, the Underwriters may purchase and sell the
Class A Common Stock in the open market. These transactions may include over-
allotment and stabilizing transactions and purchases to cover syndicate short
positions created in connection with the offering. Stabilizing transactions
consist of certain bids or purchases for the purpose of preventing or
retarding a decline in the market price of the Class A Common Stock; and
syndicate short positions involve the sale by the Underwriters of a greater
number of shares of Class A Common Stock than they are required to purchase
from the Company in the offering. The Underwriters also may impose a penalty
bid, whereby selling concessions allowed to syndicate members or other broker-
dealers in respect of the securities sold in the offering for their account
may be reclaimed by the syndicate if such shares of Class A Common Stock are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Class A Common Stock which may be higher than the price that might otherwise
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The representatives of the Underwriters have informed the Company that they
do not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of shares
of Class A Common Stock offered by them.
Prior to this offering, there has been no public market for the Company's
Class A Common Stock. The initial public offering price will be negotiated
among the Company and the representatives. Among the factors considered in
determining the initial public offering price of the Class A Common Stock, in
addition to prevailing market conditions, will be the Company's historical
performance, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and the consideration of
the above factors in relation to market valuation of companies in related
businesses.
Up to approximately ten percent of the shares of Class A Common Stock
offered hereby have been reserved for sale at the initial public offering
price to the Company's employees, directors and other individuals with direct
business relationships with the Company. The number of shares available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares not so purchased will be offered by
the Underwriters to the general public on the same basis as other shares
offered hereby.
The shares of Class A Common Stock have been approved for quotation on the
Nasdaq National Market under the symbol "PCOR".
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act. In addition,
Trilogy has agreed to indemnify the Underwriters against certain liabilities
including liabilities under the Securities Act, arising from certain
information included in this Prospectus that relates to Trilogy.
U-2
<PAGE>
Inside Back Cover
Company Logo
"Moving the Computer Industry to the Web".
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No person has been authorized to give any information or to make any repre-
sentations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having
been authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy
such securities in any circumstances in which such offer or solicitation is
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the infor-
mation contained herein is correct as of any time subsequent to its date.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 27
Dividend Policy........................................................... 27
Capitalization............................................................ 28
Dilution.................................................................. 29
Selected Financial Data................................................... 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 31
Business.................................................................. 42
Relationship with Trilogy................................................. 56
Management................................................................ 61
Certain Transactions...................................................... 70
Principal Stockholders.................................................... 74
Description of Capital Stock.............................................. 75
Shares Eligible for Future Sale........................................... 78
Legal Matters............................................................. 79
Experts................................................................... 80
Additional Information.................................................... 80
Index to Financial Statements............................................. F-1
Underwriting.............................................................. U-1
</TABLE>
Through and including March 22, 1999 (the 25th day after the date of this
Prospectus), all dealers effecting transactions in the Common Stock, whether
or not participating in this distribution, may be required to deliver a Pro-
spectus. This is in addition to the obligation of dealers to deliver a Pro-
spectus when acting as Underwriters and with respect to their unsold allot-
ments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,200,000 Shares
pcOrder.com, Inc.
Class A Common Stock
(par value $0.01 per share)
-------------------------
[pcOrder.com, Inc. Logo]
-------------------------
Goldman, Sachs & Co.
Credit Suisse First Boston
SG Cowen
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
