<PAGE>
Filed pursuant to Rule 424(b)(4)
Registration Nos. 333-90713 and 333-92215
3,000,000 Shares
[Logo of pcOrder.com, Inc. pcOrder.com, Inc.
appears here]
Class A Common Stock
----------------
pcOrder is offering 500,000 of the shares of Class A common stock to be
sold in the offering. Trilogy Software, Inc., the beneficial owner of
approximately 79% of our outstanding common stock, is offering 2,333,000
shares. Other selling stockholders identified in this prospectus are offering
an additional 167,000 shares. pcOrder will not receive any of the proceeds from
the sale of the shares being sold by Trilogy or the other selling stockholders.
The common stock is quoted on the Nasdaq National Market under the symbol
"PCOR". The last reported sale price of the common stock on December 6, 1999
was $53.3125 per share.
See "Risk Factors" beginning on page 8 to read about factors you should
consider before buying shares of our Class A common stock.
----------------
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is
a criminal offense.
----------------
<TABLE>
<CAPTION>
Per Share Total
--------- -------------
<S> <C> <C>
Initial price to public............................... $ 53.3125 $ 159,937,500
Underwriting discount................................. $ 2.6000 $ 7,800,000
Proceeds, before expenses, to pcOrder................. $ 50.7125 $ 25,356,250
Proceeds, before expenses, to the selling stockhold-
ers.................................................. $ 50.7125 $ 126,781,250
</TABLE>
----------------
To the extent that the underwriters sell more than 3,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
450,000 shares from Trilogy and certain of the other selling stockholders at
the initial price to public less the underwriting discount.
----------------
The underwriters expect to deliver the shares against payment in New York,
New York on December 10, 1999.
Goldman, Sachs & Co.
Credit Suisse First Boston
SG Cowen
Pacific Growth Equities, Inc.
----------------
Prospectus dated December 7, 1999.
<PAGE>
INSIDE PANEL:
HEADING:
pcOrder.com [LOGO] Moving the computer industry to the Web
CENTER GRAPHIC:
[pcOrder graphic - four circles with graphic representations of
manufacturers/suppliers (factory), distributors (truck), portals (web interface)
and resellers/retailers (storefront) connected via arrows. The circles are
orbiting a matrix. The powered by pcOrder.com logo appears in the center.]
SUBHEADING BELOW PICTURE:
pcOrder is a Leading Provider of Business to Business E-commerce Solutions that
are Designed to Enable Computer Industry Participants to Move their Business to
the Web.
GATEFOLD:
HEADING:
pcOrder.com [LOGO] Moving the Computer Industry to the Web
SUBHEADING (Oriented to upper left corner):
Through three key areas - commerce, content, and community - pcOrder delivers
e-business solutions for moving the computer industry to the Web.
CENTER GRAPHIC:
[Circuit board platform representing pcOrder's e-business solutions. The board
is segmented to represent the three key areas of our business - commerce,
content and community. Four boxes, representing manufacturers/suppliers,
distributors, resellers/retailers and portals, are "plugged" into the pcOrder
board across all the three segments. Each of the four boxes is linked in
multiple ways to the other boxes, creating a network of connections through each
of the key pcOrder areas. All of these connections join at the top of the
diagram into a "bus" (or plug) which gives the four boxes access to the Internet
and online customers.]
COMMERCE SUBHEADING (located at bottom left):
Through our vertically-focused software technology platform, industry
participants can automate sales and distribution functions to implement
innovative e-commerce solutions.
COMMERCE GRAPHIC:
Listing of customer logos - Compaq, Quantum, Hewlett-Packard, SGI, Nortel
Networks, Kingston Technology, Tech Data, Scribona Computer Products
CONTENT SUBHEADING (located at bottom right):
We provide extensive multi-category product information to power the buying and
selling of computer products online. Our content database contains marketing and
technical information on more than 700,000 SKUs from over 3,000 manufacturers.
CONTENT GRAPHIC:
Listing of customer logos - ZDNet, Inktomi, Active Research, beyond.com, Onsale,
AST
COMMUNITY SUBHEADING (located at top right):
Our platform is designed to establish and link e-commerce communities, allowing
multiple industry participants to buy and sell computer products online.
Strategic relationships extend the reach of our platform to thousands of new
resellers and computer buyers.
COMMUNITY GRAPHIC:
Listing of logos - InfoWorld, CMP Media, Ingram Micro, MyTechBuyer.com
BACK PANEL:
HEADING:
pcOrder.com [LOGO] Moving the computer industry to the Web
<PAGE>
PROSPECTUS SUMMARY
This summary does not contain all of the information that you should
consider before investing in our Class A common stock. You should read the
following summary together with the more detailed information regarding pcOrder
and the Class A common stock being sold in this offering, "Risk Factors", and
our financial statements and notes to those statements appearing elsewhere in
this prospectus.
As used in this prospectus, "Trilogy" refers to Trilogy Software, Inc. and
its predecessor entities, including Trilogy Development Group, Inc. References
in this prospectus to "pcOrder", "we", "our", and "us", refer to pcOrder.com,
Inc. Unless otherwise stated, all references in this prospectus to shares of
common stock are to the shares of our Class A common stock. Except as otherwise
noted, all information in this prospectus assumes the underwriters option to
purchase additional shares from Trilogy will not be exercised.
Our Business
pcOrder is a leading provider of business-to-business software
applications, content and related services that are designed to enable the
computer industry's suppliers, resellers and end users to buy and sell products
online. Our tailored solutions are designed to enable computer industry
participants to take advantage of the increasing adoption of e-commerce to
automate sales and distribution functions such as product search, comparison,
configuration, quoting, pricing, financing, ordering and reseller selection.
Our solutions are designed to enable our customers to lower their cost of sales
and marketing, reduce inventory levels, and more efficiently interact with
their business partners and customers.
Our Market Opportunity
The Internet and Internet-related technologies are revolutionizing the way
businesses and consumers communicate, share information and conduct business.
There has been a significant increase in the amount of information and services
available over the Internet. In addition, improved technology has enabled more
sophisticated information and services to be offered and has increased the
accessibility and ease of use of the Internet. These developments have
increased significantly the number of Internet users and transformed the use of
the Internet from a publishing medium to a medium that enables complex
business-to-business and business-to-consumer communications and commerce.
At the same time, businesses are faced with increasing competitive
pressures to lower costs, decrease inventories, improve sales and marketing
productivity and enhance time-to-market. To address these challenges,
businesses are increasingly using the Internet to replace traditional sales
methods, provide greater accuracy and permit the exchange of time-sensitive
business information. 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 reports 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.
We believe that the computer industry is particularly well-suited to the
use of the Internet to conduct e-commerce due to:
. the industry's large size and fragmented nature;
3
<PAGE>
. the high costs of sales, marketing and distribution;
. the challenges that the industry faces in managing the volume and
complexity of product, pricing and configuration information that result
from a wide array of products, short product life cycles and increased
demand for custom configured solutions; and
. the industry's tendency to embrace technology for automating processes.
Our Solution
As an independent, third party provider, we believe we are uniquely
positioned to deliver business-to-business solutions to computer industry
participants. Our solutions are focused on:
. Commerce. Our software technology platform enables computer industry
participants to develop and implement innovative, functional e-commerce
solutions. We offer a broad set of advanced sales, marketing,
distribution and e-commerce software applications.
. Content. Our content database contains more than 700,000 SKUs from over
3,000 manufacturers, which we believe is the industry's largest
aggregation of product information. Our database includes detailed
product categorization, compatibility, pricing and availability
information. We seek to extend our position as an industry-leading
product information source by continually broadening and deepening our
content offering.
. Community. The adoption of our platform by multiple industry participants
allows our customers to efficiently share information and buy and sell
products online. By promoting our platform as the industry standard, we
are enabling the creation of e-commerce communities within the computer
products industry.
To enable the successful deployment and use of our commerce, content and
community solutions, we provide software integration, customization, training,
Web-hosting and other services. We have developed software integration modules
that allow our applications to integrate with leading enterprise software
applications such as those of Oracle and SAP. These integrations allow the
transfer of information to enable order placement, pricing and inventory
queries, order status queries, financing and credit approval and other
functions.
To date, industry participants such as beyond.com, Compaq, CompuCom
Systems, CompUSA, CMP Media, Dell, GE Capital, Hewlett-Packard, Ingram Micro,
IBM, Inktomi, Kingston Technology, EDS, Nortel Networks, Quantum, Scribona
Computer Products, Tech Data and ZDNet have adopted either our software
applications, our content and related services, or both as part of their
overall e-commerce strategy. In 1998, the use of our software and content
generated over $3 billion of quotes for computer products, representing use by
more than 3,500 sales representatives.
4
<PAGE>
Our Strategy
Our goal is to be the leading provider of business-to-business e-commerce
software, content and related services to computer industry participants. The
key elements of our strategy are to:
. establish our technology platform as the standard for the computer
industry;
. broaden adoption of our products and services through relationships with
computer industry market leaders;
. extend our position as an industry-leading provider of content;
. create online computer industry communities; and
. enhance functionality of our software applications to facilitate the
adoption of e-commerce.
Relationship with Trilogy
Trilogy is our controlling stockholder. It established pcOrder as a
separate business unit within Trilogy and then incorporated pcOrder as a
Delaware corporation. 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 customer'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.
We have a non-exclusive technology license agreement with Trilogy that
enables us to develop products based on Trilogy's sales, marketing and
e-commerce software applications, including what we believe is one of the
industry's leading configuration and pricing technologies. We have extended
these applications to support the specific configuration and pricing rules of
the computer industry to help industry sales representatives and end users
quickly and accurately build and order custom-configured systems across
multiple vendors. Although Trilogy does not currently compete directly with us,
Trilogy has the right to compete with us.
As of September 30, 1999, Trilogy beneficially owned 12,659,650 shares of
our Class B common stock, representing approximately 81% of the shares of our
total outstanding common stock and approximately 97% of the total voting power
of our common stock. As of September 30, 1999 and as adjusted to reflect this
offering, after the sale by Trilogy of 2,333,000 shares in this offering,
Trilogy will own 10,326,650 shares of our Class B common stock, representing
approximately 64% of the shares of our total outstanding common stock and
approximately 93% of the total voting power of our common stock.
Trilogy has informed us that it does not currently intend to sell or
transfer any other shares in the near future. However, other than agreements
not to sell any shares during the pendency of the offering or for 90 days after
the date of this prospectus without the prior consent of Goldman, Sachs & Co.,
Trilogy will not be restricted contractually from selling shares.
Corporate Information
Our principal executive offices are located at 5001 Plaza on the Lake,
Austin, Texas 78746. Our telephone number is (512) 684-1100 and our website is
located at www.pcorder.com. Information contained on our website is not a part
of this prospectus. pcOrder(R), pcOrder.com(R), eStation(TM), ContentSource(TM)
and "Moving the Computer Industry to the Web"(TM) are registered and
unregistered trademarks, service marks and trade names of pcOrder used in this
prospectus.
5
<PAGE>
The Offering
The following information is based on shares outstanding as of September
30, 1999.
Class A common stock
offered by pcOrder....... 500,000 shares
Class A common stock
offered by Trilogy....... 2,333,000 shares
Class A common stock
offered by other selling
stockholders............. 167,000 shares
Shares to be outstanding
after this offering:
Class A common stock.... 5,895,205 shares
Class B common stock.... 10,326,650 shares
Total common stock.... 16,221,855 shares
Relative rights of Class
A common stock and Class
B common stock........... Except as described below, our Class A common
stock and Class B common stock have substantially
identical rights. Trilogy beneficially owns all
of our outstanding Class B common stock.
Voting Rights. Generally, holders of Class B
common stock have eight votes per share while
holders of Class A common stock have one vote per
share. On most matters, Class A common stock and
Class B common stock vote together as a single
class.
Conversion. Prior to a tax-free spin off by
Trilogy of Class B common stock, Class B common
stock is convertible at any time into shares of
Class A common stock on a one-for-one share
basis. If Trilogy transfers any shares of Class B
common stock, in other than a tax-free spin off,
and the beneficial owner after the transfer is
not Trilogy, its affiliates or a non-affiliate of
Trilogy who acquires more than 50% of the Class B
common stock in a single transaction, then the
transferred shares are automatically converted
into Class A common stock on a one-for-one share
basis. If Trilogy transfers more than 50% of its
Class B common stock to a non-affiliate in a
single transaction, all remaining shares of Class
B common stock held by Trilogy or its affiliates
are automatically converted into an equal number
of shares of Class A common stock. In addition,
subject to specific conditions, all shares of
Class B common stock are automatically converted
into an equal number of shares of Class A common
stock upon the fifth anniversary of a tax-free
spin off by Trilogy. Prior to the fifth
anniversary, Class B common stock is not
convertible into Class A common stock, except for
shares of Class B common stock held by Trilogy
and its affiliates, which automatically convert
into an equal number of shares of Class A common
stock upon the tax-free spin off. See
"Description of Capital Stock".
Use of proceeds........... For general corporate purposes, including capital
expenditures and working capital. See "Use of
Proceeds".
Nasdaq National Market
symbol................... "PCOR"
- --------
The share numbers above exclude:
. 3,023,724 shares issuable upon the exercise of outstanding stock options
as of September 30, 1999 under our 1996 Stock Option Plan at a weighted
average exercise price of $4.31 per share, and 635,004 shares issuable
upon the exercise of outstanding stock options as of September 30, 1999
under our 1999 Stock Option Plan at a weighted average exercise price of
$28.52 per share; and
. 84,421 shares reserved for future grant as of September 30, 1999 under
the 1996 Stock Option Plan, and 864,996 shares reserved for future grant
as of September 30, 1999 under the 1999 Stock Option Plan.
6
<PAGE>
Summary Financial Data
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------ ------ ------- ------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
<CAPTION>
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Software and
subscriptions......... $ -- $1,836 $ 3,633 $ 6,475 $ 12,651 $ 8,736 $ 14,489
Content and services... 515 1,887 2,249 4,114 9,063 6,423 15,136
------ ------ ------- ------- -------- -------- --------
Total revenues......... 515 3,723 5,882 10,589 21,714 15,159 29,625
------ ------ ------- ------- -------- -------- --------
Cost of revenues:
Software and
subscriptions......... 148 818 822 1,023 3,242 2,197 3,710
Content and services... 390 953 1,112 2,553 7,068 4,143 11,166
------ ------ ------- ------- -------- -------- --------
Total cost of
revenues.............. 538 1,771 1,934 3,576 10,310 6,340 14,876
------ ------ ------- ------- -------- -------- --------
Gross profit (loss)..... (23) 1,952 3,948 7,013 11,404 8,819 14,749
Operating expenses:
Research and
development........... 106 660 1,168 1,129 4,292 2,933 4,727
Selling and marketing.. 72 577 2,555 4,793 12,151 8,324 13,086
General and
administrative........ -- 116 726 1,792 3,689 2,456 4,306
Amortization of
deferred stock and
stock compensation
expense............... -- -- -- -- 1,468 954 953
------ ------ ------- ------- -------- -------- --------
Total operating
expenses.............. 178 1,353 4,449 7,714 21,600 14,667 23,072
------ ------ ------- ------- -------- -------- --------
Operating income
(loss)................. (201) 599 (501) (701) (10,196) (5,848) (8,323)
Interest income......... -- -- -- -- 172 107 1,605
------ ------ ------- ------- -------- -------- --------
Income (loss) before
income taxes........... (201) 599 (501) (701) (10,024) (5,741) (6,718)
Income tax provision
(benefit).............. (68) 207 (191) 427 (386) (203) (243)
------ ------ ------- ------- -------- -------- --------
Net income (loss)....... $ (133) $ 392 $ (310) $(1,128) $ (9,638) $ (5,538) $ (6,475)
====== ====== ======= ======= ======== ======== ========
Basic and diluted net
income (loss) per
share.................. $(0.10) $ 0.03 $ (0.02) $ (0.09) $ (0.75) $ (0.43) $ (0.43)
====== ====== ======= ======= ======== ======== ========
Weighted average shares
outstanding............ 1,280 12,800 12,800 12,800 12,861 12,837 15,019
====== ====== ======= ======= ======== ======== ========
</TABLE>
The following table presents our summary balance sheet data as of September
30, 1999 on an actual basis and as adjusted to reflect our receipt of the net
proceeds from the sale of the 500,000 shares offered by us in the offering. See
"Use of Proceeds" and "Capitalization" for more information concerning proceeds
of the offering and our capitalization after the offering.
<TABLE>
<CAPTION>
September 30, 1999
-------------------
Actual As Adjusted
------- -----------
(unaudited)
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $44,580 $ 69,562
Working capital............................................. 33,164 58,146
Total assets................................................ 77,121 102,103
Stockholders' equity........................................ 34,520 59,502
</TABLE>
7
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. The risks and uncertainties described below
are not the only ones that we face.
If any of the following risks actually occur, our business could be
adversely affected and the trading price of our common stock could decline. As
a result of those events, you could lose all or part of your investment. You
should also refer to the other information shown in this prospectus, including
our financial statements and the related notes. See also "Special Note
Regarding Forward-Looking Statements".
A majority of our revenues come from a few customers.
Greater than 60% of our revenues came from our five largest customers in
each of the last three fiscal years and in the nine months ended September 30,
1999. If we lose or fail to replace any of our large customers, our financial
results and stock price may be adversely affected. We plan to expand and
diversify our customer base. However, as a result of our limited operating
history, we have derived, and over the near term we expect to continue to
derive, a significant portion of our revenues from a limited number of large
customers.
The volume of business with specific customers is likely to vary from year
to year, and a major customer in one year may not procure software, content or
services from us in a subsequent year. Our future growth is dependent in part
on our ability to renew existing contracts on terms favorable to us, as well as
our ability to penetrate further our existing customer accounts with additional
products and services. A decrease in business from one or more of our major
customers could have a material adverse effect on our financial results and
stock price.
We are dependent on the computer industry, and we may be negatively affected by
consolidation in the industry and financial difficulties of industry
participants.
The recent decrease in the number of participants in the computer
industry's distribution channel, and the financial difficulties facing many of
the participants, could result in the loss of material customers for our
solutions or render us unable to increase the number of customers for our
solutions. The computer industry is sensitive to general economic, business and
industry conditions that can cause buyers of computer products to reduce or
delay their investments in computer systems. Any event or condition that
results in decreased spending on computer products, or consolidation within the
computer industry, could have a negative effect on our customers and negatively
impact our business. The number of participants in the channel of distribution
of computer products has decreased significantly during 1999. We believe this
is the result of consolidations among participants through mergers,
acquisitions and other business combinations, business failures, manufacturers
aligning with fewer distributors and retailers and other factors. Many of the
current participants face serious financial difficulties, or are undergoing
significant management or strategic changes, which could cause them to reduce,
delay or suspend investments in the type of products and services that we
offer. These difficulties may also cause existing customers to attempt to
renegotiate or terminate existing contracts or delay product implementations or
payments.
The sales and implementation cycles for our products and services are long,
which can delay the acquisition of new business and the receipt of revenues.
Our potential customers tend to engage in extensive internal reviews before
making purchase decisions. We spend a lot of time educating and providing
information to our prospective customers regarding the use and benefits of our
products and services. The purchase of our products and
8
<PAGE>
services for deployment within a customer's organization often involves a
significant commitment of capital and other resources. The purchase of our
products and services is therefore subject to delays that are beyond our
control, such as the customer's internal procedures to approve large capital
expenditures, budgetary constraints and the testing and acceptance of new
technologies that affect key operations.
We have historically experienced a lengthy cycle for sales to resellers,
and longer sales cycles for sales to manufacturers and distributors. We most
likely will continue to experience lengthy sales cycles in the future. The
deployment of our products and services within a customer's organization often
takes an extended period of time and requires us to work closely with the
customer during the process. Some of our customers experience difficulties or
delays in completing implementations of our products and services, in some
cases resulting in customer disputes or requests to renegotiate the contract.
Any of these difficulties or delays could cause delays or non-receipt of
related revenues, cause delays in revenue recognition, cause customers to
reject our solutions or lead to the delay or non-receipt of future orders for
our products and services.
We face significant competition and expect the competition to increase.
The market for software products that enable e-commerce is intensely
competitive, and we expect competition in our market segment to increase
substantially. Numerous companies providee-commerce solutions, and several
competitors target the computer products industry. Our competitors include both
large companies with substantially greater resources and longer operating
histories, systems integrators and the internal information technology
departments of some of our customers and potential customers.
We believe that our principal sources of competition currently are systems
integrators and the internal information technology departments of our
customers and potential customers. These organizations may seek to develop e-
commerce solutions through the use of tools offered by our competitors
primarily focused on providing e-commerce enabling solutions to the computer
industry. Certain of our competitors include, but are not limited to,
BroadVision, Calico Commerce, C/NET, i2 Technologies, Open Market, Selectica
and TechnologyNet. In addition, there are a number of significantly larger
companies with which we do not currently compete that do not presently offer
the same or similar e-commerce solutions offered by us but that could, with
limited barriers to entry, compete directly with us. Also, Trilogy is not
prohibited from competing directly or indirectly with us. Increased competition
could result in price reductions, reduced margins and loss of market share, any
of which would adversely affect our business. Many of our current and potential
competitors have significantly longer operating histories and significantly
greater financial, technical, marketing and other resources than us. We may be
unable to compete successfully with our existing competitors or with new
competitors, and failure to do so may adversely affect our financial results
and stock price.
We must develop new products, services and features that incorporate
technological advances and are responsive to market requirements or risk
obsolescence.
The market for e-commerce solutions is characterized by rapidly changing
technology, evolving industry standards and frequent new product introductions.
The introduction of products embodying new technologies or the emergence of new
industry standards can render existing products obsolete and unmarketable. Our
success will depend on our ability to enhance our existing products. Our
success will also depend on our ability to develop and introduce, on a timely
and cost-effective basis, new products that keep pace with technological
developments and emerging industry standards and that address increasingly
sophisticated customer requirements. Our business would be adversely
9
<PAGE>
affected if we were to incur difficulties or delays in developing new products
or enhancements or if those products or enhancements did not gain market
acceptance. Specifically:
. we may not be successful in identifying, developing and marketing
product enhancements or new products that respond to technological
change or evolving industry standards;
. we may experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products;
and
. our new products and enhanced products may not adequately meet the
requirements of the marketplace and achieve market acceptance or may not
keep pace with advances made by our competitors.
Our business model is evolving and unproven and we may fail to achieve broad
market acceptance.
If a significant number of computer industry participants do not adopt our
solutions, or if we fail to retain or fail to further penetrate our existing
customer accounts, we may not achieve the critical mass of users necessary to
enable the success of our solutions and services. We must attract a significant
number of manufacturers and channel partners from the computer industry and
expand our existing relationships. In particular, a fundamental element of our
business strategy is to enter into contractual relationships with manufacturers
and distributors that enable us to derive increasing revenues from those
customers to the extent that our e-commerce solutions are more broadly adopted
by market participants. In the past, these entities have purchased computer
products and accessories and exchanged information regarding these products
primarily through traditional means of commerce and communications. The market
for the types of products and services that we offer is still emerging and may
not continue to grow. Even if the market does continue to grow, our products
might not achieve market acceptance among computer product manufacturers,
distributors, resellers, retailers, other industry participants and end users,
including corporate buyers and consumers. If we are not successful in achieving
broad market acceptance of our third-party e-commerce products and services or
in achieving significant market share, our financial results and stock price
may be adversely affected.
Our business is dependent on our ability to manage our content database and
ensure the accuracy of that data.
Our business depends on our ability to update and maintain an extensive
database of technical and descriptive information on computer products,
including over 700,000 SKUs from over 3,000 manufacturers. Inaccuracies in the
data we maintain could expose us to liabilities and could result in termination
of customer contracts.
In October 1999, we signed an agreement with eCommerce Industries, Inc.
("eci/2/") pursuant to which we have committed to collect and maintain content
on office products. We have no experience in creating an information database
for office products and may experience unanticipated costs and difficulties in
this effort.
Maintaining our databases is a highly manual process and we utilize a
combination of highly trained internal personnel and contract personnel
provided by third parties. In addition, our computer systems and databases must
be sufficiently scalable to process large amounts of complex product
specification and configuration data without significant degradation in
performance. In the past, we have experienced periodic difficulties with data
accuracy. For example, in the second quarter of 1998, database capacity
constraints limited our ability to accept daily pricing and availability
updates from distributors, and temporarily disrupted our ability to provide
this data to some reseller customers. These problems caused some of those
customers to decline or delay contract renewals.
10
<PAGE>
We have a history of losses that we expect to continue in the future.
During the nine months ended September 30, 1999 and in each fiscal year
since inception, we have incurred losses from operations, except for a small
operating profit in 1995. At September 30, 1999, we had an accumulated deficit
of $17.4 million. We expect operating losses to continue for the foreseeable
future. Our ability to become profitable depends on our ability to generate and
sustain substantially higher net revenues while controlling expense levels. Our
future profitability and success, if any, will depend, among other factors, on
our ability to maintain and expand relationships with computer industry
participants and end users. Although our revenues have increased in recent
periods, there can be no assurance that our revenues will grow in future
periods or that we will achieve profitability on a quarterly or annual basis in
the future. Even if we do achieve profitability in future fiscal periods, we
cannot be sure that we would be able to sustain or increase profitability
because of the dynamic nature of our business and the industry in which we
compete.
Our operating results are volatile and may fluctuate significantly in future
fiscal periods.
Historically, our revenues and operating results have fluctuated
significantly. We expect that they will continue to fluctuate significantly on
a quarterly and annual basis due to a combination of factors. We have in the
past recognized, and may in the future be required to recognize, a significant
portion of revenue derived from perpetual license agreements with our customers
in a single fiscal quarter, which can cause significant variations in quarterly
revenues. Since a majority of our revenues come from a limited number of large
customers, the timing of significant orders and the recognition of revenue from
these orders are unpredictable and can cause large fluctuations in quarterly
operating results. Other factors that may cause our future revenues and
operating results to fluctuate include:
. our ability to expand significantly our sales, marketing and consulting
services organizations;
. our ability to develop successfully new and enhanced products;
. the level of demand for our products;
. the timing and amount of license payments from our customers;
. the diversion of our potential customers' resources to address internal
Year 2000 issues;
. our ability to retain existing customers and increase sales to those
customers;
. the timing and volume of new orders and our capacity to fulfill those
orders;
. the level of product and price competition;
. the announcement or introduction of new or enhanced products and
services by us or our competitors;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our business and sales and marketing
infrastructure;
. downtime of our systems or Internet capacity or reliability problems;
. the growth in the use and acceptance of, and activity on, the Internet,
Web and Internet-related technologies, particularly by corporate,
institutional and government users for the purchase of computer
products;
. the extent to which unauthorized access and use of online information is
perceived as a threat to network security;
. seasonal trends in customer purchasing; and
. general economic conditions.
11
<PAGE>
It is likely that in some future quarter our revenues and operating results
will fall below the expectations of securities analysts and investors. In that
event, the trading price of our common stock may decline significantly.
Our stock price has been, and may continue to be, extremely volatile.
The trading prices of Internet stocks in general, and ours in particular,
have experienced extreme price fluctuations in recent months. These
fluctuations often have been unrelated or disproportionate to the operating
performance of these companies. The valuations of many Internet stocks,
including ours, are extraordinarily high based on conventional valuation
standards such as price to earnings and price to sales ratios. These trading
prices and valuations may not be sustained. Any negative change in the public's
perception of the prospects of Internet or e-commerce companies could depress
our stock price regardless of our results of operations. Other broad market and
industry factors may decrease the trading price of our common stock, regardless
of our operating performance. Market fluctuations, as well as general political
and economic conditions such as recession or interest rate or currency rate
fluctuations, also may decrease the trading price of our common stock. In
addition, our stock price could be subject to wide fluctuations in response to
the following factors:
. actual or anticipated variations in our quarterly operating results;
. announcements of new products, product enhancements, technological
innovations or new services by us or our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet and online commerce industries;
. changes in the market valuations of other Internet or online service
companies;
. developments in Internet regulations;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. unscheduled system downtime;
. additions or departures of key personnel; and
. sales of our common stock or other securities in the open market.
In the past, securities class-action lawsuits have often been instituted
against companies following stock price declines. Litigation of this type, if
instituted, could result in substantial costs and a diversion of our
management's attention and resources.
We have a limited operating history, which makes our future prospects difficult
to evaluate.
We were established as a separate business unit within Trilogy in 1993. We
were incorporated and began to recognize revenue in 1994. We entered into
agreements with a majority of our significant customers since only the third
quarter of 1997. Our limited operating history makes an evaluation of our
future prospects very difficult. In particular, our prospects should be
compared to the prospects of companies in new and rapidly evolving markets and
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development. These risks
include our ability to:
. expand our sales, marketing and consulting services organizations;
12
<PAGE>
. expand our customer base and retain key customers;
. successfully deploy our products and services;
. develop and introduce new products and services;
. manage growing operations; and
. respond to a rapidly changing competitive environment.
We must expand our sales, marketing and consulting organizations; we are
dependent on retaining and attracting key personnel.
In order to grow our business, we must expand significantly our sales,
marketing and consulting organizations. Our future success also depends in
significant part upon our ability to retain and attract key management and
technical personnel. Competition for qualified personnel is intense, and we
have in the past experienced difficulty in recruiting qualified personnel. The
loss of key personnel or the inability to attract and retain additional
qualified personnel, may have an adverse effect on our business and stock
price.
We particularly depend on the continued services and performance of Ross A.
Cooley, our Chairman and Chief Executive Officer, and Christina C. Jones, our
President, Chief Operating Officer and founder. Mr. Cooley, in his capacity as
our Chairman and Chief Executive Officer, currently performs various executive
and leadership functions, including executive management of new customer and
new account relationship activities and recruitment of senior management
personnel. Ms. Jones, in her capacity as our President and Chief Operating
Officer, is principally responsible for managing our daily operations and
developing our strategic and operational plans. We currently do not carry key
person life insurance for either Mr. Cooley or Ms. Jones.
Trilogy has voting control over pcOrder and may exercise that control in a
manner that adversely affects the company or other stockholders.
As of September 30, 1999 and as adjusted to reflect this offering, Trilogy
owns approximately 81% of our outstanding common stock and will continue to own
approximately 64% after this offering. This level of ownership provides Trilogy
with the voting power to determine the outcome of almost any matter submitted
for the vote or consent of our stockholders. For example, Trilogy can elect all
of our directors, cause an amendment of our Certificate of Incorporation,
Bylaws and other documents, and generally control the management of our
business and affairs. In addition, the shares of Class B common stock held by
Trilogy entitle Trilogy to eight votes, while each share of Class A common
stock held by our other stockholders entitle the holders to only one vote per
share. Accordingly, Trilogy may retain the ability to determine the outcome of
matters submitted to a vote of our stockholders even if it holds less than a
majority of our outstanding common stock. If Trilogy sells some or all of its
pcOrder common stock to a third party, the third party may be able to control
us in the manner that Trilogy is currently able to control us, including the
election of all of the members of our board of directors. A sale by Trilogy to
a third party may adversely affect our other stockholders, the trading price of
our Class A common stock and our business.
Similarly, Trilogy can prevent, delay or cause a change in control of
pcOrder. If Trilogy transfers a controlling interest in pcOrder, our other
stockholders may not be able to participate in the transaction or realize any
premium or other amounts for their shares of common stock. Trilogy can also
take other actions that might be favorable to Trilogy but not necessarily
favorable to our other stockholders.
13
<PAGE>
We rely on Trilogy for the license of core technology and the provision of key
technical and management support; any conflicts that may arise between us and
Trilogy could harm our business.
We license core technology from Trilogy on a non-exclusive basis and with
some limitations. Our business would be disrupted by any termination of the
license, or reduction in the performance of the licensed technology, that
requires us to develop internally or license similar technology from a third
party. We believe that similar technology is not currently available from any
third party. If the license from Trilogy were terminated, we might not be able
to develop successfully similar technology on our own.
We have historically relied on Trilogy to provide significant human
resource, finance, recruiting, legal and other services. Since our initial
public offering in February 1999, we have begun to develop and implement the
operational, administrative and other systems and infrastructure necessary to
support our current and future business. To date, we have not completed this
process. The costs of the development and implementation will be significant.
Any failure to develop successfully and implement the systems and
infrastructure may have an adverse effect on our business.
Ownership interests of our directors or officers in Trilogy's common stock,
or service as both a director or officer of pcOrder and an officer or employee
of Trilogy, could create or appear to create potential conflicts of interest
when directors and officers are faced with decisions that could have different
implications for pcOrder and Trilogy. Joseph A. Liemandt, one of our directors,
is the Chairman and Chief Executive Officer and a substantial stockholder of
Trilogy.
An agreement between us and Trilogy that prohibited Trilogy from competing
with us expired on June 1, 1999. While Trilogy does not currently compete
directly with us, Trilogy is free to do so. Direct competition with Trilogy
could have an adverse effect on our business. Further, Trilogy has joint
ownership rights in technology jointly developed by pcOrder and Trilogy during
the term of our license arrangement with Trilogy and also have access to
technology that we develop for the computer industry. Trilogy can utilize the
technology in competition with us or license the technology to our competitors
or potential customers, which could have an adverse effect on our business.
System failures could harm our business.
Our success depends largely upon the efficient and uninterrupted operation
of our computer and communication systems. The occurrence of any system failure
or similar event could have an adverse effect on our business. We have
contracted with some of our customers to provide server hosting and to maintain
redundant leased lines to ensure system availability. Our development and
management systems are located at a facility that we lease in Austin, Texas. In
addition to that facility, we outsource the hosting of some of our servers to
third parties. Our systems and operations, whether at our site or through our
third-party outsourcing, are vulnerable to damage or interruption from fire,
flood, power loss, telecommunications failure, break-ins and similar events.
The measures we have taken to prevent a system failure may not be successful in
the future. In addition, we do not have a formal disaster recovery plan and do
not carry sufficient business interruption insurance to compensate us for
losses that may occur as a result of any system failure.
Our business is dependent on the further development and maintenance of the Web
infrastructure.
The emergence and growth of the market for our products is dependent on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion. These improvements might not be made or, if made,
they might not be made in a sufficiently timely and cost-effective manner to
facilitate market acceptance of our products. The recent growth in the use of
14
<PAGE>
the Internet has caused frequent periods of performance degradation. Any actual
or perceived degradation in the performance of the Internet as a whole could
undermine the benefits of our products. Our ability to increase the speed with
which we provide services to customers and to increase the scope of these
services ultimately is limited by, and reliant upon, the speed and reliability
of the networks operated by third parties.
There are many risks associated with international operations.
Although we have had limited sales outside of the U.S. and Canada, we
expect to increase our sales in international markets. To expand international
sales, we must establish additional foreign operations, build strategic
relationships and hire additional personnel. This expansion will require
significant management attention and financial resources and could have an
adverse effect on our business. In addition, we may be unable to maintain or
increase international market demand for our products and services. Although
our international sales are primarily denominated in U.S. dollars, we may incur
an increasing percentage of obligations denominated in foreign currencies in
the future. A change in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and, therefore, potentially
less competitive in those markets and could otherwise adversely affect our
ability to meet our foreign-currency-denominated obligations. Currently, we do
not employ currency hedging strategies to reduce this risk. Our international
business may be subject to additional risks, including the following:
. difficulties in collecting international accounts receivable;
. difficulties in obtaining export licenses;
. potentially longer payment cycles;
. increased costs associated with maintaining international marketing
efforts;
. the introduction of non-tariff barriers and higher duty rates; and
. difficulties in enforcement of contractual obligations and intellectual
property rights.
We may encounter difficulties and unanticipated costs and liabilities in
acquiring and effectively integrating assets and businesses from third parties.
As part of our business strategy, we may acquire assets and businesses
principally relating to or complementary to our current operations. Any
acquisitions that we undertake will be accompanied by the risks commonly
encountered in business acquisitions. These risks include, among other things:
. potential exposure to unknown liabilities of acquired companies;
. the difficulty and expense of assimilating the operations and personnel
of acquired businesses;
. diversion of management time and attention and other resources;
. loss of key employees and customers as a result of changes in
management;
. the incurrence of amortization expenses; and
. possible dilution to our stockholders.
In addition, geographic distances may make the integration of businesses
more difficult. We may not be successful in overcoming these risks or any other
problems encountered in connection with any acquisitions. As of the date of
this prospectus, we have no present understandings, commitments or agreements
for any material investment or acquisition.
15
<PAGE>
We may be unable to adequately protect or enforce our intellectual property
rights; we may infringe the intellectual property rights of third parties.
Our efforts to protect our intellectual property rights through copyright,
trademark, patent and trade secret laws may not be effective to prevent
misappropriation or infringement of our rights or create barriers to the
development of competitive products or services. Our success depends in part on
our ability to protect our proprietary software and other intellectual
property. To protect our proprietary rights, we rely generally on copyright,
trademark, patent and trade secret laws, confidentiality agreements with
employees and third parties and license agreements with consultants, vendors
and customers. However, we have not signed those agreements in every case.
Despite those protections, a third party could, without authorization, copy or
otherwise obtain and use our products or technology, or develop similar
technology. Our agreements with employees, consultants and others who
participate in product development activities may be breached, we may not have
adequate remedies for any breach, and our software or trade secrets may
otherwise become known or independently developed by competitors.
Many of our current and potential competitors dedicate substantially
greater resources to protection and enforcement of intellectual property
rights, especially patents. If a blocking patent has been issued or is issued
in the future, we would need to either obtain a license or design around the
patent. There can be no assurance that we would be able to obtain a license on
acceptable terms, if at all, or to design around the patent. We pursue the
registration of some of our trademarks and service marks in the U.S. and in
some other countries, although we have not secured registration of all of our
marks. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the U.S. Effective
copyright, trademark and trade secret protection may not be available in those
jurisdictions. We license some of our proprietary rights to third parties.
Those licensees may not abide by compliance and quality control guidelines
regarding proprietary rights and the licensees may take actions that would
adversely affect our business.
The computer software industry is characterized by frequent and substantial
intellectual property litigation that often is complex and expensive and
involves a significant diversion of resources and uncertainty of outcome. In
the future, we may need to pursue litigation to enforce and protect our
intellectual property rights or to defend against a claim of infringement or
misappropriation. We attempt to avoid infringing known proprietary rights of
third parties in our product development efforts. However, we have not
conducted and do not intend to conduct comprehensive patent searches to
determine whether the technology used in our products infringes patents held by
third parties. In addition, it is difficult to proceed with certainty in a
rapidly evolving technological environment in which there may be numerous
patent applications pending, which generally are confidential when filed. Any
claims against us relating to the infringement or misappropriation of third-
party proprietary rights, even if not meritorious, could result in the
expenditure of significant financial and managerial resources and in
injunctions preventing us from distributing some products.
Our business substantially depends on the continued growth of e-commerce.
If the Internet as a commercial or business medium fails to develop or
develops more slowly than expected, our business would be adversely affected.
The increased use of the Internet for retrieving, sharing and transferring
information among computer industry participants has only recently developed.
Our success will depend in large part on continued growth in, and the use of,
the Internet for commerce, which depends on:
. growth in commercial access to, and acceptance of, new interactive
technologies;
. development of technologies that facilitate interactive communication
between organizations and targeted audiences; and
. increases in user bandwidth.
16
<PAGE>
Critical issues about commercial use of the Internet are unresolved,
including security, reliability, cost, ease of access, quality of service and
necessary increases in bandwidth availability. These issues are likely to
affect the development of the market for our products and services. The
adoption of the Internet for information retrieval and exchange, commerce and
communications generally will require the acceptance of a new and evolving
medium of conducting business and exchanging information. That acceptance is
likely only if the Internet provides greater efficiency and an improved arena
of commerce and communication.
Our failure to manage growth and enhance our organizational structure could
impair our business.
Our growth and new projects have placed significant demands on our
management and other resources. Our revenues increased from $5.9 million in
1996 to $29.6 million for the nine months ended September 30, 1999. Our staff
increased from one employee in June 1994 to 219 employees at September 30,
1999. This growth has resulted in, and can be expected to continue to require,
substantial expansion of our infrastructure, including operating and financial
systems and controls and the geographic scope of our operations and customers.
Recent rapid growth has also resulted in new and increased responsibilities for
management personnel. The growth has placed and, if it continues, is expected
to continue to place, a significant strain on our management and operations. In
addition, we have historically relied on Trilogy to provide some human
resource, finance, recruiting, legal and other services. We are in the process
of assuming responsibility for many of those services. If we are unable to
develop the personnel and infrastructure necessary to manage an increased level
of business and operations, our financial performance and stock price may be
adversely affected.
We may experience unanticipated expenses and other problems related to Year
2000 issues.
Year 2000 problems are caused by computer systems that only use a two-digit
year value and, accordingly, will be subject to error or failure when the Year
2000 arrives. We have conducted evaluations to assess whether our business and
our products present Year 2000 risks as described under "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance." However, the Year 2000 problem is pervasive and complex and
there is a risk that we have not identified all of the Year 2000 issues that
may affect us or that any remedial efforts we undertake will not adequately
address identified Year 2000 problems. We have made limited contingency plans
for the remediation of Year 2000 problems that may affect our information
technology systems and products, or the third-party equipment and software
utilized by us. Any significant Year 2000 problem that may arise in our
business or in our products, including products we license from Trilogy, may
result in a disruption in our business, require us to make large, unplanned
expenditures or cause us to lose customers.
Our business will suffer if our products contain errors or defects.
Our products may contain undetected errors or defects when first introduced
or as new versions are released. Our introduction of new products or product
enhancements with reliability, quality or compatibility problems could also
result in reduced bookings, delays in collecting accounts receivable and in
additional service and warranty costs. We have in the past experienced
difficulties and delays in successfully installing our products at some
customer sites. Similar problems may occur in the future. We have recently
transitioned our product architecture to a more modular and flexible design.
New customers may experience performance problems with this new technology
platform, whether in the form of bugs, compatibility difficulties or otherwise.
In addition, our existing customers could experience problems in transitioning
to our new technology platform. If we fail to properly manage the transition by
our existing customers to our new technology platform, we could see
cancellation of
17
<PAGE>
customer contracts, a decline in our competitive position or reduced or delayed
sales of our products. In addition, defects or errors in our products may
result in product liability claims being brought against us. We currently have
only limited insurance coverage against product liability claims. We may be
unable to renew our insurance in the future and any insurance we have may be
inadequate to cover any claims brought against us.
We may be unable to meet our future capital requirements.
We need substantial working capital to fund our business. Although we
currently believe that our existing capital resources together with the
proceeds to us from this offering will be sufficient to meet our presently
anticipated cash requirements for at least the next 12 months, we may need to
raise additional financing before that time. We cannot be sure that additional
financing will be available to us on favorable terms when required, or at all.
If additional funds are raised through the issuance of equity securities, our
stockholders may experience significant dilution. In addition, financing may
not be available when needed or may not be available on acceptable terms. If
financing is not available when required or is not available on acceptable
terms, we may be unable to expand our sales and marketing organization, develop
new products and product enhancements, or take advantage of business
opportunities or respond to competitive pressures.
Future sales of common stock by Trilogy or insiders could adversely affect our
stock price.
Sales by Trilogy or our officers and directors of significant amounts of
common stock in the public market or the perception that these sales could
occur, could adversely affect our stock price. Trilogy has registration rights
for its shares of common stock, which rights could facilitate any future
disposition.
Investors' ability to trade our common stock may be limited by trading volume.
The trading volume in our common stock has been limited which may inhibit
the ability of our stockholders to sell shares of our stock and of potential
investors to buy our shares.
Investors will incur immediate and substantial dilution.
The 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 those investors.
See "Dilution" and "Shares Eligible for Future Sale".
18
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary",
"Risk Factors", "Management's Discussion and Analysis of Financial Condition
and Results of Operations", and "Business", contains forward-looking
statements. These statements relate to future events or our future financial
performance, and involve known and unknown risks, uncertainties, and other
factors that may cause our or our industry's actual results, levels of
activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements. These risks and other factors
include those listed under "Risk Factors" and elsewhere in this prospectus. In
some cases, you can identify forward-looking statements by terminology such as
"may", "will", "should", "expects", "plans", "anticipates", "believes",
"estimates", "predicts", "potential", "continue", or the negative of these
terms or other comparable terminology. These statements are only predictions.
Actual events or results may differ materially. In evaluating these statements,
you should specifically consider various factors, including the risks outlined
under "Risk Factors". These factors may cause our actual results to differ
materially from any forward-looking statement. All forward-looking statements
are made as of the date of this prospectus, and we assume no obligation to
update these statements.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to us from our sale of the 500,000 shares of Class A
common stock in the offering are estimated to be approximately $24,982,000
after deducting the underwriting discount and the estimated offering expenses
payable by us.
The principal purposes of this offering are to increase our working capital
and to increase the public market float for our common stock. We intend to use
the net proceeds for general corporate purposes, including working capital and
capital expenditures. We may, when and if the opportunity arises, use a
portion of the proceeds to acquire or invest in complementary businesses,
products or technologies. We have no present understandings, commitments or
agreements for any material investment or acquisition. Pending any of these
uses, we intend to invest the net proceeds in interest-bearing, investment-
grade securities.
We will not receive any of the proceeds from the sale of Class A common
stock by Trilogy or the other selling stockholders in connection with this
offering.
PRICE RANGE OF COMMON STOCK
Our Class A common stock has been traded on the Nasdaq National Market
since February 26, 1999 under the symbol "PCOR". Through December 6, 1999, the
high and low closing prices for the common stock were as follows:
<TABLE>
<CAPTION>
High Low
1999 ------ ------
<S> <C> <C>
First Quarter (from February 26, 1999)........................ $70.25 $39.50
Second Quarter................................................ 80.00 30.38
Third Quarter................................................. 41.00 27.38
Fourth Quarter (through December 6, 1999)..................... 71.00 34.50
</TABLE>
As of December 6, 1999, the last reported closing price of the common stock
on the Nasdaq National Market was $53.3125 and 16,033,005 shares of the Class
A common stock and Class B common stock were held by approximately 255 record
holders.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our stock. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and do not anticipate paying any cash
dividends in the foreseeable future.
20
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1999, our cash position
and capitalization on an actual basis and on an as adjusted basis to give
effect to the conversion of Class B common stock in connection with the
offering and our receipt of the net proceeds from the sale of shares of the
common stock offered by us at a price to the public of $53.3125 per share,
after deducting the underwriting discount and estimated offering expenses
payable by us. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and Notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
September 30, 1999
---------------------
Actual As Adjusted
-------- -----------
(unaudited)
(in thousands)
<S> <C> <C>
Cash and cash equivalents................................ $ 44,580 $ 69,562
======== ========
Long-term obligations, less current portion.............. $ -- $ --
Stockholders' equity:
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; 3,062,205 shares issued
and outstanding (actual) and 5,895,205 shares issued
and outstanding (as adjusted)......................... 30 59
Class B common stock, $.01 par value per share;
12,757,000 shares authorized; 12,659,650 shares issued
and outstanding (actual) and 10,326,650 shares issued
and outstanding (as adjusted)......................... 127 103
Additional paid-in capital............................... 52,937 77,914
Deferred stock compensation.............................. (1,131) (1,131)
Unrealized gain on investments........................... 4 4
Accumulated deficit...................................... (17,447) (17,447)
-------- --------
Total stockholders' equity........................... 34,520 59,502
-------- --------
Total capitalization............................... $ 34,520 $ 59,502
======== ========
</TABLE>
- --------
The outstanding share information excludes:
. 3,023,724 shares issuable upon the exercise of outstanding stock
options as of September 30, 1999 under our 1996 Stock Option Plan at
a weighted average exercise price of $4.31 per share, and 635,004
shares issuable upon the exercise of outstanding stock options as of
September 30, 1999 under our 1999 Stock Option Plan at a weighted
average exercise price of $28.52 per share; and
. 84,421 shares reserved for future grant as of September 30, 1999
under the 1996 Stock Option Plan, and 864,996 shares reserved for
future grant as of September 30, 1999 under the 1999 Stock Option
Plan.
21
<PAGE>
DILUTION
Our net tangible book value as of September 30, 1999 was approximately
$34.5 million, or $2.20 per share of common stock. Net tangible book value per
share represents the amount of total tangible assets less total liabilities,
divided by the total number of shares of common stock outstanding. After giving
effect to our sale of the 500,000 shares offered by us under this prospectus at
a price to the public of $53.3125 per share, and after deducting the
underwriting discount and estimated offering expenses payable by us, our net
tangible book value as of September 30, 1999 would have been approximately
$59.5 million, or $3.67 per share of common stock. This amount represents an
immediate increase in net tangible book value of $1.47 per share to existing
stockholders and an immediate dilution of $49.64 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Price per share................................................. $53.31
Net tangible book value per share as of September 30, 1999.... $2.20
Increase per share attributable to new investors.............. 1.47
-----
Net tangible book value per share after this offering........... 3.67
------
Dilution per share to new investors............................. $49.64
======
</TABLE>
22
<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
years ended December 31, 1996, 1997 and 1998 and the selected 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 selected balance
sheet data at December 31, 1994, 1995 and 1996 are derived from audited
financial statements not included in this prospectus. The statement of
operations data for the nine month periods ended September 30, 1998 and 1999,
and the selected balance sheet data at September 30, 1999 are derived from
unaudited interim financial statements included elsewhere in this prospectus
and, in our opinion, included all adjustments consisting solely of normal
recurring adjustments which are necessary to present fairly the results for
these periods. Historical results are not necessarily indicative of future
results and the results for interim periods are not necessarily indicative of
results to be expected for the entire year.
The selected financial data reflect that prior to 1997, we relied on Trilogy
for all of our cash management requirements. For the year ended December 31,
1998, the unaudited pro forma income tax benefit is $292,000, the unaudited pro
forma net loss is $9,732,000, and the unaudited pro forma basic and diluted net
loss per share is $0.76. For the nine months ended September 30, 1999 the
unaudited pro forma income tax benefit is $0, the unaudited pro forma net loss
is $6,718,000, and the unaudited pro forma basic and diluted net loss per share
is $0.45. All of these figures are computed as if we had filed a separate
income tax return.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------------ ------------------
1994 1995 1996 1997 1998 1998 1999
------ ------- ------- ------- -------- -------- --------
(unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Software and
subscriptions......... $ -- $ 1,836 $ 3,633 $ 6,475 $ 12,651 $ 8,736 $ 14,489
Content and services... 515 1,887 2,249 4,114 9,063 6,423 15,136
------ ------- ------- ------- -------- -------- --------
Total revenues......... 515 3,723 5,882 10,589 21,714 15,159 29,625
------ ------- ------- ------- -------- -------- --------
Cost of revenues:
Software and
subscriptions......... 148 818 822 1,023 3,242 2,197 3,710
Content and services... 390 953 1,112 2,553 7,068 4,143 11,166
------ ------- ------- ------- -------- -------- --------
Total cost of
revenues.............. 538 1,771 1,934 3,576 10,310 6,340 14,876
------ ------- ------- ------- -------- -------- --------
Gross profit (loss)..... (23) 1,952 3,948 7,013 11,404 8,819 14,749
Operating expenses:
Research and
development........... 106 660 1,168 1,129 4,292 2,933 4,727
Selling and marketing.. 72 577 2,555 4,793 12,151 8,324 13,086
General and
administrative........ -- 116 726 1,792 3,689 2,456 4,306
Amortization of
deferred stock and
stock compensation
expense............... -- -- -- -- 1,468 954 953
------ ------- ------- ------- -------- -------- --------
Total operating
expenses.............. 178 1,353 4,449 7,714 21,600 14,667 23,072
------ ------- ------- ------- -------- -------- --------
Operating income
(loss)................. (201) 599 (501) (701) (10,196) (5,848) (8,323)
Interest income......... -- -- -- -- 172 107 1,605
------ ------- ------- ------- -------- -------- --------
Income (loss) before
income taxes........... (201) 599 (501) (701) (10,024) (5,741) (6,718)
Income tax provision
(benefit).............. (68) 207 (191) 427 (386) (203) (243)
------ ------- ------- ------- -------- -------- --------
Net income (loss)....... $ (133) $ 392 $ (310) $(1,128) $ (9,638) $ (5,538) $ (6,475)
====== ======= ======= ======= ======== ======== ========
Basic and diluted net
income (loss) per
share.................. $(0.10) $ 0.03 $ (0.02) $ (0.09) $ (0.75) $ (0.43) $ (0.43)
====== ======= ======= ======= ======== ======== ========
Weighted average shares
outstanding............ 1,280 12,800 12,800 12,800 12,861 12,837 15,019
====== ======= ======= ======= ======== ======== ========
</TABLE>
In the following table, working capital (deficit) at December 31, 1996
includes the effect of deferred revenue of $2,162,000, working capital
(deficit) at December 31, 1997 includes the effect of deferred revenue of
$4,212,000, and working capital (deficit) at December 31, 1998 includes the
effect of deferred revenue of $10,428,000.
<TABLE>
<CAPTION>
December 31,
--------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------- ------- -------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ -- $ -- $ -- $ 2,207 $ 4,726 $44,580
Working capital
(deficit).............. (291) 255 (253) (1,489) (9,045) 33,164
Total assets............ 1,088 1,492 3,435 4,978 12,254 77,121
Stockholders' equity
(deficit).............. (287) 442 132 (995) (8,545) 34,520
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto, and the other information included elsewhere in
this prospectus.
Overview
pcOrder is a leading provider of business-to-business software
applications, content and related services that are designed to enable the
computer industry's suppliers, resellers and end users to buy and sell products
online. Our tailored solutions are designed to enable computer industry
participants to take advantage of the increasing adoption of e-commerce to
automate sales and distribution functions such as product search, comparison,
configuration, quoting, pricing, financing, ordering and reseller selection.
Our solutions are designed to enable our customers to lower their cost of sales
and marketing, reduce inventory levels, and more efficiently interact with
their business partners and customers.
We were established as a separate business unit within Trilogy in July
1993, and were incorporated in July 1994. We began to recognize revenue in
April 1994, and have periodically released new products and enhancements to our
existing products since that date. In late 1996, Ross A. Cooley joined as
Chairman and Chief Executive Officer and brought significant computer industry
experience and long-term relationships with computer industry participants to
pcOrder. Since that time, our e-commerce solutions for the computer industry
have gained broader acceptance, and industry participants including beyond.com,
Compaq, CompuCom Systems, CompUSA, CMP Media, Dell, GE Capital, Hewlett-
Packard, Ingram Micro, IBM, Inktomi, Kingston Technology, EDS, Nortel Networks,
Quantum, Scribona Computer Products, Tech Data and ZDNet, have adopted either
our software applications, our content and related services, or both.
We derive our revenues from software and subscription fees and content and
related service fees. Software and subscription fees consist of subscription-
based and perpetual license arrangements. Before 1997, our software and
subscription fees were derived primarily from perpetual licenses of our
products. In late 1996, we commenced a transition of our pricing model to
subscription-based arrangements. Currently, we derive the majority of our
software and subscription fees from subscription-based arrangements, but may
from time to time grant perpetual licenses to accommodate individual customer
needs. Content fees are charged on a subscription basis for access to and
maintenance of information stored in our product database. Our service fees
consist of providing integration, customization, training and Web-hosting
services to our customers. These fees are generally charged on a time and
materials basis. However, we have in the past and may from time to time in the
future provide these services on a fixed price basis.
Historically, our content and related services have been sold in
conjunction with our software applications. However, in early 1999, we launched
ContentSource, a subscription-based service that allows customers to subscribe
solely to our content without licensing our software. This service is primarily
targeted toward Internet retailers, corporate resellers, distributors, and
third parties that provide shopping services to Internet portals. Revenues from
this service began to be recognized during the third quarter of 1999.
Revenue from perpetual licenses and software subscriptions is recognized
when persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed or
24
<PAGE>
determinable and collectibility is probable. In the case of perpetual licenses,
revenue is recognized immediately upon achievement of the above criteria. In
the case of subscriptions, which represent the majority of our contracts,
revenue recognition commences upon achievement of the above criteria, but is
generally recognized over the life of the arrangement. Subscriptions also
require renewal features for continued license access and services beyond the
initial contract period. Software maintenance fees relating to perpetual
licenses are recognized over the term of the applicable maintenance agreement.
Content fees, including fees from ContentSource, are generally recognized over
the applicable service period, which generally commences upon initial content
entry or delivery.
Time and materials service fees are recognized as the services are
performed. We recognize revenue on fixed price service arrangements upon the
completion of specific contractual events, or based on an estimated percentage
of completion as work progresses.
In June 1999, we expanded our customer relationship with Compaq. Under the
new agreement, we agreed to provide a broader range of software applications
and services across more of Compaq's electronic commerce initiatives and
included international as well as domestic deployments. The agreement is a
multi-year subscription-based agreement, but can be terminated earlier by
either party upon prior written notice in the event of a payment default,
material breach, failure of pcOrder to provide specific deliverables (including
specific deliverables agreed to after execution of the agreement), and
termination of business. Revenues from this agreement began to be recognized
during the third quarter of 1999.
In October 1999, we entered into an agreement with eci/2/, a leading e-
commerce company in the office products industry. The agreement is a multi-year
subscription-based agreement that grants eci/2/ exclusive rights to sublicense
our core e-commerce technology in the office products industry. Additionally,
we and eci/2/ will share in the development of an extensive office product
content database that will be distributed by both companies as part of their
overall e-commerce services. In connection with the strategic relationship, we
made a $3.2 million minority equity investment in eci/2/ and Christina Jones,
our President and Chief Operating Officer, joined the board of directors of
eci/2/. The investment will be accounted for under the cost method of
accounting.
We record cash advances and amounts billed in excess of revenue recognized
as deferred revenue. Our deferred revenue balance on September 30, 1999 was
$28.4 million. Approximately $27.0 million of this deferred revenue is expected
to be recognized as revenue within the following 12 months, with the remaining
amount expected to be recognized in later periods. The deferred revenue balance
generally results from billings to and collections from customers in advance of
receipt of products or performance of services. The timing and amount of cash
advances from customers can vary significantly depending on specific contract
terms and can therefore have a significant impact on the amount of deferred
revenue in any given period. Deferred revenue is not indicative of our contract
backlog or future revenues. Fluctuations in deferred revenue result in similar
fluctuations in our cash flow from operations.
Statement of Position 97-2, "Software Revenue Recognition" was issued in
October 1997 by the American Institute of Certified Public Accountants and
amended by SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-
2". We adopted SOP 97-2 and SOP 98-4 effectiveJanuary 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 some
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. We do
not believe that the final adoption of SOP 98-9 will adversely affect our
financial condition or results of operations.
In connection with an intercompany license agreement with Trilogy, we are
obligated to pay Trilogy royalties based on fees generated from perpetual
license agreements, software maintenance
25
<PAGE>
and subscription-based licenses. Also, we have entered into agreements with
Trilogy for administrative, operational and corporate support services,
including some consulting, tax administration, payroll, payroll accounting,
banking, corporate finance, recruiting and employee training services. In
addition, from inception through August 25, 1999, we were subject to a tax
allocation agreement with Trilogy and were a member of the Trilogy consolidated
tax group. Effective August 26, 1999, we became de-consolidated from the
Trilogy consolidated tax group. See "Certain Relationships and Transactions--
Agreements with Trilogy", Notes 2 and 6 of the Notes to Financial Statements
and Note 8 of the Notes to Condensed Financial Statements included elsewhere
herein for more information.
Except for a small profit in 1995, we have incurred annual losses from
operations since our inception in July 1993 to date, and we expect to continue
to incur losses from operations on both a quarterly and an annual basis for the
foreseeable future. We had an accumulated deficit of $17.4 million at September
30, 1999. Further, we intend to continue to increase expenditures on sales and
marketing personnel, programs and activities to increase sales of our products
and services to our existing customers and to new customers. However,
historically we have experienced a lengthy cycle for sales of our products to
resellers and longer sales cycles for sales of our products to manufacturers
and distributors. Consequently, even if we achieve increased sales of our
products and services as a result of our investments in our sales force, these
increases likely will not be recognized in the quarter in which these
investments are made.
Because the market for our products has only recently emerged, and based on
other factors described elsewhere in this prospectus, we believe that our
quarterly and annual revenues, expenses and operating results are likely to
vary significantly in the future, that period-to-period comparisons of our
results of operations are not necessarily meaningful and that these comparisons
should not be relied upon as indications of our future performance. In
addition, although our revenues have increased in recent periods, there can be
no assurance that our revenues will grow in future periods, that they will grow
at past rates or that we will achieve profitability on a quarterly or annual
basis in the future. Our 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 we will be successful in addressing
these risks and difficulties or that we will achieve or sustain profitability
in the future.
26
<PAGE>
Results of Operations
The following table sets forth our results of operations expressed as a
percentage of total revenues. Our historical operating results are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
Nine
Months Ended
Year Ended December 31, September 30,
----------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenues:
Software and subscriptions... 62% 61% 58% 58% 49%
Content and services......... 38 39 42 42 51
------- ------- ------- ------ ------
Total revenues............. 100 100 100 100 100
------- ------- ------- ------ ------
Cost of revenues:
Software and subscriptions... 14 10 15 15 12
Content and services......... 19 24 33 27 38
------- ------- ------- ------ ------
Total cost of revenues..... 33 34 48 42 50
------- ------- ------- ------ ------
Gross profit................... 67 66 52 58 50
Operating expenses:
Research and development..... 20 11 20 20 16
Selling and marketing........ 43 45 56 55 44
General and administrative... 12 17 17 16 15
Amortization of deferred
stock and stock compensation
expense..................... -- -- 6 6 3
------- ------- ------- ------ ------
Total operating expenses... 75 73 99 97 78
------- ------- ------- ------ ------
Operating loss................. (8) (7) (47) (39) (28)
Interest income................ -- -- 1 1 5
------- ------- ------- ------ ------
Loss before income taxes....... (8) (7) (46) (38) (23)
Income tax provision
(benefit)..................... (3) 4 (2) (1) (1)
------- ------- ------- ------ ------
Net loss....................... (5)% (11)% (44)% (37)% (22)%
======= ======= ======= ====== ======
</TABLE>
Comparison of Nine Months Ended September 30, 1998 and 1999
Revenues
Total revenues increased 95% from $15.2 million for the nine months ended
September 30, 1998 to $29.6 million for the nine months ended September 30,
1999. Our top five customers during the nine months ended September 30, 1998
accounted for 65% of total revenues. Our top five customers for the nine months
ended September 30, 1999 accounted for 67% of total revenues.
Software and Subscriptions. Software and subscriptions revenues increased
66% from $8.7 million for the nine months ended September 30, 1998 to $14.5
million for the nine months ended September 30, 1999. These amounts represented
58% of total revenues for the nine months ended September 30, 1998 and 49% of
total revenues for the nine months ended September 30, 1999. The increase in
absolute dollars was due primarily to higher subscription revenues related to
new customer additions during 1999 and an expansion of the software solutions
being provided to our existing customer base. Additionally, revenues from
perpetual licenses were higher during the nine months ended September 30, 1999.
Software and subscriptions revenues decreased as a percentage of total revenues
primarily due to a higher relative increase in content and services revenues.
27
<PAGE>
Software and subscriptions revenues recognized under perpetual licenses
were $1.9 million for the nine months ended September 30, 1998 and $3.3 million
for the nine months ended September 30, 1999. These amounts represented 12% of
total revenues for the nine months ended September 30, 1998 and 11% of total
revenues for the nine months ended September 30, 1999. The increase in absolute
dollars was due primarily to new perpetual license agreements that we executed
and delivered during the nine months ended September 30, 1999.
Content and Services. Content and services revenues increased 136% from
$6.4 million for the nine months ended September 30, 1998 to $15.1 million for
the nine months ended September 30, 1999. These amounts represented 42% of
total revenues for the nine months ended September 30, 1998 and 51% of total
revenues for the nine months ended September 30, 1999. The increase in absolute
dollars and as a percentage of total revenues was due primarily to additional
software integration, customization and training fees, and to a lesser extent,
higher content and hosting fees. These increases are attributable to new
customer additions, including content only customers, as well as an increase in
the level of services being provided to our existing customer base. It is
expected that the level of content and services revenues as a percentage of
total revenues may increase slightly over the near term.
Cost of Revenues
Software and Subscriptions. Cost of software and subscriptions revenues
consists primarily of royalties paid to Trilogy and the costs of providing
maintenance and support to our software customers. Cost of software and
subscriptions revenues increased 69% from $2.2 million for the nine months
ended September 30, 1998 to $3.7 million for the nine months ended September
30, 1999. These amounts represented 25% of software and subscriptions revenues
for the nine months ended September 30, 1998 and 26% of software and
subscriptions revenues for the nine months ended September 30, 1999. The
increase in cost of software and subscriptions revenues in absolute dollars was
due primarily to an increase in customer support costs. To a lesser extent, the
increase was due to additional royalties paid to Trilogy on specific software
and subscriptions revenues. The increase in royalties resulted from higher
software and subscriptions revenues and a higher proportion of perpetual
license revenues which carry a higher royalty rate.
Content and Services. Cost of content and services revenues consists
primarily of the cost of providing access, entry, update and maintenance
services for product content services and the cost of in-house and contract
personnel providing software integration, customization and training services.
Additionally, the cost of providing hosting services to our customers is
included in this line. Cost of content and services revenues increased 170%
from $4.1 million for the nine months ended September 30, 1998 to $11.2 million
for the nine months ended September 30, 1999. These amounts represented 65% of
content and services revenues for the nine months ended September 30, 1998 and
74% of content and services revenues for the nine months ended September 30,
1999. The increase in cost of content and services revenues in absolute dollars
and as a percentage of content and services revenues was due primarily to an
increase in headcount and related costs within our content management group,
and increased personnel and other costs associated with providing increased
software integration, customization, training and hosting services to our
software customers.
Operating Expenses
Research and Development. Research and development expenses consist
primarily of personnel costs to support our product development efforts.
Research and development expenses increased 61% from $2.9 million for the nine
months ended September 30, 1998 to $4.7 million for the nine months ended
September 30, 1999. These amounts represented 20% of total revenues for the
nine months ended September 30, 1998 and 16% of total revenues for the nine
months ended September 30, 1999. The increase in absolute dollars was primarily
due to an increase in internal
28
<PAGE>
development personnel and related costs as well as higher outsourced
development costs. Although quarterly results may fluctuate, we believe that
continued investment in research and development is critical to attaining our
strategic objectives and, as a result, we expect research and development costs
in absolute dollars to increase in future periods.
Selling and Marketing. Selling and marketing expenses consist primarily of
salaries and outsourced personnel costs, advertising, travel, tradeshows and
public relations expenses. Selling and marketing expenses increased 57% from
approximately $8.3 million for the nine months ended September 30, 1998 to
$13.1 million for the nine months ended September 30, 1999. These amounts
represented 55% of total revenues for the nine months ended September 30, 1998
and 44% of total revenues for the nine months ended September 30, 1999. The
increase in absolute dollars was primarily due to an increase in selling and
marketing personnel, higher overall sales costs related to higher orders and
increased marketing campaign expenditures. Although quarterly results may
fluctuate, we believe that these expenses will increase in absolute dollars in
future periods as we continue to expand our sales and marketing organization
and activities.
General and Administrative. General and administrative expenses consist
primarily of personnel costs, recruiting and professional legal and accounting
services, as well as management fees paid to Trilogy. General and
administrative expenses increased 75% from $2.5 million for the nine months
ended September 30, 1998 to $4.3 million for the nine months ended September
30, 1999. These amounts represented 16% of total revenues for the nine months
ended September 30, 1998 and 15% of total revenues for the nine months ended
September 30, 1999. The increase in absolute dollars was primarily due to
increased personnel and related costs and higher facility expenses, all of
which have been necessary to support our growth. Although quarterly results may
fluctuate, we believe general and administrative expenses will increase in
absolute dollars as we continue to expand our personnel and infrastructure to
support our growth.
Amortization of Deferred Stock and Stock Compensation Expense. We record
deferred stock compensation for the difference between the exercise price of
some specific stock option grants and the deemed fair value of our common stock
at the time of these grants. This amount is amortized over the vesting periods
of the underlying options. During the nine months ended September 30, 1998, the
amortization totaled approximately $585,000. Additionally, during the nine
months ended September 30, 1998, we recorded approximately $369,000 in stock
compensation expense which represents the fair value of options granted to some
non-employees during that period. For the nine months ended September 30, 1999,
amortization of deferred stock compensation expense totaled approximately
$953,000.
Interest Income. Interest income represents income earned on cash and cash
equivalents and our short and long-term investments. Interest income totaled
approximately $107,000 for the nine months ended September 30, 1998 and
approximately $1.6 million for the nine months ended September 30, 1999. The
increase in interest income is due to the increase in our cash and cash
equivalents and short-term and long-term investments as a result of our initial
public offering in February 1999.
Income Taxes. From inception through August 25, 1999, we were included in
the consolidated income tax returns of Trilogy. Through this date, we were
party to a tax sharing agreement with Trilogy. Effective August 26, 1999, we
were no longer part of the consolidated tax group of Trilogy and, accordingly,
began accounting for our income taxes on a stand-alone basis. Additionally,
effective August 26, 1999, we were no longer subject to the intercompany tax
sharing agreement with Trilogy on a prospective basis. See "Certain
Relationships and Transactions--Agreements with Trilogy", Notes 2 and 6 of the
Notes to Financial Statements and Note 8 of the Notes to Condensed Financial
Statements.
29
<PAGE>
Our effective tax rate was 4% for the nine months ended September 30, 1998
and 4% for the nine months ended September 30, 1999. These amounts reflect the
income tax benefits that we were able to realize under the tax sharing
arrangement with Trilogy. Had we filed a separate income tax return for the
nine months ended September 30, 1998, our effective tax rate would have been
approximately 3% versus 4% on a consolidated basis. The difference between the
two rates was due to us not being able to fully utilize certain income tax
benefits on a stand-alone basis. Had we filed a separate income tax return for
the nine months ended September 30, 1999, no income tax benefit would have been
recorded due to a full valuation allowance having been provided on our deferred
tax assets as a result of the uncertainties surrounding their future
utilization.
Comparison of 1997 and 1998
Revenues
Total revenues increased 105% from $10.6 million in 1997 to $21.7 million
in 1998. Our top five customers in 1997 accounted for 64% of total revenues
during the year, and our top five customers in 1998 accounted for 62% of total
revenues during the year.
Software and Subscriptions. Software and subscriptions revenues increased
95% from $6.5 million in 1997 to $12.7 million in 1998, and represented 61% of
total revenues in 1997 and 58% of total revenues in 1998. 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 subscriptions
revenues decreased as a percentage of total revenues primarily due to a higher
relative increase in content and services revenues related to additional
content fees, software integration, customization and training services
associated with our increased customer base.
Software and subscriptions revenues recognized under perpetual licenses
were $744,000 in 1997 and $3.2 million in 1998 and represented 7% of total
revenues in 1997 and 15% of total revenues in 1998. The increase in absolute
dollars and as a percentage of total revenues was due primarily to a perpetual
license agreement executed and delivered during 1998.
Content and Services. Content and services revenues increased 120% from
$4.1 million in 1997 to $9.1 million in 1998, and represented 39% of total
revenues in 1997 and 42% of total revenues in 1998. 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 our increased customer base.
Cost of Revenues
Software and Subscriptions. Cost of software and subscriptions revenues
consists primarily of royalties paid to Trilogy and the cost of providing
software maintenance. Cost of software and subscriptions revenues increased
217% from $1.0 million during 1997 to $3.2 million during 1998, representing
16% of software and subscriptions revenues in 1997 and 26% of software and
subscriptions revenues in 1998. The increase in cost of software and
subscriptions revenues in absolute dollars was due primarily to the increase in
customer support headcount and the related operating expenses and the increase
in royalties paid to Trilogy on software applications as a result of increased
total revenues. The increase in cost of software and subscriptions revenues as
a percentage of software and subscriptions revenues was due primarily to the
increased personnel and other costs associated with providing software
maintenance services to a greater number of customers and due to the increase
in perpetual license revenues which has a higher royalty percentage, as a
percentage of total revenues.
30
<PAGE>
Content and Services. Cost of content and services revenues consist
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 services revenues increased 177% from $2.6
million in 1997 to $7.1 million in 1998, representing 62% of content and
services revenues in 1997 and 78% of content and services revenues in 1998. The
increase in cost of content and services revenues in absolute dollars and as a
percentage of content and services revenues was due primarily to the increase
in headcount within our content management group, known as PC Labs, and the
depreciation related to additional computer equipment for PC Labs purchased
during 1998 and 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
services 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.
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% of total revenues in 1997 and 20% of total revenues
in 1998. These increases were due primarily to an increase in internal
development personnel.
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% of total
revenues in 1997 and 56% of total revenues in 1998. The increase in absolute
dollars was due primarily to an increase in personnel and our increased
marketing campaign expenditures.
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 1997 and 1998. The
increase in absolute dollars was due primarily to increased personnel and
facility expenses necessary to support our growth.
Amortization of Deferred Stock and Stock Compensation Expense. In 1998, we
recorded total deferred stock compensation of $2.8 million in connection with
stock options granted during 1998. This 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 some stock option grants and the deemed fair value of our common stock
at the time of these grants. Additionally, we recorded approximately $383,000
in stock compensation expense which represents the fair value of options
granted to some non-employees during 1998.
Income Taxes
Our effective tax rate was 61% for 1997 and (3.9)% for 1998. The primary
differences between the effective tax rates for these periods resulted from
increases to the valuation allowance for our deferred tax assets. The pro forma
income tax provision reflects the income tax benefit for 1998 as if we had
filed a separate income tax return.
31
<PAGE>
Comparison of 1996 and 1997
Revenues
Our total revenues increased 80% from $5.9 million in 1996 to $10.6 million
in 1997. Our top five customers for 1996 accounted for approximately 89% of
total revenues in 1996, and our top five customers for 1997 accounted for 64%
of total revenues in 1997.
Software and Subscriptions. Software and subscriptions revenues increased
78% from $3.6 million in 1996 to $6.5 million in 1997, representing 62% of
total revenues in 1996 and 61% of total revenues in 1997. 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 subscriptions revenues recognized
under perpetual licenses were $2.0 million in 1996 and $744,000 in 1997,
representing 33% of total revenues in 1996 and 7% of total revenues in 1997.
Revenues from subscription-based arrangements increased due primarily to
additional subscription-based customers.
Content and Services. Content and services revenues increased 83% from $2.2
million in 1996 to $4.1 million in 1997, representing 38% of total revenues in
1996 and 39% of total revenues in 1997. 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 subscriptions revenues
increased from $822,000 in 1996 to $1.0 million in 1997, representing 23% of
software and subscriptions revenues in 1996 and 16% of software and
subscriptions revenues in 1997. The decrease in cost of software and
subscriptions revenues as a percentage of these revenues was due primarily to
higher deployment costs incurred in 1996 as compared to 1997.
Content and Services. Cost of content and services revenues increased from
$1.1 million in 1996 to $2.6 million in 1997, representing 49% of content and
services revenues in 1996 and 62% of content and services revenues in 1997. The
increase in cost of content and services 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 services
revenues increased as a percentage of content and services revenues due
primarily to an increase in headcount in PC Labs and an increase in service
personnel to handle our 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%
of total revenues in 1996 and 11% of total revenues in 1997. The decrease as a
percentage of revenues was due primarily to the completion of the development
of some of our products as these 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% of total
revenues in 1996 and 45% of total revenues
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in 1997. The increase in absolute dollars was due primarily to increases in
personnel and expenditures relating to our 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% of total
revenues in 1996 and 17% of total revenues in 1997. The increase in absolute
dollars and as a percentage of total revenues was due primarily to increased
personnel and facility expenses necessary to support our growth.
Income Taxes
We recorded an income tax provision using an effective tax rate of 38% for
the year ended December 31, 1996 and 61% for the year ended December 31, 1997.
The increase in the effective rate for 1997 resulted from the establishment of
a valuation allowance to reduce our net deferred tax assets to zero.
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Unaudited Quarterly Results of Operations
The following table sets forth some unaudited quarterly statement of
operations data for the year ended December 31, 1998 and for the nine months
ended September 30, 1999. In our opinion, this information has been prepared
substantially on the same basis as our 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 our unaudited quarterly results of operations. The quarterly
data should be read in conjunction with our audited Financial Statements and
the Notes thereto appearing elsewhere in this prospectus. The operating results
for any quarter are not necessarily indicative of the operating results for any
future period.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- --------- -------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Software and
subscriptions........ $2,397 $ 3,075 $ 3,264 $ 3,915 $ 3,944 $ 4,288 $ 6,257
Content and services.. 2,108 2,003 2,312 2,640 3,716 4,620 6,800
------ ------- ------- ------- ------- ------- -------
Total revenues...... 4,505 5,078 5,576 6,555 7,660 8,908 13,057
------ ------- ------- ------- ------- ------- -------
Cost of revenues:
Software and
subscriptions........ 580 634 983 1,045 1,201 1,122 1,387
Content and services.. 946 1,417 1,780 2,925 2,743 3,357 5,066
------ ------- ------- ------- ------- ------- -------
Total cost of
revenues........... 1,526 2,051 2,763 3,970 3,944 4,479 6,453
------ ------- ------- ------- ------- ------- -------
Gross profit............ 2,979 3,027 2,813 2,585 3,716 4,429 6,604
Operating expenses:
Research and
development.......... 810 975 1,148 1,359 1,231 1,537 1,959
Selling and
marketing............ 1,553 2,170 4,601 3,827 3,975 4,723 4,388
General and
administrative....... 636 660 1,160 1,233 1,417 1,386 1,503
Amortization of
deferred stock and
stock compensation
expense.............. -- 227 727 514 373 321 259
------ ------- ------- ------- ------- ------- -------
Total operating
expenses........... 2,999 4,032 7,636 6,933 6,996 7,967 8,109
------ ------- ------- ------- ------- ------- -------
Operating loss.......... (20) (1,005) (4,823) (4,348) (3,280) (3,538) (1,505)
Interest income......... 7 38 62 65 237 604 764
------ ------- ------- ------- ------- ------- -------
Loss before income
taxes.................. (13) (967) (4,761) (4,283) (3,043) (2,934) (741)
Income tax benefit...... -- -- (203) (183) (243) -- --
------ ------- ------- ------- ------- ------- -------
Net loss................ $ (13) $ (967) $(4,558) $(4,100) $(2,800) $(2,934) $ (741)
====== ======= ======= ======= ======= ======= =======
</TABLE>
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<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
1998 1998 1998 1998 1999 1999 1999
-------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of Total
Revenues:
Revenues:
Software and
subscriptions........ 53% 61% 59% 60% 51% 48% 48%
Content and services.. 47 39 41 40 49 52 52
--- --- --- --- --- --- ---
Total revenues...... 100 100 100 100 100 100 100
--- --- --- --- --- --- ---
Cost of revenues:
Software and
subscriptions........ 13 12 18 16 16 12 10
Content and services.. 21 28 32 45 36 38 39
--- --- --- --- --- --- ---
Total cost of
revenues........... 34 40 50 61 52 50 49
--- --- --- --- --- --- ---
Gross profit............ 66 60 50 39 48 50 51
Operating expenses:
Research and
development.......... 18 19 20 21 16 17 15
Selling and
marketing............ 35 43 82 58 52 53 34
General and
administrative....... 14 13 21 19 18 15 12
Amortization of
deferred stock and
stock compensation
expense.............. -- 5 13 7 5 4 2
--- --- --- --- --- --- ---
Total operating
expenses........... 67 80 136 105 91 89 63
--- --- --- --- --- --- ---
Operating loss.......... (1) (20) (86) (66) (43) (40) (12)
Interest income......... -- 1 1 1 3 7 6
--- --- --- --- --- --- ---
Loss before income
taxes.................. (1) (19) (85) (65) (40) (33) (6)
Income tax benefit...... -- -- (3) (2) (3) -- --
--- --- --- --- --- --- ---
Net loss................ (1)% (19)% (82)% (63)% (37)% (33)% (6)%
=== === === === === === ===
</TABLE>
Our total revenues and software and subscriptions revenues increased
quarter to quarter during each of the seven quarters ended September 30, 1999
due primarily to increasing market acceptance of our products, and increases in
our installed base of customers. Content and services revenues have generally
increased quarter to quarter due primarily to additional content fees and
software integration, customization and training services associated with an
increase in the number of software application and content customers. Software
and subscriptions revenues have decreased slightly as a percentage of total
revenues since the fourth quarter of 1998 primarily due to higher relative
increase in content and services revenues during this period of time.
Cost of software and subscriptions revenues have generally increased in
absolute dollars quarter to quarter, consistent with the increase in software
and subscriptions revenues. However, cost of software and subscriptions
revenues as a percentage of total revenues have declined slightly over the past
two quarters primarily due to higher perpetual license revenues and higher
content and services revenues. Cost of content and services revenues have
generally increased in absolute dollars quarter to quarter, consistent with the
growth in content and services revenues. The cost of content and services
revenue as a percentage of total revenues increased dramatically during the
quarter ended December 31, 1998, due primarily to the increased use of
outsourced consultants.
Research and development expenses have generally increased in absolute
dollars quarter to quarter during each of the seven quarters ended September
30, 1999. These increases are primarily due to an increase in the number of
research and development personnel and related costs and the
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increased use of outsourced development personnel. Research and development
expenses as a percentage of total revenues have declined slightly over the past
few quarters due to the high revenue growth achieved during this period of
time.
Selling and marketing expenses have generally increased in absolute dollars
quarter to quarter for each of the seven quarters ended September 30, 1999,
with the exception of the quarters ended December 31, 1998 and September 30,
1999. The general increase over time reflects the growth of our sales and
marketing organizations and related activities. The decreases in absolute
dollars during the quarters ended December 31, 1998 and September 30, 1999,
were simply due to a temporary decline in our marketing initiatives during
these quarters, as is the case from time to time. Selling and marketing expense
as a percentage of total revenues declined dramatically during the quarter
ended September 30, 1999, primarily due to the lower absolute dollars expensed
during the quarter, as previously discussed, and the high revenue growth
achieved during the quarter.
With the exception of the quarter June 30, 1999, general and administrative
expenses have generally increased quarter to quarter for each of the seven
quarters ended September 30, 1999. These increases are due primarily to the
increased personnel and facility expenses necessary to support our growth. As
is the case with the other operating expense line items, general and
administrative expense as a percentage of total revenues has declined slightly
during the past few quarters due to the high revenue growth achieved during
this period of time.
Factors Affecting Operating Results
In the "Risk Factors" section of this prospectus, we discuss important
factors related to our business and the computer industry that could materially
affect our operating results. The risks and uncertainties discussed there,
while not exclusive of other risks and uncertainties that we face or may face,
should be taken into account in connection with the discussion presented here.
Liquidity and Capital Resources
From inception through 1996, we financed our operations primarily through
advances from our parent, Trilogy. Since 1997, we have primarily financed our
operations from cash provided by operations. As of September 30, 1999, we had
approximately $63.1 million in cash and short-term investments. This amount is
primarily comprised of the $47.2 million in net proceeds we received from our
initial public offering in February 1999. As of September 30, 1999, our
principal commitments consisted of obligations outstanding under operating
leases. Although we have no material commitments for capital expenditures, we
anticipate a substantial increase in our capital expenditures and lease
commitments consistent with anticipated growth in operations, infrastructure
and personnel.
Comparison of Nine Months Ended September 30, 1998 and 1999
Net cash provided by operations was $2.0 million for the nine months ended
September 30, 1998 and $12.6 million for the nine months ended September 30,
1999. Cash provided by operations for the nine months ended September 30, 1998
resulted primarily from increases in deferred revenue and the payable to
Trilogy, offset by an increase in accounts receivable and the net loss
generated during that period of time. Cash provided by operations for the nine
months ended September 30, 1999 resulted primarily from increases in deferred
revenue and accrued liabilities, somewhat offset by an increase in accounts
receivable and the net loss generated during that period of time.
Net cash used in investing activities was $2.2 million for the nine months
ended September 30, 1998 and $21.0 million for the nine months ended September
30, 1999. Cash used in investing
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<PAGE>
activities for the nine months ended September 30, 1998 was primarily related
to the purchase of property and equipment. Cash used in investing activities
for the nine months ended September 30, 1999 was primarily related to the use
of cash to purchase interest-bearing, investment-grade securities.
Net cash provided by financing activities was $372,000 for the nine months
ended September 30, 1998 and $48.3 million for the nine months ended September
30, 1999. Cash provided by financing activities for the nine months ended
September 30, 1998 was entirely attributable to proceeds received from the
exercises of employee stock options. Cash provided by financing activities for
the nine months ended September 30, 1999 was primarily due to the net proceeds
received by us in connection with our initial public offering in February 1999.
As previously discussed, on February 26, 1999, we completed our initial public
offering of 2,530,000 shares of our Class A common stock with net proceeds
totaling approximately $47.2 million.
Comparison of Three Years Ended December 31, 1998, 1997 and 1996
Cash used in operations was $647,000 in 1996, and cash provided by
operations was $3.1 million in 1997 and $4.7 million in 1998. 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 for 1996, $662,000 for
1997, and $2.6 million for 1998 was primarily related to purchases of
equipment. In 1998, we also had expenditures for leasehold improvements related
to the move into our then current facility and software and computers for
additional employees.
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 for advances received and the net decrease for advances repaid, in
amounts payable to Trilogy. Cash provided by financing activities of $445,000
for 1998 was attributable to proceeds received from the exercise of stock
options.
Since our inception, we have significantly increased our operating
expenses. We currently anticipate that we will continue to experience
significant growth in our operating expenses for the foreseeable future and
that our operating expenses will be a material use of our cash resources. We
believe that our existing capital resources, combined with the net proceeds of
this offering, will be sufficient to meet our presently anticipated cash
requirements through at least the next 12 months. We may be required to raise
additional financing before that time, additional financing may not be
available when needed and, if available, the financing may not be available on
terms favorable to us and our stockholders.
Recently Issued Accounting Pronouncements
See Note 2 of the Notes to Financial Statements and Note 10 of the Notes to
Condensed Financial Statements for recently adopted and recently issued
accounting standards.
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<PAGE>
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. This could result in system failures or miscalculations,
causing disruptions of operations including a temporary inability to process
transactions, send invoices or engage in other normal business activities. As a
result, many companies' software and computer systems may need to be upgraded
or replaced to comply with the "Year 2000" requirements. We use a number of
computer software programs and operating systems and our proprietary solutions
include source code which must address the Year 2000 issue. However, we believe
that our Year 2000 issues are limited to information technology systems, such
as software programs and computer operating systems, and that because our
business is not solely dependent on the use of non-information technology
systems, such as embedded systems which can be devices used to control, monitor
or assist the operation of equipment and machinery, the failure of any of these
non-information technology systems as a result of Year 2000 issues would not
have a material adverse effect on our operations.
We rely, in part, on Trilogy's internal computer systems. We have been
informed by Trilogy that it believes that its internal computer systems are
Year 2000 compliant. Trilogy is continuing to assure its Year 2000 compliance.
We have completed a review of our information technology systems and the
products for which we currently provide maintenance and support, which involved
testing and verification as described below. Based on this review, we believe
our own information technology systems and the products for which we currently
provide maintenance and support are Year 2000 compliant. Our Year 2000
compliance effort consisted of verifying and testing the ability of the
products for which we currently provide maintenance and support to successfully
handle the date change from December 31, 1999 to January 1, 2000, date changes
from February 28 to February 29 and arbitrary dates ranging from 2000 to 2037.
We have no plans to conduct further review of our currently supported products
or information technology systems. We have not historically made any material
expenditures in readying our information technology systems or currently
support products for the Year 2000 and do not believe it will be necessary in
the future to expend any material amounts in connection with Year 2000
compliance.
Notwithstanding the foregoing, Year 2000 errors or defects may be
discovered in our current or future products. Any failure by us to make our
products Year 2000 compliant, or if our products are not Year 2000 compliant as
a result of a failure of Trilogy's products to be Year 2000 compliant, could
result in a decrease in sales of our products, unanticipated expenses to
address Year 2000 problems or significant liabilities resulting from losses
suffered by our customers due to these Year 2000 problems, any of which could
have an adverse affect on us. We have made limited contingency plans for the
remediation of Year 2000 problems that may effect our information technology
systems and products, or the third-party equipment and software utilized by us,
and it will be necessary for us to make the necessary expenditures to assess
and remedy these problems in the event they arise in the future, which
expenditures, if any, we cannot estimate. These expenditures, if required,
could have an adverse effect on us.
Our solutions also utilize and depend on third-party equipment and software
that may not be Year 2000 compliant. We contacted the vendors of most of these
products to ascertain their Year 2000 compliance. Based on information supplied
by these third-party vendors, our officially supported products developed using
Visual Basic 5, Visual C++ or Java can be certified Year 2000 compliant only
through December 31, 2036, the last date which we tested and verified. We
estimate that this certification applies to 90% to 95% of our total products.
Many of our products also use or rely on Microsoft's SQL Server product, which
has been certified Year 2000 compliant through December 31, 9999. We believe
that approximately 1.0% of our products use or rely on third-party vendor
software which may be subject to Year 2000 issues and for which we have
received no assurance of Year 2000 compliance. To the extent any of our
products are customized, whether by us or a third party,
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<PAGE>
there can be no assurance that any customized product will continue to be Year
2000 compliant. Failure of third-party equipment or software, or of systems
maintained by our suppliers, to operate properly with regard to the Year 2000
and thereafter could require us to incur unanticipated expenses to remedy any
problems, which could have an adverse effect on us. In addition, to the extent
our products are installed on customers' systems which rely on other software,
firmware or hardware which may not be Year 2000 compliant, problems in
communications among industry participants could result in a delay in our
products achieving market acceptance. Further, the purchasing patterns of
customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct their current systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase products from us of computer products manufacturers, which could
have an adverse effect on us.
The information contained in this prospectus related to the Year 2000
constitutes Year 2000 Readiness Disclosure for purposes of the Year 2000
Information and Readiness Disclosure Act. That act does not limit liability
under the securities laws.
39
<PAGE>
BUSINESS
Overview
pcOrder is a leading provider of business-to-business software
applications, content and related services that are designed to enable the
computer industry's suppliers, resellers and end users to buy and sell products
online. Our tailored solutions are designed to enable computer industry
participants to take advantage of the increasing adoption of e-commerce to
automate sales and distribution functions such as product search, comparison,
configuration, quoting, pricing, financing, ordering and reseller selection.
Our solutions are designed to enable our customers to lower their cost of sales
and marketing, reduce inventory levels, and more efficiently interact with
their business partners and customers.
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.
There has been a significant increase in the amount of information and services
available over the Internet. Improved technology has enabled more sophisticated
information and services to be offered and has increased the accessibility and
ease of use of the Internet. These developments have increased significantly
the number of Internet users and transformed the use of the Internet from a
publishing medium to a medium that enables complex business-to-business and
business-to-consumer communications and commerce.
At the same time, businesses are faced with increasing competitive
pressures to lower costs, decrease inventories, improve sales and marketing
productivity and enhance time-to-market. To address these challenges,
businesses are increasingly using the Internet to replace traditional sales
methods, provide greater accuracy and permit the exchange of time-sensitive
business information.
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,
representing a compound annual growth rate of over 98%. In addition, Forrester
reports that computer products, including wholesale and retail equipment,
software, semiconductors and manufacturing, represent the largest and fastest
growing segment, by revenue, in business-to-business e-commerce. We believe
that the computer industry is particularly well-suited to the use of the
Internet to conduct e-commerce due to:
. the industry's large size and fragmented nature;
. the high costs of sales and distribution;
. the challenges that the industry faces in managing the volume and
complexity of product, pricing, and configuration information that
result from a wide array of products, short product life cycles and
increased demand for custom configured solutions; and
. the industry's tendency to embrace technology for automating processes.
Need to Enhance Efficiencies in the Sales, Marketing and Distribution of
Computer Products
Growth in Markets. According to International Data Corporation, the North
American computer products market, including personal computers, servers,
workstations, data communications equipment, and peripheral computer products,
such as data storage devices,
40
<PAGE>
printers, monitors, and scanners, totaled $129 billion in 1997 and is expected
to reach $178 billion by 2002. In addition, purchases of computer products
often involve purchases of related software applications.
Complexity of Industry and Need for Information. As the Web-based market
for computer products has developed, the group of industry participants has
become more diverse and complex. These participants include:
. manufacturers of computer hardware, software, peripherals and
components;
. channel participants, including distributors, resellers, systems
integrators and retailers;
. media companies that publish articles, reviews and other information
about computer products and host portal sites for corporate buyers and
channel participants;
. Internet shopping services that provide decision guides, market research
tools and other services to assist consumers and corporate buyers in
making purchase decisions and locating products on the Internet; and
. end users, including both corporate buyers and consumers.
The traditional 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 as illustrated in the following diagram. As a result,
multiple industry participants are typically involved in the sale and
fulfillment of a transaction. For example, resellers and integrators may buy
directly from manufacturers, or they may purchase products indirectly through
distributors and resellers. For orders placed through resellers, manufacturers
may choose to ship directly to the end user or may utilize their distributor
and reseller channel partners to configure and fill orders. To provide a
broader product offering and local services, direct manufacturers may employ
distributors, resellers and integrators. These emerging distribution methods
are creating complexities, which are forcing the computer industry to find
better ways to share information about customers, products, configuration,
pricing, inventory and ordering.
[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 integrators, resellers and retailers, and integrators,
resellers and retailers to end-users.]
Direct Distribution Methods and Shorter Product Life Cycles. The relative
success of companies that build systems to user specifications and ship
directly to the end user has put
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<PAGE>
pressure on computer industry participants to better meet customer demands. In
addition, rapid technological change has caused the continuing decline of
component prices and shorter life cycles of computer products. To compete more
effectively, participants must reduce inventories, shorten time-to-market and
improve their ability to meet changing customer demands.
Need for Current Product Information. 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 sales productivity and e-commerce software combined
with current product information. Fulfilling this need helps increase the
efficiency and accuracy of sales representatives and helps enable end users to
independently select, configure and order computer products online.
Lack of Standardization. The sale of computer products frequently involves
multiple industry participants. Therefore, industry-wide standardization of
product and transaction information and software that makes the information
available online is required to provide a comprehensivee-commerce solution for
the industry. Past efforts to accomplish this have been largely proprietary to
a single or limited number of industry participants. These proprietary
solutions have had difficulty in achieving widespread adoption because
competition among industry participants makes it difficult to reach agreement
on a single standard. The development and maintenance of the required software
applications and content and the necessary integration with partners' systems
require significant investments. Participants have not been able to justify the
associated costs of building this type of a system independently. As a result,
we believe there is a need for an independent, comprehensive industry-standard
solution.
Our Solution
As an independent, third party provider, we believe we are uniquely
positioned to deliver business-to-business solutions to computer industry
participants. Our solutions are focused on:
. Commerce. Our software technology platform enables computer industry
participants to develop and implement innovative, functional e-commerce
solutions. We offer a broad set of advanced sales, marketing,
distribution and e-commerce software applications.
. Content. Our content database contains more than 700,000 SKUs from over
3,000 manufacturers, which we believe is the industry's largest
aggregation of product information. Our database includes detailed
product categorization, compatibility, pricing and availability
information. We seek to extend our position as an industry-leading
product information source by continually broadening and deepening our
content offering.
. Community. The adoption of our platform by multiple industry
participants allows our customers to efficiently share information and
buy and sell products online. By promoting our platform as the industry
standard, we are enabling the creation of e-commerce communities within
the computer products industry.
To enable the successful deployment and use of our commerce, content and
community solutions, we provide software integration, customization, training,
Web-hosting and other services. We have developed software integration modules
that allow our applications to integrate with leading enterprise software
applications such as those of Oracle and SAP. These integrations allow the
transfer of information to enable order placement, pricing and inventory
queries, order status queries, financing and credit approval and other
functions.
To date, industry participants such as beyond.com, Compaq, CompuCom
Systems, CompUSA, CMP Media, Dell, GE Capital, Hewlett-Packard, Ingram Micro,
IBM, Inktomi, Kingston Technology, EDS, Nortel Networks, Quantum, Scribona
Computer Products, Tech Data and ZDNet have adopted
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either our software applications, our content and related services, or both as
part of their overall e-commerce strategy. In 1998, the use of our software and
content generated over $3 billion of quotes for computer products, representing
use by more than 3,500 sales representatives from over 600 resellers.
We have a non-exclusive technology license agreement with Trilogy that
enables us to develop products based on Trilogy's sales, marketing and
e-commerce software applications, including what we believe is one of the
industry's leading configuration and pricing technologies. We have extended
these applications to support the specific configuration and pricing rules of
the computer industry to help industry sales representatives and end users
quickly and accurately build and order custom-configured systems across
multiple vendors.
Our solutions are designed to provide customers with the following
benefits:
. Meet end-user demand for ordering by offering online product
configuration, pricing, selection and ordering capabilities. This
enables end users to order computer products over the Internet.
. Enhance the productivity of sales and marketing efforts by providing a
comprehensive tool to access product data, configure systems and enable
ordering. We believe this allows sales representatives to respond more
quickly to customer needs.
. Reduce inventory costs by enabling computer industry participants to
build computers as orders are placed. We believe this enables our
customers to decrease the risk of product obsolescence, to improve their
ability to meet end-user demand, and to achieve higher margins by
enabling the sale to occur earlier in the product life cycle.
. Reduce costs, risks, and time-to-market of establishing e-commerce
capabilities. We believe our position as an independent third-party
solutions provider, combined with our industry focus and experience,
enables us to offer the most cost-effective and rapid time-to-markete-
commerce solutions to the computer industry.
. Improve information flow in the computer industry by standardizing
product information and software. We believe that this improved flow
will enable industry participants to better share accurate and timely
information about customers, products, configuration, pricing, inventory
and ordering.
Strategy
Our goal is to be the leading provider of business-to-business e-commerce
software, content and related services to computer industry participants. The
key elements of our strategy are to:
. Establish Our Technology Platform as the Standard for the Computer
Industry. Our solutions enable industry participants to access
information and conduct e-commerce transactions across a common
platform. We believe we can leverage our investment in software and
content creation across a wide range of customers in order to provide
comprehensive, cost-effective solutions to industry participants.
Additionally, we believe that our position as an independent third-party
solutions provider will allow us to be a significant provider of
computer product information and related e-commerce capabilities.
. Broaden Adoption of Our Products and Services Through Relationships with
Computer Industry Market Leaders. We aggressively pursue relationships
with leading computer industry participants to increase adoption of our
solutions. Our objective is to have our technology platform adopted to
help power all of their key e-commerce initiatives. To date, we have
established relationships with computer product manufacturers,
distributors, resellers,
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retailers, other industry participants and end users, including corporate
buyers and consumers. We believe that their adoption of our products and
services validates our solution and will facilitate broad market
acceptance of our technology platform.
. Extend Our Position as an Industry-Leading Provider of Content. We have
built and maintain a product information database containing more than
700,000 SKUs from over 3,000 manufacturers, and we seek to add to and
update our product information on an ongoing basis. We also seek to
extend our position as an industry-leading product information source by
continually broadening and deepening our product data. We market our
content services both as part of our e-commerce solution and on a stand-
alone basis.
. Create Online Computer Industry Communities. We intend to leverage our
leading market position to create online communities for computer
product manufacturers, distributors, resellers, retailers, end users and
other industry participants. We believe that by linking a critical mass
of computer and other industry participants who have adopted our
platform, our customers will benefit from expanded e-commerce
opportunities for their products and services. We believe this benefit
continues to increase as we add more users of our technology platform.
. Enhance Functionality of Our Software Applications to Facilitate the
Adoption of E-Commerce. We intend to continue to invest in the
development of additional software applications and services to meet the
e-commerce needs of the computer industry. We plan to execute this
strategy by working closely with our customers to understand and address
their needs. In addition, we intend to enhance our products with
additional functionality, such as our lease financing product developed
in conjunction with GE Capital Vendor Financial Services. We believe
that by using the knowledge gained from our relationships with a broad
range of industry participants, we are well-positioned to define and add
new functionality to our solutions.
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Customers
We have established a customer base of manufacturers, channel participants
(including distributors, resellers, integrators and retailers), media companies
and Internet shopping services. In 1998, MicroAge, Nortel Networks and Hewlett-
Packard each represented more than 10% of our total revenues. The customers
shown in the table below represented 82% of our total revenues for the year
ended December 31, 1998 and 90% of our total revenues for the nine months ended
September 30, 1999.
Manufacturers: Channel Participants:
AST b2bstores.com
Compaq beyond.com
Dell CompuCom Systems
Hewlett-Packard CompUSA
IBM EDS
Kingston Technology ENTEX
Nortel Networks GE Capital IT Solutions
Quantum Hartford
SGI Ingram Micro
Manchester
Media Companies: MicroAge
Onsale
CMP Media SARCOM
InfoWorld Scribona Computer Products
ZDNet SYNNEX
Tech Data
Internet Shopping Services:
Active Research
Inktomi
mySimon
In partnership with our major customers, we have deployed our solutions to
small and medium resellers. We have designed our suite of products and services
to automate and enhance our customers' sales, marketing and inventory
management capabilities.
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Our Platform
In September 1999, we introduced eStation, our third generation technology
platform that provides open and scalable solutions designed to meet the
specific needs of each segment of the computer industry, including computer
product manufacturers, channel participants, media companies, Internet shopping
services and end users, including corporate customers and consumers.
[Graphic depicting eStation platform.]
Software Applications. We offer a suite of software applications that are
designed to increase the automation of sales, marketing and distribution
functions in the computer industry. The following applications operate on the
eStation platform:
. Kiosks. A retail Kiosk application enables end-customers to access
product information, build configurations and order from virtual
inventory.
. E-Tail Sites. Turn-key E-tail Sites allow manufacturers, retailers or
resellers to market tens of thousands of products online. E-tail Sites
provide a ready-populated catalog, a retail-oriented shopping experience
and easy integration to business and fulfillment partners.
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. Large Account Extranets. Large Account Extranets give enterprise
corporate customers a personalized, streamlined way to procure computer
products online. Extranets include a custom interface, targeted
promotions, contract pricing and procurement management logic.
. Small and Medium Business Portal. Small and Medium Business Portal
technology enables retailers, resellers and manufacturers to create a
personalized portal for their small and medium-size business customers.
This technology supports thousands of personalized user accounts, each
of which can be set up rapidly by the user or an administrator.
. Request for Quote. The Request for Quote ("RFQ") technology is a reverse
auction application that streamlines the purchase process by providing
corporate customers with a single location to gather product
information, interact with merchants and purchase products over the
Internet. Buyers select products, disseminate RFQs to a network of
merchants that are qualified based on their business profile and award
bids based on the responses received from the merchants.
. Store-O-Matic. Store-O-Matic is a store-generation tool that enables the
creation of custom Web storefronts. Individual storefronts can vary
greatly in their look and feel, yet can be created rapidly.
. Sales Webtop. Sales Webtop enables internal sales representatives to
instantly access pricing, availability, configuration and product
information, build custom quotes and take orders.
. Call Centers. Many Internet sales are actually completed by telephone.
The Call Center application provides easy integration into industry-
leading call center systems. This enables customer service
representatives to access the same information as the customer,
providing easy support and up-sell opportunities.
Functionality Modules. Our software applications are modular in nature.
This modularity enables customers to purchase and add specific functionality as
needed. Modules may be accessed either through our packaged software
applications or through customer-specific, custom-developed applications. Our
applications are built upon various combinations of the following core modules:
. Promotion. The promotion module provides the ability to deliver and
manage targeted product promotions. The promotion module points users to
alternative or add-on products at the point of sale. This enables the
manufacturer to target the promotion of its products to specific
customers, track the response rates, and dynamically manage the
promotion to maximize results.
. Catalog. The catalog module enables users to easily search, browse,
compare, and view product data sheets from our content database. For
example, users can perform searches such as "show all laptop computers
with hard drives larger than 1 gigabyte".
. Custom Pricing. The pricing module allows users to access customized
pricing information. Utilizing software licensed from Trilogy, we have
developed a computer industry pricing module that enables participants
to automate complex pricing rules. For example, resellers can make
customer-specific adjustments before displaying prices to end users.
. Finance. The finance module allows users to quote lease rates,
electronically submit credit applications, select from multiple
financing options and specify optional financing terms. This module
electronically links resellers with finance companies, enabling
resellers to instantly provide end users with a variety of leasing and
finance options.
. Configuration. The configuration module enables users to more
efficiently configure valid systems. Users request desired features
through an easy to use 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.
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. Referral. The referral module enables manufacturers to refer customers
to resellers based on location or other characteristics. In addition,
the referral module delivers, processes, and tracks referrals to connect
end users with an appropriate reseller. This allows manufacturers to
monitor referrals and ensures that customer needs are met.
. OrderServer. The order module enables ordering and order confirmation.
Manufacturers, distributors and resellers can access pricing and
availability information from multiple sources and provide this real-
time information to their potential customers. We electronically link
our solution and the customer's internal ordering system to create a
seamless flow of order information.
Business Integrations. We have developed software integration modules that
allow our applications to integrate with leading enterprise software
applications such as those of Oracle and SAP. These integrations allow the
transfer of information to enable order placement, pricing and inventory
queries, order status queries, financing and credit approval and other
functions. We can also link computer industry participants with each other
electronically. For example, a manufacturer's website can quote reseller
pricing and product availability from a distributor or reseller. After the
order is placed, the manufacturer can then automatically transfer the order to
the distributor or reseller for fulfillment.
Content and Related Services. Our content strategy is to become the leading
source of accurate, timely, and helpful information to facilitate the buying
and selling of computer products. We have dedicated extensive resources to
establishing a group that is focused exclusively on product content. This group
consists of several functional areas including a team dedicated to collecting
the product information, a team dedicated to ensuring the accuracy of our
content, and a team dedicated to selling content and related services on a
stand-alone basis. By offering content as a separate solution, we believe we
are able to gain broader access to computer companies and more rapidly increase
our content market share in the computer industry.
The key features of our content and related services are:
. Breadth and Depth of Information. We offer a broad and deep computer
product content database in terms of the number of products represented,
the number of attributes per product and the amount of other content
which we classify as images, reviews, features and benefits and
marketing information. We have collected product information on more
than 700,000 SKUs from over 3,000 manufacturers, which we believe to be
the most comprehensive database of product content in the computer
industry. We are working with several distributors and manufacturers to
increase the breadth of the content that we currently maintain for each
product.
. Accuracy and Timeliness of Information. We believe that our product
content is among the most accurate in the industry. To ensure
timeliness, we work with customers to prioritize top selling products
and help ensure that new product information is added to the content
database either on the day of or before the product is released.
. Tools and Processes. We have developed proprietary tools which enable us
to capture, analyze the quality of, and control product information
which is entered into our content database. We have also created well-
defined processes for entering data which further help us ensure
accuracy and allow us to more rapidly add to and update the information
which is contained in the database. Some of these processes are
summarized below.
. Flexibility. We have designed our content database to enable our
customers to decide not only what content they want to display but also
how they want to display the content. For example, our customers may
choose to display highly technical attributes to their more technical
customers and may choose to use a customized template to maintain the
same look and feel of their website.
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We currently receive updates and additions of product data on a regular
basis from manufacturers, distributors, and resellers. Our processes supplement
the data in the following ways:
. Categorization/Classification. Our 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
search for all monitors of a specific size and select from a list of
monitors made by several manufacturers and/or available from multiple
suppliers.
. Data and Logic Modeling. Our data and logic modeling processes are
designed to enable accurate multi-vendor configuration. For example, our
systems specify that a particular computer accepts one type of memory
but not another, thereby helping the user to order the correct upgrade
package. We continually develop and enhance our computer industry model
that enables our applications to configure multi-vendor computer
systems.
. Data Sheet Creation. We create data sheets designed to give customers
detailed product data in a standardized format. Using data sheets, users
may access a quick view of all of the product information that they need
to make a purchase decision. This standardized format also enables
attribute-based searching for products and enables users to conduct a
side-by-side comparison 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 memory, but that
the other is lighter and smaller.
We have developed a detailed process for receiving, inputting, and
verifying the accuracy of the content in our databases. To manage data quality,
we have implemented a comprehensive data quality process that involves an
automated regression test and analysis of over 34,000 validation test cases.
See "Risk Factors--Our business is dependent on our ability to manage our
content database and ensure the accuracy of that data". We plan to use our data
collection tools and processes to continue to add product data that we
currently do not collect.
Services. To provide a comprehensive platform, we offer a range of services
to speed integration and adoption of our solutions at the customer site.
. Client Services. We implement customer support, software integration,
customization and training services primarily through our client
services organization. The organization's goal is to ensure successful
and rapid implementation and high levels of customer satisfaction by
facilitating open communications to quickly identify, analyze and solve
problems. Our participation in the customer's implementation may include
planning and requirements definition, project management, custom
integration, unit and system tests and support procedures design. We
believe that providing a high level of customer service and technical
support is necessary to achieve timely product implementation. We
provide ongoing product support services to our 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 through our product support group. A team of dedicated
engineers provides product, technical and product registration support
from 8:00 a.m. to 5:00 p.m., Central time, on business days, from our
support offices. We also make training available to our customers
through Client Services.
. Web-Hosting. While some of our customers host their websites internally,
a substantial number of customers utilize our Web-hosting services. To
provide these services we staff and maintain a Web-hosting facility in
our Austin location. In addition, we contract with third parties to use
their facilities to augment our Web-hosting services.
Strategic Relationships
We actively pursue strategic relationships to increase and augment our
product offerings and expand our presence. We are pursing the following
initiatives through strategic relationships:
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Office Products Industry. In October 1999, we entered into a strategic
relationship with eci/2/ in order to leverage the proprietary technology and
process expertise that we have developed for the computer industry into the
office products industry and create a complete business-to-businesse-commerce
platform for the office products industry. The agreement is a multi-year
subscription-based arrangement under which eci/2/ has been granted exclusive
rights to sublicense our core e-commerce technology in the office products
industry. Additionally, the two companies will share in the development of an
extensive office product content database that will be distributed by both
companies as part of their overall e-commerce services. In connection with the
strategic relationship, we made an equity investment in eci/2/ and Christina
Jones, our President and Chief Operating Officer, joined the board of directors
of eci/2/.
Expansion of Content Offering. We have entered into strategic relationships
in order to augment our content offerings. Our objective is to provide all
segments of the computer industry with the most comprehensive content
available. For example, we have an agreement with Deja.com to provide their
user reviews and ratings to our content customers, an agreement with Active
Research to provide their buyer's guide to our content customers and an
agreement with InfoWorld to provide their product reviews to our content
customers.
Community Sites. We have established the strategic relationships described
below to create community sites where buyers and sellers of computer products
and services come to obtain information, buy or sell products and services and
find related links.
. We have an agreement with CMP Media, one of the leading high tech media
companies, to launch a CMP-branded portal for the computer reseller
community with our Sales Webtop application. The reseller portal will be
available on CMP's ChannelWeb which currently reports 1.5 million page
views per month. CMP Media reports that 70,000 reseller members are
registered for ChannelWeb. Under the agreement, this site will be
integrated with CMP's product reviews and editorial content and enable
resellers to move their businesses online by providing product search,
comparison, real-time pricing and availability and quote generation
tools. The portal will also allow for highly targeted advertising and
promotion at the point-of-sale.
. InfoWorld and pcOrder jointly launched InfoQuote, a business service
using our Request For Quote, or RFQ technology, in October 1999.
InfoWorld is a leading portal for corporate computer buyers. The service
acts as a "reverse auction", which allows registered users of
InfoWorld's site to select products by accessing our ContentSource
database and to then disseminate their purchase requirements to a number
of merchants selected from a network of over 8,000 individual
representatives representing over 3,500 merchant organizations
registered for the MyTechBuyer.com service described below. Merchants
can then bid for the business through the service. The service also
provides links to InfoWorld product reviews.
. In cooperation with GE Capital Vendor Financial Services, we power an
online reseller community called MyTechBuyer.com with our Sales
Productivity Tools application. MyTechBuyer.com was launched in the
second quarter of 1999 and enables resellers to obtain product
information, build sales quotes online and bid on Requests-for-Quotes.
There are currently over 3,500 merchant organizations registered to use
the service.
Sales and Marketing
We sell and market our software applications, content and services
primarily through our sales and marketing organization.
Sales. Our sales force consists of technical presale consultants, account
developers, field sales representatives and telemarketers. We deploy sales
teams consisting of both sales and technical professionals to provide
customized proposals, presentations and demonstrations to potential customers.
The primary decision makers in our customers' organizations typically include
management executives such as the chief executive officer, the chief financial
officer, vice presidents of marketing, vice presidents of sales and chief
information officers.
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Marketing. Our marketing efforts are directed at establishing a market
leadership position, and therefore we are investing in the expansion of our
marketing organization and activities. Targeted at executives in the computer
industry, our marketing programs are focused on creating awareness and
generating interest in our solutions. We engage in a variety of co-marketing
activities with some of our key customers designed to strengthen our customer
relationships. We are an active participant in industry conferences and
expositions. We have sponsored several industry conferences in the past, and we
believe that exposure of this nature has contributed to our visibility within
the computer industry. Our marketing personnel engage in a variety of marketing
activities, including managing and maintaining our Web site, issuing
newsletters, creating direct mailings, placing advertisements, conducting
public relations and establishing and maintaining close relationships with
industry analysts.
Technology
Our 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.
Our software applications and content database are made available both on the
Internet via a Web browser/HTML and also via Win32 client-server interfaces.
Both interfaces access the same application layer, which provides functionality
such as configuration, pricing, product information data sheets, financing and
ordering.
We have implemented our software applications through the use of industry
standard technologies, including HTTP/HTML, C++, COM/DCOM, CORBA, Windows NT
and ODBC. We believe this implementation provides timely systems integration,
ease of implementation, broad connectivity and benefits from technological
advancements.
We have a non-exclusive, worldwide, royalty-bearing license to use
Trilogy's sales and marketing automation software. See "Certain Relationships
and Transactions--Agreements with Trilogy". We customize application modules
licensed to us by Trilogy for the specific needs of our customers. Examples of
this customization include computer industry-specific configuration and pricing
modules. We create our own application modules that specifically address the
functionality needs of computer industry participants.
Research and Development
Our research and development efforts include software application
development and customization, data modeling and tools development. Our
software application development teams identify and develop software solutions
that meet the unique needs of computer industry participants. This includes
both the development of original software applications as well as customizing
Trilogy's applications. Our database content research and development efforts
primarily focus on the development of data models and data entry tools that
enhance our content management and maintenance capabilities.
Research and development expenses were $1.2 million in 1996, $1.1 million
in 1997, $4.3 million in 1998 and $4.7 million for the nine months ended
September 30, 1999. We intend to continue to make substantial investments in
research and development and related activities. We believe that our future
success will depend in large part on our ability to support current and future
releases of software applications, to maintain and extend our content database
and to timely develop successful new products.
Competition
The market for software products that enable e-commerce is intensely
competitive, and we expect competition in our market segment to increase
substantially. Numerous companies provide
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e-commerce solutions, and several competitors target the computer products
industry. Our competitors include both large companies with substantially
greater resources and longer operating histories, systems integrators and the
internal information technology departments of some of our customers and
potential customers.
We believe that our principal sources of competition currently are systems
integrators and the internal information technology departments of our
customers and potential customers. These organizations may seek to develop e-
commerce solutions through the use of tools offered by our competitors
primarily focused on providing e-commerce enabling solutions to the computer
industry such as BroadVision, Calico Commerce, C/NET, i2 Technologies, Open
Market, Selectica and TechnologyNet. In addition, there are a number of
significantly larger companies with which we do not currently compete that do
not presently offer the same or similar e-commerce solutions offered by us but
that could, with limited barriers to entry, compete directly with us. Also,
Trilogy is not prohibited from competing directly or indirectly with us.
Increased competition could result in price reductions, reduced margins and
loss of market share, any of which would adversely affect our business. Many of
our current and potential competitors have significantly longer operating
histories and significantly greater financial, technical, marketing and other
resources than ours. We may be unable to compete successfully with our existing
competitors or with new competitors, and failure to do so may adversely affect
our financial results and stock price in the future. In addition, as described
in "Certain Relationships and Transactions--Agreements with Trilogy", nothing
in our agreements with Trilogy prohibits Trilogy from competing directly or
indirectly with us. Increased competition could result in price reductions,
reduced margins and loss of market share, any of which would materially and
adversely affect our business.
We believe that price, functionality, product performance, content,
reliability and customer service are the principal competitive factors for
companies seeking to provide e-commerce solutions. We believe our e-commerce
solutions differ from approaches taken by competitors primarily because of our
unique focus on the computer industry, our strategic relationships with
industry leaders, and our comprehensive content database.
Employees
As of September 30, 1999, we had 219 full-time employees, including 52 in
sales and marketing, 23 in research and development, 38 in content management,
36 in customer support, 42 in professional services and 28 in administration.
In addition, we employed 103 part-time and contract employees; this consisted
primarily of outsourced support for our content management and consulting
services. All of these employees are located in the U.S. We believe that our
future success is dependent on attracting and retaining highly skilled
engineering, sales and marketing, and senior management personnel. Competition
for these personnel is intense, and we cannot assure you that we will continue
to be able to attract and retain qualified employees. Our employees are not
represented by any collective bargaining unit. We have never experienced a work
stoppage, and we consider our relations with our employees to be good.
Facilities
Our principal facilities occupy an aggregate of approximately 39,000 square
feet in Austin, Texas pursuant to a lease that expires in April 2005. We
believe that our existing facilities are adequate for our current requirements
and that additional space can be obtained to meet our future growth
requirements.
Legal Proceedings
From time to time, we are involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. Currently, we are
not a party to any litigation or arbitration proceedings that would have a
material adverse effect on our business.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth some information concerning our executive
officers and directors as of September 30, 1999.
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Ross A. Cooley................... 58 Chairman and Chief Executive Officer
Christina C. Jones............... 29 President and Chief Operating Officer
James J. Luttenbacher............ 44 Vice President and Chief Financial Officer
Joseph A. Liemandt............... 31 Director
Peter J. Barris.................. 47 Director
Linwood A. Lacy, Jr.............. 53 Director
Robert W. Stearns................ 49 Director
</TABLE>
Each director holds office until the next annual meeting of stockholders
and until his or her successor is elected and qualified or until his or her
earlier resignation or removal. Each officer serves at the discretion of the
board of directors. There are no family relationships among the directors or
executive officers of pcOrder.
Ross A. Cooley has been Chairman and Chief Executive Officer 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 School Senior Executive Program. Mr. Cooley holds an
A.A.S. from Broome Community College.
Christina C. Jones is our founder and has been our President and Chief
Operating Officer since June 1996. In 1989, Ms. Jones co-founded Trilogy.
Before founding pcOrder, Ms. Jones was Director of Marketing of Trilogy. Ms.
Jones holds a B.A. in Economics from Stanford University.
James J. Luttenbacher has been our Vice President and Chief Financial
Officer since March 1998. 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 since our inception. From July 1994
to June 1996, Mr. Liemandt was President of pcOrder. Mr. Liemandt co-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 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. In
1999, Mr. Barris was appointed Managing General Partner. Mr. Barris is also a
member of the board of directors of Mobius Management Systems, Inc.,
CareerBuilder, Inc. and Pathnet, Inc. Mr. Barris holds a B.S.E.E. from
Northwestern University and an M.B.A. from the Amos Tuck School at Dartmouth
College.
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Linwood A. Lacy, Jr. has been a director 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 since September 1998. Mr. Stearns is
currently a managing partner of Sternhill Partners, a venture capital firm, and
a venture partner of Austin Ventures, a venture capital firm. From January 1996
to August 1998 Mr. Stearns served as the Senior Vice President of Technology
and Corporate Development of Compaq. He joined Compaq as Vice President of
Corporate Development in July 1993. Before 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
We currently have authorized five directors. Each director is elected for
one year at our 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.
Board Committees
The audit committee of the board reviews and monitors the corporate
financial reporting and our internal and external audits, including, our
control functions, the results and scope of the annual audit and other services
provided by our independent accountants, and our compliance with legal matters
that have a significant impact on our financial condition. The audit committee
also consults with our management and our independent accountants before the
presentation of financial statements to stockholders and, as appropriate,
initiates inquiries into aspects of our financial affairs. In addition, the
audit committee has the responsibility to consider and recommend the
appointment of, and to review fee arrangements with, our independent
accountants. The current members of the audit committee are Messrs. Barris,
Lacy and Stearns.
The compensation committee of the board reviews and makes recommendations
to the board regarding our compensation policies and all forms of compensation
to be provided to executive officers and directors, including, annual salaries
and bonuses and stock option and other incentive compensation arrangements. In
addition, the compensation committee reviews bonus and stock compensation
arrangements for all other employees. The current members of the compensation
committee are Messrs. Barris and Liemandt.
The employee stock option committee of the board is authorized to grant
options of up to a maximum in each instance of 50,000 shares of our common
stock per optionee. The committee may not grant options to our officers or
directors. Our board will establish the aggregate maximum number of shares
underlying the options that the employee stock option committee may grant in
any calendar quarter.
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Director Compensation and Other Arrangements
We do not currently compensate our outside directors for attending board of
directors or committee meetings, but we reimburse directors for their
reasonable travel expenses incurred in connection with attending the meetings.
On November 1, 1996, we granted to Mr. Liemandt an option to purchase 100
shares of our Class A common stock at an exercise price of $3.00 per share.
Upon joining the board, Mr. Barris received options to acquire 10,000 shares of
common stock at $6.40 per share, Mr. Lacy received options to acquire 30,000
shares of common stock at $8.00 per share, and Mr. Stearns received options to
acquire 15,000 shares of common stock at $9.00 per share.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee of the board serves or
has served as one of our officers or employees. None of our executive officers
serve as a member of the board or compensation committee of any entity which
has one or more executive officers serving as a member of our board or
compensation committee. Mr. Liemandt, a member of our compensation committee,
is the Chairman, Chief Executive Officer and a substantial stockholder of
Trilogy. Through his relationship with Trilogy, Mr. Liemandt beneficially owns
more than 5% of the Class B common stock.
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<PAGE>
Executive Compensation
The following table provides information concerning the compensation earned
by our Chief Executive Officer and our other executive officers whose salary
and bonus exceeded $100,000 for services rendered in all capacities to us
during the fiscal year ended December 31, 1998. All of these individuals are
called the "Named Executive Officers". The amounts in the Bonus column reflect
the bonus amount earned and paid during the fiscal year. The amounts in the
Securities Underlying Options column represent shares of our Class A common
stock. Ms. Jones's salary for fiscal year 1997 and 1998 includes $900 of
reimbursement for excess amounts paid toward our standard employee medical
benefit plan. Mr. Luttenbacher joined us in March 1998. The $59,571 paid to Mr.
Luttenbacher during fiscal year 1998 as other compensation represents
relocation expenses reimbursed by us.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------- ------------
Number of
Securities
Name and Principal Underlying All Other
Position Year Salary Bonus Options Compensation
------------------ ---- -------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Ross A. Cooley.................. 1998 $ 1 -- -- --
Chairman and Chief Executive
Officer 1997 1 -- --
Christina C. Jones.............. 1998 100,908 $ 500 125,000 --
President and Chief Operating
Officer 1997 100,908 -- -- --
James J. Luttenbacher........... 1998 145,362 5,000 150,000 $59,571
Vice President, Chief Financial 1997 -- -- -- --
Officer And Secretary
</TABLE>
The following table sets forth information regarding stock option grants
made to each of the Named Executive Officers in fiscal year 1998. We did not
grant any stock appreciation rights to the Named Executive Officers during this
fiscal year. In the following table, potential realizable value is based on an
assumption that the price per share of Class A common stock appreciates
annually at the rate shown below (compounded annually) from the date of grant
until the end of the 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 our estimate or projection
of future stock price growth. The options in the following table are granted
under our 1996 stock option plan and have exercise prices equal to the fair
market value of our Class A common stock on the date of grant. All of these
options have 10-year terms and vest over four years.
Stock Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
-------------------------------------------- Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Per Share Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees in Base Expiration ----------------------
Name Granted Fiscal Year Price Date 5% 10%
- ---- ---------- ------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ross A. Cooley.......... -- -- -- -- -- --
Christina C. Jones...... 125,000 4.8% $3.00 6/18/08 $ 235,836 $ 597,653
James J. Luttenbacher... 150,000 5.8% 3.00 2/11/08 282,905 716,879
</TABLE>
The percentages in the Percent of Total Granted to Employees in Fiscal Year
column are based on options to purchase an aggregate of 2,590,076 shares of
Class A common stock granted in connection with the 1996 plan during fiscal
1998.
56
<PAGE>
The material terms of stock option grants to Mr. Cooley and Mr.
Luttenbacher, including the vesting of the stock option grants, are described
under "Employment Agreements" below. Ms. Jones' stock option grant vests at the
rate of 25% annually over four years from the date of grant.
The following table sets forth the options exercised by each of the Named
Executive Officers during fiscal year 1998 and as of December 31, 1998 and the
number and value of the securities underlying unexercised options held by each
Named Executive Officer as of December 31, 1998. The value of the unexercised
in-the-money options at December 31, 1998 is based on the estimated fair market
value as of December 31, 1998 of $11.00 per share per our Class A common stock,
as determined by our board of directors.
Aggregate Options Exercised Year-End Option Values
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options In-the-Money Options
Shares at December 31, 1998 at December 31, 1998
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>
In February 1999, the exercise date for part of Mr. Cooley's stock option
to purchase 150,000 shares of our common stock was accelerated so that 50,000
shares became exercisable in February 1999, 50,000 shares became exercisable on
November 1, 1999, and 50,000 shares will become exercisable on November 1,
2000.
On February 15, 1999, the compensation committee granted to Ms. Jones an
additional option to purchase 50,000 shares of our common stock at an exercise
price of $12.00
Employment Agreements
We have entered into employment agreements with Ross A. Cooley, our
Chairman and Chief Executive Officer, Christina C. Jones, our President and
Chief Operating Officer, and James J. Luttenbacher, our Vice President and
Chief Financial Officer. Each of the three employment agreements is for a
period of four years. Each of the three executives is eligible to participate
in any management incentive compensation plan which we may have from time to
time.
The Cooley and Luttenbacher agreements may each be terminated by us or the
executive at any time. The Jones agreement may be terminated by us at any time
and by Ms. Jones for "good reason." The definition of good reason includes any
"change of control" of pcOrder. If we terminate any of the three employment
agreements for "cause" or if Messrs. Cooley or Luttenbacher terminate for
reasons other than as a result of a "change in control," no further rights to
compensation or benefits will accrue to that executive. During employment and
for two years following our termination of the employment, each of the three
executives is not permitted to solicit any of our customers, induce or attempt
to induce any customer to withdraw, curtail or cancel its business with us or
in any manner modify or fail to enter into any actual or potential business
relationship with us, recruit or solicit any employee or vendor of ours, or of
Trilogy in the case of Ms. Jones, to cease his, her or its relationship with
us, or with Trilogy in the case of Ms. Jones, or permit his name to be used by
or engage in any business competing with our business.
Cooley Employment Agreement. Mr. Cooley's employment agreement, dated
November 1, 1996 and amended effective November 1, 1997, provides for an annual
salary of not less than $1.00.
57
<PAGE>
Mr. Cooley currently performs various executive and leadership functions,
including development of our strategic and operational plans, strategic
planning, executive management of new customer and new account relationship
activities and recruitment of senior management personnel. In connection with
the Cooley agreement, Mr. Cooley was granted a stock option of 875,000 shares
of our 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 those shares became exercisable on November 1, 1998, 100,000
shares became exercisable on November 1, 1999, and 100,000 shares will become
exercisable on November 1, 2000. The remaining 150,000 shares under the stock
option grant were to become exercisable on November 1, 2003, provided that the
Cooley agreement is in effect on that date. However, in February 1999, the
compensation committee accelerated the exercise date for these 150,000 shares
so that 50,000 shares became exercisable in February 1999, 50,000 shares became
exercisable on November 1, 1999, and 50,000 shares will become exercisable on
November 1, 2000. Under the terms of the 1996 plan, in the event of a "change
of control", all unvested shares under that option become immediately
exercisable.
If the Cooley agreement is terminated by us without cause or by Mr. Cooley
as a result of a change of control of pcOrder, Mr. Cooley will not be entitled
to any additional compensation under the terms of the Cooley agreement, but
will have these rights relating to the exercise of then unexercised stock
options as are provided in his stock option agreement.
Jones Employment Agreement. Ms. Jones' employment agreement, dated November
1, 1996, provides for an annual salary of not less than $100,000. Under the
Jones agreement, Ms. Jones has been granted a stock option to purchase up to
650,000 shares of our Class A common stock at an exercise price of $3.00 per
share. As a condition to the grant of this option, Ms. Jones entered into an
option cancellation agreement with Trilogy which terminated a stock option
agreement dated February 10, 1994 between Trilogy and Ms. Jones in connection
with 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. On
February 15, 1999, the compensation committee granted to Ms. Jones an
additional option to purchase 50,000 shares of our common stock at an exercise
price of $12.00 per share. Under the terms of the 1996 plan, in the event of a
"change of control", all unvested shares under the option become immediately
exercisable.
If we terminate the Jones agreement without cause or if Ms. Jones
terminates the Jones agreement for good reason, including upon a change of
control, Ms. Jones will continue to receive employee benefits and monthly
payments equal to one-twelfth of her then-current annual salary for 12 months
following the effective date of the termination.
Luttenbacher Employment Agreement. Mr. Luttenbacher's employment agreement,
dated February 12, 1998, provides for an annual salary of not less than
$175,000. Mr. Luttenbacher received a bonus of $5,000 upon commencement of his
employment with us. Under this agreement, Mr. Luttenbacher has been granted a
stock option to purchase up to 150,000 shares of our Class A common stock at an
exercise price of $3.00 per share. Under the terms of the 1996 plan, in the
event of a "change of control", all unvested shares under the option become
immediately exercisable.
If we terminate the Luttenbacher agreement without cause or if Mr.
Luttenbacher terminates as a result of a change in control of pcOrder, Mr.
Luttenbacher will continue to receive employee benefits and monthly payments
equal to one-twelfth of his then-current annual salary for six months following
the effective date of the termination.
58
<PAGE>
Limitation of Liability and Indemnification Matters
Our Certificate of Incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that a director
of a corporation will not be personally liable for monetary damages for breach
of the individual's fiduciary duties as a director except for liability:
. for any breach of the director's duty of loyalty to us or to our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. for unlawful payments of dividends or unlawful stock repurchases as
provided in Section 174 of the Delaware General Corporation Law; or
. for any transaction from which a director derives an improper personal
benefit.
Our Bylaws provide that we will indemnify our directors and executive
officers, and may indemnify our officers, employees and other agents, to the
full extent permitted by law. We believe that indemnification under our Bylaws
covers at least negligence and gross negligence on the part of an indemnified
party. Our Bylaws also permit us to advance expenses incurred by an indemnified
party in connection with the defense of any action or proceeding arising out of
the party's status or service as one of our directors, officers or employees or
other agent. This indemnified party must repay these advances if it is
ultimately determined that he or she is not entitled to indemnification. We
believe that our Certificate of Incorporation and Bylaw provisions and
indemnification agreements are necessary to attract and retain qualified
persons as directors and officers. We also maintain directors' and officers'
liability insurance.
At present we are not aware of any pending litigation or proceeding
involving any of our directors, officers, employees or agents that will require
or permit indemnification. We are not aware of any threatened litigation or
proceeding that might result in a claim for that indemnification.
1996 Stock Option Plan
The 1996 plan was approved by our board 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, and nonqualified stock options. We have reserved a total of 3,500,000
shares of Class A common stock for issuance under the 1996 plan. As of
September 30, 1999, 391,855 shares of Class A common stock had been issued upon
exercise of options granted under the 1996 plan, 3,023,724 shares were reserved
for future issuance upon the exercise of outstanding options, and 84,421 shares
remained available for future grant.
The board 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 shares to be offered to each optionee. The maximum term of any stock
option granted under the 1996 plan is ten years. The term of incentive stock
options granted to a person possessing more than 10% of combined voting power,
however, will 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. However, the
exercise price of incentive stock options granted to a 10% stockholder must be
at least 110% of the 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 the exchange. In the event
of a "change of control", all of the options granted under the 1996 plan become
immediately exercisable.
59
<PAGE>
The board may amend the 1996 plan at any time, except that some amendments
require stockholder approval. The 1996 plan will terminate in September 2006,
unless earlier the board terminates the 1996 plan earlier. From and after the
offering, all further option grants will be made solely under the 1999 plan.
1999 Stock Incentive Plan
The 1999 plan was approved by our board and stockholders in February 1999.
We may grant options to purchase up to an aggregate of 1,500,000 shares of
Class A common stock, plus an annual increase equal to 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, beginning fiscal 2000. As of September 30, 1999
no shares of Class A common stock have been issued upon exercise of options
under the 1999 plan, 635,004 shares were reserved for future issuance upon the
exercise of outstanding options and 864,996 shares remained available for
future grant. Unless terminated sooner, the 1999 plan will terminate
automatically in 2009.
The 1999 plan provides for grants of incentive stock options to employees
and grants of nonstatutory stock options, stock appreciation rights, dividend
equivalent rights, restricted stock, performance units, performance shares, and
other equity-based rights to our employees, directors and consultants and our
related entities.
The per share exercise price of incentive stock options granted in
connection with 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. For an employee who owns more than 10% of
our stock, the exercise price of any incentive stock option must equal at least
110% of the 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 term of other award
will be determined by the plan administrator.
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 the terms and
conditions as the administrator will establish and communicate to the grantee
at the time that the offer is made.
In the event of various "change in control" transactions, one half of the
then unvested shares subject to outstanding award will vest, the award will
become immediately exercisable as to the shares and the repurchase or
forfeiture rights as to the shares will terminate. Upon consummation of the
transaction, all outstanding awards will terminate, unless they are assumed by
the successor company. In the event of specific hostile takeovers of pcOrder,
the vesting of all outstanding awards will accelerate as described above, but
the outstanding award will remain exercisable according to their terms.
60
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Relationship with Trilogy
Trilogy is our controlling stockholder. It established pcOrder as a
separate business unit within Trilogy and then incorporated pcOrder as a
Delaware corporation. 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 customer'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.
We have a non-exclusive license from Trilogy to use Trilogy's front-office
and e-commerce software applications in our business. To help industry sales
representatives and end users quickly and accurately build customer-configured
computer systems using components from multiple vendors, we have customized and
extended the software licensed from Trilogy to support the specific
configuration and pricing rules of the computer industry. Although Trilogy does
not currently compete directly with us, Trilogy has the right to compete
directly or indirectly with us.
Mr. Liemandt, one of our directors, is Chairman, Chief Executive Officer
and a substantial stockholder of Trilogy.
We also lease our Austin facilities from Trilogy pursuant to an arm's
length lease arrangement. See "Business -- Facilities".
Agreements with Trilogy
In June 1996, we entered into a series of agreements with Trilogy to
clarify our ongoing relationship with Trilogy. Because these agreements were
entered into at a time when we were a wholly-owned subsidiary of Trilogy, they
may not be the result of arms' length negotiations between the parties.
Asset Purchase Agreement. In August 1996, we entered into an asset transfer
agreement with Trilogy, which was amended in August 1998 and June 1999. Under
the asset transfer agreement, Trilogy transferred the assets and liabilities of
its pcOrder.com division to us. In exchange for these transferred assets, we
issued to Trilogy 900 shares of our common stock, which established us as a
wholly-owned subsidiary of Trilogy. These shares were subsequently split into
11,520,000 shares of common stock.
Trilogy has the right, on no more than four occasions after the offering,
to require us to register the shares of common stock that it holds within 180
days of the request. Trilogy is exercising one of these rights in connection
with this registration statement. In addition, Trilogy and its transferees have
the right under some circumstances to include shares held by Trilogy and its
transferees in a registration statement registering other shares of our common
stock. These registration rights are subject to some conditions and
limitations, including our right not to effect a requested registration under
some conditions. We have agreed to indemnify Trilogy against, and provide
contribution for, some liabilities under the Securities Act in connection with
any registration. These registration rights expire eight years after the
effective date of the asset transfer agreement.
Technology, Services and License Agreement. In September 1998, we entered
into a technology, services and license agreement with Trilogy which replaced
an earlier agreement we had with Trilogy. Under this agreement we each provide
the other with access to specified intellectual property and products owned by
each party or jointly owned by the parties and existing as of September 1,
1998. The agreement also requires each party to provide to the other any
updates, changes to, and new releases of the material until 5 years after a
"trigger event" but no sooner than
61
<PAGE>
September 1, 2008. However, after a trigger event Trilogy must only provide
updates, changes to, and new releases of Trilogy products that are the same,
similar to, replacements of or equivalent to Trilogy products provided to us
before such an event. A "trigger event" is the date there is a change in
control of Trilogy or the date Trilogy is no longer required by generally
accepted accounting principles to be consolidated with us for financial
reporting purposes.
In granting each other access to the material, each party allowed the other
party to use the other's intellectual property in creating, marketing,
distributing and licensing products to customers upon payment of royalties to
the owner of the material. Additionally, either party may sublicense their
right to conduct these activities to third parties, provided the other party's
intellectual property continues to be treated as confidential information.
Similarly, Trilogy also granted us a license to access Trilogy's network
based e-commerce products (except for market analysis data) beginning on the
date of a trigger event and extending for 5 years after this date, or at least
until September 1, 2008. During that period, we may use the material in
creating, marketing, distributing and licensing products to customers upon
payment of royalties to Trilogy.
The parties also agreed to provide to each other consulting services upon
the request of the other. Either party may make a request between September 1,
1998 and the later of the date of a trigger event or September 1, 2010.
However, neither party has any obligation to request these services.
In connection with the technology agreement, neither party is restricted
from entering into or having similar agreements with third parties or from
engaging in any activity relating to competitive products and services.
The technology agreement also provides that where at least one of our
employees or contractors and at least one Trilogy employee or contractor
cooperate toward jointly creating, inventing or discovering new material
qualifying for either patent or copyright protection, the parties will
negotiate in good faith on a project-by-project basis to determine to what
extent this newly developed material should be jointly owned. In the event of
joint ownership, the parties will have an equal, undivided interest in that
patent, copyright or other intellectual property.
Each party is obligated to pay to the other monthly royalties based on a
percentage of:
. license fees derived from sales of products that incorporate, or data
maintenance services related to, the other party's intellectual
property;
. software maintenance fees other than data maintenance services in
connection with products that incorporate the other party's intellectual
property; and
. online subscription service fees from products that incorporate the
other party's intellectual property.
The technology agreement provides that each party will defend, indemnify
and hold the other party harmless for any claim against the other party by any
third party to the extent based on specific circumstances enumerated in the
agreement.
This 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.
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<PAGE>
Management Services Agreement. We entered into a management services
agreement with Trilogy, effective as of July 1, 1998. Under this agreement,
Trilogy agreed to provide us with some administrative and corporate support
services. Some of these services are mandatory services, including tax
administration, payroll, payroll accounting, banking, corporate finance,
recruiting and employee training services. In addition, Trilogy has agreed to
provide some optional services to us, 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 us that Trilogy uses in rendering
services to itself or any of its other subsidiaries. This level of care must be
at least equal to the care that Trilogy used in rendering the services to us in
the past. However, the selection of personnel to perform the various services
will be within the sole control of Trilogy. Specifically, Trilogy may, without
our consent or approval, subcontract any service to be provided under this
agreement.
This agreement terminated on June 30, 1999. Both parties, however, agreed
to renew the agreement for a one year term. Successive renewals can occur. This
agreement may be terminated if there is an uncured material breach by the other
party or Trilogy ceases to own a majority of our common stock.
Tax Allocation Agreement. From our incorporation until August 25, 1999, we
were a member of the Trilogy consolidated federal income tax group. As a
result, our federal taxable income (loss) was included in Trilogy's
consolidated federal income tax return. Under a tax allocation agreement
between us and Trilogy, for these tax periods payments are required to be made
between us based on the federal income taxes we would have paid if we filed
separate federal, state and local income taxes. The amount of taxes to be paid
or received by us includes, except as provided below, any amounts to be due as
a result of a redetermination of the tax liability of Trilogy arising from an
audit or otherwise.
Under the terms of the tax allocation agreement, in computing our stand-
alone tax liability or tax refund, we are able to utilize some tax items, such
as net operating losses, foreign tax credits and other tax credits. In
addition, for our tax attributes 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 us as such of our
tax attributes are utilized by the Trilogy consolidated federal income tax
group. In connection with this agreement, Trilogy's obligation to make any
payment to us relating to the our tax attributes will apply only to tax periods
during which we, or our affiliated subsidiaries, are a member of Trilogy's
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
regarding a parent of a combined, consolidated or unitary group) for tax
periods prior to August 25, 1999. Further, Trilogy will be the sole and
exclusive agent for us in any and all matters relating to our income, franchise
and similar liabilities, 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 us for any tax periods ending prior to August 26, 1999.
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<PAGE>
The tax allocation agreement remains in effect until the expiration of any
open years for which we have filed as a member of the Trilogy consolidated
group. 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 this agreement allocates tax liabilities between
us and Trilogy, during the period in which we are included in Trilogy's
consolidated group, we could be liable if any federal tax liability is
incurred, but not discharged, by any other member of Trilogy's consolidated
group. In connection with this agreement, however, Trilogy is obligated to
indemnify us for any tax liabilities, provided that we have paid our allocated
share of those liabilities to Trilogy.
On August 25, 1999, Trilogy Software, Inc. and Trilogy eCommerce.com, Inc.
formed a Delaware general partnership, Trilogy Partnership. Trilogy Software,
Inc. contributed 450,000 shares of our Class B common stock and Trilogy
eCommerce.com, Inc. contributed cash. By Trilogy Software, Inc.'s transfer of
450,000 shares to Trilogy Partnership, we are no longer a part of the
consolidated group of Trilogy for federal, state and local income tax purposes
for tax periods after August 25, 1999. We are now required to file our federal
income tax returns on a stand-alone basis. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our Class A common stock as of November 17, 1999, and
as adjusted to reflect the sale of shares offered by this prospectus, by:
. each of our Named Executive Officers and directors;
. all of our current executive officers and directors as a group;
. each person we know to own beneficially more than 5% of our Class A
common stock; and
. each selling stockholder.
We have determined beneficial ownership in accordance with the rules of the
Securities and Exchange Commission. The number of shares beneficially owned by
a person includes shares of Class A common stock subject to options held by
that person that are currently exercisable within 60 days of November 17, 1999.
The shares issuable pursuant to these options are deemed outstanding for
purposes of computing the percentage ownership of the person holding the
options but are not deemed outstanding for purposes of computing the percentage
ownership of any other person. For purposes of calculating the percentage
beneficially owned, we have assumed all shares of Class B common stock have
been converted into shares of our Class A common stock. The number of shares of
Class A common stock deemed outstanding after this offering includes the
500,000 shares offered by us. Except pursuant to applicable community property
laws or as otherwise indicated in the paragraphs following this table, to our
knowledge, the stockholders identified in the table have sole voting and
investment power with respect to all shares beneficially owned by that
stockholder.
<TABLE>
<CAPTION>
Number of
Shares Being
Offered Shares Beneficially Shares Beneficially
(Assuming Owned Owned After
Over- After Offering Offering (Assuming
Allotment (Assuming Over- Over-Allotment
Shares Beneficially Option Not Allotment Option Option Exercised
Owned Prior To Offering Exercised)(1) Not Exercised) in Full)
---------------------------------------- ----------------------------------------------
Name and Address Number Percent Number Percent Number Percent
---------------- ------ ------- ------------ ---------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Trilogy, Inc.(2)
6034 West Courtyard Drive
Austin, TX 78730......... 12,659,650 79.0% 2,333,000 10,326,650 62.5% 9,945,650 60.2%
Joseph A. Liemandt(2)
6034 West Courtyard Dr.
Austin, TX 78730......... 12,659,725 79.0 2,333,000 10,326,725 62.5 9,945,725 60.2
Peter J. Barris........... 2,500 * -- 2,500 * 2,500 *
Linwood A. Lacy, Jr. ..... 2,500 * -- 2,500 * 2,500 *
Robert W. Stearns......... 3,750 * -- 3,750 * 3,750 *
Ross A. Cooley............ 625,000 3.8 50,000 575,000 3.4 550,000 3.2
Christina C. Jones........ 585,700 3.5 80,000 505,700 3.0 465,700 2.7
James J. Luttenbacher..... 51,950 * 6,000 45,950 * 41,950 *
All directors and officers
as a group (7 persons)...... 13,931,125 81.1% 2,469,000 11,462,125 75.4% 11,012,125 74.7%
ADDITIONAL SELLING
STOCKHOLDERS:
31 additional selling
stockholders, each of
whom is selling 1,000
shares in the offering
and will beneficially
own less than 1% of the
outstanding Class A
common stock after the
offering................ 31,000 * 31,000 -- -- -- --
</TABLE>
- -------
* Less than 1%.
(1) If the underwriters over-allotment option is exercised in full, the number
of shares offered by Trilogy, Inc. and Joseph A. Liemandt would be
2,714,000, by Ross A. Cooley would be 75,000, by Christina C. Jones would
be 120,000, by James J. Luttenbacher would be 10,000 and by all directors
and officers as a group would be 2,919,000.
65
<PAGE>
(2) Shares beneficially owned by Trilogy, Inc. are registered in the name of
Trilogy Software, Inc., a wholly owned subsidiary of Trilogy, and Trilogy
Partnership, a Delaware general partnership of which Trilogy Software, Inc.
is the general partner and the managing partner. Of the shares beneficially
owned by Trilogy, Inc., 8,000 of these shares are subject to options
granted by Trilogy Software, Inc. to some of its employees, entitling these
employees to purchase the shares at any time prior to August 25, 2009, at a
price of $5.00 per share. 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 may, under
the rules of the Securities and Exchange Commission, be deemed to be the
beneficial owner of the shares beneficially owned by Trilogy, Inc. Mr.
Liemandt disclaims beneficial ownership of the shares beneficially owned by
Trilogy, Inc., except with respect to any proportional pecuniary interest
therein.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
We are authorized to issue 50,000,000 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. As of September 30, 1999, we had 3,062,205
shares of Class A common stock outstanding and 12,659,650 shares of Class B
common stock outstanding. As of September 30, 1999 and as adjusted to reflect
this offering, no shares of preferred stock, 5,895,205 shares of Class A common
stock and 10,326,650 shares of Class B common stock will be outstanding (or
9,945,650 shares if the underwriters' over-allotment option is exercised in
full).
Common Stock
At September 30, 1999, there were 15,721,855 shares of common stock
outstanding of which 3,062,205 shares were Class A common stock held by
individuals and 12,659,650 were Class B common stock. All of the outstanding
shares of Class B common stock are beneficially owned by Trilogy. It is
contemplated that immediately before this offering, Trilogy will convert
2,333,000 shares of Class B common stock to Class A common stock on a one-for-
one basis, which Class A common stock is being offered in connection with this
offering.
The Class A common stock and Class B common stock have substantially
identical rights other than voting, conversion and transfer rights, as
described further below. In general, 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. In general, the Class A common stock and Class B
common stock 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 on the election of directors. The holders of common
stock are entitled to receive noncumulative dividends, if any, as may be
declared by the board of directors out of legally available funds. In the event
we are liquidated or dissolved, the holders of common stock are entitled to
share in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if there are 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 before a tax-free spin-off at the option of the holder
into shares of Class A common stock on a one-for-one basis.
All of the outstanding shares of Class B common stock are currently held by
Trilogy or affiliates of Trilogy.
At any time before a tax-free spinoff by Trilogy of the Class B common
stock to the stockholders of Trilogy, the shares of Class B common stock are
convertible at the option of the holder into shares of Class A common stock at
the option of the holder.
If at any time before such a tax-free spinoff, any holder of Class B common
stock transfers any shares of Class B common stock, then each transferred share
of Class B common stock will convert automatically into one share of Class A
common stock, unless the transfer is to Trilogy or an affiliate of Trilogy or a
non-affiliate of Trilogy that acquires more than 50% of the then outstanding
Class B common stock in a single transaction. However, if the transfer is to a
non-affiliate of Trilogy that acquires more than 50% of the then outstanding
Class B common stock in a single transaction, then each remaining share of
Class B common stock held by Trilogy or an affiliate of Trilogy will convert
automatically into one share of Class A common stock.
If such a tax-free spinoff takes place, then on the fifth anniversary of
the first transfer of Class B common stock in connection with the spinoff, each
share of Class B common stock will convert
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<PAGE>
automatically into one share of Class A common stock, unless we receive an
opinion of counsel that the conversion would adversely affect the tax-free
nature of the spinoff. If we do receive such an opinion of counsel, then we
will submit the matter of the conversion to a vote of our stockholders. If
our stockholders approve the conversion, then each share of Class B common
stock will convert automatically into one share of Class A common stock.
If a tax-free spinoff takes place, then the shares of Class B common stock,
other than shares of Class B common stock held by Trilogy or an affiliate of
Trilogy, will generally not be convertible into shares of Class A common stock
until the fifth anniversary of the first transfer of Class B common stock in
the spinoff.
We must always reserve and keep available out of our authorized but
unissued Class A common stock, the 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 in connection
with the restrictions contained in our Certificate of Incorporation. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of Class A common stock to be issued following this offering will be
fully paid and nonassessable.
Preferred Stock
The board of directors is authorized, without further action by our
stockholders, to issue the preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions regarding the preferred stock,
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 without further action by our stockholders and may adversely effect the
rights of our holders of common stock. The issuance of preferred stock with
voting and conversion rights may have the effect of decreasing the trading
price of our common stock, and may adversely effect the voting power of our
holders of common stock, including the loss of voting control to others. We
currently have no plans to issue any shares of preferred stock.
Certain Anti-Takeover and Limited Liability Provisions; Effect of Sale of
Trilogy's Ownership
We are subject to Section 203 of the Delaware General Corporation Law. In
general, this statute prohibits a Delaware corporation from engaging in any
"business combination" with any "interested stockholder" for three years
following the date that the stockholder became an interested stockholder,
unless the business combination or the transaction in which the person became
an interested stockholder is approved in a manner prescribed in the Delaware
General Corporation Law. A "business combination" includes a merger or
consolidation, asset or stock sale, or other transaction resulting in a
financial benefit to the stockholder. In general, an "interested stockholder"
is any entity or person who, together with affiliates and associates,
beneficially owns, or did so within the past three years, 15% or more or the
outstanding voting stock of the corporation.
In general, our directors are not personally liable for monetary damages
for breach of a director's fiduciary duty as a director, except in some
specific situations where the director has acted inappropriately.
Trilogy could elect to sell all or a substantial portion of its equity
interest to a third party, which could represent a controlling or substantial
interest, without offering to our other stockholders the opportunity to
participate in the transaction. 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 the 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, the third party may be
able to control us in
68
<PAGE>
the same manner that Trilogy is currently able to control us, including
regarding the election of all of the members of our board of directors. The
sale may adversely effect our other stockholders and the trading price of our
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.
Indemnification
Our Bylaws provide that our directors and officers are indemnified and
advanced expenses in connection with actual or threatened proceedings and
claims arising out of their status as director or officer 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) 921-8200.
Nasdaq Listing
The Class A common stock is quoted on the Nasdaq National Market under the
symbol "PCOR".
69
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our Class A common stock in the public
market after this offering (including shares of Class A common stock issuable
upon conversion of Class B common stock) or the anticipation of any of those
sales could adversely affect prevailing trading prices of the Class A common
stock. As of September 30, 1999 and as adjusted to reflect this offering, we
will have 5,895,205 shares of Class A common stock outstanding and 10,326,650
shares of Class B common stock outstanding.
With respect to the shares of Class A common stock, the 3,000,000 shares
sold in this offering will be freely tradeable without restriction under the
Securities Act. Of the remaining outstanding shares of Class A common stock,
certain existing stockholders will be subject to lock-up agreements generally
providing that, with specific limited exceptions, the stockholder will not
offer to sell, sell, contract to sell, pledge or otherwise dispose of any
shares of Common Stock owned of record or beneficially prior to the offering
for a period of 90 days following the date of the final prospectus for this
offering, without the prior written consent of Goldman, Sachs & Co. acting
alone or each of the above listed representatives acting together. As a result
of these lock-up agreements, notwithstanding possible earlier eligibility for
sale under the provisions of Rule 144, 144(k) and 701, none of these shares can
be sold until 91 days after the date of the final prospectus. Beginning 91 days
after the date of the final prospectus, these shares will be eligible for sale
in the public market, subject to specific volume limitations and the expiration
of any applicable holding periods under Rule 144 under the Securities Act.
Additionally, shares of Class B common stock owned by Trilogy are
convertible into Class A common stock on a share-for-share basis at the
election of the holder or automatically upon some transfers of the Class B
common stock. These shares (including the shares of Class A common stock
issuable upon some transfers of the Class B common stock) are "restricted
securities" as defined in Rule 144 of the Securities Act. Restricted securities
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. Trilogy agreed in connection with this offering not to sell any other
shares of common stock for a period of 90 days following the date of the final
prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who owns shares that were purchased at least one
year previously, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
. 1% of the then outstanding shares of the Class A common stock (which
will equal approximately 59,000 shares immediately after the offering);
and
. the average weekly trading volume of the Class A common stock on the
Nasdaq National Market during the four calendar weeks preceding the
sale.
Sales under Rule 144 are also subject to some manner of sale provisions,
notice requirements and the availability of current public information about
us. Any person (or persons whose shares are aggregated) who is not deemed to
have been an affiliate of ours at any time during the 90 days preceding a sale,
and who owns shares of restricted common stock under Rule 144 that were
purchased from us or any of our affiliates at least two years previously, would
be entitled to sell the shares under Rule 144(k) without regard to the volume
limitations, manner of sale provisions, public information requirements or
notice requirements.
Under Rule 701 as currently in effect, officers, directors, employees,
consultants, and others who purchase shares under a written compensatory plan
or contract may be entitled to rely on the resale provisions of Rule 701. Rule
701 permits our affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell the shares in reliance on Rule 144
without having to comply with the
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<PAGE>
holding period, public information, volume limitation, or notice provisions of
Rule 144. In addition, we have in effect registration statements under the
Securities Act registering the shares to be issued under our stock option
plans. As a result, any options exercised under the stock option plans or any
other benefit plan are freely tradable in the public market, except that shares
held by affiliates will still be subject to the volume limitation, manner of
sale, notice, and public information requirements of Rule 144 unless otherwise
resaleable under Rule 701. At September 30, 1999, there were outstanding
options under the 1996 plan and the 1999 plan for the purchase of 3,658,728
shares, of which 1,441,431 were exercisable as of that date. "Risk Factors--
Future sales of our common stock may depress our stock price", "Management--
Stock Plans" and "Description of Capital Stock" for additional information
regarding our capital stock.
We will agree 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 90 days after the
date of the final prospectus, without the prior written consent of Goldman,
Sachs & Co., subject to some limited exceptions. See "Underwriting".
Trilogy has the continuing right in some circumstances to request us to
register their shares of Class B common stock and shares of the Class A common
stock issuable upon conversion of the Class B common stock under the Securities
Act for resale to the public. Prior to the date hereof, Trilogy exercised its
registration rights in connection with the shares offered by Trilogy in
accordance with this offering. These registration rights are subject to some
conditions and limitations, among them the right of the underwriters, if any,
of an offering to limit the number of shares included in the registration. If
we were required in the future to include in a registration for additional
shares held by Trilogy, the registration or sales of stock could adversely
affect the trading price for our Class A common stock and on our ability to
raise new capital. See "Risk Factors--Future sales of common stock by Trilogy
or insiders could adversely affect our stock price".
There can be no assurance that an active public market for the Class A
common stock will continue. Future sales of substantial amounts of Class A
common stock (including shares issued upon exercise of outstanding options) in
the public market after this offering could adversely affect market prices
prevailing from time to time and could impair our ability to raise capital
through the sale of its equity securities. As described above, only a limited
number of shares will be available for sale immediately after this offering due
to specific contractual restrictions on resale. Sales of substantial amounts of
Class A common stock in the public market after the restrictions lapse could
adversely affect the prevailing market price and our ability to raise capital
in the future.
71
<PAGE>
LEGAL MATTERS
The validity of the Class A common stock offered in this registration
statement will be passed upon for us by Haynes and Boone, LLP, Austin, Texas.
Some legal matters in connection with this offering will be passed upon for the
underwriters by Wilson Sonsini Goodrich and Rosati, Professional Corporation,
Austin, Texas.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1997 and 1998, and for each of the three years in
the period ended December 31, 1998, as set forth in their report. We have
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report given on their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act for our Class A common stock
offered in this offering. This prospectus does not contain all of the
information shown in the registration statement and the exhibits and schedules
to the registration statement. For further information regarding pcOrder and
the common stock in this offering, we refer you to the registration statement
and to the attached exhibits and schedules. For each document filed as an
exhibit to the registration statement, we refer you to the exhibit for a more
complete description of the matter involved.
You may inspect our registration statement and the attached exhibits and
schedules without charge at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at Seven World
Trade Center, 13th Floor, New York, New York 10048, and the Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Please
call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information about public reference rooms. You may obtain copies of all or any
part of our registration statement from the Securities and Exchange Commission
upon payment of prescribed fees. You may also inspect reports, proxy, and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission without charge at a
website maintained by the Securities and Exchange Commission at
http://www.sec.gov.
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<PAGE>
UNDERWRITING
pcOrder, the selling stockholders and the underwriters for the offering
(the "Underwriters") named below have entered into an underwriting agreement
with respect to the shares being offered. Subject to certain conditions, each
underwriter has severally agreed to purchase the number of shares indicated in
the following table.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co....................................... 1,485,000
Credit Suisse First Boston Corporation.................... 742,500
SG Cowen Securities Corporation........................... 742,500
Pacific Growth Equities, Inc.............................. 30,000
---------
Total................................................... 3,000,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 450,000
shares from Trilogy and certain of the other selling stockholders to cover such
sales. They may exercise that option for 30 days. If any shares are purchased
pursuant to this option, the underwriters will severally purchase shares in
approximately the same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by pcOrder and the selling
stockholders. Such amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase 450,000 additional shares.
<TABLE>
<CAPTION>
Paid by pcOrder No Exercise Full Exercise
--------------- ----------- -------------
<S> <C> <C>
Per Share.......................................... $ 2.60 $ 2.60
Total.............................................. $1,300,000 $1,300,000
<CAPTION>
Paid by the
Selling Stockholders No Exercise Full Exercise
-------------------- ----------- -------------
<S> <C> <C>
Per Share.......................................... $ 2.60 $ 2.60
Total.............................................. $6,500,000 $7,670,000
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $1.56 per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to $0.10 per share from the initial
price to public. If all the shares are not sold at the initial price to public,
the representatives may change the offering price and the other selling terms.
pcOrder and the selling stockholders have agreed with the underwriters not
to dispose of or hedge any of their common stock or securities convertible into
or exchangeable for shares of common stock during the period from the date of
this prospectus continuing through the date 90 days after the date of this
prospectus, except with the prior written consent of the representatives. This
agreement does not apply to any existing employee benefit plans. See "Shares
Eligible for Future Sale" for a discussion of other transfer restrictions.
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
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<PAGE>
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on The Nasdaq
Stock Market, in the over-the-counter market or otherwise.
As permitted by Rule 103 under the Exchange Act, certain Underwriters and
selling group members that are market makers ("passive market makers") in the
common stock may make bids for or purchases of the common stock in the Nasdaq
National Market until a stabilizing bid has been made. Rule 103 generally
provides that:
. a passive market maker's net daily purchases of the common stock may not
exceed 30% of its average daily trading volume in such securities for
the two full consecutive calendar months, or any 60 consecutive days
ending within the 10 days, immediately preceding the filling date of the
registration statement of which this prospectus forms a part;
. a passive market maker may not effect transactions or display bids for
the common stock at a price that exceeds the highest independent bid for
the common stock by persons who are not passive market makers; and
. bids made by passive market makers must be identified as such.
pcOrder and the selling stockholders estimate that the total expenses of
this offering, excluding underwriting discounts and commissions, will be
approximately $375,000.
pcOrder and the selling stockholders have agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
74
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Audited Financial Statements:
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
Unaudited Interim Financial Statements:
Condensed Balance Sheets as of December 31, 1998 and September 30, 1999
(Unaudited)............................................................. F-18
Condensed Statements of Operations for the Nine Months Ended September
30, 1998 and 1999 (Unaudited)........................................... F-19
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1999 (Unaudited)........................................... F-20
Notes to Condensed Financial Statements (Unaudited)...................... F-21
</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, except for Note 10,
as to which the date is February 25, 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 subscriptions 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 services 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 for all
periods presented. To date, the Company has had no issuances of common stock,
options or warrants for nominal consideration.
F-8
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
F-9
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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>
F-10
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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) online 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.
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
F-13
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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.
F-14
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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%.
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>
F-15
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
- -------------------------------------------------------------------- ------------------------
Weighted- Weighted-
Range of Weighted-Average Average Average
Exercise 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 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 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 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>
F-16
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
10. Stock Offering
In February 1999, the Company issued 2,530,000 shares of its common stock
in connection with its initial public offering at a price of $21 per share.
Offering proceeds, net of aggregate expenses of the Company (including
underwriters discount), totaled approximately $47.2 million.
F-17
<PAGE>
PCORDER.COM, INC.
CONDENSED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 4,726 $ 44,580
Short-term investments............................ -- 18,565
Accounts receivable, net.......................... 4,775 10,540
Other current assets.............................. 150 647
-------- --------
Total current assets............................ 9,651 74,332
Property and equipment, net......................... 1,938 2,729
Other assets........................................ 665 60
-------- --------
Total assets.................................... $ 12,254 $ 77,121
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 612 $ 1,833
Accrued liabilities............................... 3,150 8,733
Payable to Trilogy, net........................... 4,506 3,628
Deferred revenue.................................. 10,428 26,974
-------- --------
Total current liabilities....................... 18,696 41,168
Deferred revenue.................................... 2,103 1,433
Commitments and contingencies (Note 9)
Stockholders' equity (deficit):
Common stock, par value $.01 per share--50,000,000
shares authorized; 12,948,602 and 15,721,855
issued and outstanding in 1998 and 1999,
respectively..................................... 129 157
Additional paid-in capital........................ 4,024 52,937
Deferred stock compensation....................... (1,726) (1,131)
Unrealized gain on investments.................... -- 4
Accumulated deficit............................... (10,972) (17,447)
-------- --------
Total stockholders' equity (deficit)............ (8,545) 34,520
-------- --------
Total liabilities and stockholders' equity
(deficit)...................................... $ 12,254 $ 77,121
======== ========
</TABLE>
See notes to condensed financial statements
F-18
<PAGE>
PCORDER.COM, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Revenues:
Software and subscriptions............................... $ 8,736 $ 14,489
Content and services..................................... 6,423 15,136
-------- --------
Total revenues......................................... 15,159 29,625
Cost of revenues:
Software and subscriptions............................... 1,375 2,685
Software and subscriptions--affiliated royalty fee....... 822 1,025
-------- --------
Total software and subscriptions....................... 2,197 3,710
Content and services..................................... 4,143 11,166
-------- --------
Total cost of revenues................................. 6,340 14,876
-------- --------
Gross profit............................................... 8,819 14,749
Operating expenses:
Research and development................................. 2,933 4,727
Selling and marketing.................................... 8,324 13,086
General and administrative............................... 2,456 4,306
Amortization of deferred stock and stock compensation
expense................................................. 954 953
-------- --------
Total operating expenses............................... 14,667 23,072
Operating loss............................................. (5,848) (8,323)
Interest income............................................ 107 1,605
-------- --------
Loss before income taxes................................... (5,741) (6,718)
Income tax benefit......................................... (203) (243)
-------- --------
Net loss................................................... $ (5,538) $ (6,475)
======== ========
Basic and diluted net loss per share....................... $ (0.43) $ (0.43)
======== ========
Weighted average shares outstanding........................ 12,837 15,019
======== ========
Pro forma information:
Historical loss before income taxes...................... $ (6,718)
Pro forma income tax benefit............................. --
--------
Pro forma net loss....................................... $ (6,718)
========
Pro forma basic and diluted net loss per share........... $ (0.45)
========
</TABLE>
See notes to condensed financial statements
F-19
<PAGE>
PCORDER.COM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,
-----------------
1998 1999
------- --------
<S> <C> <C>
Operating activities
Net loss................................................... $(5,538) $ (6,475)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation............................................. 754 1,660
Amortization of deferred stock and stock compensation
expense................................................. 954 953
Changes in operating assets and liabilities:
Accounts receivable, net............................... (6,407) (5,765)
Other assets........................................... (558) 20
Accounts payable....................................... 411 1,221
Accrued liabilities.................................... 1,011 5,583
Payable to Trilogy, net................................ 2,386 (514)
Deferred revenue....................................... 8,949 15,876
------- --------
Net cash provided by operating activities.................. 1,962 12,559
Investing activities
Purchases of short-term and long-term investments.......... -- (21,277)
Sale of short-term and long-term investments............... -- 2,737
Purchase of property and equipment......................... (2,246) (2,451)
------- --------
Net cash used in investing activities...................... (2,246) (20,991)
Financing activities
Proceeds from the issuance of common stock, net............ -- 47,239
Proceeds from the exercise of stock options................ 372 1,047
------- --------
Net cash provided by financing activities.................. 372 48,286
------- --------
Increase in cash and cash equivalents...................... 88 39,854
Cash and cash equivalents at beginning of period........... 2,207 4,726
------- --------
Cash and cash equivalents at end of period................. $ 2,295 $ 44,580
======= ========
</TABLE>
See notes to condensed financial statements
F-20
<PAGE>
PCORDER.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Business
pcOrder.com, Inc., (the "Company") is a majority owned subsidiary of
Trilogy Software, Inc. and its predecessor entities including Trilogy
Development Group, Inc. ("parent" or "Trilogy"). The Company commenced
operations as a separate business unit within Trilogy on July 1, 1993 and was
incorporated as a separate entity on July 18, 1994. The Company provides
electronic commerce technology and tailored solutions to the manufacturers,
distributors and resellers of computer products primarily in the U.S. The
Company's products include software applications and support for those
applications. The software applications consist of an integrated application
suite that includes cataloging, quoting, pricing, availability, and product
configuration. Content for these applications in the form of detailed product
databases containing configuration, pricing, availability and specifications
are also provided and updated by the Company. Customers can choose to have the
Company host the software applications or install them at their site. In
addition, the Company provides consulting services to help customers build and
integrate electronic commerce capabilities to meet their specified needs.
Effective February 26, 1999, the Company completed its initial public
offering of 2,530,000 shares at $21 per share. Offering proceeds, net of
aggregate expenses to the Company (including underwriters' discount), totaled
approximately $47.2 million.
2. Basis of Presentation
The unaudited interim financial information presented herein should be read
in conjunction with the Company's annual financial statements for the year
ended December 31, 1998, which can be found beginning on page F-2. The
accompanying unaudited interim financial statements reflect all adjustments
(which include only normal, recurring adjustments) that are, in the opinion of
management, necessary to state fairly the results for the periods presented.
The results for such periods are not necessarily indicative of the results to
be expected for the full fiscal year.
3. Investments
The Company's investments consist primarily of high-quality short-term
commercial paper, corporate notes, and money market funds. The investments are
classified as available-for-sale and are reported at fair value in the
accompanying condensed balance sheets. As of September 30, 1999, cumulative
unrealized gains totaled approximately $4,000 and were reported as a component
of stockholders' equity within comprehensive income. Unrealized losses are
charged against income when a decline in fair value is determined to be other
than temporary.
4. Related Party Transactions
The Company and Trilogy have entered into a number of agreements that
govern the business activities between the two companies. Pursuant to such
agreements, the Company is required to pay Trilogy royalties for the use of
Trilogy's technology and management fees for services performed by Trilogy on
behalf of the Company. For the nine months ended September 30, 1998 and 1999,
the Company incurred royalty fees due to Trilogy in the amounts of $822,000 and
$1.0 million, respectively. Additionally, the Company is required to pay for
certain management services performed by Trilogy on behalf of the Company. For
the nine months ended September 30, 1998 and 1999, the Company was charged
approximately $229,400 and $193,500, respectively, for such management
F-21
<PAGE>
PCORDER.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
services. Furthermore, the Company incurred approximately $1.4 million for the
nine months ended September 30, 1999 for the use of Trilogy consulting
personnel. No Trilogy consulting personnel was utilized by the Company during
the nine months ended September 30, 1998.
In addition to the above costs, as of September 30, 1999, the Company has
committed to pay Trilogy approximately $1.8 million for college new hire
recruiting and training services performed by Trilogy on behalf of the Company
for the nine months ended September 30, 1999. Such amount has been allocated to
the various departments within the Company that have directly benefited from
these services.
The Company periodically makes payments to satisfy the amounts due to
Trilogy pursuant to the intercompany agreements discussed above. During the
nine months ended September 30, 1999, the Company paid Trilogy approximately
$5.4 million under such agreements. Such amount had accumulated over several
quarters and was paid in part with proceeds generated by the Company's initial
public offering. As of September 30, 1999, the Company owed Trilogy
approximately $3.6 million, which was comprised primarily of the royalty,
management, recruiting and consulting fees discussed above.
5. Net Loss per Share
For the nine months ended September 30, 1998 and 1999, common stock
equivalents totaling 97,390 and 1,703,680 shares, respectively, were excluded
from the diluted earnings per share calculation. The aforementioned shares were
excluded from the diluted earnings per share calculations as they were anti-
dilutive due to the Company's net losses for these periods. Accordingly, the
diluted net loss per share amounts were the same as the basic net loss per
share amounts for all periods presented.
6. Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 established new rules for the reporting and display of comprehensive
income and its components. The components of comprehensive loss for the periods
presented in the accompanying statements of operations are as follows (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1998 1999
-------- --------
<S> <C> <C>
Net loss................................................. $(5,538) $(6,475)
Unrealized gain on investments........................... -- 4
-------- --------
Comprehensive loss....................................... $(5,538) $(6,471)
======== ========
</TABLE>
7. Stockholders' Equity
The Company's authorized capital stock consists of 37,243,000 shares of
Class A common stock, par value of $.01 per share, 12,757,000 shares of Class B
common stock, par value of $.01 per share, and 10,000,000 shares of preferred
stock, par value $.01 per share. On February 2, 1999, each share of common
stock of the Company not owned by Trilogy was reclassified into one share of
F-22
<PAGE>
PCORDER.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
In August and September 1999, a total of 97,350 shares of Class B common
stock owned by Trilogy were converted into the same number of shares of Class A
common stock and sold to certain employees of Trilogy. Such transaction did not
have an impact on pcOrder's capitalization, other than the conversion of Class
B common stock into Class A common stock, since the shares were owned directly
by Trilogy and sold to Trilogy employees.
8. Income Taxes
Through August 25, 1999, the Company's operations were included in the
consolidated income tax returns filed by Trilogy and the two companies operated
under a consolidated tax sharing agreement. Under such agreement, the Company
would record a current income tax benefit amount equal to the income tax
benefits generated by the Company and expected to be utilized by the
consolidated tax group. For the nine months ended September 30, 1998 and 1999,
the Company recorded income tax benefits totaling $203,000 and $243,000,
respectively under such agreement. Effective August 26, 1999, the Company's
operations ceased to be included in the consolidated tax return of Trilogy.
Accordingly, from this date forward, the Company's income taxes will be
computed on a stand-alone basis. Because of the uncertainties surrounding the
future utilization of the Company's deferred tax assets, no income tax benefit
was recorded for the period subsequent to the tax deconsolidation date.
9. Commitments and Contingencies
In September 1999, the Company settled an outstanding lawsuit with a former
employee regarding commissions allegedly owed to the former employee by the
Company. The settlement did not have a material effect on the Company's
financial condition or results of operations.
10. Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP 98-1"), Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria are met. The Company adopted SOP 98-1 effective January 1,
1999. Such adoption did not have a material impact on the Company's financial
condition or results of operations.
F-23
<PAGE>
PCORDER.COM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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.
F-24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 20
Price Range of Common Stock.............................................. 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 40
Management............................................................... 53
Certain Relationships and Transactions................................... 61
Principal and Selling Stockholders....................................... 65
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 70
Legal Matters............................................................ 72
Experts.................................................................. 72
Additional Information................................................... 72
Underwriting............................................................. 73
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 Shares
pcOrder.com, Inc.
Class A Common Stock
---------------
[Logo of pcOrder.com, Inc. appears here]
---------------
Goldman, Sachs & Co.
Credit Suisse First Boston
SG Cowen
Pacific Growth Equities, Inc.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
