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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number: 0-25447
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PCORDER.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2720849
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5001 Plaza on the Lake
Austin, Texas
(512) 684-1100 78746
------------------------ -----
(Address of principal executive offices (Zip Code)
and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of October 21, 2000, there were 6,237,565 shares of the Registrant's Class A
Common Stock outstanding, excluding 390,000 shares held in treasury, and
10,316,620 shares of the Registrant's Class B Common Stock outstanding.
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INDEX
PCORDER.COM, INC.
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of September 30, 2000 (unaudited) and 3
December 31, 1999
Condensed Statements of Operations for the Three Months Ended 4
September 30, 2000 and 1999 (unaudited) and for the Nine Months
Ended September 30, 2000 and 1999 (unaudited)
Condensed Statements of Cash Flows for the Nine Months Ended 5
September 30, 2000 and 1999 (unaudited)
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and 11
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
PART II OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Securities Holders 33
Item 5. Other Information 34
Item 6. Exhibits and Reports on Form 8-K 34
SIGNATURES 35
EXHIBIT INDEX 36
</TABLE>
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
pcOrder.com, Inc.
Condensed Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------------- -------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 69,135 $ 54,113
Short-term investments 8,852 27,364
Accounts receivable, net 7,193 16,427
Prepaid expenses and other assets 1,561 1,030
-------- --------
Total current assets 86,741 98,934
Property and equipment, net 2,870 3,592
Other assets 3,218 3,212
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Total assets $ 92,829 $105,738
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,180 $ 1,508
Accrued liabilities 4,091 8,814
Payable to Trilogy, net 5,322 4,119
Deferred revenue 21,555 28,686
-------- --------
Total current liabilities 32,148 43,127
Deferred revenue 6,272 2,694
Stockholders' equity:
Common stock, par value $.01 per share - 50,000,000 shares
authorized; 16,931,560 issued and 16,541,560 outstanding as of
September 30, 2000; 16,623,497 issued and outstanding as of
December 31, 1999 169 166
Additional paid-in capital 81,293 80,401
Deferred stock compensation (653) (1,350)
Accumulated other comprehensive loss (3) (1)
Accumulated deficit (24,104) (19,299)
Less cost of common stock held in treasury, 390,000 shares in
2000 and no shares in 1999 (2,293) -
-------- --------
Total stockholders' equity 54,409 59,917
-------- --------
Total liabilities and stockholders' equity $ 92,829 $105,738
======== ========
</TABLE>
See notes to condensed financial statements
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pcOrder.com, Inc.
Condensed Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software and subscriptions $ 6,912 $ 6,257 $20,975 $14,489
Content and services 6,540 6,800 23,161 15,136
------- ------- ------- -------
Total revenues 13,452 13,057 44,136 29,625
Cost of revenues:
Software and subscriptions 834 989 2,987 2,685
Software and subscriptions - affiliated
royalty fee 364 398 890 1,025
------- ------- ------- -------
Total software and subscriptions 1,198 1,387 3,877 3,710
Content and services 5,953 5,066 20,640 11,166
------- ------- ------- -------
Total cost of revenues 7,151 6,453 24,517 14,876
Gross profit:
Software and subscriptions 5,714 4,870 17,098 10,779
Content and services 587 1,734 2,521 3,970
------- ------- ------- -------
Total gross profit 6,301 6,604 19,619 14,749
Operating expenses:
Research and development 3,754 1,959 11,430 4,727
Selling and marketing 1,967 4,388 9,342 13,086
General and administrative 1,839 1,503 6,620 4,306
Amortization of deferred stock compensation 174 259 645 953
------- ------- ------- -------
Total operating expenses 7,734 8,109 28,037 23,072
Operating loss (1,433) (1,505) (8,418) (8,323)
Interest income 1,187 764 3,613 1,605
------- ------- ------- -------
Loss before income taxes (246) (741) (4,805) (6,718)
Income tax benefit - - - (243)
------- ------- ------- -------
Net loss $ (246) $ (741) $(4,805) $(6,475)
======= ======= ======= =======
Basic and diluted net loss per share $(0.01) $(0.05) $(0.29) $(0.43)
======= ======= ======= =======
Weighted average shares outstanding 16,714 15,602 16,735 15,019
======= ======= ======= =======
</TABLE>
See notes to condensed financial statements
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pcOrder.com, Inc.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 2000 September 30, 1999
------------------ ------------------
<S> <C> <C>
Operating activities
Net loss $(4,805) $(6,475)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 2,517 1,660
Amortization of deferred stock compensation 645 953
Changes in operating assets and liabilities:
Accounts receivable, net 9,234 (5,765)
Other assets (736) 20
Accounts payable (328) 1,221
Accrued liabilities (4,723) 5,583
Payable to Trilogy, net 1,203 (514)
Deferred revenue (3,553) 15,876
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Net cash provided by (used in) operating activities (546) 12,559
Investing activities
Purchases of short-term and long-term investments (9,026) (21,277)
Sales of short-term and long-term investments 27,538 2,737
Purchases of property and equipment (1,795) (2,451)
-------- --------
Net cash provided by (used in) investing activities 16,717 (20,991)
Financing activities
Proceeds from the issuance of common stock, net - 47,239
Purchase of treasury shares (2,293) -
Proceeds from the exercise of stock options 1,144 1,047
-------- --------
Net cash provided by (used in) financing activities (1,149) 48,286
-------- --------
Increase in cash and cash equivalents 15,022 39,854
Cash and cash equivalents at beginning of period 54,113 4,726
-------- --------
Cash and cash equivalents at end of period $ 69,135 $ 44,580
======== ========
</TABLE>
See notes to condensed financial statements
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pcOrder, Inc.
Notes to Condensed Financial Statements
(Unaudited)
1. Business
pcOrder.com, Inc., (the "Company") is a majority owned subsidiary of Trilogy
Software, Inc. and its predecessor entities including Trilogy Development Group,
Inc. ("parent" or "Trilogy"). The Company commenced operations as a separate
business unit within Trilogy on July 1, 1993 and was incorporated as a separate
entity on July 18, 1994. The Company primarily provides electronic commerce
technology and tailored solutions to the manufacturers, distributors and
resellers of computer products primarily in the United States. The Company's
products include software applications and support for those applications. The
software applications primarily 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 specific needs.
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, 1999, which can be found in the Company's Annual Report on Form 10-
K. The accompanying unaudited interim financial statements reflect all
adjustments (which include only normal, recurring adjustments) that are, in the
opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the full fiscal year.
3. Related Party Transactions
The Company and Trilogy have entered into a number of agreements that govern the
business activities between the two companies. Pursuant to such agreements, the
Company is entitled to receive royalties from Trilogy for their use of certain
software technologies ("Royalties due from Trilogy") and consulting revenue from
services rendered to Trilogy ("Consulting Revenue due from Trilogy"). The
Company is also required to pay royalties to Trilogy for the use of Trilogy's
technology ("Royalties due to Trilogy") and management services ("Management
fees due to Trilogy"). In addition to the aforementioned business arrangements,
the Company has incurred costs associated with the utilization of Trilogy
consulting and development personnel ("Personnel fees due to Trilogy").
The following table summarizes the activity for the three months and nine months
ended September 30, 2000 and 1999 (in thousands):
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<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Royalties due from Trilogy $ 259 $ - $ 528 $ -
Consulting Revenue due from Trilogy 1,153 - 1,349 -
Royalties due to Trilogy 364 398 890 1,000
Management fees due to Trilogy 20 65 71 194
Personnel fees due to Trilogy 1,900 1,200 6,300 1,400
</TABLE>
As of September 30, 2000, the Company owed Trilogy approximately $5.3 million,
which was comprised primarily of the royalty, management, and personnel fees
discussed above.
On October 25, 2000, pcOrder entered into a merger agreement with Trilogy
providing for the acquisition of all of the outstanding Class A common stock of
pcOrder at $6.375 per share. Under the terms of the merger agreement, on
November 6, 2000, Trilogy is commencing a cash tender offer for any and all
outstanding shares of pcOrder Class A common stock, at a price of $6.375 per
share. Following the tender offer, a subsidiary of Trilogy will merge with
pcOrder and any remaining shares of Class A common stock of pcOrder will be
converted into the right to receive $6.375 per share in cash. See Note 9 -
Subsequent Events.
4. Net Loss per Share
For the three months ended September 30, 1999, common stock equivalents totaling
1,689,621 shares were excluded from the diluted earnings per share calculation.
There were no common stock equivalents for the three months ended September 30,
2000. For the nine months ended September 30, 2000 and 1999, such amounts
totaled approximately 983,000 and 1,703,680, respectively. The aforementioned
shares were excluded from the diluted earnings per share calculations for the
three months and nine months ended September 30, 2000 and 1999, 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.
5. Comprehensive Income
The components of comprehensive gain (loss) for the periods presented in the
accompanying statements of operations are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Net Loss $(246) $(741) $(4,805) $(6,475)
Unrealized gain (loss) on 25 18 (2) 4
investments ----- ----- ------- -------
Comprehensive loss $(221) $(723) $(4,807) $(6,471)
===== ===== ======= =======
</TABLE>
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6. 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, 1999, the
Company recorded an income tax benefit of $243,000 under such agreement.
Effective August 26, 1999, the Company's operations ceased to be included in the
consolidated tax return of Trilogy. Accordingly, from that date forward, the
Company's income taxes have been computed on a stand-alone basis. Because of
the uncertainties surrounding the future utilization of the Company's deferred
tax attributes, a full valuation allowance has been recorded resulting in no
income tax benefit for the three months and nine months ended September 30,
2000.
7. Recent Accounting Pronouncements
The FASB recently issued Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" (the Interpretation). The
Interpretation provides guidance related to the implementation of APB Opinion
No. 25, "Accounting for Stock Issued to Employees." The Interpretation is to be
applied prospectively to all new awards, modifications to outstanding awards,
and changes in employee status on or after July 1, 2000. For changes made after
December 15, 1998 to awards that affect exercise prices of the awards, the
Company must prospectively account for the impact of those changes. The full
adoption of the Interpretation did not have a material impact on the Company's
financial condition or results of operations.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
No. 101), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. We believe our current revenue
recognition policies and practices are materially consistent with this
statement.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137, "Deferral of
the Effective Date of FASB Statement No. 133," which is effective for fiscal
years beginning after June 15, 2000. This statement requires companies to
record derivatives on the balance sheet as assets or liabilities measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
our financial statements for the year ending December 31, 2001. The Company
does not believe that this statement will have a material impact on our
financial position or results of operations.
8. Stock Repurchase Program
On August 15, 2000, the Company announced that its board of directors had
authorized a stock repurchase program whereby up to one million shares of the
Company's Class A common stock could be repurchased by the Company from time to
time in the open market or through negotiated transactions. Under this program,
the Company purchased 390,000 shares at an aggregate cost of approximately $2.3
million. All share purchases occurred during the period from August 16, 2000
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and August 23, 2000. Such shares have been classified as treasury shares in the
accompanying condensed balance sheet.
9. Subsequent Event
On October 25, 2000, pcOrder.com, Inc. entered into a merger agreement with
Trilogy providing for the acquisition of all of the outstanding Class A common
stock of pcOrder at $6.375 per share. Under the terms of the merger agreement,
on November 6, 2000, Trilogy is commencing a cash tender offer for any and all
outstanding shares of pcOrder Class A common stock, at a price of $6.375 per
share. Following the tender offer, a subsidiary of Trilogy will merge with
pcOrder and any remaining shares of Class A common stock of pcOrder will be
converted into the right to receive $6.375 per share in cash. The tender offer
and merger are subject to conditions. pcOrder cannot assure that these
conditions will be satisfied or that the tender offer or the merger will be
completed. The tender offer is being made solely pursuant to an offer to
purchase and related letter of transmittal, each dated November 6, 2000 (as each
may be supplemented and amended from time-to-time), that are being filed by
pcOrder and Trilogy with the Securities and Exchange Commission and mailed to
holders of our Class A common stock. Those documents contain important
information that should be carefully read in connection with any decision to
tender shares in the tender offer.
On October 25 and 26, 2000, and November 1, 2000, following the joint press
release on October 25, 2000 announcing the merger, five purported stockholder
class action lawsuits were filed against pcOrder, its five directors, and
Trilogy in Delaware Court of Chancery entitled Sidney Isaacs v. pcOrder.com, et
al., C.A. No. 18454; Thomas L. Hanley v. pcOrder.com, et al., C.A. No. 18458NC;
Andy Hickman v. pcOrder.com, et al., C.A. No. 18455; Amy Collins v. pcOrder.com,
et al., C.A. No. 18459NC; and Jeanette Corpus v. pcOrder.com, et al., C.A. No.
18472NC (collectively the "Delaware Complaints"). On October 26, 2000, a
similar purported class action lawsuit was filed against the same parties in the
District Court of Travis County, Texas entitled James F. Martens v. pcOrder.com,
et al., C.A. No GN003141 (the "Texas Petition").
The allegations in each of the Delaware Complaints are identical, the only
difference being the name of the purported class representative in each action.
The Delaware Complaints all allege the same grounds for relief, namely that the
defendants breached their fiduciary duty to the stockholders by orchestrating
the purchase of stock so that the public stockholders were deprived of an
"adequate" or "fair" price. The Delaware Complaints also allege that Trilogy
has a conflict of interest and committed this breach of fiduciary duty solely to
benefit itself in the tender offer and merger. The individual defendants are
alleged to have "acquiesced" in Trilogy's wrongdoing. The Delaware Complaints
also allege that pcOrder's earning results were withheld until after the merger
agreement was announced in order to artificially limit the price of the shares.
The allegations in the Texas Petition, while not identical to those in the
Delaware Complaints, claim essentially the same basic grounds for relief.
According to the Texas Petition, the individual defendants breached their
fiduciary duty to stockholders of pcOrder in connection with the merger by
failing to provide an appropriate process for eliciting and evaluating bids.
The Texas Petition further alleges that the actions of the individual defendants
were taken solely to serve their own interests and/or the interests of pcOrder's
largest stockholder, while inhibiting the "maximization" of stockholder value.
The Texas Petition also contains allegations regarding the timing of the
announcement of the merger agreement similar to those in the Delaware
Complaints.
All six of the lawsuits seek declarations that the defendants breached their
fiduciary duties (or acquiesced in the breach), unspecified damages and an award
of attorneys' fees, among other relief. All of the lawsuits include a request
for an injunction declaring the suits maintainable as class actions. Each of
the lawsuits seeks to enjoin the transactions contemplated by the merger,
including the tender offer and the merger, or to rescind the transactions in the
event they are consummated or
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to obtain rescissory damages. The Texas Petition seeks further declarations that
the merger constituted a breach of fiduciary duty and as a result is a nullity,
and a further injunction directing the individual defendants to obtain a
transaction that is in the best interests of stockholders.
Although all of the lawsuits include general claims for injunctive relief, to
the knowledge of pcOrder and Trilogy none of the plaintiffs has filed a motion
requesting the Delaware and Texas courts to prohibit the closing of the tender
offer or the merger. pcOrder intends to defend against all of these lawsuits
vigorously.
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The statements in this Quarterly Report on Form 10-Q that relate to future
plans, events or performance are forward-looking statements. Actual results,
events and performance may differ materially due to a variety of factors,
including the factors described under "Risk Factors That May Affect Results of
Operations and Financial Condition" below. We undertake no obligation to
publicly update these forward-looking statements to reflect events or
circumstances after the date hereof.
Pending merger with Trilogy Software, Inc.
On October 25, 2000, pcOrder.com entered into a merger agreement with Trilogy
Software, Inc. providing for the acquisition of all of the outstanding Class A
common stock of pcOrder at $6.375 per share. Under the terms of the merger
agreement, on November 6, 2000, Trilogy is commencing a cash tender offer for
any and all outstanding shares of pcOrder Class A common stock, at a price of
$6.375 per share. Following the tender offer, a subsidiary of Trilogy will
merge with pcOrder and any remaining shares of Class A common stock of pcOrder
will be converted into the right to receive $6.375 per share in cash. The
tender offer and merger are subject to conditions. We cannot assure that these
conditions will be satisfied or that the tender offer or the merger will be
completed. The tender offer is being made solely pursuant to an offer to
purchase and related letter of transmittal, each dated November 6, 2000 (as each
may be supplemented and amended from time-to-time), that are being filed by
pcOrder and Trilogy with the Securities and Exchange Commission and mailed to
holders of our Class A common stock. Those documents contain important
information that should be carefully read in connection with any decision to
tender shares in the tender offer.
Overview
pcOrder is a 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.
We have not acquired any significant new software customers during the first
nine months of this year. During the second quarter, we initiated steps
intended to increase our future software bookings, including refocusing our
efforts on large enterprise software deals, developing enterprise software
solutions that take advantage of the growing demand for transactive content
management tools, and increasing the technical capability of our sales force to
better align deliverables with our customers' needs and expectations. However,
these efforts have not yielded and are not expected to yield an immediate
positive impact on our revenues.
In addition to the lack of new software bookings noted above, certain
software and content customers cancelled their contracts with us during the
quarter ended September 30, 2000, including GE Capital ITS, Scribona Computer
Products, Dell Computers and ZDNet. Revenues
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from these and other cancelled contracts totaled approximately $1.3 million
during the third quarter and accounted for 10% of our total revenues for the
quarter. Furthermore, approximately $1.2 million in non-recurring affiliated
services revenues from Trilogy and approximately $0.7 million in non-recurring
license revenues were recorded during the third quarter. When combined with the
revenues from the cancelled contracts, a combined total of $3.2 million in non-
recurring revenues were recorded during the quarter ended September 30, 2000.
In addition to the customer cancellations noted above, another customer, e-
Commerce Industries, Inc. ("eci2") has indicated that it wishes to terminate its
license agreement with us. We are currently negotiating the termination of that
agreement with eci2. We originally entered into this agreement with eci2 in
October 1999 in an effort to expand our services and offerings into the office
products industry. We still maintain a $3.2 million minority equity investment
in eci2 that is being accounted for under the cost method of accounting in the
accompanying condensed balance sheets.
The lack of new software bookings and the customer cancellations mentioned
above have resulted in a significant decline in the utilization of our
consulting resources. Absent significant new software bookings, our consulting
revenues are not expected to return to recent historical levels and will likely
decline further in future quarters.
As a result of the factors mentioned above, we expect to see a substantial
reduction in our quarterly revenues during the fourth quarter of 2000 and for
the foreseeable future when compared to the revenues achieved during the third
quarter of 2000. While we have been taking steps to reduce our related cost of
sales and operating expenses to offset the decline in revenues during this
period, we currently expect our quarterly net loss and loss per share amounts to
increase in the foreseeable future.
On September 15, 2000, after lengthy discussions, we agreed to an amended
contract with our largest customer, Compaq Computer Corporation ("Compaq"),
which provides, among other changes, that Compaq could terminate the contract
one year earlier than it could under the original contract or elect to reduce
the scope of its license and the related license fees.
We derive our revenues from software and subscription fees, content fees, and
other related service fees. Software and subscription fees consist of
subscription-based and perpetual license software arrangements. Currently, we
derive the majority of our software and subscription fees from subscription-
based arrangements, but may from time to time grant perpetual licenses to
accommodate individual customer needs. Content fees are charged on a
subscription basis for access to and maintenance of information stored in our
product databases. Our service fees consist of providing consulting, training
and Web-hosting services to our customers. With the exception of Web-hosting,
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. Customers receiving Web-hosting services are typically
charged a monthly fee for each server used in providing such services.
Revenue from perpetual licenses and software subscriptions is recognized when
persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed or determinable and collection is considered
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
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above criteria, and is generally recognized over the life of the arrangement.
Subscriptions also must be renewed 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 are generally recognized over the applicable service
period, which generally commences upon the initial delivery of the content to
the customer.
Time and materials service fees are recognized as the services are performed
and collection is deemed probable. 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.
We record cash advances and amounts billed in excess of revenue recognized as
deferred revenue. Our deferred revenue balance on September 30, 2000 was $27.8
million. Approximately $21.6 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
delivery 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 entire
contract backlog or future revenues. The 22% increase in the deferred revenue
balance (including the long-term portion of deferred revenue) from June 30, 2000
to September 30, 2000 was almost entirely attributable to the receipt of a large
cash prepayment from Compaq during the quarter. As a result of the lack of new
software bookings and customer contract cancellations previously mentioned, we
expect to see a significant decline in our deferred revenue balance going
forward.
In connection with an intercompany license agreement with Trilogy, we are
obligated to pay Trilogy royalties based on fees generated from perpetual
license agreements, software maintenance and subscription-based licenses. Also,
we have entered into agreements with Trilogy for administrative, operational and
corporate support services, including some consulting, development, tax
administration, banking, corporate finance, recruiting and employee training
services. In addition, from our 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 Note 6 of the Notes to
Condensed Financial Statements included in Item 1. "Financial Statements".
Because the market for our products has only recently emerged, and because of
other factors described elsewhere in this Form 10-Q, 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. We currently expect
that our quarterly revenues will decline significantly for the foreseeable
future when compared to the quarterly revenues achieved during the third quarter
of this year. 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. 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.
13
<PAGE>
Results of Operations
Revenues
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
2000 1999 % Change 2000 1999 % Change
---------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Year-over-Year Growth
Software and Subscriptions..... $ 6,912 $ 6,257 10% $20,975 $14,489 45%
Content and Services........... 6,540 6,800 (4)% 23,161 15,136 53%
------- ------- --- ------- ------- --
Total Revenues.............. $13,452 $13,057 3% $44,136 $29,625 49%
======= ======= === ======= ======= ==
% of Revenues
Software and Subscriptions..... 51% 48% 48% 49%
Content and Services........... 49% 52% 52% 51%
------- ------- ------- -------
Total Revenues.............. 100% 100% 100% 100%
======= ======= ======= =======
</TABLE>
Software and Subscriptions. The software and subscriptions revenue figure of
$6.9 million for the three-month period ended September 30, 2000 included
approximately $0.4 million in non-recurring subscription revenues that were
accelerated due to the cancellation of a particular contract. Additionally,
approximately $1.0 million in perpetual license fees were recorded during the
quarter ended September 30, 2000, versus $2.2 million for the same period in the
prior year. Excluding these amounts and the non-recurring subscription revenue
from the cancelled contract, total software and subscriptions revenues for the
quarter ended September 30, 2000 increased by approximately $1.4 million, or
35%, when compared to the same period last year. The increase was almost
entirely due to an increase in the amount of subscription revenues recognized
under our subscription services agreement with Compaq. The increase in absolute
dollars for the nine-months ended September 30, 2000 was due primarily to
increased subscription revenues recognized from our existing customers,
primarily Compaq. Software and subscriptions revenues increased as a percentage
of total revenues during the three-month period ended September 30, 2000
primarily due to a relative decrease in content and services revenues. During
the nine-month period ended September 30, 2000, software and subscription
revenues decreased slightly as a percentage of total revenues due to a higher
relative increase in content and services revenues during the same period.
During the nine-month period ended September 30, 2000 we did not acquire any
new significant software customers. During the three-month period
ended September 30, 2000, we had a number of customers who cancelled their
contracts with us. We currently expect that the above factors will result in a
further reduction in our quarterly software and subscription revenues in the
fourth quarter of this year and for the foreseeable future. Additionally, in the
three-month period ended September 30, 2000, we amended our agreement with
Compaq following several months of discussion. The amendment provides Compaq
with rights to terminate the contract earlier or reduce the scope of the
software licensed and related license fees. If Compaq exercises these rights, we
would experience a significant decline in our software and subscription revenues
in future periods.
Content and Services. The decrease in content and services revenues in
absolute dollars and as a percentage of total revenues for the three-month
period ended September 30, 2000 was due primarily to a reduction in consulting
revenues as a result of the lack of new software customers during the year. The
increase in content and services revenues in absolute dollars and as a
percentage of total revenues for the nine-month period ended September 30, 2000
was due primarily to additional consulting revenues during the first half of
2000 as compared to the first half of 1999, and to a lesser
14
<PAGE>
degree, higher content revenues. The increase in consulting revenues was
primarily attributed to continuing integration work for software customers that
were added primarily during the second half of 1999. The increase in content
revenues was attributed to an overall increase in our content-only customer base
during the first nine months of this year.
Due to the lack of new software customer acquisitions, contract cancellations
and the anticipated lower utilization of our software by certain existing
software customers, we anticipate a significant decline in our quarterly
consulting revenues during the fourth quarter of this year and continuing for
the foreseeable future. Additionally, due to the customer contract
cancellations previously discussed, we anticipate a similar decline in our
quarterly content and hosting revenues.
Cost of Revenues and Gross Margins
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
2000 1999 % Change 2000 1999 % Change
---------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Year-over-Year Growth
Software and Subscriptions..... $1,198 $1,387 (14)% $ 3,877 $ 3,710 5%
Content and Services........... 5,953 5,066 18 % 20,640 11,166 85%
------ ------ ---- ------- ------- --
Total Cost of Revenues...... $7,151 $6,453 11 % $24,517 $14,876 65%
====== ====== ==== ======= ======= ==
Gross Margin Percentages
Software and Subscriptions..... 83% 78% 82% 74%
Content and Services........... 9% 26% 11% 26%
------ ------ ------- -------
Total Gross Margin.......... 47% 51% 44% 50%
====== ====== ======= =======
</TABLE>
Software and Subscriptions. Cost of software and subscriptions revenues
consists primarily of royalties paid to Trilogy and the costs of providing
maintenance and support for our software customers. The absolute dollar
decrease for the three-month period ended September 30, 2000 was due primarily
to higher billable utilization of our customer support organization resulting in
the allocation of those costs to the cost of content and services revenues. The
slight increase in absolute dollars for the nine-month period ended September
30, 2000 was primarily related to an increase in customer support headcount and
higher outsourced services in the first half of 2000 as compared to the first
half of 1999.
Software and subscriptions gross margins increased in both periods due to
economies realized in the software support organization, primarily related to
the increased billable utilization of our customer support personnel.
Content and Services. Cost of content and services revenues consists
primarily of the cost of providing access, entry, update and maintenance
services for our product content databases and the cost of in-house and contract
personnel providing consulting, support and training services. The increase in
cost of content and services revenues in both periods was primarily due to an
increase in the number of personnel and other costs associated with providing
increased consulting and hosting services to our software customers.
Additionally, increased headcount and outsourced data entry costs associated
with our content management organization also contributed to the increase for
the nine-month period ended September 30, 2000.
15
<PAGE>
Content and services gross margins decreased in both periods primarily due to
a decrease in the billable utilization of our consulting organization as a
result of a decrease in new software bookings and contract cancellations.
Furthermore, content and services gross margins for both periods were negatively
impacted by increased personnel and other investments made in our content
management group and higher outsourced service costs associated with our
consulting organization.
Operating Expenses
Research and Development
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
2000 1999 % Change 2000 1999 % Change
---------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Year-over-Year Growth
Research and development....... $3,754 $1,959 92% $11,430 $4,727 142%
% of Revenues.................. 28% 15% 26% 16%
</TABLE>
Research and development expenses consist primarily of the costs of in-house
and contract personnel to support our product development efforts. The increase
in absolute dollars and as a percentage of total revenues was primarily due to
the increase in outsourced development costs, primarily from Trilogy, and the
increase in the number of internal development personnel.
Selling and Marketing
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
2000 1999 % Change 2000 1999 % Change
---------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Year-over-Year Growth
Selling and marketing.......... $1,967 $4,388 (55)% $9,342 $13,086 (29)%
% of Revenues.................. 15% 34% 21% 44%
</TABLE>
Selling and marketing expenses consist primarily of salaries and related
benefits, outsourced personnel costs, and advertising, travel, tradeshow and
public relations expenses. Selling and marketing expenses decreased in absolute
dollars and as a percentage of sales in both periods primarily due to a
reduction in selling and marketing personnel, lower sales commissions, and lower
marketing campaign expenditures.
16
<PAGE>
General and Administrative
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
2000 1999 % Change 2000 1999 % Change
---------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Year-over-Year Growth
General and administrative..... $1,839 $1,503 22% $6,620 $4,306 54%
% of Revenues.................. 14% 12% 15% 15%
</TABLE>
General and administrative expenses consist primarily of personnel costs,
recruiting and professional legal and accounting services. Additionally,
management fees paid to Trilogy are also included in general and administrative
expenses. General and administrative expenses increased during the three-month
period ended September 30, 2000 primarily due to increased costs associated with
an increase in the number of administrative personnel. For the nine-month
period ended September 30, 2000, the increase in costs was primarily
attributable to an increase in recruiting campaigns and, to a lesser extent, an
increase in the number of administrative personnel.
Amortization of Deferred Stock Compensation
We record deferred stock compensation expense for the difference between the
exercise price of certain 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. For the three months ended September
30, 2000 and 1999, such amortization totaled approximately $174,000 and
$259,000, respectively. For the nine months ended September 30, 2000 and 1999,
deferred stock compensation amortization totaled approximately $645,000 and
$953,000, respectively.
Interest Income
Interest income represents income earned on cash and cash equivalents and our
short and long-term investments. Interest income increased to approximately
$1,187,000 for the three months ended September 30, 2000 from approximately
$764,000 for the three months ended September 30, 1999. For the nine months
ended September 30, 2000 and 1999, interest income totaled $3,613,000 and
$1,605,000, respectively. The increase in interest income in both periods is
due to the increase in our cash and cash equivalents and short-term investments
as a result of our initial public offering in February 1999 and our secondary
offering in December 1999.
Income Taxes
From inception through August 25, 1999, we were included in the consolidated
income tax returns of Trilogy. Through that date, we were also 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 Note 6 of the Notes to Condensed Financial
Statements included in Item 1. "Financial Statements".
17
<PAGE>
No income tax benefit was recorded for the three months and nine months ended
September 30, 2000. The income tax benefit recorded in 1999 reflects the
benefit that we were able to realize under the consolidated tax sharing
arrangement that was in place with Trilogy at that time.
Liquidity and Capital Resources
As of September 30, 2000 we had approximately $78.0 million in cash and short-
term investments. For the nine months ended September 30, 2000, cash and cash
equivalents increased approximately $15.0 million. However, when combined with
short-term investments, we had a net decrease of $3.5 million for the nine
months ended September 30, 2000.
Net cash used in operations totaled $0.5 million for the nine months ended
September 30, 2000 and net cash provided by operations totaled $12.6 million for
the nine months ended September 30, 1999. Cash used by operations for the nine
months ended September 30, 2000 resulted primarily from decreases in deferred
revenue and accrued liabilities, offset by a decrease in accounts receivable.
Cash provided by operations for the nine months ended September 30, 1999
resulted primarily from an increase in deferred revenue, accrued liabilities,
and, to a lesser extent, non-cash expenses, partially offset by an increase in
accounts receivable and a reduction in the payable to Trilogy.
Net cash provided by investing activities for the nine months ended September
30, 2000 was $16.7 million and was a result of the net activity of purchases and
sales of short-term and long-term investments, offset by the purchase of
property and equipment. Net cash used in investing activities for the nine
months ended September 30, 1999 was $21.0 million and related to the purchase of
short-term and long-term investments and to the purchase of property and
equipment.
Net cash used in financing activities was $1.1 million for the nine months
ended September 30, 2000 and was attributable to the repurchase of pcOrder
shares under the share buyback program, offset by proceeds received from the
exercise of stock options. Net cash provided by financing activities for the
nine months ended September 30, 1999 was $48.3 million. Net cash provided by
financing activities for the nine months ended September 30, 1999 was primarily
a result of the initial public offering completed in February 1999.
As of September 30, 2000, our principal sources of liquidity consisted of
$69.1 million in cash and cash equivalents and $8.9 million in short-term
investments. As of that date, our principal commitments consisted of obligations
in connection with our operating leases. We believe that our current cash and
cash equivalents and short-term investments balances, supplemented by cash flows
from our operations, will be sufficient to meet our anticipated cash needs for
at least the next 12 months. However, any projections of future cash needs and
cash flows are subject to substantial uncertainty. In the event the proposed
acquisition by Trilogy is not completed, we may be required to raise additional
financing in order to satisfy our long-term cash flow requirements and there can
be no assurance that financing will be available in amounts or on terms
acceptable to our stockholders and us.
18
<PAGE>
Risk Factors That May Affect Results of Operations and Financial Condition
Our future operations, financial performance, business and share price may be
affected by a number of factors, including the following, any of which could
cause actual results to vary materially from anticipated results or from those
expressed in any forward-looking statements made by us in this Quarterly Report
on Form 10-Q or in other reports, press releases or other statements issued from
time to time.
Risk that our stock price will decline if the acquisition by Trilogy is not
completed
Our stock price has increased significantly with the announcement of the
proposed acquisition by Trilogy. Both the tender offer and merger are subject
to conditions. In the event that these conditions are not satisfied or the
tender offer or merger are otherwise not consummated, the shares that continue
to trade may deeply decline in price to reflect that the agreement with Trilogy
is no longer pending and to reflect other potential adverse consequences
associated with the transaction, including the litigation that has commenced and
the departure of key personnel who have indicated that they would depart the
Company if it were not acquired. In addition, depending on the number of shares
purchased by Trilogy in the tender offer, there may be so few remaining
stockholders and publicly held shares that the shares will no longer be eligible
to be traded on the Nasdaq National Market System or other securities markets,
there may not be a public trading market for the shares and pcOrder may cease
making filings with the Securities and Exchange Commission or may otherwise
cease being required to comply with the rules and regulations of the Securities
and Exchange Commission governing publicly held companies.
If the tender offer and merger are not completed, the Company's continuing
operations, financial condition and share price would continue to be subject to
the following risks:
We currently expect our revenues to decline and losses to increase in the near
term.
We did not acquire any new significant software customers during the nine-
month period ended September 30, 2000 and we currently expect our revenues to
decline significantly during the remainder of the year. We are implementing
measures aimed towards increasing software bookings and revenues in the future;
however, we face significant risks in increasing our revenue base as described
in the paragraphs below. If the measures we are taking are not successful,
revenues may continue to decline in periods beyond 2000.
In each fiscal year since inception, we have incurred losses from operations,
except for a small operating profit in 1995. At September 30, 2000, we had an
accumulated deficit of $24.1 million. Given our expected decline in revenues,
we are taking steps to reduce expenses. However, we currently expect our losses
to continue. If we are not successful in our efforts to grow revenues
profitably, losses may continue to increase in future periods.
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 greater than 67% of our revenues were
generated by our five largest customers in the
19
<PAGE>
nine months ended September 30, 2000. In particular, one customer, Compaq,
represented a significant portion of our total revenues during 1999 and in the
nine months ended September 30, 2000. Also, Trilogy was one of our five largest
customers for the quarter ended September 30, 2000. In the quarter ended
September 30, 2000, certain software and content customers terminated their
contracts with us. If we lose and fail to replace any additional large
customers, including Compaq, our financial results and stock price may be
adversely affected. We plan to try and 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, beginning in 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 cycles for our products and services are long, which can delay the
receipt of cash and the recognition of revenues
Our potential customers tend to engage in extensive internal reviews before
making purchase decisions. We spend a lot of time educating and providing
information to our prospective customers regarding the use and benefits of our
products and services. The purchase of our products and services for deployment
within a customer's organization often involves a significant commitment of
capital and other resources. The purchase of our products and services is
therefore subject to delays
20
<PAGE>
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
even longer sales cycles for sales to manufacturers and distributors. We most
likely will continue to experience lengthy sales cycles in the future, which
could delay the timing of cash receipts and the recognition of the related
revenues.
The deployments of our products and services are long, which can delay the
receipt of cash and the recognition of revenues
The deployment of our products and services within a customer's organization
often takes an extended period of time and requires us to work closely with the
customer during the process. Some of our customers have experienced difficulties
or delays in completing implementations of our products and services. In some
cases, such delays have resulted in customer disputes and requests to
renegotiate or cancel the related contracts. Any of these difficulties or delays
could cause delays or non-receipt of the related cash, 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 provide e-commerce solutions, and several
competitors target the computer products industry. Our competitors include both
large companies with substantially greater resources and longer operating
histories, systems integrators and the internal information technology
departments of some of our customers and potential customers. Additionally, we
have recently begun to see an increase in competition with respect to our
content offerings.
We believe that our principal sources of competition currently are systems
integrators, content providers 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.
21
<PAGE>
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 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. To date, we have not achieved broad market acceptance
of our solutions. 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.
Inaccuracies in the data we maintain could expose us to liabilities and could
result in termination of customer contracts.
22
<PAGE>
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.
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;
. 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;
23
<PAGE>
. 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.
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. These fluctuations often have been
unrelated or disproportionate to the operating performance of these companies.
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
24
<PAGE>
. 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;
. 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, development 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, development 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. Mr. Cooley
25
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has indicated that he will depart the company if the acquisition by Trilogy is
not completed. Other key personnel have made similar indications.
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, 2000, Trilogy owned approximately 61% of our outstanding
common stock. This level of ownership provides Trilogy with the voting power to
determine the outcome of almost any matter submitted for the vote or consent of
our stockholders. For example, Trilogy can elect all of our directors, cause an
amendment of our Certificate of Incorporation, Bylaws and other documents, and
generally control the management of our business and affairs. In addition, the
shares of Class B common stock held by Trilogy entitle Trilogy to eight votes
per share, while each share of Class A common stock held by our other
stockholders entitle the holders to only one vote per share. Accordingly,
Trilogy may retain the ability to determine the outcome of matters submitted to
a vote of our stockholders even if it holds less than a majority of our
outstanding common stock. If Trilogy sells some or all of its pcOrder common
stock to a third party, the third party may be able to control us in the manner
that Trilogy is currently able to control us, including the election of all of
the members of our board of directors. A sale by Trilogy to a third party may
adversely affect our other stockholders, the trading price of our Class A common
stock and our business.
Similarly, Trilogy can prevent, delay or cause a change in control of pcOrder.
If Trilogy transfers a controlling interest in pcOrder, our other stockholders
may not be able to participate in the transaction or realize any premium or
other amounts for their shares of common stock. Trilogy can also take other
actions that might be favorable to Trilogy but not necessarily favorable to our
other stockholders.
We rely on Trilogy for the license of core technology and the provision of key
technical and management support; any conflicts that may arise between us and
Trilogy could harm our business.
We license core technology from Trilogy on a non-exclusive basis and with some
limitations. Our business would be disrupted by any termination of the license,
or reduction in the performance of the licensed technology, that requires us to
develop internally or license similar technology from a third party. We believe
that similar technology is not currently available from any third party. If the
license from Trilogy were terminated, we might not be able to develop
successfully similar technology on our own.
We have historically relied on Trilogy to provide significant human resource,
finance, recruiting, legal and other services. Since our initial public offering
in February 1999, we have begun to develop and implement the operational,
administrative and other systems and infrastructure necessary to support our
current and future business. To date, we have not completed this process. The
costs of the development and implementation will be significant. Any failure to
develop successfully and implement the systems and infrastructure may have an
adverse effect on our business.
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<PAGE>
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 has access to
technology that we develop for the computer industry. Trilogy can utilize the
technology in competition with us or license the technology to our competitors
or potential customers, which could have an adverse effect on our business.
System failures could harm our business.
Our success depends largely upon the efficient and uninterrupted operation of
our computer and communication systems. The occurrence of any system failure or
similar event could have an adverse effect on our business. We have contracted
with some of our customers to provide server hosting and to maintain redundant
leased lines to ensure system availability. Our development and management
systems are located at a facility that we lease in Austin, Texas. In addition to
that facility, we outsource the hosting of some of our servers to third parties.
Our systems and operations, whether at our site or through our third-party
outsourcing, are vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, break-ins and similar events. The measures we
have taken to prevent a system failure may not be successful in the future. In
addition, we do not have a formal disaster recovery plan and do not carry
sufficient business interruption insurance to compensate us for losses that may
occur as a result of any system failure.
Our business is dependent on the further development and maintenance of the Web
infrastructure.
The emergence and growth of the market for our products is dependent on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion. These improvements might not be made or, if made,
they might not be made in a sufficiently timely and cost-effective manner to
facilitate market acceptance of our products. The recent growth in the use of
the Internet has caused frequent periods of performance degradation. Any 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 at some point in the future. To
expand international sales, we must
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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
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with any acquisitions. As of the date of this report, we have no present
understandings, commitments or agreements for any material investment or
acquisition.
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.
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<PAGE>
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.
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 enhance our organizational structure could impair our business.
Our past growth -has placed significant demands on our management and other
resources. Our revenues increased from $5.9 million in 1996 to $44.0 million in
1999. Our staff increased from one employee in June 1994 to 233 employees at
September 30, 2000. This growth has resulted in substantial expansion of our
infrastructure, including operating and financial systems and controls and the
geographic scope of our operations and customers, as well as new and increased
responsibilities for management personnel. The growth has placed 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 have assumed responsibility for some of those services. If we
are unable to develop the necessary personnel and infrastructure to manage our
business and operations, our financial performance and stock price may be
adversely affected.
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. 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.
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We may be unable to meet our future capital requirements.
We need substantial working capital to fund our business. Although we
currently believe that our existing capital resources will be sufficient to meet
our presently anticipated cash requirements for at least the next 12 months, we
may need to raise additional financing before that time. We cannot be sure that
additional financing will be available to us on favorable terms when required,
or at all. If additional funds are raised through the issuance of equity
securities, our stockholders may experience significant dilution. In addition,
financing may not be available when needed or may not be available on acceptable
terms. If financing is not available when required or is not available on
acceptable terms, we may be unable to expand our sales and marketing
organization, develop new products and product enhancements, or take advantage
of business opportunities or respond to competitive pressures.
Future sales of common stock by Trilogy or insiders could adversely affect our
stock price.
Sales by Trilogy or our officers and directors of significant amounts of
common stock in the public market or the perception that these sales could
occur, could adversely affect our stock price. Trilogy has registration rights
for its shares of common stock, which rights could facilitate any future
disposition.
Investors' ability to trade our common stock may be limited by trading volume.
The trading volume in our common stock has been limited which may inhibit the
ability of our stockholders to sell shares of our stock and of potential
investors to buy our shares.
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<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of interest rate changes on our investment
portfolio as well as changes in the value of our equity investment in e-commerce
Industries, Inc. Such risks were discussed in detail in our Annual Report on
Form 10-K for the year ended December 31, 1999 and did not materially change
during the three months or nine months ended September 30, 2000.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None. See, however, footnote 9 to the financial statements included in Item 1 of
Part I for a description of certain lawsuits filed after the end of the third
quarter.
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Item 2. Changes in Securities
The Company's registration statement (Registration No. 333-62985) under the
Securities Act of 1933, as amended, for its initial public offering became
effective on February 26, 1999. Offering proceeds, net of aggregate expenses to
the Company of approximately $2.2 million, were approximately $47.2 million.
The Company continues to use the proceeds to help fund its working capital
requirements, as needed.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on July 6, 2000.
(b) All board of directors nominees referenced in Item 4(c) below were
elected at the Annual Meeting of Stockholders on July 6, 2000.
(c) The matters voted upon and the results of the voting were as follows:
(1) The following five persons were elected to the Board of Directors:
<TABLE>
<CAPTION>
Nominee Votes for Votes against
-------------------- ---------- --------------------
<S> <C> <C>
Ross A. Cooley 88,559,892 14,977
Joseph A. Liemandt 88,543,965 30,904
Peter J. Barris 88,559,892 14,977
Linwood A. Lacy 88,559,892 14,977
Robert W. Stearns 88,559,892 14,977
</TABLE>
(2) Adoption of the pcOrder.com Employees Stock Purchase Plan and the
pcOrder.com, Inc. Foreign Subsidiary Employee Stock Purchase Plan
was approved. The votes on this proposal were 85,278,021 for,
45,480 against, and 99,589 abstained.
(3) Amendment to the Company's 1999 Stock Option Incentive Plan (the
"Incentive Plan") to (a) increase the number of shares of Class A
common stock reserved for issuance under the Incentive Plan by an
additional 1,500,000 shares and (b) impose a limit on the number of
shares with respect to which awards may be made to each executive
officer under the Incentive Plan in any
33
<PAGE>
one year was approved. The votes on this proposal were 85,004,446
for, 322,414 against, and 96,230 abstained.
(4) The appointment of Ernst & Young LLP as the Company's independent
auditors for the fiscal year ending December 31, 2000 was approved.
The votes on this proposal were 88,563,024 for, 9,820 against, and
2,025 abstained.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
---------
The Exhibit Index attached hereto is hereby incorporated by reference
to this Item.
(b) Reports on Form 8-K:
--------------------
The Company did not file any reports on Form 8-K during the three
months ended September 30, 2000.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PCORDER.COM, INC.
Date: November 6, 2000 /s/ Carleton K. Thompson
------------------------------------------
Name: Carleton K. Thompson
Title: Vice-President of Finance (principal
accounting officer)
35
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
-------------- -----------------------------------------------------------
<S> <C>
10.18+ Amendment No. 1 to Subscription Services Agreement,
effective September 15, 2000, between pcOrder.com, Inc.
and Compaq Computer Corporation
27 Financial Data Schedule
</TABLE>
+ Confidential treatment has been requested with respect to portions of the
agreement indicated with an asterisk [*]. A complete copy of this agreement,
including the redacted items, has been separately filed with the Securities and
Exchange Commission.
36
