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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the year ended December 31, 1999
Commission File No. 000-25447
PCORDER.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2720849
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5001 Plaza on the Lake
Austin, Texas 78746
(512) 684-1100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
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Aggregate market value of voting stock held by non-affiliates
of the registrant as of
March 27, 2000................................................ $167,027,183
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Number of shares of Class A common stock outstanding as of
March 27, 2000................................................ 6,393,385
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Number of shares of Class B common stock outstanding as of
March 27, 2000................................................ 10,317,650
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DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report, to the extent
not set forth herein, is incorporated herein by reference from the
registrant's definitive proxy statement relating to the annual meeting of
stockholders scheduled to be held on June 30, 2000, which definitive proxy
statement shall be filed with the Securities and Exchange Commission within
120 days after the end of the fiscal year to which this Annual Report relates.
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PCORDER.COM, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
INDEX
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Page
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PART I
Item 1.Business.......................................................... 3
Item 2.Properties........................................................ 21
Item 3.Legal Proceedings................................................. 22
Item 4.Submission of Matters to a Vote of Security Holders............... 22
PART II
Item 5.Market for the Registrant's Common Stock and Related Stockholder
Matters................................................................. 23
Item 6.Selected Financial Data........................................... 24
Item 7.Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 25
Item 7A.Quantitative and Qualitative Disclosure About Market Risk........ 35
Item 8.Financial Statements and Supplementary Data....................... 36
Item 9.Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................... 54
PART III
Item 10.Directors and Executive Officers of the Registrant............... 54
Item 11.Executive Compensation........................................... 54
Item 12.Security Ownership of Certain Beneficial Owners and Management... 54
Item 13.Certain Relationships and Related Transactions................... 54
PART IV
Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 55
Signatures............................................................... 57
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PART I
ITEM 1. BUSINESS
The statements in this Annual Report on Form 10-K that relate to future
plans, events or performance are forward-looking statements. Actual results
could differ materially due to a variety of factors, including the factors
described under "Risk Factors" and the other risks described in this Annual
Report on Form 10-K. We undertake no obligation to publicly update these
forward-looking statements to reflect events or circumstances after the date
hereof.
OVERVIEW
pcOrder is a leading provider of business-to-business software applications,
content and related services that are designed to enable the computer
industry's suppliers, resellers and end users to buy and sell products online.
Our tailored solutions are designed to enable computer industry participants
to take advantage of the increasing adoption of e-commerce to automate sales
and distribution functions such as product search, comparison, configuration,
quoting, pricing, financing, ordering and reseller selection. Our solutions
are designed to enable our customers to lower their cost of sales and
marketing, reduce inventory levels, and more efficiently interact with their
business partners and customers.
INDUSTRY BACKGROUND
Growth of Internet Usage and E-Commerce
The Internet and Internet-related technologies are revolutionizing the way
businesses and consumers communicate, share information and conduct business.
There has been a significant increase in the amount of information and
services available over the Internet. Improved technology has enabled more
sophisticated information and services to be offered and has increased the
accessibility and ease of use of the Internet. These developments have
increased significantly the number of Internet users and transformed the use
of the Internet from a publishing medium to a medium that enables complex
business-to-business and business-to-consumer communications and commerce.
At the same time, businesses are faced with increasing competitive pressures
to lower costs, decrease inventories, improve sales and marketing productivity
and enhance time-to-market. To address these challenges, businesses are
increasingly using the Internet to replace traditional sales methods, provide
greater accuracy and permit the exchange of time-sensitive business
information.
Forrester Research, Inc. estimates that the business-to-business e-commerce
market will grow from $43 billion in 1998 to $1.3 trillion by 2003,
representing a compound annual growth rate of over 98%. In addition, Forrester
reports that computer products, including wholesale and retail equipment,
software, semiconductors and manufacturing, represent the largest and fastest
growing segment, by revenue, in business-to-business e-commerce. We believe
that the computer industry is particularly well suited to the use of the
Internet to conduct e-commerce due to:
. the industry's large size and fragmented nature;
. the high costs of sales and distribution;
. the challenges that the industry faces in managing the volume and
complexity of product, pricing, and configuration information that
result from a wide array of products, short product life cycles and
increased demand for custom configured solutions; and
. the industry's tendency to embrace technology for automating processes.
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Need to Enhance Efficiencies in the Sales, Marketing and Distribution of
Computer Products
Growth in Markets. According to International Data Corporation, the North
American computer products market, including personal computers, servers,
workstations, data communications equipment, and peripheral computer products,
such as data storage devices, printers, monitors, and scanners, totaled $129
billion in 1997 and is expected to reach $178 billion by 2002. In addition,
purchases of computer products often involve purchases of related software
applications.
Complexity of Industry and Need for Information. As the Web-based market for
computer products has developed, the group of industry participants has become
more diverse and complex. These participants include:
. manufacturers of computer hardware, software, peripherals and
components;
. channel participants, including distributors, resellers, systems
integrators and retailers;
. media companies that publish articles, reviews and other information
about computer products and host portal sites for corporate buyers and
channel participants;
. Internet shopping services that provide decision guides, market research
tools and other services to assist consumers and corporate buyers in
making purchase decisions and locating products on the Internet; and
. end users, including both corporate buyers and consumers.
The traditional computer industry supply chain consists of various sales and
distribution models, including direct-to-the-end-user and indirect 2-tier and
3-tier models. As a result, multiple industry participants are typically
involved in the sale and fulfillment of a transaction. For example, resellers
and integrators may buy directly from manufacturers, or they may purchase
products indirectly through distributors and resellers. For orders placed
through resellers, manufacturers may choose to ship directly to the end user
or may utilize their distributor and reseller channel partners to configure
and fill orders. To provide a broader product offering and local services,
direct manufacturers may employ distributors, resellers and integrators. These
emerging distribution methods are creating complexities, which are forcing the
computer industry to find better ways to share information about customers,
products, configuration, pricing, inventory and ordering.
Direct Distribution Methods and Shorter Product Life Cycles. The relative
success of companies that build systems to user specifications and ship
directly to the end user has put pressure on computer industry participants to
better meet customer demands. In addition, rapid technological change has
caused the continuing decline of component prices and shorter life cycles of
computer products. To compete more effectively, participants must reduce
inventories, shorten time-to-market and improve their ability to meet changing
customer demands.
Need for Current Product Information. The wide array of products, short
product life cycles and high volume of new product introductions make it
difficult for sales representatives and end users to remain current with
changing product and compatibility information. These difficulties have
underscored the need for sales productivity and e-commerce software combined
with current product information. Fulfilling this need helps increase the
efficiency and accuracy of sales representatives and helps enable end users to
independently select, configure and order computer products online.
Lack of Standardization. The sale of computer products frequently involves
multiple industry participants. Therefore, industry-wide standardization of
product and transaction information and software that makes the information
available online is required to provide a comprehensive e-commerce solution
for the industry. Past efforts to accomplish this have been largely
proprietary to a single or limited number of industry participants. These
proprietary solutions have had difficulty in achieving widespread adoption
because competition among industry participants makes it difficult to reach
agreement on a single standard. The development and maintenance of the
required software applications and content and the necessary integration with
partners' systems require significant investments. Participants have not been
able to justify the associated costs of building this type of a system
independently. As a result, we believe there is a need for an independent,
comprehensive industry-standard solution.
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OUR SOLUTION
As an independent, third party provider, we believe we are uniquely
positioned to deliver business-to-business solutions to computer industry
participants. Our solutions are focused on:
. Commerce. Our software technology platform enables computer industry
participants to develop and implement innovative, functional e-commerce
solutions. We offer a broad set of advanced sales, marketing,
distribution and e-commerce software applications.
. Content. Our content database contains more than 700,000 SKUs from over
3,000 manufacturers, which we believe is the industry's largest
aggregation of product information. Our database includes detailed
product categorization, compatibility, pricing and availability
information. We seek to extend our position as an industry-leading
product information source by continually broadening and deepening our
content offering.
. Community. The adoption of our platform by multiple industry
participants allows our customers to efficiently share information and
buy and sell products online. By promoting our platform as the industry
standard, we are enabling the creation of e-commerce communities within
the computer products industry.
To enable the successful deployment and use of our commerce, content and
community solutions, we provide software integration, customization, training,
Web-hosting and other services. We have developed software integration modules
that allow our applications to integrate with leading enterprise software
applications such as those of Oracle and SAP. These integrations allow the
transfer of information to enable order placement, pricing and inventory
queries, order status queries, financing and credit approval and other
functions.
To date, industry participants such as beyond.com, Compaq, CompuCom Systems,
CompUSA, CMP Media, Dell, GE Capital, Hewlett-Packard, Ingram Micro, IBM,
Inktomi, EDS, Nortel Networks, Quantum, Scribona Computer Products, Tech Data
and ZDNet have adopted either our software applications, our content and
related services, or both as part of their overall e-commerce strategy. In
1999, our software and content was used by more than 19,000 computer product
sales representatives from over 4,400 reseller organizations.
We have a non-exclusive technology license agreement with Trilogy Software,
Inc. ("Trilogy") that enables us to develop products based on Trilogy's sales,
marketing and e-commerce software applications, including what we believe is
one of the industry's leading configuration and pricing technologies. We have
extended these applications to support the specific configuration and pricing
rules of the computer industry to help industry sales representatives and end
users quickly and accurately build and order custom-configured systems across
multiple vendors. As of December 31, 1999, Trilogy owned approximately 62% of
our outstanding common stock.
Our solutions are designed to provide customers with the following benefits:
. Meet end-user demand for ordering by offering online product
configuration, pricing, selection and ordering capabilities. This
enables end users to order computer products over the Internet.
. Enhance the productivity of sales and marketing efforts by providing a
comprehensive tool to access product data, configure systems and enable
ordering. We believe this allows sales representatives to respond more
quickly to customer needs.
. Reduce inventory costs by enabling computer industry participants to
build computers as orders are placed. We believe this enables our
customers to decrease the risk of product obsolescence, to improve their
ability to meet end-user demand, and to achieve higher margins by
enabling the sale to occur earlier in the product life cycle.
. Reduce costs, risks, and time-to-market of establishing e-commerce
capabilities. We believe our position as an independent third-party
solutions provider, combined with our industry focus and experience,
enables us to offer the most cost-effective and rapid time-to-market e-
commerce solutions to the computer industry.
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. Improve information flow in the computer industry by standardizing
product information and software. We believe that this improved flow
will enable industry participants to better share accurate and timely
information about customers, products, configuration, pricing, inventory
and ordering.
CUSTOMERS
We have established a customer base of manufacturers, channel participants
(including distributors, resellers, integrators and retailers), media
companies and Internet shopping services. In 1999, Compaq and Hewlett-Packard
each represented more than 10% of our total revenues. The customers shown in
the table below represented 88% of our total revenues for the year ended
December 31, 1999.
Manufacturers: Channel Participants:
AST b2bstores.com
Compaq CompuCom Systems
Dell CompUSA
Hewlett-Packard EDS
IBM ENTEX
Nortel Networks GE Capital IT Solutions
Quantum Hartford
SGI Ingram Micro
Manchester
Media Companies: SARCOM
Scribona Computer Products
CMP Media SYNNEX
InfoWorld Tech Data
ZDNet
Internet Shopping Services:
Active Research
Deja.com
Inktomi
NexTag.com
PriceGrabber.com
In partnership with our major customers, we have deployed our solutions to
small and medium resellers. We have designed our suite of products and
services to automate and enhance our customers' sales, marketing and inventory
management capabilities.
OUT PLATFORM
In September 1999, we introduced eStation, our third generation technology
platform that provides open and scalable solutions designed to meet the
specific needs of each segment of the computer industry, including computer
product manufacturers, channel participants, media companies, Internet
shopping services and end users, including corporate customers and consumers.
Software Applications. We offer a suite of software applications that are
designed to increase the automation of sales, marketing and distribution
functions in the computer industry. The following applications operate on the
eStation platform:
. Kiosks. A retail Kiosk application enables end-customers to access
product information, build configurations and order from virtual
inventory.
. E-Tail Sites. Turn-key E-tail Sites allow manufacturers, retailers or
resellers to market tens of thousands of products online. E-tail Sites
provide a ready-populated catalog, a retail-oriented shopping experience
and easy integration to business and fulfillment partners.
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. Large Account Extranets. Large Account Extranets give enterprise
corporate customers a personalized, streamlined way to procure computer
products online. Extranets include a custom interface, targeted
promotions, contract pricing and procurement management logic.
. Small and Medium Business Portal. Small and Medium Business Portal
technology enables retailers, resellers and manufacturers to create a
personalized portal for their small and medium-size business customers.
This technology supports thousands of personalized user accounts, each
of which can be set up rapidly by the user or an administrator.
. Request for Quote. The Request for Quote ("RFQ") technology is a reverse
auction application that streamlines the purchase process by providing
corporate customers with a single location to gather product
information, interact with merchants and purchase products over the
Internet. Buyers select products, disseminate RFQs to a network of
merchants that are qualified based on their business profile and award
bids based on the responses received from the merchants.
. Store-O-Matic. Store-O-Matic is a store-generation tool that enables the
creation of custom Web storefronts. Individual storefronts can vary
greatly in their look and feel, yet can be created rapidly.
. Sales Webtop. Sales Webtop enables internal sales representatives to
instantly access pricing, availability, configuration and product
information, build custom quotes and take orders.
. Call Centers. Many Internet sales are actually completed by telephone.
The Call Center application provides easy integration into industry-
leading call center systems. This enables customer service
representatives to access the same information as the customer,
providing easy support and up-sell opportunities.
Functionality Modules. Our software applications are modular in nature. This
modularity enables customers to purchase and add specific functionality as
needed. Modules may be accessed either through our packaged software
applications or through customer-specific, custom-developed applications. Our
applications are built upon various combinations of the following core
modules:
. Promotion. The promotion module provides the ability to deliver and
manage targeted product promotions. The promotion module points users to
alternative or add-on products at the point of sale. This enables the
manufacturer to target the promotion of its products to specific
customers, track the response rates, and dynamically manage the
promotion to maximize results.
. Catalog. The catalog module enables users to easily search, browse,
compare, and view product data sheets from our content database. For
example, users can perform searches such as "show all laptop computers
with hard drives larger than 1 gigabyte".
. Custom Pricing. The pricing module allows users to access customized
pricing information. Utilizing software licensed from Trilogy, we have
developed a computer industry pricing module that enables participants
to automate complex pricing rules. For example, resellers can make
customer-specific adjustments before displaying prices to end users.
. Finance. The finance module allows users to quote lease rates,
electronically submit credit applications, select from multiple
financing options and specify optional financing terms. This module
electronically links resellers with finance companies, enabling
resellers to instantly provide end users with a variety of leasing and
finance options.
. Configuration. The configuration module enables users to more
efficiently configure valid systems. Users request desired features
through an easy to use needs analysis interface, which then interacts
with Trilogy's configuration engine to select components. This interface
shields the user from technical details of the components while
preventing invalid configurations.
. Referral. The referral module enables manufacturers to refer customers
to resellers based on location or other characteristics. In addition,
the referral module delivers, processes, and tracks referrals to connect
end users with an appropriate reseller. This allows manufacturers to
monitor referrals and ensures that customer needs are met.
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. OrderServer. The order module enables ordering and order confirmation.
Manufacturers, distributors and resellers can access pricing and
availability information from multiple sources and provide this real-
time information to their potential customers. We electronically link
our solution and the customer's internal ordering system to create a
seamless flow of order information.
Business Integrations. We have developed software integration modules that
allow our applications to integrate with leading enterprise software
applications such as those of Oracle and SAP. These integrations allow the
transfer of information to enable order placement, pricing and inventory
queries, order status queries, financing and credit approval and other
functions. We can also link computer industry participants with each other
electronically. For example, a manufacturer's website can quote reseller
pricing and product availability from a distributor or reseller. After the
order is placed, the manufacturer can then automatically transfer the order to
the distributor or reseller for fulfillment.
Content and Related Services. Our content strategy is to become the leading
source of accurate, timely, and helpful information to facilitate the buying
and selling of computer products, office products and consumer electronics
products. We have dedicated extensive resources to establishing a group that
is focused exclusively on product content. This group consists of several
functional areas including a team dedicated to collecting the product
information, a team dedicated to ensuring the accuracy of our content, and a
team dedicated to selling content and related services on a stand-alone basis.
By offering content as a separate solution, we believe we are able to gain
broader access to companies in the computer, office and consumer electronics
product industries, and more rapidly increase our content market share in such
industries.
The key features of our content and related services are:
. Breadth and Depth of Information. We currently offer a broad and deep
computer product content database in terms of the number of products
represented, the number of attributes per product and the amount of
other content which we classify as images, reviews, features and
benefits and marketing information. We have collected product
information on more than 700,000 SKUs from over 3,000 manufacturers,
which we believe to be the most comprehensive database of product
content in the computer industry. We are working with several
distributors and manufacturers to increase the breadth of the content
that we currently maintain for each product. Additionally, we are
currently in the process of developing similar content databases for the
office and consumer electronics products industries.
. Accuracy and Timeliness of Information. We believe that our product
content is among the most accurate in the industry. To ensure
timeliness, we work with customers to prioritize top selling products
and help ensure that new product information is added to the content
database either on the day of or before the product is released.
. Tools and Processes. We have developed proprietary tools which enable us
to capture, analyze the quality of, and control product information
which is entered into our content database. We have also created well-
defined processes for entering data which further help us ensure
accuracy and allow us to more rapidly add to and update the information
which is contained in the database. Some of these processes are
summarized below.
. Flexibility. We have designed our content database to enable our
customers to decide not only what content they want to display but also
how they want to display the content. For example, our customers may
choose to display highly technical attributes to their more technical
customers and may choose to use a customized template to maintain the
same look and feel of their website.
We currently receive updates and additions of product data on a regular
basis from manufacturers, distributors, and resellers. Our processes
supplement the data in the following ways:
. Categorization/Classification. Our categorization and classification
processes are designed to create and populate standardized product
groupings across the industry and enable convenient access to a broad
array of products from multiple suppliers. For example, an end user can
search for all monitors of a specific size and select from a list of
monitors made by several manufacturers and/or available from multiple
suppliers.
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. Data and Logic Modeling. Our data and logic modeling processes are
designed to enable accurate multi-vendor configuration. For example, our
systems specify that a particular computer accepts one type of memory
but not another, thereby helping the user to order the correct upgrade
package. We continually develop and enhance our computer industry model
that enables our applications to configure multi-vendor computer
systems.
. Data Sheet Creation. We create data sheets designed to give customers
detailed product data in a standardized format. Using data sheets, users
may access a quick view of all of the product information that they need
to make a purchase decision. This standardized format also enables
attribute-based searching for products and enables users to conduct a
side-by-side comparison between two or more products. For example, a
user deciding between two otherwise identical laptop computers would be
able to see that one comes with a fax modem and more memory, but that
the other is lighter and smaller.
We have developed a detailed process for receiving, inputting, and verifying
the accuracy of the content in our databases. To manage data quality, we have
implemented a comprehensive data quality process that involves an automated
regression test and analysis of over 34,000 validation test cases. See "Risk
Factors--Our business is dependent on our ability to manage our content
database and ensure the accuracy of that data". We plan to use our data
collection tools and processes to continue to add product data that we
currently do not collect.
Services. To provide a comprehensive platform, we offer a range of services
to speed integration and adoption of our solutions at the customer site.
. Client Services. We implement customer support, software integration,
customization and training services primarily through our client
services organization. The organization's goal is to ensure successful
and rapid implementation and high levels of customer satisfaction by
facilitating open communications to quickly identify, analyze and solve
problems. Our participation in the customer's implementation may include
planning and requirements definition, project management, custom
integration, unit and system tests and support procedures design. We
believe that providing a high level of customer service and technical
support is necessary to achieve timely product implementation. We
provide ongoing product support services to our customers in the form of
telephone, e-mail and Web-based support, documentation and software
updates and error corrections. All product updates are available to
customers through our product support group. A team of dedicated
engineers and support staff provide product, technical and product
registration support from 8:00 a.m. to 5:00 p.m., Central time, on
business days, from our support offices. For additional fees, we also
provide support services 24 hours a day, seven days a week. We also make
training available to our customers through our client services
organization.
. Web-Hosting. While some of our customers host their websites internally,
a substantial number of customers utilize our Web-hosting services. To
provide these services we staff and maintain a Web-hosting facility in
our Austin location. In addition, we contract with third parties to use
their facilities to augment our Web-hosting services.
STRATEGIC RELATIONSHIPS
We actively pursue strategic relationships to increase and augment our
product offerings and expand our presence. We are pursing the following
initiatives through strategic relationships:
Office Products Industry. In October 1999, we entered into a strategic
relationship with e-Commerce Industries, Inc. ("eci/2/") in order to leverage
the proprietary technology and process expertise that we have developed for
the computer industry into the office products industry and create a complete
business-to-business e-commerce platform for the office products industry. The
agreement is a multi-year subscription-based arrangement under which eci/2/
has been granted exclusive rights to sublicense our core e-commerce technology
in the office products industry. Additionally, the two companies will share in
the development of an extensive office product content database that will be
distributed by both companies as part of their overall e-commerce
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services. In connection with the strategic relationship, we made an equity
investment in eci/2/ and Christina Jones, our President and Chief Operating
Officer, joined the board of directors of eci/2/.
Expansion of Content Offering. We have entered into strategic relationships
in order to augment our content offerings. Our objective is to provide all
segments of the computer industry with the most comprehensive content
available. For example, we have an agreement with Deja.com to provide their
user reviews and ratings to our content customers, an agreement with Active
Research to provide their buyer's guide to our content customers and an
agreement with InfoWorld to provide their product reviews to our content
customers.
Community Sites. We have established the strategic relationships described
below to create community sites where buyers and sellers of computer products
and services come to obtain information, buy or sell products and services and
find related links.
. We have an agreement with CMP Media, one of the leading high tech media
companies, to launch a CMP-branded portal for the computer reseller
community with our Sales Webtop application. The reseller portal will be
available on CMP's ChannelWeb which currently reports 1.5 million page
views per month. CMP Media reports that 70,000 reseller members are
registered for ChannelWeb. Under the agreement, this site will be
integrated with CMP's product reviews and editorial content and enable
resellers to move their businesses online by providing product search,
comparison, real-time pricing and availability and quote generation
tools. The portal will also allow for highly targeted advertising and
promotion at the point-of-sale.
. InfoWorld and pcOrder jointly launched InfoQuote, a business service
using our Request For Quote, or RFQ technology, in October 1999.
InfoWorld is a leading portal for corporate computer buyers. The service
acts as a "reverse auction", which allows registered users of
InfoWorld's site to select products by accessing our ContentSource
database and to then disseminate their purchase requirements to a number
of merchants selected from a network of over 8,000 individual
representatives representing over 3,500 merchant organizations
registered for the MyTechBuyer.com service described below. Merchants
can then bid for the business through the service. The service also
provides links to InfoWorld product reviews.
. In cooperation with GE Capital Vendor Financial Services, we power an
online reseller community called MyTechBuyer.com. MyTechBuyer.com was
launched in the second quarter of 1999 and enables resellers to obtain
product information, build sales quotes online and bid on Requests-for-
Quotes. There are currently over 4,400 merchant organizations registered
to use the service.
SALES AND MARKETING
We sell and market our software applications, content and services primarily
through our sales and marketing organization.
Sales. Our sales force consists of technical presale consultants, account
developers, field sales representatives and telemarketers. We deploy sales
teams consisting of both sales and technical professionals to provide
customized proposals, presentations and demonstrations to potential customers.
The primary decision makers in our customers' organizations typically include
management executives such as the chief executive officer, the chief financial
officer, vice presidents of marketing, vice presidents of sales and chief
information officers.
Marketing. Our marketing efforts are directed at establishing a market
leadership position, and therefore we are investing in the expansion of our
marketing organization and activities. Targeted at executives in the computer
industry, our marketing programs are focused on creating awareness and
generating interest in our solutions. We engage in a variety of co-marketing
activities with some of our key customers designed to strengthen our customer
relationships. We are an active participant in industry conferences and
expositions. We have sponsored several industry conferences in the past, and
we believe that exposure of this nature has
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contributed to our visibility within the computer industry. Our marketing
personnel engage in a variety of marketing activities, including managing and
maintaining our Web site, issuing newsletters, creating direct mailings,
placing advertisements, conducting public relations and establishing and
maintaining close relationships with industry analysts.
TECHNOLOGY
Our solutions are based on open industry standards and are designed to be
fully modular and extensible. The architecture is designed to allow new
modules to be added to the backbone, and replaced when newer versions become
available. Our software applications and content database are made available
both on the Internet via a Web browser/HTML and also via Win32 client-server
interfaces. Both interfaces access the same application layer, which provides
functionality such as configuration, pricing, product information data sheets,
financing and ordering.
We have implemented our software applications through the use of industry
standard technologies, including HTTP/HTML, C++, COM/DCOM, CORBA, Windows NT
and ODBC. We believe this implementation provides timely systems integration,
ease of implementation, broad connectivity and benefits from technological
advancements.
We have a non-exclusive, worldwide, royalty-bearing license to use Trilogy's
sales and marketing automation software. We customize application modules
licensed to us by Trilogy for the specific needs of our customers. Examples of
this customization include computer industry-specific configuration and
pricing modules. We create our own application modules that specifically
address the functionality needs of computer industry participants.
RESEARCH AND DEVELOPMENT
Our research and development efforts include software application
development and customization, data modeling and tools development. Our
software application development teams identify and develop software solutions
that meet the unique needs of computer industry participants. This includes
both the development of original software applications as well as customizing
Trilogy's applications. Our database content research and development efforts
primarily focus on the development of data models and data entry tools that
enhance our content management and maintenance capabilities.
We intend to continue to make substantial investments in research and
development and related activities. We believe that our future success will
depend in large part on our ability to support current and future releases of
software applications, to maintain and extend our content database and to
timely develop successful new products.
COMPETITION
The market for software products that enable e-commerce is intensely
competitive, and we expect competition in our market segment to increase
substantially. Numerous companies provide 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.
With respect to our software solutions, we believe that our principal
sources of competition currently are systems integrators and the internal
information technology departments of our customers and potential customers.
These organizations may seek to develop e-commerce solutions through the use
of tools offered by our competitors primarily focused on providing e-commerce
enabling solutions to the computer industry such as BroadVision, Calico
Commerce, 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
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offer the same or similar e-commerce solutions offered by us but that could,
with limited barriers to entry, compete directly with us. Also, Trilogy is not
prohibited from competing directly or indirectly with us. Increased
competition could result in price reductions, reduced margins and loss of
market share, any of which would adversely affect our business. Many of our
current and potential competitors have significantly longer operating
histories and significantly greater financial, technical, marketing and other
resources than ours. We may be unable to compete successfully with our
existing competitors or with new competitors, and failure to do so may
adversely affect our financial results and stock price in the future.
Increased competition could result in price reductions, reduced margins and
loss of market share, any of which would materially and adversely affect our
business.
We believe that price, functionality, product performance, content,
reliability and customer service are the principal competitive factors for
companies seeking to provide e-commerce solutions. We believe our e-commerce
solutions differ from approaches taken by competitors primarily because of our
unique focus on the computer industry, our strategic relationships with
industry leaders, and our comprehensive content database.
With respect to our content solutions, we have seen a significant increase
in competition in recent months. Most notably, C/Net has begun to aggressively
target the computer and consumer electronics industries. We believe that the
breadth and depth of our content solutions, along with the additional features
that we continue to incorporate in to such solutions, will differentiate our
content offerings from those of our competitors.
EMPLOYEES
As of December 31, 1999, we had 242 full-time employees, including 46 in
sales and marketing, 29 in research and development, 40 in content management,
38 in customer support, 50 in professional services and 39 in administration.
In addition, we employed 117 part-time and contract employees; this consisted
primarily of outsourced support for our content management and consulting
services. All of these employees are located in the U.S. We believe that our
future success is dependent on attracting and retaining highly skilled
engineering, sales and marketing, and senior management personnel. Competition
for these personnel is intense, and we cannot assure you that we will continue
to be able to attract and retain qualified employees. Our employees are not
represented by any collective bargaining unit. We have never experienced a
work stoppage, and we consider our relations with our employees to be good.
RISK FACTORS
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 Annual
Report on Form 10-K or in other reports, press releases or other statements
issued from time to time.
A majority of our revenues come from a few customers.
Greater than 60% of our revenues came from our five largest customers in
each of the last three fiscal years. In particular, one customer, Compaq,
represented a significant portion of our total revenues during 1999. If we
lose and fail to replace any of our large customers, including Compaq, our
financial results and stock price may be adversely affected. We plan to expand
and diversify our customer base. However, as a result of our limited operating
history, we have derived, and over the near term we expect to continue to
derive, a significant portion of our revenues from a limited number of large
customers.
The volume of business with specific customers is likely to vary from year
to year, and a major customer in one year may not procure software, content or
services from us in a subsequent year. Our future growth is dependent in part
on our ability to renew existing contracts on terms favorable to us, as well
as our ability to penetrate further our existing customer accounts with
additional products and services. A decrease in business from one or more of
our major customers could have a material adverse effect on our financial
results and stock price.
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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 decreased significantly during 1999. We believe this is the
result of consolidations among participants through mergers, acquisitions and
other business combinations, business failures, manufacturers aligning with
fewer distributors and retailers and other factors. Many of the current
participants face serious financial difficulties, or are undergoing
significant management or strategic changes, which could cause them to reduce,
delay or suspend investments in the type of products and services that we
offer. These difficulties may also cause existing customers to attempt to
renegotiate or terminate existing contracts or delay product implementations
or payments.
The sales 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 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 the contract. 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.
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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.
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. In the past, these entities have
purchased computer products and accessories and exchanged information
regarding these products primarily through traditional means of commerce and
communications. The market for the types of products and services that we
offer is still emerging and may not continue to grow. Even if the market does
continue to grow, our products might not achieve market acceptance among
computer product manufacturers, distributors, resellers, retailers, other
industry participants and end users, including corporate buyers and consumers.
If we are not successful in achieving broad market acceptance of our third-
party e-commerce products and services or in achieving significant market
share, our financial results and stock price may be adversely affected.
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Our business is dependent on our ability to manage our content database and
ensure the accuracy of that data.
Our business depends on our ability to update and maintain an extensive
database of technical and descriptive information on computer products,
including over 700,000 SKUs from over 3,000 manufacturers. Inaccuracies in the
data we maintain could expose us to liabilities and could result in
termination of customer contracts.
In October 1999, we signed an agreement with eci/2/ pursuant to which we
have committed to collect and maintain content on office products. We have no
experience in creating an information database for office products and may
experience unanticipated costs and difficulties in this effort.
Maintaining our databases is a highly manual process and we utilize a
combination of highly trained internal personnel and contract personnel
provided by third parties. In addition, our computer systems and databases
must be sufficiently scalable to process large amounts of complex product
specification and configuration data without significant degradation in
performance. In the past, we have experienced periodic difficulties with data
accuracy. For example, in the second quarter of 1998, database capacity
constraints limited our ability to accept daily pricing and availability
updates from distributors, and temporarily disrupted our ability to provide
this data to some reseller customers. These problems caused some of those
customers to decline or delay contract renewals.
We have a history of losses that we expect to continue in the future.
In each fiscal year since inception, we have incurred losses from
operations, except for a small operating profit in 1995. At December 31, 1999,
we had an accumulated deficit of $19.3 million. We expect operating losses to
continue for the foreseeable future. Our ability to become profitable depends
on our ability to generate and sustain substantially higher revenues while
controlling expense levels. Our future profitability and success, if any, will
depend, among other factors, on our ability to maintain and expand
relationships with computer industry participants and end users. Although our
revenues have increased in recent periods, there can be no assurance that our
revenues will grow in future periods or that we will achieve profitability on
a quarterly or annual basis in the future. Even if we do achieve profitability
in future fiscal periods, we cannot be sure that we would be able to sustain
or increase profitability because of the dynamic nature of our business and
the industry in which we compete.
Our operating results are volatile and may fluctuate significantly in future
fiscal periods.
Historically, our revenues and operating results have fluctuated
significantly. We expect that they will continue to fluctuate significantly on
a quarterly and annual basis due to a combination of factors. We have in the
past recognized, and may in the future be required to recognize, a significant
portion of revenue derived from perpetual license agreements with our
customers in a single fiscal quarter, which can cause significant variations
in quarterly revenues. Since a majority of our revenues come from a limited
number of large customers, the timing of significant orders and the
recognition of revenue from these orders are unpredictable and can cause large
fluctuations in quarterly operating results. Other factors that may cause our
future revenues and operating results to fluctuate include:
. our ability to expand significantly our sales, marketing and consulting
services organizations;
. our ability to develop successfully new and enhanced products;
. the level of demand for our products;
. the timing and amount of license payments from our customers;
. the diversion of our potential customers' resources to address internal
Year 2000 issues;
. our ability to retain existing customers and increase sales to those
customers;
. the timing and volume of new orders and our capacity to fulfill those
orders;
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. the level of product and price competition;
. the announcement or introduction of new or enhanced products and
services by us or our competitors;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our business and sales and marketing
infrastructure;
. downtime of our systems or Internet capacity or reliability problems;
. the growth in the use and acceptance of, and activity on, the Internet,
Web and Internet-related technologies, particularly by corporate,
institutional and government users for the purchase of computer
products;
. the extent to which unauthorized access and use of online information is
perceived as a threat to network security;
. seasonal trends in customer purchasing; and
. general economic conditions.
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. The valuations of many Internet stocks, including ours, are
extraordinarily high based on conventional valuation standards such as price
to earnings and price to sales ratios. These trading prices and valuations may
not be sustained. Any negative change in the public's perception of the
prospects of Internet or e-commerce companies could depress our stock price
regardless of our results of operations. Other broad market and industry
factors may decrease the trading price of our common stock, regardless of our
operating performance. Market fluctuations, as well as general political and
economic conditions such as recession or interest rate or currency rate
fluctuations, also may decrease the trading price of our common stock. In
addition, our stock price could be subject to wide fluctuations in response to
the following factors:
. actual or anticipated variations in our quarterly operating results;
. announcements of new products, product enhancements, technological
innovations or new services by us or our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the Internet and online commerce industries;
. changes in the market valuations of other Internet or online service
companies;
. developments in Internet regulations;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. unscheduled system downtime;
. additions or departures of key personnel; and
. sales of our common stock or other securities in the open market.
In the past, securities class-action lawsuits have often been instituted
against companies following stock price declines. Litigation of this type, if
instituted, could result in substantial costs and a diversion of our
management's attention and resources.
We have a limited operating history, which makes our future prospects
difficult to evaluate.
We were established as a separate business unit within Trilogy in 1993. We
were incorporated and began to recognize revenue in 1994. We entered into
agreements with a majority of our significant customers since only
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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.
Trilogy has voting control over pcOrder and may exercise that control in a
manner that adversely affects the company or other stockholders.
As of December 31, 1999, Trilogy owned approximately 62% 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.
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We rely on Trilogy for the license of core technology and the provision of key
technical and management support; any conflicts that may arise between us and
Trilogy could harm our business.
We license core technology from Trilogy on a non-exclusive basis and with
some limitations. Our business would be disrupted by any termination of the
license, or reduction in the performance of the licensed technology, that
requires us to develop internally or license similar technology from a third
party. We believe that similar technology is not currently available from any
third party. If the license from Trilogy were terminated, we might not be able
to develop successfully similar technology on our own.
We have historically relied on Trilogy to provide significant human
resource, finance, recruiting, legal and other services. Since our initial
public offering in February 1999, we have begun to develop and implement the
operational, administrative and other systems and infrastructure necessary to
support our current and future business. To date, we have not completed this
process. The costs of the development and implementation will be significant.
Any failure to develop successfully and implement the systems and
infrastructure may have an adverse effect on our business.
Ownership interests of our directors or officers in Trilogy's common stock,
or service as both a director or officer of pcOrder and an officer or employee
of Trilogy, could create or appear to create potential conflicts of interest
when directors and officers are faced with decisions that could have different
implications for pcOrder and Trilogy. Joseph A. Liemandt, one of our
directors, is the Chairman and Chief Executive Officer and a substantial
stockholder of Trilogy.
An agreement between us and Trilogy that prohibited Trilogy from competing
with us expired on June 1, 1999. While Trilogy does not currently compete
directly with us, Trilogy is free to do so. Direct competition with Trilogy
could have an adverse effect on our business. Further, Trilogy has joint
ownership rights in technology jointly developed by pcOrder and Trilogy during
the term of our license arrangement with Trilogy and also have access to
technology that we develop for the computer industry. Trilogy can utilize the
technology in competition with us or license the technology to our competitors
or potential customers, which could have an adverse effect on our business.
System failures could harm our business.
Our success depends largely upon the efficient and uninterrupted operation
of our computer and communication systems. The occurrence of any system
failure or similar event could have an adverse effect on our business. We have
contracted with some of our customers to provide server hosting and to
maintain redundant leased lines to ensure system availability. Our development
and management systems are located at a facility that we lease in Austin,
Texas. In addition to that facility, we outsource the hosting of some of our
servers to third parties. Our systems and operations, whether at our site or
through our third-party outsourcing, are vulnerable to damage or interruption
from fire, flood, power loss, telecommunications failure, break-ins and
similar events. The measures we have taken to prevent a system failure may not
be successful in the future. In addition, we do not have a formal disaster
recovery plan and do not carry sufficient business interruption insurance to
compensate us for losses that may occur as a result of any system failure.
Our business is dependent on the further development and maintenance of the
Web infrastructure.
The emergence and growth of the market for our products is dependent on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion. These improvements might not be made or, if made,
they might not be made in a sufficiently timely and cost-effective manner to
facilitate market acceptance of our products. The recent growth in the use of
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.
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There are many risks associated with international operations.
Although we have had limited sales outside of the U.S. and Canada, we expect
to increase our sales in international markets. To expand international sales,
we must establish additional foreign operations, build strategic relationships
and hire additional personnel. This expansion will require significant
management attention and financial resources and could have an adverse effect
on our business. In addition, we may be unable to maintain or increase
international market demand for our products and services. Although our
international sales are primarily denominated in U.S. dollars, we may incur an
increasing percentage of obligations denominated in foreign currencies in the
future. A change in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and, therefore, potentially
less competitive in those markets and could otherwise adversely affect our
ability to meet our foreign-currency-denominated obligations. Currently, we do
not employ currency hedging strategies to reduce this risk. Our international
business may be subject to additional risks, including the following:
. difficulties in collecting international accounts receivable;
. difficulties in obtaining export licenses;
. potentially longer payment cycles;
. increased costs associated with maintaining international marketing
efforts;
. the introduction of non-tariff barriers and higher duty rates; and
. difficulties in enforcement of contractual obligations and intellectual
property rights.
We may encounter difficulties and unanticipated costs and liabilities in
acquiring and effectively integrating assets and businesses from third
parties.
As part of our business strategy, we may acquire assets and businesses
principally relating to or complementary to our current operations. Any
acquisitions that we undertake will be accompanied by the risks commonly
encountered in business acquisitions. These risks include, among other things:
. potential exposure to unknown liabilities of acquired companies;
. the difficulty and expense of assimilating the operations and personnel
of acquired businesses;
. diversion of management time and attention and other resources;
. loss of key employees and customers as a result of changes in
management;
. the incurrence of amortization expenses; and
. possible dilution to our stockholders.
In addition, geographic distances may make the integration of businesses
more difficult. We may not be successful in overcoming these risks or any
other problems encountered in connection with any acquisitions. As of the date
of this prospectus, we have no present understandings, commitments or
agreements for any material investment or acquisition.
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
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others who participate in product development activities may be breached, we
may not have adequate remedies for any breach, and our software or trade
secrets may otherwise become known or independently developed by competitors.
Many of our current and potential competitors dedicate substantially greater
resources to protection and enforcement of intellectual property rights,
especially patents. If a blocking patent has been issued or is issued in the
future, we would need to either obtain a license or design around the patent.
There can be no assurance that we would be able to obtain a license on
acceptable terms, if at all, or to design around the patent. We pursue the
registration of some of our trademarks and service marks in the U.S. and in
some other countries, although we have not secured registration of all of our
marks. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the U.S. Effective
copyright, trademark and trade secret protection may not be available in those
jurisdictions. We license some of our proprietary rights to third parties.
Those licensees may not abide by compliance and quality control guidelines
regarding proprietary rights and the licensees may take actions that would
adversely affect our business.
The computer software industry is characterized by frequent and substantial
intellectual property litigation that often is complex and expensive and
involves a significant diversion of resources and uncertainty of outcome. In
the future, we may need to pursue litigation to enforce and protect our
intellectual property rights or to defend against a claim of infringement or
misappropriation. We attempt to avoid infringing known proprietary rights of
third parties in our product development efforts. However, we have not
conducted and do not intend to conduct comprehensive patent searches to
determine whether the technology used in our products infringes patents held
by third parties. In addition, it is difficult to proceed with certainty in a
rapidly evolving technological environment in which there may be numerous
patent applications pending, which generally are confidential when filed. Any
claims against us relating to the infringement or misappropriation of third-
party proprietary rights, even if not meritorious, could result in the
expenditure of significant financial and managerial resources and in
injunctions preventing us from distributing some products.
Our business substantially depends on the continued growth of e-commerce.
If the Internet as a commercial or business medium fails to develop or
develops more slowly than expected, our business would be adversely affected.
The increased use of the Internet for retrieving, sharing and transferring
information among computer industry participants has only recently developed.
Our success will depend in large part on continued growth in, and the use of,
the Internet for commerce, which depends on:
. growth in commercial access to, and acceptance of, new interactive
technologies;
. development of technologies that facilitate interactive communication
between organizations and targeted audiences; and
. increases in user bandwidth.
Critical issues about commercial use of the Internet are unresolved,
including security, reliability, cost, ease of access, quality of service and
necessary increases in bandwidth availability. These issues are likely to
affect the development of the market for our products and services. The
adoption of the Internet for information retrieval and exchange, commerce and
communications generally will require the acceptance of a new and evolving
medium of conducting business and exchanging information. That acceptance is
likely only if the Internet provides greater efficiency and an improved arena
of commerce and communication.
Our failure to manage growth and enhance our organizational structure could
impair our business.
Our growth and new projects have placed significant demands on our
management and other resources. Our revenues increased from $5.9 million in
1996 to $44.0 million in 1999. Our staff increased from one employee in June
1994 to 242 employees at December 31, 1999. This growth has resulted in, and
can be expected to continue to require, substantial expansion of our
infrastructure, including operating and financial systems and controls and the
geographic scope of our operations and customers. Recent rapid growth has also
resulted in new
20
<PAGE>
and increased responsibilities for management personnel. The growth has placed
and, if it continues, is expected to continue to place, a significant strain
on our management and operations. In addition, we have historically relied on
Trilogy to provide some human resource, finance, recruiting, legal and other
services. We are in the process of assuming responsibility for many of those
services. If we are unable to develop the personnel and infrastructure
necessary to manage an increased level of business and operations, our
financial performance and stock price may be adversely affected.
Our business will suffer if our products contain errors or defects.
Our products may contain undetected errors or defects when first introduced
or as new versions are released. Our introduction of new products or product
enhancements with reliability, quality or compatibility problems could also
result in reduced bookings, delays in collecting accounts receivable and in
additional service and warranty costs. We have in the past experienced
difficulties and delays in successfully installing our products at some
customer sites. Similar problems may occur in the future. We have recently
transitioned our product architecture to a more modular and flexible design.
New customers may experience performance problems with this new technology
platform, whether in the form of bugs, compatibility difficulties or
otherwise. In addition, our existing customers could experience problems in
transitioning to our new technology platform. If we fail to properly manage
the transition by our existing customers to our new technology platform, we
could see cancellation of customer contracts, a decline in our competitive
position or reduced or delayed sales of our products. In addition, defects or
errors in our products may result in product liability claims being brought
against us. We currently have only limited insurance coverage against product
liability claims. We may be unable to renew our insurance in the future and
any insurance we have may be inadequate to cover any claims brought against
us.
We may be unable to meet our future capital requirements.
We need substantial working capital to fund our business. Although we
currently believe that our existing capital resources will be sufficient to
meet our presently anticipated cash requirements for at least the next 12
months, we may need to raise additional financing before that time. We cannot
be sure that additional financing will be available to us on favorable terms
when required, or at all. If additional funds are raised through the issuance
of equity securities, our stockholders may experience significant dilution. In
addition, financing may not be available when needed or may not be available
on acceptable terms. If financing is not available when required or is not
available on acceptable terms, we may be unable to expand our sales and
marketing organization, develop new products and product enhancements, or take
advantage of business opportunities or respond to competitive pressures.
Future sales of common stock by Trilogy or insiders could adversely affect our
stock price.
Sales by Trilogy or our officers and directors of significant amounts of
common stock in the public market or the perception that these sales could
occur, could adversely affect our stock price. Trilogy has registration rights
for its shares of common stock, which rights could facilitate any future
disposition.
Investors' ability to trade our common stock may be limited by trading volume.
The trading volume in our common stock has been limited which may inhibit
the ability of our stockholders to sell shares of our stock and of potential
investors to buy our shares.
ITEM 2. PROPERTIES
Our principal facilities occupy an aggregate of approximately 45,000 square
feet in Austin, Texas pursuant to a lease with Trilogy that expires in April
2005. We believe that our existing facilities are adequate for our current
requirements and that additional space can be obtained to meet our future
growth requirements.
21
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in various lawsuits and legal proceedings
which arise in the ordinary course of business. Currently, we are not a party
to any litigation or arbitration proceedings that would have a material
adverse effect on our business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matters were submitted to a vote of security-holders during the fourth
quarter of the fiscal year ended December 31, 1999.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of pcOrder, and their ages as of March 24, 2000, are
as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
---- --- -----------
<S> <C> <C>
Ross A. Cooley............... 58 Chairman and Chief Executive Officer
Christina C. Jones........... 30 President and Chief Operating Officer
James J. Luttenbacher(1)..... 44 Vice President and Chief Financial Officer
Richard Friedman............. 37 Vice President, General Counsel and Secretary
</TABLE>
Ross A. Cooley has been Chairman and Chief Executive Officer since November
1996. From 1984 to 1996, Mr. Cooley was employed by Compaq, most recently as
Senior Vice President and General Manager responsible for all North American
business and operations. Mr. Cooley is a member of the RosettaNet board of
directors, the computer industry's e-commerce standards effort, and a member
of its executive committee. During his 18-year career at IBM, Mr. Cooley
completed the Harvard Business School Senior Executive Program. Mr. Cooley
holds an A.A.S. from Broome Community College.
Christina C. Jones is our founder and has been our President and Chief
Operating Officer since June 1996. In 1989, Ms. Jones co-founded Trilogy.
Before founding pcOrder, Ms. Jones was Director of Marketing of Trilogy. Ms.
Jones holds a B.A. in Economics from Stanford University.
James J. Luttenbacher has been our Vice President and Chief Financial
Officer since March 1998. From 1992 to 1998, Mr. Luttenbacher was employed at
Mentor Graphics Corporation, most recently as division manager for a software
product division focused on integrated circuit test and physical verification
applications. Mr. Luttenbacher holds a B.A. in Accounting from the University
of Michigan and a Masters of Management in finance and operations from Kellogg
Graduate School of Management at Northwestern University.
Richard Friedman has been our Vice President and General Counsel since July
1999. Mr. Friedman was elected Secretary in September 1999. From January 1995
to July 1999, he was a partner in the Palo Alto office of Heller Ehrman White
& McAuliffe LLP, an international law firm, where he specialized in corporate
and securities law. From April 1998 to July 1999, Mr. Friedman was also acting
general counsel of Identix Incorporated. Mr. Friedman holds a B.A. from the
University of Rochester and a J.D. from the University of Chicago Law School.
- --------
(1) Mr. Luttenbacher resigned from the Company effective March 31, 2000.
22
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Market Information
The Class A common stock is traded on the Nasdaq National Market under the
symbol "PCOR." The following table sets forth the high and low closing sale
prices for the common stock for the periods indicated, as reported by the
Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Year ended December 31, 1999
First Quarter (from February 26, 1999)...................... $70.25 $39.50
Second Quarter.............................................. 80.00 30.38
Third Quarter............................................... 41.00 27.38
Fourth Quarter.............................................. 71.00 34.50
</TABLE>
Holders
As of March 27, 2000 there were 236 stockholders of record of the Company's
Class A common stock, although there are a larger number of beneficial owners.
All outstanding Class B common stock is owned by Trilogy.
Dividends
The Company has never declared or paid any dividends on its common stock.
The Company currently intends to retain all available funds and any future
earnings for use in the operation of our business and does not anticipate
paying any cash dividends in the foreseeable future.
23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes thereto and the information contained herein
in Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Historical results are not necessarily indicative of
future results.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------ ------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Software and subscriptions...... $ 21,103 $ 12,651 $ 6,475 $3,633 $1,836
Content and services............ 22,909 9,063 4,114 2,249 1,887
-------- -------- -------- ------ ------
Total revenues................ 44,012 21,714 10,589 5,882 3,723
-------- -------- -------- ------ ------
Cost of revenues:
Software and subscriptions...... 5,436 3,242 1,023 822 818
Content and services............ 17,011 7,068 2,553 1,112 953
-------- -------- -------- ------ ------
Total cost of revenues........ 22,447 10,310 3,576 1,934 1,771
-------- -------- -------- ------ ------
Gross profit...................... 21,565 11,404 7,013 3,948 1,952
Operating expenses:
Research and development........ 7,101 4,292 1,129 1,168 660
Selling and marketing........... 17,832 12,151 4,793 2,555 577
General and administrative...... 6,620 3,689 1,792 726 116
Amortization of deferred stock
and stock compensation
expense........................ 1,275 1,468 -- -- --
-------- -------- -------- ------ ------
Total operating expenses...... 32,828 21,600 7,714 4,449 1,353
-------- -------- -------- ------ ------
Operating income (loss)........... (11,263) (10,196) (701) (501) 599
Interest income................... 2,610 172 -- -- --
-------- -------- -------- ------ ------
Income (loss) before income
taxes............................ (8,653) (10,024) (701) (501) 599
Income tax provision (benefit).... (326) (386) 427 (191) 207
======== ======== ======== ====== ======
Net income (loss)................. $(8,327) $(9,638) $(1,128) $ (310) $ 392
======== ======== ======== ====== ======
Basic and diluted net income
(loss) per share................. $ (0.54) $ (0.75) $ (0.09) $(0.02) $ 0.03
======== ======== ======== ====== ======
Weighted average shares
outstanding...................... 15,292 12,861 12,800 12,800 12,800
======== ======== ======== ====== ======
<CAPTION>
December 31,
--------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......... $ 54,113 $ 4,726 $ 2,207 $ -- $ --
Short-term investments............ 27,364 -- -- -- --
Working capital (deficit) (1)..... 55,807 (9,045) (1,489) (253) 255
Total assets...................... 105,738 12,254 4,978 3,435 1,492
Stockholders' equity (deficit).... 59,917 (8,545) (995) 132 442
</TABLE>
- --------
(1) Working capital (deficit) at December 31, 1998, 1997, and 1996 includes the
effect of deferred revenue of $10,428, $4,212 and $2,162, respectively.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements in this Annual Report on Form 10-K 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" in Item 1 and the other
risks identified in this Annual Report on Form 10-K. We undertake no
obligation to publicly update these forward-looking statements to reflect
events or circumstances after the date hereof.
OVERVIEW
pcOrder is a leading provider of business-to-business software applications,
content and related services that are designed to enable the computer
industry's suppliers, resellers and end users to buy and sell products online.
Our tailored solutions are designed to enable computer industry participants
to take advantage of the increasing adoption of e-commerce to automate sales
and distribution functions such as product search, comparison, configuration,
quoting, pricing, financing, ordering and reseller selection. Our solutions
are designed to enable our customers to lower their cost of sales and
marketing, reduce inventory levels, and more efficiently interact with their
business partners and customers.
We were established as a separate business unit within Trilogy in July 1993,
and were incorporated in July 1994. We began to recognize revenue in April
1994, and have periodically released new products and enhancements to our
existing products since that date. In late 1996, Ross A. Cooley joined as
Chairman and Chief Executive Officer and brought significant computer industry
experience and long-term relationships with computer industry participants to
pcOrder. Since that time, our e-commerce solutions for the computer industry
have gained broader acceptance, and industry participants including
beyond.com, Compaq, CompuCom Systems, CompUSA, CMP Media, Dell, GE Capital,
Hewlett-Packard, Ingram Micro, IBM, Inktomi, EDS, Nortel Networks, Quantum,
Scribona Computer Products, Tech Data and ZDNet, have adopted either our
software applications, our content and related services, or both.
We derive our revenues from software and subscription fees, content fees,
and other related service fees. Software and subscription fees consist of
subscription-based and perpetual license software arrangements. Before 1997,
our software and subscription fees were derived primarily from perpetual
licenses of our software products. In late 1996, we commenced a transition of
our pricing model to subscription-based arrangements. Currently, we derive the
majority of our software and subscription fees from subscription-based
arrangements, but may from time to time grant perpetual licenses to
accommodate individual customer needs. Content fees are charged on a
subscription basis for access to and maintenance of information stored in our
product databases. Our service fees consist of providing integration,
customization, 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.
Historically, our content services have been sold in conjunction with our
software applications. However, in early 1999, we launched ContentSource, a
subscription-based service that allows customers to subscribe solely to our
content without licensing our software. This service is primarily targeted
toward Internet retailers, corporate resellers, distributors, and third
parties that provide shopping services to Internet portals. Revenues from this
service began to be recognized during the third quarter of 1999.
Revenue from perpetual licenses and software subscriptions is recognized
when persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed or determinable and collectibility is probable. In
the case of perpetual licenses, revenue is recognized immediately upon
achievement of the above
25
<PAGE>
criteria. In the case of subscriptions, which represent the majority of our
contracts, revenue recognition commences upon achievement of the 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, including fees from ContentSource, are generally
recognized over the applicable service period, which generally commences upon
the initial delivery of such content to the customer.
Time and materials service fees are recognized as the services are
performed. We recognize revenue on fixed-price service arrangements upon the
completion of specific contractual events, or based on an estimated percentage
of completion as work progresses.
In June 1999, we expanded our customer relationship with Compaq. Under the
new agreement, we agreed to provide a broader range of software applications
and services across more of Compaq's e-commerce initiatives and included
international as well as domestic deployments. The agreement is a multi-year
subscription-based agreement, but can be terminated earlier by either party
upon prior written notice in the event of a payment default, material breach,
failure of pcOrder to provide specific deliverables (including specific
deliverables agreed to after execution of the agreement), and termination of
business. Revenues from Compaq, including amounts recognized under the
agreement in place prior to the June 1999 agreement, represented a significant
portion of our total revenues during 1999 and are expected to comprise a
significant portion of our revenues in 2000. Accordingly, any negative
modifications to this agreement could have a material adverse effect on our
financial condition and results of operations.
In October 1999, we entered into an agreement with e-Commerce Industries,
Inc. (eci/2/), a leading e-commerce company in the office products industry.
The agreement is a multi-year subscription-based agreement that grants eci/2/
exclusive rights to sublicense our core e-commerce technology in the office
products industry. Additionally, we and eci/2/ will share in the development
of an extensive office product content database that will be distributed by
both companies as part of their overall e-commerce services. In connection
with the strategic relationship, we made a $3.2 million minority equity
investment in eci/2/ and Christina Jones, our President and Chief Operating
Officer, joined the board of directors of eci/2/. The investment is being
accounted for under the cost method of accounting.
We record cash advances and amounts billed in excess of revenue recognized
as deferred revenue. Our deferred revenue balance on December 31, 1999 was
$31.4 million. Approximately $28.7 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.
Statement of Position 97-2, "Software Revenue Recognition" was issued in
October 1997 by the American Institute of Certified Public Accountants and
amended by SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-
2". We adopted SOP 97-2 and SOP 98-4 effective January 1, 1998. Effective
December 15, 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
"Software Revenue Recognition', With Respect to Certain Transactions". SOP 98-
9 amends SOP 97-2 and 98-4, extending the deferral of the application of some
passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or
before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. We
do not believe that the full adoption of SOP 98-9, effective January 1, 2000,
will have a material impact on our financial condition or results of
operations.
In connection with an intercompany license agreement with Trilogy, we are
obligated to pay Trilogy royalties based on fees generated from perpetual
license agreements, software maintenance and subscription-based licenses.
Also, we have entered into agreements with Trilogy for administrative,
operational and corporate
26
<PAGE>
support services, including some consulting, development, tax administration,
payroll, payroll accounting, 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 Financial Statements included in Item 8. "Financial Statements
and Supplementary Data".
Except for a small profit in 1995, we have incurred annual losses from
operations since our inception in July 1993 to date, and we expect to continue
to incur losses from operations on both a quarterly and an annual basis for
the foreseeable future. We had an accumulated deficit of $19.3 million at
December 31, 1999. Further, we intend to continue to increase our expenditures
in the foreseeable future, primarily through continued investments to increase
the number of personnel in our consulting, development, and sales departments.
Furthermore, we also plan to continue increasing our expenditures with respect
to marketing programs and activities to increase the sales of our products and
services to our existing customers and to new customers. However, historically
we have experienced a lengthy cycle for sales of our products to resellers and
longer sales cycles for sales of our products to manufacturers and
distributors. Consequently, even if we achieve increased sales of our products
and services as a result of our investments in our sales force, such increases
likely will not be recognized in the quarter in which these investments are
made.
Because the market for our products has only recently emerged, and because
of other factors described elsewhere in this Form 10-K, we believe that our
quarterly and annual revenues, expenses and operating results are likely to
vary significantly in the future, that period-to-period comparisons of our
results of operations are not necessarily meaningful and that these
comparisons should not be relied upon as indications of our future
performance. In addition, although our revenues have increased in recent
periods, there can be no assurance that our revenues will grow in future
periods, that they will grow at past rates or that we will achieve
profitability on a quarterly or annual basis in the future. Our prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stage of development, particularly
companies in new and rapidly evolving markets. There can be no assurance that
we will be successful in addressing these risks and difficulties or that we
will achieve or sustain profitability in the future.
RESULTS OF OPERATIONS
Revenues
<TABLE>
<CAPTION>
Year-over-Year Growth 1999 % Change 1998 % Change 1997
--------------------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Software and Subscriptions..... $21,103 67% $12,651 95% $ 6,475
Content and Services........... 22,909 153% 9,063 120% 4,114
------- --- ------- --- -------
Total Revenues............... $44,012 103% $21,714 105% $10,589
======= === ======= === =======
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C> <C> <C>
% of Revenues
Software and Subscriptions..... 48% 58% 61%
Content and Services........... 52% 42% 39%
------- ------- -------
Total Revenues............... 100% 100% 100%
======= ======= =======
</TABLE>
Revenues increased 103% to $44.0 million in 1999, up from $21.7 million in
1998. This compares with an increase in revenues of 105% in 1998, up from
$10.6 million in 1997. Our top five customers accounted for approximately 69%
of total revenues in 1999 compared with 62% in 1998 and 64% in 1997.
Software and Subscriptions. Software and subscriptions revenues increased
67% in 1999 to $21.1 million, up from $12.7 million in 1998. In 1998, software
and subscriptions revenues increased 95%, up from $6.5
27
<PAGE>
million in 1997. The increase for each period was primarily due to higher
software subscription revenues resulting from a combination of new customers
and increases in the software solutions being provided to existing customers.
The lower percentage growth in 1999 when compared to 1998 was primarily due to
lower growth in perpetual license fees in 1999 when compared to 1998. During
1999, perpetual license revenues increased 19% to $3.8 million, up from $3.2
million in 1998. The lower growth rate for perpetual licenses is primarily due
to the use of subscription-based contracts (as opposed to perpetual licenses)
to license the majority of our software. Recurring software and subscription
revenues (which excludes revenues from perpetual licenses), increased 83% in
1999 versus 66% in 1998.
Software and subscriptions revenues as a percentage of total revenues
decreased to 48% in 1999 from 58% in 1998 and 61% in 1997. The decrease as a
percentage of total revenues for both periods was due to a higher growth rate
in our content and services revenues. The higher growth rate associated with
content and services revenues during both periods was primarily due to an
increase in the demand for our software integration, customization and
training services, and, to a lesser extent, higher content and Web-hosting
fees.
Content and Services. Content and services revenues increased 153% in 1999
to $22.9 million, up from $9.1 million in 1998. In 1998, content and services
revenues increased 120%, up from $4.1 million in 1997. As previously
mentioned, the increase for each period was primarily driven by increased
demand for our software integration, customization and training services, and,
to a lesser extent, higher content and Web-hosting fees. The increased demand
for our software integration, customization and training services was due to
our expanding software customer base as well as an increase in the level of
services being provided to our existing customer base. Additionally, the scope
and complexity of our recent software agreements have dramatically increased,
thus contributing to the higher overall software integration, customization
and training services fees. We believe that the continued expansion of our
software and content customer base and an increase in the number of software
and content solutions being provided to our existing customers will continue
to result in increased demand for our software integration, customization and
training services.
In addition to the above, higher content and Web-hosting revenues also
contributed to the yearly increases in our content and services revenues. The
higher content revenues in both periods were primarily driven by an increase
in the number of bundled software and content deals that were sold to new and
existing customers during 1999 and 1998. Additionally, the unbundling of our
content offering from our software platform in 1999 also contributed to the
increase in our content revenues during the latter part of 1999. The higher
Web-hosting revenues in both periods were primarily driven by an increase in
the hosting services provided to our existing customer base and, to a lesser
extent, new software customer additions during such periods.
We believe that the heightened demand that we have seen for our content and
software integration, customization and training revenues will continue for
the foreseeable future. Accordingly, we expect that content and services
revenues will comprise a larger percentage of our total revenues during this
period of time.
Cost of Revenues and Gross Margin
<TABLE>
<CAPTION>
1999 % Change 1998 % Change 1997
------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C>
Year-over-Year Growth
Software and Subscriptions..... $ 5,436 68% $ 3,242 217% $1,023
Content and Services........... 17,011 141% 7,068 177% 2,553
------- --- ------- --- ------
Total Cost of Revenues....... $22,447 118% $10,310 188% $3,576
======= === ======= === ======
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C> <C> <C>
Gross Margin Percentage
Software and Subscriptions..... 74% 74% 84%
Content and Services........... 26% 22% 38%
------- ------- ------
Total Gross Margin
Percentage.................. 49% 53% 66%
======= ======= ======
</TABLE>
28
<PAGE>
Total cost of revenues increased 118% to $22.4 million in 1999, up from
$10.3 million in 1998. This compares with an increase in total cost of
revenues of 188% in 1998, up from $3.6 million in 1997. The total gross margin
percentage for 1999 was 49%, down from 53% in 1998 and 66% in 1997. The
declining trend in our total gross margin during the above periods is due to a
higher overall weighting of content and services revenues (which carry a lower
gross margin) as a percentage of total revenues. As discussed above, the
expected higher weighting of content and services revenues in the foreseeable
future will continue to result in lower overall gross margins.
Software and Subscriptions. Cost of software and subscriptions revenues
consists primarily of royalties paid to Trilogy and the costs of providing
maintenance and support to our software customers. Cost of software and
subscriptions revenues increased 68% in 1999 to $5.4 million, up from $3.2
million in 1998. In 1998, cost of software and subscriptions revenues
increased 217%, up from $1.0 million in 1997. The increase in both periods was
due to an increase in customer support headcount and costs necessary to
support our increased software customer base, as well as an increase in the
amount of royalties paid to Trilogy due to the increase in software revenues
in each period.
Software and subscriptions gross margin totaled 74% in 1999, unchanged from
1998 and down from 84% in 1997. The decline in gross margin levels in 1999 and
1998 from the 1997 level is due primarily to the increased customer support
infrastructure costs previously discussed.
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 software integration, customization and training
services. Cost of content and services revenues increased 141% in 1999 to
$17.0 million, up from $7.1 million in 1998. In 1998, cost of content and
services revenues increased 177%, up from $2.6 million in 1997. The increase
in both periods was due to increased personnel and related costs in our
content management group and increased personnel and other costs associated
with providing increased software integration, customization, training and
hosting services to our software customers.
Content and services gross margin totaled 26% in 1999, up from 22% in 1998
and down from 38% in 1997. The increase in our content and services gross
margin in 1999 was primarily due to a higher weighting of software
integration, customization and training services revenues, which carry a
higher gross margin, as a percentage of total content and services revenues.
The decrease in the 1999 and 1998 content and services gross margins when
compared to 1997 was primarily due to increased personnel and other
investments made in our content management group in order to scale that side
of our business.
OPERATING EXPENSES
Research and Development
<TABLE>
<CAPTION>
1999 % Change 1998 % Change 1997
------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
Research and Development.............. $7,101 65% $4,292 280% $1,129
% of Total Revenues................... 16% 20% 11%
</TABLE>
Research and development expenses consist primarily of the cost of in-house
and contract personnel to support our product development efforts. Research
and development expenses increased 65% in 1999 to $7.1 million, up from $4.3
million in 1998. In 1998, research and development expenses increased 280%, up
from $1.1 million in 1997. Research and development expenses represented 16%
of total revenues in 1999, down slightly from 20% in 1998 and up from 11% in
1997.
The increase in research and development expenses in absolute dollars for
each period was primarily due to increases in the number of internal
development personnel. Additionally, higher outsourced development costs also
contributed to the absolute dollar increase in 1999. The decrease in research
and development expenses as a
29
<PAGE>
percentage of total revenues in 1999 was due to the fact that revenue growth
outpaced the growth in research and development expenses during such period.
The opposite situation occurred in 1998 when the growth in research and
development expenses outpaced the growth in revenues.
Although quarterly results may fluctuate, we believe that continued
investment in research and development is critical to attaining our strategic
objectives. Accordingly, we expect research and development expenditures to
increase in future periods as we continue to increase the number of internal
development personnel and our use of outsourced development resources.
Selling and Marketing
<TABLE>
<CAPTION>
1999 % Change 1998 % Change 1997
------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C>
Selling and marketing........... $17,832 47% $12,151 154% $4,793
% of Total Revenues............. 41% 56% 45%
</TABLE>
Selling and marketing expenses consist primarily of salaries and related
benefits, outsourced personnel costs, and advertising, travel, tradeshow and
public relations expenses. Sales and marketing expenses increased 47% in 1999
to $17.8 million, up from $12.2 million in 1998. In 1998, research and
development expenses increased 154%, up from $4.8 million in 1997. Sales and
marketing expenses represented 41% of total revenues in 1999, down from 56% in
1998 and 45% in 1997.
The increase in sales and marketing expenses in absolute dollars for each
period was primarily due to increases in the number of sales and marketing
personnel, higher overall sales costs related to higher customer orders, and
increased marketing campaign expenditures. The decrease in sales and marketing
expenses as a percentage of total revenues in 1999 was due to the fact that
revenue growth outpaced the growth in sales and marketing expenses during such
period. The opposite situation occurred in 1998 when higher marketing campaign
expenditures caused the growth in sales and marketing expenses to outpace the
growth in revenues.
Although quarterly results may fluctuate, we believe that sales and
marketing expenses will continue to increase in absolute dollars as we
continue to increase the number of sales and marketing personnel and
aggressively market our products and services.
General and Administrative
<TABLE>
<CAPTION>
1999 % Change 1998 % Change 1997
------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C>
General and Administrative......... $6,620 79% $3,689 106% $1,792
% of Total Revenues................ 15% 17% 17%
</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 79% in
1999 to $6.6 million, up from $3.7 million in 1998. In 1998, general and
administrative expenses increased 106%, up from $1.8 million in 1997. General
and administrative expenses represented 15% of total revenues in 1999, down
slightly from the 17% level achieved in both 1998 and 1997.
The increase in general and administrative expenses in absolute dollars for
each period was primarily due to increased personnel and related costs and
higher facility expenses, all of which have been necessary to support our
growth. Additionally, higher professional legal and accounting fees associated
with being a public company also contributed to the increase in general and
administrative expenses in 1999. The slight decrease in general and
administrative expenses as a percentage of total revenues in 1999 was
primarily due to the fact that revenue growth outpaced the growth in general
and administrative expenses in such period.
30
<PAGE>
Although quarterly results may fluctuate, we believe that general and
administrative expenses will continue to increase in absolute dollars as we
continue to expand our personnel and infrastructure to support our growth.
Furthermore, we expect general and administrative expenses to increase
significantly in the near term as we plan to significantly expand our
recruiting organization to support the recruiting efforts for our development,
sales and consulting departments.
Amortization of Deferred Stock and Stock Compensation Expense
<TABLE>
<CAPTION>
1999 % Change 1998 % Change 1997
------ -------- ------ -------- ----
<S> <C> <C> <C> <C> <C>
Amortization of Deferred Stock and
Stock Compensation Expense........ $1,275 (13)% $1,468 N/A $0
% of Total Revenues................ 3% 7% 0%
</TABLE>
We record deferred stock compensation 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. In 1999, such amortization totaled
$1.3 million, a decline of 13% from the $1.5 million in amortization recorded
in 1998. The 1998 figure of $1.5 million also included approximately $383,000
in stock compensation expense which represented the fair value of options
granted to non-employees during such period. During 1999, approximately
$13,000 and $65,000 were recorded as sales and marketing expenses and general
and administrative expenses, respectively, for certain stock options granted
to outside consultants. There was no deferred stock or stock compensation
expense recorded in 1997.
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 Financial Statements included elsewhere herein.
Our effective tax rate was approximately (4.0)% in both 1999 and 1998 and
61% in 1997. The tax benefit amounts in 1999 and 1998 reflect the income tax
benefits that we were able to realize under the tax sharing arrangement with
Trilogy. The tax provision amount in 1997 primarily reflected the
establishment of a valuation allowance that reduced our net deferred tax
assets to zero due uncertainties surrounding their future utilization.
Had we filed a separate income tax return for the year ended December 31,
1999, our effective tax rate would have been approximately 0% versus 4% on a
consolidated basis. The difference between the two rates was due to us not
being able to utilize certain income tax benefits on a stand-alone basis.
31
<PAGE>
Unaudited Quarterly Results of Operations
The following table sets forth some unaudited quarterly statement of
operations data for the years ended December 31, 1999 and 1998. In our
opinion, this information has been prepared substantially on the same basis as
our audited financial statements appearing elsewhere herein, and all necessary
adjustments, consisting only of normal recurring adjustments, have been
included in the amounts stated below to present fairly our unaudited quarterly
results of operations. The quarterly data should be read in conjunction with
our audited financial statements and the notes thereto appearing elsewhere
herein. The operating results for any quarter are not necessarily indicative
of the operating results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------------------------
Dec 31, Sept 30, June 30, Mar 31, Dec 31, Sept 30, June 30, Mar 31,
1999 1999 1999 1999 1998 1998 1998 1998
------- -------- -------- ------- ------- -------- -------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Software and
subscriptions......... $ 6,614 $ 6,257 $ 4,288 $ 3,944 $ 3,915 $ 3,264 $ 3,075 $2,397
Content and services... 7,773 6,800 4,620 3,716 2,640 2,312 2,003 2,108
------- ------- ------- ------- ------- ------- ------- ------
Total revenues......... 14,387 13,057 8,908 7,660 6,555 5,576 5,078 4,505
------- ------- ------- ------- ------- ------- ------- ------
Cost of revenues:
Software and
subscriptions......... 1,726 1,387 1,122 1,201 1,045 983 634 580
Content and services... 5,845 5,066 3,357 2,743 2,925 1,780 1,417 946
------- ------- ------- ------- ------- ------- ------- ------
Total cost of
revenues.............. 7,571 6,453 4,479 3,944 3,970 2,763 2,051 1,526
------- ------- ------- ------- ------- ------- ------- ------
Gross profit............ 6,816 6,604 4,429 3,716 2,585 2,813 3,027 2,979
Operating expenses:
Research and
development........... 2,374 1,959 1,537 1,231 1,359 1,148 975 810
Selling and marketing.. 4,746 4,388 4,723 3,975 3,827 4,601 2,170 1,553
General and
administrative........ 2,314 1,503 1,386 1,417 1,233 1,160 660 636
Amortization of
deferred stock and
stock compensation
expense............... 322 259 321 373 514 727 227 --
------- ------- ------- ------- ------- ------- ------- ------
Total operating
expenses.............. 9,756 8,109 7,967 6,996 6,933 7,636 4,032 2,999
------- ------- ------- ------- ------- ------- ------- ------
Operating loss.......... (2,940) (1,505) (3,538) (3,280) (4,348) (4,823) (1,005) (20)
Interest income......... 1,004 764 604 237 65 62 38 7
------- ------- ------- ------- ------- ------- ------- ------
Loss before income
taxes.................. (1,936) (741) (2,934) (3,043) (4,283) (4,761) (967) (13)
Income tax benefit...... (83) -- -- (243) (183) (203) -- --
------- ------- ------- ------- ------- ------- ------- ------
Net loss................ $(1,853) $ (741) $(2,934) $(2,800) $(4,100) $(4,558) $ (967) $ (13)
======= ======= ======= ======= ======= ======= ======= ======
As a Percentage of Total
Revenues:
Revenues:
Software and
subscriptions......... 46% 48% 48% 51% 60% 59% 61% 53%
Content and services... 54 52 52 49 40 41 39 47
------- ------- ------- ------- ------- ------- ------- ------
Total revenues......... 100 100 100 100 100 100 100 100
------- ------- ------- ------- ------- ------- ------- ------
Cost of revenues:
Software and
subscriptions......... 12 10 12 16 16 18 12 13
Content and services... 41 39 38 36 45 32 28 21
------- ------- ------- ------- ------- ------- ------- ------
Total cost of
revenues.............. 53 49 50 52 61 50 40 34
------- ------- ------- ------- ------- ------- ------- ------
Gross profit............ 47 51 50 48 39 50 60 66
Operating expenses:
Research and
development........... 17 15 17 16 21 20 19 18
Selling and marketing.. 33 34 53 52 58 82 43 35
General and
administrative........ 16 12 15 18 19 21 13 14
Amortization of
deferred stock and
stock compensation
expense............... 2 2 4 5 7 13 5 --
------- ------- ------- ------- ------- ------- ------- ------
Total operating
expenses.............. 68 63 89 91 105 136 80 67
------- ------- ------- ------- ------- ------- ------- ------
Operating loss.......... (20) (12) (40) (43) (66) (86) (20) (1)
Interest income......... 7 6 7 3 1 1 1 --
------- ------- ------- ------- ------- ------- ------- ------
Loss before income
taxes.................. (13) (6) (33) (40) (65) (85) (19) (1)
Income tax benefit...... (1) -- -- (3) (2) (3) -- --
------- ------- ------- ------- ------- ------- ------- ------
Net loss................ (13)% (6)% (33)% (37)% (63)% (82)% (19)% (1)%
======= ======= ======= ======= ======= ======= ======= ======
</TABLE>
32
<PAGE>
Total revenues, including our software and subscription revenues, have
increased quarter to quarter during each of the eight quarters ended December
31, 1999 due primarily to increasing market acceptance of our products, and
increases in our installed base of customers. Content and services revenues
have generally increased quarter to quarter due primarily to additional
content fees and software integration, customization and training services
associated with an increase in the number of software application and content
customers. Software and subscriptions revenues have continued to decline
slightly as a percentage of total revenues since the fourth quarter of 1998
primarily due to a higher relative increase in content and services revenues
during that period of time.
Cost of software and subscriptions revenues have generally increased in
absolute dollars quarter to quarter, consistent with the increase in software
and subscriptions revenues. However, cost of software and subscriptions
revenues as a percentage of total revenues have declined slightly since the
first quarter of 1999 primarily due to higher perpetual license revenues and
higher overall content and services revenues as a percentage of total
revenues. Cost of content and services revenues have generally increased in
absolute dollars quarter to quarter, consistent with the growth in our content
and services revenues. The cost of content and services revenue as a
percentage of total revenues increased dramatically during the quarter ended
December 31, 1998, due primarily to new consulting hires and the increased use
of outsourced consultants during such quarter. Additionally, the cost of
content and services revenues as a percentage of total revenues increased
gradually during 1999 as a result of the continued investments made in our
content and services operations.
Research and development expenses have generally increased in absolute
dollars quarter to quarter during each of the eight quarters ended December
31, 1999. These increases are primarily due to an increase in the number of
research and development personnel and related costs and the increased use of
outsourced development personnel.
Selling and marketing expenses have generally increased in absolute dollars
quarter to quarter for each of the eight quarters ended December 31, 1999,
with the exception of the quarters ended December 31, 1998 and September 30,
1999. The general increase over time reflects the growth of our sales and
marketing organizations and related activities. The decreases in absolute
dollars during the quarters ended December 31, 1998 and September 30, 1999,
were simply due to a temporary decline in our marketing initiatives during
these quarters, as is the case from time to time. Selling and marketing
expense as a percentage of total revenues declined during the quarter ended
September 30, 1999, primarily due to the lower absolute dollars expensed
during the quarter, as previously discussed, and the high revenue growth
achieved during the quarter.
With the exception of the quarter June 30, 1999, general and administrative
expenses have generally increased quarter to quarter for each of the eight
quarters ended December 31, 1999. These increases are due primarily to the
increased personnel and facility expenses necessary to support our growth. The
larger increase during the quarter ended December 31, 1999, was primarily due
to an increase in executive recruiting expenditures. Such increased recruiting
costs are expected to continue for the foreseeable future, especially during
the first half of 2000, as we continue to hire the resources necessary to fuel
our growth.
Factors Affecting Operating Results
Under "Risk Factors" in Item 1 of this Annual Report on Form 10-K, we
discuss important factors related to our business and the computer industry
that could materially affect our operating results. The risks and
uncertainties discussed there, while not exclusive of other risks and
uncertainties that we face or may face, should be taken into account in
connection with the discussion presented here.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999 we had approximately $81.5 million in cash and
short-term investments. This amount was primarily generated from our initial
public offering in February 1999, which raised approximately $47.2 million in
net proceeds, and our secondary offering in December 1999, which raised
approximately $25.1 million in net proceeds. We had a net increase in cash and
cash equivalents of approximately $49.4 million for the year ended December
31, 1999.
33
<PAGE>
Over the past three years, we have generated increasing positive cash flows
from our operating activities. In 1999, net cash provided by operating
activities was $8.9 million. Such amount compares with $4.7 million generated
in 1998 and $3.1 million generated in 1997. Net cash provided by operating
activities of $8.9 million in 1999 resulted primarily from an increase in
deferred revenue of $18.8 million offset by an increase in accounts receivable
of $11.7 million. Deferred revenue and accounts receivable increased primarily
due to our expanded customer base. Net cash provided by operating activities
of $4.7 million in 1998 was primarily attributable to an increase in deferred
revenue of $8.3 million and an increase in the payable to Trilogy of $4.2
million, largely offset by a net loss of $9.6 million, net of the amortization
of deferred stock and stock compensation expense of $1.5 million. Net cash
provided by operating activities of $3.1 million in 1997 resulted primarily
from an increase in deferred revenue of $2.1 million and other favorable
working capital changes, offset by a net loss of $1.1 million.
Net cash used in investing activities was $34.6 million in 1999. Such amount
compares with $2.6 million used in 1998 and $662,000 used in 1997. Net cash
used in investing activities in 1999 was primarily related to the net purchase
of short-term investments which were made to strategically manage the funds
received from the initial and secondary offerings completed in 1999.
Investments of $4.0 million in 1999 were also made to purchase equipment for
additional resources and for leasehold improvements associated with the move
into our current facilities. Lastly, $3.2 million was used to purchase a
minority stake in e-commerce Industries, Inc. to broaden our e-commerce
initiatives. Net cash used in investing activities of $2.6 million in 1998 was
primarily attributable to the purchase of equipment for additional employees
and leasehold improvements related to our then current facility. Net cash used
in investing activities in 1997 of $662,000 was due to the purchase of
equipment.
Net cash provided by financing activities was $75.1 million in 1999. Such
amount compares with $445,000 generated in 1998 and $254,000 used in 1997. Net
cash provided by financing activities of $75.1 million in 1999 consisted of
the net proceeds received from our stock offerings in 1999 and proceeds
received from the exercise of stock options. Net cash provided by financing
activities of $445,000 in 1998 was due to the proceeds received from stock
option exercises. Net cash used in financing actives in 1997 of $254,000 was
primarily attributable to the repayment of advances to Trilogy.
As of December 31, 1999, our principal sources of liquidity consisted of
$54.1 million in cash and cash equivalents and $27.4 million in short-term
investments. As of that date, our principal commitments consisted of
obligations in connection with our operating leases. Although we have no
material commitments for capital expenditures, we anticipate an increase in
our capital expenditures and lease commitments consistent with the anticipated
growth in our operations, infrastructure and personnel over and beyond the
next 12 months. 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. We may be required to raise
additional financing in order to satisfy our long-term liquidity requirements
and there can be no assurance that financing will be available in amounts or
on terms acceptable to our stockholders and us.
IMPACT OF YEAR 2000
Year 2000 problems are caused by computer systems that only use a two-digit
year value and, accordingly, were subject to error or failure when the Year
2000 arrived. During 1999, we completed testing and remediation of our systems
and products for Year 2000 issues, as well as other Year 2000 planning that
included investigating the Year 2000 readiness of equipment and software
provided by third parties. During and after the Year 2000 date change, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and we believe those systems
successfully responded to the Year 2000 date change. We are not aware of any
material problems resulting from Year 2000 issues, either with our products,
our internal systems, or the products and services of third parties. We plan
to monitor our mission critical computer applications for any latent Year 2000
matters that may arise. We did not make any material
34
<PAGE>
expenditures during 1999 in connection with remediating our systems and do not
believe it will be necessary in the future to expend any material amounts in
connection with any latent Year 2000 matters.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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 are discussed in more detail below:
. Interest rate risk--Because the majority of our investments are in
short-term interest bearing instruments, our interest income is
sensitive to changes in the general level of U.S. interest rates.
However, due to the nature of our short-term investments, we believe
that our interest rate risk exposure is not material. Our investment
policy requires that we invest all excess funds in instruments that are
high investment grade and that have maturities of less than two years.
As of December 31, 1999, our short-term investment portfolio totaled
$27.4 million, had a weighted-average maturity of 50 days and was
primarily comprised of high quality commercial paper, corporate notes
and money market funds. Our cash and cash equivalents at December 31,
1999 totaled $54.1 million and consisted primarily of demand deposits
and money market funds.
. Investment risk--In October 1999, we invested approximately $3.2 million
in e-commerce Industries, Inc., a privately-held company that provides
e-commerce solutions to the office products industry. Because our
ownership percentage is below 20%, we have accounted for this investment
under the cost method of accounting. Our policy is to regularly assess
the carrying value of this investment by reviewing the assumptions
underlying the operating performance and anticipated cash flows from
this entity. If such a review indicates that our initial investment has
declined in value, an impairment loss will be recorded at that time. As
of December 31, 1999, no such impairment was warranted.
. Foreign currency risk--We do not currently have any significant
international operations and all of our cash sources and uses are
denominated entirely in U.S. dollars. Accordingly, we are not currently
subject to foreign currency risk.
35
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT AUDITORS.............................................. 37
BALANCE SHEETS.............................................................. 38
STATEMENTS OF OPERATIONS.................................................... 39
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)................................ 40
STATEMENTS OF CASH FLOWS.................................................... 41
NOTES TO FINANCIAL STATEMENTS............................................... 42
</TABLE>
36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
pcOrder.com, Inc.
We have audited the accompanying balance sheets of pcOrder.com, Inc. (the
Company), a subsidiary of Trilogy Software, Inc. and its predecessor entities
including Trilogy Development Group, Inc., as of December 31, 1999 and 1998,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of pcOrder.com, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Austin, Texas
January 25, 2000
37
<PAGE>
PCORDER.COM, INC.
BALANCE SHEETS
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 54,113 $ 4,726
Short-term investments.................................... 27,364 --
Accounts receivable, net of allowance of $500 in 1999 and
$350 in 1998............................................. 16,427 4,775
Other current assets...................................... 1,030 150
-------- -------
Total current assets.................................... 98,934 9,651
Property and equipment, net................................. 3,592 1,938
Other assets................................................ 3,212 665
-------- -------
Total assets............................................ $105,738 $12,254
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,508 $ 612
Accrued liabilities....................................... 8,814 3,150
Payable to Trilogy, net................................... 4,119 4,506
Deferred revenue.......................................... 28,686 10,428
-------- -------
Total current liabilities............................... 43,127 18,696
Deferred revenue............................................ 2,694 2,103
Commitments and contingencies
Stockholders' equity (deficit):
Preferred Stock, $.01 par value; 10,000,000 shares
authorized; no shares issued or outstanding.............. -- --
Class A Common Stock, $.01 par value; 37,243,000 shares
authorized; 6,299,847 and 191,602 shares issued and
outstanding in 1999 and 1998, respectively............... 63 1
Class B Common Stock, $.01 par value; 10,323,650 and
12,757,000 shares authorized, issued and outstanding in
1999 and 1998, respectively.............................. 103 128
Additional paid-in capital................................ 80,401 4,024
Deferred stock compensation............................... (1,350) (1,726)
Accumulated other comprehensive loss...................... (1) --
Accumulated deficit....................................... (19,299) (10,972)
-------- -------
Total stockholders' equity (deficit).................... 59,917 (8,545)
-------- -------
Total liabilities and stockholders' equity (deficit).... $105,738 $12,254
======== =======
</TABLE>
See accompanying notes.
38
<PAGE>
PCORDER.COM, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues:
Software and subscriptions........................ $21,103 $12,651 $ 6,475
Content and services.............................. 22,909 9,063 4,114
------- ------- -------
Total revenues.................................. 44,012 21,714 10,589
------- ------- -------
Costs of revenues:
Software and subscriptions........................ 4,116 2,170 440
Software and subscriptions--affiliated royalty
fee.............................................. 1,320 1,072 583
------- ------- -------
Total software and subscriptions................ 5,436 3,242 1,023
Content and services.............................. 17,011 7,068 2,553
------- ------- -------
Total cost of revenues.......................... 22,447 10,310 3,576
------- ------- -------
Gross profit........................................ 21,565 11,404 7,013
Operating expenses:
Research and development.......................... 7,101 4,292 1,129
Selling and marketing............................. 17,832 12,151 4,793
General and administrative........................ 6,620 3,689 1,792
Amortization of deferred stock and stock
compensation expense............................. 1,275 1,468 --
------- ------- -------
Total operating expenses........................ 32,828 21,600 7,714
------- ------- -------
Operating loss...................................... (11,263) (10,196) (701)
Interest income..................................... 2,610 172 --
------- ------- -------
Loss before income taxes............................ (8,653) (10,024) (701)
Income tax provision (benefit)...................... (326) (386) 427
------- ------- -------
Net loss............................................ $(8,327) $(9,638) $(1,128)
======= ======= =======
Basic and diluted net loss per share................ $ (0.54) $ (0.75) $ (0.09)
======= ======= =======
Weighted average shares outstanding................. 15,292 12,861 12,800
======= ======= =======
Unaudited pro forma information:
Historical loss before income taxes............... $(8,653)
Pro forma income tax benefit...................... (0)
-------
Pro forma net loss................................ $(8,653)
=======
Pro forma basic and diluted net loss per share.... $ (0.57)
=======
</TABLE>
See accompanying notes.
39
<PAGE>
PCORDER.COM, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Class A Class B
Common Common Accumulated
Shares Shares Additional Deferred Other Retained
------------- -------------- Paid-in Stock Comprehensive Earnings/
Shares Amount Shares Amount Capital Compensation Loss (deficit) Total
------ ------ ------ ------ ---------- ------------ ------------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1997................... 43 $ -- 12,757 $128 $ 210 $ -- $ -- $ (206) $ 132
Exercise of stock
options................ -- -- -- -- 1 -- -- -- 1
Net loss................ -- -- -- -- -- -- -- (1,128) (1,128)
----- ----- ------ ---- ------- ------- ----- -------- --------
Balance at December 31,
1997................... 43 -- 12,757 128 211 -- -- (1,334) (995)
Exercise of stock
options................ 149 1 -- -- 444 -- -- -- 445
Income tax benefit from
stock options
exercised.............. -- -- -- -- 175 -- -- -- 175
Deferred stock
compensation related to
stock options.......... -- -- -- -- 2,811 (2,811) -- -- --
Amortization of deferred
stock and stock
compensation expense... -- -- -- -- 383 1,085 -- -- 1,468
Net loss................ -- -- -- -- -- -- -- (9,638) (9,638)
----- ----- ------ ---- ------- ------- ----- -------- --------
Balance at December 31,
1998................... 192 1 12,757 128 4,024 (1,726) -- (10,972) (8,545)
Initial public offering,
net of offering costs.. 2,530 25 -- -- 47,126 -- -- -- 47,151
Secondary public
offering, net of
offering costs......... 2,833 29 (2,333) (24) 25,144 -- -- -- 25,149
Conversion of Class B
common stock to Class A
common stock........... 100 1 (100) (1) -- -- -- -- --
Exercises of employee
stock options.......... 645 7 -- -- 2,746 -- -- -- 2,753
Income tax benefit from
stock options
exercised.............. -- -- -- -- 384 -- -- -- 384
Deferred stock
compensation related to
stock options.......... -- -- -- -- 899 (899) -- -- --
Amortization of deferred
stock and stock
compensation expense... -- -- -- -- 78 1,275 -- -- 1,353
Comprehensive loss:
Net Loss............... -- -- -- -- -- -- -- (8,327) (8,327)
Unrealized loss on
investments........... -- -- -- -- -- -- (1) -- (1)
--------
Total comprehensive
loss................... -- -- -- -- -- -- -- -- (8,328)
----- ----- ------ ---- ------- ------- ----- -------- --------
Balance at December 31,
1999................... 6,300 $ 63 10,324 $103 $80,401 $(1,350) $ (1) $(19,299) $(59,917)
===== ===== ====== ==== ======= ======= ===== ======== ========
</TABLE>
See accompanying notes.
40
<PAGE>
PCORDER.COM, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss......................................... $(8,327) $(9,638) $(1,128)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation.................................... 2,339 1,189 459
Amortization of deferred stock and stock
compensation Expense........................... 1,353 1,468 --
Changes in operating assets and liabilities:
Accounts receivable............................ (11,652) (2,498) 172
Other assets................................... (227) (815) 4
Deferred tax assets............................ -- -- 691
Accounts payable............................... 896 575 (36)
Accrued liabilities............................ 5,664 1,858 479
Payable to Trilogy............................. (4) 4,249 432
Deferred revenue............................... 18,849 8,319 2,050
-------- -------- -------
Net cash provided by operating activities....... 8,891 4,707 3,123
INVESTING ACTIVITIES
Purchase of minority interest investment......... (3,200) -- --
Purchases of short-term investments.............. (35,026) -- --
Proceeds from sales and maturities of short-term
investments..................................... 7,662 -- --
Purchases of property and equipment.............. (3,993) (2,633) (662)
-------- -------- -------
Net cash used in investing activities........... (34,557) (2,633) (662)
FINANCING ACTIVITIES
Change in payable to Trilogy..................... -- -- (255)
Proceeds from the sale of Class A Common Stock,
net of offering costs........................... 72,300 -- --
Proceeds from exercises of stock options......... 2,753 445 1
-------- -------- -------
Net cash provided by (used in) financing
activities..................................... 75,053 445 (254)
-------- -------- -------
Increase in cash and cash equivalents............ 49,387 2,519 2,207
Cash and cash equivalents at beginning of year... 4,726 2,207 --
-------- -------- -------
Cash and cash equivalents at end of year......... $ 54,113 $ 4,726 $ 2,207
======== ======== =======
</TABLE>
See accompanying notes.
41
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 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 U.S. The Company's
products include software applications and support for those applications. The
software applications consist of an integrated application suite that includes
cataloging, quoting, pricing, availability, and product configuration. Content
for these applications in the form of detailed product databases containing
configuration, pricing, availability and specifications are also provided and
updated by the Company. Customers can choose to have the Company host the
software applications or install them at their site. In addition, the Company
provides consulting services to help customers build and integrate electronic
commerce capabilities to meet their specified needs.
On February 26, 1999, the Company completed its initial public offering of
2,530,000 shares at $21 per share. Offering proceeds, net of aggregate
expenses to the Company (including underwriters' discount), totaled
approximately $47.2 million. Additionally, on December 7, 1999, the Company
successfully completed a secondary offering of 3,000,000 shares of common
stock at $53.31 per share. Of the 3,000,000 shares included in the offering,
2,500,000 shares were sold by Trilogy and other selling shareholders of the
Company, resulting in no proceeds to the Company. The remaining 500,000 shares
were sold directly by the Company and resulted in approximately $25.1 million
in net proceeds to the Company.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, and such
differences may be material to the financial statements.
Revenue Recognition
The Company accounts for its software revenues in accordance with Statement
of Position ("SOP") 97-2, Software Revenue Recognition, as amended by SOP 98-4
and SOP 98-9. SOP 97-2 and SOP 98-4 were adopted effective January 1, 1998,
and did not have a material impact on the Company's financial results. The
Company does not believe that the full adoption of SOP 98-9 effective January
1, 2000, will have a material impact on the Company's financial condition and
results of operations.
Software and subscriptions revenues primarily consist of subscription and
perpetual license fees that provide customers with the right to use the
Company's products. Additionally, software maintenance fees charged in
connection with perpetual licenses are included in software and subscriptions
revenues. The Company generally sells the right to use its products under
subscription-based license arrangements which provide the customer with access
to any new versions or releases and technical support at no additional charge
over the term of the arrangement. Software maintenance fees are charged for
providing technical support and the right to unspecified upgrades on an if-
and-when available basis. Revenues from subscription-based arrangements are
recognized ratably over the term of the agreement and commence when persuasive
evidence of an agreement exists, delivery of the product has occurred, the fee
is fixed and determinable and collection is probable. Revenues from software
42
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
maintenance fees are recognized ratably over the term of the agreement and
commence once delivery of the product has occurred. The Company may also sell
the right to use its products under a perpetual license arrangement. Revenue
from perpetual licenses is recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, the fee is fixed and
determinable, and collection is probable. Revenue recognized from perpetual
license arrangements represented 9%, 15%, and 7% of total revenues in 1999,
1998 and 1997, respectively.
Content revenues consist of fees charged for content access, entry, updates
and maintenance services (collectively, "content maintenance"). Content
maintenance provides the customer with continually updated information within
the catalog database, especially information that is specific to the
customer's product offerings. Content fees are recognized ratably over the
term of the arrangement generally commencing upon initial content delivery.
Service revenues consist of software integration, customization, training
and Web-hosting fees. Software integration, customization and training
revenues are generally recognized as the services are performed, upon
completion of specific contractual events or based on an estimated percentage
of completion as the work progresses, depending on the underlying contract
terms. Such services generally occur at the inception of a subscription or
license arrangement to provide installation, integration, and/or customization
to deploy the software products as well as training of customer personnel.
Web-hosting revenues are recognized ratably over the underlying contract term
and generally commence upon initial software delivery.
Customer advances and billed amounts due from customers in excess of revenue
recognized are recorded as deferred revenue. Amounts recorded as deferred
revenue that are not expected to be recognized as revenue within the following
twelve months are classified as long-term in the accompanying balance sheets.
Product Development and Database Maintenance Cost
The Company's policy is to capitalize eligible computer software costs upon
achievement of technological feasibility, which the Company has defined as
completion of a working model, subject to net realizable value considerations.
As of December 31, 1999, no significant costs have met this criteria and,
accordingly, the Company has charged all software development costs to expense
as incurred in the accompanying statements of operations.
Research and development expenses are expensed as incurred.
Costs to maintain the Company's proprietary content databases are expensed
as incurred and are included as costs of content and services revenues.
Net Loss per Share
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") 128, Earnings Per Share. Basic net loss per share is
computed by dividing net loss available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted net
loss per share is calculated using the weighted average number of outstanding
shares of common stock plus all dilutive common stock equivalents. For the
years ended December 31, 1999, 1998 and 1997, there was no impact from common
stock equivalents under the treasury stock method. For the years ended
December 31, 1999 and 1998, approximately 1,410,000 and 1,200,000 common
equivalent shares, respectively, were excluded from the diluted calculation as
they were anti-dilutive. There were no common stock equivalents for the year
ended December 31, 1997. Accordingly, basic and diluted net loss per share are
the same for all periods presented.
43
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In February 1998, the SEC issued Staff Accounting Bulletin ("SAB") 98 which
requires issuances of common stock, options and warrants for nominal
consideration in periods preceding an initial public offering to be included
in the calculations of earnings per share as if they were outstanding for all
periods presented. The Company has had no issuances of common stock, options
or warrants for nominal consideration.
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 established new rules for the reporting and display of comprehensive
income and its components. Accumulated comprehensive income, as presented in
the accompanying statement of stockholders' equity (deficit), consisted solely
of the net unrealized losses on available-for-sale securities as of December
31, 1999.
Cash and Cash Equivalents
Cash equivalents consist primarily of cash deposits and money market
investments with original maturities of ninety days or less when purchased.
Short-term Investments
The Company's short-term investments consist primarily of high-quality
short-term commercial paper, corporate notes, and money market funds. The
investments are classified as available-for-sale and are reported at fair
value in the accompanying balance sheets. As of December 31, 1999, cumulative
unrealized losses totaled approximately $1,000 and were reported as a
component of stockholders' equity within comprehensive income.
Other Investments
In October 1999, the Company entered into an agreement with e-Commerce
Industries, Inc. (eci/2/), a leading e-commerce company in the office products
industry. The agreement is a multi-year subscription-based agreement that
grants eci/2/ exclusive rights to sublicense the Company's core e-commerce
technology in the office products industry. Additionally, the Company and
eci/2/ will share in the development of an extensive office product content
database that will be distributed by both companies as part of their overall
e-commerce services. In connection with the strategic relationship, the
Company made a $3.2 million minority equity investment in eci/2/. The
investment is being accounted for under the cost method of accounting.
Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is computed using the straight-line method over their estimated
useful lives, which range from 18 months to 5 years. Depreciation expense
totaled approximately $2.3 million, $1.2 million and $0.5 million for the
three years in the period ended December 31, 1999.
Stock-Based Compensation
The Company accounts for its stock-based employee compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("ABP No. 25"), and its related
interpretations. Additionally, the Company complies with the disclosure
requirements of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS
No. 123"). Under APB No. 25, compensation cost is recognized over the vesting
period based on the difference, if any, on the date of grant between the fair
value of the Company's stock and the price the employee must pay to acquire
the stock.
44
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Segments
In June 1997, the FASB issued SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. The Company adopted SFAS 131 during the
year ended December 31, 1998. Such adoption did not have a material effect on
the Company's financial disclosures as the Company continues to consider its
business activities as a single segment.
Internally Used Computer Software
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use ("SOP 98-1"). SOP 98-
1 requires that entities capitalize certain costs related to internal-use
software once certain criteria have been met. The Company implemented SOP 98-1
during the year ended December 31, 1999. Such adoption of SOP 98-1 did not
have a material impact on the Company's financial condition or results of
operations.
Income Taxes
The liability method is used for accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
Financial Presentation
Certain prior year amounts have been reclassified to conform to the 1999
presentation.
NOTE 3--CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Cash and accounts receivable potentially expose the Company to
concentrations of credit risk, as defined by SFAS No. 105, Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk. Excess cash is
placed with highly rated financial institutions. The Company provides credit,
in the normal course of business, to a number of customers geographically
dispersed throughout the U.S. The Company performs ongoing credit evaluations
of its customers and maintains allowances for potential credit losses. The
Company generally requires certain up-front payments from customers, and
customers can be denied access to the Company's products in the event of non-
payment.
The following table summarizes the changes in the allowance for doubtful
accounts for 1997, 1998, and 1999 (in thousands):
<TABLE>
<S> <C>
Balance at December 31, 1996........................................... $113
Additions charged to costs and expenses.............................. 315
Write-off of uncollectible accounts.................................. (147)
----
Balance at December 31, 1997........................................... 281
Additions charged to costs and expenses.............................. 112
Write-off of uncollectible accounts.................................. (43)
----
Balance at December 31, 1998........................................... 350
Additions charged to costs and expenses.............................. 150
Write-off of uncollectible accounts.................................. --
----
Balance at December 31, 1999........................................... $500
====
</TABLE>
45
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Sales to individual customers constituting 10% or more of total revenues for
each year were as follows (in thousands). Revenue amounts from each customer
are only reflected in those years in which such revenues exceeded 10% of total
revenues.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Customer No. 1...................................... $ 14,578 $ -- $ --
Customer No. 2...................................... -- 3,833 4,070
Customer No. 3...................................... -- 3,523 --
Customer No. 4...................................... 5,761 2,975 --
</TABLE>
NOTE 4--RELATED PARTY TRANSACTIONS
Effective September 1, 1998, the Company and Trilogy entered into a
technology, services and license agreement that amended a master license
agreement signed in 1994. Under the new agreement, each party granted the
other a nonexclusive, irrevocable, perpetual, worldwide, fully paid-up license
to internally use, make, reproduce and/or prepare derivative works of the
products of the other party, or to sublicense any non-party to do so, subject
to certain confidentiality restrictions. The Company and Trilogy are each
obligated to pay to the other monthly royalties on license, subscription and
software maintenance fees from certain products that incorporate the other
party's technology. The rights granted to Trilogy by the Company are subject
to change of control provisions as described in the agreement. For each of the
three years in the period ended December 31, 1999, the Company committed to
pay royalties annually to Trilogy pursuant to the applicable agreements in
effect at that time, as follows:
. 20% of the license fees derived from sales of certain of the Company's
products.
. 9% of software maintenance fees related to certain of the Company's
products.
. 6% of subscription fees from sales of certain of the Company's products.
Such royalties amounted to approximately $1.3 million, $1.1 million, and
$583,000 in the years ended December 31, 1999, 1998 and 1997, respectively. No
royalties were received by the Company from Trilogy during any of such years.
In addition to the above royalty rates, in October 1999, the Company agreed
to pay Trilogy $1.0 million to license Trilogy's technology for use in the
office products industry. Such fee will be recognized as a cost of software
and subscription revenues in accordance with the existing royalty rates
discussed above, and will commence upon the initial recognition of the related
software revenues.
The Company operates under a services agreement with Trilogy whereby Trilogy
provides certain services on behalf of the Company as follows:
. Management services in the form of on-going support in business
operations.
. Financial services support in the form of insurance and risk management,
tax reporting assistance and payroll processing.
. Human resources support in the form of advice and assistance with
respect to compensation, employee benefits and other employee matters.
. Certain administrative services.
The above services agreement may be modified as deemed necessary, upon
mutual consent between Trilogy and the Company.
46
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In consideration of receipt of the above services, the Company must
reimburse Trilogy for its pro rata share of the total cost of such services
based upon the number of full-time equivalent Trilogy employees providing such
services to the Company. Such costs totaled approximately $185,000, $294,000
and $443,000 in the years ended December 31, 1999, 1998 and 1997,
respectively.
In addition to the services provided above, the Company relies on Trilogy to
provide for the majority of its office space needs. The Company's primary
office facilities are currently subleased from Trilogy. The Company incurred
approximately $344,000 under such lease for the year ended December 31, 1999.
In addition to the above fees and services, during 1999 the Company also
committed to pay Trilogy approximately $2.3 million for technical new hire
recruiting and training services performed by Trilogy on behalf of the
Company. During 1998, such amount totaled approximately $1.2 million. There
were no such fees during the year ended December 31, 1997. The amounts
expensed in 1999 and 1998 have been allocated to the various departments
within the Company that have directly benefited from these services.
During 1999 and 1998, the Company utilized various Trilogy consulting and
development personnel in connection with certain customer deployments. The
Company was charged approximately $2.3 million and $150,000 in 1999 and 1998,
respectively, for the use of such personnel. The costs of utilizing Trilogy's
consultants were recorded as a cost of content and services revenues. The
costs of utilizing Trilogy's development personnel were recorded as research
and development expenses to the extent such costs were not reimbursed by the
Company's customers. The Company did not utilize any Trilogy consulting or
development personnel during 1997.
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Furniture and fixtures..................................... $ 549 $ 275
Equipment.................................................. 6,175 3,306
Software................................................... 448 135
Leasehold improvements..................................... 566 292
------- -------
7,738 4,008
Accumulated depreciation................................... (4,146) (2,070)
------- -------
Net property and equipment................................. $ 3,592 $ 1,938
======= =======
</TABLE>
NOTE 6--INCOME TAXES
From inception through August 25, 1999, the Company was included in the
consolidated income tax returns of Trilogy and was party to a tax sharing
agreement with Trilogy. Effective August 26, 1999, the Company was no longer
part of the consolidated tax group of Trilogy and, accordingly, began
accounting for its income taxes on a stand-alone basis. Additionally,
effective August 26, 1999, the Company was no longer subject to the
intercompany tax sharing agreement with Trilogy on a prospective basis.
47
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Significant components of the provision for income tax expense (benefit)
attributable to the Company's continuing operations are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal......................................... $ (326) $(361) $(239)
State........................................... -- (25) (25)
------- ------- -------
(326) (386) (264)
Deferred:
Federal......................................... -- -- 627
State........................................... -- -- 64
------- ------- -------
-- -- 691
------- ------- -------
$ (326) $ (386) $ 427
======= ======= =======
</TABLE>
A current tax benefit was recorded in each of the three years in the period
ended December 31, 1999, resulting from utilization of the Company's net
operating losses and tax credits within the Trilogy consolidated income tax
return. The recorded benefits were reimbursed to the Company under the
provisions of the intercompany tax allocation agreement.
Had the Company filed a separate stand-alone return in 1999, the pro-forma
income tax benefit would have been zero since all of the recorded income tax
benefit resulted from Trilogy's use of the Company's current operating losses
under the intercompany tax allocation agreement.
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense
(benefit) is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Tax at U.S. statutory
rate................... (35.0)% (35.0)% (35.0)%
State taxes--net of
federal benefit........ (1.7) (3.6) (3.0)
Non-deductible expenses
and other.............. 0.9 0.4 5.6
Change in valuation
allowance.............. 37.3 35.5 97.7
Tax credits and other... (5.3) (1.2) (4.3)
------- ------- -------
(3.8)% (3.9)% 61.0%
======= ======= =======
</TABLE>
48
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying values of assets and liabilities for financial reporting
purposes and the values used for income tax purposes. Significant components
of the Company's net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating losses and tax credits..................... $ 4,121 $ --
Deferred revenue......................................... 3,309 3,084
Stock option compensation, net of exercises.............. 934 564
Accrued liabilities and other............................ 841 136
Depreciation and related amounts......................... 450 195
Bad debt and other non-deductible allowances............. 316 250
------- -------
Total deferred tax assets.................................. 9,971 4,229
Valuation allowance for deferred tax assets................ (9,971) (4,229)
------- -------
Net deferred taxes......................................... $ -- $ --
======= =======
</TABLE>
A valuation allowance has been provided to offset the deferred tax assets at
December 31, 1999 and 1998 due to uncertainties regarding the future
realization of such deferred tax assets. As of December 31, 1999, the
Company's net operating loss ("NOL") carryforwards for income tax purposes
totaled approximately $10.5 million. The Company also had research and
development tax credit carryforwards that totaled $50,000 at December 31,
1999. The NOL and tax credit carryforwards will begin to expire in 2020 if not
utilized prior to that time. No deferred tax assets were recorded for any net
operating losses generated prior to August 25, 1999, as they were completely
utilized in the Trilogy consolidated tax return, as previously discussed.
Approximately $6.5 million of the valuation allowance for deferred tax
assets at December 31, 1999, relates to items which, when recognized, will
result in a credit to equity rather than a reduction in the Company's federal
income tax provision.
NOTE 7--EMPLOYEE BENEFIT PLAN
Trilogy sponsors a defined contribution plan in accordance with Section
401(k) of the Internal Revenue Code. The Plan is available to all full-time
employees of the Company on the first day of the month following employment.
The Plan is funded through employee contributions. The Company's only expenses
relating to the Plan are administrative costs, which are not significant.
NOTE 8--STOCKHOLDERS' EQUITY
On February 2, 1999, the authorized capital stock of the Company was
reclassified as set forth in the Amendment to the Certificate of Incorporation
and consists of 37,243,000 shares of Class A Common Stock, par value of $.01
per share, 12,757,000 shares of Class B Common Stock, par value of $.01 per
share, and 10,000,000 shares of Preferred Stock, par value $.01 per share.
Each share of common stock of the Company not owned by Trilogy was
reclassified into one share of Class A Common Stock and each share of Common
Stock owned by Trilogy was reclassified into one share of Class B Common
Stock. The Class A Common Stock and Class B Common Stock have substantially
identical rights other than as described below. During 1999, 2,433,350 shares
of Class B Common Stock were converted into the same number of shares of Class
A Common Stock, thus reducing the number of authorized shares of Class B
Common Stock to 10,323,650 shares at December 31, 1999.
49
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Class B Common Stock entitles its holders to eight votes per share while
the Class A Common Stock entitles its holders to one vote per share on all
matters submitted to a vote or for the consent of stockholders. The shares of
Class B Common Stock are convertible at any time prior to a tax free spin-off
at the option of the holder into shares of Class A Common Stock on a share-
for-share basis. Each outstanding share of Class B Common Stock will
automatically be converted into a share of Class A Common Stock upon any
transfer of such share, if after the transfer, such share is not owned by
Trilogy, an affiliate of Trilogy, or a non-affiliate of Trilogy which acquires
more than 50% of the then outstanding Class B Common Stock in a single
transaction. In addition, subject to certain conditions, then outstanding
shares of Class B Common Stock will automatically convert, after the fifth
anniversary of the first transfer of Class B Common Stock in a tax free spin-
off. The effect of this reclassification has been reflected for all periods
presented in the accompanying financial statements.
Stock Option Plans
The Company's stock options plans consist of the 1996 Stock Option Plan ("1996
Plan") and the 1999 Stock Incentive Plan ("1999 Plan"). As of December 31,
1999, shares reserved under the plans consisted of 2,706,501 shares in the
1996 Plan and 1,500,000 shares in the 1999 Plan.
The Company's 1996 Plan provides for the grant for up to 3,500,000 shares of
Class A Common Stock of incentive and nonqualified options to employees. The
stock options vest over various terms, generally with 0% to 25% exercisable
immediately, and an additional 18.75% to 40% exercisable each year thereafter
until the option is fully exercisable. The term of each option is 10 years
from the date of grant.
The Company's 1999 Plan was adopted by the Board of Directors in February
1999. A total of 1,500,000 shares of common stock were initially reserved for
issuance under the 1999 Plan. In addition to the initial allotment, the shares
reserved for issuance under the 1999 Plan increase annually by 5% of the total
number of shares of Class A Common Stock and Class B Common Stock outstanding
on the first day of each fiscal year of the Company. Such annual increase
resulted in the reservation of an additional 831,175 shares for future
issuance under the 1999 Plan effective January 1, 2000. Additionally, the
Company's Board of Directors authorized an additional 1,500,000 shares for
future issuance under the 1999 Plan in February 2000, bringing the total
currently authorized number of shares to 3,831,175.
Under the 1999 Plan, the eligible individuals are: employees, non-employee
members of the board and consultants. The types of awards that may be made
include, but are not limited to, options to purchase shares of the Company's
Class A Common Stock, stock appreciation rights, restricted shares, dividend
equivalent rights, performance units and performance shares. The stock options
vest over various terms, generally with 0% to 25% exercisable immediately, and
an additional 25% to 40% exercisable each year thereafter until the option is
fully exercisable. The term of each option is 10 years from the date of grant.
50
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
Weighted-
Average
Exercise
Price Price
Shares Per Share Per Share
---------- --------------- ---------
<S> <C> <C> <C>
Options outstanding December 31,
1996............................... 2,040,300 $ 3.00 $ 3.00
Granted........................... 158,500 $ 3.00 $ 3.00
Exercised......................... (225) $ 3.00 $ 3.00
Surrendered....................... (7,750) $ 3.00 $ 3.00
---------- --------------- ------
Options outstanding December 31,
1997............................... 2,190,825 $ 3.00 $ 3.00
Granted........................... 2,590,076 $ 3.00 - $10.00 $ 4.31
Exercised......................... (148,377) $ 3.00 $ 3.00
Surrendered....................... (1,425,450) $ 3.00 - $ 8.00 $ 3.13
---------- --------------- ------
Options outstanding December 31,
1998............................... 3,207,074 $ 3.00 - $10.00 $ 4.00
---------- --------------- ------
Granted........................... 2,171,474 $10.00 - $67.88 $20.46
Exercised......................... (644,897) $ 3.00 - $10.00 $ 4.27
Surrendered....................... (1,182,326) $ 3.00 - $66.13 $ 4.36
---------- --------------- ------
Options outstanding December 31,
1999............................... 3,551,325 $ 3.00 - $67.88 $13.90
========== =============== ======
</TABLE>
At December 31, 1999, there were 227,176 options available for grant under
the 1996 Plan and 428,000 options available for grant under the 1999 Plan.
The following table summarizes information about options outstanding and
exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
- ---------------------------------------------------------- -------------------
Weighted-
Weighted-Average Weighted- Average
Range of Remaining Average Exercise
Exercise Prices Number Contractual Life Exercise Price Number Price
- --------------- --------- ---------------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 3.00 1,919,546 7.3 years $33.00 1,131,246 $ 3.00
$ 6.40 - $ 9.00 347,591 8.6 years $ 8.23 94,500 $ 8.19
$10.00 - $12.00 296,620 8.8 years $10.57 12,276 $10.11
$28.69 - $40.13 768,132 9.7 years $31.55 6,000 $39.88
$46.50 - $67.88 219,436 9.8 years $60.96 500 $54.50
--------- ---------
$ 3.00 - $67.88 3,551,325 8.2 years $13.90 1,244,522 $ 3.63
========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Weighted-average deemed fair value of stock options granted
during the year:
Exercise price equal to fair value of stock on date of
Grant................................................... $26.53 $1.22 $0.82
Exercise price less than fair value of stock on date of
Grant................................................... $13.11 $4.73 --
</TABLE>
In March 1997, under the terms of an applications subscription arrangement,
the Company gave the right to require the Company to grant to a customer an
option to purchase up to 320,000 shares of common stock of the Company if one
of certain specified events occurs, including an initial public offering. The
customer did not exercise the option to purchase the shares and the option
expired on February 26, 1999.
51
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred Compensation
In 1999, the Company granted a total of 6,000 options to certain non-
employees which vested immediately. In connection with such grants, the
Company expensed approximately $78,000 in 1999 based on the Black-Scholes
pricing model, using a historical volatility factor of 115%, a risk-free
interest rate of 6%, a dividend yield of 0% and an expected life of six
months. Such amount was allocated $65,000 to general and administrative
expenses and $13,000 to sales and marketing expenses in the accompanying
statements of operations.
In 1998, the Company granted a total of 160,000 options to certain non-
employees which vested immediately. In connection with such grants, the
Company recorded stock compensation expense of $383,000 in 1998 based on the
Black-Scholes pricing model, using a volatility factor of 40%, a risk-free
interest rate of 5.6%, a dividend yield of 0% and an expected life of five
years.
The Company recorded net deferred compensation of approximately $899,000,
and $2,811,000 in 1999 and 1998, respectively. The amounts recorded represent
the difference between the grant price and the deemed fair market value of the
Company's common stock for shares subject to options granted in 1999 and 1998.
In 1999, 296,475 shares were granted below fair market value and the exercise
price and deemed fair values ranged from $10.00 to $29.375 per share and
$12.00 to $34.50 per share, respectively. In 1998, 941,142 shares were granted
below fair market value and the exercise price and deemed fair values ranged
from $3.00 to $10.00 per share and $6.40 and $11.00 per share, respectively.
The deferred compensation is amortized over the vesting period of each
respective option, generally four years. Approximately $1,353,000 and
$1,468,000 was recorded as compensation expense in 1999 and 1998,
respectively.
A deferred tax benefit is recorded for the amortized compensation expense if
and when the Company realizes the associated tax benefits of the options. As
of December 31, 1999 and 1998, such deferred tax benefits have been fully
reserved by a valuation allowance due to the uncertain future utilization of
such benefits.
Pro Forma Disclosure
The Company follows the intrinsic value method in accounting for its stock
options. Had compensation cost been recognized based on the fair value at the
date of grant for options granted in 1999, 1998, and 1997, the pro forma
amounts of the Company's net loss and net loss per share would have been as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
------- -------- -------
<S> <C> <C> <C>
Net loss (in thousands):
As reported................................... $(8,327) $ (9,638) $(1,128)
Pro forma..................................... $(8,788) $(10,408) $(1,401)
Basic and diluted net loss per share:
As reported................................... $ (0.54) $ (0.75) $ (0.09)
Pro forma..................................... $ (0.57) $ (0.81) $ (0.11)
</TABLE>
52
<PAGE>
PCORDER.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The fair value of options granted prior to the Company's initial filing on
Form S-1 dated September 4, 1998, were estimated at the date of grant using a
minimum value option pricing model (0% volatility). The fair value of options
granted subsequent to the initial filing date through February 26, 1999 and
subsequent to February 26, 1999 were estimated at the date of grant using the
Black-Scholes pricing model and a volatility of 40% and 90%, respectively. The
fair value of options was estimated under both pricing models with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate........................... 5.9% 5.0% 6.4%
Dividend yield.................................... 0% 0% 0%
Weighted-average expected life of options......... 5 years 5 years 5 years
</TABLE>
NOTE 9--COMMITMENTS AND CONTINGENCIES
Lease Arrangements
The Company leases office facilities under various operating leases expiring
from 2000 to 2004. Future lease commitments for office facilities as of
December 31, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000.................................................................... $942
2001.................................................................... 951
2002.................................................................... 961
2003.................................................................... 940
2004.................................................................... 975
</TABLE>
Rent expense for the three years in the period ended December 31, 1999
totaled approximately $798,000, $563,000 and $220,000, respectively.
Litigation
In September 1999, the Company settled an outstanding lawsuit with a former
employee regarding commissions allegedly owed to the former employee by the
Company. The settlement did not have a material effect on the Company's
financial condition or results of operations.
The Company is involved in various other lawsuits and legal proceedings
which have arisen in the normal course of business. While the ultimate results
of these other matters cannot be predicted with certainty, management does not
expect them to have a material adverse effect on the financial position of the
Company.
53
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Information regarding the Company's executive officers required by Part III,
Item 10, is set forth in Item 1 of Part I herein under the caption "Executive
Officers of the Registrant." Information required by Part III, Item 10,
regarding the Company's directors is included in the Company's Proxy Statement
relating to the Company's annual meeting of stockholders scheduled to be held
on June 30, 2000, and is incorporated herein by reference. Information
relating to compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended, is set forth in the Proxy Statement and incorporated herein
by reference.
ITEM 11. Executive Compensation
Information required by Part III, Item 11, is included in the Company's
Proxy Statement relating to the Company's annual meeting of stockholders
scheduled to be held on June 30, 2000, and is incorporated herein by
reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
Information required by Part III, Item 12, is included in the Company's
Proxy Statement relating to the Company's annual meeting of stockholders
scheduled to be held on June 30, 2000, and is incorporated herein by
reference.
ITEM 13. Certain Relationships and Related Transactions
Information regarding certain of the Company's relationships and related
transactions is included in the Company's Proxy Statement relating to the
Company's annual meeting of stockholders scheduled to be held on June 30,
2000, and is incorporated herein by reference.
54
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements: See Index to Financial Statements at Item 8 on
page 36 of this report.
(2) Exhibits are incorporated herein by reference or are filed with this
report as indicated below (numbered in accordance with Item 601 of
Regulation S-K):
<TABLE>
<CAPTION>
Exhibit No. Document
----------- --------
<C> <S>
3.1* Certificate of Incorporation of the registrant. (Filed as Exhibit
3.1 to the registration statement on S-1 (File No. 333-62985)
filed by the registrant (the "February 1999 Form S-1") and
incorporated herein by reference.)
3.2* Certificate of Amendment to the Certificate of Incorporation of
the registrant. (Filed as Exhibit 3.2 to the February 1999 Form
S-1 and incorporated herein by reference.)
3.3* Bylaws of the registrant. (Filed as Exhibit 3.3 to the February
1999 Form S-1 and incorporated herein by reference.)
10.2* Employment Agreement between the registrant and Ross A. Cooley
dated November 1, 1997. (Filed as Exhibit 10.2 to the February
1999 Form S-1 and incorporated herein by reference.)
10.3* Employment Agreement between the registrant and Christina C.
Jones dated November 1, 1996. (Filed as Exhibit 10.3 to the
February 1999 Form S-1 and incorporated herein by reference.)
10.4* Employment Agreement between the registrant and James J.
Luttenbacher dated February 12, 1998. (Filed as Exhibit 10.4 to
the February 1999 Form S-1 and incorporated herein by reference.)
10.5* 1996 Stock Option Plan. (Filed as Exhibit 10.5 to the February
1999 Form S-1 and incorporated herein by reference.)
10.5.1* 1999 Stock Option Plan. (Filed as Exhibit 10.5.1 to the February
1999 Form S-1 and incorporated herein by reference.)
10.6+* Technology, Services and License Agreement between the registrant
and Trilogy dated September 1, 1998. (Filed as Exhibit 10.6 to
the February 1999 Form S-1 and incorporated herein by reference.)
10.7+* Management Services Agreement between the registrant and Trilogy
dated July 1, 1998. (Filed as Exhibit 10.7 to the February 1999
Form S-1 and incorporated herein by reference.)
10.8* Tax Allocation Agreement between the registrant and Trilogy dated
March 4, 1996. (Filed as Exhibit 10.8 to the February 1999 Form
S-1 and incorporated herein by reference.)
10.9* Asset Transfer Agreement between the registrant and Trilogy dated
June 1, 1996. (Filed as Exhibit 10.9 to the February 1999 Form S-
1 and incorporated herein by reference.)
10.10* Amendment to Asset Transfer Agreement between the registrant and
Trilogy dated August 21, 1998. (Filed as Exhibit 10.10 to the
February 1999 Form S-1 and incorporated herein by reference.)
10.12+* Subscription Services Agreement, effective June 16, 1999 between
registrant and Compaq Computer Corporation. (Filed as Exhibit
10.12 to the Form 10-Q for the quarter ended June 30, 1999 and
incorporated herein by reference.)
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Document
----------- --------
<C> <S>
10.13* Employee Stock Purchase Plan. (Filed as Exhibit 4.1 to the
registration statement on S-8 (File No. 333-32700) filed by the
registrant (the "March 2000 Form S-8") and incorporated herein by
reference.)
10.14* Foreign Subsidiary Employee Stock Purchase Plan. (Filed as Exhibit
4.2 to the March 2000 Form S-8 and incorporated herein by
reference.)
10.15 Sublease between the registrant and Trilogy dated June 1, 1999.
10.16 Employment Agreement between the registrant and Richard Friedman
dated July 9, 1999.
10.17 Amendment of Technology, Services and License Agreement between
the registrant and Trilogy dated October 8, 1999.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Powers of Attorney (see page 57)
27 Financial Data Schedule
</TABLE>
- --------
+ Confidential Treatment has been granted with respect to portions of the
exhibit. A complete copy of this agreement, including the redacted terms, has
been separately filed with the Securities and Exchange Commission.
* Previously filed.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, pcOrder.com, Inc., a corporation
organized and existing under the laws of the State of Delaware, has duly
caused this report to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Austin, State of Texas, on the 29 day of March
2000.
PCOrder.Com, Inc.
/s/ Ross A. Cooley
By: _________________________________
Ross A. Cooley
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ross A. Cooley and Christina C. Jones, with
full power to act alone, his or her true and lawful attorneys-in-fact, with
the power of substitution, for such person and in such person's name, place
and stead, in any and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his substitute or substitutes, may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ross A. Cooley Chairman of the Board and March 29, 2000
______________________________________ Chief Executive Officer
Ross A. Cooley (Principal Executive
Officer)
/s/ Christina C. Jones President and Chief March 29, 2000
______________________________________ Operating Officer
Christina C. Jones (Principal Executive
Officer)
/s/ James J. Luttenbacher Vice President and Chief March 29, 2000
______________________________________ Financial Officer
James J. Luttenbacher (Principal Financial
Officer and Accounting
Officer)
/s/ Joseph A. Liemandt Director March 29, 2000
______________________________________
Joseph A. Liemandt
/s/ Peter J. Barris Director March 29, 2000
______________________________________
Peter J. Barris
/s/ Linwood A. Lacy, Jr. Director March 29, 2000
______________________________________
Linwood A. Lacy, Jr.
/s/ Robert W. Stearns Director March 29, 2000
______________________________________
</TABLE> Robert W. Stearns
57
<PAGE>
EXHIBIT 10.15
SUBLEASE
THIS SUBLEASE is executed by and between Trilogy Software, Inc. ("Trilogy"), a
Delaware corporation, and pcOrder.com, Inc. ("pcOrder"), a Delaware corporation,
to be effective as of June 1, 1999.
RECITALS
Reference is made to that certain Office Lease (the "Master Lease") executed by
and between Trilogy, as "Lessee," and Opus South Corporation, as "Lessor,"
whereby Trilogy leased from Landlord a three story commercial office building,
containing approximately 122,530 rentable square feet of space, located in
Austin, Travis County, Texas, commonly known as Plaza on the Lake II. A true and
correct copy of the Master Lease is attached as Exhibit A hereto and
incorporated herein by reference. Opus South Corporation, together with its
successors in interest as "Lessor" under the Master Lease, is hereafter
referred to as "Landlord." Unless otherwise defined herein, terms used herein
which are defined in the Master Lease shall be given the same meanings herein as
are ascribed to them in the Master Lease.
Trilogy has agreed to sublease a portion of the Premises to pcOrder, pcOrder has
agreed to sublease a portion of the Premises from Trilogy, all on the terms and
conditions set forth herein.
AGREEMENTS
NOW, THEREFORE, for and in consideration of the mutual covenants and agreements
set forth herein, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Trilogy and pcOrder hereby agree as
follows:
1) Demise and Description of Property
Trilogy hereby leases to pcOrder, and pcOrder hereby leases from Trilogy,
approximately 38,560 rentable square feet of space on the first floor of the
Office Complex (the "Subleased Premises") as reflected on Exhibit B attached
hereto and incorporated herein by reference.
2) Term
This Sublease is for a term of approximately 70 months (the "Sublease Term"),
beginning on June 1, 1999 (the "Commencement Date"), and ending on April 7, 2005
(the "Termination Date"). But this Sublease will terminate earlier in the event
of a surrender, forfeiture, or termination of the Master Lease. If the Master
Lease shall expire or terminate prior to the Termination Date, (1) a termination
of this Sublease will be simultaneously effected, (2) the rental paid or to be
paid under this Sublease shall abate proportionately, (3) any rentals paid to
Trilogy for a period beyond such termination shall be repaid to pcOrder, and (4)
all amounts owed by pcOrder this Sublease shall be immediately due and payable
to Trilogy. In the event Trilogy receives any type of notice from the Lessor
under the Master Lease which would directly affect pcOrder and its rights under
this Sublease, then Trilogy will forward a copy of such notice to pcOrder with
five business days of receipt.
3) Base Rent
PAGE 1
<PAGE>
pcOrder hereby covenants and agrees to pay Trilogy, at Trilogy's principal
office at the address set forth below, monthly rent (the "Base Rent") for the
Subleased Premises as follows:
Months Base Rent
- ----------------------------------- ------------------------
1 through 11 inclusive $62,720.04
- ----------------------------------- ------------------------
12 through 47 inclusive $64,328.25
- ----------------------------------- ------------------------
48 through 71 inclusive $69,152.87
- ----------------------------------- ------------------------
The Base Rent shall be payable in advance, in equal monthly installments,
commencing on the Commencement Date and continuing on the first day of each
calendar month thereafter for the balance of the Sublease Term. If the
Commencement Date is a date other than the first day of a calendar month, then
the Base Rent for such calendar month shall be prorated accordingly.
4) Additional Rent
pcOrder shall pay to Trilogy, as Additional Rent under this Sublease, pcOrder's
"Proportionate Share" (defined as 31.5%) of all amounts which become due and
payable by Trilogy as Additional Rent under the Master Lease. pcOrder's
Proportionate Share of the Additional Rent shall be paid in the same manner, and
at the same time, as the Additional Rent payments under the Master Lease.
5) Common Areas
The "Common Area" is that part of the Office Complex designated by Trilogy or
Landlord, from time to time, for the common use, benefit, and enjoyment of all
tenants and guests, including, among other facilities, parking area, sidewalks,
landscaping, curbs, loading areas, private streets and alleys, lighting
facilities, hallways, malls, atria, rest rooms, and other areas and improvements
provided in the Office Complex for the common use and enjoyment of all tenants,
all of which shall be subject to Trilogy's sole management and control and shall
be operated and maintained in such manner as Trilogy, in its discretion, shall
determine. pcOrder and its employees, customers, subtenants, licensees, and
concessionaires shall have the non-exclusive right and license to use the Common
Area, as constituted from time to time, such use to be in common with Trilogy,
any other tenants of the Office Complex, and other persons permitted by Trilogy
or Landlord to use the same. This non-exclusive right and license shall include
the right to utilize a proportionate share of the parking places available under
the Master Lease. The non-exclusive right and license to use the Common Area, as
constituted from time to time, shall be subject to the Building Rules and
Regulations, and such other reasonable rules and regulations governing the use
thereof as Trilogy or Landlord may, from time to time, prescribe, including the
designation of specific areas within the Office Complex or in reasonable
proximity thereto in which automobiles owned by Tenants, its employees,
subtenants, licensees and concessionaires shall be parked. Trilogy and/or
Landlord shall at all times have the right to change such rules and regulations
or to promulgate other rules and regulations in such manner as may be deemed
advisable for safety, care or cleanliness of the Office Complex and for
preservation of good order therein, all of which rules and regulations, changes
and amendments will be forwarded to
PAGE 2
<PAGE>
pcOrder in writing and shall be carried out and observed by pcOrder. pcOrder
shall further be responsible for the compliance with such rules and regulations
by the employees, servants, agents, visitors and invitees of pcOrder. Trilogy or
Landlord may temporarily close any part of the Common Area for such periods of
time as may be necessary to prevent the public from obtaining prescriptive
rights or to make repairs or alterations.
6) Condition of Subleased Premises
pcOrder acknowledges that Landlord has completed construction of the
improvements to the Subleased Premises required under Article 1 of the Master
Lease. pcOrder has had an opportunity to inspect the Subleased Premises and has
found it satisfactory for pcOrder's intended use. Accordingly, pcOrder accepts
the Subleased Premises in their "AS-IS" condition and Trilogy shall have no
obligation to improve, repair, restore, or refurbish the Subleased Premises.
pcOrder acknowledges that neither Trilogy, nor any agent of Trilogy, has made
any representation or warranty with respect to the Subleased Premises or any
other portion of the Office Complex including, without limitation, any
representation or warranty with respect to the suitability or fitness of the
Subleased Premises or any other portion of the Office Complex for the conduct of
pcOrder's business. Subject to obtaining the prior approval of Landlord as
required by Article 7 of the Master Lease and Trilogy's approval, as hereafter
provided, pcOrder shall be entitled to make such alterations and improvements to
the Subleased Premises as pcOrder may determine are appropriate for pcOrder's
use of the Subleased Premises. Prior to undertaking any alterations of or
improvements to the Subleased Premises, pcOrder shall submit a written request
for approval to Trilogy, together with the plans and specifications for such
alterations and improvements. Trilogy's approval shall not be unreasonably
withheld, delayed or denied. If Landlord and Trilogy each gives its consent,
according to the requirements of this agreement, to alterations or improvements
to the Subleased Premises by pcOrder, pcOrder shall procure, at pcOrder's
expense, all necessary permits before undertaking such work. All such
alterations shall be done at pcOrder's sole cost and expense, and in accordance
the provisions and requirements of the Master Lease and in accordance with all
applicable laws, including applicable building codes and regulations.
7) Use of Subleased Premises
pcOrder will use the Subleased Premises only for office space and for uses
normally incident to that purpose. Under no circumstances shall pcOrder utilize
the Subleased Premises, or allow the Subleased Premises to be utilized, in any
form or fashion which would violate any term, covenant, or condition of the
Master Lease or any applicable law, rule, regulation, or order governing the use
and enjoyment of the Subleased Premises.
8) Assumption Agreement and Covenants
a) pcOrder will comply with all of the provisions of the Master Lease that
are to be performed by Trilogy as Tenant during the Sublease Term insofar
as such provisions relate to the Subleased Premises and Tenant's use of
Common Areas, but the rent provisions of the Master Lease will not apply to
pcOrder. Paragraphs 3 and 4, above, govern pcOrder's payment of rent.
PAGE 3
<PAGE>
b) All of the terms and conditions contained in the Master Lease, to the
extent that they do not conflict with specific provisions of this Sublease,
are made a part of this Sublease, and the rights and obligations contained
in the Master Lease are, during the term of this subletting, imposed on the
respective parties, Trilogy being substituted for Landlord in the Master
Lease, and pcOrder being substituted for Trilogy in the Master Lease.
pcOrder recognizes that Trilogy is not in a position to independently
render any of the services or to perform any of the obligations required of
Trilogy by the terms of this Sublease. Therefore, notwithstanding anything
to the contrary contained in this Sublease, pcOrder agrees that performance
by Trilogy of all of its obligations under this Sublease (other than those
set forth in Sections 8(c) and 9(c) below) is conditional upon the due
performance by Landlord of its corresponding obligations under the Master
Lease.
c) Trilogy agrees to pay the Basic Rent, the Additional Rent, and all other
sums which may become due and payable to Landlord under the Master Lease,
as and when due, and to otherwise comply with all other terms and
conditions of the Master Lease as to that part of the Premises not sublet
to pcOrder. Trilogy further agrees to notify pcOrder immediately upon its
receipt of any notice or other communication received from Landlord under
or pertaining to the Master Lease which would potentially have a material
impact upon pcOrder and/or this Sublease, including any notice of default
or potential default under the Master Lease. In the event Trilogy fails to
cure any default by Trilogy under the Master Lease within any applicable
cure periods, pcOrder shall have the right, but not the obligation, to cure
such default, subject in any event to the willingness of the Lessor to
accept such cure from pcOrder, and in such event Trilogy shall be obligated
to reimburse pcOrder promptly for any reasonable costs incurred by pcOrder
in effecting such cure.
9) Limitation of Liability and Indemnity
a) Notwithstanding any contrary provision of the Master Lease, neither the
Landlord nor Trilogy will be liable to pcOrder, or any of its agents,
employees, servants, or invitees, (nor will pcOrder be liable to Trilogy or
any of its agents, employees, servants, or invitees), for any damage to
persons or property due to the condition, design, or any defect in the
Office Complex or its mechanical systems that may exist or subsequently
occur. pcOrder, with respect to itself and its agents, employees, servants,
and invitees, assumes all risks and damage to persons and property, either
proximate or remote, by reason of the present or future condition of the
Subleased Premises or the Office Complex. Trilogy, with respect to itself
and its agents, employees, servants, and invitees, assumes all risks and
damage to persons and property, either proximate or remote, by reason of
the present or future condition of the Office Complex.
b) Except for any claims, losses, costs, liabilities, actions, and damages
that Trilogy has expressly released, or for which Trilogy's otherwise
responsible as an occupant of the Office Complex, and except for those
matters for which Trilogy is obligated to indemnify pcOrder pursuant to
this Sublease, pcOrder agrees to indemnify, protect, defend, and hold
Trilogy and Trilogy's partners, shareholders, employees, and agents
harmless from
PAGE 4
<PAGE>
and against any and all claims, losses, costs, liabilities, actions, and
damages, including, without limitation, reasonable attorney's fees and
costs, incurred by or on behalf of any person or persons, firm or firms,
corporation or corporations, arising from any breach or default on the part
of pcOrder in the performance of any covenant or agreement on the part of
pcOrder to be performed pursuant to the terms of this Sublease, or arising
primarily from any act or negligence on the part of pcOrder or its agents,
contractors, servants, employees, or licensees, or arising from any
accident, injury, or damage, to the extent, and only to the extent, caused
by pcOrder or its agents or employees, to any person, firm, or corporation
occurring during the term of this Sublease or any renewal thereof, in or
about the Subleased Premises and the Office Complex, and from an against
all costs, reasonable counsel fees, expenses, and liabilities, incurred in
connection with any such claim, action, or proceeding brought thereon; and
in case any action or proceeding shall be brought against Trilogy by reason
of any such claim, pcOrder, upon notice from Trilogy, covenants to resist
and defend such action or proceeding by counsel reasonably satisfactory to
Trilogy.
c) Notwithstanding anything contained herein to the contrary, Trilogy shall be
liable for, pcOrder shall not be liable for, and Trilogy shall indemnify,
protect, defend, and hold pcOrder and its partners, shareholders,
directors, and employees harmless from and against any and all liability
caused, in whole or in part, by the act, neglect, fault, or omission of any
duty by Trilogy, its agents, contractors, servants, employees, or
licensees, whether in the Subleased Premises, the Office Complex, the
Parking Garage, or the other parking areas.
10) Insurance
Article 5 of the Master Lease details the insurance requirements imposed on
Trilogy. Section 9.3 of the Master Lease requires any sublessee under the Master
Lease to deliver certificates of insurance evidencing the issuance of insurance
policies in the forms and content required by Article 5. Upon request by
Trilogy, pcOrder will deliver certificates of insurance complying with the
requirements of Article 5 and Section 9.3 of the Master Lease to Landlord and
Trilogy. Upon request by Trilogy, each insurance policy required under Article 5
of the Master Lease which is to name Landlord as an additional insured shall
also name Trilogy as an additional insured. In addition and upon request by
Trilogy, each insurance policy required under Article 5 of the Master Lease
which is to contain a waiver of subrogation with respect to Landlord will also
contain a waiver of subrogation with respect to Trilogy.
11) Taxes on pcOrder's Property
pcOrder shall pay, and indemnify, defend, and hold Trilogy and Landlord harmless
against, all taxes, impositions, and assessments, of every kind, levied or
assessed against personal property, furniture, fixtures, and other improvements
placed by or for pcOrder in the Subleased Premises.
12) Renewal Option
Section 15.25 of the Master Lease provides Trilogy with the option to renew the
Master Lease for one (1) additional term of five (5) years. In the event Trilogy
elects to exercise its option to
PAGE 5
<PAGE>
renew the Master Lease, Trilogy will provide pcOrder with the option of renewing
this Sublease for the same period. The option to renew this Sublease must be
exercised by written notice delivered by pcOrder to Trilogy at least three
hundred (300) days before the end of the Sublease Term. The Base Rent for the
renewal term of this Sublease shall be determined by taking the Base Rent which
is determined for the renewal term of the Master Lease and multiplying it by
pcOrder's Proportionate Share.
13) Right of First Notice to Purchase
Section 15.27 of the Master Lease provides Trilogy with a "Right of First Notice
to Purchase" the Office Complex in the event Landlord determines that it wishes
to sell the Office Complex. This right of first notice with respect to the
purchase of the Office Complex is personal to Trilogy, and not assignable by
Trilogy. None of the rights, privileges or benefits afforded to Trilogy under
Section 15.27 of the Master Lease shall be exercisable or otherwise enjoyed by
pcOrder. In the event Trilogy exercises such right, however, Trilogy agrees
that this Sublease shall become a direct lease between Trilogy and pcOrder on
the same terms and conditions.
14) Signs
pcOrder covenants and agrees that no signs or symbols shall be placed in the
windows or doors of the Subleased Premises, or on any exterior part of the
Office Complex, without Trilogy's and the Landlord's prior written approval. Any
sign or symbol placed on the exterior of Office Complex or in the windows or
doors of the Office Complex so as to be visible from the street, that is not
satisfactory to Trilogy, shall be removed immediately on demand by Trilogy and
if not so removed within twenty-four (24) hours will constitute a breach of this
Sublease. pcOrder shall remove any approved sign placed on or about the exterior
of the Subleased Premises when this lease expires or terminates, and any damage
to the Office Complex or Subleased Premises resulting from the removal will be
repaired at pcOrder's sole cost and expense.
15) Building Rules
pcOrder will comply with such rules and regulations generally applying to
tenants in the Building as may be adopted from time to time by Landlord and/or
Trilogy and delivered in writing to pcOrder for the management, safety, care and
cleanliness of, and the preservation of good order and protection of property in
the Subleased Premises and the Building. Trilogy hereby reserves all rights
necessary to implement and enforce such building rules and regulations.
16) Access
pcOrder shall allow Landlord and Trilogy, and their agents, free access at all
reasonable times to the Subleased Premises for purposes of inspecting or making
repairs, additions, or alterations to the Subleased Premises or any property
owned by or under the control of Landlord or Trilogy.
17) Furniture and Fixtures
All furniture, fixtures and equipment placed in the Subleased Premises by
pcOrder, including without limitation any computer or telecommunications systems
or equipment, will remain pcOrder's property, subject to Trilogy's rights as
provided by law. pcOrder may, when the
PAGE 6
<PAGE>
Sublease Term expires, remove such furniture, fixtures and equipment if removal
is done so as not to damage the Subleased Premises; or if any damage does occur
such damage is repaired.
18) Assignment and Subletting
a) pcOrder will not assign or sublease the Subleased Premises, or any part
of the Subleased Premises, without Trilogy's prior written consent,
which may be withheld at Trilogy's discretion.
b) Notwithstanding the foregoing, this Sublease may be assigned, or the
Subleased Premises sublet, in whole or in part, to any corporation or
other legal entity into which, or with which, pcOrder may be merged or
consolidated or that acquires substantially all the assets of pcOrder or
to any corporation or other legal entity that is a majority-owned
subsidiary, parent, or affiliate of pcOrder.
c) If there is an assignment, the assignee will agree in writing to assume
all the terms and covenants of this Sublease to be performed by pcOrder.
A duplicate original of that assignment and assumption agreement will be
delivered to Trilogy within ten (10) days following the date of its
execution or its effective date, whichever is earlier. pcOrder's
liability under this Sublease, and that of any assignee of this
Sublease, will survive any assignment or subletting, and such liability
will be unaffected by any extension of time that Trilogy may grant to
any assignee or pcOrder for paying rent or other charges due under this
Sublease, or for performing any other term or covenant of this Sublease.
19) Default
a) Trilogy may terminate this Sublease upon the happening of any one, or
more, of the following events:
i) pcOrder's making a general assignment for the benefit of its
creditors;
ii) The levying on or against pcOrder's property of a writ of
execution or attachment that is not released or discharged within
sixty (60) days;
iii) The institution in a court of competent jurisdiction of
proceedings for the reorganization, liquidation, or involuntary
dissolution of pcOrder, or for its adjudication as a bankrupt or
insolvent, or for the appointment of a receiver of pcOrder's
property, if the proceedings are not dismissed, and any receiver,
trustee, or liquidator appointed therein is not discharged within
sixty (60) days after the proceedings are instituted;
iv) pcOrder's doing or permitting to be done any act that creates a
mechanics' lien or claim against the land or Office Complex of
which the Subleased Premises are a part that is not released or
otherwise provided for by indemnification satisfactory to Trilogy
within sixty (60) days after discovery of the existence of such
lien by pcOrder; and
v) pcOrder's failing to pay any rental installment, or other charge
or money
PAGE 7
<PAGE>
obligation required by this Sublease, within ten (10) days
after the date on which such payment is due, or to perform any
other covenant under this Sublease within thirty (60) days after
receipt of written notice of such failure from Trilogy.
b) Upon any termination of the estate, Trilogy may reenter the Subleased
Premises, with or without process of law, using such force as necessary,
and remove all persons and chattels. Trilogy will not be liable for
damages or otherwise by reason of reentry or termination of the terms of
this Sublease. Notwithstanding any termination by Trilogy, pcOrder's
liability for the rents and charges under this Sublease will not be
relinquished, diminished, or extinguished for the balance of the
Sublease Term. pcOrder will pay, in addition to the rent and other sums
agreed to be paid under this lease, any additional sums as the court may
adjudge reasonable as attorney's fees in any suit or action instituted
by Trilogy to enforce this Sublease, or the collection of the rent due
Trilogy if Trilogy prevails in the suit or action. Any property
belonging to pcOrder or any persons holding by, through, or under
pcOrder, or otherwise found upon the Subleased Premises, may be removed
and stored in any public warehouse at the cost of and for the account of
pcOrder. Should pcOrder abandon, vacate, or surrender the Subleased
Premises or be dispossessed by process of law, any personal property
left the Subleased Premises may be deemed abandoned, at Trilogy's
option.
c) If pcOrder breaches this Sublease after expiration of any applicable
notice and cure period, Trilogy may immediately or at any time
thereafter, without notice, cure the breach for the account and at the
expense of pcOrder. If Trilogy at any time, by reason of the breach,
must pay, or elects to pay, any sum of money or do any act that will
require paying any sum of money, or must incur any expense, including
reasonable attorney's fees, in instituting or prosecuting any action or
proceeding to enforce Trilogy's rights under this Sublease, the sums
paid by Trilogy, with interest at the rate of twelve percent (12%)
annually from the date of payment, will be considered additional rent
and will be due from pcOrder to Trilogy on the first day of the month
following pcOrder's receipt of a statement from Trilogy of payment of
the respective sums or expense.
d) All Trilogy's rights and remedies enumerated in this Sublease are
cumulative and will not exclude any other right or remedy allowed by
law. These rights and remedies may be exercised and enforced
concurrently, whenever necessary. If Trilogy is in default under this
Sublease, Trilogy will have sixty (60) days to cure the default after
written notice to Trilogy by pcOrder specifying such default.
20) Eminent Domain
If any public authority takes the whole or any part of the Subleased Premises
under the power of eminent domain, then the Sublease Term will cease with
respect to that part from the date that its possession is required for any
public purpose, and the rent will be up to that day. If a portion of the
Subleased Premises is taken so that the remaining portion will not be reasonably
adequate for
PAGE 8
<PAGE>
operating pcOrder's business after Trilogy completes such repairs or alterations
as Trilogy is obligated to make, pcOrder may elect either to terminate this
lease or to remain in possession of the remainder of the Subleased Premises. In
the latter event, the rent will be equitably adjusted to account for that
portion of the Subleased Premises so taken. If pcOrder elects to remain in
possession, all the terms of this Sublease will continue in effect except for
rent, and Trilogy will at its own cost and expense make all necessary repairs or
alterations to the Office Complex.
21) Miscellaneous Provisions
a) Corporate Authority
Trilogy and pcOrder each warrant and represent to the other that this
Sublease, the transactions contemplated by this Sublease, and the execution
and delivery of this Sublease, have been duly authorized by all necessary
corporate proceedings and actions, including without limitation, action on
the part of the party's board of directors. Certified copies of such
corporate or other resolutions authorizing this transaction shall be
delivered by each party to the other.
b) Parties Bound
This Sublease will bind and inure to the benefit of the parties and their
respective legal representatives, successors, and assigns except as this
Sublease otherwise specifies.
c) Legal Construction
If any one or more of the provisions of this Sublease is for any reason
held invalid, illegal, or unenforceable in any respect, that invalidity,
illegality, or unenforceability will not affect any other provision of this
Sublease, which will be construed as if it had never included the invalid,
illegal, or unenforceable provision.
d) Prior Agreements Superseded
This Sublease constitutes the sole agreement of the parties and supersedes
any prior understandings or written or oral agreements between the parties
respecting the subject matter. Notwithstanding the foregoing, Exhibit A to
this sublease specifies additional lease terms that are in effect through
12/31/99.
e) Attorney's Fees
If any action at law or in equity, including an action for declaratory
relief, is brought to enforce or interpret this Sublease, the prevailing
party is entitled to recover reasonable attorney's fees from the other. The
fees may be set by the court in the trial of the action or may be enforced
in a separate action for that purpose, and the fees will be in addition to
any other relief that may be awarded.
f) Specific Performance
The parties declare that it is impossible to measure in money the damages
that will accrue to either party, their heirs, executors, administrators,
legal representatives, successors, or assigns by reason of a failure to
perform any of the obligations under this Sublease. Therefore, if a party,
its heirs, executors, administrators, legal representatives, successors,
PAGE 9
<PAGE>
or assigns institute any action or proceeding to enforce this Sublease, any
person against whom the action or proceedings are brought agrees that
specific performance may be sought and obtained for any breach of this
Sublease.
g) Counterparts, One Agreement
This Sublease and all other copies of it, insofar as they relate to the
rights, duties, and remedies of the parties, will be considered one
agreement. This Sublease may be executed concurrently in one or more
counterparts, each of which will be considered an original, but all of
which together will constitute one instrument.
h) Notice
Unless this Sublease provides otherwise, any notice, tender, or delivery to
be given by either party to the other may be effected by personal delivery
in writing or by registered or certified mail, postage prepaid, return
receipt requested, and will be considered received as of actual receipt.
i) Time of Essence
Time is of the essence in this Sublease.
j) Paragraph Headings
The paragraph headings used in this Sublease are descriptive only and shall
have no legal force or effect whatever.
k) Texas law
This Sublease shall be subject to and governed by the laws of the State of
Texas. Any and all obligations or payments are due and payable in Austin,
Travis County, Texas.
l) Severability
If any provision of this Sublease shall, for any reason, be held to violate
of any applicable law, and so much of said agreement is held to be
unenforceable, the invalidity of such a specific provision shall not
invalidate any other provisions of this Sublease, which other provisions
shall remain in full force and effect, unless removal of the invalid
provisions destroy the legitimate purposes of this Sublease, in which event
this Sublease shall be cancelled.
PAGE 10
<PAGE>
m) Relationship Between the Parties
The relationship between the parties as to this Sublease and the
transactions described herein is only that of independent contractors, i.e.
sub-landlord and subtenant. No partnership, joint venture, or relationship
of principal and agent is intended. pcOrder shall not pledge the credit of
Trilogy or bind Trilogy to any obligation with respect hereto.
Executed to be effective as of the date first written above.
Trilogy Software, Inc., a Delaware corporation
By: /s/ PAT KELLY
-----------------------------------
Printed Name: Pat Kelly
-------------------------
Title: VP - CFO
--------------------------------
pcOrder.com, Inc., a Delaware corporation
By: /s/ JIM LUTTENBACHER
-----------------------------------
Printed Name: Jim Luttenbacher
-------------------------
Title: VP - CFO
--------------------------------
PAGE 11
<PAGE>
Exhibit A
Trilogy and pcOrder.com agree to the following terms:
1. pcOrder will continue making rent payments to Plaza I (IXC) in accordance
with their current lease obligation.
2. Trilogy will reimburse pcOrder for 1/2 floor of rent payments at Plaza II
(includes base rent and operating expenses) through 12/31/99 (expiration of
most of Plaza I lease); subject to pcOrder staying current on its lease
obligations at Plaza I.
3. Trilogy will work to sublease space at Plaza I; any sublease payments
received by pcOrder will be passed through to Trilogy. This is in exchange
for Trilogy paying rent on 1/2 floor at Plaza II.
4. pcOrder will honor and pay for any buyout agreement that Trilogy negotiates
related to Plaza I. Trilogy will reimburse pcOrder for any buyout payment
made by pcOrder.
PAGE 12
<PAGE>
EXHIBIT 10.16
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the 9th
day of July, 1999 (the "Effective Date"), by and between pcOrder.com, Inc., a
Delaware corporation (the "Employer") and Richard Friedman (the "Employee").
The Employer desires to employ the Employee, and Employee desires to be
employed by the Employer, in accordance with the terms and conditions set forth
herein:
1. Employment. Employer hereby employees Employee as Vice President and
----------
General Counsel of the Employer, or in such other capacity as the parties may
agree from time to time. The Employee hereby accepts such employment upon the
terms and conditions set forth herein and agrees to devote his full business
time and efforts to the performance of his duties hereunder.
2. Employment Period. Employee is an employee at will. Either Employer or
-----------------
Employee may terminate this Agreement at any time for any reason, subject to the
terms of this Agreement. Employee will commence his services hereunder on July
19, 1999.
3. Duties. Employee shall have those duties and responsibilities which are
------
assigned to him by the Chief Executive Officer or the board of directors of the
Employer during the period of his employment. Employee agrees to perform
faithfully the duties assigned to him to the best of his abilities.
4. Compensation. As compensation for all services rendered and to be
------------
rendered pursuant to this Agreement, Employer agrees to pay Employee a salary
(the "Base Salary") equivalent to no less than $175,000 per annum. The Base
Salary shall accrue and be payable in accordance with the payroll practices of
the Employer as in effect from time to time. In addition, Employee will be
eligible for semi-annual bonuses awarded at the discretion of the Employer,
based upon the Employer's performance and the Employee's individual performance.
Employer shall have the right to deduct from any compensation paid to Employee
hereunder all taxes and other amounts which may be required to be deducted or
withheld by law (including, but not limited to, income tax withholding and
social security payments), whether such laws are now in effect or become
effective after the date of this Agreement.
5. Stock Options. As additional consideration for services rendered or to
-------------
be rendered hereunder or otherwise and for Employee's execution and delivery of
this Agreement, the Employer shall grant to Employee the right and option to
purchase from Employer all or any part of an aggregate of 75,000 shares of the
Common Stock, $.01 par value, of Employer at a strike price of the fair market
value at the close of market on the day previous to the board approved grant,
upon the terms and subject to the conditions set forth in the 1999 Class A
pcOrder.com Stock Option Plan. The options will vest at a rate of 25% per year
for four years. The first 25% will vest on the first anniversary of the grant
date.
6. Expenses. Employer shall promptly reimburse Employee for all reasonable
--------
and documented expenses incurred by Employee on behalf of Employer or in
connection with Employee's performance of his duties hereunder.
7. Relocation Expenses. Employer will reimburse Employee for certain
-------------------
expenses associated with relocating from Portola Valley, California to Austin,
Texas, as follows:
a. Lump sum. Within 15 days of employee's demand following
--------
commencement of employment, the sum of $19,650 will be paid. This
amount will be grossed up for taxes at employee's tax rate. For
purposes of this Agreement, "employee's tax rate" shall mean the
Employee's highest marginal tax rate for the year in which the
payment is made.
b. Moving expense. Employer will pay actual, reasonable, documented
--------------
expenses to relocate the household goods, including one car, of
Employee's immediate
<PAGE>
family to Austin, Texas and to store such goods for up to 6
months, using North American Van Lines.
c. Sale of California home. Employer will pay Employee 6% of the
-----------------------
actual sales proceeds obtained by Employee upon sale of Employee's
California home, up to a maximum of $40,000, grossed up for taxes,
provided Employee sells the home by July 17, 2002, and delivers to
Employer evidence of the final sales price. This amount will be
grossed up for taxes at employee's tax rate.
d. Purchase of Texas home. Employer will pay Employee 2% of the
----------------------
purchase price paid by Employee upon purchase of a residence in
Texas, up to a maximum of $10,000, grossed up for taxes, provided
Employee purchases a Texas residence by December 31, 2000 and
delivers to Employer evidence by January 18, 2000 of the purchase
price paid by Employee for the residence. This amount will be
grossed up for taxes at employee's tax rate.
8. Employment Benefits. While employed by Employer, Employee shall be
-------------------
entitled to such other benefits as are customarily accorded to the employees of
the Employer, including, but not limited to, the right to participate in
employee benefit programs maintained by the Employer from time to time, such as
group health, life, and disability insurance.
9. Termination.
-----------
(a) This Agreement may be terminated by written notice by the
Employer or the Employee at any time. If such termination is by
Employee for any reason, or by Employer with Cause (as such term
is hereinafter defined), all of Employee's rights to compensation
and benefits under Sections 4 and 8 above shall terminate, except
amounts accrued for periods prior to such termination. If such
termination is by the Employer without Cause, Employer shall (i)
continue to pay to Employee a monthly amount equal to one-twelfth
of the then current Base Salary for six months following the
effective date of such termination (or, at Employer's option, pay
such amount in a lump sum) and (ii) continue to provide to
Employee the employee benefits (through COBRA or otherwise) as
provided in Section 8 above during suchsix-month period. The term
"Cause" shall mean (i) material failure by Employee to perform
his duties as Vice President and General Council in a manner
consistent with such position and responsibilities, (ii) a
material breach by Employee of any of his obligations under this
Agreement, (iii) fraud or willful misconduct on the part of the
Employee, or (iv) conviction of Employee for fraud,
misappropriation, embezzlement, or any felony.
(b) If Employee shall die during the Employment Period, this
Agreement shall terminate, and no further compensation shall be
payable to Employee hereunder.
(c) If the Employee is unable to discharge his duties hereunder for a
period of six consecutive months by reason of physical or mental
illness, injury, or incapacity, Employer may, by written notice
to Employee, terminate this Agreement and no further compensation
shall be payable to Employee hereunder.
10. Proprietary Information and Restrictive Covenants.
-------------------------------------------------
(a) As used herein, the term "Proprietary Information" means
-----------------------
information, knowledge or data not generally known in the
relevant trade or industry that was disclosed to or known by
Employee as a consequence of or through Employee's employment
with the Employer (including, without limitation, information
conceived or developed by Employee during the course of his
employment by Employer), whether before or after the date of this
Agreement about:
<PAGE>
(i) The Employer's activities, services, products, formulas,
computer programs and systems, trade secrets,
manufacturers, compositions, inventions, discoveries,
customer records, processes, information relating to
research, development, inventions, work performed or to be
performed for Customers (as such term is hereinafter
defined), contractual agreements, lists of past, current or
prospective Customers, lists of employees and salary
information, marketing plans, strategies, and forecasts;
(ii) Customers' activities, plans, products, processes and
services including, without limitation, information
relating to business operations, employee relations,
finance, and product or service marketing;
(iii) Vendors' (as such term is hereinafter defined) activities,
plans, services, products and processes including, without
limitation, information relating to business operations,
employee relations, finance, and product or service
marketing; and
(iv) All information which Employee has a reasonable basis to
know was created, modified or used and held secret by
Employer or that was accepted by Employer from any third
party under an obligation of confidentiality.
As used herein, the term "Customer" means any person or entity for whom Employer
--------
provided services or products on or within 12 months prior to the termination of
Employee's employment. As used herein, the term "Vendor" means any third party
------
selling or licensing a product or service to a Customer or to Employer on or
within 12 months prior to termination of Employee's employment.
(b) Employee acknowledges that Employer has spent significant time,
effort, and money to develop the Proprietary Information, which
Employer considers vital to its business and goodwill. Employee
also acknowledges that the Proprietary Information has been or
will be communicated to or acquired by Employee in the course of
his training by and employment with Employer (whether before or
after the date of this Agreement), and Employer desires to have
the services of Employee only if, in doing so, it can protect its
Proprietary Information and goodwill.
(c) Employee agrees to hold the Proprietary Information in strict
confidence and trust and that he shall not, at any time, disclose
any Proprietary Information to any person or entity, except in
the course of Employee's duties on behalf of Employer, and shall
not copy, publish or use any Proprietary Information for the
benefit of anyone or any entity other than Employer.
(d) In consideration, among other things, of the disclosure of the
Proprietary Information by Employer to Employee, Employee
covenants and agrees that he shall not (personally, nor will he
direct any third party to do so), during his employment by
Employer, during the period of his employment by Employer and for
an additional period of two years immediately following
termination of his employment by Employer (the "Restriction
-----------
Period"), (i) provide or offer to provide to any Customer any
------
product or service similar to that offered by Employer at the
time of such termination of employment, or (ii) induce or attempt
to induce any Customer to withdraw, curtail or cancel its
business with Employer or in any manner modify or fail to enter
into any actual or potential business relationship with Employer.
<PAGE>
(e) In consideration, among other things, of the disclosure of the
Proprietary Information by Employer to Employee, Employee
covenants and agrees that he shall not (personally, nor will he
direct any third party to do so), during the Restriction Period,
recruit or otherwise solicit or induce any person or entity who
is, at the time of such termination of Employee's employment or
thereafter, an employee or Vendor of Employer to terminate their
employment with, or otherwise cease their relationship with,
Employer.
(f) In consideration, among other things, of the disclosure of the
Proprietary Information by Employer to Employee, Employee
covenants and agrees that he shall not, during the Restriction
Period, working alone or in conjunction with one or more other
persons or entities, for compensation or not, permit Employee's
name to be used by or engage in or carry on, directly or
indirectly, either for himself or as a member of a partnership or
other entity or as a stockholder, investor (other than as the
holder of 1% or less of the voting capital stock of any
corporation with a class of equity securities registered under
Section 12 (b) or 12 (g) of the Securities Exchange Act of 1934,
as amended) in any business providing electronic commerce
technology and services to computer manufacturers, distributors,
corporate resellers, or retailers to facilitate the purchase and
sale of their information technology products, but only for as
long as such business is carried on by (i) Employer or (ii) any
person, corporation, partnership, trust or other organization or
entity deriving title from Employer to the assets and goodwill of
the business being carried on by Employer immediately prior to
such termination of Employee's employment by Employer, in any
county of any state of the United States, or in any country or
political subdivision of the world, except for shareholdings in
WebOrder. The parties intend that the covenants contained in
this Section 10 (f) shall be deemed to be a series of separate
covenants, one for each county in each state of the United States
and for each country and political subdivision of the world, and
except for geographic coverage, each such separate covenant shall
be identical in terms to the covenant contained in this Section
10 (f).
(g) If Employee violates any covenant contained in paragraphs (d),
(e) or (f) of this Section 10, then the term of such violated
covenant shall be tolled for the commencing on the commencement
date of such violation and ending upon the earlier of (i) such
time as such violation shall be cured by Employee to the
reasonable satisfaction of Employer or (ii) final adjudication
(including appeals) of any action filed for injunctive relief or
damages arising out of such violation.
(h) If, in any judicial proceeding, the court shall refuse to enforce
any of the separate covenants contained in paragraphs (d), (e) or
(f) of this Section 10 because the time limit is too long, it is
expressly understood and agreed between the parties hereto that
for purposes of such proceeding such time limitation shall be
deemed reduced to the extent necessary to permit enforcement of
such covenants. If, in any judicial proceeding, the court shall
refuse to enforce any of the separate covenants contained in
paragraphs (d), (e) or (f) of this Section 10 because they are
more extensive than necessary to protect the business and
goodwill of the Employer, it is expressly understood and agreed
between the parties hereto that for purposes of such proceeding
such provisions shall be deemed reduced to the extent necessary
to permit enforcement of such covenants.
(i) Employee acknowledges that a breach of this Section 10 would
cause irreparable damage to Employer, and in the event of
Employee's actual or threatened breach of the provisions of this
Section 10, Employer shall be entitled to a temporary restraining
order and injunction restraining Employee from
<PAGE>
breaching such covenants without the necessity of posting bond or
proving irreparable harm, such being conclusively admitted by
Employee. Nothing herein shall be construed as prohibiting Employer
from pursuing any other available remedies for such breach, including
the recovery of damages from Employee. Employee acknowledges that the
restrictions set forth in this Section 10 are ancillary to an
otherwise enforceable agreement and are reasonable in scope and
duration, given the nature of the business of the Employer. Employee
agrees that issuance of an injunction will not pose an unreasonable
restriction on Employee's ability to obtain employment or other work
following termination of Employee's employment by Employer.
11. Representations by Employee. Employee hereby represents and warrants
---------------------------
to Employer that (i) Employee's execution and delivery of this Agreement and his
performance of his duties and obligations hereunder will not conflict with, or
cause a default under, or give any party a right to damages under, or to
terminate, any other agreement to which Employee is a party or by which he is
bound, and (ii) there are no agreements or understandings that would make
unlawful Employee's execution or delivery of this Agreement or his employment
hereunder.
12. Notices. All notices, requests, demands, and other communications
-------
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given, made, and received only when personally delivered, sent by
electronically confirmed facsimile transmission, delivered by Federal Express or
other nationally recognized courier service, or two days after having been
deposited in the United States mail, certified mail, postage prepaid, return
receipt requested, addressed as set forth below:
in the case of the Employer at:
pcOrder.com, Inc.
5001 Plaza on the Lake
Austin, Texas 78746
and, in the case of the Employee, at his residence at:
Richard Friedman
260 S. Castanya Way
Portola Valley, CA 94028
Either party may designate a different address by giving notice of change of
address in the manner provided above.
13. Waiver. No waiver or modification in whole or in part of this
------
Agreement, or any term or condition hereof, shall be effective against any party
unless in writing and duly signed by the party sought to be bound. Any waiver
or any breach of a any provisions hereof or any right or power by any party on
one occasion shall not be construed as a waiver of, or a bar to, the exercise of
such right or power on any other occasion or as a waiver of any subsequent
breach.
14. Binding Effect; Successor. This Agreement shall be binding upon and
-------------------------
shall inure to the benefit of Employer and its successors and assigns, and shall
inure to the benefit of and be binding upon Employee and his executors,
administrators, heirs, and legal representatives. This Agreement may not be
transferred, sold or assigned by Employer. Because the Employee's duties and
services hereunder are special, personal, and unique in nature, Employee may not
transfer, sell or otherwise assign his rights, obligations, or benefits under
this Agreement.
15. Controlling Law. This Agreement shall be governed by and construed in
---------------
accordance with the laws of the State of Texas applicable to contracts made and
to be performed therein exclusive of the conflict of laws provisions thereof.
<PAGE>
16. Severability. If any provision of this Agreement shall be held to be
------------
invalid or unenforceable, such invalidity or unenforceability shall not affect
or impair the validity or enforceability of the remaining provisions of this
Agreement, which shall remain in full force and effect and the parties hereto
shall continue to be bound thereby.
17. Entire Agreement. This Agreement contains the entire agreement between
----------------
the parties relating to the subject matter hereof and shall supersede all
previous agreements between the parties, whether written or oral, with respect
to the subject matter hereof. This Agreement cannot be modified, altered, or
amended except by a writing signed by each of the parties hereto.
IN WITNESS WHEREOF, Employer and Employee have executed this Agreement as
of the Effective Date.
EMPLOYER: EMPLOYEE:
PCORDER.COM, INC.
By: /s/ CHRISTINA C. JONES /s/ RICHARD FRIEDMAN
----------------------------------- ------------------------------------
Christina C. Jones, President RICHARD FRIEDMAN
<PAGE>
EXHIBIT 10.17
AMENDMENT OF
TECHNOLOGY, SERVICES AND LICENSE AGREEMENT ("Agreement")
This Amendment of Technology, Services and License Agreement (this
"Amendment"), effective as of October 8, 1999 ("Effective Amendment Date"), is
entered into by and between pcOrder.com, Inc., a Delaware Corporation, having an
address at 5001 Plaza on the Lake, Suite 100, Austin, TX 78746 ("pcOrder") and
Trilogy Software, Inc., a Delaware Corporation, having an address at 6034 West
Courtyard Drive, Austin, Texas 78730 ("Trilogy").
RECITALS
WHEREAS, the parties (i.e. pcOrder and Trilogy) entered into the
Technology, Services and License Agreement dated September 1, 1998
("Agreement"); and
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereby agree to amend the Agreement as set forth
below.
AMENDMENT
1. In Schedule A, add the following.
"Office Products E-Commerce Product" shall mean any network based
electronic commerce product for enabling sales, purchasing, marketing, or
distribution within the office products market, including but not limited
to the markets for paper, envelopes, stationary, pens, pencils, binders,
office furniture, office equipment (printer, copiers and facsimile
machines), supplies for office equipment, discs, tapes and accessories for
computer peripherals.
2. In Schedule A, replace the definition of pcOrder Product in its entirety
with the following.
"pcOrder Product" shall mean:
(a) any product identified in Schedule E, in the forms (and versions)
thereof existing on or before the Effective Date;
(b) Any other product of pcOrder (or any one or more of its Affiliates),
but only to the extent that such product is either (i) a Computer E-Commerce
Product or (ii) an Office Products E-Commerce Product; and
(c) any other product of pcOrder but only to the extent approved in
writing by Trilogy on a case-by-case basis for a particular customer receiving a
particular product.
3. In Section 1.2, add the following.
Notwithstanding anything to the contrary in this Agreement, pcOrder shall
have no obligation to give Trilogy access to (and shall have no obligation
to disclose or deliver to Trilogy) any pcOrder Product that satisfies only
subparagraph (b)(ii) in the definition of pcOrder Product in Schedule A,
except to the extent that such product is a Computer E-Commerce Product.
4. Payment
In addition to any and all payments otherwise due pursuant to the Agreement (as
amended herein), pcOrder shall pay Trilogy the sum of One Million Dollars
($1,000,000) within fifteen (15) days from execution of this Amendment.
<PAGE>
5. By signing below and delivering this Amendment, each of the parties hereto
acknowledge that:
(a) it has read, understands and agrees to this Amendment;
(b) this Amendment:
(i) is incorporated as a part of the Agreement,
(ii) shall not be effective for any purpose before the Effective
Amendment Date,
(iii) is effective for all purposes as of and after the Effective
Amendment Date, notwithstanding any date of execution set
forth elsewhere in this Agreement,
(iv) amends, modifies and supersedes the provisions of the
Agreement to the extent of any inconsistencies therewith; and
(c) except as expressly amended by this Amendment, the Agreement shall
remain in full force and effect in accordance with its provisions.
pcOrder Trilogy
By: /s/ CHRISTINA C. JONES By: /s/ JOSEPH A. LIEMANDT
------------------------------ --------------------------------
Name: Christina C. Jones Name: Joseph A. Liemandt
Title: President Title: President & Chief Executive Officer
Date: October 8, 1999 Date: October 8, 1999
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 333-79353 and No. 333-32700) pertaining to the 1996 Stock
Option Plan, the 1999 Stock Incentive Plan, the Employee Stock Purchase Plan
and the Foreign Subsidiary Employee Stock Purchase Plan of pcOrder.com, Inc.
of our report dated January 25, 2000, with respect to the financial statements
of pcOrder.com, Inc. included in the annual report (Form 10-K) for the year
ended December 31, 1999.
/s/ Ernst & Young LLP
Austin, Texas
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
PCORDER.COM, INC. FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 54,113
<SECURITIES> 27,364
<RECEIVABLES> 16,927
<ALLOWANCES> 500
<INVENTORY> 0
<CURRENT-ASSETS> 98,934
<PP&E> 7,738
<DEPRECIATION> 4,146
<TOTAL-ASSETS> 105,738
<CURRENT-LIABILITIES> 43,127
<BONDS> 0
0
0
<COMMON> 166
<OTHER-SE> 59,751
<TOTAL-LIABILITY-AND-EQUITY> 105,738
<SALES> 44,012
<TOTAL-REVENUES> 44,012
<CGS> 22,447
<TOTAL-COSTS> 22,447
<OTHER-EXPENSES> 32,828
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,653)
<INCOME-TAX> (326)
<INCOME-CONTINUING> (8,327)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,327)
<EPS-BASIC> (0.54)
<EPS-DILUTED> (0.54)
</TABLE>
