<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number: 0-25447
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PCORDER.COM, INC.
(Exact name of registrant as specified in its charter)
Delaware 74-2720849
-------- ----------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
5001 Plaza on the Lake
Austin, Texas
(512) 684-1100 78746
------------------------ -----
(Address of principal executive offices (Zip Code)
and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
As of May 11, 2000, there were 6,508,159 shares of the Registrant's Class A
Common Stock outstanding and 10,317,620 shares of the Registrant's Class B
Common Stock outstanding.
1
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<TABLE>
<CAPTION>
INDEX
PCORDER.COM, INC.
Page No.
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 2000 (unaudited) and 3
December 31, 1999
Condensed Statements of Operations for the Three Months Ended 4
March 31, 2000 and 1999 (unaudited)
Condensed Statements of Cash Flows for the Three Months Ended 5
March 31, 2000 and 1999 (unaudited)
Notes to Condensed Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Securities Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURES 31
EXHIBIT INDEX 32
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
pcOrder.com, Inc.
Condensed Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<S> <C> <C>
March 31, December 31,
2000 1999
------------------------- ------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 66,001 $ 54,113
Short-term investments 12,059 27,364
Accounts receivable, net 11,626 16,427
Other current assets 2,813 1,030
------------------------- ------------------------
Total current assets 92,499 98,934
Property and equipment, net 4,061 3,592
Other assets 3,212 3,212
------------------------- ------------------------
Total assets $ 99,772 $ 105,738
========================= ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,685 $ 1,508
Accrued liabilities 6,766 8,814
Payable to Trilogy, net 7,270 4,119
Deferred revenue 24,341 28,686
------------------------- ------------------------
Total current liabilities 40,062 43,127
Deferred revenue 1,537 2,694
Stockholders' equity
Common stock, par value $.01 per share -- 50,000,000 shares
authorized; 16,769,857 and 16,623,497 issued and outstanding in
2000 and 1999, respectively 168 166
Additional paid-in capital 80,815 80,401
Deferred stock compensation (1,092) (1,350)
Unrealized loss on investments (20) (1)
Accumulated deficit (21,698) (19,299)
------------------------- ------------------------
Total stockholders' equity 58,173 59,917
------------------------- ------------------------
Total liabilities and stockholders' equity $ 99,772 $ 105,738
========================= ========================
</TABLE>
See notes to condensed financial statements
3
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pcOrder.com, Inc.
Condensed Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------------ -------------------------
<S> <C> <C>
Revenues:
Software and subscriptions $ 6,905 $ 3,944
Content and services 8,404 3,716
------------------------ -------------------------
Total revenues 15,309 7,660
Cost of revenues:
Software and subscriptions 1,208 875
Software and subscriptions -- affiliated royalty fee 272 326
------------------------ -------------------------
Total software and subscriptions 1,480 1,201
Content and services 6,645 2,743
------------------------ -------------------------
Total cost of revenues 8,125 3,944
------------------------ -------------------------
Gross profit 7,184 3,716
Operating expenses:
Research and development 3,544 1,231
Selling and marketing 4,172 3,975
General and administrative 2,789 1,417
Amortization of deferred stock and stock compensation expense 258 373
------------------------ -------------------------
Total operating expenses 10,763 6,996
Operating loss (3,579) (3,280)
Interest income 1,180 237
------------------------ -------------------------
Loss before income taxes (2,399) (3,043)
Income tax benefit - (243)
------------------------ -------------------------
Net loss $ (2,399) $ (2,800)
======================== =========================
Basic and diluted net loss per share $ (0.14) $ (0.20)
======================== =========================
Weighted average shares outstanding 16,669 13,907
======================== =========================
</TABLE>
See notes to condensed financial statements
4
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pcOrder.com, Inc.
Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 March 31, 1999
------------------------ ------------------------
<S> <C> <C>
Operating activities
Net loss $ (2,399) $ $(2,800)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 810 601
Amortization of deferred stock and stock compensation expense 258 373
Changes in operating assets and liabilities:
Accounts receivable, net 4,801 (2,240)
Other assets (1,982) 607
Accounts payable 177 536
Accrued liabilities (2,048) 2,419
Payable to Trilogy, net 3,151 (4,825)
Deferred revenue (5,502) 3,302
------------------------ ------------------------
Net cash used in operating activities (2,734) (2,027)
Investing activities
Purchase of short-term investments (5,989) -
Sale of short-term investments 21,275 -
Purchase of property and equipment (1,279) (606)
------------------------ ------------------------
Net cash provided by (used in) investing activities 14,007 (606)
Financing activities
Proceeds from the issuance of common stock, net - 47,239
Proceeds from the exercise of stock options 615 149
------------------------ ------------------------
Net cash provided by financing activities 615 47,388
------------------------ ------------------------
Increase in cash and cash equivalents 11,888 44,755
Cash and cash equivalents at beginning of period 54,113 4,726
------------------------ ------------------------
Cash and cash equivalents at end of period $ 66,001 $ 49,481
======================== ========================
</TABLE>
See notes to condensed financial statements
5
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pcOrder, Inc.
Notes to Condensed Financial Statements
(Unaudited)
1. Business
pcOrder.com, Inc., (the "Company") is a majority owned subsidiary of Trilogy
Software, Inc. and its predecessor entities including Trilogy Development Group,
Inc. ("parent" or "Trilogy"). The Company commenced operations as a separate
business unit within Trilogy on July 1, 1993 and was incorporated as a separate
entity on July 18, 1994. The Company primarily provides electronic commerce
technology and tailored solutions to the manufacturers, distributors and
resellers of computer products primarily in the United States. The Company's
products include software applications and support for those applications. The
software applications consist of an integrated application suite that includes
cataloging, quoting, pricing, availability, and product configuration. Content
for these applications in the form of detailed product databases containing
configuration, pricing, availability and specifications are also provided and
updated by the Company. Customers can choose to have the Company host the
software applications or install them at their site. In addition, the Company
provides consulting services to help customers build and integrate electronic
commerce capabilities to meet their specified needs.
2. Basis of Presentation
The unaudited interim financial information presented herein should be read in
conjunction with the Company's annual financial statements for the year ended
December 31, 1999, which can be found in the Company's Annual Report on Form
10-K. The accompanying unaudited interim financial statements reflect all
adjustments (which include only normal, recurring adjustments) that are, in the
opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the full fiscal year.
3. Related Party Transactions
The Company and Trilogy have entered into a number of agreements that govern the
business activities between the two companies. Pursuant to such agreements, the
Company is entitled to receive royalties from Trilogy for their use of certain
software technologies. For the three months ended March 31, 2000, the Company
recorded royalty revenue from Trilogy in the amount of $208,000. The Company is
also required to pay Trilogy royalties for the use of Trilogy's technology and
management fees for services performed by Trilogy on behalf of the Company. For
the three months ended March 31, 2000 and 1999, the Company incurred royalty
fees due to Trilogy in the amounts of $272,000 and $326,000, respectively.
Additionally, the Company is required to pay for certain management services
performed by Trilogy on behalf of the Company. For the three months ended March
31, 2000 and 1999, the Company was charged approximately $26,000 and $65,000,
respectively, for such services. Furthermore, the Company incurred
approximately $1.4 million for the three months ended March 31, 2000, for the
use of Trilogy consulting and development personnel. No Trilogy consulting or
development personnel were utilized by the Company during the three month period
ended March 31, 1999.
6
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The Company periodically makes payments to satisfy the amounts due to Trilogy
pursuant to the intercompany agreements discussed above. No such payment was
made during the three months ended March 31, 2000. As of March 31, 2000, the
Company owed Trilogy approximately $7.3 million, which was comprised primarily
of the royalty, management, and consulting fees discussed above.
4. Net Loss per Share
For the three months ended March 31, 2000 and 1999, common stock equivalents
totaling 1,362,000 and 1,777,000 shares, respectively, were excluded from the
diluted earnings per share calculation. The aforementioned shares were excluded
from the diluted earnings per share calculations for the three months ended
March 31, 2000 and 1999, as they were anti-dilutive due to the Company's net
losses for these periods. Accordingly, the diluted net loss per share amounts
were the same as the basic net loss per share amounts for all periods presented.
5. Comprehensive Income
The components of comprehensive loss for the periods presented in the
accompanying statements of operations are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Net Loss $ (2,399) $ (2,800)
Unrealized loss on investments (19) -
------------------- -------------------
Comprehensive loss $ (2,418) $ (2,800)
=================== ===================
</TABLE>
6. Income Taxes
Through August 25, 1999, the Company's operations were included in the
consolidated income tax returns filed by Trilogy and the two companies operated
under a consolidated tax sharing agreement. Under such agreement, the Company
would record a current income tax benefit amount equal to the income tax
benefits generated by the Company and expected to be utilized by the
consolidated tax group. For the three months ended March 31, 1999, the Company
recorded an income tax benefit of $243,000 under such agreement. Effective
August 26, 1999, the Company's operations ceased to be included in the
consolidated tax return of Trilogy. Accordingly, from this date forward, the
Company's income taxes will be computed on a stand-alone basis. Because of the
uncertainties surrounding the future utilization of the Company's deferred tax
assets, no income tax benefit was recorded for the three months ended March 31,
2000.
7. Recent Accounting Pronouncements
The FASB recently issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, (the Interpretation). The
Interpretation provides guidance related to the implementation of APB Opinion
No. 25, Accounting for Stock Issued to Employees. The Interpretation is to be
applied prospectively to all new awards, modifications to outstanding awards,
and changes in employee status on or after July 1, 2000. For changes made after
December 15, 1998
7
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to awards that affect exercise prices of the awards, the Company must
prospectively account for the impact of those changes. The Company does not
believe the full adoption of the Interpretation will have a material impact on
the Company's financial condition or results of operations.
Effective December 15, 1998, the AICPA issued SOP 98-9, Modification of SOP 97-
2, "Software Revenue Recognition", With Respect to Certain Transactions. SOP
98-9 amends SOP 97-2 and 98-4 extending the deferral of the application of
certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years beginning
on or before March 15, 1999. All other provisions of SOP 98-9 are effective for
transactions entered into in fiscal years beginning after March 15, 1999. The
Company has fully adopted SOP 98-9 effective January 1, 2000 and such adoption
did not have a material impact on the Company's financial condition or results
of operations for the three months ended March 31, 2000.
8
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The statements in this Quarterly Report on Form 10-Q that relate to future
plans, events or performance are forward-looking statements. Actual results,
events and performance may differ materially due to a variety of factors,
including the factors described under "Risk Factors That May Affect Results of
Operations and Financial Condition" below. We undertake no obligation to
publicly update these forward-looking statements to reflect events or
circumstances after the date hereof.
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. To date, industry participants such as 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. 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.
9
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Revenue from perpetual licenses and software subscriptions is recognized when
persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed or determinable and collectibility is probable. In
the case of perpetual licenses, revenue is recognized immediately upon
achievement of the above criteria. In the case of subscriptions, which represent
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.
We record cash advances and amounts billed in excess of revenue recognized as
deferred revenue. Our deferred revenue balance on March 31, 2000 was $25.9
million. Approximately $24.3 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.
10
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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
fully adopted SOP 98-9 effective January 1, 2000 and such adoption did not have
a material impact on our financial condition or results of operations for the
three months ended March 31, 2000.
In connection with an intercompany license agreement with Trilogy, we are
obligated to pay Trilogy royalties based on fees generated from perpetual
license agreements, software maintenance and subscription-based licenses. Also,
we have entered into agreements with Trilogy for administrative, operational and
corporate support services, including some consulting, development, tax
administration, 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 Condensed Financial Statements included in
Item 1. "Financial Statements".
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 $21.7 million at March 31,
2000. 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.
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-Q, we believe that our
quarterly and annual revenues, expenses and operating results are likely to vary
significantly in the future, that period-to-period comparisons of our results of
operations are not necessarily meaningful and that these comparisons should not
be relied upon as indications of our future performance. 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
11
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Revenues
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999 % Change
--------------------------------------------------
<S> <C> <C> <C>
Year-over-Year Growth
Software and Subscriptions.............................. $ 6,905 $3,944 75%
Content and Services.................................... 8,404 3,716 126%
------- ------ ---
Total Revenues....................................... $15,309 $7,660 100%
======= ====== ===
% of Revenues
Software and Subscriptions.............................. 45% 51%
Content and Services.................................... 55% 49%
------- ------
Total Revenues....................................... 100% 100%
======= ======
</TABLE>
Total revenues increased 100% to $15.3 million for the three months ended
March 31, 2000 from $7.7 million for the three months ended March 31, 1999. The
overall increase in revenues is primarily attributable to an increase in our
software and content customer base, resulting in higher software integration and
customization fees.
Software and Subscriptions. Software and subscriptions revenues increased 75%
to $6.9 million for the three months ended March 31, 2000 from $3.9 million for
the three months ended March 31, 1999. The increase in absolute dollars was due
primarily to the expansion of our software solutions to our existing customers
and to a lesser degree, an increase in our software customer base. Software and
subscriptions revenues decreased as a percentage of total revenues for the three
months ended March 31, 2000 primarily due to a higher relative increase in
content and services revenues. During the quarter ended March 31, 2000, we did
not add any significant new software customers to our customer base.
Accordingly, the growth in our software revenues for the remainder of the year
is likely to be lower than the growth levels historically achieved.
Content and Services. Content and services revenues increased 126% to $8.4
million for the three months ended March 31, 2000 from $3.7 million for the
three months ended March 31, 1999. The increase in absolute dollars and as a
percentage of total revenues for both periods was due primarily to additional
software integration, customization and training fees, and to a lesser extent,
higher content and hosting fees. These increases are attributable to new
customer additions, including content only customers, as well as an increase in
the level of services being provided to our existing software customer base. Due
to this increased demand for content and services and the anticipated slower
software revenue growth, we expect that content and services revenues will
comprise a larger percentage of our total revenues for the foreseeable future.
Cost of Revenues and Gross Margins
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999 % Change
--------------------------------------------------
<S> <C> <C> <C>
</TABLE>
12
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<TABLE>
<CAPTION>
--------------------------------------------------
<S> <C> <C> <C>
Year-over-Year Growth
Software and Subscriptions.............................. $1,480 $1,201 23%
Content and Services.................................... 6,645 2,743 142%
------ ------ ---
Total Cost of Revenues............................... $8,125 $3,944 106%
====== ====== ===
Gross Margin Percentages
Software and Subscriptions.............................. 79% 70%
Content and Services.................................... 21% 26%
------ ------
Total Gross Margin................................... 47% 49%
====== ======
</TABLE>
Software and Subscriptions. Cost of software and subscriptions revenues
consists primarily of royalties paid to Trilogy and the costs of providing
maintenance and support for our software customers. Cost of software and
subscriptions revenues increased 23% to $1.5 million for the three months ended
March 31, 2000 from $1.2 million for the three months ended March 31, 1999. The
increase was due primarily to an increase in customer support headcount and
higher outsourced support costs.
Software and subscriptions gross margin totaled 79% and 70% for the three
months ended March 31, 2000 and 1999, respectively. The increase in gross
margin for the three months ended March 31, 2000 was primarily due to economies
realized in the software support organization.
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 142% to $6.6 million for the
three months ended March 31, 2000 from $2.7 million for the three months March
31, 1999. The increase in cost of content and services revenues was primarily
due to an increase in personnel and other costs associated with providing
increased software integration, customization, training, and hosting services to
our software customers, and increases in headcount and outsourced data entry
costs within our content management group.
Content and services gross margin totaled 21% and 26% for the three months
ended March 31, 2000 and 1999, respectively. The decrease in gross margin for
the three months ended March 31, 2000 was primarily due to increased personnel
and other investments made in our content management group and higher recruiting
costs associated with our software integration, customization and training
organization.
Operating Expenses
Research and Development
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999 % Change
--------------------------------------------------
<S> <C> <C> <C>
Year-over-Year Growth
Research and development................................ $3,544 $1,231 188%
% of Revenues 23% 16%
</TABLE>
13
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Research and development expenses consist primarily of the costs of in-house
and contract personnel to support our product development efforts. Research and
development expenses increased 188% to $3.5 million for the three months ended
March 31, 2000 from approximately $1.2 million for the three months ended March
31, 1999. The increase in absolute dollars was primarily due to the increase in
outsourced development costs and the increase in the number of internal
development personnel. Research and development expenses represented 23% of
total revenues for the three months ended March 31, 2000 as compared to 16% for
the three months ended March 31, 1999. The increase in research and development
expenses as a percentage of total revenues was due to the fact that the research
and development expenses outpaced the growth in revenues. Although quarterly
expenditures 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 use of
outsourced development resources.
Selling and Marketing
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999 % Change
--------------------------------------------------
<S> <C> <C> <C>
Year-over-Year Growth
Selling and marketing................................... $4,172 $3,975 5%
% of Revenues 27% 52%
</TABLE>
Selling and marketing expenses consist primarily of salaries and related
benefits, outsourced personnel costs, and advertising, travel, tradeshow and
public relations expenses. Selling and marketing expenses increased 5% to $4.2
million for the three months ended March 31, 2000 from approximately $4.0
million for the three months ended March 31, 1999. The increase in absolute
dollars was primarily due to an increase in recruiting costs associated with
hiring internal sales and marketing personnel. Overall, selling and marketing
expenses decreased as a percentage of total revenues due to the high revenue
growth achieved in the three months ended March 31, 2000 and due to the timing
of certain marketing commitments and expenditures. Although quarterly
expenditures may fluctuate, we believe that selling and marketing expenses will
increase in absolute dollars over time as we continue to expand our sales and
marketing organization.
General and Administrative
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999 % Change
--------------------------------------------------
<S> <C> <C> <C>
Year-over-Year Growth
General and administrative.............................. $2,789 $1,417 97%
% of Revenues 18% 18%
</TABLE>
14
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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 97% to $2.8 million for
the three months ended March 31, 2000 from $1.4 million for the three months
ended March 31, 1999. The increase in absolute dollars was primarily due to
increased costs associated with recruiting campaigns and an increase in
administrative personnel. Although quarterly expenditures may fluctuate, we
believe that general and administrative expenses will increase in absolute
dollars in future periods as we continue to expand our personnel and
infrastructure to support our growth.
Amortization of Deferred Stock and Stock Compensation Expense
We record deferred stock compensation expense for the difference between the
exercise price of certain stock option grants and the deemed fair value of our
common stock at the time of these grants. This amount is amortized over the
vesting periods of the underlying options. For the three months ended March 31,
2000 and 1999, such amortization totaled approximately $258,000 and $373,000,
respectively.
Interest Income
Interest income represents income earned on cash and cash equivalents and our
short-term investments. Interest income increased to approximately $1,180,000
for the three months ended March 31, 2000 from approximately $237,000 for the
three months ended March 31, 1999. The increase in interest income is due to the
increase in our cash and cash equivalents and short-term investments as a result
of our initial public offering in February 1999 and our secondary offering in
December 1999.
Income Taxes
From inception through August 25, 1999, we were included in the consolidated
income tax returns of Trilogy. Through that date, we were also party to a tax
sharing agreement with Trilogy. Effective August 26, 1999, we were no longer
part of the consolidated tax group of Trilogy and, accordingly, began accounting
for our income taxes on a stand-alone basis. Additionally, effective August 26,
1999, we were no longer subject to the intercompany tax sharing agreement with
Trilogy on a prospective basis. See Note 6 of the Notes to Condensed Financial
Statements included in Item 1. "Financial Statements".
Our effective tax rate was approximately 8% for the three months ended March 31,
1999, and no income tax benefit was recorded for the three months ended March
31, 2000. The income tax benefit recorded in 1999 reflects the benefit that we
were able to realize under the consolidated tax sharing arrangement that was in
place with Trilogy at that time.
Liquidity and Capital Resources
As of March 31, 2000 we had approximately $78.1 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 $11.9 million from December 31, 1999 to March
31, 2000. However, cash and short-term investments decreased $3.4 million from
December 31, 1999 to March 31, 2000.
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Net cash used by operations was $2.7 million and $2.0 million for the three
months ended March 31, 2000 and 1999, respectively. Cash used by operations for
the three months ended March 31, 2000 resulted primarily from decreases in
deferred revenue, accrued liabilities and other assets, offset by an increase in
accounts receivable and the intercompany payable. Cash used in operations for
the three months ended March 31, 1999 resulted primarily from a net loss of $2.8
million and the payment of approximately $5.4 million to Trilogy to satisfy
existing intercompany indebtedness, offset by increases in accrued liabilities
and deferred revenue.
Net cash provided by investing activities for the three months ended March 31,
2000 was $14.0 million and was a result of the net activity of the purchase and
sale of short-term investments offset by the purchase of property and equipment.
Net cash used in investing activities for the three months ended March 31, 1999
related to the purchase of property and equipment.
Net cash provided by financing activities was $615,000 and $47.4 million for
the three months ended March 31, 2000 and 1999, respectively. Net cash provided
by financing activities for the three months ended March 31, 2000 was entirely
attributable to proceeds received from the exercise of employee stock options.
Net cash provided by financing activities for the three months ended March 31,
1999 was primarily a result of the initial public offering completed in February
1999.
As of March 31, 2000, our principal sources of liquidity consisted of $66.0
million in cash and cash equivalents and $12.1 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.
Risk Factors That May Affect Results of Operations and Financial Condition
Our future operations, financial performance, business and share price may be
affected by a number of factors, including the following, any of which could
cause actual results to vary materially from anticipated results or from those
expressed in any forward-looking statements made by us in this Quarterly Report
on Form 10-Q or in other reports, press releases or other statements issued from
time to time.
A majority of our revenues come from a few customers.
Greater than 60% of our revenues came from our five largest customers in each
of the last three fiscal years and in the three months ended March 31, 2000. In
particular, one customer, Compaq, represented a significant portion of our total
revenues during 1999 and in the three months ended March 31, 2000. If we lose
and fail to replace any of our large customers, including Compaq, our
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financial results and stock price may be adversely affected. We plan to expand
and diversify our customer base. However, as a result of our limited operating
history, we have derived, and over the near term we expect to continue to
derive, a significant portion of our revenues from a limited number of large
customers.
The volume of business with specific customers is likely to vary from year to
year, and a major customer in one year may not procure software, content or
services from us in a subsequent year. Our future growth is dependent in part on
our ability to renew existing contracts on terms favorable to us, as well as our
ability to penetrate further our existing customer accounts with additional
products and services. A decrease in business from one or more of our major
customers could have a material adverse effect on our financial results and
stock price.
We are dependent on the computer industry, and we may be negatively affected by
consolidation in the industry and financial difficulties of industry
participants.
The recent decrease in the number of participants in the computer industry's
distribution channel, and the financial difficulties facing many of the
participants, could result in the loss of material customers for our solutions
or render us unable to increase the number of customers for our solutions. The
computer industry is sensitive to general economic, business and industry
conditions that can cause buyers of computer products to reduce or delay their
investments in computer systems. Any event or condition that results in
decreased spending on computer products, or consolidation within the computer
industry, could have a negative effect on our customers and negatively impact
our business. The number of participants in the channel of distribution of
computer products 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
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lengthy sales cycles in the future, which could delay the timing of cash
receipts and the recognition of the related revenues.
The deployments of our products and services are long, which can delay the
receipt of cash and the recognition of revenues
The deployment of our products and services within a customer's organization
often takes an extended period of time and requires us to work closely with the
customer during the process. Some of our customers have experienced difficulties
or delays in completing implementations of our products and services. In some
cases, such delays have resulted in customer disputes and requests to
renegotiate or cancel the related contracts. Any of these difficulties or delays
could cause delays or non-receipt of the related cash, cause delays in revenue
recognition, cause customers to reject our solutions or lead to the delay or
non-receipt of future orders for our products and services.
We face significant competition and expect the competition to increase.
The market for software products that enable e-commerce is intensely
competitive, and we expect competition in our market segment to increase
substantially. Numerous companies provide e-commerce solutions, and several
competitors target the computer products industry. Our competitors include both
large companies with substantially greater resources and longer operating
histories, systems integrators and the internal information technology
departments of some of our customers and potential customers. Additionally, we
have recently begun to see an increase in competition with respect to our
content offerings.
We believe that our principal sources of competition currently are systems
integrators, content providers and the internal information technology
departments of our customers and potential customers. These organizations may
seek to develop e-commerce solutions through the use of tools offered by our
competitors primarily focused on providing e-commerce enabling solutions to the
computer industry. Certain of our competitors include, but are not limited to,
BroadVision, Calico Commerce, C/Net, i2 Technologies, Open Market, Selectica and
TechnologyNet. In addition, there are a number of significantly larger companies
with which we do not currently compete that do not presently offer the same or
similar e-commerce solutions offered by us but that could, with limited barriers
to entry, compete directly with us. Also, Trilogy is not prohibited from
competing directly or indirectly with us. Increased competition could result in
price reductions, reduced margins and loss of market share, any of which would
adversely affect our business. Many of our current and potential competitors
have significantly longer operating histories and significantly greater
financial, technical, marketing and other resources than us. We may be unable to
compete successfully with our existing competitors or with new competitors, and
failure to do so may adversely affect our financial results and stock price.
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
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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.
Our business is dependent on our ability to manage our content database and
ensure the accuracy of that data.
Our business depends on our ability to update and maintain an extensive
database of technical and descriptive information on computer products.
Inaccuracies in the data we maintain could expose us to liabilities and could
result in termination of customer contracts.
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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 March 31, 2000, we had an
accumulated deficit of $21.7 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;
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. our ability to retain existing customers and increase sales to those
customers;
. the timing and volume of new orders and our capacity to fulfill those
orders;
. the level of product and price competition;
. the announcement or introduction of new or enhanced products and services
by us or our competitors;
. the amount and timing of operating costs and capital expenditures relating
to expansion of our business and sales and marketing infrastructure;
. downtime of our systems or Internet capacity or reliability problems;
. the growth in the use and acceptance of, and activity on, the Internet, Web
and Internet-related technologies, particularly by corporate, institutional
and government users for the purchase of computer products;
. the extent to which unauthorized access and use of online information is
perceived as a threat to network security;
. seasonal trends in customer purchasing; and
. general economic conditions.
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;
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. changes in financial estimates by securities analysts;
. conditions or trends in the Internet and online commerce industries;
. changes in the market valuations of other Internet or online service
companies;
. developments in Internet regulations;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. unscheduled system downtime;
. additions or departures of key personnel; and
. sales of our common stock or other securities in the open market.
In the past, securities class-action lawsuits have often been instituted
against companies following stock price declines. Litigation of this type, if
instituted, could result in substantial costs and a diversion of our
management's attention and resources.
We have a limited operating history, which makes our future prospects difficult
to evaluate.
We were established as a separate business unit within Trilogy in 1993. We
were incorporated and began to recognize revenue in 1994. We entered into
agreements with a majority of our significant customers since only the third
quarter of 1997. Our limited operating history makes an evaluation of our future
prospects very difficult. In particular, our prospects should be compared to the
prospects of companies in new and rapidly evolving markets and must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stage of development. These risks
include our ability to:
. expand our sales, marketing and consulting services organizations;
. 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.
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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 March 31, 2000, 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.
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
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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 has access to
technology that we develop for the computer industry. Trilogy can utilize the
technology in competition with us or license the technology to our competitors
or potential customers, which could have an adverse effect on our business.
System failures could harm our business.
Our success depends largely upon the efficient and uninterrupted operation of
our computer and communication systems. The occurrence of any system failure or
similar event could have an adverse effect on our business. We have contracted
with some of our customers to provide server hosting and to maintain redundant
leased lines to ensure system availability. Our development and management
systems are located at a facility that we lease in Austin, Texas. In addition to
that facility, we outsource the hosting of some of our servers to third parties.
Our systems and operations, whether at our site or through our third-party
outsourcing, are vulnerable to damage or interruption from fire, flood, power
loss, telecommunications failure, break-ins and similar events. The measures we
have taken to prevent a system failure may not be successful in the future. In
addition, we do not have a formal disaster recovery plan and do not carry
sufficient business interruption insurance to compensate us for losses that may
occur as a result of any system failure.
Our business is dependent on the further development and maintenance of the Web
infrastructure.
The emergence and growth of the market for our products is dependent on
improvements being made to the entire Internet infrastructure to alleviate
overloading and congestion. These improvements might not be made or, if made,
they might not be made in a sufficiently timely and
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cost-effective manner to facilitate market acceptance of our products. The
recent growth in the use of the Internet has caused frequent periods of
performance degradation. Any actual or perceived degradation in the performance
of the Internet as a whole could undermine the benefits of our products. Our
ability to increase the speed with which we provide services to customers and to
increase the scope of these services ultimately is limited by, and reliant upon,
the speed and reliability of the networks operated by third parties.
There are many risks associated with international operations.
Although we have had limited sales outside of the U.S. and Canada, we expect
to increase our sales in international markets at some point in the future. To
expand international sales, we must 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;
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. 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 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
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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 256
employees at March 31, 2000. This growth has resulted in, and can be expected to
continue to require, substantial expansion of our infrastructure, including
operating and financial systems and controls and the geographic scope of our
operations and customers. Recent rapid growth has also resulted in new and
increased responsibilities for management personnel. The growth has placed and,
if it continues, is expected to continue to place, a significant strain on our
management and operations. In addition, we have historically relied on Trilogy
to provide some human resource, finance, recruiting, legal and other services.
We are in the process of assuming responsibility for many of those services. If
we are unable to develop the
27
<PAGE>
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.
28
<PAGE>
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.
29
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to the impact of interest rate changes on our investment
portfolio as well as changes in the value of our equity investment in e-commerce
Industries, Inc. Such risks were discussed in detail in our Annual Report on
Form 10-K for the year ended December 31, 1999 and did not materially change
during the three months ended March 31, 2000.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
The Company's registration statement (Registration No. 333-62985) under the
Securities Act of 1933, as amended, for its initial public offering became
effective on February 26, 1999. Offering proceeds, net of aggregate expenses to
the Company of approximately $2.2 million, were approximately $47.2 million.
The Company has used a portion of the proceeds to in the repayment of $5.4
million in indebtedness to its parent company. The remainder of the net
proceeds has been used to purchase temporary investments primarily consisting of
cash and cash equivalents and short-term investments.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
---------
The Exhibit Index attached hereto is hereby incorporated by reference
to this Item.
(b) Reports on Form 8-K:
--------------------
The Company did not file any reports on Form 8-K during the three
months ended March 31, 2000.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PCORDER.COM, INC.
Date: May 15, 2000 /s/ Carleton K. Thompson
-------------------------------------------------
Name: Carleton K. Thompson
Title: Vice-President and Principal Accounting
Officer
31
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
- -------------- ----------------------------------------------------------
27 Financial Data Schedule
32
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Condensed Balance Sheet (Unaudited) as of March 31, 2000 and Condensed
Statement of Operations (Unaudited) for the three months ended March 31, 2000,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 66,001
<SECURITIES> 12,059
<RECEIVABLES> 11,626
<ALLOWANCES> 500
<INVENTORY> 0
<CURRENT-ASSETS> 92,499
<PP&E> 9,018
<DEPRECIATION> 4,957
<TOTAL-ASSETS> 99,772
<CURRENT-LIABILITIES> 40,062
<BONDS> 0
0
0
<COMMON> 168
<OTHER-SE> 58,005
<TOTAL-LIABILITY-AND-EQUITY> 99,772
<SALES> 15,309
<TOTAL-REVENUES> 15,309
<CGS> 8,125
<TOTAL-COSTS> 8,125
<OTHER-EXPENSES> 10,763
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,399)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,399)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,399)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
