<PAGE>
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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
----------------
[X]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1999
[_]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Transition period from to
.
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Commission File Number: 000-26465
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PURCHASEPRO.COM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Nevada 88-0385401
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
3291 North Buffalo Drive, Suite 2, Las Vegas, Nevada 89129
(Address of principal executive offices) (Zip Code)
(702) 316-7000
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report)
----------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. The number of outstanding
shares of the Registrant's Common Stock, $.01 par value, was 18,683,665 as of
November 12, 1999.
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<PAGE>
PURCHASEPRO.COM, INC. AND SUBSIDIARY
FORM 10-Q
I N D E X
PART I. FINANCIAL INFORMATION
<TABLE>
<C> <S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September 30, 1999
and December 31, 1998......................................... 1
Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 1999 and September
30, 1998...................................................... 3
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and September 30, 1998........ 4
Notes to Condensed Consolidated Financial Statements.......... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 28
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..................... 29
Item 6. Exhibits and Reports on Form 8-K.............................. 30
SIGNATURES.................................................... 30
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
PURCHASEPRO.COM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................... $1,689,288 $48,477,852
Trade accounts receivable, net of allowance for
doubtful accounts of $200,000 and $242,000,
respectively..................................... 215,234 1,600,012
Other receivables................................. 99,078 127,130
Prepaid expenses and other........................ 20,000 403,488
---------- -----------
Total current assets............................ 2,023,600 50,608,482
Property and equipment
Computer equipment................................ 714,465 3,684,942
Communication equipment........................... 65,160 65,160
Furniture and fixtures............................ 155,328 262,882
Leasehold improvements............................ 44,090 52,413
---------- -----------
979,043 4,065,397
Less--accumulated depreciation and amortization... (415,039) (776,023)
---------- -----------
564,004 3,289,374
Other assets........................................ 157,153 1,108,023
---------- -----------
Total assets.................................... $2,744,757 $55,005,879
========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
PURCHASEPRO.COM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.................................. $ 98,799 $ 1,554,213
Accrued salaries and benefits..................... 207,635 402,600
Accrued payroll taxes............................. 63,167 58,947
Accrued interest.................................. 59,256 --
Other accrued liabilities......................... 147,655 1,271,099
Deferred revenues................................. 164,812 281,418
Notes payable, current portion.................... 375,000 50,000
----------- ------------
Total current liabilities....................... 1,116,324 3,618,277
Notes payable, net of current portion............... 1,169,939 --
Commitments and contingencies
Redeemable convertible preferred stock
Preferred stock, Series A......................... 4,339,438 --
Preferred stock, Series B......................... 2,000,000 --
Stockholders' equity (deficit)
Common stock...................................... 76,000 186,765
Additional paid-in capital........................ 1,178,504 87,248,282
Deferred stock-based compensation................. -- (4,773,203)
Accumulated deficit............................... (7,135,448) (31,274,242)
----------- ------------
Total stockholders' equity (deficit)............ (5,880,944) 51,387,602
----------- ------------
Total liabilities and stockholders' equity
(deficit)...................................... $ 2,744,757 $ 55,005,879
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
PURCHASEPRO.COM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1998 1999 1998 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues
Subscription fees...... $ 405,461 $ 781,651 $ 819,546 $ 1,993,346
Other.................. 96,387 888,439 212,167 1,356,652
----------- ----------- ----------- ------------
Total revenues....... 501,848 1,670,090 1,031,713 3,349,998
Cost of revenues......... 123,186 217,929 335,411 567,669
----------- ----------- ----------- ------------
Gross profit............. 378,662 1,452,161 696,302 2,782,329
Operating expenses
Sales and marketing.... 915,730 2,337,992 2,766,137 5,404,783
General and
administrative........ 734,594 2,110,280 2,005,234 4,637,895
Programming and
development........... 227,655 752,466 687,305 1,530,973
Amortization of stock-
based compensation.... -- 3,857,089 -- 4,946,281
----------- ----------- ----------- ------------
Total operating
expenses............ 1,877,979 9,057,827 5,458,676 16,519,932
----------- ----------- ----------- ------------
Operating loss........... (1,499,317) (7,605,666) (4,762,374) (13,737,603)
Other income (expense)
Interest income
(expense), net........ 2,272 79,938 (218,176) (80,147)
Other.................. 4,227 -- 6,857 (279,007)
----------- ----------- ----------- ------------
Total other income
(expense)........... 6,499 79,938 (211,319) (359,154)
----------- ----------- ----------- ------------
Net loss before benefit
for income taxes........ (1,492,818) (7,525,728) (4,973,693) (14,096,757)
Benefit for income
taxes................... -- -- -- --
----------- ----------- ----------- ------------
Net loss................. (1,492,818) (7,525,728) (4,973,693) (14,096,757)
Preferred stock
dividends............... (105,000) (224,000) (140,000) (511,000)
Accretion of preferred
stock to redemption
value................... (44,981) (36,191) (44,981) (131,037)
Value of preferred stock
beneficial conversion
feature................. -- -- -- (9,400,000)
----------- ----------- ----------- ------------
Net loss applicable to
common stockholders..... $(1,642,799) $(7,785,919) $(5,158,674) $(24,138,794)
=========== =========== =========== ============
Net loss per share
applicable to common
stockholders
Basic.................. $ (0.22) $ (0.75) $ (0.57) $ (2.78)
=========== =========== =========== ============
Diluted................ $ (0.20) $ (0.75) $ (0.53) $ (2.69)
=========== =========== =========== ============
Weighted average number
of common shares
outstanding
Basic.................. 7,600,000 10,328,664 9,100,000 8,668,597
=========== =========== =========== ============
Diluted................ 8,159,999 10,388,760 9,659,999 8,958,886
=========== =========== =========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
PURCHASEPRO.COM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1999
----------- ------------
<S> <C> <C>
Cash flows from operating activites
Net loss.......................................... $(4,973,693) $(14,096,757)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 181,877 403,042
Amortization of stock-based compensation........ -- 4,946,281
Imputed interest................................ 67,000 --
Amortization of debt discount................... -- 355,061
Provision for doubtful accounts................. 60,205 351,372
Non-cash services............................... 720,000 800,000
(Increase) decrease in:
Trade accounts receivable..................... (190,509) (1,736,150)
Other receivables............................. (48,883) (28,052)
Prepaid expenses and other.................... -- (383,488)
Increase (decrease) in:
Accounts payable.............................. 47,211 355,414
Accrued liabilities........................... (322,630) 513,717
Deferred revenues............................. 197,295 116,606
----------- ------------
Net cash used in operating activities....... (4,262,127) (8,402,954)
----------- ------------
Cash flows from investing activities
Purchase of property and equipment................ (145,672) (1,986,354)
Other assets...................................... 3,535 (319,178)
----------- ------------
Net cash used in investing activities....... (142,137) (2,305,532)
----------- ------------
Cash flows from financing activities
Proceeds from notes payable and advances.......... 3,765,000 200,000
Repayment of notes payable and advances........... (3,362,000) (1,350,000)
Issuance of common stock, net..................... -- 50,620,800
Issuance of preferred stock and warrants, net..... 5,000,000 8,026,250
----------- ------------
Net cash provided by financing activities... 5,403,000 57,497,050
----------- ------------
Increase in cash and cash equivalents............... 998,736 46,788,564
Cash and cash equivalents
Beginning of period............................... 7,894 1,689,288
----------- ------------
End of period..................................... $ 1,006,630 $ 48,477,852
=========== ============
Non-cash investing and financing activities
Other assets acquired with note payable........... $ 50,000 $ --
=========== ============
Other assets acquired with preferred stock........ $ -- $ 673,750
=========== ============
Conversion of notes payable to equity............. $ 1,782,000 $ 700,000
=========== ============
Conversion of preferred shares to common stock.... $ -- $ 16,381,475
=========== ============
Cash paid for:
Interest.......................................... $ 189,051 $ 124,375
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
PURCHASEPRO.COM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The unaudited interim condensed consolidated financial statements of
PurchasePro.com, Inc. and its subsidiary, Hospitality Purchasing Systems
(collectively, the "Company"), for the three and nine month periods ended
September 30, 1998 and 1999, included herein, have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations relating to interim financial statements. In the opinion
of management, the accompanying unaudited condensed consolidated financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the results of the Company's
operations and its cash flows for the three and nine month periods ended
September 30, 1998 and 1999. The accompanying unaudited condensed consolidated
financial statements are not necessarily indicative of full year results.
Certain reclassifications have been made to prior period financial statements
to conform with the 1999 presentation, which have no effect on previously
reported net income.
These condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended December 31, 1998, included in the Company's
Registration Statement on Form S-1 declared effective by the SEC on September
13, 1999 (File No. 333-80165).
(2) Notes Payable
Principal Stockholder
The Company's principal stockholder and Chief Executive Officer (the
"Principal Stockholder") provided funds to finance development of the Company's
product. As of December 31, 1997, the total obligation of the Company to the
Principal Stockholder was $2,518,000. In January 1998, the Company paid
$813,000 to the Principal Stockholder with proceeds from the Lenders' Notes
Payable (see below). The remaining obligation of $1,705,000 was formalized with
a note payable. In April 1998, the Principal Stockholder advanced an additional
$387,000 to the Company. In June 1998, the Company repaid $310,000 from the
proceeds of the Series A Convertible Preferred Stock offering (see Note 3), and
the Principal Stockholder contributed his remaining notes payable and advances
totaling $1,782,000 to the Company in consideration for previously issued
shares of common stock. The Company has included the $1,782,000 as additional
paid-in capital in the accompanying condensed consolidated balance sheets.
Lenders' Notes Payable
In January 1998, the Company issued promissory notes totaling $2,300,000
(the "Lenders' Notes Payable") to several individuals (collectively, the
"Lenders"). Terms of the Lenders' Notes Payable provided for interest at 8%
payable quarterly and 48 monthly principal payments beginning January 1999. In
addition, the Lenders were issued 2,300,000 shares of the Company's common
stock; however, if the Company repaid the Lenders' Notes Payable within 120
days, 1,150,000 of these shares were to be contributed back to the Company. The
Company did not repay the Lenders' Notes Payable within 120 days; however, the
Lenders' Notes Payable were repaid in June 1998 with proceeds from the Series A
Convertible Preferred Stock offering (see Note 3). The Lenders ultimately
contributed 1,475,000 shares of common stock back to the Company.
The Company allocated the $2,300,000 of proceeds between the Lenders' Notes
Payable and the shares issued based on their estimated fair values.
Accordingly, an additional $67,000 of interest expense was recorded with a
corresponding credit to additional paid-in capital.
5
<PAGE>
PURCHASEPRO.COM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 1998 Notes Payable
In September 1998, the Company issued promissory notes to three individuals,
including the Principal Stockholder and a former member of the Company's Board
of Directors, totaling $1,500,000 (the "September 1998 Notes"). Terms of the
September 1998 Notes require quarterly payments of interest at 15% and mature
in September 2000. In connection with the issuance of these notes, the Company
issued 159,999 warrants to the note holders. Each warrant provided the holder
the right to purchase one share of Company common stock for $0.01 per share
through September 2003. Using the Black-Scholes pricing model, the Company
determined the value of these warrants to be $2.49 per share, or $398,400. The
Company recognized the $398,400 as an original issue discount and is amortizing
the discount to interest expense over the period from grant to maturity.
Through September 30, 1999, 106,666 of the warrants had been exercised.
In June 1999, $700,000 of the notes payable were converted into 200,000
shares of Series B Convertible Preferred Stock, and the Company used $800,000
of the Series B proceeds to repay the remaining amounts outstanding (see Note
3).
Other Notes Payable
In December 1998, the Principal Stockholder and the President of the Company
advanced a total of $350,000 to the Company. In March 1999, the Principal
Stockholder advanced an additional $200,000 to the Company. In connection with
Series B Convertible Preferred Stock offering, the Company used proceeds of
$450,000 and $100,000 to repay the Principal Stockholder and the President,
respectively, for their advances.
Hospitality Purchasing Systems Note Payable
In connection with the acquisition by Hospitality Purchasing Systems ("HPS")
of certain assets from Network Management Services, Inc., HPS issued a note
payable for $50,000 that requires the payments of $25,000 each in 1999 and
2000.
(3) Stockholders' Equity
Common Stock
The Company has authorized the issuance of 40,000,000 shares of common
stock. For the period from inception (October 8, 1996) through December
31,1997, the Principal Stockholder contributed cash of $139,382 and services
valued at $250,000 for his shares of common stock. The Principal Stockholder
served as the Company's Chief Executive Officer during 1997 and did not receive
a salary. The Company recognized compensation expense in the amount of $250,000
and a contribution to capital relating to the Principal Stockholder's services.
In connection with the repayment of the Lenders' Notes Payable in June 1998
(see Note 2), the Company and the Lenders entered into an agreement whereby
1,475,000 shares were contributed back to the Company. Accordingly, the number
of shares held by the Lenders was reduced to 825,000. In connection with the
same agreement and in connection with the Series A Preferred Stock offering,
two of the founders of the Company contributed an aggregate of 925,000 shares
of common stock to the Company.
In June 1998, the Principal Stockholder sold 300,000 of his shares of common
stock to an unrelated third party for $0.10 per share. The Company recognized a
charge of $720,000 that reflects the difference between the fair value of its
stock on that date of $2.50 per share and the sales price. The third party
provided significant assistance to the Company in obtaining subscriber
contracts and, accordingly, the Company recorded
6
<PAGE>
PURCHASEPRO.COM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the full amount of the charge to sales and marketing expense at the time the
transaction occurred. During 1998, the Principal Stockholder sold an additional
1,470,000 shares of common stock that he owned to various individuals at prices
that reflected their estimated fair value at the time of each sale.
In connection with the closing of the Series B Preferred Stock private
placement in June 1999, the holders of Series A Preferred Stock were granted an
aggregate 450,000 shares of common stock pursuant to certain anti-dilution
rights of the holders of Series A Preferred Stock.
On September 13, 1999, the Company completed an initial public offering
("IPO") in which it sold 4,600,000 shares of common stock, including 600,000
shares in connection with the exercise of the underwriters' over-allotment
option, at $12 per share. The Company received $50.0 million in cash, net of
underwriting discounts, commissions and other offering costs. At September 30,
1999, the net proceeds were predominately held in short-term investments. Upon
the closing of the IPO, all of the Company's Series A preferred stock and
Series B preferred stock automatically converted into an aggregate of 5,400,000
shares of common stock (see below).
Preferred Stock
In June 1998, the Company issued 2,100,000 shares of 8% Series A Convertible
Preferred Stock, par value $0.001 ("Series A"). In June 1998, the Company sold
the 2,100,000 Series A shares at $2.50 per share. Net proceeds from the
offering totaled $5,000,000, net of offering costs of $250,000, which were paid
to a company that employs a member of the Company's Board of Directors. In
connection with the issuance of the Series A, the Company granted warrants to
purchase a total of 400,000 shares of common stock, including warrants to
purchase 380,000 shares of common stock to three members of the Company's Board
of Directors and a company which employs one such director. Each warrant
provides for the holder to purchase one share of Company common stock for $0.01
per share through June 1, 2003. Using the Black-Scholes pricing model, the
Company determined that the value of the warrants was $996,000, as of the date
of issuance. The value of the warrants has been recognized as a cost of
issuance of the Series A shares.
In May 1999, the Company issued 3,300,000 shares of 8% Series B Convertible
Preferred Stock, par value $0.001 ("Series B") for $3.50 per share and received
aggregate proceeds of $11,400,000, net of offering costs of $150,000.
Prior to the completion of the Series B offering, the Company had received
cash totaling $3,140,000 pursuant to Series B subscription agreements. Of this
amount, $2,000,000 was received in December 1998, $500,000 was received in
March 1999, and the remaining $640,000 was received in April 1999. The Series B
shares subscribed and issued after December 1998 have a beneficial conversion
feature totaling $9.4 million, measured as the difference between the
conversion price of $3.50 per share and the fair value of the underlying common
stock at the time of issuance. The beneficial conversion feature has been
recorded as additional paid-in capital. The value of the beneficial conversion
feature was recognized immediately because the Series B shares are convertible
at the option of the holder.
Of the 3,300,000 Series B shares issued, 200,000 shares were issued to
holders of the September 1998 Notes, including a former member of the Company's
Board of Directors (see Note 2). The Company used cash proceeds from the Series
B offering to repay $800,000 of the September 1998 Notes, including $500,000 to
the Principal Stockholder, and to repay $450,000 and $100,000 of advances made
by the Company's Principal Stockholder and President, respectively.
7
<PAGE>
PURCHASEPRO.COM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company issued 150,000 shares of Series B to acquire the assets of a
software development company and for non-compete agreements with the owners of
the company. In May 1999, the Company issued 42,500 shares of Series B to an
individual in exchange for his rescission of a future right to acquire up to
35% of HPS.
On September 13, 1999, the date of the IPO, all shares of preferred stock
were mandatorily converted to shares of common stock and all amounts included
in the preferred stock accounts, including cumulative unpaid dividends and
associated accretion totaling $642,000, were converted to common stock and
additional paid-in capital.
(4) Deferred Stock-Based Compensation
The Company uses the intrinsic value method of accounting for its employee
stock-based compensation plans. Accordingly, no compensation cost is recognized
for any of its stock options when the exercise price of each option equals or
exceeds the fair value of the underlying common stock as of the grant date for
each stock option. With respect to the stock options granted since inception
through September 30, 1999, the Company recorded deferred stock-based
compensation of $9.7 million for the difference at the grant date between the
exercise price and the fair value of the common stock underlying the options.
This amount is being amortized over the vesting period of the individual
options.
8
<PAGE>
PURCHASEPRO.COM, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Earnings Per Share
The computations of basic and diluted earnings per share for each period
were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1998 1999 1998 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Loss (Numerator)
Net loss................. $(1,492,818) $(7,525,728) $(4,973,693) $(14,096,757)
Preferred stock
dividends............... (105,000) (224,000) (140,000) (511,000)
Accretion of preferred
stock to redemption
value................... (44,981) (36,191) (44,981) (131,037)
Value of preferred stock
beneficial conversion
feature................. -- -- -- (9,400,000)
----------- ----------- ----------- ------------
Basic EPS
Net loss applicable to
common stockholders..... $(1,642,799) $(7,785,919) $(5,158,674) $(24,138,794)
=========== =========== =========== ============
Diluted EPS
Net loss applicable to
common stockholders
after assumed
conversions............. $(1,642,799) $(7,785,919) $(5,158,674) $(24,138,794)
=========== =========== =========== ============
Shares (Denominator)
Basic EPS
Net loss applicable to
common stockholders..... 7,600,000 10,328,664 9,100,000 8,668,597
Effect of Securities
Issued for Nominal
Consideration
Warrants................. 559,999 559,999 559,999 559,999
Exercise of Warrants..... -- (499,903) -- (269,710)
----------- ----------- ----------- ------------
Diluted EPS
Net loss applicable to
common stockholders
after assumed
conversions............. 8,159,999 10,388,760 9,659,999 8,958,886
=========== =========== =========== ============
Per Share Amount
Basic EPS................ $ (0.22) $ (0.75) $ (0.57) $ (2.78)
=========== =========== =========== ============
Diluted EPS.............. $ (0.20) $ (0.75) $ (0.53) $ (2.69)
=========== =========== =========== ============
</TABLE>
Options to purchase 654,850, and 3,281,460 shares of common stock were
outstanding as of September 30, 1998 and 1999, respectively, but were not
included in the computation of diluted earnings per share because the Company
incurred a loss in each of the periods presented and the effect would have been
antidilutive.
(6) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. The FASB recently issued SFAS No. 137, which defers the effective
date of SFAS No. 133. SFAS No. 133 will be effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company currently does not
engage in, nor does it expect to engage in, derivative or hedging activities,
and therefore, the Company does not believe that SFAS No. 133 will have a
material impact on its results of operations or financial position.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results
of Operations as of September 30, 1999 and for the three- and nine-month
periods ended September 30, 1999 and 1998 should be read in conjunction with
the unaudited condensed consolidated financial statements and notes thereto set
forth in Item 1 of this report and the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
the Company's registration statement of Form S-1, declared effective on
September 13, 1999 by the SEC (File No. 333-80165) (Registration Statement).
The information in this discussion contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Such
statements are based upon current expectations that involve risks and
uncertainties. Any statements contained herein that are not statements of
historical facts may be deemed to be forward-looking statements. For example,
words such as, "may", "will", "should", "estimates", "predicts", "potential",
"continue", "strategy", "believes", "anticipates", "plans", "expects",
"intends", and similar expressions are intended to identify forward-looking
statements. Our actual results and the timing of certain events may differ
significantly from the results discussed in the forward-looking statement.
Factors that might cause or contribute to such a discrepancy include, but are
not limited to, those discussed herein under the heading "Factors That May
Affect Results" and the risks discussed in our other SEC filings. These
forward-looking statements speak only as of the date hereof. We expressly
disclaim any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.
Recent Developments
On September 28, 1999 we announced our intent to form a strategic alliance
with Ariba, Inc. that includes a revenue sharing arrangement. Under terms of
the proposed arrangement, we will connect our business community to the Ariba
Network(TM) platform and our subscribers will be able to buy from the suppliers
already integrated with the Ariba Network platform, and will gain access to
Ariba Network services. This agreement has not yet been formalized, but we
believe that it will be finalized in the fourth quarter of 1999, and that
revenues under the agreement will begin to be earned in early 2000.
In September 1999, we formed a strategic relationship with Primavera
Systems, Inc., a developer of integrated, scalable project management software
solutions, to develop an e-marketplace for construction companies,
subcontractors, project owners and suppliers. This strategic alliance was
formed as part of our efforts to move into the Architectural, Engineering and
Construction vertical. The agreement provides for Primavera to pay subscription
fees per user and for sharing of transaction fees generated from users of the
e-marketplace. Under the agreement, the Company and Primavera will jointly
develop the e-marketplace. We believe that revenues from this arrangement will
begin to be recognized in the first six months of 2000.
In October 1999, we announced a strategic e-business relationship and
marketing agreement with Office Depot, Inc., the world's largest seller of
office supplies. Under terms of the agreement, we will be the recommended
business-to-business e-commerce solution to be mass marketed to the millions of
Office Depot customers and clients. Office Depot will be featured as the
exclusive preferred provider in our business-to-business e-marketplace. Terms
of the agreement provide that transaction fees of 1% will be shared, with 25%
to Office Depot and the remaining 75% to us.
In October 1999, we completed development of what we believe to be the first
true browser-based business-to-business e-commerce solution. This proprietary
system will allow new businesses immediate access to the PurchasePro.com system
to source, bid, buy and sell, which can all be tracked using extensive
management reporting tools. Our members can access popular back-office systems,
via certified interface tools to J.D. Edwards, Oracle, PeopleSoft and SAP.
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In October 1999, we signed an electronic purchasing program contract with
The Marketplace by Marriott, the procurement arm of Marriott International,
Inc. Under terms of the agreement, we will develop the pilot rendition of a
private e-marketplace that will enable Marketplace customers and suppliers to
participate in a single interactive trading community supported with electronic
catalogs, embedded corporate purchasing rules and robust reporting and
archiving features.
On November 1, 1999, Mr. Charles Johnson, our Chairman and Chief Executive
Officer, announced his intention to purchase up to $1 million of shares of the
Company's common stock in the open market. Mr. Johnson has further advised us
that he intends to make such purchases from time to time at prevailing market
prices in the open market, in compliance with the restrictions and limitations
of Rule 10b-18 of the Securities Exchange Act of 1934, and applicable SEC
guidelines. Such purchases of the Company's common stock, if consummated, will
reduce the number of shares of Company common stock owned by non-affiliates.
Overview
PurchasePro.com, Inc. is a leading provider of Internet business-to-business
electronic commerce services. We develop public and private online business e-
marketplace communities. Our e-marketplaces provide businesses of all sizes
with a low cost and efficient e-commerce solution for buying and selling a wide
range of products and services over the Internet.
Our predecessor company was incorporated in October 1996. In January 1998,
we incorporated PurchasePro.com, Inc. and acquired all of the assets and
assumed all the liabilities of our predecessor. In August 1998, we acquired our
subsidiary company, Hospitality Purchasing Systems (HPS). From October 1996 to
the commercial release of our service in April 1997, we were primarily engaged
in raising capital and developing our e-marketplace software and network
infrastructure.
In April 1997, we released PurchasePro 1.0, enabling our members to transact
e-commerce over our network. Our next release in July 1997 provided this
capability over the Internet. In September 1998, we released PurchasePro 3.0,
our e-marketplace enabling software. In February 1999, we released PurchasePro
4.0, which allows members the additional capability of building private e-
marketplaces.
From inception through June 30, 1999, substantially all of our revenues were
derived from monthly membership subscription fees for access to our e-
marketplaces. Beginning in 1999, we began to earn revenues from other sources,
including transaction fees, license fees and advertising. Most of our members
are companies that sell products and services to large hotels and resorts.
Generally, our subscription and license fee contracts are entered into on a
month-to-month basis. Although we have executed contracts of a longer duration,
generally these contracts may be terminated at any time on 30 to 60 days'
notice. Some of our contracts may be terminated on even shorter notice, one in
as little as 7 days. Some of our agreements with members are verbal and as such
may be terminated at any time. In August 1998, HPS began generating transaction
fees from group buying services provided to the hospitality industry. In 1999,
with the release of version 4.0, we began contracting with larger corporate
customers to create customized, private e-marketplaces. Typically, we charge
these companies licensing and maintenance fees for this service. The licensing
fees are initially deferred and recognized over the period that the private e-
marketplace is created and the maintenance fees are deferred and recognized
ratably over the period of service. In order to build our subscriber base we
have also provided Web site development and hosting services and fees for
catalog building services. We also charge our members a fee for processing
their subscription payments by electronic funds transfer or credit card.
During the three months ended September 30, 1999, we began generating
transaction fee revenue from transactions consummated by our members with value
added merchandise and service providers. Also, we began generating advertising
fees, which we believe will continue to generate both transactions and
advertising revenues in the future, and that these revenue streams will become
a more significant portion of our total revenues. As of November 12, 1999, we
believe that there are approximately 16,000 users that have been provided with
the capability to access and use our network. We cannot assure you that we will
be successful in
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generating any of these additional revenues and fees. See "Factors That May
Affect Results--The revenue and profit potential of our business model is
unproven. Our success is dependent on our ability to expand our membership base
and expand into new markets and industries."
Since our inception on October 8, 1996, we have incurred significant net
losses. From inception through December 31, 1996, we had a net loss of
$123,000. For the years ended December 31, 1997 and 1998, our net losses
applicable to common stockholders were $3.0 million and $7.1 million,
respectively. For the nine months ended September 30, 1998 and 1999, we had net
losses applicable to common stockholders of $5.2 million and $24.1 million,
respectively. Through September 30, 1999, our accumulated deficit totaled $31.3
million.
Results of Operations
The following table sets forth certain statements of operations data as a
percentage of revenues for the periods indicated. The data has been derived
from the unaudited condensed consolidated financial statements contained in
this Form 10-Q which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position and results of operations for the interim periods. The
operating results for any period should not be considered indicative of results
for any future period. This information should be read in conjunction with the
Financial Statements and Notes thereto included in the Company's Registration
Statement.
<TABLE>
<CAPTION>
Nine Months
Three Months Ended Ended
September 30, September 30,
--------------------- ---------------
1998 1999 1998 1999
--------- --------- ------ ------
<S> <C> <C> <C> <C>
Revenues
Subscription fees.................. 80.8 % 46.8 % 79.4 % 59.5 %
Other.............................. 19.2 53.2 20.6 40.5
--------- --------- ------ ------
100.0 100.0 100.0 100.0
Cost of revenues..................... 24.5 13.0 32.5 16.9
--------- --------- ------ ------
Gross profit......................... 75.5 87.0 67.5 83.1
Operating expenses
Sales and marketing................ 182.5 140.0 268.1 161.3
General and administrative......... 146.4 126.3 194.4 138.5
Programming and development........ 45.3 45.1 66.6 45.7
Amortization of stock-based
compensation...................... 0.0 231.0 0.0 147.7
--------- --------- ------ ------
Total operating expenses......... 374.2 542.4 529.1 493.2
--------- --------- ------ ------
Operating loss....................... (298.7) (455.4) (461.6) (410.1)
Other income (expense)............... 1.3 4.8 (20.5) (10.7)
--------- --------- ------ ------
Net loss............................. (297.4) (450.6) (482.1) (420.8)
Preferred stock dividends, accretion
of preferred stock to redemption
value and value of preferred stock
beneficial conversion feature....... (29.9) (15.6) (17.9) (299.8)
--------- --------- ------ ------
Net loss applicable to common
stockholders........................ (327.3)% (466.2)% (500.0)% (720.6)%
========= ========= ====== ======
</TABLE>
Comparison of the Three Months Ended September 30, 1998 and September 30,
1999
Revenues. Our revenues consist primarily of subscription fees, transaction
fees, license fees and advertising for our public and private e-marketplaces.
Through HPS, we earn transaction fees for providing a service that consolidates
the buying power of its participating members. We also charge license fees to
larger buyer companies for creating and developing their private e-marketplaces
along with an annual maintenance fee. In addition, we earn revenues from the
sale of Web site development and hosting services, from catalog development
services and for electronically processing our members' payments. Our net
revenues increased from $502,000 for the three months ended September 30, 1998,
to $1.7 million for the three months ended
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September 30, 1999. Substantially all of this increase resulted from growth in
our membership and from new license arrangements. Our subscription revenue
increased from $405,000 for the three months ended September 30, 1998 to
$782,000 for the three months ended September 30, 1999. HPS transaction fees
increased from $0 for the three months ended September 30, 1998 to $93,000 for
the three months ended September 30, 1999. Other revenues, including license
fees, web site development and hosting fees, catalog fees, and advertising,
increased from $96,000 for the three months ended September 30, 1998, to
$888,000 for the three months ended September 30, 1999. We believe that, in the
future, transactions fees and advertising revenues will become more significant
components of our total revenues.
Cost of Revenues. Our cost of revenues consists primarily of costs for
member support and Web site operations, including fees for independent
contractors, compensation for our member support and site operations personnel
and, to a lesser extent, bank and credit card processing charges. Our cost of
revenue increased from $123,000 for the three months ended September 30, 1998,
to $218,000 for the three months ended September 30, 1999. The increase was
primarily the result of the increase in personnel in our member service
department. Expenses related to personnel costs of our member service and web
site operations departments increased from $104,000 for the three months ended
September 30, 1998 to $179,000 for the three months ended September 30, 1999.
We expect that our cost of revenues will increase in absolute dollars, but will
remain constant or decrease as a percentage of revenues in future periods. This
reflects the increased efficiency of our member service department to provide
service to our customers and the decrease in the number of member service calls
per member as our members gain experience using the network. Our gross profit
increased from $379,000 for the three months ended September 30, 1998 to $1.5
million for the three months ended September 30, 1999.
Sales and Marketing Expenses. Our sales and marketing expenses are comprised
primarily of compensation for our sales and marketing personnel, travel and
related costs, and costs associated with our marketing activities, such as
advertising, trade show and other promotional activities. Our sales and
marketing expenses increased from $916,000 for the three months ended September
30, 1998, to $2.3 million for the three months ended September 30, 1999. This
increase is primarily attributable to an increase in the size of our sales
force. Expenses related to personnel costs of sales and marketing personnel
increased from $628,000 for the three months ended September 30, 1998 to $1.5
million for the three months ended September 30, 1999. We plan to continue to
increase the size of our sales force and to expand our advertising and
marketing activities. Travel and related costs increased from $130,000 for the
three months ended September 30, 1998, to $308,000 for the three months ended
September 30, 1999. Costs associated with our marketing activities increased
from $124,000 for the three months ended September 30, 1998, to $495,000 for
the three months ended September 30, 1999. We expect that our sales and
marketing expenditures will increase significantly, both in absolute dollars
and as a percentage of net revenues, as a result of the anticipated opening of
sales offices in new geographic regions, increased marketing efforts and
additional sales commissions.
General and Administrative Expenses. Our general and administrative expenses
consist primarily of compensation for personnel and, to a lesser extent, fees
for professional services, facility costs and communications costs. Our general
and administrative expenses increased from $735,000 for the three months ended
September 30, 1998, to $2.1 million for the three months ended September 30,
1999. The increase is primarily attributable to the increased size of our
executive and administrative staff. Expenses related to personnel costs of our
general and administrative personnel increased from $310,000 for the three
months ended September 30, 1998 to $853,000 for the three months ended
September 30, 1999. Facilities costs increased from $30,000 for the three
months ended September 30, 1998, to $126,000 for the three months ended
September 30, 1999, as the result of our move into our new corporate location.
Our communications costs remained constant at $77,000 for the three months
ended September 30, 1998 and 1999. Other general and administrative expenses
increased primarily as a result of a larger amount charged to our reserve for
doubtful accounts. The charge for doubtful accounts totaled $46,000 for the
three months ended September 30, 1998, as compared to $197,000 for the three
months ended September 30, 1999. The increase corresponds to the increase in
our revenues, and a better knowledge of the estimated bad debt percentage based
on our
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collection experience since September 30, 1998. We believe that our allowance
for doubtful accounts will decrease as a percentage of revenues in future
periods as we anticipate implementing more efficient membership credit reviews
and as we expect more members will convert to electronic fund transfer or
credit card payment methods. We expect that our general and administrative
expenses will increase in absolute dollars but remain relatively constant as a
percentage of net revenues, as we anticipate continuing to expand our
operations.
Programming and Development Expenses. Programming and development expenses
consist primarily of compensation for our programming and development staff and
payments to outside contractors. Our programming and development expenses
increased from $228,000 for the three months ended September 30, 1998, to
$752,000 for the three months ended September 30, 1999. The increase is
primarily attributable to an increase in our programming staff. Expenses
related to programming and development personnel increased from $200,000 for
the three months ended September 30, 1998 to $675,000 for the three months
ended September 30, 1999. We expect that our programming and development
expenses will increase in absolute dollars but remain relatively constant as a
percentage of net revenues as we anticipate continuing to develop and enhance
our service offerings.
Deferred Stock-Based Compensation. During the three months ended September
30, 1999, we charged an additional $965,000 of deferred stock-based
compensation to additional paid-in capital in connection with certain stock
options granted to employees. The deferred stock compensation is being
amortized over the vesting periods of the related options. For the three months
ended September 30, 1999, amortization of deferred stock-based compensation
totaled $3.9 million. We expect that $833,000 of deferred stock-based
compensation will be amortized to expense in the three months ended December
31, 1999, based on the vesting schedules of stock options outstanding as of
September 30, 1999.
Interest Income (Expense). Interest income increased from $2,000 for the
three months ended September 30, 1998, to $80,000 for the three months ended
September 30, 1999. The increase relates to interest earned on IPO proceeds
that were invested in short-term investments.
Comparison of the Nine Months Ended September 30, 1998 and September 30, 1999
Revenues. Our net revenues increased from $1.0 million for the nine months
ended September 30, 1998, to $3.3 million for the nine months ended September
30, 1999. Substantially all of this increase resulted from growth in our
membership and from new license arrangements. Our subscription revenue
increased from $820,000 for the nine months ended September 30, 1998 to $2.0
million for the nine months ended September 30, 1999. HPS transaction fees
increased from $0 for the nine months ended September 30, 1998 to $231,000 for
the nine months ended September 30, 1999. Other revenues, including license
fees, web site development and hosting fees, catalog fees, and advertising,
increased from $212,000 for the nine months ended September 30, 1998, to $1.4
million for the nine months ended September 30, 1999.
Cost of Revenues. Our cost of revenues increased from $335,000 for the nine
months ended September 30, 1998, to $568,000 for the nine months ended
September 30, 1999. The increase was primarily the result of the increase in
personnel in our member service department. Expenses related to personnel costs
of our member service and web site operations departments increased from
$272,000 for the nine months ended September 30, 1998 to $476,000 for the nine
months ended September 30, 1999. We expect that our cost of revenues will
increase in absolute dollars, but will remain constant or decrease as a
percentage of revenues in future periods, as a result of an anticipated
increase in the efficiency of our member service department to provide service
to our customers and the decrease in the number of member service calls per
member as our members gain experience using the network. Our gross profit
increased from $696,000 for the nine months ended September 30, 1998 to $2.8
million for the nine months ended September 30, 1999.
Sales and Marketing Expenses. Our sales and marketing expenses increased
from $2.8 million for the nine months ended September 30, 1998, to $5.4 million
for the nine months ended September 30, 1999. This
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increase is primarily attributable to an increase in the size of our sales
force. Expenses related to personnel costs of sales and marketing personnel
increased from $1.4 million for the nine months ended September 30, 1998 to
$3.2 million for the nine months ended September 30, 1999. We plan to continue
to increase the size of our sales force and to expand our advertising and
marketing activities. Travel and related costs increased from $298,000 for the
nine months ended September 30, 1998, to $621,000 for the nine months ended
September 30, 1999. Costs associated with our marketing activities increased
from $249,000 for the nine months ended September 30, 1998, to $757,000 for the
nine months ended September 30, 1999. In 1999, we recognized a non-cash charge
of $800,000 related to the issuance of stock options offered to a strategic
marketing partner at an exercise price below fair value. We expect that our
sales and marketing expenditures will increase significantly, both in absolute
dollars and as a percentage of net revenues, as a result of the anticipated
opening of sales offices in new geographic regions, increased marketing efforts
and additional sales commissions.
General and Administrative Expenses. Our general and administrative expenses
increased from $2.0 million for the nine months ended September 30, 1998, to
$4.6 million for the nine months ended September 30, 1999. The increase is
primarily attributable to the increased size of our executive and
administrative staff. Expenses related to personnel costs of our general and
administrative personnel increased from $884,000 for the nine months ended
September 30, 1998 to $1.9 million for the nine months ended September 30,
1999. Facilities costs increased from $82,000 for the nine months ended
September 30, 1998, to $280,000 for the nine months ended September 30, 1999,
as the result of our move into our new corporate location. Our communications
costs increased from $191,000 for the nine months ended September 30, 1998, to
$216,000 for the nine months ended September 30, 1999, as a result of our
expansion into new geographic areas throughout late 1998 and early 1999. Other
general and administrative expenses increased primarily as a result of a larger
amount charged to our reserve for doubtful accounts. The charge for doubtful
accounts totaled $60,000 for the nine months ended September 30, 1998, as
compared to $351,000 for the nine months ended September 30, 1999. The increase
resulted primarily from the increase in our revenues in such period, and a
better knowledge of the estimated bad debt percentage based on our collection
experience since September 30, 1998. We believe that our allowance for doubtful
accounts will decrease as a percentage of revenues in future periods as we
anticipate implementing more efficient membership credit reviews and as we
expect more members will convert to electronic fund transfer or credit card
payment methods. We expect that our general and administrative expenses will
increase in absolute dollars but remain relatively constant as a percentage of
net revenues, as we anticipate continuing to expand our operations.
Programming and Development Expenses. Our programming and development
expenses increased from $687,000 for the nine months ended September 30, 1998,
to $1.5 million for the nine months ended September 30, 1999. The increase is
primarily attributable to an increase in our programming staff. Expenses
related to programming and development personnel increased from $589,000 for
the nine months ended September 30, 1998 to $1.4 million for the nine months
ended September 30, 1999. We expect that our programming and development
expenses will increase in absolute dollars but remain relatively constant as a
percentage of revenues as we anticipate continuing to develop and enhance our
service offerings.
Deferred Stock-Based Compensation. During the nine months ended September
30, 1999, we recorded aggregate deferred stock compensation of $9.7 million in
connection with certain stock options granted to employees as additional paid-
in capital. The deferred stock compensation is being amortized over the vesting
periods of the related options. For the nine months ended September 30, 1999,
amortization of deferred stock-based compensation totaled $4.9 million.
Interest Income (Expense). Interest expense primarily relates to borrowings
from the Principal Stockholder in 1997, notes payable outstanding from January
1998 through September 1998 and notes payable outstanding since September 1998
and December 1998. Interest income relates to interest earned on IPO proceeds
that were invested in short-term investments. Our net interest expense
decreased from $218,000 for the nine months ended September 30, 1998, to
$80,000 for the nine months ended September 30, 1999. The decrease resulted
from the repayment of $2,300,000 of notes payable plus interest earned on the
IPO proceeds.
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Liquidity and Capital Resources
Since our inception on October 8, 1996, we have had significant negative
cash flows from our operations. For the nine months ended September 30, 1998
and 1999, we used a total of $4.3 million and $8.4 million of cash,
respectively, in our operating activities. Cash used in operating activities in
each period resulted primarily from net losses in those periods. For the nine
months ended September 30, 1998 and 1999, our cash used in operating activities
included increases in our trade accounts receivable of $191,000 and $1.7
million, respectively. The increase is primarily attributable to billings under
terms of our license and advertising contracts entered into during the three
months ended September 30, 1999, as well as member receivables that reflect our
efforts to expand the membership base by allowing for payment terms up to 90
days and billings for our new license and advertising revenues in the third
quarter of 1999. For the nine months ended September 30, 1998 and 1999, we used
cash totaling $142,000 and $2.3 million, respectively, in our investing
activities, which have consisted primarily of expenditures for computer and
related equipment, furniture and fixtures, communication equipment and
leasehold improvements as well as deposits on various equipment leases.
Since inception, we have financed our operations primarily from the issuance
of common stock, proceeds of notes payable, and the sale of Series A Preferred
and Series B Preferred Stock. Net cash provided by financing activities for the
nine months ended September 30, 1998, was $5.4 million. Funds provided by
financing activities included the issuance of Series A Preferred Stock and
warrants, with net proceeds of $5.0 million, the issuance of the $2.3 million
Lenders' Notes Payable, and the issuance of $1.2 million of the September 1998
Notes. Funds used in financing activities included the repayment of the
Lenders' Notes Payable and the repayment of $1.1 million of borrowings from our
Principal Stockholder.
Net cash provided by financing activities for the nine months ended
September 30, 1999, was $57.5 million. Funds provided by financing activities
included the completion of our IPO, with net proceeds of $50 million after
underwriting discounts, commissions and other offering costs, and the issuance
of Series B Preferred Stock. Funds used in financing activities related to the
repayment of the September 1998 Notes.
As of September 30, 1999, our principal source of liquidity was
approximately $48.5 million of cash and cash equivalents. As of September 30,
1999, we had material commitments for capital expenditures of $1.1 million. We
expect such expenditures to be approximately $1.5 million during the remainder
of 1999. We expect such expenditures will primarily be for computer equipment
to expand and enhance our network. We have also entered into several non-
cancelable lease commitments that will require payments of approximately $2.3
million over the next five years.
We believe that we have sufficient cash and cash equivalents, including the
proceeds from the IPO, to fund our operating and investing activities for at
least the next 18 months. However, we may need to raise additional funds in
future periods through public or private financings, or other arrangements. Any
additional financings, if needed, might not be available on reasonable terms or
at all. Failure to raise capital when needed could harm our business, financial
condition and results of operations.
Year 2000 Readiness
The Year 2000 issue refers generally to the problems that some software may
have in determining the correct century for the year. For example, software
with date-sensitive functions that is not Year 2000 compliant may not be able
to distinguish whether "00" means 1900 or 2000, which may result in failures or
the creation of erroneous results.
We have defined Year 2000 compliant as the ability to:
. correctly handle date information needed for the December 31, 1999, to
January 1, 2000, date change,
. function according to the product documentation for this date change,
without changes in operation resulting from the advent of a new century,
assuming correct configuration,
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. respond to two-digit date input in a way that resolves the ambiguity as
to century in a disclosed, defined, and predetermined manner,
. store and provide output of date information in ways that are unambiguous
as to century if the date elements in interfaces and data storage specify
the century, and
. recognize Year 2000 as a leap year.
We have designed all of our products to be Year 2000 compliant when
configured and used in accordance with related documentation.
We have completed an assessment of most of our material information
technology systems, including both our own software products and third-party
software and hardware technology. We have tested the flow of data through our
electronic commerce platform for regular bids (RFQs), automatic bids, and
purchase orders as the date rolled from 12/31/1999, 02/28/2000, 02/29/2000,
12/31/2000, 02/28/2001, 02/28/2004, 12/31/2019, and 09/08/1999 to the next day
and found all transactions processed correctly. We have not individually tested
each computer that supports the electronic commerce platform for these specific
dates. The computer systems that support key customer activities all have the
most current operating system and third-party software patches applied. Based
on the representations of third-party software providers and the testing
performed in house, we believe all information technology systems that support
our electronic commerce platform and our customers are Year 2000 compliant.
Unknown date-related errors or defects in our products could result in damage
to our reputation, increased service costs, or loss of our customers, any of
which could materially and adversely harm our business.
The Year 2000 readiness of information technology systems used by our staff
to support our internal business enterprises is under review. Our internal
technical support personnel have checked many of the desktop systems used by
our staff. Any updates to operating system or application software provided by
the various third-party software vendors as part of their Year 2000 compliance
efforts are applied on a case by case basis. We will have completed this
activity for all of our desktop systems before the end of 1999.
The status of our non-information technology systems is not known. A review
of such systems and all required remediation and testing is scheduled to be
complete by the end of 1999.
Other than the probability of Year 2000 issues with the telephone system in
use at our corporate headquarters in Las Vegas, Nevada, we are not currently
aware of any material operational issues or costs associated with preparing our
internal information technology and non-information technology systems for the
Year 2000. However, we may experience material unanticipated problems and costs
caused by undetected errors or defects in the technology used in our internal
information technology and non-information technology systems. Also, we are
subject to external forces that might generally affect industry and commerce,
such as utility or transportation company Year 2000 compliance failure
interruptions.
Some commentators have predicted significant litigation regarding Year 2000
compliance issues, and we are aware of these lawsuits against other software
vendors. Because of the unprecedented nature of this litigation, it is
uncertain whether or to what extent we may be affected by it.
To date we have responded to all requests from our customers for information
regarding our Year 2000 compliance. We have appointed a Year 2000 Project
Coordinator. Our Year 2000 Project Coordinator has sent letters to our key
vendors requesting information about their Year 2000 readiness, and they have
all responded with positive reassurances.
We do not have any information concerning the Year 2000 compliance status of
our customers. Our current or future customers may incur significant expenses
to achieve Year 2000 compliance. If our customers are not Year 2000 compliant,
they may experience material costs to remedy problems, or they may face
litigation costs. If our customers' systems or applications are not Year 2000
compliant, our customers may not be able to use our products or services. In
either case, Year 2000 issues could reduce or eliminate the budgets
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<PAGE>
that current or potential customers could have for, or delay purchases of, our
products and services. As a result, our business could be seriously harmed.
We have funded our Year 2000 plan from operating cash flows and have not
separately accounted for these costs in the past. We believe these costs have
not been material. We could incur additional costs related to the Year 2000
plan for administrative personnel to manage the project, outside contractor
assistance, technical support for our products, product engineering, and
customer satisfaction. We expect any additional costs to be funded from
operating cash flows and do not expect these additional Year 2000 compliance
costs to be material. However, we may experience material problems and costs
with Year 2000 compliance that could seriously harm our business.
Our Year 2000 Compliance Plan is in effect; however, there is no guarantee
that it addresses all situations that may result if our critical operations
prove not to be Year 2000 ready. We will have staff and tools standing by
during each century event date should unexpected problems occur. If an
adjustment is needed, these experts will make and test the changes and install
any software updates on our Web site making the software available for download
by our customers. We cannot guarantee that we will be able to make these
changes in a timely manner, which could significantly impact our business and
the ability of our customers to conduct business.
If, in the future, it comes to our attention that some of our products need
modification, or some of our third-party hardware and software is not Year 2000
compliant, then we will seek to make modifications. In such case, we expect
such modifications to be made on a timely basis, and we do not believe that the
cost of such modifications will materially harm our operating results. We may
not be able to modify our products, services, and systems in a timely and
successful manner to comply with the Year 2000 requirements.
There has been no independent verification or validation to assure our Year
2000 readiness other than by our clients. Various customers have been concerned
about Year 2000 readiness and have tested our software under different date
scenarios. We have received no report of Year 2000 problems as a result of this
testing. However, we can make no assurance that this testing was sufficient or
adequate.
The worst case scenario for Year 2000 issues would be if we ceased normal
operations for an indefinite period of time while we attempted to respond to
our own and/or our customers' Year 2000 problems without having full internal
operational capabilities. Year 2000 issues affecting our business, if not
adequately addressed by us, our third-party vendors, or our customers, could
have a number of "worst case" consequences. These include:
. the inability of our customers to use our products and services to
procure and manage their operating resources,
. claims from our customers asserting liability, including liability for
breach of warranties related to the failure of our products and services
to function properly, and any resulting settlements or judgments, and
. our inability to manage our own business.
To date we have experienced one Year 2000 problem. One component of software
obtained from a third-party vendor was not compliant. We reported the problem
to the third-party vendor, received and applied an update to the software, and
have experienced no further problems in this area. We cannot assure you that
other such problems will not occur or that we will be able to modify our
products, services, and systems in a timely and successful manner to comply
with Year 2000 requirements.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. The FASB recently issued SFAS No. 137, which defers the effective
date of SFAS No. 133. SFAS No. 133 will be
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effective for all fiscal quarters of fiscal years beginning after June 15,
2000. We currently do not engage in, nor do we expect to engage in, derivative
or hedging activities, and, therefore, we do not believe that SFAS No. 133 will
have a material impact on our results of operations or financial position.
Factors That May Affect Results
The risks and uncertainties described below are not the only ones facing us.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business operations. If any of
the following risks actually occur, our business, financial condition and
results of operations could be materially and adversely affected.
Risks Related to Our Business
We are an early stage company. Our limited operating history makes it
difficult to evaluate our future prospects.
We only began offering access to our network in April 1997. We have entered
into the majority of our contracts and significant relationships only within
the last 12 months. Our extremely limited operating history makes it difficult
to evaluate our future prospects. Our prospects are subject to risks and
uncertainties frequently encountered by start-up companies in new and rapidly
evolving markets such as the business-to-business e-commerce market. Many of
these risks are unknown, but include the lack of widespread acceptance of the
Internet as a means of purchasing products and services and managing our
growth. Our failure to identify the challenges and risks in this new market and
successfully address these risks would harm our business.
We have a history of losses and anticipate continued losses, and we may be
unable to achieve profitability.
We have never been profitable and expect to continue to incur operating
losses on both a quarterly and annual basis for at least the foreseeable
future. We may be unable to achieve profitability in the future. We have
incurred net losses in each accounting period since our organization in October
1996. As of September 30, 1999, we had an accumulated deficit of $31.3 million.
For a detailed discussion of our losses, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview." We expect
to continue to make significant expenditures for sales and marketing,
programming and development and general and administrative functions. As a
result, we will need to generate significant revenues to achieve profitability.
We cannot assure you that revenues will grow in the future or that we will
achieve sufficient revenues for profitability. If revenues grow more slowly
than we anticipate, or if operating expenses exceed our expectations, our
business would be severely harmed.
The revenue and profit potential of our business model is unproven. Our
success is dependent on our ability to expand our membership base and
expand into new markets and industries.
Our business model is to generate revenues from the development of both
public and private e-marketplaces for business-to-business e-commerce. Our
business model is new and our ability to generate revenue or profits is
unproven. We have initially focused on the hospitality industry and our success
is dependent on our ability to expand our membership base within the
hospitality industry. Our success is also dependent on our ability to expand
into new markets and industries. We cannot assure you that we will be
successful.
We depend on sales and marketing strategic relationships for growth. These
relationships may not contribute to increased use of our services, help us
add new members, or increase our revenue. We may not be able to enter into
new relationships or maintain our existing relationships.
We have used and plan to continue to establish sales and marketing strategic
relationships with large organizations as part of our growth strategy. These
arrangements may not generate any new members or
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increased revenues. We may not be able to enter into new relationships or renew
existing relationships on favorable terms, if at all. We may not be able to
recover our costs and expenses associated with these efforts which could
severely harm our business.
We face intense competition in the business-to-business e-commerce market,
and we cannot assure you that we will be able to compete successfully.
The business-to-business e-commerce market is new, rapidly evolving and
intensely competitive, and we expect competition to intensify in the future.
Barriers to entry are minimal, and competitors may develop and offer similar
services in the future. Our business could be severely harmed if we are not
able to compete successfully against current or future competitors. Although we
believe that there may be opportunities for several providers of products and
services similar to ours, a single provider may dominate the market. We believe
there is no current dominant provider in our market. We expect that additional
companies will offer competing e-commerce solutions in the future.
In addition, our members and partners may become competitors in the future.
Increased competition is likely to result in price reductions, reduced gross
margins and loss of market share, any of which could harm our business. Our
competitors vary in size and in the scope and breadth of the services they
offer. In addition to competition from several e-commerce trade communities, we
primarily encounter competition from enterprise software purchasing systems
providers such as Ariba, Commerce One and TRADE'ex. We may also encounter
competition from enterprise software developers such as Peoplesoft, Oracle and
SAP.
Virtually all of our current and potential competitors have longer operating
histories, larger customer bases and greater brand recognition in business and
Internet markets and significantly greater financial, marketing, technical and
other resources. Our competitors may be able to devote significantly greater
resources to marketing and promotional campaigns, may adopt more aggressive
pricing policies or may try to attract users by offering services for free and
may devote substantially more resources to product development.
If we fail to improve our financial and managerial controls and reporting
systems and procedures, and if we do not effectively expand, train and
manage our workforce, our business will suffer dramatically and we may not
be able to implement our business plan.
Successful implementation of our business plan requires an effective
planning and management process. Our business will suffer dramatically if we do
not effectively manage our growth. We expect that we will need to continue to
improve our financial and managerial controls and reporting systems and
procedures, and we will need to continue to expand, train and manage our
workforce. We continue to increase the scope of our operations both
domestically and internationally, and we have grown our workforce
substantially. Our growth has placed, and our anticipated future growth in our
operations will continue to place, a significant strain on our management
systems and resources. We have grown from eight employees in January 1997 to
227 employees as of September 30, 1999. In addition, we plan to continue to add
to our sales and marketing, customer support and product development personnel.
Our future performance may also depend on the effective integration of acquired
businesses. This integration, even if successful, may take a significant period
of time and expense, and may place a significant strain on our resources.
We may pursue the acquisition of new and complementary businesses, products
and technologies to grow our business. Unsuccessful acquisitions could harm
our operating results, business and growth.
We may acquire businesses, products and technologies that complement or
augment our existing businesses, services and technologies. The inability to
integrate any newly acquired entities or technologies effectively could harm
our operating results, business and growth. Integrating any newly acquired
businesses or technologies may be expensive and time consuming. To finance any
acquisitions, we may need to raise additional funds through public or private
financings. Any equity or debt financings, if available at all, may be
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on terms that are not favorable to us and, in the case of equity financings,
may result in dilution to our stockholders. We may not be able to operate any
acquired businesses profitably or otherwise implement our business strategy
successfully.
Our long sales cycle for large corporate accounts could cause delays in
revenue growth.
Our sales cycle for large corporate accounts typically takes six to nine
months to complete and varies from contract to contract, but has taken up to 18
months for some contracts. A large number of our members are introduced to our
e-marketplaces through such accounts. Our lengthy sales cycle for large
corporate accounts could cause delays in revenue growth, and result in
significant fluctuations in our quarterly operating results. The length of the
sales cycle may vary depending on a number of factors over which we may have
little or no control, including the internal decision-making process of the
potential customer and the level of competition that we encounter in our
selling activities. Additionally, since the market for business-to-business e-
commerce is relatively new, we often have to educate potential customers about
the use and benefits of our products and services, which can prolong the sales
process. In some cases, we provide access to our e-marketplaces on a trial
basis for customer evaluation, which can again prolong the sales process. Our
sales cycle can be further extended for product sales made through third
parties.
Our quarterly results are subject to significant fluctuations, and our
stock price may decline if we do not meet expectations of investors and
analysts.
We expect that our quarterly operating results will fluctuate significantly
due to many factors, many of which are outside our control, including:
. demand for and market acceptance of our products and services;
. inconsistent growth, if any, of our member base;
. loss of key customers or strategic partners;
. timing of the recognition of revenue for large contracts;
. variations in the dollar volume of transactions effected through our e-
marketplaces;
. intense and increased competition;
. introductions of new services or enhancements, or changes in pricing
policies, by us and our competitors;
. our ability to control costs; and
. reliable continuity of service and network availability.
We believe that quarterly revenues, expenses and operating results are
likely to vary significantly in the future, that period-to-period comparisons
of results of operations are not necessarily meaningful and that, as a result,
such comparisons should not be relied upon as indications of future
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Due to these and other factors, it is likely that
our operating results will be below market analysts' expectations in some
future quarters, which would cause the market price of our stock to decline.
Some small and medium sized businesses that supply larger organizations
have been reluctant to join or continue as a member of our e-marketplaces.
Our failure to attract and retain a large number of members would severely
harm our business.
Our public e-marketplace operates as an open bidding process allowing buyers
to instantaneously compare the prices of suppliers. In some instances,
suppliers have been reluctant to join or continue as a member of our e-
marketplaces and participate in an open bidding process because of the
increased competition and
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comparisons this environment creates. We must add and retain a substantial
number of small to medium sized businesses as members. Our ability to attract
and retain members will depend in part on the continued willingness of our
large organization members who buy from them to support us in our recruiting
and retention efforts.
Our revenue is derived from providing e-marketplace access to members under
short-term, pilot and verbal agreements. The cancellation or non-renewal of
these agreements would adversely affect us.
We have generated substantially all of our revenues through member
subscription and license fees for access to our e-marketplaces. A failure of
our members to continuously renew their contracts, or a high rate of
termination, would significantly reduce our revenues. For the nine months ended
September 30, 1999, approximately 60% of our revenues were comprised of member
subscription fees. Generally, our subscription and license fee contracts are
entered into on a month-to-month basis. Although we have executed contracts of
a longer duration, generally these longer contracts may be terminated on short-
term notice. Some of our agreements with members are verbal and may be
terminated at any time. Moreover, several of our significant member agreements
are pilot programs. We have expended significant financial and personnel
resources and have expanded our operations on the assumption that these will be
long-term contracts. If these become contracts of short-term duration because
of an early termination or non-renewal by the member, we may be unable to
recover the costs we incurred and our business could suffer dramatically.
Our success depends on our ability to continuously enhance our services.
Our future success will depend on our ability to enhance our e-marketplace
software, and to continue to develop and introduce new services that keep pace
with competitive introductions and technological developments, satisfy diverse
and evolving member requirements and otherwise achieve market acceptance. Any
failure by us to anticipate or respond adequately to changes in technology and
member preferences, or any significant delays in our development efforts, could
make our services unmarketable or obsolete. In particular, we believe that our
future success will depend, in part, upon market acceptance of PurchasePro 4.0
which has only recently been released. We may not be successful in developing
and marketing quickly and effectively future versions or upgrades of our
software, or offering new services that respond to technological advances or
new market requirements.
We depend upon our key personnel and they would be difficult to replace.
We believe that our success will depend on the continued employment of our
senior management team and key sales and technical personnel. If one or more
members of our senior management team were unable or unwilling to continue in
their present positions, our business would suffer.
We plan to expand our employee base to manage our anticipated growth. Most
importantly, we plan to hire additional members of senior management.
Competition for personnel, particularly for senior management personnel and
employees with technical and sales expertise, is intense. The success of our
business is dependent upon hiring and retaining suitable personnel.
If our intellectual property protection is inadequate, competitors may gain
access to our technology and undermine our competitive position, causing us
to lose members. Infringement by us on the intellectual property rights of
others could expose us to substantial liabilities which would severely harm
our business.
We regard our copyrights, service marks, trademarks, patents, trade secrets
and similar intellectual property as important to our success, and rely on
trademark and copyright law, trade secret protection and confidentiality and/or
license agreements with our employees, customers and business partners to
protect our proprietary rights. Despite our precautions, unauthorized third
parties may copy certain portions of our services
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or reverse engineer or obtain and use information that we regard as
proprietary. End-user license provisions protecting against unauthorized use,
copying, transfer and disclosure of the licensed program may be unenforceable
under the laws of certain jurisdictions and foreign countries. The status of
United States patent protection in the software industry is not well defined
and will evolve as the U.S. Patent and Trademark Office grants additional
patents. We have been granted one patent in the United States and we may seek
additional patents in the future. We do not know if any future patent
application will be issued with the scope of the claims we seek, if at all, or
whether any patents we receive will be challenged or invalidated. In addition,
the laws of some foreign countries do not protect proprietary rights to the
same extent as do the laws of the United States. Our means of protecting our
proprietary rights in the United States or abroad may not be adequate and
competitors may independently develop similar technology.
Third parties may infringe or misappropriate our copyrights, trademarks,
patents and similar proprietary rights. In addition, other parties may assert
infringement claims against us. We cannot be certain that our services do not
infringe patents or other intellectual property rights that may relate to our
services. In addition, because patent applications in the United States are not
publicly disclosed until the patent is issued, applications may have been filed
which relate to our services. We may be subject to legal proceedings and claims
from time to time in the ordinary course of our business, including claims of
alleged infringement of the trademarks and other intellectual property rights
of third parties. If our services violate third-party proprietary rights, we
cannot assure you that we would be able to obtain licenses to continue offering
such services on commercially reasonable terms, or at all. Any claims against
us relating to the infringement of third-party proprietary rights, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources and in injunctions preventing us from distributing these
services. These claims could severely harm our business.
Our inability to continue licensing third-party technologies could delay
product development which could result in a loss of members or slow our
growth.
We intend to continue to license technology from third parties, including
our Web server and encryption technology. Our inability to obtain any of these
licenses could delay product development until equivalent technology could be
identified, licensed and integrated. Any such delays in services could result
in a loss of members, and slow our growth and severely harm our business. The
market is evolving and we may need to license additional technologies to remain
competitive. We may not be able to license these technologies on commercially
reasonable terms or at all. In addition, we may fail to successfully integrate
any licensed technology into our services. These third-party licenses may
expose us to increased risks, including risks associated with the integration
of new technology, the diversion of resources from the development of our own
proprietary technology and our ability to generate revenues from new technology
sufficient to offset associated acquisition and maintenance costs.
Our agreements with affiliates may not have been the result of arm's-length
negotiations, and may be less favorable to us than those we could obtain
from unaffiliated third parties. Entering into agreements on less than the
most favorable terms available could harm our business or limit our revenue
growth.
Our agreements with some of our sales and marketing partners may not have
been the result of arm's-length negotiations. To the extent our agreements with
our affiliates, such as the E-MarketPro, were not negotiated at arm's-length,
they may contain terms and conditions less favorable to us than we could have
obtained from unaffiliated third parties. Any future agreements or
relationships with affiliates may not necessarily result from arm's-length
negotiations and may not be on terms that are most favorable to us, which could
severely harm our business or limit our revenue growth.
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If we do not adequately address "Year 2000" issues, we may incur
significant costs and our business could suffer.
Failure of our internal computer systems or third-party equipment or
software, or systems maintained by our members and strategic sales and
marketing partners, to operate properly with regard to the Year 2000 and
thereafter could require us to incur significant unanticipated expenses to
remedy any problems and could cause system interruptions and loss of data. Any
of these events could harm our reputation and adversely affect our business. We
have no specific contingency plan to address the issues that could result from
Year 2000 complications. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Readiness."
If we expand our international sales and marketing activities, our business
will be exposed to the numerous risks associated with international
operations.
We intend to have operations in a number of international markets. To date,
we have limited experience in developing localized versions of our e-
marketplace enabling software and in marketing, selling and distributing our
solutions internationally.
International operations are subject to many risks, including:
. the impact of recessions in economies outside the United States,
especially in Asia;
. changes in regulatory requirements;
. reduced protection for intellectual property rights in some countries;
. potentially adverse tax consequences;
. difficulties and costs of staffing and managing foreign operations;
. political and economic instability;
. fluctuations in currency exchange rates; and
. seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world.
Risks Related to the Internet and E-commerce Industries
Our success depends on the Internet's ability to accommodate growth in e-
commerce.
The use of the Internet for retrieving, sharing and transferring information
among businesses, buyers, suppliers and partners has only recently begun to
develop. If the Internet is not able to accommodate growth in e-commerce, our
business would suffer. The recent growth in the use of the Internet has caused
frequent periods of performance degradation. Our ability to sustain and improve
our services is limited, in part, by the speed and reliability of the networks
operated by third parties. Consequently, the emergence and growth of the market
for our services is dependent on improvements being made to the Internet
infrastructure to alleviate overloading and congestion.
We are dependent upon the growth of the Internet as a means of commerce.
If the e-commerce market does not grow or grows more slowly than expected,
our business will suffer. The possible slow adoption of the Internet as a means
of commerce by businesses may harm our prospects. A number of factors could
prevent the acceptance and growth of e-commerce, including the following:
. e-commerce is at an early stage and buyers may be unwilling to shift
their traditional purchasing to online purchasing;
. businesses may not be able to implement e-commerce applications on these
networks;
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. increased government regulation or taxation may adversely affect the
viability of e-commerce;
. insufficient availability of telecommunication services or changes in
telecommunication services may result in slower response times; and
. adverse publicity and consumer concern about the reliability, cost, ease
of access, quality of services, capacity, performance and security of e-
commerce transactions could discourage its acceptance and growth.
Even if the Internet is widely adopted as a means of commerce, the adoption
of our network for procurement, particularly by companies that have relied on
traditional means of procurement, will require broad acceptance of the new
approach. In addition, companies that have already invested substantial
resources in traditional methods of procurement, or in-house e-commerce
solutions, may be reluctant to adopt our e-commerce solution.
Security risks of electronic commerce may deter use of our products and
services.
A fundamental requirement to conduct business-to-business e-commerce is the
secure transmission of information over public networks. If members are not
confident in the security of e-commerce, they may not effect transactions on
our e-marketplaces or renew their memberships which would severely harm our
business. We cannot be certain that advances in computer capabilities, new
discoveries in the field of cryptography, or other developments will not result
in the compromise or breach of the algorithms we use to protect content and
transactions on our e-marketplaces or proprietary information in our databases.
Anyone who is able to circumvent our security measures could misappropriate
proprietary, confidential member information, place false orders or cause
interruptions in our operations. We may be required to incur significant costs
to protect against security breaches or to alleviate problems caused by
breaches. Further, a well-publicized compromise of security could deter people
from using the Internet to conduct transactions that involve transmitting
confidential information. Our failure to prevent security breaches, or well-
publicized security breaches affecting the Internet in general, could adversely
affect our business.
Failure to maintain accurate databases could seriously harm our business
and reputation.
We update and maintain extensive databases of the products, services and e-
marketplace transactions for our members. Our computer systems and databases
must allow for expansion as a member's business grows without losing
performance. Database capacity constraints may result in data maintenance and
accuracy problems which could cause a disruption in our service and our ability
to provide accurate information to our members. These problems may result in a
loss of members which could severely harm our business. Some of our customer
contracts provide for service level guarantees for the accuracy of data. Our
failure to satisfy these service level guarantees could result in liability or
termination of the contract and a loss of business, and our business and our
reputation would suffer.
We may not be able to accurately predict the rate of increase in the usage
of our network which may affect our timing and ability to expand and
upgrade our systems.
Traffic in our e-marketplaces has increased to the point where we must
expand and upgrade some of our transaction processing systems and network
hardware and software. We may not be able to accurately predict the rate of
increase in the usage of our network. This may affect our timing and ability to
expand and upgrade our systems and network hardware and software capabilities
to accommodate increased use of our network. If we do not upgrade our systems
and network hardware and software appropriately, we may experience downgraded
service which could damage our business reputation, relationship with members
and our operating results.
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If we encounter system failure, service to our customers could be delayed
or interrupted. Service delays or interruptions could severely harm our
business and result in a loss of customers.
Our ability to successfully maintain an e-commerce marketplace and provide
acceptable levels of customer service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware and network
systems. Any interruptions could severely harm our business and result in a
loss of customers. Our computer and communications systems are located in Las
Vegas, Nevada. Although we periodically back up our databases to tapes and
store the backup tapes offsite, we do not maintain a redundant site. Our
systems and operations are vulnerable to damage or interruption from human
error, sabotage, fire, flood, earthquake, power loss, telecommunications
failure and similar events. Although we have taken certain steps to prevent a
system failure, we cannot assure you that our measures will be successful and
that we will not experience system failures in the future. Moreover, we have
experienced delays and interruptions in our telephone and Internet access which
have prevented members from accessing our e-marketplaces and customer service
department. Furthermore, 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. The occurrence of any
system failure or similar event could harm our business dramatically. In
addition, we may move to third-party hosting of our servers. We cannot assure
you that this transition, if undertaken, would be effected without
interruptions. Further, any such third-party host could be subject to the same
risks of system failure as our current site.
Our services depend on complex software. Unknown defects in this software
could result in service and development delays.
Our e-marketplace services depend on complex software developed internally
and by third parties. Software often contains defects, particularly when first
introduced or when new versions are released. Our testing procedures may not
discover software defects that affect our new or current services or
enhancements until after they are deployed. These defects could cause service
interruptions, which could damage our reputation or increase our service costs,
cause us to lose revenue, delay market acceptance or divert our development
resources, any of which could severely harm our business. In the past, we have
missed internal software development and enhancement deadlines. Some of our
contracts contain software enhancement and development milestones. If we are
unable to meet these milestones, whether or not the failure is attributable to
us or a third party, we may be in breach of our contractual obligations. Such a
breach could damage our reputation, lead to termination of the contract and
adversely affect our business.
Governmental regulation and legal uncertainties could impair the growth of
the Internet and decrease demand for our services and increase our cost of
doing business.
The laws governing Internet transactions remain largely unsettled, even in
areas where there has been some legislative action. The adoption or
modification of laws or regulations relating to the Internet could increase our
costs and administrative burdens. It may take years to determine whether and
how existing laws, such as those governing intellectual property, privacy,
libel, consumer protection and taxation, apply to the Internet.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. We must comply with new regulations
in the United States and other countries where we conduct business. The growth
and development of the business-to-business e-commerce market may prompt calls
for more stringent laws governing consumer protection and the taxation of e-
commerce. Non-compliance with any newly adopted laws and regulations could
expose us to significant liabilities.
The inability to acquire or maintain effective Web domain names could
create confusion and direct traffic away from our e-marketplaces.
We currently hold various Internet Web addresses relating to our network. If
we are not able to prevent third parties from acquiring Web addresses that are
similar to our addresses, third parties could acquire similar
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domain names which could create confusion that diverts traffic to other
websites away from our e-marketplaces, thereby adversely affecting our
business. The acquisition and maintenance of Web addresses generally is
regulated by governmental agencies and their designees. The regulation of Web
addresses in the United States and in foreign countries is subject to change.
As a result, we may not be able to acquire or maintain relevant Web addresses
in all countries where we conduct business. Furthermore, the relationship
between regulations governing such addresses and laws protecting proprietary
rights is unclear.
We may be subject to legal liability for communication on our network.
We may be subject to legal claims relating to the content in our network, or
the downloading and distribution of such content. Claims could involve matters
such as fraud, defamation, invasion of privacy and copyright infringement.
Providers of Internet products and services have been sued in the past,
sometimes successfully, based on the content of material. Our insurance may not
cover claims of this type, or may not provide sufficient coverage. Even if we
are ultimately successful in our defense of these claims, any such litigation
is costly and these claims could harm our reputation and our business.
Our stock was not publicly traded until the recent completion of our IPO
and as a result our stock price may be volatile.
Our common stock was not publicly traded until the recent completion of our
IPO in September 1999, and as a result our stock price may be subject to
fluctuation. Factors which may cause our stock to fluctuate substantially
include:
. actual or anticipated fluctuations in our results of operations;
. changes in or failure by us to meet securities analysts' expectations;
. announcements of technological innovations;
. introduction of new services by us or our competitors;
. developments with respect to intellectual property rights;
. conditions and trends in the Internet and other technology industries;
and
. general market conditions.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
common stocks of technology companies, particularly Internet companies. These
broad market fluctuations may result in a material decline in the market price
of our common stock. In the past, following periods of volatility in the market
price of a particular company's securities, securities class action litigation
has often been brought against that company. We may become involved in this
type of litigation in the future. Litigation is often expensive and diverts
management's attention and resources which is needed to successfully run our
business.
Shares eligible for future sale by our existing stockholders may adversely
affect our stock price.
The market price of our common stock could drop due to the sales of a large
number of shares of our common stock or the perception that such sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
As of November 12, 1999, 18,683,665 shares of common stock are outstanding.
Of these shares, 4,600,000 shares were sold in the IPO and are freely tradeable
without restrictions under the Securities Act of 1933, except for any shares
purchased by our "affiliates," as defined in Rule 144 under the Securities Act.
Our officers and directors and all stockholders have entered into lock-up
agreements pursuant to which they have agreed not to offer or sell any shares
of common stock for a period of 180 days after the date of the offering
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without the prior written consent of Prudential Securities, on behalf of the
underwriters. These individuals or entities may request that Prudential
Securities consider an early release from their lock-up agreement. Prudential
Securities may, at any time and without notice, grant an early release for
shares subject to these lock-up agreements. Upon expiration of this 180-day
lock-up period, the shares owned by these persons prior to completion of the
intial public offering may be sold into the public market without registration
under the Securities Act in compliance with the volume limitations and other
applicable restrictions of Rule 144 under the Securities Act. We intend to file
a registration statement under the Securities Act to register all shares of
common stock issuable upon the exercise of outstanding stock options and
reserved for issuance under our stock option plans. This registration statement
is expected to become effective immediately upon filing and, subject to the
vesting requirements and exercise of the related options (as well as the terms
of the lock-up agreements), shares covered by this registration statement will
be eligible for sale in the public markets.
Our management has broad discretion over the use of the net proceeds from
the IPO. Failure to use the net proceeds in an effective and beneficial manner
could impede our ability to expand our sales and marketing activities and make
startegic investments.
We intend generally to use the net proceeds from the offering to expand our
sales and marketing activities and for general corporate purposes, including
working capital and strategic investments. We have not yet determined the
actual expected expenditures and thus cannot estimate the amounts to be used
for each specified purpose. Depending on future developments and circumstances,
we may use some of the proceeds for uses other than those described above. Our
management, therefore, has significant flexibility in applying the net proceeds
of the offering. Our success and growth depends on the beneficial use of the
net proceeds.
Our articles of incorporation and bylaws and Nevada law contain provisions
which could delay or prevent a change in control and could also limit the
market price of our stock.
Our articles of incorporation and bylaws contain provisions that could delay
or prevent a change in control. These provisions could limit the price that
investors might be willing to pay in the future for shares of our common stock.
Some of these provisions:
. divide our board of directors into three classes;
. authorize the issuance of preferred stock which can be created and issued
by the board of directors without prior stockholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to those
of common stock;
. prohibit stockholder action by written consent; and
. establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.
In addition, certain provisions of Nevada law make it more difficult for a
third party to acquire us. Some of these provisions:
. establish a supermajority stockholder voting requirement to approve an
acquisition by a third party of a controlling interest; and
. impose time restrictions or require additional approvals for an
acquisition of us by an interested stockholder.
These provisions could also limit the price that investors might be willing
to pay in the future for shares of our common stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
28
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Changes in Securities.
During the quarter ended September 30, 1999 and prior to the closing of our
IPO, we granted options to purchase 119,807 shares of common stock to employees
under our 1999 Equity Incentive Plan and our 1998 Stock Option Plan. During the
quarter ended September 30, 1999 and prior to the closing of our IPO,
employees, consultants and other service providers of the Company exercised
options to purchase 1,975,648 shares of common stock. The sale of the above
securities was deemed to be exempt from registration under the Securities Act
of 1933 ("the Securities Act") in reliance upon Section 4(2) of the Securities
Act or Rule 701 promulgated under Section 3(b) of the Securities Act.
(d) Use of Proceeds.
On September 13, 1999, we completed the initial public offering of our
common stock. The managing underwriters in the offering were Prudential
Securities, Inc. and Jefferies & Company. The shares of the common stock sold
in the offering were registered under the Securities Act, on a Registration
Statement on Form S-1 (No. 333-80165). The SEC declared the Registration
Statement effective on September 13, 1999. The offering commenced on September
14, 1999 and terminated on September 30, 1999, after we had sold all of the
4,600,000 shares of common stock registered under the Registration Statement
(including 600,000 shares sold in connection with the exercise of the
underwriters' over-allotment option). The initial public offering price was $12
per share for an aggregate initial public offering of $55,200,000. We paid a
total of $3,584,000 in underwriting discounts and commissions. In addition, the
following table sets forth the estimated costs and expenses, other than
underwriting discounts and commissions, incurred in connection with the
offering. None of the amounts shown was paid directly or indirectly to any
director, officer, general partner of the Company or their associates, persons
owning 10 percent or more of any class of equity securities of the Company or
an affiliate of the Company.
<TABLE>
<S> <C>
SEC registration................................................. $ 16,600
NASD fee......................................................... 6,500
NASDAQ National Market Listing Fee............................... 91,000
Printing and engraving........................................... 390,000
Legal fees and expenses.......................................... 811,900
Accounting fee and expenses...................................... 230,000
Blue sky fees and expenses....................................... 5,000
Transfer agent fees.............................................. 50,000
Miscellaneous.................................................... 465,000
----------
Total.......................................................... $2,066,000
==========
</TABLE>
After deducting the underwriting discounts and commissions and the offering
expenses, the estimated net proceeds to the Company from the offering were
approximately $50 million. The net proceeds were predominately held in a money
market fund and short-term investments at September 30, 1999.
29
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<C> <S>
3.1 (i) Amended and Restated Articles of Incorporation of the Registrant
3.1 (ii) Bylaws of the Registrant
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed with the SEC during the quarter ended
September 30, 1999.
SIGNATURES
Pursuant to the requirements 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.
PURCHASEPRO.COM, INC.
By: /s/ Scott H. Miller
-----------------------------------
Scott H. Miller,
Vice President-Finance and
Chief Accounting Officer
Date: November 15, 1999 (Authorized Officer)
30
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Title
----------- -------------
<C> <S>
3.1 (i) Amended and Restated Articles of Incorporation of the Registrant
3.1 (ii) Bylaws of the Registrant
27.1 Financial Data Schedule
</TABLE>
<PAGE>
Exhibit 3.1(i)
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
PURCHASEPRO.COM, INC.
We the undersigned President and Secretary of PurchasePro.com, Inc. do
hereby certify that:
1.The Articles of Incorporation of said corporation are amended and
restated to read in full as follows:
FIRST: The name of the corporation is PurchasePro.com, Inc.
(hereinafter, the "Corporation").
SECOND: The authorized capital stock of the Corporation shall consist
of a total of Forty Five Million (45,000,000) shares of stock which are
divided into classes and which have such designations, preferences,
limitations and relative rights as follows:
A. Forty million (40,000,000) shares of common stock with a par value
of $.01 per share, designated as "Common Stock."
B. Five million (5,000,000) shares of preferred stock of $.001 par
value, designated as "Preferred Stock." The Board of Directors is vested
with the authority to authorize by resolution from time to time the
issuance of the Preferred Shares in one or more series, and to prescribe
the number of Preferred Shares within each such series and the voting
powers, designations, preferences, limitations, restrictions and relative
rights of each such series, including preferences and relative rights that
may be superior to the Common Shares.
THIRD: The governing board of this Corporation shall be known as
directors, and the number of directors may from time to time be increased
or decreased in such manner as shall be provided by the bylaws of this
Corporation.
A. The Board of Directors shall be divided into three classes, each
class to serve for a term of three years and to be as nearly equal in
number as possible. The term of office of the first, second and third
classes of directors shall expire at the 2000, 2001 and 2002 annual
meetings of stockholders, respectively. The number and classification of
directors shall be as set forth in the bylaws of this Corporation.
B. At all elections of directors of the Corporation, all holders of
Common Stock are entitled to as many votes as equal the number of their
shares of Common Stock multiplied by the number of directors to be elected,
and they may cast all of their votes for a single nominee or may distribute
the votes among the nominees to be voted for any two or more of them, as
they see fit.
FOURTH: The holder of each share of Common Stock shall have the right
to one vote, and shall be entitled to notice of any stockholders' meeting
in accordance with the bylaws of this Corporation, and shall be entitled to
vote upon such matters and in such manner as may be provided by law. No
action required or permitted to be taken by the stockholders of the
Corporation may be taken by written consent.
A. Any action required or permitted to be taken by the stockholders
that causes the acquisition of this Corporation by another entity or
entities by means of any transaction or series of related transactions
(including, without limitation, any reorganization, merger or
consolidation) that results in the transfer of fifty percent (50%) or more
of the outstanding voting power of this Corporation, or the sale, transfer
or lease (other than a pledge or grant of a security interest to a bona
fide lender) of all or substantially all of the assets of the Corporation
shall be taken only upon the affirmative vote of at least sixty-six and
two-thirds percent (66-2/3%) of the shares of the Corporation issued and
outstanding entitled to vote thereon.
B. The affirmative vote of the holders of at least sixty-six and two-
thirds percent (66-2/3%) of the outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of directors
(considered for this purpose as one class) shall be required to amend,
alter or repeal these Articles of Incorporation.
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<PAGE>
FIFTH: To the fullest extent permitted by Chapter 78 of the Nevada
Revised Statutes as the same exists or may hereafter be amended, an officer
or director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages due to breach of
fiduciary duty as such officer or director.
SIXTH: The Corporation is authorized to provide indemnification of
agents for breach of duty to the Corporation and its stockholders through
bylaw provisions or through agreements with agents, or both, in excess of
the indemnification otherwise permitted by law, subject to any limits on
such excess indemnification as set fourth therein.
2. The foregoing Amended and Restated Articles of Incorporation have been
duly approved by the Board of Directors.
3. The foregoing Amended and Restated Articles of Incorporation have been
duly approved by the required vote of stockholders in accordance with sections
78.390 and 78.403 of the Nevada Revised Statutes. The total number of
outstanding shares of Common Stock of the Corporation is 8,566,198, of which
4,633,000 have voted in favor of the Amended and Restated Articles of
Incorporation. The total number of outstanding shares of Series A Preferred
Stock of the Corporation is 2,100,000, of which 1,340,000 have voted in favor
of the Amended and Restated Articles of Incorporation. The total number of
outstanding shares of Series B Preferred Stock of the Corporation is 3,300,000,
of which 1,785,714 have voted in favor of the Amended and Restated Articles of
Incorporation. The number of shares voting in favor of the amendment equaled or
exceeded the vote required. The percentage vote required under the law and the
Articles of Incorporation in effect at the time of this amendment was more than
fifty percent (50%) of the outstanding Common Stock and more than fifty percent
(50%) of the outstanding Preferred Stock, each voting separately as a class.
Upon the consummation of the Corporation's initial public offering of its
Common Stock, all outstanding shares of Preferred Stock are automatically
converted into Common Stock and no shares of Preferred Stock remain
outstanding.
/s/ Christopher P. Carton
_____________________________________
Christopher P. Carton
President
/s/ Christopher P. Carton
_____________________________________
Christopher P. Carton
Secretary
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<PAGE>
Exhibit 3.2(ii)
B Y L A W S
OF
PURCHASEPRO.COM, INC.
(Effective as of September 17, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I PRINCIPLE OFFICE................................................ 1
Section 1. Principal Office............................................. 1
Section 2. Other Offices................................................ 1
ARTICLE II STOCKHOLDERS................................................... 1
Section 1. Place of Meetings............................................ 1
Section 2. Annual Meetings.............................................. 1
Section 3. Special Meetings............................................. 1
Section 4. Procedure of Annual Meeting; Notice of Meetings.............. 1
Section 5. Quorum....................................................... 2
ARTICLE III BOARD OF DIRECTORS............................................ 2
Section 1. Powers....................................................... 2
Section 2. Number, Classes and Qualifications........................... 3
Section 3. Nomination................................................... 3
Section 4. Removal...................................................... 3
Section 5. Vacancies.................................................... 3
ARTICLE IV MEETINGS OF DIRECTORS.......................................... 4
Section 1. Regular Meetings............................................. 4
Section 2. Special Meetings............................................. 4
Section 3. Quorum....................................................... 4
Section 4. Waiver....................................................... 4
Section 5. Action by Written Consent.................................... 4
Section 6. Committees of the Board...................................... 4
ARTICLE V OFFICERS........................................................ 5
Section 1. Officers..................................................... 5
Section 2. Chairman of the Board........................................ 5
Section 3. Chief Executive Officer and President........................ 5
Section 4. President.................................................... 5
Section 5. Chief Operating Officer...................................... 5
Section 6. Vice Presidents.............................................. 5
Section 7. Secretary.................................................... 5
Section 8. Assistant Secretaries........................................ 6
Section 9. Treasurer and Chief Financial Officer........................ 6
Section 10. Assistant Treasurers........................................ 6
Section 11. Loans or Guarantees of Obligations of Directors and
Officers............................................................... 6
ARTICLE VI AMENDMENTS..................................................... 6
Section 1. By Stockholders.............................................. 6
Section 2. By Directors................................................. 6
ARTICLE VII ANNUAL AND OTHER REPORTS...................................... 6
ARTICLE VIII INDEMNIFICATION.............................................. 7
Section 1. Right of Indemnification..................................... 7
Section 2. Definition of Agent.......................................... 7
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE IX CERTIFICATES AND TRANSFER OF SHARES............................. 7
Section 1. Certificates for Shares....................................... 7
Section 2. Transfer on the Books......................................... 7
Section 3. Lost or Destroyed Certificates................................ 7
Section 4. Transfer Agents and Registrars................................ 7
Section 5. Closing Stock Transfer Books--Record Date..................... 8
Section 6. Legend Condition.............................................. 8
ARTICLE X CORPORATE RECORDS AND REPORTS--INSPECTION........................ 8
Section 1. Records....................................................... 8
Section 2. Inspection of Books and Records............................... 8
Section 3. Certification and Inspection of Bylaws........................ 8
Section 4. Checks, Drafts, Etc........................................... 8
Section 5. Contracts, Etc.--How Executed................................. 8
</TABLE>
-ii-
<PAGE>
BYLAWS OF
PURCHASEPRO.COM, INC.
(Effective as of September 17, 1999)
ARTICLE I
PRINCIPAL OFFICE
Section 1. Principal Office. The Board of Directors shall fix the location
of the principal executive office of the Corporation at any place within or
outside the State of Nevada. If the principal executive office is located
outside Nevada and the Corporation has one or more business offices in Nevada,
then the Board of Directors shall fix and designate a principal business office
in Nevada.
Section 2. Other Offices. The Board of Directors may at any time establish
branch or subordinate offices at any place or places.
ARTICLE II
STOCKHOLDERS
Section 1. Place of Meetings. All meetings of the stockholders shall be held
at any place within or without the State of Nevada which may be designated by
the Board of Directors. In the absence of any such designation, stockholders'
meetings shall be held at the principal executive office of the Corporation.
Section 2. Annual Meetings. An annual meeting of stockholders shall be held
each year on a date and at a time designated by the Board of Directors. At that
meeting, directors shall be elected. Any other proper business may be
transacted at the annual meeting of stockholders.
Section 3. Special Meetings. Special meetings of the stockholders may be
called by (a) the Board of Directors, (b) the chairman of the board or (c) the
chief executive officer and president. Notice of any special meeting shall
specify the purpose or purposes of the meeting. Upon receipt of a written
request addressed to the chairman, chief executive officer and president, vice
president or secretary, mailed or delivered personally to such officer by any
person (other than the board) entitled to call a special meeting of
stockholders, such officer shall cause notice to be given, to the stockholders
entitled to vote, that a meeting will be held at a time requested by the person
or persons calling the meeting, not less than thirty-five (35) nor more than
sixty (60) days after the receipt of such request.
Section 4. Procedure of Annual Meeting; Notice of Meetings. To be properly
brought before the annual meeting, business must be either (a) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (b) otherwise properly brought before the meeting by or
at the direction of the Board of Directors, or (c) otherwise properly brought
before the meeting by a stockholder of record. In addition to any other
applicable requirements, for business to be properly brought before the annual
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the Secretary of the Corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Corporation, addressed to the attention of the Secretary of the
Corporation, within one hundred twenty (120) calendar days before the date of
the Corporation's proxy statement released to stockholders in connection with
the previous year's annual meeting. A stockholder's notice to the Secretary
shall set forth as to each matter the stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting, (ii) the name and record address of the stockholder
proposing such business, (iii) the class and number of shares of the
Corporation which are beneficially owned by the stockholder, and (iv) any
material interest of the stockholder in such business. Not-with-standing
anything in these bylaws to the contrary, no business shall be conducted at the
annual meeting except in accordance with the procedures set forth in this
Section 4; provided, however, that nothing in this
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<PAGE>
Section 4 shall be deemed to preclude discussion by any stockholder of any
business properly brought before the annual meeting.
Written notice of each meeting of the stockholders, annual or special, shall
be given to each stockholder entitled to vote thereat not less than ten (10)
days nor more than sixty (60) days before the date of the meeting. Such notices
shall be given personally or by first-class mail or other means of written
communication permitted by Chapter 78, Nevada Revised Statutes (the "Nevada
General Corporation Law"), charges prepaid, addressed to each stockholder of
record at the address appearing on the books of the Corporation, or given by
the stockholder to the Corporation for the purpose of notice. If no address of
a stockholder appears on the books of the Corporation or is given by the
stockholder to the Corporation, notice is duly given to him or her if sent by
mail or other means of written communication addressed to the place where the
principal executive office of the Corporation is located or if published at
least once in a newspaper of general circulation in the county in which said
principal executive office is located. Any such notice shall be deemed to have
been given at the time when delivered personally or deposited in the United
States mail or sent by other means of written communication.
Such notices shall state (i) the place, date and hour of the meeting, (ii)
those matters which the board, at the time of the mailing of the notice,
intends to present for action by the stockholders, (iii) if directors are to be
elected, the names of nominees intended at the time of the notice to be
presented by management for election, and (iv) such other matters, if any, as
may be expressly required by the Nevada General Corporation Law. In addition,
in the case of a special meeting, the general nature of the business to be
transacted shall be set forth in the notice, and no other business may be
transacted.
A stockholder may waive notice of a meeting before or after the time and
date of the meeting by a writing signed by such stockholder. Such waiver shall
be delivered to the Corporation for filing with the corporate records, but this
delivery and filing shall not be conditions to the effectiveness of the waiver.
Further, by attending a meeting either in person or by proxy, a stockholder
waives objection to lack of notice or defective notice of the meeting unless
the stockholder objects to the beginning of the meeting to the holding of the
meeting or the transaction of business at the meeting because of lack of notice
or defective notice. By attending the annual meeting, the stockholder also
waives any objection to consideration at the meeting of a particular matter not
within the purpose or purposes described in the meeting notice unless the
stockholder objects to considering the matter when it is presented.
Section 5. Quorum. The presence in person or by proxy of the holders of a
majority of the shares entitled to vote at any meeting shall constitute a
quorum for the transaction of business. Except as provided in this section, the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present shall be the act of the stockholders,
unless the vote of a greater number or voting by classes is required by law or
the articles of incorporation. The stockholders present at a duly called or
held meeting at which a quorum is present may continue to transact business
until adjournment, notwithstanding the withdrawal of enough stockholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
In the absence of a quorum, any meeting of stockholders may be adjourned from
time to time by the vote of a majority of the shares represented either in
person or by proxy, but no other business may be transacted except as provided
in the preceding sentence.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Powers. Subject to the provisions of the Nevada General
Corporation Law and any limitations in the articles of incorporation and these
bylaws as to action to be authorized or approved by the stockholders, the
business and affairs of the Corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the Board of Directors.
-2-
<PAGE>
Section 2. Number, Classes and Qualifications. The authorized number of
directors shall not be less than five (5) nor more than nine (9). The exact
authorized number of directors shall be fixed from time to time, within the
limits specified in this Section 2 or in the articles of incorporation, by the
Board of Directors, or by a bylaw or amendment thereof duly adopted by the vote
of sixty-six and two-thirds percent (66-2/3%) of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least sixty-six and two-thirds percent (66-
2/3%) of the required quorum).
The Board of Directors shall be divided into three classes, each class to
serve for a term of three (3) years and to be as nearly equal in number as
possible. Class I shall be comprised of directors who shall serve until the
annual meeting of stockholders in 2000 and until their successors shall have
been elected and qualified. Class II shall be comprised of directors who shall
serve until the annual meeting of stockholders in 2001 and until their
successors shall have been elected and qualified. Class III shall be comprised
of directors who shall serve until the annual meeting of stockholders in 2002
and until their successors shall have been elected and qualified.
A director shall be a natural person who is eighteen (18) years of age or
older. A director need not be a resident of Nevada or a stockholder of the
Corporation.
Section 3. Nomination. Only persons who are nominated in accordance with the
following procedures shall be eligible for election as directors. Nominations
of persons for election to the Board of Directors at the annual meeting, by or
at the direction of the Board of Directors, may be made by the nominating
committee of the Board of Directors or any person appointed by the Board of
Directors; nominations may also be made by any stockholder of record of the
Corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 3. Such
nominations, other than those made by or at the direction of the Board of
Directors, shall be made pursuant to timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered to
or mailed and received at the principal executive offices of the Corporation
addressed to the attention of the Secretary of the Corporation not less than
one hundred twenty (120) calendar days before the date of the Corporation's
proxy statement released to stockholders in connection with the previous year's
annual meeting. Such stockholder's notice to the Secretary shall set forth (a)
as to each person whom the stockholder proposes to nominate for election or
reelection as a director, (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class and number of shares of capital stock of the
Corporation which are beneficially owned by the person, (iv) a statement as to
the person's citizenship, and (v) any other information relating to the person
that is required to be disclosed in solicitations for proxies for election of
directors pursuant to section 14 of the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder; and (b) as to
the stockholder giving the notice, (i) the name and record address of the
stockholder and (ii) the class, series and number of shares of capital stock of
the Corporation which are beneficially owned by the stockholder. The
Corporation may require any proposed nominee to furnish such other information
as may reasonably be required by the Corporation to determine the eligibility
of such proposed nominee to serve as director of the Corporation. No person
shall be eligible for election as a director of the Corporation unless
nominated in accordance with the procedures set forth herein.
Section 4. Removal. Directors shall be removed in the manner provided by the
Nevada General Corporation Law. Any director may be removed by the stockholders
of the Corporation at a meeting called for that purpose. The notice of the
meeting shall state that the purpose or one of the purposes of the meeting is
removal of the director. A director may be removed only if the number of votes
cast in favor of removal exceeds the number of votes cast against removal;
provided, however, that no director may be removed when the votes cast against
removal would be sufficient to elect the director if voted cumulatively at an
election at which the same total number of votes were cast and the entire
number of directors authorized at the time of the director's most recent
election were then being elected.
Section 5. Vacancies. Vacancies in the Board of Directors, including a
vacancy created by the removal of a director, may be filled by a majority of
the directors then in office, whether or not less than a quorum, or by a sole
remaining director.
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<PAGE>
ARTICLE IV
MEETINGS OF DIRECTORS
Section 1. Regular Meetings. Regular meetings of the Board of Directors
shall be held at any place within or without the State of Nevada that has been
designated from time to time by the Board of Directors. In the absence of such
designation, regular meetings shall be held at the principal executive office
of the Corporation; provided, however, that immediately following each annual
meeting of the stockholders there shall be a regular meeting of the Board of
Directors of the Corporation at the place of said annual meeting or at such
other place as shall have been designated by the Board of Directors for the
purpose of organization, election of officers and the transaction of other
business. Other regular meetings of the Board of Directors shall be held
without call on such date and time as may be fixed by the Board of Directors;
provided, however, that should any such day fall on a legal holiday, then said
meeting shall be held at the same time on the next business day thereafter
ensuing which is not a legal holiday. Notice of regular meetings of the
directors is hereby dispensed with and no notice whatever of any such meeting
need be given, provided that notice of any change in the time or place of
regular meetings shall be given to all of the directors in the same manner as
notice for special meetings of the Board of Directors.
Section 2. Special Meetings. Special meetings of the Board of Directors may
be held at any place within or without the State of Nevada which has been
designated in the notice of the meeting, or, if not designated in the notice or
if there is no notice, at the principal executive office of the Corporation.
Special meetings of the Board of Directors for any purpose or purposes may be
called at any time by the chairman of the board or chief executive officer and
president or any two directors. Notice of the time and place of special
meetings shall be delivered personally or by telephone to each director, or
sent by first-class mail or telegram or facsimile transmission, charges
prepaid, addressed to him or her at his or her address as it appears upon the
records of the Corporation or, if it is not so shown on the records and is not
readily ascertainable, at the place at which the meetings of the directors are
regularly held. Such notice shall be sent at least four (4) days prior to the
meeting if sent by mail and at least forty-eight (48) hours prior to the
meeting if delivered personally or by telephone or telegraph. The notice need
not specify the place of the meeting if the meeting is to be held at the
principal executive office of the Corporation, and need not specify the purpose
of the meeting.
Section 3. Quorum. Presence of a majority of the authorized number of
directors at a meeting of the Board of Directors constitutes a quorum for the
transaction of business, except as hereinafter provided. Members of the board
may participate in a meeting through use of conference telephone or similar
communications equipment, so long as all members participating in such meeting
can hear one another.
Section 4. Waiver. Notice of a meeting need not be given to any director who
signs a waiver of notice or consent to holding the meeting or an approval of
the minutes thereof, whether before or after the meeting, or who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such director. All such waivers, consents and approvals shall be
filed with the corporate records or made a part of the minutes of the meeting.
Section 5. Action by Written Consent. Any action required or permitted to be
taken by the Board of Directors may be taken without a meeting if all members
of the board shall individually or collectively consent in writing to such
action. Such written consent or consents shall be filed with the minutes of the
proceedings of the board. Such action by written consent shall have the same
force and effect as a unanimous vote of such directors.
Section 6. Committees of the Board. The provisions of this Article IV shall
also apply, with necessary changes in points of detail, to committees of the
Board of Directors, if any, and to actions by such committees (except for the
first sentence of Section 2 of Article IV, which shall not apply, and except
that special meetings of a committee may also be called at any time by any two
members of the committee), unless otherwise provided by these bylaws or by the
resolution of the Board of Directors designating such committees. For such
purpose, references to "the board" or "the Board of Directors" shall be deemed
to refer to each such
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<PAGE>
committee and references to "directors" or "members of the board" shall be
deemed to refer to members of the committee. Committees of the Board of
Directors may be designated, and shall be subject to the limitations on their
authority, as provided in section 78.125 of the Nevada General Corporation Law.
The appointment of members or alternate members of a committee requires the
vote of a majority of the authorized number of directors.
ARTICLE V
OFFICERS
Section 1. Officers. The officers of the Corporation shall be a chairman of
the board or a chief executive officer or both, a president, a chief operating
officer, a treasurer and chief financial officer and a secretary. The
Corporation may also have, at the discretion of the Board of Directors, one or
more vice presidents, one or more assistant secretaries and such other officers
as may be designated from time to time by the Board of Directors. Any number of
offices may be held by the same person. The officers shall be elected by the
Board of Directors and shall hold office at the pleasure of such board.
Section 2. Chairman of the Board. The chairman of the board, if there be
such officer, shall, if present, preside at all meetings of the Board of
Directors and exercise and perform such other powers and duties as may be from
time to time assigned to him or her by the Board of Directors or prescribed by
the bylaws. The chairman of the board shall, in addition, be the general
manager and chief executive officer of the Corporation and shall have the
powers and duties prescribed in Section 3 of this Article V.
Section 3. Chief Executive Officer. Subject to such supervisory powers, if
any, as may be given by the Board of Directors to the chairman of the board, if
there be such an officer, the chief executive officer of the Corporation shall,
subject to the control of the Board of Directors, have general supervision,
direction and control of the business and officers of the Corporation. The
chief executive officer shall have the general powers and duties of management
usually vested in the chief executive officer of a Corporation, and shall have
such other powers and duties as may be prescribed by the Board of Directors or
bylaws.
Section 4. President. The Board of Directors must designate a president. The
president shall have the responsibilities and duties as set forth by the Board
of Directors or the chief executive officer.
Section 5. Chief Operating Officer. The Board of Directors may designate a
chief operating officer. The chief operating officer shall have the
responsibilities and duties as set forth by the Board of Directors or the chief
executive officer.
Section 6. Vice Presidents. In the absence or disability of the president,
the vice presidents in order of their rank as fixed by the Board of Directors
or, if not ranked, the vice president designated by the Board of Directors,
shall perform all of the duties of the chief executive officer and president
and when so acting shall have all the powers of and be subject to all the
restrictions upon the chief executive officer and president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them, respectively, by the Board of
Directors or the bylaws.
Section 7. Secretary. The secretary shall keep or cause to be kept at the
principal executive office of the Corporation or such other place as the Board
of Directors may order, a book of minutes of all proceedings of the
stockholders, the Board of Directors and committees of the board, with the time
and place of holding, whether regular or special, and if special how
authorized, the notice thereof given, the names of those present at directors'
and committee meetings, and the number of shares present or represented at
stockholders' meetings. The secretary shall keep or cause to be kept at the
principal executive office or at the office of the Corporation's transfer agent
a record of stockholders or a duplicate record of stockholders showing the
names of the stockholders and their addresses, the number of shares and classes
of shares held by each, the number and date of certificates issued for the same
and the number and date of cancellation of every certificate
-5-
<PAGE>
surrendered for cancellation. The secretary or an assistant secretary or, if
they are absent or unable or refuse to act, any other officer of the
Corporation, shall give or cause to be given notice of all the meetings of the
stockholders, the Board of Directors and committees of the board required by
the bylaws or by law to be given, and he or she shall keep the seal of the
Corporation, if any, in safe custody and shall have such other powers and
perform such other duties as may be prescribed by the Board of Directors or by
the bylaws.
Section 8. Assistant Secretaries. It shall be the duty of the assistant
secretaries to assist the secretary in the performance of his or her duties and
generally to perform such other duties as may be delegated to them by the Board
of Directors.
Section 9. Treasurer and Chief Financial Officer. The treasurer and chief
financial officer shall keep and maintain, or cause to be kept and maintained,
in accordance with generally accepted accounting principles adequate and
correct books and records of account of the Corporation. He or she shall
receive and deposit all moneys and other valuables belonging to the Corporation
in the name and to the credit of the Corporation and shall disburse the same
only in such manner as the Board of Directors or the appropriate officers of
the Corporation may from time to time determine, shall render to the chief
executive officer and president and the Board of Directors, whenever they
request it, an account of all his or her transactions as chief financial
officer and of the financial condition of the Corporation, and shall perform
such further duties as the Board of Directors may require.
Section 10. Assistant Treasurers. It shall be the duty of the assistant
treasurers to assist the chief financial officer in the performance of his or
her duties and generally to perform such other duties as may be delegated to
them by the Board of Directors.
Section 11. Loans or Guarantees of Obligations of Directors and
Officers. The Corporation may make any loan of money or property to, or
guarantee the obligation of, any director or officer of the Corporation or of
its parent if such loan or guaranty is approved by the board alone by a vote
sufficient without counting the vote of any interested director or directors if
the board determines that such loan or guaranty may reasonably be expected to
benefit the Corporation.
ARTICLE VI
AMENDMENTS
Section 1. By Stockholders. New bylaws may be adopted or these bylaws may be
amended or repealed by the affirmative vote of sixty-six and two-thirds percent
(66-2/3%) of the outstanding shares entitled to vote.
Section 2. By Directors. Subject to the right of stockholders as provided in
Section 1 of this Article to adopt, amend or repeal bylaws, and except as
otherwise provided by law or by the articles of incorporation; bylaws, other
than a bylaw or amendment thereof changing the authorized maximum or minimum
number of directors, may be adopted, amended or repealed by the Board of
Directors.
ARTICLE VII
ANNUAL AND OTHER REPORTS
The Board of Directors of the Corporation shall cause an annual report to be
sent to the stockholders not later than one hundred twenty (120) days after the
close of the fiscal year of the Corporation. Such report shall contain a
balance sheet as of the end of that completed fiscal year and an income
statement and statement of changes in cash flows for that fiscal year,
accompanied by any report thereon of independent accountants or, if there is no
such report, the certificate of an authorized officer of the Corporation that
the statements were prepared without audit from the books and records of the
Corporation. Such report shall be sent at least fifteen (15) days prior to the
annual meeting of stockholders to be held during the next fiscal year. The
annual report shall also contain any information required by the Nevada General
Corporation Law.
-6-
<PAGE>
ARTICLE VIII
INDEMNIFICATION
Section 1. Right of Indemnification. The Corporation shall have power to
indemnify each of its officers, directors and agents to the fullest extent
permissible by the Nevada General Corporation Law. Without limiting the
generality of the foregoing sentence, the Corporation:
(a) is authorized to provide indemnification of officers, directors and
agents in excess of that otherwise permitted by sections 78.7502 and 78.751 of
the Nevada General Corporation Law for those officers, directors and agents of
the Corporation for breach of duty to the Corporation and its stockholders;
provided, however, that the Corporation is not authorized to provide
indemnification of any officer, director or agent for any acts or omissions or
transactions from which an officer, director or agent may not be relieved of
liability as set forth in section 78.037(1) of the Nevada General Corporation
Law; and
(b) shall have power to purchase and maintain insurance or make other
financial arrangements in accordance with section 78.752 of the Nevada General
Corporation Law on behalf of any officer, director or agent of the Corporation
against any liability asserted against or incurred by the officer, director or
agent in such capacity or arising out of the officer, director or agent's
status as such, whether or not the Corporation would have the power to
indemnify the officer, director or agent against such liability under the
provisions of section 78.037(1) of the Nevada General Corporation Law, and
shall have power to advance the expenses reasonably expected to be incurred by
such officer, director or agent in defending any such proceeding upon receipt
of the undertaking.
Section 2. Definition of Agent. The term "agent" used in this Article shall
have the same meaning as such term in the Nevada General Corporation Law.
ARTICLE IX
CERTIFICATES AND TRANSFER OF SHARES
Section 1. Certificates for Shares. Certificates for shares shall be of such
form and device as the Board of Directors may designate and shall state the
name of the record holder of the shares represented thereby; its number; date
of issuance; the number of shares for which it is issued; a statement of the
rights, privileges, preferences and restrictions, if any; a statement as to the
redemption or conversion, if any; a statement of liens or restrictions upon
transfer or voting, if any; if the shares be assessable or, if assessments are
collectible by personal action, a plain statement of such facts. Every
certificate for shares must be signed by the chief executive officer or
president or the treasurer and chief financial officer and the secretary or an
assistant secretary.
Section 2. Transfer on the Books. Upon surrender to the secretary or
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 3. Lost or Destroyed Certificates. Any person claiming a certificate
of stock to be lost or destroyed shall make an affidavit or affirmation of that
fact and shall if the directors so require give the Corporation a bond of
indemnity, in form and with one or more sureties satisfactory to the board, in
at least double the value of the stock represented by said certificate,
whereupon a new certificate may be issued in the same tenor and for the same
number of shares as the one alleged to be lost or destroyed.
Section 4. Transfer Agents and Registrars. The Board of Directors may
appoint one or more transfer agents or transfer clerks, and one or more
registrars, which shall be an incorporated bank or trust company-- either
domestic or foreign, who shall be appointed at such times and places as the
requirements of the Corporation may necessitate and the Board of Directors may
designate.
-7-
<PAGE>
Section 5. Closing Stock Transfer Books--Record Date. In order that the
Corporation may determine the stockholders entitled to notice of any meeting or
to vote or entitled to receive payment of any dividend or other distribution or
allotment of any rights or entitled to exercise any rights in respect of any
other lawful action, the board may fix, in advance, a record date, which shall
not be more than sixty nor less than ten (10) days prior to the date of such
meeting nor more than sixty (60) days prior to any other action.
Section 6. Legend Condition. In the event any shares of this Corporation are
issued pursuant to a permit or exemption therefrom requiring the imposition of
a legend condition the person or persons issuing or transferring said shares
shall make sure said legend appears on the certificate and on the stub relating
thereto in the stock record book and shall not be required to transfer any
shares free of such legend unless an amendment to such permit or a new permit
be first issued so authorizing such a deletion.
ARTICLE X
CORPORATE RECORDS AND REPORTS--INSPECTION
Section 1. Records. The Corporation shall maintain, in accordance with
generally accepted accounting principles, adequate and correct accounts, books
and records of its business and properties. All of such books, records and
accounts shall be kept at its principal executive office in the State of
Nevada, as fixed by the Board of Directors from time to time.
Section 2. Inspection of Books and Records. All books and records provided
for in section 78.105 of the Nevada General Corporation Law shall be open to
inspection of the directors and stockholders from time to time in accordance
with section 78.105.
Section 3. Certification and Inspection of Bylaws. The original or a copy of
these bylaws, as amended or otherwise altered to date, certified by the
secretary, shall be kept at the Corporation's principal executive office and
shall be open to inspection by the stockholders of the Corporation, at all
reasonable times during office hours, as provided in section 78.105 of the
Nevada General Corporation Law.
Section 4. Checks, Drafts, Etc. All checks, drafts or other orders for
payment of money, notes or other evidences of indebtedness, issued in the name
of or payable to the Corporation, shall be signed or endorsed by such person or
persons and in such manner as shall be determined from time to time by
resolution of the Board of Directors.
Section 5. Contracts, Etc.--How Executed. The Board of Directors, except as
in the bylaws otherwise provided, may authorize any officer or officers, agent
or agents, to enter into any contract or execute any instrument in the name of
and on behalf of the Corporation. Such authority may be general or confined to
specific instances.
I, THE UNDERSIGNED, being the secretary of PurchasePro.com, Inc., DO HEREBY
CERTIFY the foregoing to be the bylaws of said Corporation, as adopted by the
Board of Directors on September 17, 1999.
/s/ Christopher P. Carton
________________________________________
Christopher P. Carton
-8-
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<PAGE>
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<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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0
0
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<EPS-BASIC> (2.78)
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