ITEM
1. DESCRIPTION
OF BUSINESS
OVERVIEW
Commerce One is a technology company that specializes
in business-to-business electronic commerce.
Commerce One’s software provides the technology and infrastructure that
enable companies to conduct sourcing and purchasing transactions via the
Internet or Intranets and to manage their supplier relationships more
effectively. Commerce One’s services
operations support these software solutions and help companies take maximum
advantage of the efficiencies that on-line purchasing and supplier management
can offer. Together, Commerce One’s software
and services allow companies to automate business functions that traditionally
involved costly and time-consuming phone calls and paperwork.
Our worldwide headquarters are located at 4440
Rosewood Drive, Pleasanton, CA 94588. We can be reached at 925.520.6000 and
info@commerceone.com.
COMMERCE ONE’S VISION
Commerce One is committed to enabling smooth
interactions between trading partners. Standards-based communication is central
to their goal.
Open Platform
Through XMLÔ
technology, we have created an open architecture for all Commerce One
solutions. The XML Common Business LibraryÔ
(xCBL) enables integration and interoperability between disparate systems and
applications within a company’s own IT infrastructure, and with a company’s
trading partners. XML technology
enables the creation and secure transmission of XML documents over the
Internet.
Scalable Architecture
By combining our Internet
applications framework into a unified architecture, we are able to focus on
creating additional business functions in our solutions, rather than building
and maintaining complex infrastructure code. We have also designed our
solutions to be able to grow our infrastructure through the simple addition of
low-cost systems. This framework allows us to leverage technologies such as
resource pooling, message queuing, security services, and coordination and
distribution of transactions, components and services.
Interoperability ¾ The Global
Trading Webä
Our open architecture allows Commerce One’s solutions
to communicate with one another and with other compatible applications. The centerpiece of this interoperability
framework is the Global Trading WebÔ
network. Founded by Commerce One in
1999, the Global Trading Web network is a worldwide business-to-business
trading community. This global network of e-marketplaces promotes the
acceleration of global trade with reduced costs for business-service providers,
buyers and suppliers. These e-marketplaces interoperate around the globe
through our open and scalable XML-based standards, allowing regional trading
partners and industry-specific players to streamline business-to-business
processes and global supply chain strategies.
COMMERCE ONE ENTERPRISE SOLUTIONS
Commerce One 5.0Ô
Commerce One’s flagship enterprise offering¾the
Commerce One 5.0Ô suite¾was released during
January 2002 and combines several different software applications that are
designed to help companies save money by streamlining their purchasing,
sourcing and supplier-management processes.
The Commerce One 5.0 suite helps enterprises automate these processes
through the stages of sourcing, negotiating, procurement, fulfillment, and
payment.
The Commerce One 5.0 suite is composed of applications
and a platform that enables the applications to communicate with each other,
and with other compatible systems. The
application suite, in turn, consists of two main components - (1) sourcing
applications, and (2) procurement applications.
Commerce One’s sourcing applications help companies
better manage their supplier relationships.
For example, these applications enable businesses to quickly create,
complete, and manage on-line requests for supplier proposals (RFP’s), compare
supplier pricing and performance, monitor product status, run forward and
reverse auctions, and customize the supplier-management process to meet their
particular needs.
Our procurement applications facilitate on-line buying
and selling through: an advanced search engine that navigates multiple supplier
catalogues; an application that manages orders and invoice processing with
various suppliers; a feature that enables third-party software applications to
be incorporated into the on-line purchasing process; a feature that allows
buyers and suppliers to check the status of orders; an application that enables
companies to customize the software to meet their particular needs in their
specific industries or geographic regions; a purchasing function that allows
purchasers from anywhere in the business enterprise to access the on-line
procurement process from their desktop computers; and various other features
designed to make the on-line buying and selling run smoothly and efficiently.
Recognizing that many businesses prefer to make
technology investments in steps or according to specific needs, Commerce One
separately sells and supports the applications that constitute Commerce One
5.0. These modular applications include
the following:
Commerce One SourceÔ
The Commerce One
SourceÔ
suite enables businesses to find, evaluate, and manage suppliers according to a
variety of criteria tailored to each business enterprise. The Source suite is designed to optimize
supplier relationships and lower the overall cost of buying goods and services.
The
Source suite consists of the following products:
• Sourcing - supports RFX
management, negotiations, supplier performance management and activity reports.
• Auction - allows forward and
reverse auctions for buying and selling.
• Sourcing Intelligence - lets
enterprises conduct in-depth analyses of spending and supplier performance.
Commerce One BuyÔ
The Commerce One BuyÔ
suite automates the procurement process.
Integrating into both legacy ERP systems and suppliers’ back-office
applications, Commerce One Buy is built to provide real-time tracking of
availability and order status. Commerce One Buy can help companies obtain the best possible pricing and reduce
associated costs and cycle-times.
The
Buy suite consists of the following products:
• Auction - allows forward and reverse
auctions for buying and selling.
• Supplier Self Service - provides order
information, product availability, confirmations, notices and payments.
• Contract
Labor - tracks usage and expenses on contractors.
• Trading
Partner Connectivity - links enterprise applications and trading partners.
• Procurement
- Enables enterprises to purchase goods from e-marketplaces.
Commerce One Collaborative PlatformÔ
The Commerce One 5.0 suite of applications is built on
an integration and process management platform. The Commerce One Collaborative PlatformÔ
links and orchestrates enterprise legacy applications with trading
partners. The platform provides
real-time information exchange to automate and streamline e-commerce activities
within and outside an enterprise. Its integrated
business process engine enables organizations to create unique process flows
tailored to support industries, companies, and supplier relationships. The Commerce One Collaborative Platform also
integrates with existing enterprise applications, along with the full suite of
Commerce One procurement and e-commerce solutions, to automate the complete
source-to-pay process.
COMMERCE
ONE E-MARKETPLACE PRODUCTS
The Commerce One e-marketplace solutions are an integrated
set of products and services that allows our customers to build and run
e-marketplace businesses focused on automating inter-company business
processes. This solution is designed to
create a network of interoperable marketplaces, trading communities, and
commerce portals, bringing together the world’s largest buyers and
suppliers. Typical public e-marketplace
customers are entities interested in building an e-marketplace as a business,
or existing businesses that wish to take advantage of other e-marketplaces for
their own operations, or both.
Commerce One Collaborative Platform
(formerly MarketsiteÔ)
The Commerce One Collaborative platform is our open
foundation for e-marketplaces. With its ability to interoperate with other
systems through its open and scalable architecture, the Collaborative Platform
enables organizations to integrate business processes, legacy systems, and
third party applications and services within and across companies and other
enterprises. The Collaborative Platform
powers the Global Trading Web, a worldwide business-to-business trading
community.
MarketSetÔ
The MarketSetÔ
suite, the joint e-marketplace offering from Commerce One and SAP AG and SAP
Markets (collectively, “SAP”), is designed to transform linear supply chains
into collaborative communities to bring products to market more quickly, reduce
costs, improve product profitability and strengthen customer and supplier
relationships. MarketSet offers integrated applications supporting end-to-end
business processes for procurement, order management, auctions, content
management, planning, design, and analysis. The architecture of MarketSet makes
the e-marketplace open to virtually any buying, selling or enterprise
application on-ramp.
Commerce One Buy ASP EditionÔ
This product is designed to enable small-and
medium-sized businesses to create trading communities with a smaller
infrastructure investment. The product
includes a marketplace builder, a customizable user interface, a content engine
and procurement components.
COMMERCE ONE SERVICES
Commerce One Global Services provides a critical
component of our solution strategy by helping customers implement, operate and
manage their sourcing and procurement processes. Commerce One Global Services
provides comprehensive design, planning, analysis, systems integration,
implementation, technical support, and operations services to help deliver
Commerce One solutions to global organizations.
Strategic
Account Management Group
We deliver services to our e-marketplace partners and
enterprise customers through an integrated framework called the Strategic Account Management Group (“SAM”).
The SAM delivers a management structure and process that integrates all
Commerce One streams of activity flowing into the exchanges and enterprises
with the objective of maximizing their success. We believe that this structured
approach to account management and planning has improved our ability to deploy
the right resources against clearly defined and prioritized opportunities and
challenges.
Primary
Services Offerings
Commerce One
Hosting Services.
For buyers and suppliers who require a faster time to market or lower
infrastructure investment, we offer full hosting services both internally and
through our partners. These services allow Commerce One to further tailor its
solutions to the preferences and needs of particular customers.
Commerce One
Content Services.
Content Services provides the processes and the tools to automate and aggregate
catalog content from multiple suppliers to create a scalable resource across
the e-marketplace. Provided through our Content Refinery and Solutions tools,
this solution provides both manual and automated options for acquiring and
aggregating content from supplier catalogs. Advanced elements of this solution
provide aggregation, search, and rationalization capabilities.
Commerce One
Knowledge Services.
Knowledge Services leads the development and deployment of technical,
functional and end-user education for Commerce One customers and partners. In
addition, Knowledge Services provides learning solutions on Commerce One
products to internal audiences. This training provides the knowledge and tools
needed for the successful implementation and deployment of Commerce One
products.
Commerce One
Deployment Services.
Deployment Services provides a critical component of our solution
strategy by deploying the sourcing and procurement products with customers. The
services help customers implement, operate and manage their sourcing and
procurement processes.
GLOBAL
CUSTOMER SUPPORT
Our Technical Support group provides day-to-day
maintenance and support programs to help our customers and partners identify, manage
and resolve their issues. Using on-line access, call tracking and knowledge
management systems, Technical Support provides a comprehensive range of
services. We currently have Technical
Support offices located in the USA, France and Australia.
STRATEGIC
RELATIONSHIPS
We have entered into several strategic relationships
that are integral to establishing trading communities, implementing our
solutions and developing our products. The continued establishment of strategic
relationships is a fundamental piece of our strategy as we expand our products
and services and enter new markets. We have strategic development and marketing
relationships with Accenture, Compaq, Computer Sciences Corporation,
PricewaterhouseCoopers, SAP, SeeBeyond and Sun Microsystems, among others. We
co-develop and market joint solutions with SAP.
Our regional and horizontal e-marketplace partners
include British Telecom; Banamex; Cable & Wireless Optus; Deutsche
Telekom; NTT Communications; Sesami.Net; Citigroup and Swisscom AG. Our
partners for vertical or “mega” exchanges include Covisint, Exostar,
Trade-Ranger, Pantellos, Enporion, Quadrem, Forest Express, and eAEC.
RESEARCH
AND DEVELOPMENT
Commerce One continues to invest in researching and
developing new products and services.
Our product-development team employs object-oriented analysis and design
principles to guide the development of an object-oriented system of software
code. Our methodology allows us to exploit the capabilities of object-oriented
programming languages like Visual Basic, C++ and Java to build reusable
components and designs. This methodology also helps reduce the risks inherent
in developing complex systems, and helps us design our solutions to meet the
needs of our customers and trading partners.
Key Strategic areas in product development in 2001
focused on:
• Integration of developed technology
acquired from Exterprise in May 2001, including the launch of a strategic
sourcing application.
• Joint
development initiatives with SAP relating to the launch of a major release of
MarketSet, the co-developed solution for marketplaces targeted at delivering
direct goods and supply chain functionality.
• The launch of
a major release of Marketsite (now "Commerce One Collaborative
Platform"), our collaborative infrastructure for powering marketplaces and
our enterprise application suite.
• Enhancement of
our technology for more efficient scalability and effective deployment.
• Enhancement of
our supplier and catalog service offerings with introduction of a concept for
supplier self-service.
During 2002, our
plans include continued support for industry standards and the adoption of xCBLÔ
technology, our open library of
business documents. We also plan to
continue building upon our suite of applications in procurement and sourcing to
automate the entire source-to-pay process.
SALES
AND MARKETING
We market and sell our products and services to
organizations through direct and indirect sales forces. As of December 31,
2001, we had 395 employees in our sales and marketing departments. Our sales
offices are located in the United States, the United Kingdom, France,
Switzerland and Singapore. Because our products and services touch upon
multiple departments within an organization, our sales efforts are directed at
multiple decision makers, frequently including the chief financial officer,
chief information officer and vice president of procurement. We target our
sales efforts at Global-2000 enterprises and their suppliers and have initiated
vertical sales strategies targeted at the automotive, utilities, healthcare,
metals and mining, aerospace, and energy industries.
Our indirect sales force consists of support from SAP
to sell our joint solutions, as well as support from third-party integrators
(including Accenture and PricewaterhouseCoopers) and e-marketplace resellers
and distributors. We have a royalty-sharing relationship with SAP, and pay
referral fees to some third party integrators, for their sale of our products
and services.
Our marketing activities include seminar programs,
trade shows, Web-site programs, public relation events and direct mailings. We
are also engaged in an on-going effort to maintain relationships with key
industry analysts.
INTELLECTUAL
PROPERTY RIGHTS
Our future success depends in part on our proprietary
rights and technology. We rely on a combination of patent, copyright, trademark
and trade secret laws, employee and third-party nondisclosure agreements and
other methods to protect our proprietary rights. To date, we own two U.S.
patents. We also pursue patents
internationally. We have filed and intend to file additional patent
applications on our other proprietary technology.
We have been granted eight trademark registrations in
the United States to date. Our
registered and unregistered trademarks and service marks include: Commerce One, Powering the Business
Internet, Many Markets. One Source., Commerce One Source, Commerce One 5.0,
Commerce One Buy, Commerce One Buy ASP Edition, Commerce One Collaborative
Platform, Community Manager, Process Manager, Web Services Framework,
Transaction Manager, Business Intelligence Framework, XML Common Business
Library, Global Trading Web, GTW, Commerce One.net, xCBL MailBox, MarketSite, eLink,
Net Market Maker, XML Development Kit, xDK, XML Commerce Connector, xCC,
BuySite, xCBL, RoundTrip, Commerce Chain, and SupplyOrder. Enterprise Buyer and
MarketSet are trademarks of Commerce One and SAPMarkets, Inc. We also pursue trademark registrations
internationally.
It may be possible for unauthorized third parties to
copy certain portions of our products or reverse engineer or obtain and use
information that we regard as proprietary. Certain end-user license provisions
protecting against unauthorized use, copying, transfer and disclosure of the
licensed program may be unenforceable under the laws of some foreign countries.
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. Some of our
agreements with our customers and development partners contain residual clauses
regarding confidentiality and contain clauses that allow these parties to
obtain the source code for our products in certain circumstances. These provisions
may curtail our ability to limit access to our intellectual property rights in
the future.
We license and will continue to license certain
products integral to our products and services from third parties, including
products which are integrated with internally developed products and used with
our products to provide key content and services. We cannot be assured that
these third party product licenses will continue to be available to us on
commercially reasonable terms or that we will be able to successfully integrate
such third party products into our solutions. Such product licenses may expose
us to increased risks, including risks associated with the assimilation of new
products, claims of infringement resulting from the use of such third party products,
the diversion of resources from the development of our products, the inability
to generate revenues from new products sufficient to offset associated
acquisition costs, and the maintenance of uniform, appealing products. The
inability to obtain any of these licenses could result in delays in site
development or services until equivalent products can be identified, licensed
and integrated. Any such delays in site development or services could harm our
business, operating results and financial condition.
COMPETITION
The market for our products is intensely competitive,
subject to rapid change and significantly affected by new product introductions
and other market activities of industry participants. Our primary source of
direct competition comes from independent software vendors of procurement,
sourcing and related applications. We also face indirect competition from
potential customers’ internal development efforts and must overcome potential customers’ reluctance to
move away from existing systems and processes.
Our current and potential competitors include without
limitation Ariba, Freemarkets, i2, Oracle, PeopleSoft, SAP, VerticalNet and
WebMethods. In addition, there are a number of companies developing and
marketing business-to-
business
e-commerce solutions targeted at specific vertical markets. Some of these
competitors offer Web-based solutions that are designed to enable an enterprise
to buy more effectively from its suppliers. Other competitors are also
attempting to migrate their technologies to an Internet-enabled platform. Some
of these competitors and potential competitors include ERP vendors that are
expected to sell their procurement products along with their application
suites. These ERP vendors have a significant installed customer base and have
the opportunity to offer additional products to those customers as additional
components of their respective application suites.
We believe that the principal competitive factors for
business-to-business e-commerce solutions are breadth and scope of solution,
depth of supplier content, interoperability with existing information
technology systems, scalability, functionality, ease-of-use,
ease-of-implementation, total cost of ownership and installed base of
referenceable customers. We believe we compete favorably with our competitors
in these areas.
EMPLOYEES
As of December 31, 2001, we had 1,896 full-time
employees, 588 of whom were engaged in product development, 395 in sales and
marketing, 640 in professional services and 273 in general administration. Our
total full-time employee population has subsequently decreased to 1,672 as at
March 1, 2002, due to ongoing divestitures of certain operations within our
Global Services division. Our future
success depends, in part, on our continuing ability to attract, train and
retain highly qualified technical, sales and managerial personnel. We cannot
guarantee that we will be able to recruit and retain sufficient qualified
personnel. None of our employees are represented by a labor union and we are
not a party to any collective bargaining agreements. We have not experienced
any work stoppages and consider our relations with our employees to be good.
RISK FACTORS
We have a limited
operating history and a history of losses.
We incurred net losses of
$2,584.1 million, $344.9 million and $63.3 million for the years
ended December 31, 2001, 2000 and 1999, respectively. We also incurred a loss
of $168.3 million for the quarter ended December 31, 2001. As of December
31, 2001, we had an accumulated deficit of $3,031.6 million. We will need
to generate significant additional revenues to avoid losses in the future. If we do not decrease our losses in the future,
our business may suffer in a number of ways, including increased difficulties
in obtaining additional capital, selling our products and services (since
nearly all customers require future support) and funding our continued
operations.
If we continue to use
substantial cash, we may not be able to fund our continued operations or meet
our future capital requirements.
Because our business operations
uses more cash than it generates, the cash used each quarter substantially
reduces the cash available to fund our operations and future capital requirements. In addition, the current unfavorable market
for equity or debt financing makes it increasingly difficult to raise
additional funding. If we do not
achieve positive cash flow from our operations and future financing is not
available, or are not available on acceptable terms, we may not be able to fund
our continued operations.
Our revenues are
volatile and difficult to predict.
Our revenues and operating
results are difficult to forecast and may fluctuate substantially from quarter
to quarter due to a number of factors, including the following:
• a significant portion of our license revenues are
derived from royalty payments earned through our strategic alliance with SAP
and we may have limited visibility into such revenues in the fourth quarter of
2002, until royalty information is provided to us by SAP at the end of this
quarter;
• a significant portion of our revenues has in the
past been derived from a small number of relatively large license sales; these
sales are typically completed during the last few weeks of the quarter;
• our sales cycle is relatively long, frequently
six months or longer, and may result from delays associated with our customers’
budgeting and approval process that are difficult to predict;
• the size of licensing transactions can vary
significantly;
• customers may unexpectedly postpone or cancel
purchases of our products and services;
• the market may not accept our new products;
• our strategic relationships may change;
• our pricing policies and those of our competitors
may change; and
• we have a limited operating history from which to
predict our revenues and operating expenses.
If our revenues fall below our
expectations, our operating results are likely to be harmed.
The current downturn
in general economic conditions may decrease our revenues.
The current downturn and uncertainty in general
economic and market conditions have decreased and may continue to decrease
demand for our products and services. If the current economic downturn
continues or worsens, our business, financial condition and results of
operations could be seriously harmed.
In addition, the September 11, 2001 terrorist attacks in the United
States, the subsequent U.S. military operations in Afghanistan, and potential
related events may adversely affect our business. This uncertainty could further decrease demand for our products
and services and make it more difficult for us to raise debt or equity
financing in the future. These outcomes, and other unforeseen and negative
outcomes of these world events, would adversely affect our revenues, results of
operations and financial condition.
If we do not sell our
new Commerce One 5.0 solution and other solutions or products, our growth and
revenues will be limited.
Our business model is shifting
to focus increasingly on enterprise software solutions (i.e., sales to
companies for their own internal use) in addition to our historical focus on
e-marketplaces. We face significant
uncertainties that may affect our ability to sell Commerce One 5.0 and other
products, including the level of demand for this relatively new product
category, the demand for or acceptance of our new products in particular, the
ability of our products to satisfy our customers or compete favorably with
those of our competitors, and the fact that businesses that have made
substantial up-front payments to our competitors for enterprise solutions may
be reluctant to replace their current solution and adopt our solution. If we do not sell significant numbers of our
new enterprise solutions, particularly Commerce One 5.0, our revenues, and
hence our business, will suffer.
Delays in shipment of Commerce One 5.0 and
other solutions or products may result in delay or loss of revenue.
Delays in shipping new products
and enhancements to existing products may result in client dissatisfaction and
delay, or loss of product revenues. Because Commerce One 5.0 is a new solution,
we cannot be certain of our ability to ship it in a timely manner or to
continue shipping it. Delays may result
from a number of factors, including extended product-development cycles and
product defects. Products as complex as ours often contain unknown and
undetected errors or performance problems.
These defects are frequently found during the period immediately
following the introduction and initial shipment of new products or enhancements
to existing products. Although we attempt to resolve all errors that we believe
would be considered serious by our customers before shipment to them, our
products are not error-free. These errors or performance problems could result
in lost revenues or delays in customer acceptance and would be detrimental to
our business and reputation. If we are unable, for technological or other
reasons, to ship new products or enhancements of existing products in a timely
manner in response to changing market conditions or client requirements, or if
new products or new versions of existing products do not achieve market
acceptance, our business would be seriously harmed.
If our relationship
with SAP is unsuccessful, changes significantly or is terminated, our revenues
may suffer.
In 2000, we entered into a
strategic alliance agreement with SAP to jointly develop, market and sell
e-commerce software products. In
connection with this agreement, our product development efforts with respect to
certain of our products have grown increasingly interdependent with SAP. In addition, a substantial portion of our
license revenues in 2000 and 2001 were derived from this relationship. We may in the future continue to derive a
significant portion of our license revenues from this relationship.
Strategic relationships such as
the one we have with SAP can be difficult to implement and maintain, and may not
succeed for various reasons including:
• changes in strategic direction by one or
both companies;
• technical obstacles to combining existing
software products or developing new compatible products;
• changes or decreases in market or customer
demand for the relevant products;
• difficulties in coordinating sales and
marketing efforts;
• difficulties in structuring and maintaining
revenue sharing arrangements; and
• operating differences between the companies
and their respective employees;
The scope of our relationship
with SAP has changed over time and may change again in the future. For example, in early 2002, Commerce One and
SAP agreed that the two companies would continue to jointly develop, market and
sell the MarketSet suite of products, but that the Enterprise Buyer procurement
products would be phased out.
It is possible that our
relationship with SAP will change again.
In addition, the strategic alliance agreement may be terminated by
Commerce One or SAP with relatively little notice, and we therefore cannot
assure you the relationship will not terminate entirely in the future. A change in or termination of our
relationship with SAP could materially and adversely affect our product
development, marketing and sales efforts and, ultimately, our revenues.
Our restructuring
and other strategic initiatives may not achieve our desired results and could
result in business distractions that could harm our business.
We implemented restructuring plans throughout 2001.
The primary objectives of our restructuring plans have been to reduce our
operating expense run rate and to focus on new products. We also implemented certain strategic
initiatives designed to strengthen our operations. These plans include without limitation, reductions in our
workforce and facilities, improved alignment of our organization around our
core business objectives and realignment of our sales force, professional
services and general and administrative functions. The workforce reductions
could temporarily impact our remaining employees, including those directly
responsible for sales, which may affect our future revenues. In addition, the failure to retain and
effectively manage remaining employees could increase our costs, and hurt our
development and sales efforts.
Additionally, these changes might affect our ability to close revenue
transactions with our customers and prospects.
Failure to achieve the desired results of our strategic initiatives
could harm our business, operating results and financial condition.
Our industry is
highly competitive and has low barriers to entry, and we cannot assure you that
we will be able to compete effectively.
Because the market for
business-to-business e-commerce solutions is extremely competitive, we may
suffer a loss of business and a reduction in the prices we can charge for our
products and services. We expect competition to intensify as current
competitors expand their product offerings and new competitors enter the
market. There are relatively low barriers to entry in the e-commerce market,
and competition from other established and emerging companies may develop in
the future. In addition, our customers and partners may become competitors in
the future. Increased competition is likely to result in price reductions,
lower average sales prices, reduced margins, longer sales cycles and a decrease
or loss of our market share, any of which could harm our business, operating
results or financial condition. Our competitors include Ariba, Freemarkets, i2,
Oracle, PeopleSoft, SAP, VerticalNet and WebMethods, among others. Our Global
Services division competes against many consulting companies, including many of
our integration partners. Certain of these
competitors jointly offer business-to-business e-commerce solutions to
potential customers. These joint efforts could intensify the competitive
pressure in our market. Many of our competitors, and new potential competitors
may have a longer operating history, more experience developing Internet-based
software and end-to-end purchasing solutions, larger technical staffs, larger
customer bases, more established distribution channels and customer
relationships, greater brand recognition and greater financial, marketing and
other resources than we have. In addition, competitors may be able to develop
products and services that are superior to our products and services, that
achieve greater customer acceptance or that have significantly improved
functionality as compared to our existing and future products and services. The
business-to-business e-commerce solutions offered by competitors may be
perceived by buyers and suppliers as superior to ours. Some of the companies
with whom we have strategic relationships, such as SAP, compete with us in certain
areas and may continue to compete with us.
Our services revenue and
operating results will suffer if we are not able to maintain our prices and
utilization rates for our professional services.
The rates we are able to charge
for our professional services and the utilization, or chargeability, of our
professional services organization are a large component of our overall gross
margin, and therefore our operating results. Accordingly, if we are not able to
maintain the rates we charge for our professional services or an appropriate
utilization rate for our professionals, we will not be able to sustain our
gross margin and our operating results will suffer. The rates we are able to
charge for our professional services are affected by a number of factors,
including our customers’ perceptions of our ability to add value through our
professional services, competition, the introduction of new services or
products by us or our competitors, the pricing policies of our competitors and
general economic conditions. Our utilization rates are also affected by a
number of factors, including seasonal trends, primarily as a result of our
hiring cycle and holiday and summer vacations, our ability to transition employees
from completed projects to new engagements, our ability to forecast demand of
our professional services and thereby maintain an appropriate headcount, and
our ability to manage attrition.
Our gross margins may
decline.
In most cases, our license revenues have a higher
gross margin percent than our services revenues. Thus, to the extent services revenues increase as a percentage of
our total revenues, our overall gross margin will likely decline. As a result
of our acquisition of AppNet Inc., a provider of end-to-end Internet
professional services, our services revenues have increased as a percentage of
our total revenues in 2001. If we are not successful in increasing revenues
from license fees, or we are not successful in increasing the gross margin of
our services fees, our overall gross margins will suffer. Our expenses
related to the cost of licenses sold are relatively fixed in the near term, and
if our license revenues continue to decline any further, such a decline would
have a disproportionately adverse impact on our gross margins reported in the
near term.
The development of e-marketplaces or
exchanges entails certain risk for us.
Our strategy of establishing and
promoting the Global Trading Web and facilitating the development and operation
of e-marketplaces is unproven and may not be successful. The companies that are
using our software and services to establish e-marketplaces have encountered
and may continue to encounter delays in launching their e-marketplaces, in
fully deploying these e-marketplaces and in achieving supplier participation in
their e-marketplaces. Additionally, although our technology architecture is
designed to support the development of trading communities that can operate
with each other, these marketplaces may not in fact operate with each other or
may do so in an unsatisfactory manner.
Although our business model is
increasingly focused on enterprise solutions, our strategy of facilitating the
development and operation of large trading exchanges continues to entail particular
risks for us. These risks include:
• the diversion of a significant portion of our
management, technical and sales personnel to develop these e-marketplaces;
• delays in the commencement of significant
operations by these e-marketplaces;
• failure by industry participants to adopt and use
these e-marketplaces;
• difficulties in the hiring and retention of
skilled management for these e-marketplaces;
• and all of the other risks of creating such
e-marketplaces described elsewhere in this Risk Factors section.
If these e-marketplaces are not
successful, we may not generate all of the expected benefits from our
development efforts, including transaction and other network-services
fees. In addition, the establishment
and operation of these exchanges may raise issues under U.S. and foreign
antitrust laws. To the extent that U.S. or foreign antitrust regulators take
adverse action or establish rules or regulations with respect to any
exchange or business-to-business e-commerce exchanges in general, the establishment
and growth of such exchanges may be delayed. If our e-marketplaces are not
successful, our business, operating results and financial condition will
suffer.
We face credit risks because of the
concentration and nature of some of our customers.
Some
of our customers are small emerging growth companies with limited credit
operating histories that are operating at a loss and have limited access to
capital. With the significant downturn
in the economy and uncertainty relating to the prospects for near-term economic
growth, some of these customers may represent a credit risk. In addition, a small number of our customers
account for a significant amount of our accounts receivable. At December 31, 2001, two
customers accounted for 13% and 12% of our gross accounts receivable
balance. At December 31, 2000, no
customer accounted for more than 10% of our gross accounts receivable
balance. If our customers experience financial
difficulties, we may have difficulty
collecting
on our accounts receivable and our cash position would suffer.
We depend upon continuing our relationship
with third-party systems integrators who support our solutions.
Our success depends upon the
acceptance and successful integration by customers and their suppliers of our
products. Our current and potential customers, and their related suppliers,
often rely on third-party systems integrators such as Accenture, Computer
Sciences Corporation, PricewaterhouseCoopers and others to develop, deploy and
manage their business-to-business e-commerce platforms and solutions. We and
our customers will need to continue to rely on these systems integrators,
particularly in light of the recent down sizing of our Global Services
division, which competes with these systems integrators to some extent. If
large systems integrators stop supporting
our solution or committing resources to us, or if any of our customers
or suppliers are not able to successfully integrate our solution, or if we are
unable to adequately train our existing systems integration partners, our
business, operating results and financial condition could suffer.
In addition, we cannot control
the level and quality of service provided by our current and future third-party
integrators. While our agreements with
those integrators normally include provisions designed to ensure quality, those
provisions are often difficult to enforce and cannot guarantee acceptable
quality in all cases. If our customers
experience quality problems arising from installation of our software by these
third parties, we may experience negative customer reactions, adverse
publicity, or even legal claims. If
such problems are significant, our reputation, financial condition and
ultimately our business may be harmed.
Our strategy of reselling through our
strategic relationships may not be successful.
We have established strategic
relationships with companies that resell and distribute our products to our
customers. This strategy is unproven and, to date, some of our partners have
been unsuccessful in reselling our products.
In addition, because many of our resellers are operators of
e-marketplaces, their ability to resell our products will suffer if they are
unsuccessful in generating customers for their e-marketplaces or funding their
continued operations. If any of our current or future resellers are not able to
successfully resell our products, our business will suffer.
Our executive officers
and certain key personnel are critical to our business and these officers and
key personnel may not remain with us in the future.
Our future success depends upon
the continued service of our executive officers and other key personnel, and
none of our current executive officers is bound by an employment agreement for
any specific term. Any of our officers may leave our organization in the
future. In particular, the services of Mark Hoffman, our Chairman of the Board
and Chief Executive Officer and Dennis Jones, our Vice Chairman of the Board
and President, would be difficult to replace. If we lose the services of one or
more of our executive officers or key employees, or if one or more of them
decides to join a competitor or otherwise compete directly or indirectly with
us, our business, operating results and financial condition may be seriously
harmed.
We may not be able to retain and hire
qualified personnel.
Our
future performance depends on the continued service and our ability to hire our
management, engineering, sales and marketing personnel. Our ability to retain key employees may be
harder, given recent adverse changes in our business, particularly since the
market price of our common stock has fluctuated and declined substantially
since our initial public offering in July 1999. In addition, new hires may require extensive training before they
achieve desired levels of productivity.
We may fail to retain our key employees or to attract other highly
qualified personnel.
Managing growth and reductions in a
changing environment could strain our management and other resources.
Our
ability to successfully offer products and services and implement our business
plan in a rapidly evolving market requires an effective planning and management
process. Our workforce and expenditures
have grown rapidly and been reduced rapidly in the past two years. These changes place a strain on our
managerial resources and make planning more difficult. While we manage these rapid changes, we must
also compete effectively and manage our operations by maintaining and enhancing
our financial and accounting systems and controls, and integrating new and
existing personnel. We also expect that
we will be required to manage an increasing number of relationships with
various customers and third parties. If
we cannot effectively manage and plan in this rapidly changing environment, our
operations would suffer.
We may not be able to integrate
acquisitions into our business effectively.
As part of our business
strategy, we have made and expect to continue making acquisitions of businesses
that offer complementary products, services and technologies. We have limited experience with business
acquisitions, and may not acquire such businesses on favorable terms or be able
to integrate such organizations into our business successfully. For example, we
recently engaged in divestures of certain business units acquired in the AppNet
acquisition that were not
integrated into our overall
strategy of developing and implementing our core products. Our acquisitions are
subject to the risks commonly encountered in acquisitions of businesses,
including, among other things:
• the difficulty of integrating the operations and
personnel of the acquired business into our business;
• the difficulty of integrating service and product
offerings;
• the difficulty of integrating technology, back
office, accounting and financial systems;
• the potential disruption of our ongoing business;
• the distraction of management from our business;
the inability of management to maximize our financial and strategic position;
and
• the impairment of relationships with, and
difficulty of retaining, employees and customers.
Further, our acquisitions and
investments may have negative financial consequences. For example, we recently recognized a substantial impairment of
goodwill and other intangible assets related to the AppNet and CommerceBid
acquisitions and may recognize additional impairments in the future. Relevant risks include:
• the possibility that we pay more than the
acquired business is worth;
• potentially dilutive issuances of equity
securities;
• incurrence of contingent liabilities;
• increased net loss resulting from the purchase
method of accounting for acquisitions, under which we incur amortization expenses
related to certain intangible assets and deferred stock compensation; and
• one-time write-offs, such as those for in-process
research and development or impairment of intangibles and other long-lived
assets.
In addition, potential companies
acquired by us may not have audited financial statements, detailed financial
statements or any degree of internal controls. An audit subsequent to any
successful completion of an acquisition may reveal matters of significance,
including issues regarding revenues, expenses, liabilities, contingent or
otherwise, technology, products, services or intellectual property. We may not
be successful in overcoming these or any other significant risks and the
failure to do so could have a material adverse effect on our business,
financial condition and results of operations.
Because our business is
extensively international, we face numerous obstacles in other countries.
Our business relies heavily on
our international operations to manage our international sales. International business involves inherent
difficulties that may affect us, including:
• unexpected changes in regulatory requirements and
tariffs;
• the impact of recessions in economies outside the
United States; the global impact of armed or political conflicts; political
instability;
• seasonal reductions in business activity;
difficulties in staffing and managing foreign offices as a result of, among
other things, distance, language, costs and cultural differences; longer
payment cycles and greater difficulty in accounts receivable collection;
• price controls or other restrictions on foreign
currency; potentially harmful tax consequences, including withholding tax
issues; fluctuating exchange and tariff rates;
• difficulty in protecting intellectual property; difficulties
in obtaining export and import licenses;
• foreign antitrust regulation; and
• inadequate technical and other infrastructure.
We also have only limited
experience in marketing, selling, implementing and supporting our products and
services outside the United States.
These difficulties may adversely affect our business.
Our market may undergo
rapid technological change and this change may make our products and services
obsolete or cause us to incur substantial costs to adapt to these changes.
Our market is characterized by
rapidly changing technology, evolving industry standards and frequent new
product announcements. To be successful, we must adapt to the rapidly changing
market by continually improving the performance, features and reliability of
our products and services or else our products and services may become
obsolete. We could also incur substantial costs to modify our products,
services or infrastructure in order to adapt to these changes. Our business,
operating results and financial
condition could be harmed if we incur significant costs without adequate
results, or are unable to adapt rapidly to these changes.
Product liability
claims or other claims regarding the performance of our products may be harmful
to our reputation and business.
We may be subject to product
liability claims or other claims regarding the performance of our products,
even though our license agreements typically seek to limit our exposure to such
claims, because the contract provisions of our license agreements may not be
sufficient to preclude all potential claims. Additionally, our general
liability insurance may be inadequate to protect us from all liabilities that
we may face. We could be required to spend significant time and money
litigating these claims, or where necessary, to pay significant damages. Such claims could also result in lost
revenues, adverse publicity and negative customer reaction. As a result, any claim, whether successful
or not, could harm our reputation, operating results, financial condition and
ultimately our business.
We may have potential liability to clients
who are dissatisfied with our professional services.
We design, develop, implement
and manage e-commerce solutions that are often crucial to the operation of our
clients’ businesses. Defects in the solutions we develop could result in
delayed or lost revenues, adverse customer reaction and negative publicity or
require expensive corrections, any of which could have a material adverse
effect on our business, financial condition or results of operations. Clients
who are not satisfied with these services could bring claims against us for
substantial damages. The successful assertion of one or more large claims that
are uninsured, exceed insurance coverage or result in changes to insurance
policies, including premium increases, could have a material adverse effect on
our business, financial condition or results of operations.
If third parties claim
that we infringe upon their intellectual property rights, our ability to use
certain technologies and products could be limited and we may incur significant
costs to resolve these claims.
Our business depends upon
intellectual property, and litigation regarding intellectual property rights is
common in the Internet and software industries. Intellectual property ownership
issues may be complicated by the fact that our Global Services division
frequently develops intellectual property for its clients and, in order to
carry out projects, frequently receives confidential client information. If an intellectual property infringement
claim is filed against us, we may be prevented from using certain technologies
and may incur significant costs to resolve the claim. In addition, we generally indemnify customers against claims that
our products infringe upon the intellectual property rights of others. We could
incur substantial costs in defending ourselves and our customers against
infringement claims. In the event of a claim of infringement, we and our
customers may be required to obtain one or more licenses from third parties. We
or our customers may not be able to obtain necessary licenses from third
parties at a reasonable cost, or at all.
Because the protection of our proprietary
technology is limited, our proprietary technology could be used by others.
Our success depends, in part,
upon our proprietary technology and other intellectual property rights. To
date, we have relied primarily on a combination of copyright, patent, trade
secret, and trademark laws, and nondisclosure and other contractual
restrictions on copying and distribution to protect our proprietary technology.
We have two issued patents to date. We may not be able to protect our
intellectual property rights adequately in the United States or abroad.
Furthermore, litigation may be necessary to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of
the proprietary rights of others, or to defend against claims of infringement
or invalidity. Such litigation could result in substantial costs and diversion
of resources and could harm our business, operating results and financial
condition.
Additional government regulations may
increase our costs of doing business.
The laws governing Internet
transactions remain largely unsettled. The adoption or modification of laws or
regulations relating to the Internet could harm our business, operating results
and financial condition by increasing our costs and administrative burdens. It
may take years to determine whether and how existing laws such as those
governing antitrust, 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 both Europe and the United
States, as well as any other regulations
adopted by other countries where
we may do business. The growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws, both in
the United States and abroad, as well as new laws governing the taxation of
Internet commerce. Compliance with any newly adopted laws may prove expensive
and may harm our business, operating results and financial condition.
Security risks of e-commerce may deter
future use of our products and services.
A fundamental requirement to
conduct business-to-business e-commerce is the secure transmission of
confidential information over public networks. Failure to prevent security
breaches of e-marketplaces, or well-publicized security breaches affecting the
Internet in general, could significantly harm our business, operating results
and financial condition. Advances in computer capabilities, new discoveries in
the field of cryptography, or other developments may not be sufficient to
prevent a compromise or breach of the algorithms we use to protect content and
transactions on e-marketplaces or proprietary information in our databases. In
addition to our own security systems, our Global Services division relies on
encryption and authentication technology licenses from third parties.
Unauthorized access, computer viruses, or the accidental or intentional acts of
Internet users, current and former employees or others could jeopardize the
security of confidential information and create delays or interruptions in our
services or operations, including our Global Services e-business outsourcing
centers. We have in the past been impacted by global computer viruses, such as
NIMDA and the Code Red viruses, and have incurred costs to resolve such viruses.
In the future, we may be required to incur significant costs to protect
against security breaches or to alleviate problems caused by breaches. In
addition, such disruptions or breaches in security could result in liability
and in the loss of existing clients or the deterrence of potential clients or
transactions.
We may not have adequate back-up systems,
and a disaster could damage our operations.
We are in the process of
creating a disaster recovery plan and do not have fully redundant systems for
service at an alternate site. A disaster could severely harm our business
because our service could be interrupted for an indeterminate length of time.
Our operations depend upon our ability to maintain and protect our computer
systems in our principal facilities in Pleasanton and Cupertino, California,
which exist on or near known earthquake fault zones. We also depend upon third
parties to host most e-marketplaces and
some of these third parties are also located in the same earthquake fault
zones. Although these systems are designed to be fault tolerant, they are
vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures and similar events. In addition, our facilities in
California could be subject to electrical blackouts if California faces another
power shortage similar to that of 2001.
Although we do have a backup generator, which would maintain critical
operations, this generator could fail. Furthermore, blackouts could disrupt the
operations of our affected facilities.
Disruptions in our internal business operations, Commerce One.net, or
any of our hosted facilities could harm our business by resulting in delays,
disruption of our customers’ business, loss of data, and loss of customer
confidence.
Failure to expand
Internet use could limit our future growth.
Our business depends upon use of
the Internet as an effective medium of business-to-business commerce. The failure of the Internet to continue to
develop as a commercial or business medium for significant numbers of buyers
and suppliers to conduct business commerce
would harm our business, operating results and financial condition. In
addition, the growth of the market for our services depends upon improvements
being made to the entire Internet as well as to our individual customers’
networking infrastructures, to alleviate overloading and congestion. If these
improvements are not made, the ability of our customers to use our solution will be hindered, and our
business, operating results and financial condition may suffer.
We may lose money in other companies we
have invested in.
We have and may continue to
invest in numerous technology
companies, usually in connection with license contracts and arrangements. In
particular, we have invested in various privately held companies, many of which
are still in the start-up or development stage. These investments are
inherently risky because the markets for technologies or products they have
under development are typically in the early stages and may never develop. We
have incurred losses in the past and, in 2001, we recorded investment losses of
approximately $24.5 million related to investments in these companies. Due to
the recent economic and market downturn, particularly in the United States, and
difficulties that may be faced by some of these companies, our investment
portfolio could be further impaired.
Provisions of our charter documents and
Delaware law could make it more difficult for a third party to acquire us.
Our certificate of incorporation
and bylaws contain provisions which could make it harder for a third party to
acquire us without the consent of our Board of Directors. Among other things,
our Board of Directors has adopted a shareholder rights plan, or “poison pill,”
which would significantly dilute the ownership of a hostile acquirer. In
addition, Section 203 of the Delaware General Corporation Law limits
business combination transactions with 15% stockholders that have not been
approved by the Board of Directors. We also have entered into agreements with
some of our strategic investors that, to an extent, limit their ability to
attempt to acquire us without board approval. All of these provisions make it
more difficult for a third party to acquire us without negotiation. These
provisions may apply even if the offer may be considered beneficial by some
stockholders.
Changes in accounting standards and in the
way we charge for licenses could affect our future operating results.
In October 1997, the American
Institute of Certified Public Accountants issued its Statement of Position
97-2, “Software Revenue Recognition,” and later amended its position by its
Statement of Position 98-4 and Statement of Position 98-9. Based on our
interpretation of the AICPA’s position, we believe our current revenue
recognition policies and practices are consistent with Statement of Position
97-2, Statement of Position 98-4 and Statement of Position 98-9. However,
interpretations of these standards continue to be issued by the accounting
standard setters. Future interpretations could lead to unanticipated changes in
our current revenue recognition practices, which could materially adversely
affect our business, financial condition and operating results.
Accounting standard setters,
including the Securities and Exchange Commission and the Financial Accounting
Standards Board, are also currently reviewing the accounting standards related
to other areas. Any changes to these accounting standards, or the way these
standards are interpreted or applied, could require us to change the way we
account for any other aspects of our business in a manner that could adversely
affect our reported financial results.
ITEM 2.
ITEM 2. DESCRIPTION
OF PROPERTY
We lease office space in approximately 20 cities in
North America and 20 cities in a variety of international markets. Our
corporate headquarters is located in Pleasanton, California, where we currently
occupy approximately 160,000 square feet of office space. We currently sublease
an aggregate of approximately 79,000 square feet of office space to third
parties, and have an additional 291,000 square feet of office space available
for sublease. We believe our current
facilities will be adequate to address our space needs through at least the end
of 2002.
ITEM
3.
ITEM
3. LEGAL
PROCEEDINGS
On June 19, 2001, a putative securities class
action, captioned Cameron v. Commerce
One, Inc., et al., Civil Action No. 01-CV-5575, was filed
against the Company, several company officers and directors (the “Individual
Defendants”), and three underwriters in the Company’s initial public offering
(“IPO”), in the U.S. District Court for the Southern District of New York. The
complaint alleges violations of Section 11 of the Securities Act of 1933
(“Securities Act”) against all defendants, a violation of Section 15 of
the Securities Act and Section 20(a) of the Securities Exchange Act of
1934 (“Exchange Act”) against the Individual Defendants, and violations of
Section 12(a)(2) of the Securities Act and Section 10(b) of the
Exchange Act (and Rule 10b-5, promulgated thereunder) against the
underwriters. The complaint seeks unspecified damages on behalf of a purported
class of purchasers of common stock between July 1, 1999 and June 15,
2001.
On July 6, 2001, a similar complaint, captioned Market Street Securities v. Commerce One, Inc.,
Civil Action
No. 1-01-CV-6138, was filed against the Company,
the Individual Defendants, and several of the IPO underwriters in the Southern
District of New York. The complaint is substantially identical to the Cameron complaint, except in that it
alleges violations of Section 10(b) of the Exchange Act (and
Rule 10b-5, promulgated thereunder) against all defendants, including the
Company and the Individual Defendants and the class period ends
December 6, 2001.
Additional lawsuits were filed making substantially
identical allegations to those in the Cameron
and Market Street Securities
complaints. Various plaintiffs have
filed similar actions asserting virtually identical allegations against more
than 300 other companies. The lawsuits
against the Company have been coordinated for pretrial purposes with these
other related lawsuits, and have been assigned the collective caption In re
Initial Public Offering Securities Litigation, Civil Action No. 21-MC-92. The coordinated pretrial proceedings are
presently being overseen by Judge Shira A. Scheindlin. As of March 27, 2002, no briefing schedule
has been established regarding the lawsuits against the Company. The Company believes it has meritorious
defenses to these securities lawsuits and will defend itself vigorously.
From time to time the Company is involved in other
disputes and litigation in the normal course of business.
The Company does not believe that the outcome of any
of these disputes or litigation will have a material effect on the Company’s
financial condition or results of operations. However, an unfavorable outcome
of some or all of these matters could have a material effect on the Company’s
financial position or results of operations.
ITEM 4.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security
holders during the fourth quarter of 2001.
PART
II
ITEM 5.
ITEM 5. MARKET
FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the NASDAQ National
Market under the symbol “CMRC.” The price per share reflected in the table
below represents the range of low and high sale prices for our common stock as
reported on the NASDAQ National Market commencing January 1, 2000 for the
quarters indicated.
The information
above reflects a three-for-one stock split and a two-for-one stock split on
December 23, 1999 and April 19, 2000, respectively, effected in the
form of a stock dividend to each stockholder of record as of December 3,
1999 and March 13, 2000, respectively.
We have never paid cash dividends on our capital
stock. We currently intend to retain any earnings, if any, for use in our
business and do not anticipate paying any cash dividends in the foreseeable
future.
The closing price of Commerce One’s common stock as
reported on the NASDAQ National Market on March 1, 2002 was $1.84. As of March 1, 2002, we had 1,690
stockholders of record of our common stock and a substantially greater number
of beneficial owners of our common stock.
ITEM 6.
ITEM 6. SELECTED
FINANCIAL DATA
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (In thousands,
except per share data)
Certain previously
reported amounts for the year ended December 31, 2000 have been reclassified to
conform to the current presentation format.
BALANCE
SHEET: (In thousands)
ITEM 7.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Background
Commerce One is a
provider of business-to-business electronic commerce solutions that link buyers
and suppliers of goods and services into trading communities over the Internet
and Intranets. Recently our business
model has increasingly shifted focus toward enterprise software solutions
(i.e., sales of solutions to companies for their internal use) in addition to
our historical focus on trading communities.
We were founded as
Distrivision in 1994, changed our name to Commerce One in 1997, and
re-incorporated into Delaware in 1999.
On July 11, 2001, we completed our reorganization into a holding company
structure. As part of the
reorganization, the stockholders of the “old” Commerce One (now our
wholly-owned subsidiary Commerce One Operations, Inc.) became stockholders of
the “new” Commerce One. The financial
results reported in this Annual Report on Form 10-K include, as applicable, the
financial results of Commerce One after the reorganization and the historical
financial results of Commerce One Operations prior to the reorganization. The reorganization is described more fully
in Note 11 of Notes to Consolidated Financial Statements.
Source
of Revenues
We generate
revenues from multiple sources. License fees are generated from licensing our
software solutions to end-user organizations, third-party product distributors
and resellers. Services revenues are
generated from professional consulting, software maintenance, application
hosting, transaction and subscription fees, revenue-sharing arrangements with
partners, and other related services. Revenues from transactions, subscription
fees and revenue-sharing arrangements have not been a significant portion of
total services revenues to date.
We recently
downsized our Global Services division, which provides professional services to
third parties, through reductions in force and divestitures. Although in recent
quarters our services revenue has been a substantial portion of our overall
revenue, we expect a substantial decrease in service revenue over the next few
quarters as a result of the downsizing.
The portion of our
license and service revenues attributable to sales outside the United States
continues to be a substantial portion of our overall revenues, although it has
decreased in the past year. In 2001, approximately 34% of our license and
service revenues were derived from sales outside United States, compared to 44%
in 2000.
Critical Accounting Policies and Estimates
The preparation of
consolidated financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate estimates,
including those related to revenue recognition, software product returns,
warranty obligations, uncollectible accounts receivable and long-lived assets. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about amount and timing of revenues and expenses, the carrying values
of assets and the recorded amounts of liabilities that are not readily apparent
from other sources. Actual results may
differ from these estimates and such estimates may change if the underlying
conditions or assumptions change.
We believe that
these significant judgments affect the following critical accounting policies
used in the preparation of our consolidated financial statements.
Revenue
recognition
Our revenue
recognition policies are consistent with Statement of Position 97-2 “Software
Revenue Recognition,” as modified by Statement of Position 98-9.
Revenues from license agreements for our software
products are recognized upon delivery of the software if there is persuasive
evidence of an arrangement, collection is probable and the fee is fixed or
determinable. If an acceptance period is required, license revenues are
recognized upon the earlier of customer acceptance or the expiration of the
acceptance period. When our software is licensed to third parties through
indirect sales channels, generally license fees are recognized as revenue,
under the “sell-through method,” when the criteria described above have been
met and the reseller has sold the software to an end user customer. While
generally we do not license software under barter or concurrent arrangements,
whenever software has been licensed under such arrangements, we have recognized
revenue equal to the net monetary amounts to be received by us.
We reduce license
revenue to reflect estimated product returns. While as a matter of contract and
general practice, we do not accept the return of software products after the
expiration of any acceptance periods, unforeseen contractual disputes with
customers may require us to accept the return of a product. Should our actual
product returns differ from estimates, revisions to the product return
allowance would be required.
We charge
estimated product warranty costs to cost of licenses at the time revenue is
recognized. While we engage in
extensive product quality programs and processes prior to the release of
software, unforeseen product errors may exist in our products that may require
us to incur costs to correct or replace the affected products. Should our actual costs differ from our estimates,
revisions to the estimated warranty costs would be required.
Revenues from
professional services contracts are recognized on the percentage-of-completion
method, with costs and estimated profits recorded as work is performed. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in contract performance and estimated profitability,
including final contract settlements, may result in revisions to costs and
revenues, which are recognized in the period in which the revisions are
determined.
If a customer
transaction includes both software license and services elements, or the rights
to multiple software products, the total arrangement fee is allocated to each
of the elements using the residual method, under which revenue is allocated to
undelivered elements based on vendor-specific objective evidence of the fair
values of such undelivered elements and the residual amounts of revenue are
allocated to the delivered elements.
Revenue is
recognized using contract accounting for arrangements involving significant
customization or modifications of the software or where professional services
are considered necessary to the functionality of the software. Revenue from
these software and services arrangements is recognized using the
percentage-of-completion method.
Software
maintenance revenues and subscription fees are recognized ratably over the term
of the related contract, typically one year.
Network service
fees (transaction fees, hosting fees and revenue sharing), have not been
significant and are not expected to be material in the future. Revenues related to transaction fees and
revenue sharing are recognized as earned based on customer transactions. Revenues related to hosting fees are
recognized ratably over the term of the related contracts, typically one year.
Deferred revenue
consists of license fees for which revenue has been deferred and prepaid fees
for services, subscription fees, and maintenance and support agreements.
Allowance for uncollectible accounts
We maintain an
allowance for doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make such payments, increases in
the allowance may be required. During
2001, we increased our allowance for doubtful accounts due to an increase in
managements’ estimate of uncollectible amounts due from customers.
Long-lived assets
In accordance with
the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 121,
“Accounting for the impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of,” we periodically
assess the carrying value of our long-lived assets including property, plant
and equipment, goodwill, our Technology Agreement with Covisint and other
identified intangible assets for impairment.
An impairment assessment is performed whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Impairment indicators
include, but are not limited to, our net book value as compared to market
capitalization, significant negative industry and economic trends, a
significant decline in our stock price for a sustained period and significant
under performance relative to historical and projected future operating
results. In assessing the
recoverability of the current carrying value of goodwill and other intangible
assets, we must make assumptions regarding the estimated future cash flows and
other factors to determine the fair value of the respective assets. If these estimates or their related
assumptions change in the future, we may be required to record impairment
charges for these assets not previously recorded. In 2001, we recorded impairment charges related to certain prior
acquisitions and a technology agreement we entered into with Covisint.
Effective as of January
1, 2002, we adopted SFAS No. 142, “Goodwill
and Other Intangible Assets,” and are now required to analyze
goodwill for impairment issues during the first six months of fiscal 2002, and
then on a periodic basis thereafter.
Effective as of January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets.” The
Company will apply the provisions of SFAS No. 144 prospectively.
Stock Option Exchange Program
On March 5, 2001,
we announced a voluntary stock option exchange program for our employees. Under the program, employees were given the
opportunity to elect to cancel outstanding stock options held by them in
exchange for an equal number of replacement options to be granted at a future
date. The elections to cancel options were
effective on April 6, 2001. The exchange
resulted in the voluntary cancellation by 2,307 employees of options to
purchase 24,585,051 shares of common stock with exercise prices ranging from
$1.00 to $104.44 per share in exchange for the same number of replacement
options. The replacement options were
granted on October 8, 2001 at an exercise price of $2.81 per share of common
stock, and have the same terms and conditions as each optionee’s cancelled
options, including the historical vesting schedule and expiration date of the
cancelled options. Employees were
eligible to participate in the program; non-employee Board members, former
employees and consultants were ineligible to participate. We did not incur any compensation charge in
connection with the program.
Relationship with SAP
Commercial Relationship
On September 18,
2000, we entered into a strategic alliance agreement with SAP and SAPMarkets
(collectively, “SAP”) to jointly develop, market and sell the MarketSet suite
of applications and the Enterprise Buyer procurement applications. This agreement provided that either party
licensing the jointly developed products to its customers would owe a royalty
to the other party. The amount of the
royalty was generally based on a percentage of the total license fee paid by
the customer.
During 2001,
Commerce One and SAP amended these agreements to provide for different rights
to resell certain technology included in the jointly developed products and for
varying royalty rates and maintenance fees depending on the particular product,
category of customer and other factors.
Effective January
1, 2002, we amended our strategic alliance agreement with SAP to simplify its
royalty payment provisions and to provide that SAP will have an unlimited right
to resell the jointly developed products, in addition to a right to resell
certain other Commerce One technology on an OEM basis, during the first three
quarters of 2002 in return for an aggregate fee of approximately $20.7 million,
comprised primarily of license fees, as well as associated maintenance and
support. These fees will be credited
against SAP’s prior pre-payments to Commerce One, which have been recorded by
Commerce One as deferred revenue, and the license fees will be recognized
ratably over the three-quarter period. The amendment provides that during this
three-quarter period, Commerce One will pay SAP a royalty based upon a fixed
percentage of the total license fee for jointly developed products sold by
Commerce One. The amendment further provides that the royalty payments for such
rights shall be renegotiated by the parties prior to September 30, 2002 and the
agreement will default to the historical royalty structure in the event the
parties fail to agree on a new payment schedule by that date.
The amendment further provides that each of the
parties intend to phase out the jointly developed Enterprise Buyer procurement
products and replace such products over time with its own successor procurement
products. As a result, we
anticipate that
corresponding revenues received by Commerce One from SAP for the sale of such
products will decline in the future as the parties’ shift their focus to their
respective procurement products. We
further anticipate that revenues from the MarketSet product, primarily targeted
at the e-marketplace sector, may decline over time as we shift our focus to our
other enterprise applications.
Equity Relationship
At the time we entered into the strategic alliance
agreement with SAP in 2000, we sold 5,059,546 shares of our common stock to SAP
for an aggregate purchase price of approximately $250 million.
Subsequently, in
2001, we sold an additional 47,484,767 shares of our common stock to SAP for an
aggregate purchase price of approximately $225 million.
In connection with
our issuance of common stock to SAP, we entered into various agreements that
restrict SAP’s ability to acquire more than 23% of our outstanding common stock
or otherwise attempt to acquire control of Commerce One, restrict its transfer
the shares of common stock it purchased from us and, in very limited ways,
affect SAP’s ability to votes its shares of our common stock. We also granted SAP certain rights to
require us to register the resale of its shares of our common stock, certain
pro rata rights to acquire additional shares of our common stock and the right
to have a designee appointed to our board of directors or to send an observer
to our board of directors meetings. As
of March 30, 2002, SAP has not exercised its right to have such a designee
appointed, but has exercised its right to send an observer to our board of
directors meetings.
As of December 31,
2001, through its purchases from us and on the open market, SAP owned
approximately 20%
of our outstanding common stock.
Revenues Resulting from Royalty Arrangements with SAP
SAP has been
instrumental in assisting us with selling our jointly developed products,
MarketSet and Enterprise Buyer, to its customer base. We receive royalty payments from SAP whenever SAP sells these
joint products to their customers. In
these instances, SAP typically licenses the product to its customer and the
sale is documented by an agreement between SAP and the customer. Commerce One and SAP have taken this
approach for a variety of reasons, including administrative efficiency,
particularly where the customer had an existing license relationship with
SAP. When Commerce One and SAP take
this approach, we record the royalty payment received from SAP in connection with
the sale to the customer as revenues received from SAP.
SAP’s royalty
payments to us constituted a substantial portion of our revenues in 2001 and
2000. In 2001 and 2000, SAP reported
royalties to us of approximately $79.1
million and $44.6 million, respectively, of which license revenues were
approximately $68.3 million and $44.1 million, respectively. As described above under the terms of the
amended strategic alliance agreement with SAP, effective January 1, 2002, SAP
will have an unlimited right to resell the jointly developed products, in
addition to a right to resell certain other Commerce One technology on an OEM
basis, during the first three quarters of 2002, in return for aggregate fees of
approximately $20.7 million, comprised primarily of license fees, as well as
associated maintenance and support.
These fees will be credited against SAP's prior prepayments to Commerce
One, which have been recorded by Commerce One as deferred revenue, and the
license fees will be recognized ratably over the three-quarter period.
SAP has historically
made non-refundable royalty prepayments to us, which we have recorded as
deferred revenue as payments are received.
As SAP incurs the obligation to pay royalties to us, these royalties are
credited against this deferred revenue.
Prepayments received from SAP and included in deferred revenue totaled
approximately $33.8 million and $35.9 million as of December 31, 2001 and 2000,
respectively.
When we license
one of the jointly developed products to our customers, we pay a royalty to SAP
in connection with the sale. We record
the royalty payments due to SAP as a reduction of license or support revenue,
as appropriate. In 2001 and 2000, we
made royalty payments to SAP of approximately $16.9 million and $10.5 million,
respectively.
We anticipate that
SAP’s contribution to our license revenues will decline over time as Commerce
One and SAP substitute the Enterprise Buyer procurement products with the
parties’ respective successor procurement products and as we increase our focus
on developing, marketing and selling our enterprise applications.
To a lesser extent, we have also generated revenue
from our relationship with SAP by performing professional services as a
subcontractor to SAP, primarily on software implementation engagements where we
have jointly sold MarketSet or Enterprise Buyer to an SAP customer. SAP has
also completed professional services for us by acting as a
subcontractor, primarily
in relation to the jointly sold MarketSet or Enterprise Buyer products. We also expect these revenues and expenses
to decline over time.
RESULTS OF OPERATIONS
The following
table sets forth the results of operations for the Company expressed as a
percentage of total revenues for the years ended December 31, 2001, 2000
and 1999. The Company’s historical operating results are not necessarily
indicative of the results for any future period.
COMMERCE ONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
2001, 2000 and 1999.
Revenue
Total revenues for
2001 increased to approximately $408.6 million compared to
$401.8 million for 2000 and $33.6 million for 1999.
License revenues for
2001 decreased to approximately $130.9 million compared to
$223.3 million for 2000. License
revenues increased in 2000 when compared to license revenues of $24.6 million
in 1999. In 2001, the decrease in
license revenues primarily resulted from a significant slowdown in technology
orders spending coupled with a general economic downturn, a significantly
longer sales cycle and significantly fewer opportunities to license
e-marketplaces resulting in fewer and lower priced customer orders.
Service revenues
for 2001 increased to $277.7 million compared to $178.5 million in
2000 and $9.0 million in 1999. The percentage of our revenues attributable
to professional services in 2001 increased significantly compared to 2000. This resulted primarily from the acquisition
of AppNet, a professional services company, in September 2000, and due to a
lesser extent from an increase in both software maintenance and hosting
services revenues. Following our
acquisition of AppNet, we consolidated its operations into our Global Services
division. Global Services provides
services in connection
with the implementation of our software products. The increase in the percentage of our revenues attributable to
professional services resulted in a decline in our overall gross margin
percentage because services revenues carry a significantly lower gross margin
than license revenues. If this
percentage increases in the future, our gross margins will decline further.
We recently
downsized our Global Services division through reductions in force and
divestitures and, although in recent quarters our services revenues have been a
substantial portion of our overall revenues, we expect a substantial decrease
in service revenues over the next few quarters as a result of the downsizing.
Royalty payments
received from our strategic alliance with SAP constituted a substantial portion
of our total revenues during the years 2001 and 2000. Total revenues received from SAP were approximately $79.1 million
and $44.6 million for the years 2001 and 2000, respectively, of which license
revenues were approximately $68.3 million and $44.1 million for the years 2001
and 2000, respectively.
Cost of Revenues
Cost of revenues
consisting of cost of services and cost of licenses were approximately
$890.3 million, or 218% of total revenues, in 2001; $154.7 million,
or 39% of total revenues, in 2000; and $16.1 million, or 48% of total revenues,
in 1999.
Cost of license
fees was $662.3 million for 2001, compared to $14.9 million for 2000
and $0.5 million for 1999. In 2001, cost of license fees was primarily composed
of charges related to the impairment of the Technology Agreement with Covisint
of approximately $592.3 million and the amortization of the cost of the
Technology Agreement with Covisint of approximately $55.2 million. In 2000 cost of license fees included
charges related to the amortization of the cost of Technology Agreement with
Covisint of approximately $5.7 million.
We currently estimate that the amortization of the Technology Agreement
with Covisint will be approximately $5.8 million per quarter over the remaining
nine-year term of the agreement. The
Technology Agreement with Covisint is discussed more fully in Note 11 of Notes
to Consolidated Financial Statements.
Cost of services,
which primarily consists of consulting, software maintenance and training
costs, was $228.0 million for 2001, $139.7 million for 2000 and
$15.6 million for 1999. The increase in cost of services resulted primarily
from an increase in personnel-related expenses due to the hiring and training
of consulting, support and training personnel in the United States, Europe and
Asia Pacific and personnel related expenses resulting from increased headcount
due to the acquisition of AppNet in September 2000.
As of December 31,
2001 the overall number of employees working in our Global Services division
was 640, a significant decrease from 1,992 as of December 31, 2000. Consistent with the decrease in the size of
our professional services organization, we expect a decline in professional
services costs over the next few quarters.
Sales and Marketing Expenses
Sales and
marketing expenses consist primarily of employee salaries, benefits and
commissions, and the costs of seminars, promotional materials, trade shows and
other sales and marketing programs. Sales and marketing expenses were
approximately $183.4 million for 2001, $168.6 million for 2000 and
$31.5 million for 1999. The increase in 2001 was primarily attributable to
an overall increase in the average number of sales and marketing personnel
during the year as well as an increase in marketing related activity related to
product user conferences held during the year.
The number of employees engaged in sales and marketing was 395 at
December 31, 2001 compared to 642 at December 31, 2000 and 146 at
December 31, 1999. We expect that sales and marketing expenses will
decrease substantially over the next year primarily due to a decrease in the
number of employees in this area as part of our corporate restructuring.
Product-Development Expenses
Product-development expenses consist primarily of
personnel and related costs associated with our product-development efforts.
Product-development expenses were approximately $118.2 million for 2001,
$102.7 million for 2000 and $20.5 million for 1999. The increase in product-development expenses
was primarily attributable to an overall increase in the average number of
product-development personnel employed during the year and increased
consulting-related expenses to support development of our products.
The overall number
of employees engaged in product-development increased slightly to 588 at
December 31, 2001, compared to 561 at December 31, 2000 and 158 at
December 31, 1999. We do not expect product-development expenses to
increase substantially over the next year.
General and Administrative Expenses
General and
administrative expenses consist primarily of employee salaries and related
expenses for executive, administrative and finance personnel. General and
administrative expenses were approximately $116.6 million for 2001,
$43.2 million for 2000 and $5.1 million for 1999. The increase in
2001 was primarily attributable to an overall increase in the average number of
general and administrative personnel employed during the year, due to among
other things our acquisition of AppNet in September 2000, an increase in
various accounting and legal costs associated with operating our business and
an increase in bad debt expense charged during the year for certain
uncollectible customer accounts. The
number of employees engaged in general and administrative functions was 273 at
December 31, 2001, compared to 571 at December 31, 2000 and 90 at
December 31, 1999. We expect general and administrative expenses will
decrease over the next year due primarily to an expected decrease in the
average number of employees in this area as part of the corporate
restructuring.
Purchased In-Process Research and
Development
In May 2001, we
acquired Exterprise, a provider of platform solutions that enable the
development and deployment of e-commerce applications for corporations. The acquisition was structured as a common
stock for common stock merger and was accounted for as a purchase
transaction. The purchase consideration
was approximately $66.3 million, consisting of 7.2 million shares of common
stock with a fair value of approximately $60.7 million, assumption of option to
acquire approximately 258,000 shares of common stock with a fair value of $2.5
million and transaction costs of approximately $3.1 million.
We estimated that
approximately $4.5 million of the $66.3 million purchase consideration
represented purchased in-process research and development that had not yet
reached technological feasibility and had no alternative future use. Accordingly, this amount was charged to
operations in 2001.
The total purchase
cost for the Exterprise acquisition has been allocated to the acquired assets
and assumed liabilities based upon estimates of their fair value. The following table depicts the total
purchase cost and the allocation thereof (in thousands):
Goodwill arising
from the acquisition was amortized on a straight-line basis over five years
until December 31, 2001. Effective
January 1, 2002 goodwill will be assessed for impairment under SFAS No. 142,
“Goodwill and Other Intangible Assets.”
Purchased
in-process research consisted of: (1) a Sourcing application and (2) the next
generation of proprietary technology related to Agent-based Process Engine
platforms (“APEx”). The Sourcing
application will incorporate functionality such as an electronic request for a
quote, contract management, demand aggregation, supplier relationship
management and management reporting, whereas the next generation APEx platform
is being updated to increase processing speed and reliability.
The value of the
acquired in-process technology was computed using a discounted cash flow
analysis on the anticipated income stream of the related purchased in-process
research and development revenues. The
discounted cash flow analysis was based on management’s forecast of future
revenues, cost of revenues, and operating expenses related to the technologies
purchased from Exterprise. The
calculation of value was then adjusted to reflect only the value creation
efforts of Exterprise prior to the close of the acquisition. At the time of acquisition, the Marketplace
Sourcing and APEx platform products were estimated at being 60% and 25%
complete, respectively. The technology
was made available in our products during the first quarter of 2002 and both
are expected to have a technological life of approximately four years. The resultant value of in-process technology
was further reduced by the estimated value of core technology, which was
included in capitalized developed technology.
The discount rates
selected for estimating future discounted cash flows for the core and
in-process technology was 25% and 20%, respectively. In the selection of the appropriate discount rates, consideration
was given to our estimated weighted average return on working capital and our
estimated weighted average return on assets.
These discount rates are consistent with both our weighted average cost
of capital and the implied transaction discount rate. The discount rate reflects both the risk factors associated with
a company projecting high growth rates, improved profitability, and increased
rates of return associated with intangible assets.
Stock Compensation
Stock compensation
expenses result from the grant of stock options, grant of restricted common
stock and sales of stock to employees at exercise or sales prices below the
deemed fair market value of our common stock. Stock compensation expense was
approximately $98.3 million in 2001, $39.8 million in 2000 and $2.3 million in
1999. The increase in stock
compensation expense in 2001 was primarily attributable to the vesting of
certain options assumed in the acquisitions of AppNet and Exterprise, and the
grant of restricted common stock to employees.
The deferred stock compensation is being amortized over the three to
four year vesting period of the related options using a graded vesting
method. We anticipate incurring
deferred stock compensation expense relating to these options of approximately
$43 million in 2002. The vesting period
of the options range from three to four years.
The expense related to the restricted stock grant made to our employees
in May 2001 is being amortized on straight-line basis over a two-year vesting
period.
Restructuring Costs and Other
In February 2001,
management approved and began to implement a corporate restructuring plan (the
“Plan”) aimed at streamlining our cost structure to better position us for
growth and improved operating results.
Included in the Plan were costs related to severance pay, outplacement
services, benefits continuation, office closure costs and the termination of
certain office leases. The Plan
included staff reductions totaling approximately 270 employees, which were completed
within the first and second quarters of 2001.
We incurred restructuring charges of approximately $14.1 million in
connection with the Plan in the first quarter of 2001.
In June 2001,
management approved and began to implement a further corporate restructuring
plan (the “Second Plan”) aimed at optimizing and streamlining the Company so
that we could effectively focus on our core e-business strategy. Under the Second Plan, we estimated and charged
restructuring costs of approximately $62.0 million in the second quarter of
2001. The Second Plan included the
costs associated with the termination of approximately 600 employees including
severance pay, outplacement services and benefit continuation, estimated
customer claims resulting from the divestiture of certain operations within our
Global Services division, and also the termination of certain office leases,
the consolidation or closure of certain facilities and the write-down of the
carrying value of computers and equipment used by terminated employees.
In October 2001,
management approved and began to implement an additional restructuring program
(the “Third Plan”), which included further staff reductions totaling
approximately 1,200 employees, to be completed within the fourth quarter of
2001 and the first quarter of 2002. The
reductions have been achieved through a reduction in force, attrition
and the divestiture of a
number of professional service operations within our Global Services division
that are not directly related to our core product offering.
Under the Third
Plan, we charged
a further $54.8 million to restructuring expenses in relation to the costs
associated with terminating 1,200 employees, costs associated with the
termination of office leases, and the consolidation and closure of certain
facilities and subsidiaries. Also in
the fourth quarter of 2001, we determined that amounts previously charged in
the second quarter of 2001 of approximately $4.3 million that related to estimated
customer claims resulting from the divestiture of certain professional services
operations within our Global Services division were no longer required, and
these amounts were credited to other costs in the fourth quarter of 2001. The net charge to the restructure costs and
other was therefore approximately $50.5 in the fourth quarter of 2001.
As part of the
Third Plan, we completed the divestiture and liquidation of certain
professional services operations within our Global Services division. These service divisions were initially acquired
through the acquisition of AppNet Inc., in September 2000, and were either
divested through management buy-outs during the fourth quarter of 2001, or the
first quarter of 2002, or ceased business operations. The divestitures completed in connection with the Third Plan are
discussed in more detail below. We
recognized total revenues of approximately $98.7 million in 2001 from our
professional services operations within our Global Services division, which
were disposed of in the fourth quarter of 2001 and the first quarter of 2002
under the Third Plan.
The following table summarizes the activity
related to the restructuring liability for the year ended December 31, 2001,
(in thousands):
Lease cancellations and commitments
In the first, second and fourth quarters of 2001 we incurred total
restructuring charges of approximately $9.4 million, $33.6 million and $25.9
million, respectively, for facilities consolidated or closed in the United
States, Europe and Asia. These offices
were primarily responsible for the sale of our software products, professional
services or customer support. These
restructuring charges reflect the remaining contractual obligations under
facility leases net of anticipated sublease income from the date of facility
abandonment to the end of the lease term.
Certain facilities continued in use during the completion of the restructuring
for which we continued to record monthly rent expense until the facilities were
available for sub-lease or were abandoned.
Accrued restructuring costs related to lease cancellations and
commitments as at December 31, 2001 were approximately $50.9 million of which
non-current amounts accrued were approximately $37.0 million. We estimate that cash payments for lease
cancellations and commitments, net of any sublease income, will be
approximately $13.9 million in 2002 and approximately $37 million for
non-current lease obligation payments which are payable through to July 2009.
Termination payments to employees and related costs
In the first, second and fourth quarters of 2001, we incurred
restructuring charges of approximately $4.7 million, $15.9 million and $10.2
million, respectively, for the termination of approximately 2,070 employees to
cover costs such as separation pay, outplacement services and benefit
continuation. The separation payments
and termination benefits were accrued and charged to restructuring costs in the
period that both the benefit amounts were determined and such amounts
were
communicated to the affected employees.
The employee reductions came from all areas of the Company and, as of
December 31, 2001, all of the employees affected under the Plan, Second Plan
and Third Plan had been notified and the majority of these terminations had
been completed. We expect accrued
restructuring costs of approximately $4.5 million, as at December 31, 2001,
will be fully paid during 2002.
Write-off on disposal of assets and related costs
In the second and
fourth quarters of 2001, we incurred restructuring charges of approximately
$12.5 million and $17.9 million, respectively, related to the carrying values
of equipment and leasehold improvements abandoned in connection with the
restructuring and exit costs associated with the anticipated liabilities for
estimated customer claims resulting from the divestiture of certain operations
within our Global Services division.
Included within the assets disposed of and charged to restructuring
costs were personal computers and equipment used by employees terminated,
office equipment and leaseholds in connection with closure or consolidation of
facilities and subsidiaries in the United States, Asia and Europe. All identified assets had been taken out of
service and were held for disposal at the end of the quarter for which they
were identified for inclusion in the Second and Third Plans.
Included within
the second quarter of 2001 charge of $12.5 million were amounts associated with
the anticipated liabilities for estimated customer claims resulting from the
divestiture of certain operations within our Global Services division which
were no longer core to our business.
The amounts accrued were based on our estimation of the likely costs
associated with the exit of certain service contracts. In the fourth quarter of 2001, we
reevaluated this liability based on the actual customer claims received,
amounts paid and the successful execution of certain exit activities. We reduced the liability by $4.3 million
with a corresponding credit to the restructuring charge in the fourth quarter
of 2001. We expect accrued restructuring costs of approximately $0.4 million, as
at December 31, 2001, will be fully paid in 2002.
Costs associated with divestiture of certain
businesses
In October 2001,
we entered into and executed an asset sale to Beaconfire Consulting Inc., a
company composed of former Commerce One employees. In consideration for the assets sold, we received a note
receivable with a face value of approximately $0.4 million due on September 30,
2006, that bears an annual interest rate of 8% receivable on a quarterly
basis. Subject to certain criteria, we
also have the rights to a 4% and 4.5% annual share of future revenues of
Beaconfire Consulting for the next 2 and succeeding 3 years, respectively,
following the closing of this transaction.
Also in October
2001, we entered into and executed a stock transfer and asset sale to Edgar, Dunn
& Company, Inc., a company composed of former Commerce One employees. In connection with this agreement, we
received a 10% equity interest in Edgar, Dunn & Company, Inc., and two
notes receivable with face values totaling $1.3 million that are due by September
30, 2004. The notes bear an annual
interest rate of 7.5% receivable primarily on a quarterly basis. Subject to certain criteria, we also have
the rights to an annual revenue share of 6% of the revenues of Edgar, Dunn
& Company, Inc., for the four years following the closing of this
transaction.
On January 9,
2002, we entered into and executed an asset sale agreement with Connective
Commerce Company LLC., a Massachusetts limited liability company, composed of
former Commerce One employees. In connection
with this agreement, the Company received cash of approximately $2.4 million
and a note receivable with a face value of approximately $4.0 million due on
December 31, 2004, that bears a quarterly interest rate of 1.75%, receivable on
a quarterly basis commencing September 30, 2002.
On February 21,
2002, we entered into and executed a stock purchase agreement with Commerce One
E-Government Solutions, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Company, and eGov Holdings, Inc., a Delaware corporation
composed of former Company employees.
In consideration for the sale of 100% of the outstanding common stock of
Commerce One E-Government Solutions, Inc to eGov Holdings, Inc., we received cash
consideration of approximately $8.4 million.
As a result of the
business divestitures completed in the fourth quarter of 2001, we recorded a
loss on divestiture of $0.8 million that was charged to restructuring costs and
other in the fourth quarter of 2001. We
estimate that as a result of the business divestitures completed in the first
quarter of 2002 we will record a gain of approximately $2.3 million based on
the cash proceeds received from the sale of E-Government Solutions, Inc. We recognized total revenues of
approximately $98.7 million in 2001 from our professional services operations
within our Global Services division which were disposed of in the fourth
quarter of 2001 and the first quarter of 2002 under the Third Plan.
Amortization of Goodwill and Other Intangible Assets
Amortization of
goodwill and other intangible assets totaled approximately $332.8 million in
2001, $233.2 million in 2000 and $11.1 million in 1999. The amortization of goodwill and other
intangible assets resulted from the acquisitions of Veo Systems and CommerceBid
during 1999, Mergent and AppNet during 2000, and Exterprise in May 2001.
Impairment of Intangible Assets and Investments
We periodically
assess the impairment of long-lived assets including goodwill, the Technology
Agreement with Covisint and other identified intangible assets. An impairment assessment is performed
whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. During the
second quarter of 2001, we identified indicators of possible impairment of our
long-lived assets. The impairment
indicators included, but were not limited to, our net book value as compared to
market capitalization, significant negative industry and economic trends, a
significant decline in our stock price for a sustained period and significant
underperformance relative to historical or projected future operating results.
In accordance with
the provisions of SFAS No. 121, “Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of,” we performed, with the
assistance of independent valuation experts, impairment tests to determine
whether any impairment existed. We
determined that the sum of the expected undiscounted cash flows attributable to
certain of our intangible assets was less than the carrying value of those
intangible assets. Accordingly, we
calculated the estimated fair value of the assets by summing the present value
of the expected cash flows over the life of the assets. The impairment was then calculated by
deducting the present value of the expected cash flows from the carrying value
of the intangible assets. Based on the
results of these tests, we determined that the carrying values of goodwill and
other intangible assets related to AppNet, the Technology Agreement with
Covisint and CommerceBid were not recoverable and therefore had suffered
impairment.
This assessment
resulted in a write-down during 2001 of $1,098.9 million to record the amount
by which the carrying amounts of the goodwill and other intangible assets
related to AppNet and CommerceBid exceeded their respective fair values. Further, an impairment write-down of $592.3
million was recorded in relation to the Technology Agreement with Covisint and
this amount was charged to cost of license fees in 2001.
We again performed
an impairment analysis based on undiscounted cash flows to determine whether
any further impairment existed with regard to the carrying value of our
long-lived assets in the third and fourth quarters of 2001. We concluded that based on the results of
these tests the carrying values of goodwill and other identified intangible
assets were still recoverable and therefore had not suffered any further
impairment. We may record further
impairment charges in the future if impairment indicators exist and an
impairment assessment indicates that the carrying value of our intangible
assets and investments are no longer recoverable.
We have made
several strategic investments in privately held companies and two publicly
traded companies. We own less than a 5% interest in each of these companies and
do not have a significant influence over these companies. Investments in
publicly traded companies are carried at fair value, based on quoted market
prices, with unrealized gains and losses recorded in equity. Investments in
private companies are recorded at cost. These investments are periodically
evaluated for declines in value which are considered other than temporary.
During the year 2001 we recorded investment losses of approximately
$24.5 million of which $21.6 million related to the investment in
Covisint, $2.4 million related to investments in other privately held companies
and $0.5 million related to investments in publicly traded companies. As at December 31, 2001 we held investments
recorded at approximately $9.5 million related to our investment in Covisint
and other strategic investments.
Interest Income and Other, net
Interest
income and other, net, increased by approximately $0.6 million to $7.6 million
in 2001 and increased by approximately $3.7 million to $7.0 million in
2000. The increase in interest, net,
for 2001 was primarily attributable to interest income earned on higher average
cash and investment balances in 2001 compared to 2000, despite the general
decline in average interest rates during 2001.
The increase in 2000 was due mainly to an increase in interest income
due to higher average cash and investment balances during 2000 compared to
1999.
Provision for Income Taxes
The income tax
provision for 2001, 2000 and 1999 is the result of withholding and income taxes
generated in certain foreign jurisdictions.
Realization of our
net deferred tax assets is dependent upon the generation of sufficient taxable
income in future years in appropriate tax jurisdictions to obtain benefit from
the reversal of temporary differences and from net loss operating carry
forwards. Due to the uncertainty of the amount and timing of future taxable
income, we have provided a full valuation allowance against the net deferred
tax assets.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and
cash equivalents and short-term investments of approximately $288.2 million at
December 31, 2001 compared to approximately $341.4 million as at December 31,
2000. The amounts as of December 31,
2001, included approximately $14.3 million which collateralized certain of our
obligations related to operating lease agreements for office facilities,
potential workers compensation claims and guarantee of a personal home mortgage
of an executive officer.
We have
historically satisfied our cash requirements primarily through the issuances of
equity securities. In September 2000 and June 2001, we issued common stock to
SAP for aggregate proceeds of approximately $250 million and $225 million,
respectively.
On March 15, 2001
we entered into an alliance agreement with Microsoft in connection with the
marketing, promotion and optimization of Commerce One products using Microsoft
technology. To support the optimization, Microsoft made a two-year, interest
free loan of $19.0 million to us. This
loan was originally due on March 15, 2003 but would become immediately payable
in the event we breached certain provisions of the loan agreement or alliance
agreement.
On March 22, 2002,
Commerce One and Microsoft terminated the alliance agreement and revised the
terms of the loan agreement. Under the
revised terms, the $19.0 million loan is now due on April 1, 2003 and bears interest
at 7% per annum, payable quarterly. The
loan will become immediately due, however, if our cash, cash equivalents and
short-term investment balance falls below $125.0 million at any point during
the term of the revised loan. We have
also agreed to secure the loan with a $19.0 million cash collateral account.
Net cash used in
operating activities totaled approximately $267.0 million for 2001, as compared
to net cash used in operating activities of approximately $0.1 million for 2000
and net cash provided by operating activities of approximately
$3.8 million for 1999. Cash used
in operating activities for 2001 resulted primarily from the net loss in 2001
and a decrease in deferred revenues and accrued compensation and related expenses
which was partly offset by the amortization of goodwill and other intangible
assets, amortization of deferred stock compensation and non-cash charges due to
the impairment of the Technology Agreement with Covisint, the impairment of the
equity investment held in Covisint, and the goodwill associated with the
acquisitions of CommerceBid and AppNet.
Net cash used in
investing activities totaled approximately $10.9 million for 2001, as compared
to $137.1 million and $88.5 million in 2000 and 1999, respectively. Cash used in investing activities related
primarily to the purchase of short-term investments, the purchase and sale of
property and equipment and additional costs of the Technology Agreement with
Covisint. This was partially offset by
the net proceeds from the maturity of short-term investments, disposal of
property and equipment and investment gains.
Our net capital expenditures were approximately $39.5 million for 2001, $79.2 million for 2000 and
$11.5 million for 1999. Our capital expenditures have historically consisted of
purchases and capitalized
leases of computer hardware and software, office furniture and equipment and
leasehold improvements
Net cash provided
by financing activities totaled approximately $255.1 million for 2001, compared
to $300.9 million in 2000 and $121.4 million in 1999. The cash provided in 2001 resulted primarily from the issuance of
common stock to SAP, as well as proceeds from the issuance of common stock upon
the exercise of employee stock options and cash proceeds drawn from an interest
free loan in connection with the alliance agreement entered into with Microsoft
Corporation during the first quarter of 2001.
The cash from financing in 2000 resulted primarily from the issuance of
common stock to SAP and the issuance of common stock upon the exercise of
employee stock options. The cash provided in 1999 resulted primarily from an
initial public offering and concurrent private placement of our common stock
and the exercise of employee stock options.
The following
summarizes our contractual obligations as at December 31, 2001, and the effects
such obligations are expected to have on our liquidity and cash flows in
certain future periods after December 31, 2001 (in thousands):
Non-cancelable
operating leases obligations include $50.9 million which were accrued as
restructuring costs as of December 31, 2001 and are payable through to July
2009.
We have no
significant commitments or obligations other than these described in the
analysis above. We do not have any
relationships with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special purpose entities,
which would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any
obligations of unconsolidated entities nor have we any commitment or intent to
provide additional funding to any such entity.
We believe that
our available cash resources will be sufficient to finance our operating losses
and working capital expenditure requirements for at least the next twelve
months. Our future liquidity and capital requirements will depend upon numerous
factors. The rate of expansion of our operations in response to potential
acquisition opportunities, growth opportunities and competitive pressures will
affect our capital requirements as will funding of continued net losses and
substantial negative cash flows. If we
do not decrease or reserve our negative cash flows we will be forced to seek
additional financing in the future.
If we require
additional capital resources, we may seek to sell additional equity or debt
securities or secure a bank line of credit. We currently have no committed bank
credit facility available. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. We cannot assure you that any financing
arrangements will be available in amounts or on terms acceptable to us, if at
all.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the
Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 “Business
Combinations” effective for fiscal years beginning after December 15,
2001. Under SFAS No. 141, pooling of
interest is no longer an acceptable method of accounting for business
combinations. SFAS No. 141 also
develops further criteria for recognizing intangible assets separate from
goodwill in a purchase transaction. We
do not expect the adoption of this statement to have a material impact on our
consolidated financial statement.
In July 2001 the
FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” Under the guidance of SFAS No. 142, goodwill
and indefinite lived intangible assets will no longer be amortized but will be
periodically
assessed for any
indication of impairment. Separable
intangible assets that are not deemed to have an indefinite life will continue
to be amortized over their useful lives.
The amortization provisions of SFAS No. 142 apply to goodwill and
intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to
July 1, 2001, the provisions of SFAS No. 142 will be effective at January 1,
2002. During the transition period for
goodwill and intangible assets acquired on or before June 30, 2001 and those
acquired after that date, pre-existing goodwill and intangibles are to be
amortized during this transition period until adoption of SFAS No. 142, whereas
any new goodwill and indefinite lived intangible assets acquired on or after
July 1, 2001 will be reviewed for future impairment indicators. We expect that the adoption of SFAS No. 142
in 2002 will result in a reduced operating charge for the amortization of
goodwill and intangibles. We have not
yet determined whether we will incur additional impairment charges as a result
of the transition provisions of SFAS No. 142.
In August 2001,
the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-lived Assets.” SFAS No. 144
establishes a single accounting model, based on the framework established in
SFAS No. 121, for long-lived assets to be disposed of by sale. Consistent with SFAS No. 121, SFAS No. 144
continues to require a step approach for recognizing and measuring the
impairment of long-lived assets held for use.
The statement is effective for financial statements issued for fiscal
years beginning after December 15, 2001.
We have adopted the provisions of SFAS No. 144 effective from January 1,
2002 and these provisions will be applied prospectively. We do not expect the adoption of SFAS No.144
will have a material effect on our consolidated financial position or results of
operations.
ITEM 7A.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The following
discusses our exposure to market risk related to changes in interest rates,
foreign currency exchange rates and equity prices. This discussion contains
forward-looking statements that are subject to risks and uncertainties. Actual
results could vary materially as a result of a number of factors including
those set forth in “Risk Factors” beginning on page 9.
Interest
Rate Risk
As of December 31, 2001, we had cash, highly liquid investments and
short-term investments of approximately $288.2 million. These investments may
be subject to interest rate risk and will decrease in value if market interest
rates decrease. A hypothetical increase or decrease in market interest rates by
10 percent from the market interest rates at December 31, 2001 would cause
the fair market value of our cash and cash equivalents to change by an
immaterial amount. Declines in interest rates over time will, however, reduce
our interest income.
Foreign Currency Exchange Rate Risk
Substantially all
of our revenues recognized to date have been denominated in U.S. dollars, a
significant portion of which have been transacted with customers outside the
United States. To the extent that we engage in international sales denominated
in U.S. dollars, an increase in the value of the U.S. dollar relative to
foreign currencies could make our products more expensive in international
markets. We will continue to monitor our exposure to currency fluctuations and
although we have never used financial hedging techniques to date, we may use
them in the future to minimize the effect of these fluctuations. Nevertheless,
we cannot assure you that these fluctuations will not harm our business in the
future.
Equity Price Risk
From time to time,
we make investments in private companies, particularly private companies that
are strategic partners or customers of ours. As of December 31, 2001, our
investment in private companies had a carrying value of approximately $9.3
million. If these companies do not complete initial public offerings or are not
acquired by publicly traded companies, we may not be able to sell these
investments. In addition, even if we are able to sell these investments we
cannot assure that we will be able to sell them at a gain or even recoup our
investment. The recent general decline in the NASDAQ Stock Market and the
market prices of publicly traded technology companies, as well as any further
declines in the future, will adversely affect our ability to realize gains or a
return of our capital on many of these investments.
ITEM 8.
ITEM 8. FINANCIAL
STATEMENTS
Page
Report
of Ernst and Young LLP, Independent Auditors
Consolidated Financial
Statements;
Consolidated Balance Sheets
as of December 31, 2001 and 2000
Consolidated
Statements of Operations for the Years Ended December 31, 2001, 2000 and
Consolidated
Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity
(Deficit) for the Years Ended December 31, 2001, 2000 and 1999
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and
Notes to
Consolidated Financial Statements
REPORT OF ERNST AND YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Commerce One, Inc.
We have audited the accompanying consolidated balance sheets of
Commerce One, Inc. as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders’ equity (deficit) and cash
flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial
statement schedule listed in the Index at Item 14. These consolidated financial statements and financial statement
schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commerce One, Inc. at December 31, 2001 and 2000, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States. Also in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
/s/ Ernst & Young LLP
Walnut Creek, California
January 18, 2002,
Except for Notes 7, 8 and 10,
as to which the date is
March 29, 2002
COMMERCE ONE, INC.
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share, and per share data)
See accompanying
notes.
COMMERCE
ONE, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
See
accompanying notes.
COMMERCE ONE, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE
CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS’ EQUITY
(DEFICIT)
(In thousands, except share data)
See accompanying
notes.
COMMERCE ONE, INC.
CONSOLIDATED
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED
STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
(In
thousands, except share data)
See accompanying
notes.
COMMERCE ONE OPERATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
See accompanying
notes.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
The Company was
founded as Distrivision in 1994, and changed its name to Commerce One in 1997,
and re-incorporated into Delaware in 1999.
On July 11, 2001, the Company completed its reorganization into a
holding company structure. The Company
is a technology company that operates in one business segment that specializes
in business-to-business electronic commerce.
The Company’s software provides the technology and infrastructure that
enable companies to conduct purchasing transactions via the Internet or
Intranets and to manage their supplier relationships more effectively. The Company’s services operations support
those software solutions and help companies take advantage of the efficiencies
that on-line purchasing and supplier management can offer. Together, the Company’s software and
services allow companies to automate certain business functions that were
traditionally done through phone calls or paper.
BASIS OF PRESENTATION
The consolidated
financial statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Certain
previously reported amounts have been reclassified to conform to the current
presentation format.
The functional
currency of the Company's foreign subsidiaries is the local currency. The
Company translates all assets and liabilities to U.S. dollars at the current
exchange rates as of the applicable balance sheet date. Revenue and expenses
are translated at the prior month ending exchange rate. Gains and losses
resulting from the translation of the foreign subsidiaries' financial
statements are reported as a separate component of accumulated comprehensive
other income (loss) in stockholders' equity. Net gains and losses resulting
from foreign exchange transactions, which are recorded in the statement of
operations, were not significant during any of the periods presented.
USE OF ESTIMATES
The preparation of
the consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents
are highly liquid investments with insignificant interest rate risk and
maturities of 90 days or less at the date of purchase and are stated at amounts
that approximate fair value. Cash equivalents consist principally of
investments in short-term money market instruments and certificates of deposit.
SHORT TERM INVESTMENTS
Short term
investments consist principally of commercial paper, corporate notes and bonds,
government notes and bonds and certificates of deposit with maturities greater
than 90 days and are stated at amounts that approximate fair value.
The Company
accounts for its short term investments in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities.” Management determines the appropriate classification of debt
securities at the time of purchase and reevaluates such designation as of each
balance sheet date.
The Company has
classified its short term investments as available-for-sale. Available-for-sale
investments are recorded at fair value based on quoted market prices at
December 31, 2001 and 2000, where available with unrealized gains and losses reported
as other comprehensive income (loss) and included within accumulated other
comprehensive income (loss) in the statement of stockholders' equity. Realized
gains and losses, which have been immaterial to date, are
included in interest and
other income and are derived using the specific identification method for
determining the cost of investments sold. Dividend and interest income is
recognized when earned.
The following
summarizes the fair value of the Company's short-term investments at
December 31, 2001 (amounts in thousands):
Short-term
investments as of December 31, 2001, included approximately $8.0 million and
$6.3 million in certificates of deposit and government bonds, respectively,
which collateralized certain of the Company’s obligations related to operating
lease agreements for office facilities, potential workers compensation claims
and guarantees of a personal home mortgage for an executive officer.
The following
summarizes the fair value of the Company's short-term investments at
December 31, 2000 (amounts in thousands):
Short-term investments as of December 31, 2000
included approximately $9.6 million in certificates of deposit which
collateralized certain of the Company’s obligation related to operating lease
agreements for office facilities and potential workers compensation claims.
PROPERTY AND EQUIPMENT
Property and
equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the related assets as follows: computer equipment,
office equipment, furniture and fixtures-three
years; and leasehold improvements-the
shorter of the remaining term of the related leases or the estimated economic
useful lives of the improvements. Equipment under capital leases is amortized
to depreciation expense over the shorter of the expected useful life or the
related lease term.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other
intangible assets result from business combinations accounted for under the
purchase method. Goodwill is being
amortized on a straight-line basis over estimated useful lives of four to five
years. Intangible assets related to acquired technology, assembled workforce,
trademarks, patents and other intangible assets are being amortized on a
straight-line method over the estimated useful life of the related asset,
generally one to five years. The
Company periodically evaluates potential impairments of its long-lived assets,
including intangibles. When the Company
determines that the carrying value of long-lived assets may not be recoverable
based upon the existence of one or more
indicators of impairment,
the Company evaluates the expected undiscounted cash flows related to the
assets. If these cash flows are less
than the carrying value of the assets, the Company measures the impairment
using discounted cash flows.
SOFTWARE DEVELOPMENT COSTS
The Company
accounts for software development costs in accordance with FASB No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," under which certain software development costs
incurred subsequent to the establishment of technological feasibility are
capitalized and amortized over the estimated lives of the related products. Technological
feasibility is established upon completion of a working model. Development
costs incurred subsequent to the establishment of technological feasibility
have not been significant, and all software development costs have been charged
to product development expense in the accompanying consolidated statements of
operations.
CONCENTRATION OF CREDIT RISK AND CREDIT
EVALUATIONS
Financial
instruments, which potentially subject the Company to concentrations of risk,
include cash, cash equivalents, short term investments and accounts receivable.
The Company’s investment policies limit cash equivalents and short term
investments to short-term, low risk investments. Cash and cash equivalents, short-term investments are held with
two domestic financial institutions with high credit standing. For the year
ended December 31, 2001, transactions with SAP AG and SAP Markets (“SAP”)
accounted for approximately 19.4% of the Company's total revenues. No other
customer accounted for more than 10% of the Company’s total revenues during
2001. For the year ended December 31, 2000, no customer accounted for more
than 10% of the Company’s total revenues and for the year ended December 31,
1999, three customers accounted for 21%, 15% and 11% of the Company's revenues,
respectively. At December 31, 2001, two customers accounted for 13% and
12% of the Company’s gross accounts receivable balance. At December 31, 2000, no customer accounted
for more than 10% of the Company’s gross accounts receivable balance. The
Company performs ongoing credit evaluations of its customers and does not
typically require collateral or guarantees. Management maintains allowances for
doubtful accounts for estimated losses resulting from the inability of the
Company’s customers to make required payments.
If the financial condition of the Company’s customers were to
deteriorate, resulting in an impairment of their ability to make such payments,
increases in the allowance may be required.
REVENUE
RECOGNITION
The Company’s revenue recognition policies are
consistent with Statement of Position 97-2 "Software Revenue
Recognition," as modified by Statement of Position 98-9.
Revenues from license agreements for our software
products are recognized upon delivery of the software if there is persuasive
evidence of an arrangement, collection is probable and the fee is fixed or
determinable. If an acceptance period is required, license revenues are
recognized upon the earlier of customer acceptance or the expiration of the
acceptance period. When software is licensed to third parties through indirect
sales channels, generally license fees are recognized as revenue, ‘under the
sell-through method’, when the criteria described above have been met and the
reseller has sold the software to an end user customer. While generally the
Company does not license software under barter or concurrent arrangements,
whenever software has been licensed under such arrangements the Company has
recognized revenue equal to the net monetary amounts to be received by the
Company.
The Company reduces license revenue to reflect
estimated product returns. While as a
matter of contract and general practice, we do not accept the return of
software products after the expiration of any acceptance period, unforeseen
contractual disputes with customers may require us to accept the return of a
product. Should actual product returns
differ from estimates, revisions to the product return allowance would be
required.
The Company charges estimated product warranty costs
to cost of licenses at the time revenue is recognized. While the Company engages in extensive
product quality programs and processes prior to the release of software,
unforeseen product errors may exist in our products that may require us to
incur costs to correct or replace the affected products. Should actual costs differ from its
estimates, revisions to the estimated warranty costs would be required.
Revenues from
professional services contracts are recognized on the percentage-of-completion
method, with costs and estimated profits recorded as work is performed. Provisions for estimated losses on
uncompleted contracts are made
in the period in which
such losses are determined. Changes in contract performance and estimated
profitability, including final contract settlements, may result in revisions to
costs and revenues, which are recognized in the period in which the revisions
are determined.
If a customer transaction includes both software
license and services elements or the rights to multiple software products, the
total arrangement fee is allocated to each of the elements using the residual
method, under which revenue is allocated to undelivered elements based on
vendor specific objective evidence of the fair values of such undelivered
elements and the residual amounts of revenue are allocated to the delivered
elements.
Revenue is recognized using contract accounting for
arrangements involving significant customization or modifications of the
software or where professional services are considered necessary to the
functionality of the software. Revenue from these software and services
arrangements is recognized using the percentage of completion method.
Software maintenance revenues, subscription and
hosting fees are recognized ratably over the term of the related contract,
typically one year.
Network service fees (transaction fees and revenue
sharing), which have not been significant, are recognized as earned based on
customer transactions.
Deferred revenue consists of license fees for which
revenue has been deferred and prepaid fees for services, subscription fees, and
maintenance and support agreements.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options using
the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25 ("APB 25") and has adopted the disclosure-only
alternative of SFAS No. 123, "Accounting for Stock-Based
Compensation.
ADVERTISING
Advertising costs are expensed as incurred.
Advertising expense was approximately $5,981,000, $9,368,000 and $332,000 for
2001, 2000 and 1999, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes," which requires
the use of the liability method in accounting for income taxes. Under this
method, deferred tax assets and liabilities are measured using enacted tax
rates and laws that will be in effect when the differences are expected to
reverse.
NET LOSS PER SHARE
Basic and diluted net loss per share information for
all periods is presented under the requirements of SFAS No. 128,
"Earnings per Share." Basic earnings per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, less shares subject to repurchase and forfeiture, and excludes any
dilutive effects of options, warrants, and convertible securities. Potentially
dilutive securities have also been excluded from the computation of diluted net
loss per share as their inclusion would be antidilutive.
The calculation of
basic and diluted net loss per share is as follows (in thousands, expect per
share data):
If the Company had reported net income, the calculation of diluted
earnings per share would have included, approximately, an additional
23,273,000, 22,231,000, 7,568,000 common equivalent shares related to
outstanding stock options and warrants not included above (determined using the
treasury stock method) for the years ended December 31, 2001, 2000 and
1999, respectively.
EFFECTS OF NEW ACCOUNTING
STANDARDS
In July 2001, the
Financial Accounting Standards Board (“FASB”) issued SFAS No. 141 “Business
Combinations” effective for fiscal years beginning after December 15,
2001. Under SFAS No. 141, pooling of
interest is no longer an acceptable method of accounting for business
combinations. SFAS No. 141 also
develops further criteria for recognizing intangible assets separate from
goodwill in a purchase transaction. The
Company does not expect the adoption of this statement to have a material
impact on its consolidated financial statements.
In July 2001, the
FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” Under the guidance of SFAS No. 142, goodwill
and indefinite lived intangible assets will no longer be amortized but will be
periodically assessed for any indication of impairment. Separable intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives. The amortization
provisions of SFAS No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001 the provisions of
SFAS No. 142 will be effective at January 1, 2002. During the transition period for goodwill and intangible assets
acquired on or before June 30, 2001 and those acquired after that date,
pre-existing goodwill and intangibles were amortized until adoption of SFAS No.
142, whereas any new goodwill and indefinite lived intangible assets acquired
on or after July 1, 2001 were reviewed for future impairment indicators. The Company expects that the adoption of SFAS
No. 142 in 2002 will result in a reduced operating charge for the amortization
of goodwill and intangibles. The
Company has not yet determined whether it will incur additional impairment
charges as a result of the transition provisions of SFAS No. 142.
In August 2001,
the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-lived Assets.” SFAS No. 144
establishes a single accounting model, based on the framework established in
SFAS No. 121, for long-lived assets to be disposed of by sale. Consistent with SFAS No. 121, SFAS No. 144
continues to require a step approach for recognizing and measuring the
impairment of long-lived assets to be held and used. The statement is effective for financial statements issued for
fiscal years beginning after December 15, 2001. The Company has adopted the provisions of SFAS No. 144 effective
from January 1, 2002 and these provisions will be applied prospectively. The Company does not expect the adoption of
SFAS No.144 will have a material effect on our consolidated financial position
or results of operations.
2. ACCOUNTS
RECEIVABLE
Accounts
receivable consists of the following (in thousands):
Unbilled accounts
receivable result from professional services provided to customers that have
not yet been formally invoiced as of the reporting date. Such amounts are
generally invoiced within fifteen business days of the end of the period in
which services are provided.
3. PROPERTY AND
EQUIPMENT
Property
and equipment consists of the following (in thousands):
Depreciation
expense was approximately $45.4 million in 2001, $15.3 million in 2000 and $2.5
million in 1999.
4. GOODWILL AND OTHER
INTANGIBLE ASSETS
Goodwill
and other intangible assets, which result from acquisitions accounted for under
the purchase method (Note 15) and the Covisint Technology Agreement
entered into in December 2000, consists of the following (in thousands):
The Company
periodically assesses the impairment of long-lived assets including goodwill,
the Technology Agreement with Covisint and other identified intangible
assets. An impairment assessment is
performed whenever events or changes in circumstances indicate that the
carrying value may not be recoverable.
During the second quarter of 2001 the Company identified indicators of
possible impairment relating to its long-lived assets. The impairment indicators included, but were
not limited to, the Company’s net book value as compared to market
capitalization, significant negative industry and economic trends, a significant
decline in the Company’s stock price for a sustained period and significant
underperformance relative to historical or projected future operating results.
In accordance with
the provisions of SFAS No. 121, “Accounting for the Impairment of Long Lived
Assets and for Long Lived Assets to be Disposed of,” the Company performed,
with the assistance of independent valuation experts, impairment tests to
determine whether any impairment existed.
The Company determined that the sum of the expected undiscounted cash
flows attributable to certain of its intangible assets was less than the
carrying value of those intangible assets.
Accordingly, the Company calculated the estimated fair value of the
assets by summing the present value of the expected cash flows over the life of
the assets. The impairment was
calculated by deducting the present value of the expected cash flows from the
carrying value of the intangible assets.
Based on the results of these tests, the Company
determined that the
carrying values of goodwill and other intangible assets related to AppNet, the
Technology Agreement with Covisint and CommerceBid were not recoverable and
therefore had suffered impairment.
This assessment
resulted in write-downs during the second quarter of 2001 of $1,098.9 million
to record the amount by which the carrying amounts of the goodwill and other
intangible assets related to AppNet and CommerceBid exceeded their respective
fair values. Further, an impairment
write-down of $592.3 million was recorded in relation to the Technology
Agreement with Covisint and this amount was charged to cost of license fees.
The Company again
performed an impairment analysis based on undiscounted cash flows to determine
whether any further impairment existed with regard to the carrying value of its
long-lived assets in the third and fourth quarters of 2001. The Company concluded that based on the
results of these tests the carrying values of goodwill and other identified intangible
assets were still recoverable and therefore had not suffered any further
impairment.
5. INVESTMENTS AND
OTHER ASSETS
Investments and
other assets consists of the following (in thousands):
The Company has
made several strategic investments in privately held companies and two publicly
traded companies and has an investment in Covisint (Note 11). The Company owns
less than a 5% interest and does not have a significant influence over these
companies. Investments in publicly traded companies are carried at fair value,
based on quoted market prices, with unrealized gains and losses recorded in
equity. Investments in private companies are recorded at cost. These
investments are periodically evaluated for declines in value that are
considered other than temporary. During the year 2001, the Company recorded
investment losses of approximately $24.5 million of which
$21.6 million related to the investment in Covisint, $2.4 million related
to investments in other privately held companies and $0.5 million related
to investments in publicly traded companies.
During the year the note receivable from an officer was repaid in full
following the resignation of the officer from the Company.
6. OTHER ACCRUED
LIABILITIES
Other
accrued liabilities consists of the following (in thousands):
In February 2001, the Company approved and
began to implement a restructuring plan (the “Plan”) aimed at streamlining its
cost structure to better position the Company for growth and improved operating
results. The Plan
included costs related to separation pay,
outplacement services, benefits continuation, office closure costs and the
termination of certain office leases.
The Plan included staff reductions totaling approximately 270 employees
which were completed in the first and second quarters of 2001. The Company incurred restructuring charges
of approximately $14.1 million in connection with the Plan in the first quarter
of 2001.
In June 2001, the Company approved and began
to implement an additional restructuring plan (the “Second Plan”) optimizing
and streamlining management to focus on their core e-business strategy. The primary goal of the Second Plan was to
significantly reduce the Company’s annual operating expenses by realigning
resources around the Company’s core product initiatives. Under the Second Plan estimated
restructuring charges of approximately $62.0 million were incurred in the
second quarter of 2001. The Second Plan
included the costs associated with the termination of approximately 600
employees including separation pay, outplacement services and benefit
continuation, estimated customer claims resulting from the divestiture of
certain parts of the Company’s Global Services division, and also the
termination of certain office leases, the consolidation or closure of certain
facilities and the write-down of the carrying value of computers and equipment
used by terminated employees.
In October 2001,
the Company approved and began to implement a further restructuring program
(the “Third Plan”) and charged a further $54.8 million to restructuring costs
in relation to, the costs associated with terminating a further 1,200
employees, further costs associated with the termination of office leases and
the consolidation and closure of certain facilities and subsidiaries. Also in the fourth quarter of 2001, the
Company determined that amounts previously charged in the second quarter of
2001 of approximately $4.3 million that related to anticipated liabilities for
estimated customer claims resulting from the divestiture of certain parts of
the company’s Global Services division were no longer required and this amount
was credited to restructuring costs and other in the fourth quarter of
2001. The net charge to restructure
costs and other was approximately $50.5 in the fourth quarter of 2001.
The following table summarizes
the activity related to the current restructuring liability for the year ended
December 31, 2001, (in thousands):
Lease
cancellations and commitments
In the first, second and fourth quarters of 2001, the Company incurred
total restructuring charges of approximately $9.4 million, $33.6 million and
$25.9 million, respectively, for facilities consolidated or closed in the
United States, Europe and Asia. These
offices were primarily responsible for the sale of the Company’s software
products, professional services or customer support. These restructuring charges reflect the remaining current
contractual obligations under facility leases net of anticipated sublease
income from the date of facility
abandonment to the end of the lease term.
Certain facilities continued in use during the completion of the
restructuring for which the Company continued to record monthly rent expense on
these facilities as an operating expense until the facilities were available
for
sub-lease
or abandoned. Non-current lease
cancellation and commitment costs related to the restructuring plan and accrued
at December 31, 2001 were approximately $37.0 million. The Company estimates that cash payments for
lease cancellations and commitments, net of any sublease income, will be
approximately $13.9 million in 2002 and approximately $37 million for non-current
lease obligation payments which are payable through to July 2009.
Termination payments to employees and related costs
In the first, second and fourth quarters of 2001, the Company incurred
restructuring charges of approximately $4.7 million, $15.9 million and $10.2
million, respectively, for the termination of approximately 2,070 employees to
cover costs such as separation pay, outplacement services and benefit
continuation. The separation payments
and termination benefits were accrued and charged to restructuring costs in the
period that both the benefit amounts were determined and such amounts were
communicated to the affected employees.
The employee reductions came from all areas of the Company and as of
December 31, 2001 all of the employees affected under the Plan, Second Plan and
Third Plan had been notified and the majority of these terminations were
completed. The Company expects accrued
restructuring costs of approximately $4.5 million, as at December 31, 2001,
will be fully paid during 2002.
Write-off on
disposal of assets and related costs
In the second and
fourth quarters of 2001, the Company incurred restructuring charges of
approximately $12.5 million and $17.9 million, respectively, related to the
carrying values of property, equipment and leasehold improvements abandoned in
connection with the restructuring and exit costs associated with the
anticipated liabilities for estimated customer claims resulting from the
divestiture of certain parts of the Company’s Global Services division. Included within the assets disposed of and
charged to restructuring costs were personal computers and equipment used by
employees terminated, office equipment and leasehold improvements in connection
with the office closure or consolidation of facilities and subsidiaries in the
United States, Asia and Europe. All
identified assets had been taken out of service and were held for disposal at
the end of the quarter for which they were identified for inclusion in the
Second and the Third Plans.
Included within
the second quarter of 2001 charge of $12.5 million were amounts associated with
the anticipated liabilities for estimated customer claims resulting from the
divestiture of certain parts of the Company’s Global Services division which
were no longer core to the Company’s business strategy. The amounts accrued were based on the
Company’s estimation of the likely costs associated with the exit of certain
service contracts. In the fourth
quarter of 2001, the Company reevaluated this liability, based on the actual
customer claims received, amounts paid and the successful execution of certain
exit activities. The Company reduced the liability by $4.3 million with a
corresponding credit to the restructuring charge in the fourth quarter of
2001. The net charge to restructure
costs and other related to the write-off on disposal of assets and other
related costs after recording this credit was approximately $13.6 million. The Company expects accrued restructuring
costs of approximately $0.4 million, as at December 31, 2001, will be fully
paid in 2002.
Costs associated with
divestiture of certain businesses
In the
fourth quarter of 2001, the Company recorded restructuring charges of
approximately $0.8 million associated with the divestiture and closure of a
number of professional services operations no longer directly related to the
Company’s core product offering. These
business divestitures and liquidations related primarily to the professional
services organization purchased through the acquisition of AppNet in September
2000. The business divestitures which
were completed in the first quarter of 2002 are described more fully in
Corporate Restructuring and Business Divestitures within Management’s
Discussion and Analysis of operating results for the year.
7. NOTES PAYABLE
Notes payable as at
December 31, 2000 included notes payable in connection with assets acquired
under a leasing agreement and to former owners of a subsidiary acquired through
the acquisition of AppNet in September 2000.
During 2001 the Company repaid these notes and the related accrued
interest.
On March 15, 2001, the Company
entered into an alliance agreement with Microsoft in connection with the
marketing, promotion and optimization of Commerce One products using Microsoft
technology. To support the
optimization, Microsoft made a two-year, interest free loan of $19.0 million to
the Company. This loan was originally
due on March 15, 2003 but would become immediately payable in the event the
Company breached certain provisions of the loan agreement or alliance agreement.
On March 22, 2002,
the Company and Microsoft Corporation terminated the alliance agreement and
revised the terms of the loan agreement.
Under the revised terms, the $19.0 million loan is now due on April 1,
2003 and bears interest at 7% per annum, payable quarterly. The loan will become immediately due,
however, if the Company's cash, cash equivalents and short-term investment
balance falls below $125.0 million at any point during the term of the revised
loan. The Company has also agreed to
secure the loan with a $19.0 million cash collateral account.
8. BUSINESS
DIVESTITURE AND NOTES RECEIVABLE
During 2001, the
Company completed the divestiture and closure of certain professional services
divisions within its Global Services division as part of the restructuring plan
detailed in Note 6 of the Notes to the Consolidated Financial Statements. These service divisions were initially
acquired through the acquisition of AppNet in September 2000, and were either
divested through management buy-outs during the fourth quarter of 2001 or the
first quarter of 2002, or the Company ceased business operations. As part of the Third Plan, the Company
entered into three note receivable agreements, the terms of which are detailed
below.
In October 2001,
the Company entered into and executed an asset sale to Beaconfire Consulting
Inc., a company composed of former Commerce One employees. In consideration of the assets sold the
Company received a note receivable with a face value of approximately $0.4
million due on September 30, 2006, that bears an annual interest rate of 8%,
receivable on a quarterly basis.
Subject to certain criteria the Company also has the rights to a 4% and
4.5% annual share of future revenues of Beaconfire Consulting for the next 2
and succeeding 3 years, respectively, from the date of contract execution.
In October 2001,
the Company entered into and executed a stock transfer and asset sale with
Edgar, Dunn & Company, Inc., a company composed of former Commerce One
employees. In connection with this
agreement the Company received a 10% minority interest in Edgar, Dunn &
Company, Inc., and two notes receivable with face values totaling $1.3 million
that are due by September 30, 2004. The notes bear an annual interest rate of
7.5%, receivable primarily on a quarterly basis. Subject to certain criteria, the Company also has the rights to
an annual revenue share of 6% of the future revenues of Edgar, Dunn &
Company, Inc., for the four year period following the execution of this
agreement.
On January 9,
2002, the Company entered into and executed an asset sale agreement with
Connective Commerce Company LLC., a Massachusetts limited liability company
composed of former Commerce One employees.
In connection with this agreement, the Company received cash of
approximately $2.4 million and a note receivable with a face value of
approximately $4.0 million due on December 31, 2004, that bears a quarterly
interest rate of 1.75%, receivable on a quarterly basis commencing September
30, 2002.
On February 21,
2002, the Company entered into and executed a stock purchase agreement with
Commerce One E-Government Solutions, Inc., a Delaware corporation and a
wholly-owned subsidiary of the Company, and eGov Holdings, Inc., a Delaware
corporation composed of former Company employees. In consideration for the sale of 100% of the outstanding common
stock of Commerce One E-Government Solutions, Inc to eGov Holdings, Inc., the
Company received cash consideration of approximately $8.4 million.
As a result of the
business divestitures completed in the fourth quarter of 2001 the Company
recorded a loss on divestiture of $0.8 million that was charged to
restructuring costs and other. The
Company recognized total revenues of approximately $98.7 million in 2001 from
its professional services operations within the Company’s Global Services
division which were disposed of in the fourth quarter of 2001 and the first
quarter of 2002 under the Third Plan.
9. COMMITMENTS AND
CONTINGENCIES
LEASE OBLIGATIONS
The Company leases
its principal office facilities under non-cancelable operating leases. Rent
expense amounted to $22,856,000, $14,411,000 and $2,321,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
Capital lease
obligations represent the present value of future rental payments under capital
lease agreements for equipment. The original cost and accumulated depreciation
of equipment under capital leases was $1,392,000 as at December 31, 2000.
Future minimum
payments under operating leases, net of any contracted third-party sub-lease
rental income at December 31, 2001 are as follows (in thousands):
Non-cancelable operating
lease obligations include $50.9 million which were accrued as restructuring
costs as at December 31, 2001.
LEGAL PROCEEDINGS
On June 19,
2001, a putative securities class action, captioned Cameron v. Commerce One, Inc., et al., Civil Action
No. 01-CV-5575, was filed against the Company, several company officers
and directors (the “Individual Defendants”), and three underwriters in the
Company's initial public offering (“IPO”), in the U.S. District Court for the
Southern District of New York. The complaint alleges violations of
Section 11 of the Securities Act of 1933 (“Securities Act”) against all defendants,
a violation of Section 15 of the Securities Act and Section 20(a) of
the Securities Exchange Act of 1934 (“Exchange Act”) against the Individual
Defendants, and violations of Section 12(a)(2) of the Securities Act and
Section 10(b) of the Exchange Act (and Rule 10b-5, promulgated
thereunder) against the underwriters. The complaint seeks unspecified damages
on behalf of a purported class of purchasers of common stock between
July 1, 1999 and June 15, 2001.
On July 6,
2001, a similar complaint, captioned Market
Street Securities v. Commerce One, Inc., Civil Action
No. 1-01-CV-6138, was filed against the Company, the Individual
Defendants, and several of the IPO underwriters in the Southern District of New
York. The complaint is substantially identical to the Cameron complaint, except in that it
alleges violations of Section 10(b) of the Exchange Act (and
Rule 10b-5, promulgated thereunder) against all defendants, including the
Company and the Individual Defendants and the class period ends December 6,
2001.
Additional
lawsuits were filed making substantially identical allegations to those in the Cameron and Market Street Securities complaints. Various plaintiffs have filed similar
actions asserting virtually identical allegations against more than 300 other
companies. The lawsuits against the
Company have been coordinated for pretrial purposes with these other related
lawsuits, and have been assigned the collective caption In re Initial Public
Offering Securities Litigation, Civil Action No. 21-MC-92. The coordinated pretrial proceedings are
presently being overseen by Judge Shira A. Scheindlin. As of March 27, 2002, no briefing schedule
has been established regarding the lawsuits against the Company. The Company believes it has meritorious defenses
to these securities lawsuits and will defend itself vigorously.
From
time to time the Company is involved in other disputes and litigation in the
normal course of business.
The Company does
not believe that the outcome of any of these disputes or litigation will have a
material effect on the Company's financial condition or results of operations.
However, an unfavorable outcome of some or all of these matters could have a
material effect on the Company's financial position or results of operations.
10.
RELATED PARTY TRANSACTIONS
On September 18,
2000, the Company entered into a strategic alliance agreement with SAP and
SAPMarkets (collectively, "SAP") to jointly develop, market and sell
the MarketSet suite of applications and the Enterprise Buyer procurement
applications. This agreement provided
that either party licensing the jointly developed products to its customers
would owe a royalty to the other party.
The amount of the royalty was generally based on a percentage of the
total license fee paid by the customer.
During 2001,
Commerce One and SAP amended these agreements to provide for different rights
to resell certain technology included in the jointly developed products and for
varying royalty rates and maintenance fees depending on the particular product,
category of customer and other factors.
Effective January
1, 2002, the Company amended its strategic alliance agreement with SAP to
simplify its royalty payment provisions and to provide that SAP will have an
unlimited right to resell the jointly developed products, in addition to a
right to resell certain other Commerce One technology on an OEM basis, during
the first three quarters of 2002 in return for an aggregate fee of approximately
$20.7 million, comprised primarily of license fees, as well as associated
maintenance and support. These fees
will be credited against SAP's prior pre-payments to Commerce One, which have
been recorded by Commerce One as deferred revenue, and the license fees will be
recognized ratably over the three-quarter period. The amendment provides that
during this three-quarter period, Commerce One will pay SAP a royalty based
upon a fixed percentage of the total license fee for jointly developed products
sold by Commerce One. The amendment further provides that the royalty payments
for such rights shall be renegotiated by the parties prior to September 30,
2002 and the agreement will default to the historical royalty structure in the
event the parties fail to agree on a new payment schedule by that date.
The amendment
further provides that each of the parties intend to phase out the jointly
developed Enterprise Buyer procurement products and replace such products over
time with its own successor procurement products. As a result, the Company anticipates that corresponding revenues
received from SAP for the sale of such products will decline in the future as
the parties' shift their focus to their respective procurement products. The Company further anticipates that
revenues from the MarketSet product, primarily targeted at the e-marketplace
sector, may decline over time as the Company shifts its focus to its other
enterprise applications.
During the years
ended December 31, 2001 and 2000, the Company recognized substantial revenues
in connection with its strategic alliance with SAP. In 2001 and 2000, SAP
reported royalties to the Company of approximately $79.1 million and $44.6
million, respectively, of which license revenues were approximately $68.3
million and $44.1 million, respectively.
As described above under the terms of the amended strategic alliance
agreement with SAP, effective January 1, 2002, SAP will have an unlimited right
to resell jointly developed products during the first three quarters of 2002, in
return for aggregate royalty fees of approximately $20.7 million, comprised
primarily of license fees. The license fees will be recognized ratably over the
first three quarters of 2002. SAP has historically made non-refundable royalty
prepayments to the Company, which the Company has recorded as deferred revenue
as payments have been received. The
Company recognizes revenue when SAP reports the Company’s share of the license
and software maintenance fees from jointly developed products that have been licensed
by SAP. When the Company licenses one
of the jointly developed products to its customer the Company records the
royalty payments due to SAP as a reduction of license or support revenue, as
appropriate. The Company has also
generated revenues from its relationship with SAP by performing professional
services as a subcontractor to SAP, primarily on software implementation
engagements where the Company has jointly sold MarketSet or Enterprise Buyer to
a SAP customer.
During the years
ended December 31, 2001 and 2000, the Company recognized revenues with
Covisint, LLC (“Covisint”), a business-to-business e-marketplace for the
procurement of goods and services by automakers, their suppliers and
others. The Company holds a two percent
equity interest in Covisint and under the terms of a Technology Agreement with
Covisint (see Note 11), the Company indirectly licenses software and
professional services and software maintenance to Covisint in exchange for cash
compensation and a share of Covisint’s e-marketplace revenue over a ten-year
period.
During the years
ended December 31, 2001, 2000 and 1999, the Company recognized revenue from
transactions with NTT Corporation (“NTT”).
A member of the Company’s Board of Directors currently serves as an
executive of an NTT subsidiary.
Amounts included
in the consolidated financial statements in connection with the related party
transactions described above are as follows (in thousands):
11. STOCKHOLDERS' EQUITY
STRATEGIC RELATIONSHIP WITH SAP AG
On September 18, 2000, the Company entered into agreements with SAP AG
to jointly develop and deliver the next generation of e-business marketplace
solutions. In connection with those
agreements, the Company issued 5,059,546 shares of common stock to SAP AG for
an aggregate purchase price of $250 million.
On June 28,
2001, Commerce One and SAP AG entered into a further stock purchase agreement
and related agreements that resulted in Commerce One's issuance of 47,484,767
shares of its common stock to SAP AG at a purchase price of $4.75 per share,
for a total purchase price of approximately $225 million. The transaction
was completed on August 6, 2001.
SAP AG owned a total of approximately 57.3 million shares of Commerce
One common stock as of March 20, 2002.
SAP AG is generally prohibited from transferring its shares for three
years from the date of the closing, although it may sell up to 10% of its
shares during the first year after the closing, up to 30% during the second
year and up to 50% during the third year, subject to certain limitations on
open market sales and transfers to persons who after the transfer will hold in
excess of 10% of Commerce One's voting power. These restrictions on transfer
terminate on the earliest to occur of a change of control of Commerce One, the
termination of the strategic alliance agreement (other than as a result of a
material breach of the strategic alliance agreement by SAP AG) and the third
anniversary of the agreements. SAP AG is also prohibited from transferring the
shares to a competitor of Commerce One for six years from the closing date,
except in open market transactions. Commerce One has a right of first refusal
on any private sale of shares by SAP AG for 54 months following the closing.
SAP AG also agreed to certain standstill restrictions that, for three
years following the date of share purchase agreement, generally restrict SAP
AG's ability to acquire more than 23% of Commerce One's outstanding common
stock, seek control of Commerce One, or participate in groups with respect to
the holding or voting of Commerce One's stock. The standstill obligations
terminate prior to three years from the date of the share purchase agreement
upon the occurrence of certain events, such as a change of control of Commerce
One or the acquisition of more than 15% of Commerce One by certain named
competitors of SAP AG. These obligations are also suspended in the event of an
offer for such a change of control or acquisition, but will be reinstated if
the offer is withdrawn or terminated. SAP AG also remains subject to the
operation of
Commerce One's shareholder rights plan, or “poison pill”, which was amended to
permit SAP AG to beneficially own shares of Commerce One common stock up to the
23% standstill limit.
Until the earlier of three years from the closing or the end of the
standstill period, SAP AG has the right to participate to maintain its pro
rata ownership of Commerce One's outstanding shares in the event Commerce One
issues additional securities in a private transaction. In addition, SAP AG
is entitled to certain registration rights, after one year with respect to
shares purchased by SAP AG from Commerce One prior to the transaction, and
after two years with respect to the other shares it currently owns, shares acquired
in the transaction and any shares it acquires from Commerce One in the future.
SAP AG also received the right to nominate a director for election to
Commerce One's board of directors for as long as SAP AG owns ten percent
or more of Commerce One's common stock. If SAP AG is entitled to nominate
a director but no director is nominated or available to attend a meeting of
Commerce One's board of directors, SAP AG may send an observer to attend.
SAP AG also generally agreed to vote its shares in proportion with the other
stockholders of Commerce One only with respect to nominees to Commerce One's
board of directors and stockholder proposals to amend or rescind Commerce One's
rights plan or SAP AG's standstill agreement during the standstill period.
There are no other restrictions on SAP AG's voting rights.
STOCKHOLDERS’ RIGHTS AGREEMENT
In
March 2001, the Board of Directors of the Company approved a Stockholders'
Rights Plan. Under the plan, Commerce One issued a dividend of one right for
each share of common stock of the Company held by stockholders of record as of
the close of business on April 30, 2001. The rights trade with Commerce
One's common stock. Each right entitles stockholders to purchase a fractional
share of Commerce One's preferred stock for an exercise price of $70. However,
the rights are not immediately exercisable and will generally become
exercisable if a person or group acquires beneficial ownership of
15 percent or more of Commerce One's common stock or commences a tender or
exchange offer upon consummation of which such person or group would
beneficially own 15 percent or more of Commerce One's common stock. The
rights will become exercisable by holders, other than the unsolicited third
party acquiror, for shares of Commerce One or of the third party acquiror
having a value of twice the right's then-current exercise price. The rights are
redeemable by Commerce One and will expire on April 30, 2011. The Rights
Plan was not adopted in response to any effort to acquire control of the
Company.
REORGANIZATION INTO A HOLDING COMPANY STRUCTURE
During 2001, the
Company completed its reorganization into a holding company structure. As part of the reorganization, the
Stockholders of the “old” Commerce One (now the wholly-owned subsidiary
Commerce One Operations, Inc.) became stockholders of the “new” Commerce One.
In December 2000,
Commerce One Operations, Commerce One, Ford Motor Company (Ford), General
Motors Corporation (GM), DaimlerChrysler AG, Renault S.A. and Nissan Motor
Co., Ltd. entered into several agreements relating to the formation of
Covisint, LLC ("Covisint"), a business-to-business e-marketplace for
procurement of goods and services by automakers, their suppliers and others. In
connection with the formation of Covisint, under the terms of a Formation
Agreement, Commerce One Operations agreed to undergo a corporate restructuring
into a holding company. In addition, under the terms of a Technology Agreement,
Commerce One indirectly licenses software and professional services and support
and maintenance services to Covisint in exchange for cash compensation and a
share of Covisint's e-marketplace revenue over a ten-year period.
In July 2001,
Commerce One Operations completed the reorganization into a holding company
structure by means of a merger with and into a wholly-owned subsidiary of
Commerce One, pursuant to an Agreement and Plan of Merger, dated April 25,
2001 by and among Commerce One, New C1 Merger Corporation and Commerce One
Operations.
Upon completion of
the reorganization, Commerce One Operations became a wholly owned subsidiary of
Commerce One and changed its name to Commerce One Operations, Inc. Holders
of Commerce One Operations common stock (and the associated right under
Commerce One Operation's stockholder rights plan) received one share of
Commerce One common stock for each share of Commerce One Operations common
stock (and associated right) held by such stockholder prior to the
reorganization. Commerce One stock began trading on the NASDAQ Stock Market in
place of Commerce One Operations without interruption under the same trading
symbol "CMRC."
Commerce
One continued the business of Commerce One Operations as the parent holding
company of Commerce One Operations.
On the completion
of the reorganization, Commerce One received an aggregate two percent equity
interest in Covisint. Upon the execution of the Formation Agreement, Commerce
One issued 14.4 million shares of its common stock to Ford and
14.4 million shares of its common stock to GM. Half of each of Ford's and
GM's shares are held in escrow and will be released to Ford and GM in December
2002, unless certain conditions under the Formation Agreement are not
satisfied, in which case the shares will be released in June 2004. Prior
to the reorganization, the board of directors issued a dividend of one right
under Commerce One's stockholder rights plan per share of common stock held by
Ford and General Motors.
In addition,
pursuant to a Standstill and Stock Restriction Agreement entered into between
Commerce One, Commerce One Operations, Ford and GM, all of the shares of stock
issued to Ford and GM will generally be subject to transfer restrictions for
three years subject to certain exceptions. Ford and GM also agreed to certain
"standstill" restrictions that will generally limit their ability to
acquire individually more than 9.95%, or collectively more than 19.9%, of
Commerce One's outstanding common stock for three years, and individually 12.5%
and collectively 25% thereafter. In addition, for a period of three years, Ford
and GM generally agreed to vote their shares in accordance with the
recommendations of Commerce One's Board of Directors with respect to nominees
to the Board of Directors and increases in Commerce One authorized capital
stock and amendments to stock option plans and employee stock purchase plans
approved by Commerce One's Board of Directors. Under a Registration Rights
Agreement entered into between Commerce One, Ford and GM, Ford and GM are entitled
to registration rights generally beginning after three years, subject to
certain exceptions.
STOCK OPTIONS
In 1997, the
Company adopted the Commerce One 1997 Incentive Stock Option Plan, which plan
was amended and restated in 1999 (the "1997 Plan"). In 1999, the Company adopted the 1999
Nonstatutory Stock Option Plan (the "1999 Plan"). In connection with
various acquisitions, the Company assumed the VEO and CommerceBid stock option
plans in 1999 and the Mergent and AppNet stock option plans in 2000 and the
Exterprise stock option plan in 2001. The Company terminated all the assumed
plans upon the assumption and no further options will be granted under them. As
of December 31, 2001, the Company reserved an aggregate of 16,605,360
shares of common stock for issuance pursuant to all of its stock option plans
and one standalone nonstatutory stock option agreement. All employees,
including without limitation, independent contractors and directors are
eligible to receive awards under the 1997 Plan.
Options granted
under the 1997 Plan may be either incentive stock options or non-qualified
stock options. The exercise price of incentive stock options granted under the
1997 Plan may not be less than the fair market value of the shares of the
Company's common stock on the date of grant. However, the Administrator of the
plan shall determine the exercise price of non-qualified stock options. The
option holder may exercise unvested options and obtain shares of stock that are
subject to a repurchase option by the Company at the original exercise price in
the event of the employee's termination. As at December 31, 2001 the Company
had issued 668,000 shares of common stock subject to repurchase. The repurchase rights lapse over the period
that the underlying options vest.
Options granted
under the 1999 Plan may only be non-qualified stock options and the
Administrator shall determine the exercise price.
Under the
Company's 1999 Director Option Plan, 810,000 shares of common stock have been
reserved for grants of stock options under such plan. As of December 31,
2001, options to purchase 765,000 shares have been granted under the 1999
Director Option Plan.
A summary of the
Company's stock option activity under all plans is set forth below:
STOCK OPTION EXCHANGE PROGRAM
On March 5,
2001, the Company announced a voluntary stock option exchange program for its
employees. Under the program, employees were given the opportunity to elect to
cancel outstanding stock options held by them in exchange for an equal number
of replacement options to be granted at a future date. The elections to cancel
options were effective on April 6, 2001. The exchange resulted in the
voluntary cancellation by 2,307 employees of options to purchase 24,585,051
shares of common stock with exercise prices ranging from $1.00 to $104.44 in
exchange for the same number of replacement options. The replacement options
were granted on October 8, 2001 and have the same terms and conditions as each
optionee's cancelled options, including the vesting schedule and
expiration date of the cancelled options. The replacement options were granted
at an exercise price of $2.81 per share of common stock on October 8, 2001.
Employees were eligible to participate in the program; Board members, former
employees and consultants were ineligible to participate. The Company did not
incur any compensation charge in connection with the program.
RESTRICTED COMMON STOCK
In May 2001, the
Company issued 1,725,697 restricted shares of common stock to certain
employees. The shares of restricted
common stock vest ratably over a two year period and are subject to forfeiture
if an employee ceases employment prior to that time. In 2001, 658,846 shares of restricted common stock were forfeited
due to the cessation of employment by certain employees. As of December 31, 2001, 744,593 shares of
restricted common stock were outstanding and subject to forfeiture.
DEFERRED
STOCK-BASED COMPENSATION
The Company
recorded deferred stock compensation of approximately $16,279,000 in 2001, of
which $2,180,000 related to the business acquisition of Exterprise Inc. and
$14,099,000 related to the difference between the fair market value and fair
value of restricted stock issued to employees in May 2001. During the year the deferred stock
compensation recorded in relation to the restricted stock award was reduced by
$4,836,000, representing the deferred stock compensation recorded for
restricted stock subsequently forfeited by employees upon termination of their
employment. In the years ended December
31, 2000 and 1999 the Company recorded deferred stock compensation of
approximately $189,340,000 (of which $169,166,000 related to acquisitions) and
$4,586,000, respectively, representing the difference between the exercise
price and the deemed fair value of certain of the Company's stock options
granted to employees and options assumed in connection with the acquisitions of
Mergent Systems and AppNet. These amounts are being amortized by charges to
operations over the vesting periods of the individual stock options and
restricted common stock awards using a graded vesting method. Such amortization amounted to approximately
$98,302,000, $39,820,000 and $2,324,000 for the years ended December 31,
2001, 2000 and 1999, respectively.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK BASED
COMPENSATION
Proforma
information regarding results of operations and net loss per share is required
by SFAS No. 123, which also requires that the information be determined as if
the Company had accounted for its employee stock options under the fair value
method of SFAS No. 123. The fair value for these options was estimated at
the date of grant using a Black-Scholes option valuation model with the
following weighted-average assumptions: a risk-free interest rate of 5.0%, 6.2%
and 5.7% for the years ended December 31, 2001, 2000 and 1999,
respectively, no dividend yield, a weighted-average expected life of the
options of 3.0 years for the year ended December 31, 2001 and 2000
and 4.5 years for the year ended December 31, 1999, a volatility
factor of the expected market price of the Company's common stock of 146% and
135% for the years ended December 31, 2001 and 2000, respectively, and 170% for
the period July 1, 1999 to December 31, 1999 and 0% for the period
January 1, 1999 to June 30, 1999.
The option
valuation models were developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected life of the option. Because the Company's
employee stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
If compensation
cost for the Company's stock-based compensation plans had been determined using
the fair value at the grant dates for awards under those plans calculated using
the Black-Scholes option valuation model, the Company's net loss and basic and
diluted net loss per share would have been increased to the pro forma as
adjusted amounts indicated below (in thousands except per share data):
The weighted
average fair value of options granted, which is the value assigned to the
options under SFAS No. 123, was $4.08, $47.06 and $18.89 for options
granted during the years ended December 31, 2001, 2000 and 1999,
respectively.
The pro forma
impact of options on the net loss for the years ended December 31, 2001,
2000 and 1999 is not representative of the effects on pro forma net income
(loss) for future years, as future years will include the effects of additional
years of stock option grants.
1999 EMPLOYEE STOCK
PURCHASE PLAN
Under the 1999
Employee Stock Purchase Plan, (“ESPP Plan”), the Company issued 2,913,301
shares of common stock at a weighted average price of $4.00 per share,
1,985,340 shares of common stock at a weighted average price of $5.65 per share
and 653,076 shares of common stock at a weighted average price of $2.97 per
share, in 2001, 2000 and 1999, respectively.
As of December 31, 2001, 10,783,687 shares of common stock have
been reserved for issuance under the ESPP Plan. Eligible employees may purchase
common stock at 85% of the lesser of the fair market value of the Company's
common stock on the first day of the applicable two-year offering period or the
last day of the applicable six month purchase period.
WARRANTS
In
November 2000, the Company issued a warrant to a consulting firm, in
connection with services provided, to purchase 100,000 shares of common stock
at an exercise price of $110.92. The warrant is exercisable through
March 17, 2005. The fair value of the warrants was estimated using the
Black-Scholes option pricing model with the following assumptions: risk free
rate of 5.0%, weighted average contractual life of 4.3 years, 106%
volatility and no dividend yield, which resulted in a value of $1,524,000. This
amount was charged to operations during the year 2000.
12. INCOME TAXES
The
following is a geographical breakdown of consolidated income (loss) before
income taxes by income tax jurisdiction (in thousands):
There has been no
provision for U.S. federal or state income taxes for any period as the Company
has incurred operating losses in all periods. During the years ended
December 31, 2001, 2000 and 1999, the Company recorded foreign income tax
provisions of $9,001,000, $6,400,000 and $4,188,000, respectively, relating to
taxes withheld from customer payments and remitted to foreign taxing
jurisdictions on the Company's behalf and income taxes generated in certain
foreign jurisdictions.
A
reconciliation of income taxes at the statutory federal income tax rate to net
income taxes included in the accompanying statements of operations is as
follows:
Deferred income
taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Company's
deferred tax assets are as follows (in thousands):
Realization of
deferred tax assets is dependent upon future earnings, if any, the timing and
amount of which are uncertain. Accordingly, the net deferred tax assets have
been fully offset by a valuation allowance. The valuation allowance increased
by $154,008,000, $102,829,000 and $29,212,000 during 2001, 2000 and 1999
respectively.
The tax benefits
associated with employee stock options provide a deferred tax benefit of
$174 million as of December 31, 2001 which has been fully offset by a
valuation allowance and will be credited to additional paid-in capital when
realized.
As of
December 31, 2001, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $662,272,000, which expire in the
years 2009 through 2021.
The Company also
had net operating loss carryforwards for state income tax purposes of
approximately $240,584,000 expiring in the years 2002 through 2011.
In addition, the
Company had federal and state tax credit carryforwards of approximately
$6,251,000 and $4,947,000 respectively, which expire in the years 2012 through
2021.
Utilization of the
Company's net operating loss and tax credit carryforwards may be subject to a
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss and tax
credit carryforwards before utilization.
13.
PROFIT SHARING PLAN
The Company has a
profit sharing plan and trust under Section 401(k) of the Internal Revenue
Code that covers substantially all employees. Eligible employees may contribute
amounts to the plan via payroll withholdings, subject to certain limitations.
The Company did not match contributions by plan participants during the year
ended December 31, 2000. The Company began making matching contributions
in 2001.
14. REVENUE BY GEOGRAPHIC AREA
Revenue
was derived from customers in the following geographic areas (in thousands):
15. BUSINESS COMBINATIONS
EXTERPRISE, INC.
Effective May 25,
2001, the Company acquired Exterprise, Inc. (“Exterprise”), a provider of
platform solutions that enable the development and deployment of e-commerce
applications. The acquisition was
structured as a common stock for common stock merger and has been accounted for
as a purchase transaction. The purchase
consideration was approximately $66.3 million consisting of 7.2 million shares
of common stock with a fair value of approximately $60.7 million, assumption of
option to acquire approximately 258,000 shares of common stock with a fair
value of $2.5 million and transaction costs of approximately $3.1 million.
The Company
estimated that approximately $4.5 million of the $66.3 million purchase
consideration represented purchased in-process research and development that
had not yet reached technological feasibility and had no alternative future
use. Accordingly, this amount was
charged to operations during the year.
The total purchase
cost for the Exterprise acquisition has been allocated to the acquired assets
and assumed liabilities based upon estimates of their fair value. The following table depicts the total
purchase cost and the allocation thereof (in thousands):
Goodwill arising
from the acquisition was amortized on a straight-line basis over five years
until December 31, 2001. Other
intangible assets are amortized over their estimated useful lives ranging from
one to five years. Effective January 1,
2002 goodwill and indefinite lived intangible assets will be assessed for
impairment under SFAS No. 142, “Goodwill and other Intangible Assets.”
APPNET, INC.
Effective
September 13, 2000, the Company acquired publicly traded AppNet, Inc.
("AppNet"), a provider of end-to-end Internet professional services.
The acquisition was accounted for as a purchase transaction. The financial
statements include operating results of AppNet from the date of the
acquisition. The purchase consideration was approximately $1,653.3 million
consisting of 27,887,280 shares of common stock with a fair value of
approximately $1.266 billion and assumption of option to acquire
approximately 7.0 million options of common stock with a fair value of
approximately $363.1 million, and transaction costs of approximately
$24.0 million.
The purchase costs was allocated to the acquired
assets and assumed liabilities based on the estimated deemed fair
values as follows
(in thousands):
Goodwill arising
from the acquisition was amortized on a straight-line basis over three years
until December 31, 2001. Other
intangible assets are amortized over their estimated useful lives ranging from
one to three years. Effective January
1, 2002 goodwill and indefinite lived intangible assets will be assessed for
impairment under SFAS No. 142, “Goodwill and other Intangible Assets.”
During 2001 the Company
issued an additional 857,792 shares of its common stock to certain former
stockholders and employees of AppNet.
The fair value of these shares was approximately $11.5 million, which
amount was charged against related liabilities assumed by the Company in
connection with the acquisition.
MERGENT SYSTEMS, INC.
Effective
January 7, 2000, the Company acquired Mergent Systems, Inc.
("Mergent"), a company specializing in enabling infomediaries and
Global 3000 companies to create, operate, and manage product information
systems and aggregated multivendor catalogs for e-commerce, in a transaction
accounted for as a purchase. The consolidated financial statements include
operating results of Mergent from the date of acquisition. The purchase
consideration was approximately $148.4 million consisting of 1,742,190
shares of common stock with a fair value of $122.6 million, assumption of
options to acquire 219,010 options with a fair value of $15.3 million,
$238,000 of assumed liabilities, transaction costs of $250,000, and
approximately $10.0 million in cash to the Mergent stockholders in this
transaction.
The purchase cost was
allocated to the acquired assets and assumed liabilities based on the estimated
deemed fair values as follows (in thousands):
Goodwill arising
from the acquisition was amortized on a straight-line basis over five years
until December 31, 2001. Other
intangible assets are amortized over their estimated useful lives ranging from
one to five years. Effective
January 1, 2002
goodwill and indefinite lived intangible assets will be assessed for impairment
under SFAS No. 142, “Goodwill and other Intangible Assets.”
The value of the
acquired in-process technology was computed using a discounted cash flow
analysis on the anticipated income stream of the related product revenues. The
discounted cash flow analysis was based on management's forecast of future
revenues, cost of revenues, and operating expenses related to the products and
technologies purchased from Mergent. The calculation of value was then adjusted
to reflect only the value creation efforts of Mergent prior to the close of the
acquisition.
COMMERCEBID.COM, INC.
Effective
November 12, 1999, the Company acquired CommerceBid.com, Inc.
("CommerceBid"), a provider of business-to-business auction and
reverse auction service solutions, in a transaction accounted for as a
purchase. The consolidated financial statements include the operating results
of CommerceBid from the date of acquisition. The purchase consideration was
approximately $227.5 million consisting of 4,578,312 shares of common
stock with a fair value of $217.1 million, assumptions to acquire 59,004
options with a fair value of $2.8 million, $4.5 million in cash plus
an additional $5.0 million in contingent consideration.
The
purchase cost was allocated to the acquired assets and assumed liabilities
based on deemed fair values as follows (in thousands):
Goodwill arising
from the acquisition was amortized on a straight-line basis over four years
until December 31, 2001. Other
intangible assets are amortized over their estimated useful lives ranging from
one to four years. Effective January 1,
2002 goodwill and indefinite lived intangible assets will be assessed for
impairment under SFAS No. 142, “Goodwill and other Intangible Assets.”
The value of the
acquired in-process technology was computed using a discounted cash flow
analysis on the anticipated income stream of the related product revenues. The
discounted cash flow analysis was based on management's forecast of future
revenues, cost of revenues, and operating expenses related to the products and
technologies purchased from CommerceBid. The calculation of value was then
adjusted to reflect only the value creation efforts of CommerceBid prior to the
close of the acquisition.
VEO SYSTEMS, INC.
Effective January 15,
1999, the Company acquired VEO Systems, Inc. ("VEO"), a company
specializing in the creation of XML technology applications, in a transaction
accounted for as a purchase. The consolidated financial statements include the
operating results of VEO from the date of acquisition. The purchase
consideration was approximately $23.2 million consisting of 11,794,130
shares of common stock with a fair value of $13.3 million, 1,200,249
shares of Series D prime preferred stock (having the same rights as Series D
with an aggregate liquidation preference of $2,000,000) with a fair value of
$2.8 million, 4,954,626 stock options with a fair value of
$5.1 million, $258,000 of assumed liabilities, $400,000 in cash and
$400,000 of acquisition costs. In addition, the Company advanced $950,000 in
cash to VEO under a note receivable during 1998. An additional consideration of
$400,000 in cash was paid to certain employees who remained employed through
January 2000.
The purchase cost
was allocated to the acquired assets and assumed liabilities based on deemed
fair
values as follows (in thousands):
Goodwill arising from the acquisition was amortized on
a straight-line basis over five years until December 31, 2001. Other intangible assets are amortized over
their estimated useful lives ranging from two to five years. Effective January 1, 2002 goodwill and
indefinite lived intangible assets will be assessed for impairment under SFAS
No. 142, “Goodwill and other Intangible Assets.”
The following unaudited pro forma adjusted summary
represents the consolidated results of operations for the years ended December
31, 2001, 2000 and 1999 as if the acquisitions of VEO, CommerceBid, Mergent
Systems, AppNet and Exterprise had occurred on January 1, 1999 and are not
intended to be indicative of future results (in thousands, except per share
data):
The pro forma results of operations include historical
operations of the Company, VEO, CommerceBid, Mergent Systems, AppNet and
Exterprise adjusted to reflect certain pro-forma adjustments, including
amortization of goodwill and other intangible assets arising from the
acquisitions, and do not include charges for purchased in-process research and
development of $4,548,000, $9,374,000 and $5,142,000 in 2001, 2000 and 1999,
respectively, as a result of these acquisitions as they are non-recurring
charges. These results do not purport
to be indicative of what would have occurred had the acquisition been made as
of that date or the results of operations which may occur in future periods.
15.
SELECTED QUARTERLY COMBINED FINANCIAL DATA (UNAUDITED)
A summary of the Company’s quarterly financial results
follows (in thousands, except per share data).
ITEM
9.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information
required by this item with respect to identification of directors and officers
is incorporated by reference from Commerce One’s definitive Proxy Statement
(“Proxy Statement”) for the Annual Meeting of Stockholders to be held on
May 29, 2002 under the captions “The Board” and “Executive Officers,”
respectively.
The information required by this item with respect to
the information required under Item 405 of Regulation S-K is incorporated
by reference from the Proxy Statement under the caption “Section 16(a)
Beneficial Ownership Reporting Compliance.”
ITEM
11.
ITEM
11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated
by reference from the Proxy Statement under the caption “Executive
Compensation.”
ITEM
12.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information required under this Item is
incorporated by reference from the Proxy Statement under the caption “Security
Ownership of Management and Principal Stockholders.”
ITEM
13.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The information required under this Item is
incorporated by reference from the Proxy Statement under the captions “Certain
Relationships and Related Transactions” and “Compensation Committee Interlocks
and Insider Participation.”
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) DOCUMENTS FILED AS PART OF THE REPORT
1. FINANCIAL STATEMENTS
See Item 8 of this Form 10-K
2. FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule of Commerce
One for each of the years ended December 31, 2001, 2000 and 1999 should be
read in conjunction with the Consolidated Financial Statements, and related
notes thereto, of Commerce One.
Schedule
II-Valuation and Qualifying Accounts
Schedules other than those listed above have been
omitted as they are either not required, not applicable, or the information has
otherwise been shown in the consolidated financial statements or notes
thereafter.
3. EXHIBITS
The exhibits listed on the accompanying index to
exhibits immediately following the financial statement schedule are filed as
part of, or incorporated by reference into, this Form 10-K.
EXHIBIT INDEX
EXHIBIT NUMBER
DESCRIPTION
3.1(1)
Restated Certificate of Incorporation of the
Registrant.
3.2
Amended and Restated Bylaws of the Registrant.
4.1(1)
Specimen Common Stock Certificate.
4.2(1)
Amended and Restated Preferred Stock Rights
Agreement, dated as of July 11, 2001, between Commerce One, Inc., New
Commerce One Holding, Inc. and Fleet National Bank including the form of
Rights Certificate and the Rights attached thereto as Exhibits B and C,
respectively.
10.1(2)
Form of Indemnification Agreement between the Registrant
and each of its directors and officers.
10.2(2)
Form of 1997 Incentive Stock Option Plan and form of
agreements thereunder.
10.3(2)
Form of 1999 Employee Stock Purchase Plan and form
of agreements thereunder.
10.4(3)
1999 Nonstatutory Stock Option Plan and form of
agreements thereunder.
10.5(2)
Form of 1999 Director Option Plan and form of
agreements thereunder.
10.6(2)
Master Software License and Services Agreement
between the Registrant and NTT Communications, dated April 16, 1999.
10.7(2)
Governance Agreement between the Registrant and
British Telecommunications, plc., dated March 26, 1999.
10.8(2)
Marketing Agreement between the Registrant and
British Telecommunications, plc., dated March 26, 1999.
10.9(2)
MarketSite License Agreement between the Registrant
and British Telecommunications, plc., dated March 25, 1999.
10.10(2)
Amended and Restated Trading Agreement between the
Registrant and British Telecommunications, plc., dated March 25, 1999.
10.11(2)
Stock Purchase and Master Strategic Relationship
Agreement between the Registrant and NTT Communications, dated June 1999.
10.12(4)
Amended and Restated Standstill and Stock
Restriction Agreement by and among Commerce One, Inc., New Commerce One
Holding, Inc. and SAP AG dated June 28, 2001.
10.13(4)
Investor Rights Agreement by and between Commerce
One, Inc., New Commerce One Holding, Inc. and SAP AG dated June 28, 2001.
10.14(5)
Formation Agreement dated December 8, 2000 by and
among Commerce One, Inc., Ford Motor Company, General Motors Corporation, New
Commerce One Holding, Inc. (solely for the purposes of Section 11.3 thereof)
Daimler Chrysler AG and (solely for the purposes of section 2.4, 11.2 and
11.9 thereof) Covisint LLC.
10.15(5)
Standstill and Stock Restriction Agreement dated
December 8, 2000 by and among Commerce One, Inc., Ford Motor Company, General
Motors Corporation and New Commerce One Holding, Inc.
10.16(5)
Registration Rights Agreement dated December 8,
2000 by and among Commerce One, Inc., Ford Motor Company, General Motors
Corporation and New Commerce One Holding, Inc.
10.17(6)
Stand-alone Stock Option Agreement between Robert M.
Kimmitt and Commerce One, Inc., dated as of April 14, 2000.
10.18(6)
Relocation Loan Agreement between Robert M. Kimmitt
and Commerce One, Inc. dated May 17, 2000, (repaid in full during 2001.)
10.18.1(7)
First Amended Relocation Loan Agreement between
Robert M. Kimmitt and Commerce One, Inc. dated January 31, 2001.
10.19(8)
Strategic Alliance Agreement dated September 18,
2000 by and between Commerce One, Inc., SAP and SAP Markets, Inc.
10.20(9)
AppNet Systems, Inc. 1999 Stock Incentive Plan.
10.21(9)
AppNet Systems, Inc. 1998 Stock Option and Incentive
Plan.
10.22(9)
Internet Outfitters, Inc. 1996 Incentive Stock
Option Plan.
10.23(9)
Century Computing, Incorporated Incentive Stock
Option Plan.
10.24(7)
Form of Change of Control Severance Agreement.
10.25(7)
Form of Amendment No. 1 to Change of Control Severance
Agreement.
10.26(10)
Strategic Alliance Agreement Amendment No. 2, dated
April 10, 2001 by and between Commerce One Operations, Inc., SAP and SAP
Markets, Inc.
10.27(10)
Strategic Alliance Agreement Amendment No. 3, dated
June 29, 2001 by and between Commerce One Operations, Inc., SAP and SAP
Markets, Inc.
10.28(11)
Employee Loan Agreement between Commerce One, Inc.,
and Dennis H. Jones, dated August 22, 2001.
10.29
Promissory Note, dated March 22, 2002, executed by
Commerce One, Inc. in favor of Microsoft Capital Corporation.
10.30
Collateral Account Notification and Acknowledgment
between Commerce One, Inc. and Microsoft Capital Corporation.
10.31
Strategic Alliance Agreement Amendment No. 4,
effective as of January 1, 2002 by and between Commerce One Operations, Inc.,
SAP and SAP Markets, Inc.*
21.1
List of Subsidiaries of Registrant.
23.1
Consent of Ernst & Young LLP, Independent
Auditors.
24.1
Power of Attorney (see page 66).
(1) Incorporated by reference to Commerce
One’s Form 8-A (File No. 000-32979) filed on July 11, 2001.
(2) Incorporated by reference to Commerce
One’s Registration Statement of Form S-1 (File No. 333-76987), declared
effective July 1, 1999.
(3) Incorporated by reference to Commerce
One’s Form S-8 (File No. 333-33328), filed on March 27, 2000.
(4) Incorporated by reference to Commerce
One’s Current Report on Form 8-K (File No. 333-58558), filed on July 10, 2001.
(5) Incorporated by reference to Commerce
One’s Current Report on Form 8-K (File No. 000-26453), filed on December 29,
2000.
(6) Incorporated by reference to Commerce
One’s Quarterly Report on Form 10-Q (File No. 000-26453), filed on August 14,
2000.
(7) Incorporated by reference to Commerce
One’s Annual Report on Form 10-K (File No. 000-26453), filed on April 2, 2001.
(8) Incorporated by reference to Commerce
One’s Quarterly Report on Form 10-Q (File No. 000-26453), filed on November 14,
2000.
(9) Incorporated by reference to Commerce One’s
Form S-8 (File No. 333-46254), filed on September 20, 2000.
(10) Incorporated by reference to Commerce One’s
Quarterly Report on Form 10-Q (File No. 000-32979), filed on August 14, 2001.
(11) Incorporated by reference to Commerce One’s
Quarterly Report on Form 10-Q (File No. 000-32979), filed on November 14, 2001.
* Portions of this exhibit have been omitted pending a
determination by the Securities and Exchange Commission as to whether these
portions should be granted confidential treatment.
(b) REPORTS
ON FORM 8-K
The following reports on Form 8-K were filed during
the quarter ended December 31, 2000:
None.
(c) EXHIBITS
See Item 14(a)(3), above.
(d) FINANCIAL
STATEMENT SCHEDULES
See Item 8, above.
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 30, 2002
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints Peter F. Pervere and
Beth Frensilli, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Annual Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and conforming all that said
attorney-in-fact, or his or her substitute or substitutes, any do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
Title
Date
/s/ MARK B. HOFFMAN
Chief Executive Officer
and Chairman of the
March 30, 2002
Mark B. Hoffman
Board (Principal
Executive Officer)
/s/ DENNIS H. JONES
Vice Chairman of the
Board and President
March 30, 2002
Dennis H. Jones
/s/ PETER F. PERVERE
Senior Vice President
and Chief Financial
March 30, 2002
Peter F. Pervere
Officer
(Principal Financial and
Accounting
Officer)
/s/ JOHN V. BALEN
Director
March 30, 2002
John V. Balen
/s/ KENNETH C. GARDNER
Director
March 30, 2002
Kenneth C. Gardner
/s/ WILLIAM J. HARDING
Director
March 30, 2002
William J. Harding
/s/ ROBERT M. KIMMITT
Director
March 30, 2002
Robert M. Kimmitt
/s/ DAVID H. FURNISS
Director
March 30, 2002
David H. Furniss
/s/ TOSHIMUNE OKIHARA
Director
March 30, 2002
Toshimune Okihara
/s/ LARRY W. SONSINI
Director
March 30, 2002
Larry W. Sonsini
/s/ ALEX S. VIEUX
Director
March 30, 2002
Alex S. Vieux
COMMERCE ONE, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS
RECEIVABLE ALLOWANCES (in thousands)
S-1
EXHIBIT
INDEX
(1) Incorporated by reference to Commerce
One’s Form 8-A (File No. 000-32979) filed on July 11, 2001.
(2) Incorporated by reference to Commerce
One’s Registration Statement of Form S-1 (File No. 333-76987), declared
effective July 1, 1999.
(3) Incorporated by reference to Commerce
One’s Form S-8 (File No. 333-33328), filed on March 27, 2000.
(4) Incorporated by reference to Commerce
One’s Current Report on Form 8-K (File No. 333-58558), filed on July 10, 2001.
(5) Incorporated by reference to Commerce
One’s Current Report on Form 8-K (File No. 000-26453), filed on December 29,
2000.
(6) Incorporated by reference to Commerce
One’s Quarterly Report on Form 10-Q (File No. 000-26453), filed on August 14,
2000.
(7) Incorporated by reference to Commerce
One’s Annual Report on Form 10-K (File No. 000-26453), filed on April 2, 2001.
(8) Incorporated by reference to Commerce
One’s Quarterly Report on Form 10-Q (File No. 000-26453), filed on November 14,
2000.
(9) Incorporated by reference to Commerce
One’s Form S-8 (File No. 333-46254), filed on September 20, 2000.
(10) Incorporated by reference to Commerce One’s
Quarterly Report on Form 10-Q (File No. 000-32979), filed on August 14, 2001.
(11) Incorporated by reference to Commerce One’s
Quarterly Report on Form 10-Q (File No. 000-32979), filed on November 14, 2001.
* Portions of this exhibit have been omitted pending a
determination by the Securities and Exchange Commission as to whether these
portions should be granted confidential treatment.
S-2