<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1999
REGISTRATION NO. 333-76987
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
COMMERCE ONE, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7372 68-0322810
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
----------------
1600 RIVIERA AVENUE
WALNUT CREEK, CALIFORNIA 94596
(925) 941-6000
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
----------------
MARK B. HOFFMAN
CHIEF EXECUTIVE OFFICER
1600 RIVIERA AVENUE
WALNUT CREEK, CALIFORNIA 94596
(925) 941-6000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
COPIES TO:
DAVID J. SEGRE STEVEN M. SPURLOCK
N. ANTHONY JEFFRIES ANTHONY J. MCCUSKER
LINDA M. CUNY JOHN F. DIETZ
ELIZABETH C. HEWITT Gunderson Dettmer Stough
Wilson Sonsini Goodrich & Rosati Villeneuve Franklin & Hachigian, LLP
Professional Corporation 155 Constitution Drive
650 Page Mill Road Menlo Park, California 94025
Palo Alto, California 94304 (650) 321-2400
(650) 493-9300
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
----------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 7, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE
IS NOT PERMITTED.
<PAGE>
3,000,000 Shares
[LOGO]
Common Stock
-----------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price is expected to be between $13.00 and
$15.00 per share. We have applied to list the shares on The Nasdaq Stock
Market's National Market under the symbol "CMRC."
The underwriters have an option to purchase a maximum of 450,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" starting on
page 5.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Commerce One
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share............................................. $ $ $
Total................................................. $ $ $
</TABLE>
Delivery of the shares of Common Stock will be made on or about ,
1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Donaldson, Lufkin & Jenrette
U.S. Bancorp Piper Jaffray
The date of this prospectus is , 1999.
<PAGE>
[INSIDE FRONT COVER PAGES OF PROSPECTUS]
The gatefold page includes language as follows:
"Commerce One is a leading provider of business-to-business electronic
commerce solutions that link buyers and suppliers of goods and services into
real-time trading communities over the Internet."
Above and below this language is Commerce One's logo.
The graphic on the left hand side of the inside front cover pages depicts
our architecture of a global trading web. This graphic is preceded by the
following language:
"Commerce One-Registered Trademark- is a leading provider of
business-to-business electronic commerce solutions that link buyers and
suppliers of goods and services into real-time trading communities over the
Internet. Our solutions are architected to enable development of a global
trading web of interoperable marketplace portals."
"Our solution is designed to enable an enterprise buyer or supplier to
access a global network of trading communities as they are deployed. We have
established Commerce One MARKETSITE.NET marketplace, the only MARKETSITE
marketplace that is currently operational. Through strategic partnerships,
such as our partnerships with British Telecommunications and Nippon
Telegraph and Telephone, we intend to develop additional marketplaces built
on the Commerce One MARKETSITE platform."
This graphic also includes the logos of two of our strategic partners, British
Telecommunications and Nippon Telegraph and Telephone.
Toward the bottom of the inside front cover pages, the key benefits of the
Commerce One Solution are listed for buyers, suppliers and market-makers. Key
benefits to buyers are described as follows:
- Streamlines and reduces costs associated with generating purchase orders;
- Reduces off-contract purchasing; and
- Compresses purchasing cycle time.
Key benefits to suppliers are described as follows:
- Provides access to expanding channel of corporate purchasers;
- Streamlines sales process; and
- Reduces transaction costs.
Key benefits to market-makers are described as follows:
- Increases commerce traffic between trading partners;
- Provides incremental revenue opportunities; and
- Provides new commerce services for market-makers' customers.
The graphics and accompanying language on the right hand portion of the
inside front cover pages describe our Commerce Chain Solution and the
relationship between BUYSITE and the MARKETSITE marketplaces. This portion list
describes the Commerce Chain Solution as:
"The Commerce Chain Solution, comprised of Commerce One BuySite-TM- and
Commerce One MarketSite-TM-, is designed to enable companies to reduce
operational costs and increase efficiency by automating the entire indirect
goods and services supply chain. This solution is designed to enable
business-to-business electronic commerce for a broad range of
organizations."
A description of our BUYSITE, accompanied by a graphic of the initial
BUYSITE screen, follows. This description states:
"Commerce One BuySite, Desktop Commerce Application, is a Web-based
procurement application that enables businesses to make purchases over the
Internet. BuySite provides a comprehensive suite of commerce services to
users' desktops to automate the entire purchasing cycle, from requisition to
payment. BuySite provides an easy way for users to make purchases from the
catalogs of many different suppliers while eliminating paperwork,
streamlining the approval process, and enforcing the purchasing policies
that apply to each buyer and supplier."
The bottom half of the right hand portion of the inside front cover pages
contains a graphic of the initial MARKETSITE screen and a description of our
MARKETSITE. The description states:
"Commerce One MarketSite, Open Marketplace Platform, provides the foundation
for commerce service providers to create and maintain regional and vertical
marketplaces. We believe this platform creates significant economies of
scale for market participants by centralizing content and transaction
management services, eliminating the need for buyers and suppliers to create
point-to-point integration with each trading partner. The first MarketSite
marketplace to be deployed using this platform is Commerce One
MarketSite.net."
"Commerce One MarketSite.net, B to B Marketplace Portal, is designed to
deliver a business-to-business marketplace for the procurement of indirect
goods and services. MarketSite.net is operational today and in use by a
number of buyers and suppliers in North America to automate the interactions
between trading partners."
Our logo and our Web site address is on the bottom of the right hand portion of
the inside front cover pages.
<PAGE>
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY................ 3
RISK FACTORS...................... 7
USE OF PROCEEDS................... 20
DIVIDEND POLICY................... 20
CAPITALIZATION.................... 21
DILUTION.......................... 22
SELECTED CONSOLIDATED FINANCIAL
DATA............................ 23
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....... 25
BUSINESS.......................... 35
MANAGEMENT........................ 49
<CAPTION>
PAGE
----
<S> <C>
CERTAIN TRANSACTIONS.............. 60
PRINCIPAL STOCKHOLDERS............ 62
DESCRIPTION OF CAPITAL STOCK...... 64
SHARES ELIGIBLE FOR FUTURE SALE... 66
WHERE YOU CAN FIND MORE
INFORMATION ABOUT US............ 68
UNDERWRITING...................... 69
NOTICE TO CANADIAN RESIDENTS...... 71
LEGAL MATTERS..................... 72
EXPERTS........................... 72
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS...................... F-1
</TABLE>
--------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. WE USE WORDS SUCH AS "ANTICIPATES," "BELIEVES," "PLANS,"
"EXPECTS," "FUTURE," "INTENDS" AND SIMILAR EXPRESSIONS TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING
STATEMENTS ATTRIBUTED TO CERTAIN THIRD PARTIES RELATING TO THEIR ESTIMATES
REGARDING THE GROWTH OF BUSINESS-TO-BUSINESS AND BUSINESS-TO-CONSUMER ELECTRONIC
COMMERCE AND RELATED SERVICE MARKETS AND SPENDING. YOU SHOULD NOT PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF
THIS PROSPECTUS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS FOR MANY REASONS, INCLUDING THE
RISKS FACED BY US DESCRIBED BELOW UNDER THE CAPTION "RISK FACTORS" AND ELSEWHERE
IN THIS PROSPECTUS.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND FOR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL THE INFORMATION YOU SHOULD
CONSIDER BEFORE BUYING SHARES IN THE OFFERING. YOU SHOULD CAREFULLY READ THE
ENTIRE PROSPECTUS AND THE RISK FACTORS BEGINNING ON PAGE 5.
COMMERCE ONE, INC.
Commerce One is a leading provider of business-to-business electronic
commerce solutions that link buyers and suppliers of indirect goods and services
into real-time trading communities over the Internet. Forrester Research
estimates that, in the U.S. alone, business-to-business electronic commerce
transactions will grow from $109 billion in 1999 to $1.3 trillion in 2003, more
than ten times their $108 billion estimate for business-to-consumer transactions
in 2003. A significant portion of these transactions will involve the
procurement of indirect goods and services, which include information technology
and telecommunications equipment, office equipment and supplies, travel and
entertainment, professional services, and a wide variety of other repeat
purchase items.
Our products and services are designed to lower the overall costs of
business-to-business transactions by reducing the inefficiencies related to
phone- and fax-based manual processes experienced by both buyers and suppliers
of goods and services. Using our Commerce Chain Solution, multiple buyers and
suppliers are able to connect to an electronic marketplace supporting a variety
of real-time commerce services.
The Commerce Chain Solution is comprised of our BUYSITE enterprise
procurement applications, our MARKETSITE PLATFORM, and our MARKETSITE COMMERCE
SERVICES. Taken together, these components are designed to support
business-to-business electronic commerce for organizations ranging from small
corporations to large enterprises. BUYSITE is an intranet-based purchasing
application that allows users throughout an organization to make purchases over
the Internet through an easy-to-use desktop application that facilitates
automated access to and purchasing from the catalogs of multiple suppliers.
The MARKETSITE PLATFORM provides the foundation for commerce service
providers, including both our strategic partners and us, to create and maintain
electronic marketplaces and offer value-added services to the buyers and
suppliers that join these trading communities. Our own MARKETSITE.NET
marketplace is the first MARKETSITE marketplace, and we have developed strategic
relationships with British Telecommunications and Nippon Telegraph and Telephone
to create and operate MARKETSITE marketplaces in their respective regional
markets. By connecting to a MARKETSITE marketplace, trading community members
can take advantage of our MARKETSITE COMMERCE SERVICES, including real-time
transaction support, content management and order availability and status
tracking.
Our objective is to create the leading global, business-to-business trading
web, comprised of interoperable marketplaces in targeted regional and
industry-specific, or "vertical," markets. We seek to obtain our objective by:
- establishing MARKETSITE.NET as the premier business-to-business electronic
commerce portal for North America;
- driving global adoption of our solutions through strategic partnerships to
establish MARKETSITE marketplaces;
- empowering market-makers to establish vertical marketplaces;
- offering a single point of integration into our trading communities for
third-party value-added service providers;
- promoting entry into our MARKETSITE marketplaces through enhanced BUYSITE
functionality;
3
<PAGE>
- leveraging our systems integration and technology partnerships; and
- leveraging our leading-edge XML software technology and content management
tools.
In addition to our strategic partnerships with British Telecommunications
and Nippon Telegraph and Telephone, we have developed key strategic
relationships with PricewaterhouseCoopers, MCI Systemhouse, now a subsidiary of
EDS, and Microsoft Corporation. Our customers include large enterprises in the
public sector, as well as the utilities, finance, telecommunications,
information services, travel and transportation industries. Among these
customers are the following enterprises: Booz-Allen Hamilton; California State
University, Fullerton; The County of Los Angeles; Eastman Chemical; Foundation
Health; The Idaho Power Company; MCI WorldCom; Pacific Bell Network Integration;
Pacific Gas and Electric; Promus Hotels; The SABRE Group; University of
California, Los Angeles; Warner-Lambert; The Boots Company; British
Telecommunications; Nippon Telegraph and Telephone; and Schlumberger Oilfield
Services. Sales to four of these customers represented 79% of our revenues in
the quarter ended March 31, 1999 and sales to four other customers represented
75% of our revenues for the year ended December 31, 1998.
Our principal executive offices are located at 1600 Riviera Avenue, Walnut
Creek, California 94596 and our telephone number is (925) 941-6000. Our Web site
is located at http://www.commerceone.com. Information contained on our Web site
does not constitute part of this prospectus.
"COMMERCE ONE," "COMMERCE CHAIN," "BUYSITE," "MARKETSITE" and "VEO" are
registered trademarks of Commerce One. All other trademarks or service marks
appearing in this prospectus are trademarks or service marks of the respective
companies that use them.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered........................ 3,000,000 shares
Common stock to be outstanding
after this offering....................... 20,942,799 shares. This is based on the actual
number of shares outstanding on May 31, 1999.
The number excludes 5,827,102 shares
subject to outstanding options or reserved
for issuance under our stock and option
plans and 703,980 shares subject to
outstanding warrants.
Use of proceeds............................. For general corporate purposes, principally
working capital, capital expenditures,
geographic expansion of our operations,
potential acquisitions, and additional
sales and marketing efforts.
Proposed Nasdaq National Market symbol...... CMRC
</TABLE>
--------------
EXCEPT AS OTHERWISE INDICATED, INFORMATION IN THIS PROSPECTUS IS BASED ON THE
FOLLOWING FIVE ASSUMPTIONS:
- THE REINCORPORATION OF COMMERCE ONE INTO DELAWARE PRIOR TO THE
EFFECTIVENESS OF THIS OFFERING;
- A ONE-FOR-TWO REVERSE STOCK SPLIT OF THE COMMON STOCK IMMEDIATELY PRIOR TO
THE EFFECTIVENESS OF THIS OFFERING;
- THE CONVERSION OF ALL OUTSTANDING SHARES OF PREFERRED STOCK INTO SHARES OF
COMMON STOCK, AT A RATE OF TWO SHARES OF PREFERRED STOCK CONVERTIBLE INTO
ONE SHARE OF COMMON STOCK, IMMEDIATELY PRIOR TO THE CLOSING OF THIS
OFFERING;
- THE FILING OF THE AMENDED AND RESTATED CERTIFICATE OF INCORPORATION; AND
- NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenues........................................... $ 812 $ 1,746 $ 2,563 $ 125 $ 2,104
Cost of revenues......................................... 782 2,887 4,369 674 1,668
---------- ---------- ---------- ---------- ----------
Gross profit (loss)...................................... 30 (1,141) (1,806) (549) 436
Loss from operations..................................... (1,780) (11,173) (24,796) (4,647) (12,327)
Net loss................................................. (1,805) (11,164) (24,640) (4,632) (12,311)
Net loss per share:
Basic and diluted...................................... $ (0.69) $ (4.21) $ (8.21) $ (1.58) $ (2.64)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average shares................................ 2,618 2,679 3,053 2,966 4,723
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Pro forma net loss per share:
Basic and diluted (unaudited).......................... $ (2.60) $ (0.87)
---------- ----------
---------- ----------
Weighted average shares (unaudited).................... 9,469 14,175
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..................................................... $ 7,839 $ 31,439 $ 69,499
Working capital............................................................... 3,364 26,964 65,024
Total assets.................................................................. 30,813 54,413 92,473
Long-term obligations, net of current portion................................. 1,601 1,601 1,601
Redeemable convertible preferred stock........................................ 53,403 -- --
Total stockholders' equity (deficit).......................................... (30,479) 46,524 84,584
</TABLE>
The Consolidated Balance Sheet Data table set forth above summarizes:
- actual consolidated balance sheet data;
- pro forma consolidated balance sheet data giving effect to the sale of
2,758,819 shares of Series E preferred stock in April 1999 with net
proceeds of approximately $23.6 million and the conversion of all
outstanding shares of preferred stock, including the shares of Series E
preferred stock, into shares of common stock; and
- pro forma as adjusted consolidated balance sheet data, adjusted to give
effect to the sale by Commerce One of 3,000,000 shares of common stock
offered through this prospectus at an assumed initial public offering
price of $14.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses.
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE BUYING SHARES
IN THIS OFFERING.
WE ARE AN EARLY STAGE COMPANY, WE HAVE A HISTORY OF LOSSES AND WE EXPECT FUTURE
LOSSES.
We have never been profitable, we expect to incur net losses for the
foreseeable future and we may never be profitable. We incurred net losses of
$12.3 million for the three months ended March 31, 1999, $24.6 million for 1998,
$11.2 million for 1997 and $1.8 million for 1996. As of March 31, 1999, we had
an accumulated deficit of $51.3 million. Net losses have increased for each of
the last five quarters and we expect this trend will continue.
We were founded in January 1994, first shipped our current line of products
in 1998 and recently introduced new versions of these products. We have a
limited operating history that makes it difficult to forecast our future
operating results. We expect to substantially increase our sales and marketing,
product development and general and administrative expenses. As a result we will
need to generate significant additional revenues to achieve and maintain
profitability in the future. Although our revenues have grown in recent
quarters, we cannot be certain that such growth will continue or that we will
achieve sufficient revenues for profitability. If we do achieve profitability in
any period, we cannot be certain that we will sustain or increase such
profitability on a quarterly or annual basis.
OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS WHICH
COULD CAUSE OUR STOCK PRICE TO FALL.
We believe that quarter-to-quarter comparisons of our revenues and operating
results are not necessarily meaningful, and that such comparisons may not be
accurate indicators of future performance. If revenues fall below our
expectations and we are not able to quickly reduce our spending in response, our
business, operating results and financial condition would be harmed. It is
likely that in some future quarter our operating results may be below the
expectations of public market analysts and investors and, as a result, the price
of our common stock may fall. Our operating expenses, which include sales and
marketing, product development and general and administrative expenses, are
based on our expectations of future revenues and are relatively fixed in the
short term.
A number of factors, certain of which are beyond our control, are likely to
affect our future operating results and may cause significant quarter-to-quarter
fluctuations in these operating results. These factors include:
- our ability to retain existing customers or attract new customers at a
steady rate and maintain customer satisfaction;
- the volume of transactions effected through our BUYSITE and MARKETSITE
PLATFORM products for which we receive transaction fees;
- the length of the sales cycle and implementation of our products;
- the announcement and introduction of new products by us or our
competitors;
- our ability to attract new personnel in a timely and effective manner;
- the timing of large customer orders or the failure to enter into
additional strategic alliances or the failure of our existing partners to
develop trading communities based on our products;
- the amount and timing of operating costs and capital expenditures relating
to expansion of our business, operations and infrastructure; and
- our mix of domestic and international sales.
7
<PAGE>
WE DEPEND UPON OUR COMMERCE SERVICE PROVIDER PARTNERS TO DEVELOP AND OPERATE
MARKETSITE MARKETPLACES; IF THESE MARKETPLACES ARE NOT SUCCESSFUL, WE WILL NOT
GENERATE SUFFICIENT REVENUES TO SUSTAIN OUR BUSINESS OR ALLOW US TO GROW.
We have established strategic relationships with British Telecommunications
and Nippon Telegraph and Telephone, which have licensed our BUYSITE and
MARKETSITE PLATFORM products in order to create MARKETSITE marketplaces in
certain defined regions. We cannot assure you that these partners will be able
to implement our products and services effectively, that they will develop and
launch MARKETSITE marketplaces or that buyers or suppliers will participate in
their MARKETSITE marketplaces. If these or any other MARKETSITE marketplaces are
not successful, our business, operating results and financial condition will
suffer.
Neither British Telecommunications nor Nippon Telegraph and Telephone has
launched a MARKETSITE marketplace, and neither is obligated to develop and
operate these marketplaces. Additionally, although our technology architecture
supports the development of interoperable trading communities, we cannot assure
you that their marketplaces will be interoperable. Furthermore, we cannot assure
you that these potentially interoperable marketplaces will be able to be
successfully scaled to address markets of different size, scope and geography.
OUR STRATEGY OF ESTABLISHING MARKETSITE MARKETPLACES AS TRADING COMMUNITIES IS
UNPROVEN AND MAY NOT BE SUCCESSFUL.
As part of our business strategy, we intend, directly and through
relationships with our strategic partners, to establish and maintain MARKETSITE
marketplaces where buyers and suppliers can conduct business-to-business
electronic commerce. If this business strategy is flawed, or if we are unable to
execute it effectively, our business, operating results and financial condition
will be substantially harmed. This strategy is unproven and currently the only
operating trading community based on our products is MARKETSITE.NET, which we
operate. We have limited experience developing and operating MARKETSITE
marketplaces, and we cannot assure you that these trading communities will be
operated effectively, that buyers or suppliers will license our products and
join and remain in these trading communities, or that we will generate
significant revenues from these communities. To date, we have not generated
significant revenue from MARKETSITE.NET.
BECAUSE OUR INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY, WE
CANNOT ASSURE YOU THAT WE WILL BE ABLE TO EFFECTIVELY COMPETE.
The market for Internet-based, business-to-business electronic commerce
solutions is extremely competitive. We expect competition to intensify as
current competitors expand their product offerings and new competitors enter the
market. We cannot assure you that we will be able to compete successfully
against current or future competitors, or that competitive pressures we face
will not harm our business, operating results or financial condition.
Because there are relatively low barriers to entry in the electronic
commerce market, competition from other established and emerging companies may
develop in the future. In addition, our customers and partners may become
competitors in the future. Certain of our competitors may be able to negotiate
alliances with strategic partners on more favorable terms than we are able to
negotiate. Many of our competitors may also have well-established relationships
with our existing and prospective customers. Increased competition is likely to
result in price reductions, lower average sales prices, reduced margins, longer
sales cycles and decrease or loss of our market share, any of which could harm
our business, operating results or financial condition.
Many of our competitors have, and new potential competitors may have, more
experience developing Internet-based software and end-to-end purchasing
solutions, larger technical staffs, larger customer bases, more established
distribution channels, greater brand recognition and greater financial,
8
<PAGE>
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. We
cannot assure you that the business-to-business electronic commerce solutions
offered by our competitors now or in the future will not be perceived by buyers
and suppliers as superior to ours.
OUR LENGTHY SALES AND IMPLEMENTATION CYCLE COULD CAUSE DELAYS IN REVENUE GROWTH.
The period between our initial contact with a potential customer and the
purchase of our products and services is often long and subject to delays
associated with the lengthy budgeting and approval process of our customers.
Historically, our typical sales cycle has been approximately six to nine months
and the implementation cycle at customer sites has been approximately an
additional six to twelve months. These lengthy cycles will have a negative
impact on the timing of our revenues, especially our realization of any
transaction fee based revenues.
We believe that a customer's decision to purchase our products and services
is discretionary, involves a significant commitment of resources, and is
influenced by customer budgetary cycles. To successfully sell our products and
services, we generally must educate our potential customers regarding the use
and benefit of our products and services, which can require significant time and
resources. Many of our potential customers are large enterprises that generally
take longer to make significant business decisions. In addition, our solutions
include enterprise applications that take significant time to deploy
successfully across an organization.
IF OUR POTENTIAL CUSTOMERS ARE NOT WILLING TO SWITCH TO OR ADOPT OUR ELECTRONIC
COMMERCE SOLUTION, OUR GROWTH AND REVENUES WILL BE LIMITED.
The failure to generate a large customer base would harm our growth and
revenues. This failure could occur for several reasons. Some of our
business-to-business electronic commerce competitors charge their customers
large fees upon the execution of customer agreements. Businesses that have made
substantial up-front payments to our competitors for electronic commerce
solutions may be reluctant to replace their current solution and adopt our
solution. As a result, our efforts to create a larger customer base may be more
difficult than expected even if we are deemed to offer products and services
superior to those of our competitors. Further, because the business-to-business
electronic commerce market is new and underdeveloped, potential customers in
this market may be confused or uncertain about the relative merits of each
electronic commerce solution or which electronic commerce solution to adopt, if
any. Confusion and uncertainty in the marketplace may inhibit customers from
adopting our solution, which could harm our business, operating results and
financial condition.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND
FAILURE TO MANAGE OUR GROWTH 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. Future expansion efforts could be expensive and put a strain
on our management and resources. We have increased, and plan to continue to
increase, the scope of our operations at a rapid rate. Our headcount has grown
and will continue to grow substantially. At December 31, 1998, we had a total of
156 employees and at May 31, 1999, we had a total of 244 employees. To manage
future growth effectively, we must maintain and enhance our financial and
accounting systems and controls, integrate new personnel and manage expanded
operations.
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OUR CUSTOMER BASE IS CONCENTRATED AND OUR SUCCESS DEPENDS ON OUR ABILITY TO
RETAIN EXISTING CUSTOMERS AND ATTRACT NEW CUSTOMERS.
If one or more of our major customers were to substantially reduce or stop
their use of our products or services, or if we do not attract significant
numbers of new customers, our business, operating results and financial
condition would be harmed. In the first quarter of 1999, The SABRE Group, Inc.,
Schlumberger Oilfield Services, The Idaho Power Company and British
Telecommunications, plc, each accounted for more than 10% of our revenues, and
together comprised approximately 79% of our total revenues. In 1998, MCI
WorldCom, Eastman Chemical, The County of Los Angeles and Foundation Health each
accounted for more than 10% of our revenues, and together comprised
approximately 75% of our total revenues. We do not have long-term contractual
commitments from any of our current customers and our customers may terminate
their contracts with us with little or no advance notice and without significant
penalty to them. As a result, we cannot assure you that any of our current
customers will be customers in future periods. A customer termination would not
only result in lost revenue, but also the loss of customer references that are
necessary for securing future customers. In addition, regardless of whether we
retain our current customers, we need to attract new customers for our business
to succeed.
IF SUPPLIERS DO NOT PARTICIPATE IN THE MARKETSITE MARKETPLACES, OUR MARKETSITE
MARKETPLACE PRODUCTS WILL NOT GROW AND OUR REVENUES WILL SUFFER.
If an adequate number of suppliers do not participate in the MARKETSITE
marketplaces, our MARKETSITE marketplace products will not grow and our revenues
will suffer. To date, only a limited number of suppliers of certain types of
goods, such as office supplies, are connected to MARKETSITE.NET, currently the
only operational MARKETSITE marketplace. MARKETSITE marketplaces will be
attractive to suppliers only if a significant number of buyers are willing to
purchase goods and services through the MARKETSITE marketplaces. We cannot
assure you that the goods and services currently available or made available in
the future on MARKETSITE marketplaces will be sufficient to attract and retain
buyers or that we will be able to make available the goods and services buyers
will want in the future. Suppliers incur costs making information relating to
their goods and services available on these trading communities and thus must
realize additional revenues to justify their continued participation in these
trading communities. We cannot assure you that the suppliers will remain in the
MARKETSITE marketplaces or that new suppliers will join these communities.
IF THE COMMERCE-RELATED SERVICES OFFERED ON THE MARKETSITE MARKETPLACES DO NOT
EXPAND, THE MARKETSITE MARKETPLACES MAY NOT REMAIN COMPETITIVE.
As part of our strategy of establishing and maintaining MARKETSITE
marketplaces, we intend to expand the commerce-related service offerings
available on the MARKETSITE marketplaces. Although we plan to make additional
commerce-related services, such as shipping, payment and tax services, available
on MARKETSITE.NET in 1999, these services are not yet available on any
MARKETSITE marketplace. The availability of these commerce-related services is a
forward-looking statement that is subject to risks and uncertainties. The actual
timing of their availability may differ materially from these forward-looking
statements as a result of a number of factors, including our ability to timely
source these services from third parties and effectively integrate them into our
products and services.
OUR FUTURE REVENUES DEPEND UPON OUR ABILITY TO INCREASE TRANSACTION VOLUME ON
MARKETSITE MARKETPLACES.
If the transaction volume on the MARKETSITE marketplaces does not grow, it
is unlikely that we will ever achieve or maintain profitability. We currently
derive substantially all of our revenues from licensing our BUYSITE solution to
buyers and providing related services. Transaction revenue from MARKETSITE has
been immaterial to date. However, our business model calls for a significant
portion of
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our revenues in the future to be based upon a percentage of the transactions
completed on MARKETSITE marketplaces developed by current and future MARKETSITE
PLATFORM licensees. Accordingly, our future revenues will depend significantly
on the number of transactions that are successfully completed on the MARKETSITE
marketplaces.
IF OUR ELECTRONIC COMMERCE PRODUCTS DO NOT CONTAIN THE FEATURES AND
FUNCTIONALITY OUR CUSTOMERS WANT, OUR CUSTOMERS WILL NOT BUY THEM.
Our success depends upon our ability to accurately determine the features
and functionality required by customers and to design and implement
business-to-business electronic commerce products that meet these requirements
in a timely and efficient manner. If we fail to accurately determine customer
feature and functionality requirements, enhance our existing products and
develop new products, our current and potential future customers will not buy
them. To date, our products have been based on our internal efforts and on
feedback from a limited number of customers and potential customers. We cannot
assure you that we have determined or will successfully determine customer
requirements or that the features and functionality of our future products and
services will adequately satisfy current or future customer demands.
OUR FUTURE REVENUES DEPEND UPON CURRENT AND POTENTIAL CUSTOMERS INTEGRATING OUR
SOLUTIONS INTO THEIR BUSINESSES.
Our success depends upon the acceptance and successful integration by
customers and their suppliers of our BUYSITE and MARKETSITE PLATFORM products.
Our current customers and potential customers and their related suppliers often
rely on third-party systems integrators such as PricewaterhouseCoopers, MCI
Systemhouse and Cambridge Technology Partners and others to develop, deploy and
manage their Internet-based, business-to-business electronic commerce platforms
and solutions. If a large number of systems integrators fail to adopt and
support our solution, 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 will suffer.
CONTINUED ADOPTION OF THE INTERNET AS A METHOD OF CONDUCTING BUSINESS IS
NECESSARY FOR OUR FUTURE GROWTH.
The market for Internet-based, business-to-business electronic commerce
products is relatively new and is evolving rapidly. Our future revenues and any
future profits depend upon the widespread acceptance and use of the Internet as
an effective medium of business-to-business commerce, particularly as a medium
to perform indirect goods procurement and fulfillment functions. The failure of
the Internet to continue to develop as a commercial or business medium or of
significant numbers of buyers and suppliers of indirect goods to conduct
business-to-business commerce on the Internet would harm our business, operating
results and financial condition. The acceptance and use of the Internet for
business-to-business commerce could be limited by a number of factors, such as
the growth and use of the Internet in general, the relative ease of conducting
business on the Internet, the efficiencies and improvements that conducting
commerce on the Internet provides, concerns about transaction security and
taxation of transactions on the Internet.
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.
Failure of the market for our products and services to develop and grow or
our failure to gain acceptance in this market would harm our business, operating
results and financial condition. Our market is characterized by rapidly changing
technology, evolving industry standards and frequent new product announcements.
To be successful, we must adapt to our rapidly changing market by continually
improving the performance, features and reliability of our products and services
or else our products
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and services may become obsolete. We also could 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 find ourselves unable
to adapt rapidly to these changes.
DELAYS IN RELEASING ENHANCED VERSIONS OF OUR PRODUCTS COULD ADVERSELY AFFECT OUR
COMPETITIVE POSITION.
We currently expect to release new versions of our BUYSITE and MARKETSITE
PLATFORM products in the second half of 1999. If we are unable to timely
introduce these new product releases, our competitive position may be harmed.
These new releases are currently expected to increase functionality of our
BUYSITE products and incorporate our XML software technology to provide
increased functionality of our MARKETSITE products. The timing of the release of
these new products is a forward-looking statement that is subject to risks and
uncertainties and the actual timing of such release may differ materially from
this as a result of a number of factors. In the past, we have experienced delays
releasing new products. As a result, we cannot assure you that we will be able
to successfully complete the development of currently planned or future products
in a timely and efficient manner. Due to the complexity of these products,
internal quality assurance testing and customer testing of pre-commercial
releases may reveal product performance issues or desirable feature enhancements
that could lead us to postpone the release of these new versions. In addition,
the reallocation of resources associated with any such postponement would likely
cause delays in the development and release of other future products or
enhancements to our currently available products.
IF OUR XML SOFTWARE TECHNOLOGY DOES NOT PROVE TO BE EFFECTIVE, WE WILL NOT
REMAIN COMPETITIVE.
In connection with our acquisition of VEO Systems, we acquired the rights to
its XML software technology. This technology is an information modeling language
for self-describing data exchange in electronic commerce applications. If we are
unable to utilize this technology effectively or if this technology is not
compatible with our other technology or technology we develop or acquire in the
future, we will not remain competitive in our industry. To date we have only
limited experience utilizing this technology.
FAILURE TO EXPAND INTERNET INFRASTRUCTURE COULD LIMIT OUR FUTURE GROWTH.
The recent growth in Internet traffic has caused frequent periods of
decreased performance, and if Internet usage continues to grow rapidly, its
infrastructure may not be able to support these demands and its performance and
reliability may decline. If outages or delays on the Internet occur frequently
or increase in frequency, overall Internet usage including usage of our products
and services could grow more slowly or decline. Our ability to increase the
speed and scope of our services to customers is ultimately limited by and
depends upon the speed and reliability of both the Internet and our customers'
internal networks. Consequently, the emergence and 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 utilize our solution will be hindered, and our business, operating results
and financial condition may suffer.
OUR REVENUES MAY DECREASE IF GROWTH IN THE USE OF THE INTERNET IN THE MARKETS WE
TARGET DOES NOT OCCUR AS PROJECTED.
The use of the Internet as a means to interconnect buyers and sellers and to
create online trading communities is integral to our business model. Our
business strategy is, in part, to create a global, business-to-business
electronic marketplace for buyers and sellers of indirect goods. However, the
use of the Internet as a means of transacting business is relatively new and has
not been accepted by all customers in the markets we have targeted. If the rate
of growth of the Internet use in or targeted
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markets is less than expected, or if the Internet fails to produce a feasible
electronic commerce marketplace, our revenues will suffer. We cannot assure you
that the use of the Internet as a means of conducting business will continue to
grow at a rate similar to the historical rates, if at all.
SECURITY RISKS OF ELECTRONIC COMMERCE MAY DETER FUTURE USE OF OUR PRODUCTS AND
SERVICES.
A fundamental requirement to conduct Internet-based, business-to-business
electronic commerce is the secure transmission of confidential information over
public networks. Failure to prevent security breaches of the MARKETSITE
marketplaces, or well publicized security breaches affecting the Web in general,
could significantly harm our business, operating results and financial
condition. We cannot be certain that advances in computer capabilities, new
discoveries in the field of cryptography, or other developments will not result
in a compromise or breach of the algorithms we use to protect content and
transactions on MARKETSITE marketplaces or proprietary information in our
databases. Anyone who is able to circumvent our security measures could
misappropriate proprietary, confidential customer information or cause
interruptions in our operations. We may be required to incur significant costs
to protect against security breaches or to alleviate problems caused by
breaches. Further, a well-publicized compromise of security could deter people
from using the Internet to conduct transactions that involve transmitting
confidential information.
IF OUR PRODUCTS CONTAIN DEFECTS, PRODUCT SHIPMENTS MAY BE DELAYED AND OUR
BUSINESS AND REPUTATION WOULD BE HARMED.
Products as complex as ours often contain known and undetected errors or
performance problems. Many serious defects are frequently found during the
period immediately following introduction 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, 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. In
the past, defects in our products have delayed their shipments even after
commercially introduced. While these delays have not been material to date, we
cannot assure you that undetected errors or performance problems will not be
discovered in the future or that known errors considered minor by us will not be
considered serious by our customers.
WE MAY NOT BE ABLE TO HIRE AND RETAIN SUFFICIENT SALES, MARKETING AND TECHNICAL
PERSONNEL THAT WE NEED TO SUCCEED BECAUSE THESE PERSONNEL ARE LIMITED IN
NUMBER AND IN HIGH DEMAND.
If we fail to hire and retain sufficient numbers of sales, marketing and
technical personnel, our business, operating results and financial condition
would be harmed. Competition for qualified sales, marketing and technical
personnel is intense as these personnel are in limited supply, and we might not
be able to hire and retain sufficient numbers of such personnel to grow our
business. We need to substantially expand our sales operations and marketing
efforts, both domestically and internationally, in order to increase market
awareness and sales of our BUYSITE and MARKETSITE PLATFORM and the related
services we offer. We will also need to increase our technical staff to support
the growth of our business. In addition, our competitors have in the past
attempted to hire our employees away from us. We expect that they will continue
to attempt to do so in the future.
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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 executive officers or key
employees is bound by an employment agreement for any specific term. If we lose
the services of one or more of our executive officers or key employees, or if
one or more of them decide to join a competitor or otherwise compete directly or
indirectly with us, our business, operating results and financial condition
would be seriously harmed. In particular, the services of Mark Hoffman, our
Chief Executive Officer, would be difficult to replace.
WE INTEND TO EXPAND OUR INTERNATIONAL OPERATIONS AND THESE EFFORTS MAY NOT BE
SUCCESSFUL IN GENERATING ADDITIONAL REVENUES.
Although we have yet to generate any significant international revenues, we
are planning to increase our international operations and sales efforts. We
cannot assure you that we will generate international revenues or that risks of
international sales and operations will not harm us.
International business is subject to inherent risks, and we anticipate the
risks that may affect us include:
- unexpected changes in regulatory requirements and tariffs;
- difficulties in staffing and managing foreign operations;
- longer payment cycles;
- greater difficulty in accounts receivable collection;
- potentially harmful tax consequences;
- fluctuating exchange rates;
- price controls or other restrictions on foreign currency; and
- difficulties in obtaining export and import licenses.
In addition, we have only limited experience in marketing, selling and
supporting our products and services in foreign countries. We do not have any
experience in developing foreign language versions of our products. This may be
more difficult or take longer than we anticipate especially due to international
problems, such as language barriers or currency exchange issues, and the fact
that the Internet infrastructure in such foreign countries may be less advanced
than the Internet infrastructure in the United States.
OUR ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, COULD DISRUPT OUR BUSINESS AND
COULD DILUTE STOCKHOLDER VALUE.
In January 1999, we acquired VEO Systems, a company specializing in the
creation of XML software technology applications, to complement our existing
technologies. We expect to continue to review acquisition and strategic
investment prospects that would complement our existing product offerings,
augment our market coverage or enhance our technological capabilities. We cannot
assure you that we will be able to successfully integrate VEO Systems' or any
other business' products, technologies or personnel in any acquisition. Our
failure to do so could harm our business, operating results and financial
condition. Future acquisitions or investments pose the following risks, each of
which largely depends on the nature of the acquisition:
- potentially dilutive issuances of equity securities;
- large one-time write-offs relating to in-process research and development;
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- the incurrence of debt and contingent liabilities;
- amortization expenses related to goodwill and other intangible assets;
- difficulties in the assimilation of operations, personnel, technologies,
products and the information systems of the acquired companies;
- the diversion of management's attention away from other business concerns;
- the diversion of resources from our existing businesses, products or
technologies;
- the impairment of relationships with our existing customers;
- risks of entering geographic and business markets in which we have no or
limited prior experience; and
- the potential loss of key employees of acquired organizations.
BECAUSE THE PROTECTION OF OUR PROPRIETARY TECHNOLOGY IS LIMITED, OUR PROPRIETARY
TECHNOLOGY COULD BE USED BY OTHERS WITHOUT OUR CONSENT.
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, trade secret, and trademark laws, and nondisclosure and other
contractual restrictions on copying and distribution to protect our proprietary
technology. We cannot assure you that our means of protecting our intellectual
property rights in the United States or abroad will be adequate or that others,
including our competitors, will not use our proprietary technology without our
consent.
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.
IF THIRD PARTIES CLAIM THAT WE INFRINGE UPON THEIR INTELLECTUAL PROPERTY, OUR
ABILITY TO USE CERTAIN TECHNOLOGIES AND PRODUCTS COULD BE LIMITED AND WE MAY
INCUR SIGNIFICANT COSTS TO RESOLVE THESE CLAIMS.
Litigation regarding intellectual property rights is common in the Internet
and software industries. We expect that Internet technologies and software
products and services may be increasingly subject to third-party infringement
claims. If we are subject to an infringement claim, we may be prevented from
using certain technologies and may incur significant costs to resolve the claim.
We have in the past received letters suggesting that we are infringing the
intellectual rights of others, and we may from time to time encounter disputes
over rights and obligations concerning intellectual property. Although we
believe that our intellectual property rights are sufficient to allow us to
market our existing products without incurring liability to third parties, we
cannot assure you that our products and services do not infringe on the
intellectual property rights of third parties.
In addition, we have agreed, and may agree in the future, to indemnify
certain of our 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 cannot assure you that we or our
customers could obtain necessary licenses from third parties at a reasonable
cost or at all.
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OUR PRODUCTS DEPEND UPON THE CONTINUED AVAILABILITY OF LICENSED TECHNOLOGY FROM
THIRD PARTIES.
We license and will continue to license certain technology integral to our
products and services from third parties. Our inability to acquire any
third-party product licenses, or integrate the related third-party products into
our products, could result in delays in product development until equivalent
products can be identified, licensed and integrated. We also expect to require
new licenses in the future as our business grows and technology evolves. We
cannot assure you that these licenses will continue to be available to us on
commercially reasonable terms, if at all.
SPENDING BY OUR CUSTOMERS TO EVALUATE AND ADDRESS YEAR 2000 COMPLIANCE COULD
RESULT IN LOWER DEMAND FOR OUR PRODUCTS AND SERVICES.
As the year 2000 approaches, orders for our products and services may be
reduced or delayed as information technology departments within companies
reallocate their capital expenditures to prepare for the year 2000 and resolve
year 2000 problems. If companies do reduce or defer purchases of our products
and services because of such reallocation, our business, operating results and
financial condition could be harmed.
POTENTIAL YEAR 2000 PROBLEMS WITH OUR INTERNAL OPERATING SYSTEMS OR THE SOFTWARE
PRODUCTS THAT WE SELL COULD BE COSTLY TO REMEDY AND COULD DECREASE DEMAND FOR
OUR PRODUCTS.
We have designed and tested our products to be year 2000 compliant. However,
we cannot assure you that our current products do not contain undetected errors
or defects associated with year 2000 date functions. Further, we cannot assure
you that the technology we license from third parties and incorporate into our
products do not contain errors or defects. If any such errors or defects do
exist, we may incur material costs to resolve them. The internal systems used to
deliver our services utilize third-party hardware and software. Although we
believe that the costs of ensuring that these systems are year 2000 compliant
will not be material, we cannot assure you of this.
In addition, our customers' and commerce service provider partners' internal
operating systems and other software applications must operate effectively for
them to use our products and services effectively. If these systems or
applications are not year 2000 compliant, the customers may not use our products
and services and the commerce service provider partners may not be able to host
our solutions. We cannot predict to what extent our customers' and commerce
service provider partners' systems and applications are year 2000 compliant.
POTENTIAL INVESTORS SHOULD NOT RELY ON STATEMENTS MADE IN OUR PRESS RELEASES
WHEN DECIDING WHETHER TO PURCHASE OUR COMMON STOCK AS A NUMBER OF SUCH
STATEMENTS ARE BASED ON INTERNAL ESTIMATES AND PROJECTIONS THAT HAVE NOT BEEN
VERIFIED BY THIRD PARTIES.
We from time to time issue press releases concerning our products and
business. Some of our recent press releases issued in connection with the April
27, 1999 Internet Electronic Commerce Expo tradeshow held in New York City
contained statements about the annual purchasing power of our customers, our
position in the marketplace, the ability of our products to reduce our
customers' costs, and the ability of our products to support electronic commerce
adoption. These statements may not be verifiable by third parties and were based
on our internal estimates and projections of current and potential future
customers as well as those potential future customers of certain of our Commerce
Service Provider Partners and, as a result, are subject to potential risks and
uncertainties. In addition, many of the risks described elsewhere in this risk
factors section apply to these statements. You should not rely on any of the
statements from our press releases when deciding whether to purchase our common
stock. Instead, you should rely only on the information contained in this
prospectus when making such a decision.
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Statements in our recent press releases regarding the potential purchasing
power of our customers were based primarily on our internal estimates and
projections of our customers' aggregate expenditures for indirect goods and
services in 1998. Our customers have not provided us with specific information
about their indirect goods purchasing expenditures, nor do we have any
independent third party information about these expenditures. In addition, we do
not expect that our customers will make all of their indirect goods purchases
through our solution. Further, we face significant competition from other
leading companies, many of which have greater technical, marketing and financial
resources than we do. We cannot assure you that our customers will ever make a
significant portion of these purchases though our solution.
Statements in another recent press release concerning the potential cost
savings customers may achieve by using our electronic commerce solution were
based on our internal analysis of the potential savings and return on investment
our customers may achieve using our electronic commerce solutions. We have not
verified, and no independent outside source has verified, these cost savings.
Further, these estimates are based on only a limited number of implementations
and may not be indicative of the cost savings from future implementations. We
cannot assure you that our customers will achieve any cost savings through their
use of our electronic commerce solutions.
WE DO NOT HAVE A DISASTER RECOVERY PLAN OR BACK-UP SYSTEMS, AND A DISASTER COULD
SEVERELY DAMAGE OUR OPERATIONS.
We currently do not have a disaster recovery plan in effect and do not have
fully redundant systems for our 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 Walnut Creek,
California and Mountain View, California, which exist on or near known
earthquake fault zones. British Telecommunications will host the MARKETSITE
marketplace in the United Kingdom once the marketplace is developed and
launched. We will depend on Nippon Telegraph and Telephone for hosting the
MARKETSITE marketplace in Japan once the marketplace is developed and launched.
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.
OUR PUBLICATION OF INACCURATE CATALOG CONTENT DATA COULD CAUSE THE LOSS OF
CUSTOMERS AND EXPOSE US TO LEGAL LIABILITY.
The accurate publication of supplier catalog content is critical to our
customers' businesses. Our MARKETSITE PLATFORM product contains content
management tools that help suppliers manage the collection and publication of
their catalog content. Any defects or errors in these tools or the failure of
these tools to accurately publish catalog content could deter businesses from
participating in the MARKETSITE marketplaces, damage our business reputation,
harm our ability to win new customers and potentially expose us to legal
liability. In addition, from time to time some of our customers may submit to us
inaccurate pricing or other catalog information. Even though such inaccuracies
are not caused by our work and are not within our control, similar consequences
could occur. We currently do not carry insurance that would adequately cover
losses which may be incurred as a result of inaccurate content publication.
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 intellectual property, privacy, libel,
consumer protection and taxation apply to the Internet.
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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 difficult for us and may harm our business, operating results and
financial condition.
IF WE CANNOT MEET OUR FUTURE CAPITAL REQUIREMENTS, WE MAY NOT BE ABLE TO FUND
OUR CONTINUED OPERATIONS.
We currently anticipate that our available cash resources, combined with the
net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least the next
eighteen months. The estimate of the time period in which our cash resources and
proceeds from the offering will be sufficient to meet our working capital and
capital expenditure needs is a forward-looking statement that is subject to
risks and uncertainties. The actual time period may differ materially from that
indicated in the forward-looking statement as a result of a number of factors so
that we cannot assure you that such resources will be sufficient for anticipated
or unanticipated working capital and capital expenditure requirements for this
period. If adequate funds are not available or are not available on acceptable
terms, we may not be able to take advantage of unanticipated opportunities,
develop new products or services, fund our continued operations, or otherwise
respond to unanticipated competitive pressures. We cannot assure you that any
additional financing we may need will be available on terms favorable to us, if
at all.
CONCENTRATION OF OWNERSHIP MAY LIMIT YOUR ABILITY TO INFLUENCE CORPORATE
MATTERS.
Following consummation of this offering, it is anticipated that our
officers, directors and 5% or greater stockholders will beneficially own or
control, directly or indirectly, 4,149,719 shares of common stock, which in the
aggregate will represent approximately 19.0% of the outstanding shares of common
stock. If the underwriters' overallotment option is exercised in full, the
number of shares will remain the same and the percentage will decrease to 18.6%.
As a result, if such persons act together, they will have the ability to control
all matters submitted to our stockholders for approval, including the election
and removal of directors and the approval of any merger, consolidation or sale
of all or substantially all of our assets. See "Principal Stockholders."
SUBSTANTIAL SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
If new investors or our current stockholders sell substantial amounts of our
common stock, including shares issued upon the exercise of outstanding options
and warrants, in the public market following this offering, the market price of
our common stock could fall. In addition, such sales could create the perception
to the public of difficulties or problems with our products and services. As a
result, these sales may make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate.
Upon completion of this offering, we will have outstanding 20,942,799 shares
of common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options, based on the shares outstanding as of
May 31, 1999. Of these shares, the shares sold in this offering
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are freely tradable. The remaining 17,942,799 shares will become eligible for
sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- ----------------- -----------------------------------------------------------------------------------------------
<C> <S>
129,176 At the date of this prospectus
12,101,837 180 days after the date of this prospectus subject to certain restrictions under the federal
securities laws
5,711,786 More than 180 days after the date of this prospectus, subject to certain restrictions under the
federal securities laws
</TABLE>
The above table gives effect to certain lock-up arrangements with the
underwriters under which our directors, officers and stockholders have agreed
not to sell or otherwise dispose of their shares of common stock. The
underwriters may remove these lock-up restrictions prior to 180 days after the
offering without prior notice. See "Shares Eligible for Future Sale" and
"Underwriting" for more information about when and how shares of our common
stock may become available for sale in the public market.
WE HAVE BROAD DISCRETION TO USE THE OFFERING PROCEEDS FOR PURPOSES FOR WHICH YOU
MAY OR MAY NOT AGREE, AND OUR USE OF THESE PROCEEDS MAY NOT YIELD A FAVORABLE
RETURN ON YOUR INVESTMENT.
The majority of the net proceeds of this offering are not allocated for
specific uses other than working capital and general corporate purposes. Thus,
our management has broad discretion over how these proceeds are used and could
spend most of these proceeds in ways with which our stockholders may not agree.
We cannot assure you that the proceeds will be invested in a way that yields a
favorable return to you. See "Use of Proceeds" for more information about how we
plan to use our proceeds from this offering.
OUR STOCK HAS NO PRIOR TRADING MARKET; YOU MAY NOT BE ABLE TO RESELL YOUR STOCK
AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
Before this offering, there has not been a public trading market for our
common stock and an active trading market for our common stock may not develop
or be sustained after this offering. Further, the trading market price of our
common stock may decline below our initial public offering price. The initial
public offering price has been determined by negotiations between the
representatives of the underwriters and us. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price.
INTERNET RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY MAY
DEPRESS OUR STOCK PRICE.
The stock market and specifically the stock prices of Internet related
companies have been very volatile. This volatility is often not related to the
operating performance of the companies. This broad market volatility and
industry volatility may reduce the price of our common stock, without regard to
our operating performance. Due to this volatility, the market price of our
common stock could significantly decrease.
AS A NEW INVESTOR, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
If you purchase shares of our common stock in this offering, you will incur
immediate and substantial dilution in pro forma net tangible book value. If the
holders of outstanding options or warrants exercise those options or warrants,
you will incur further dilution. At an assumed initial public offering price of
$14.00 per share, book value per share will be $3.20 per share, representing an
immediate dilution to you of $10.80 per share.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the 3,000,000 shares of common stock
offered by us are estimated to be $38,060,000, after deducting the underwriting
discount, estimated offering expenses and assuming no exercise of the
underwriters' over-allotment option to purchase 450,000 shares from us.
We expect to use the proceeds of this offering for general corporate
purposes, principally working capital, capital expenditures, geographic
expansion of our operations, potential acquisitions, and additional sales and
marketing efforts. We currently have no commitments or agreements for
acquisitions of complementary businesses, products or technologies. Pending use
of the net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. Our bank loan agreement restricts the payment of dividends.
20
<PAGE>
CAPITALIZATION
The following table sets forth the following information:
- our actual capitalization as of March 31, 1999;
- our pro forma capitalization after giving effect to our sale of 2,758,819
shares of preferred stock on April 19, 1999, with net proceeds of
approximately $23.6 million, and the conversion of all outstanding shares
of preferred stock into shares of common stock; and
- our pro forma as adjusted capitalization to give effect to the sale of
3,000,000 shares of common stock at an assumed initial public offering
price of $14.00 per share in this offering, less the underwriting discount
and estimated offering expenses payable by us.
This table excludes the following shares:
- 3,020,578 shares of common stock issuable upon the exercise of stock
options outstanding under our employee stock option plans, and 1,382,537
additional shares of common stock available for issuance under these stock
option plans;
- 150,000 shares of common stock available for issuance under our 1999
director stock option plan;
- 750,000 shares of common stock available for issuance under our 1999
employee stock purchase plan; and
- 710,435 shares of common stock issuable upon exercise of outstanding
warrants.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Long-term obligations, net of current portion........................ $ 1,601 $ 1,601 $ 1,601
Redeemable convertible preferred stock, $0.0001 par value, issuable
in series; 20,745,976 shares authorized, 9,177,912 shares issued
and outstanding, actual; no shares authorized, issued or
outstanding, pro forma and as adjusted............................. 53,403 -- --
Stockholders' equity (deficit):
Convertible preferred stock; $0.0001 par value, 22,000,000 shares
authorized (including 20,745,976 shares designated as redeemable
convertible preferred), 336,840 shares issued and outstanding,
actual; 10,000,000 shares authorized, no shares issued or
outstanding, pro forma and pro forma as adjusted................... 487 -- --
Common stock, $0.0001 par value; 50,000,000 shares authorized,
5,499,255 shares issued and outstanding, actual; 250,000,000 shares
authorized, 17,772,826 shares issued and outstanding, pro forma;
250,000,000 shares authorized, 20,772,826 shares issued and
outstanding, as adjusted........................................... 23,592 101,082 139,142
Deferred stock compensation.......................................... (3,246) (3,246) (3,246)
Accumulated deficit.................................................. (51,254) (51,254) (51,254)
Accumulated other comprehensive loss................................. (58) (58) (58)
--------- ----------- -----------
Total stockholders' equity (deficit)................................. (30,479) 46,524 84,584
--------- ----------- -----------
Total capitalization................................................. $ 24,525 $ 48,125 $ 86,185
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
21
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock, after giving
effect to our sale of 2,758,819 shares of preferred stock on April 19, 1999 for
net proceeds of approximately $23.6 million, on March 31, 1999 was approximately
$28.5 million, or $1.60 per share. Pro forma net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the number of shares of common stock outstanding. Dilution in pro
forma net tangible book value per share represents the difference between the
amount per share paid by purchasers of shares of our common stock in this
offering and the net tangible book value per share of our common stock
immediately afterwards. After giving effect to our sale of 3,000,000 shares of
common stock offered by this prospectus at an assumed initial public offering
price of $14.00 per share and after deducting the underwriting discount and
estimated offering expenses payable by us, our net tangible book value would
have been approximately $66.5 million, or $3.20 per share. This represents an
immediate increase in net tangible book value of $1.60 per share to existing
stockholders and an immediate dilution in net tangible book value of $10.80 per
share to new investors purchasing shares of common stock in this offering. The
following table, which excludes all options and warrants currently outstanding,
illustrates this dilution. The exercise of outstanding options and warrants
having an exercise price less than the offering price would increase the
dilutive effect to new investors.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 14.00
Pro forma net tangible book value per share as of March 31, 1999.......... $ 1.60
Increase per share attributable to new investors.......................... 1.60
---------
Pro forma net tangible book value per share after the offering.............. 3.20
---------
Dilution in pro forma net tangible book value per share to new investors.... $ 10.80
---------
---------
</TABLE>
The following tables set forth, as of March 31, 1999, on the pro forma basis
described above, the differences between the number of shares of common stock
purchased from us, the total price paid and average price per share paid by
existing stockholders and by the new investors in this offering at an assumed
initial public offering price of $14.00 per share, calculated before deducting
the estimated underwriting discount and offering expenses. The first table shows
these amounts assuming no exercise of the underwriters' over-allotment option,
and the second table shows these amounts assuming the over-allotment option is
exercised.
<TABLE>
<CAPTION>
SHARES PURCHASED ASSUMING
NO EXERCISE OF
UNDERWRITERS'
OVER-ALLOTMENT OPTION TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 17,772,826 85.6% $ 79,557,000 65.4% $ 4.48
New investors............................... 3,000,000 14.4% $ 42,000,000 34.6% $ 14.00
------------ ----- -------------- -----------
Total................................... 20,772,826 100.0% $ 127,557,000 100.0%
------------ ----- -------------- -----------
------------ ----- -------------- -----------
</TABLE>
<TABLE>
<CAPTION>
SHARES PURCHASED ASSUMING
FULL EXERCISE OF
UNDERWRITERS'
OVER-ALLOTMENT OPTION TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....................... 17,772,826 83.7% $ 79,557,000 62.2% $ 4.48
New investors............................... 3,450,000 16.3% $ 48,300,000 37.8% $ 14.00
------------ ----- -------------- -----------
Total................................... 21,222,826 100.0% $ 127,857,000 100.0%
------------ ----- -------------- -----------
------------ ----- -------------- -----------
</TABLE>
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for the years ended December
31, 1996, 1997 and 1998, and the consolidated balance sheet data at December 31,
1997 and 1998 are derived from our Consolidated Financial Statements, which have
been audited by Ernst & Young LLP, independent auditors, and are included
elsewhere in this prospectus. The selected consolidated balance sheet data as of
December 31, 1994, 1995 and 1996 is derived from financial statements not
included in this prospectus. The selected consolidated statement of operations
data for the year ended December 31, 1994 is derived from unaudited consolidated
financial statements not included in this prospectus. The pro forma statement of
operations data for the year ended December 31, 1998 is derived from the
selected unaudited pro forma condensed combined financial information included
elsewhere in this prospectus. The consolidated financial data for the three
months ended March 31, 1998 and 1999 is derived from unaudited financial
statements included elsewhere in this prospectus. We have prepared this
unaudited information on the same basis as the audited Consolidated Financial
Statements and have included all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of our
financial position and operating results for such periods. When you read this
selected consolidated financial data, it is important that you also read the
historical Consolidated Financial Statements and related Notes included in this
prospectus, as well as the section of this prospectus related to "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Historical results are not necessarily indicative of future results.
Our pro forma statement of operations data gives effect to our acquisition
of VEO Systems which was effective January 15, 1999 as if it occurred on January
1, 1998. See "Selected Unaudited Pro Forma Condensed Combined Financial
Information." See Note 1 of Notes to Consolidated Financial Statements for an
explanation of the method used to determine the number of shares used in
computing pro forma net loss per share.
The amounts shown for the three months ended March 31, 1999 include the
results of VEO Systems' operations from January 15, 1999 (the date of
acquisition) through March 31, 1999. See Note 8 to Notes to Consolidated
Financial Statements.
Pro forma services revenue includes revenue recognized by VEO Systems under
a cost reimbursement revenue contract. We expect to account for such fees as a
reduction to product development expenses as of the date of acquisition. Pro
forma cost of revenues includes costs associated with the cost reimbursement
revenue contract as described above.
23
<PAGE>
<TABLE>
<CAPTION>
THREE
MONTHS
PRO FORMA ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED MARCH 31,
----------------------------------------------------- DECEMBER 31, ---------
1994 1995 1996 1997 1998 1998 1998
--------- --------- --------- --------- --------- ------------- ---------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License fees............................ $ 112 $ 90 $ 152 $ 742 $ 1,633 $ 1,633 $ 5
Services................................ 108 349 660 1,004 930 3,720 120
--------- --------- --------- --------- --------- ------------- ---------
Total revenues........................ 220 439 812 1,746 2,563 5,353 125
Cost of revenues.......................... 181 232 782 2,887 4,369 5,530 674
--------- --------- --------- --------- --------- ------------- ---------
Gross profit (loss)....................... 39 207 30 (1,141) (1,806) (177) (549)
Operating expenses:
Sales and marketing..................... 89 146 862 6,055 13,108 13,902 2,511
Product development..................... 179 314 516 2,172 6,839 8,013 1,157
General and administrative.............. 25 57 432 1,805 1,941 3,727 331
Purchased in-process research and
development........................... -- -- -- -- -- -- --
Amortization of deferred stock
compensation.......................... -- -- -- -- 1,102 1,102 99
Amortization of goodwill and other
intangible assets..................... -- -- -- -- -- 4,198 --
--------- --------- --------- --------- --------- ------------- ---------
Total operating expenses.............. 293 517 1,810 10,032 22,990 30,942 4,098
--------- --------- --------- --------- --------- ------------- ---------
Loss from operations...................... (254) (310) (1,780) (11,173) (24,796) (31,119) (4,647)
Interest income (expense), net............ -- (31) (25) 9 156 216 15
--------- --------- --------- --------- --------- ------------- ---------
Net loss.................................. $ (254) $ (341) $ (1,805) $ (11,164) $ (24,640) $ (30,903) $ (4,632)
--------- --------- --------- --------- --------- ------------- ---------
--------- --------- --------- --------- --------- ------------- ---------
Net loss per share:
Basic and diluted....................... $ (0.11) $ (0.14) $ (0.69) $ (4.21) $ (8.21) $ (7.73) $ (1.58)
--------- --------- --------- --------- --------- ------------- ---------
--------- --------- --------- --------- --------- ------------- ---------
Pro forma basic and diluted............. $ (2.60)
---------
---------
Shares used in calculation of net
loss per share:
Basic and diluted....................... 2,384 2,513 2,618 2,679 3,053 3,998 2,966
--------- --------- --------- --------- --------- ------------- ---------
--------- --------- --------- --------- --------- ------------- ---------
Pro forma basic and diluted............. 9,469
---------
---------
<CAPTION>
1999
---------
<S> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License fees............................ $ 1,456
Services................................ 648
---------
Total revenues........................ 2,104
Cost of revenues.......................... 1,668
---------
Gross profit (loss)....................... 436
Operating expenses:
Sales and marketing..................... 4,078
Product development..................... 3,362
General and administrative.............. 827
Purchased in-process research and
development........................... 3,037
Amortization of deferred stock
compensation.......................... 584
Amortization of goodwill and other
intangible assets..................... 875
---------
Total operating expenses.............. 12,763
---------
Loss from operations...................... (12,327)
Interest income (expense), net............ 16
---------
Net loss.................................. $ (12,311)
---------
---------
Net loss per share:
Basic and diluted....................... $ (2.64)
---------
---------
Pro forma basic and diluted............. $ (0.87)
---------
---------
Shares used in calculation of net
loss per share:
Basic and diluted....................... 4,723
---------
---------
Pro forma basic and diluted............. 14,175
---------
---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998 1999
----------- ----------- ----------- --------- --------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 2 $ 230 $ 6,111 $ 9,367 $ 15,138 $ 7,839
Working capital (deficit)......................... (299) (246) 5,209 7,194 11,777 3,364
Total assets...................................... 98 327 6,745 11,664 20,507 30,813
Long-term obligations, net of current portion..... -- -- 199 1,096 1,896 1,601
Redeemable convertible preferred stock............ -- -- 7,258 20,650 50,432 53,403
Total stockholders' equity (deficit).............. (254) (157) (1,897) (13,040) (37,011) (30,479)
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Commerce One is a leading provider of business-to-business electronic
commerce solutions that link buyers and suppliers of indirect goods and services
into real-time trading communities over the Internet. We were founded under the
name DistriVision Development Corporation in 1994. In March 1997, we changed our
name to Commerce One and embarked on an aggressive product development effort,
which culminated in the release of the BUYSITE and MARKETSITE products in April
1998. We released subsequent versions of the BUYSITE and MARKETSITE products in
November 1998 and April 1999.
HISTORY OF LOSSES
We have never been profitable, we expect to incur net losses in the
foreseeable future and we may never be profitable. As of March 31, 1999, we had
an accumulated deficit of $51.3 million. Net losses have increased in the last
five quarters and we expect this trend will continue.
SOURCE OF REVENUES AND REVENUE RECOGNITION POLICY
We generate revenues from multiple sources. License fees are generated from
licensing the BUYSITE and MARKETSITE products to end-user organizations,
primarily Fortune 1000 enterprises. Professional service fees are received from
BUYSITE and MARKETSITE licensees and their suppliers for enterprise resource
planning integration, installation, content aggregation, project management and
other related services. Software maintenance revenues are generated from product
licensees based on the scope of their implementation and the extent of the
service provided. Transaction fees are received from suppliers for purchase
orders the supplier receives through MARKETSITE. To date, transaction fees have
been immaterial. However, our revenue growth will depend upon realizing
significant transaction fees in the future.
We recognize revenues from license agreements upon delivery and acceptance
of the software if there is persuasive evidence of an arrangement, collection is
probable, the fee is fixed or determinable, and there is sufficient
vendor-specific objective evidence to support allocating the total fee to all
elements of these license arrangements. If an acceptance period is required,
license revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period.
We recognize revenues from professional services as the services are
provided. If a transaction includes both license and service elements, the
license fee is recognized on delivery and acceptance of the software, provided
services do not include significant customization or modification of the base
product, and the payment terms for licenses are not subject to additional
acceptance criteria. In cases where license fee payments are contingent on the
acceptance of services, recognition of revenues is deferred for both the license
and the service elements until the acceptance criteria are met. Software
maintenance revenues are recognized ratably over the term of the support
contract, typically one year.
CUSTOMER CONCENTRATION
Our customer base is concentrated as sales to our top four customers have
accounted for a significant portion of our revenue. In the first quarter of
1999, The SABRE Group, Inc., Schlumberger Oilfield Services, The Idaho Power
Company and British Telecommunications, plc each accounted for more than 10.0%
of our revenues. Together, the sales to these four customers comprised
approximately 79.0% of our total revenues in the first quarter of 1999. In 1998,
MCI WorldCom, Eastman Chemical, The County of Los Angeles and Foundation Health
each accounted for more than 10.0% of our
25
<PAGE>
revenues. Together, the sales to these four customers comprised approximately
75.0% of our total revenues in 1998.
LIMITED OPERATING HISTORY
We have a limited operating history that makes it difficult to forecast our
future operating results. We expect to continue to increase our sales and
marketing, product development and general and administrative expenses. As a
result, we will need to generate significant additional revenues to achieve and
maintain profitability in the future. Although our revenues have grown in recent
quarters, we cannot be certain that such growth will continue or that we will
achieve sufficient revenues for profitability. If we do achieve profitability in
any period, we cannot be certain that we will sustain or increase such
profitability on a quarterly or annual basis.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1999
REVENUES
Total revenues increased from approximately $125,000 for the three months
ended March 31, 1998 to approximately $2.1 million for the three months ended
March 31, 1999. For the three months ended March 31, 1998, license fees and
services revenues accounted for 4.0% and 96.0% of total revenues, respectively.
For the three months ended March 31, 1999, license fees and services revenues
accounted for 69.2% and 30.8% of total revenues, respectively.
Revenues from license fees increased from approximately $5,000 for the three
months ended March 31, 1998 to approximately $1.5 million for the three months
ended March 31, 1999. The increase in revenues from license fees primarily
resulted from the release of the BUYSITE and MARKETSITE products in April 1998
and customer acceptance of these products.
Services revenues include revenue from professional services and maintenance
fees. Services revenues increased from approximately $120,000 for the three
months ended March 31, 1998 to approximately $648,000 for the three months ended
March 31, 1999. The increase in services revenues resulted primarily from an
increase in consulting revenue associated with increased sales of our products
and overall growth of our installed base of customers during these periods.
COST OF REVENUES
Total cost of revenues increased from $674,000 for the three months ended
March 31, 1998 to approximately $1.7 million for the three months ended March
31, 1999. Cost of revenues consists primarily of consulting, customer support
and training costs. Cost of revenues also includes software media and
duplication and software documentation costs, although these costs have not been
material to date. The increase in cost of revenues resulted primarily from
personnel related expenses due to the hiring and training of consulting, support
and training personnel and from increases in allocated overhead expenses.
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
increased from approximately $2.5 million for the three months ended March 31,
1998 to approximately $4.1 million for the three months ended March 31, 1999.
This increase was primarily attributable to an overall increase in the number of
sales and marketing personnel. The number of employees engaged in sales and
marketing increased from 41 at March 31, 1998 to 62 at March 31, 1999. In
addition, an increase in marketing costs contributed to the overall
26
<PAGE>
increase. Management expects that the dollar amount of sales and marketing
expenses will continue to increase due to the planned growth of our sales force,
including the establishment of sales offices in additional domestic and
international locations, and due to expected additional increases in marketing
programs and other promotional activities.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses consist primarily of personnel and related
costs associated with our product development efforts. Product development
expenses increased from approximately $1.2 million for the three months ended
March 31, 1998 to approximately $3.4 million for the three months ended March
31, 1999. The increase was primarily due to an increase in the number of product
development personnel employed, including the addition of 22 employees from the
acquisition of VEO Systems in January 1999, to support development of the
BUYSITE and MARKETSITE products. The overall number of employees engaged in
product development increased from 22 at March 31, 1998 to 89 at March 31, 1999
which caused personnel related costs to be the primary reason for the increase
in product development expenses. In addition, increases in allocated overhead
expenses and consulting expenses contributed to the overall increase. Management
believes that investments in product development is essential to our future
success and expects that the dollar amount of product development expenses will
increase in future periods.
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 increased from approximately $331,000 for
the three months ended March 31, 1998 to approximately $827,000 for the three
months ended March 31, 1999. This increase was primarily attributable to an
increase in personnel related expenses as the number of employees engaged in
general and administrative functions increased from 8 at March 31, 1998 to 15 at
March 31, 1999. In addition, an increase in consulting and legal expenses
contributed to the overall increase. Management expects general and
administrative expenses to increase in dollar amount in future periods.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
In January 1999, we acquired VEO Systems, a company specializing in the
creation of XML software technology applications, to complement our existing
technologies. We accounted for the VEO Systems acquisition as a purchase
transaction. The purchase consideration was approximately $23.2 million
consisting of shares of common and preferred stock, stock options assumed, and
$400,000 in cash plus an additional $400,000 in contingent consideration. See
Note 8 of the Notes to Consolidated Financial Statements.
Management estimated that approximately $3.0 million of the $23.2 million
purchase consideration represented purchased in-process research and development
that has not yet reached technological feasibility and has no alternative future
use. Accordingly, this amount was charged to operations in the three months
ended March 31, 1999. A total of approximately $3.5 million of the purchase
consideration was allocated to other intangible assets, including existing
technology ($2.3 million), assembled workforce ($541,000) and tradenames and
patents ($693,000), with these amounts being amortized over periods of four, two
and five years, respectively.
Purchased in-process research and development consisted of a single project,
the development of a set of software tools which is being designed to enable
applications developers to generate programs to interface with the XML document
interchange and transport server. These tools will be integrated into our
products. The efforts required to develop the acquired in-process technology
include the completion of all planning, designing, and testing activities that
are necessary to establish that the
27
<PAGE>
product or service can be produced to meet its design requirements, including
functions, features, and technical performance requirements.
These development tools are based on VEO Systems' proprietary platform and
new standards utilizing the schema for object oriented XML language and will be
scalable, will have new security features and functionality and will have
capabilities for several new services. Significant risk factors with respect to
the timely completion of the development of the technology include the
successful development of the new platform, the development of the schema for
object oriented XML operating language, development of specific service modules,
the configuration into a scalable product, the interoperability independent of
any operating language and maintaining project timing schedules and retention of
key development personnel.
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 VEO Systems. The calculation of
value was then adjusted to reflect only the value creation efforts of VEO
Systems prior to the close of the acquisition. At the time of the acquisition,
the product was approximately 46.0% complete with approximately $1.3 million in
estimated costs remaining which are expected to be incurred in 1999. The
technology was expected to be available for use in our products in late 1999 and
have a technology life of approximately five 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
developed and in-process technology were 20.0% and 30.0%, 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. The discount rate utilized for the in-process
technology was determined to be higher than our estimated weighted average
return on working capital due to the fact that the technology had not yet
reached technological feasibility as of the date of valuation. In utilizing a
discount rate greater than our weighted average return on working capital, we
have reflected the risk premium associated with achieving and sustaining growth
rates and improved profitability as well as the increased rates of return
associated with intangible assets.
DEFERRED STOCK COMPENSATION
In the three months ended March 31, 1999, we recorded aggregate deferred
stock compensation totaling approximately $2.0 million in connection with
certain stock option grants. The deferred stock compensation is being amortized
over the four year vesting period of the related options. During the three
months ended March 31, 1999, amortization of deferred stock compensation totaled
approximately $584,000. See Note 5 of Notes to Consolidated Financial
Statements.
NET LOSS
Our net loss increased from approximately $4.6 million for the three months
ended March 31, 1998 to approximately $12.3 million for the comparable period in
1999.
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
REVENUES
Total revenues increased from approximately $812,000 in 1996 to
approximately $1.7 million in 1997, and increased 46.8% to approximately $2.6
million in 1998. For 1996, license fees and services revenues accounted for
18.7% and 81.3% of total revenues, respectively. For 1997, license fees and
services revenues accounted for 42.5% and 57.5% of total revenues, respectively.
For 1998, license fees and services revenues accounted for 63.7% and 36.3% of
total revenues, respectively.
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License fees revenues increased from approximately $152,000 in 1996 to
approximately $742,000 in 1997, and increased 120.1% to approximately $1.6
million in 1998. The increase in revenues from license fees from 1996 to 1997
primarily resulted from increased licenses of a non-Web-based, client-server
procurement application that was historically offered by us. The increase in
revenues from license fees from 1997 to 1998 resulted from customer acceptance
of the Web-based BUYSITE and MARKETSITE products introduced in April 1998.
Services revenues increased from approximately $660,000 in 1996 to
approximately $1.0 million in 1997 and remained relatively flat at approximately
$930,000 in 1998. The increase in services revenues from 1996 to 1997 resulted
primarily from the increase in consulting customer support and training services
associated with our non-Web-based, client-server procurement applications
offered during this period. Services revenues did not continue to grow in 1998
compared to 1997 as we transitioned to our Web-based BUYSITE and MARKETSITE
products. This resulted in reduced services revenues associated with our
predecessor products in advance of growth in services revenues from our new
BUYSITE and MARKETSITE licensees.
COST OF REVENUES
Cost of revenues increased from approximately $782,000 in 1996 to
approximately $2.9 million in 1997 and increased 51.3% to approximately $4.4
million in 1998. The increase in dollar amount and as a percentage of revenues
from 1996 to 1998 primarily resulted from the hiring and training of consulting,
support and training personnel to support our growing customer base and
increased use of third-party service providers.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased from approximately $862,000 in 1996
to approximately $6.1 million in 1997, and increased 116.5% to approximately
$13.1 million in 1998. The increases in sales and marketing expenses from 1996
to 1998 resulted primarily from investing in sales and marketing infrastructure,
both domestically and internationally, which included significant personnel-
related expenses, recruiting fees, travel expenses, and related facility and
equipment costs, as well as increased marketing activities, including trade
shows, public relations, direct mail campaigns and other promotional expenses.
PRODUCT DEVELOPMENT EXPENSES
Product development expenses increased from approximately $516,000 in 1996
to approximately $2.2 million in 1997, and increased 214.9% to approximately
$6.8 million in 1998. The increases in product development expenses from 1996 to
1998 related primarily to the increase in the number of software developers and
quality assurance personnel and outside contractors hired to support product
development and testing activities.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased from approximately $432,000 in
1996 to approximately $1.8 million in 1997, and increased 7.5% to approximately
$1.9 million in 1998. The increases in general and administrative expenses from
1996 to 1998 resulted primarily from the addition of finance, executive and
administrative personnel to support the growth of our business during these
periods.
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DEFERRED STOCK COMPENSATION
In 1998, we recorded aggregate deferred stock compensation totaling
approximately $3.0 million in connection with certain stock option grants.
Amortization of deferred stock compensation was approximately $1.1 million for
1998. See Note 5 of Notes to Consolidated Financial Statements.
NET LOSS
Our net loss increased from $1.8 million in 1996 to approximately $11.2
million in 1997 and approximately $24.6 million in 1998.
INCOME TAXES
From inception through December 31, 1998, we incurred net losses for federal
and state income tax purposes and have not recognized any income tax provision
or benefit. As of December 31, 1998, we had approximately $32.7 million of
federal and $16.6 million of state net operating loss carryforwards to offset
future taxable income which expire in varying amounts beginning in 2009 and
2002, respectively. Given our limited operating history, losses incurred to date
and the difficulty in accurately forecasting our future results, management does
not believe that the related deferred income tax asset meets the recognition
criteria required by generally accepted accounting principles. Accordingly, a
full valuation allowance has been recorded. Furthermore, as a result of changes
in our equity ownership from our convertible preferred stock financing and this
offering, utilization of the net operating losses and tax credits is subject to
substantial annual limitations. This is due to the ownership change limitations
provided by the Internal Revenue Code and similar state provisions. The annual
limitation may result in the expiration of net operating losses and tax credits
before utilization. See Note 6 of Notes to Consolidated Financial Statements.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth our unaudited quarterly results of operations
data for our five most recent quarters ended March 31, 1999. You should read the
following table in conjunction with our Consolidated Financial Statements and
related Notes included elsewhere in this prospectus. We have prepared this
unaudited information on the same basis as the audited Consolidated Financial
Statements. This table includes all adjustments, consisting only of normal
recurring adjustments, that we consider necessary for a fair presentation of our
financial position and operating results for the quarters presented. We have
experienced and expect to continue to experience fluctuations in operating
results from quarter to quarter. We incurred net losses in each of the last five
quarters and expect to
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continue to incur losses for the foreseeable future. You should not draw any
conclusions about our future results from the results of operations for any
quarter.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------
MARCH SEPTEMBER MARCH
31, JUNE 30, 30, DECEMBER 31, 31,
1998 1998 1998 1998 1999
------- ---------- ------------ ------------ -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUES:
License fees..................... $ 5 $ 500 $ 450 $ 678 $ 1,456
Services......................... 120 198 276 336 648
------- ---------- ------------ ------------ -------
Total revenues................. 125 698 726 1,014 2,104
Cost of revenues................... 674 961 1,352 1,382 1,668
------- ---------- ------------ ------------ -------
Gross profit (loss)................ (549) (263) (626) (368) 436
OPERATING EXPENSES:
Sales and marketing.............. 2,511 3,373 3,329 3,895 4,078
Product development.............. 1,157 1,494 1,724 2,464 3,362
General and administrative....... 331 461 534 615 827
Purchased in-process research and
development.................... -- -- -- -- 3,037
Amortization of deferred stock
compensation................... 99 226 348 429 584
Amortization of goodwill and
other intangible assets........ -- -- -- -- 875
------- ---------- ------------ ------------ -------
Total operating expenses....... 4,098 5,554 5,935 7,403 12,763
------- ---------- ------------ ------------ -------
Loss from operations............... (4,647) (5,817) (6,561) (7,771) (12,327)
Interest income (expense), net..... 15 (76) 73 144 16
------- ---------- ------------ ------------ -------
Net loss........................... $(4,632) $ (5,893) $(6,488) $(7,627) $(12,311)
------- ---------- ------------ ------------ -------
------- ---------- ------------ ------------ -------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
We have historically satisfied our cash requirements primarily through
private placements of equity securities and lease and debt financing. Through
March 31, 1999, we have raised approximately $73.9 million through equity
financings which included the sale of 2,758,819 shares of Series E preferred
stock for net proceeds of approximately $23.6 million. See Notes 5 and 8 of
Notes to Consolidated Financial Statements.
Net cash used in operating activities totaled approximately $1.3 million for
1996, approximately $10.6 million for 1997, approximately $21.3 million for 1998
and approximately $6.3 million for the three months ended March 31, 1999. Cash
used in operating activities for each period resulted primarily from net losses
in those periods.
Net cash used in investing activities totaled approximately $286,000 for
1996, approximately $924,000 for 1997, approximately $2.5 million for 1998 and
approximately $785,000 for the three months ended March 31, 1999. The increases
in each period resulted primarily from the acquisition of capital assets,
primarily computer and office equipment, and in the cash advances made to VEO
Systems in 1998. See Note 8 of Notes to Consolidated Financial Statements.
Net cash provided by financing activities totaled approximately $7.4 million
for 1996, approximately $14.8 million for 1997, and approximately $29.6 million
for 1998. The increases in each period resulted primarily from the net proceeds
from issuances of convertible preferred stock and from bank line of credit
borrowings. In the three months ended March 31, 1999, we used approximately
$180,000 in financing activities.
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As of March 31, 1999, our principal sources of liquidity included
approximately $7.8 million of cash and cash equivalents. On April 19, 1999 we
received net proceeds of approximately $23.6 from the sale of shares of our
Series E preferred stock. We anticipate an increase in our capital expenditures
consistent with anticipated growth in operations, infrastructure and personnel.
We believe that our available cash resources together with the net proceeds
from this offering will be sufficient to finance our presently anticipated
operating losses and working capital expenditure requirements for at least the
next 18 months. Our future liquidity and capital requirements will depend upon
numerous factors. The rate of expansion of our operations in response to
potential growth opportunities and competitive pressures will affect capital
requirements. Additionally, we may need additional capital to fund acquisitions
of complementary businesses, products and technologies. Our forecast of the
period of time through which its financial resources will be adequate to support
operations is a forward-looking statement that involves risks and uncertainties,
and actual results could vary materially as a result of the factors described
above. If we require additional capital resources, we may seek to sell
additional equity or debt securities or secure a bank line of credit. 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.
YEAR 2000 ISSUES
Many currently installed computer systems, software products and other
control devices are unable to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, many companies' computer
systems, software products and control devices may need to be upgraded or
replaced in order to operate properly in the year 2000 and beyond.
The internal systems used to deliver our services utilize third-party
hardware and software. We have contacted all infrastructure products' vendors
and are in the process of contacting the few remaining outside service providers
with whom we have not yet spoken in order to gauge their year 2000 compliance.
Based on these vendors' representations, we believe that there are a number of
third-party hardware and software systems, some of which are material to our
products and operations, that require some upgrade in order to be year 2000
compliant. The upgrades will be performed by a combination of our internal
technical staff and outside specialized vendors and contractors. We believe that
all of our software will be year 2000 compliant by September 1999 and all of our
hardware will be year 2000 compliant by November 1999. We are currently in the
process of effecting these upgrades and currently estimate the costs of such
efforts to be less than $500,000. The time period in which we expect to upgrade
our software and hardware to be year 2000 compliant is a forward-looking
statement that is subject to risks and uncertainties. Actual results may differ
materially from those described as a result of a number of factors, including
difficulties in identifying or upgrading software or hardware systems that are
not currently year 2000 compliant and in coordinating these efforts through our
internal technical staff and specialized contractors. We expect to be able to
complete these upgrades before any year 2000 problem could arise and with ample
time to test and refine any adjustments made. Unanticipated problems such as
material costs caused by undetected errors or defects in the technology used in
our internal systems could delay our completion of the upgrades.
In addition, our customers' and commerce service providers partners'
internal operating systems and other software applications must operate
effectively for them to use our products and services effectively. If these
systems or applications are not year 2000 compliant, our customers may not use
our products and services and the commerce service provider partners may not be
able to host our solutions. We cannot predict to what extent our customers' and
commerce service providers partners' systems and applications are year 2000
compliant.
As the year 2000 approaches, there is a risk that orders for our products
will be reduced or delayed as information technology departments within
companies reallocate their capital expenditures
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to prepare for the year 2000 and resolve year 2000 problems. If companies do
defer purchases of our products and services because of such reallocation, such
a resulting reduction in orders could significantly impact our business.
If, in the future, it comes to our attention that some of our products need
modification, or some of our third-party hardware and software is not year 2000
compliant, then we will seek to make modifications. In such case, we expect such
modifications to be made on a timely basis, and we do not believe that the cost
of such modifications will materially harm our operating results. We cannot
assure you, however, that we will be able to modify our products, services and
systems in a timely and successful manner to comply with the year 2000
requirements.
The worst case scenario for year 2000 problems for us would be the need for
us to cease normal operations for an indefinite period of time while we attempt
to respond to customers' and suppliers' year 2000 problems without having full
internal operational capabilities. We are in the process of assesing our
exposure to liability for any failure to provide year 2000 compliant products to
our customers and suppliers. In the event that year 2000 issues are not resolved
in a timely manner, we are developing a disaster recovery plan that is scheduled
to be completed by November 1999. The cost of developing and implementing our
plan may be material.
MARKET RISK
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".
INTEREST RATE RISK
As of March 31, 1999, we had cash and cash equivalents of approximately $7.8
million which consist of cash and highly liquid short-term investments with
original maturities of three months or less at the date of purchase. We have
invested the proceeds of our recent Series E preferred stock financing in
similar investments. These investments may be subject to interest rate risk and
will decrease in value if market interest rates increase. A hypothetical
increase or decrease in market interest rates by 10 percent from the market
interest rates at March 31, 1999 would cause the fair value of these short-term
investments 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 and are primarily from customers in the United States. Although
revenues from international customers to date have not been substantial, we
expect that future license fees and services revenues derived from international
markets will be denominated in the currency of the applicable foreign market. As
a result, our operating results could become subject to significant fluctuations
based upon changes in the exchange rates of certain currencies in relation to
the U.S. dollar. Furthermore, if 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 less competitive in international markets.
Although we will continue to monitor our exposure to currency fluctuations, and,
when appropriate, may use financial hedging techniques in the future to minimize
the effect of these fluctuations, we cannot assure you that exchange rate
fluctuations will not harm our business in the future.
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EQUITY PRICE RISK
We do not own any equity investments. Therefore, we are not currently
exposed to any direct equity price risk.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Position 97-2, "Software Revenue Recognition," was issued in
October 1997 by the American Institute of Certified Public Accountants and
amended by Statement of Position 98-4. We adopted Statement of Position 97-2
effective January 1, 1998. Based on our interpretation of Statement of Position
97-2 and Statement of Position 98-4, we believe our current revenue recognition
policies and practices, as discussed in "Management's Discussion and Analysis of
Financial Condition and Result of Operations -- Overview," are consistent with
Statement of Position 97-2 and Statement of Position 98-4. The American
Institute of Certified Public Accountants has also issued Statement of Position
98-9 which will be effective for us for transactions entered into beginning
January 1, 2000. However, full implementation guidelines for this standard have
not yet been issued. Once available, such implementation guidelines could lead
to unanticipated changes in our current revenue recognition policies, which
changes could materially adversely affect our business, financial condition or
operating results.
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BUSINESS
INDUSTRY BACKGROUND
The success of the Internet in streamlining business-to-consumer commerce is
encouraging companies to seek similar efficiencies in their transactions with
other businesses. Companies are increasingly using the Internet to enter new
markets, improve supply chains and meet the challenges of increased competition
and global markets. Forrester Research estimates that U.S.-based Internet
commerce between companies will grow from $109 billion in 1999 to $1.3 trillion
in 2003. Forrester Research further estimates that by 2003 this market for
business-to-business transactions will be more than ten times larger than the
related business-to-consumer transactions market.
EARLY ENTERPRISE COMMERCE AUTOMATION
Initial efforts by businesses to reduce transaction costs and increase
commerce efficiency focused on an organization's interaction with suppliers,
particularly for the purchase and sale of raw materials, unfinished items and
other direct goods. Most large companies have historically relied upon
enterprise resource planning and supply chain automation systems to increase the
efficiency of their internal procurement processes for direct goods. These
systems are based on complex client-server architectures that are designed to be
used by a relatively small number of sophisticated users. In addition, since
enterprise resource planning solutions do not typically tie the corporation with
its suppliers or customers, they do not address any transaction costs or
inefficiencies that are external to the organization.
A variety of point-to-point solutions have been developed to address
procurement cycle inefficiencies across both buyers and suppliers. The most
successful of these has been to integrate electronic data interchange, or EDI,
into existing enterprise resource planning systems. EDI has gained wide
acceptance in automating the sale and procurement of selected direct goods,
principally in environments characterized by frequent high dollar-volume
transactions with a few suppliers. However, because EDI relies on the execution
of certain pre-defined transactions, it typically is not well suited for
situations involving many buyers and suppliers, a wide variety of goods and
services, or numerous low dollar-volume transactions. Moreover, EDI is not
generally used for real-time interactions between trading partners, making it
difficult for buyers to obtain up to date supplier information about price,
availability and order status. Finally, the expense and complexity associated
with licensing, implementing and managing both enterprise resource planning and
EDI solutions can make them unsuitable for all but the largest organizations.
FIRST GENERATION INDIRECT PROCUREMENT SOLUTIONS
Similar efforts have been made to improve the procurement process for
indirect goods and services, which include information technology and
telecommunications equipment, office equipment and supplies, travel and
entertainment, professional services and other repeat purchase items. The
purchase and sale of these goods comprise a large portion of
business-to-business transactions. The process of procuring these goods often
involves thousands of internal users, as numerous work groups, departments, and
divisions within an enterprise are involved in the purchase of indirect goods
and services. As a result, the indirect goods procurement process is also mired
in several inefficiencies, including:
- high purchasing costs since paper-based, manual processes still dominate
this process;
- wasted time on low value activities within purchasing departments; and
- poor communication between buyers and suppliers.
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A number of desktop-based requisitioning software products have been
introduced to focus on automating the indirect goods and services procurement
processes within the enterprise. These solutions serve to enforce purchasing
policies and improve the efficiency of supplier management, buying
authorization, approval routing and order processing. However, these
buyer-focused approaches offer limited ability to address the costs and
inefficiencies associated with the supplier side of the transaction. They also
typically lack the interactivity users need to check prices, availability and
order status, while they also generally fail to provide a mechanism to
automatically update supplier information relating to these areas. Consequently,
both internal users and suppliers typically still rely upon costly, manual
phone- and fax-based processes to interact and conduct commerce.
In response to these limitations, some vendors have produced point-to-point
solutions that automate buying and selling among trading partners. These
solutions typically require compatible software to be deployed at both the buyer
and supplier, a costly and inefficient approach that is difficult to scale to a
large number of trading partners.
The Internet offers the potential to transform the indirect goods supply
chain into open marketplaces or trading communities by enabling companies to
publish information so that it is instantly available to all trading partners.
Ideally, these marketplaces should be open and interoperable, so that buyers and
suppliers can reach the largest number of trading partners, regardless of the
procurement applications they may be using or the trading communities to which
they belong.
THE COMMERCE ONE SOLUTION
Commerce One is a leading provider of electronic commerce solutions that
link buyers and suppliers of indirect goods and services into real-time trading
communities over the Internet. Our solutions are architected to enable
development of a global web of interoperable marketplaces and trading
communities. We have developed the Commerce Chain Solution to automate the
procurement cycle between multiple buyers and suppliers. The Commerce Chain
Solution is comprised of the following components:
- BUYSITE, ENTERPRISE EDITION and BUYSITE, HOSTED EDITION;
- THE MARKETSITE OPEN MARKETPLACE PLATFORM; AND
- MARKETSITE COMMERCE SERVICES.
The Commerce Chain Solution is designed to enable business-to-business
electronic commerce for a broad range of organizations.
BUYSITE is an intranet-based purchasing application that enables users
throughout the enterprise to make purchases over the Internet. BUYSITE provides
access to and easy purchasing from catalogs of many different suppliers while
eliminating paperwork, automating the approval process, and enforcing the
purchasing policies that apply to each buyer and supplier.
The MARKETSITE PLATFORM provides the foundation for commerce service
providers to create and maintain marketplaces for specific geographic regions as
well as to address the needs of trading partners in vertical markets for a
specific industry or group of related industries. We believe this platform
creates significant economies of scale for market participants by centralizing
content and transaction management services, eliminating the need for buyers and
suppliers to create point-to-point integration with each trading partner. The
first MARKETSITE marketplace operating on this platform is our MARKETSITE.NET
marketplace.
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Key benefits of our approach include the following:
COMPLETE ENTERPRISE PURCHASING SOLUTION
We believe that the Commerce Chain Solution offers a complete solution that
automates the procurement cycle for marketplace participants, including buyers,
suppliers, market-makers and value-added commerce service providers. Our
solution not only automates internal procurement functions within the
organization--replacing traditional methods such as phone, fax, simple email,
and EDI for communication between trading partners--but also offers the products
and services necessary for establishing real-time on-line trading communities.
SCALABLE ARCHITECTURE
The Commerce Chain Solution architecture allows buyers and suppliers to
perform a single integration of their systems with the MARKETSITE PLATFORM. The
MARKETSITE PLATFORM is designed to provide a centralized portal for all commerce
services and to enable business transactions between all trading partners within
the marketplace. This architecture is highly scalable and is designed to support
real-time Internet trading communities. Moreover, individual trading communities
established on the MARKETSITE PLATFORM will be able to interoperate to create
marketplaces on a global scale.
SUPERIOR SUPPLIER SOLUTION
Our MARKETSITE PLATFORM features a "publish once" content model and related
tools that enable suppliers to standardize their content presentation and
centralize the delivery of their catalogs. Purchasing enterprises in the trading
community can access this content and make purchases using our BUYSITE products,
providing suppliers with a large and expanding channel for reaching corporate
purchasers. We believe this approach, combined with a supplier's ability to
easily update pricing and availability information in real time, streamlines the
sales process and can lower the supplier's overall transaction costs.
MULTIPLE PROCUREMENT APPLICATION SUPPORT
In addition to our own BUYSITE applications, we also enable third-party
procurement applications to connect to the MARKETSITE PLATFORM. This extends the
leverage of our "publish once" content model for suppliers, greatly expanding
the number of potential participants in our trading communities. Enterprises
that have already deployed third-party applications within their organizations
are able to leverage these applications and still utilize our solutions. In
addition, we have acquired, and are in the process of integrating, innovative
XML software technology which we expect will enable us to incorporate additional
third-party applications in the future.
GLOBAL MARKETPLACE SUPPORT
Our solution is designed to enable an enterprise buyer or supplier to use
our Commerce Chain Solution to access a global network of trading communities as
they are deployed, through a single Internet connection. We have established
strategic relationships with British Telecommunications and Nippon Telegraph and
Telephone to host MARKETSITES in their regional markets, and plan to pursue
additional strategic relationships in the future. We believe these global
partnerships will be attractive to additional trading partners, increasing the
breadth and depth of our commerce service offerings and accelerating the
deployment of our Internet-based procurement applications. Most importantly, we
believe that our partners will benefit from increased commerce traffic between
trading partners, incremental revenue opportunities from operating regional
marketplaces and opportunities to provide new commerce services.
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VERTICAL TRADING COMMUNITIES
Our products are designed to create vertical trading communities for
specialized market segments in a specific industry or group of related
industries. Our solutions are constructed to allow distributors to transform
their existing customer and supplier relationships into real-time trading
communities, improving the efficiency of existing business processes and
creating opportunities to offer new value-added services. Moreover, because
marketplaces in different industries are designed to be interoperable,
market-makers will be able to significantly expand their supply and distribution
chains. Our MARKETSITE PLATFORM also enables market-makers within defined
trading communities to host transactions in their community on a subscription
basis in order to encourage electronic trading within their specific industries.
ELECTRONIC TRADING COMMUNITY FOR ORGANIZATIONS OF ALL SIZES
For buyers and suppliers with limited in-house electronic commerce
capabilities, we provide hosted applications that offer low cost, low risk
access to electronic trading communities. BUYSITE, HOSTED EDITION requires only
a Web browser interface and is an innovative platform for offering electronic
procurement solutions to small-to-medium size businesses on a subscription
basis. Using MARKETSITE.NET, these buyers can order products electronically from
supplier catalogs of any supplier on MARKETSITE.NET, pay for these products and
arrange for their shipment.
COMMERCE ONE STRATEGY
Our objective is to create the leading global business-to-business trading
web comprised of interoperable marketplaces, trading communities and commerce
portals operated by both our strategic partners and us in targeted regional and
vertical markets. We intend to create a global network effect by attracting the
world's largest buyers, suppliers and commerce service providers and providing
the products and services necessary to create new economies of scale for all
these key participants. The infrastructure for this worldwide trading web will
be regional trading communities based in North America, Europe and Asia. We
operate a North American marketplace, MARKETSITE.NET, while in the future
European and Asian marketplaces will be delivered by our strategic partners who
will in turn drive adoption of our solution. Our strategy is to deliver the
world's largest and most valuable business-to-business marketplace by building
upon this infrastructure, delivering the products and services necessary for
creating new marketplaces, offering a platform for the easy integration of
third-party commerce services and extending the capabilities of our buying
solutions.
Key elements of our strategy include:
ESTABLISH MARKETSITE.NET AS THE PREMIER BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE
PORTAL FOR NORTH AMERICA
Our MARKETSITE.NET, the first marketplace built upon the MARKETSITE
PLATFORM, is designed to be open to third party and proprietary buying
applications, including our BUYSITE application, selling applications, hosted
applications and value-added commerce services. We believe this open environment
creates new economies of scale for all participants. Suppliers will have access
to a larger selection of buyers, buyers will have a wider choice of suppliers
and commerce service providers will gain a single point of access to all trading
community members. We intend to leverage this network effect to establish
MARKETSITE.NET as the premier business-to-business electronic commerce portal
for indirect goods procurement for North America. We believe the value of
MARKETSITE.NET will increase as both complementary regional MARKETSITE
marketplaces, planned to be operated by our strategic partners, and specialized
vertical trading communities, are added to our global trading web.
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DRIVE GLOBAL ADOPTION OF OUR SOLUTIONS THROUGH STRATEGIC PARTNERSHIPS
We license the MARKETSITE PLATFORM as an enabling technology for
market-makers to develop and deploy open trading communities that complement
MARKETSITE.NET. We intend to establish alliances with key participants in a
number of geographic markets to drive adoption of our solution on a global
basis. We further intend to license our BUYSITE solution for internal use by
these key geographic partners to drive adoption by their suppliers and provide
key references for the benefit of our solution. We expect that the value of this
marketplace will attract other buyers utilizing either our BUYSITE application
or other third-party buying applications. We believe commerce service providers
will seek to access the MARKETSITE marketplace to deliver their services to all
participating buyers and suppliers. Our strategic partners will also be able to
leverage our hosted capabilities to offer procurement and selling solutions to
small and medium size enterprises.
Earlier this year, we established an alliance with British
Telecommunications that includes our grant of licenses to use our BUYSITE
product and MARKETSITE PLATFORM internally and to host a trading community built
on the MARKETSITE PLATFORM in the United Kingdom. We also recently established
an alliance with Nippon Telegraph and Telephone that includes our grant of
licenses of our MARKETSITE PLATFORM and BUYSITE products. This alliance also
contemplates the creation of a MARKETSITE trading community in Japan.
EMPOWER MARKET-MAKERS TO ESTABLISH VERTICAL MARKETPLACES
By licensing the MARKETSITE PLATFORM for the creation and deployment of new
vertical marketplaces, we intend to establish relationships with key industry
participants that have the resources and market position to drive adoption of
marketplaces in specific industries or groups of related industries. Vertical
markets that we intend to target include telecommunications, financial services,
utilities, healthcare, pharmaceuticals, hospitality, information technology,
chemicals, and government. The open, scalable nature of our MARKETSITE PLATFORM
and BUYSITE products is designed to enable trading across these vertical markets
and with regional MARKETSITE marketplaces. We believe the proliferation of
vertical market communities can substantially increase the value to all industry
trading partners.
OFFER A SINGLE POINT OF INTEGRATION FOR THIRD-PARTY VALUE-ADDED SERVICE
PROVIDERS
The MARKETSITE PLATFORM is designed to provide a single point of integration
for making new services available immediately across a MARKETSITE marketplace to
all users, alleviating the need for the point-to-point,
application-to-application integration required by competing solutions. We
believe that this capability will encourage MARKETSITE commerce service
providers to offer a wide variety of value-added commerce services, both
creating more value for all participants and extending the network effect of our
solution. For example, we expect third-party service providers to offer
shipping, payment, travel and taxation analysis services on MARKETSITE.NET
beginning in the second half of 1999, and we intend to integrate additional
value-added services in the future.
DRIVE ENTRY INTO OUR MARKETSITE MARKETPLACES THROUGH ENHANCED BUYSITE
FUNCTIONALITY
BUYSITE is the primary means through which trading partners access
MARKETSITE marketplaces. We plan to extend BUYSITE functionality to accomodate
additional services that become available on MARKETSITE marketplaces and to
automate the process of procuring other goods, such as direct goods. We also
will continue to develop our BUYSITE, HOSTED EDITION application, which permits
a buyer's employees to conduct commerce on the MARKETSITE PLATFORM from their
desktops via an Internet browser without the need to license BUYSITE, ENTERPRISE
EDITION and integrate it into the buyer's internal enterprise resource planning
system. We intend to continue to extend BUYSITE'S functionality to further
attract buying organizations of all sizes, adding more value to MARKETSITE
marketplaces and extending the network effect of our solution.
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LEVERAGE SYSTEM INTEGRATION AND TECHNOLOGY PARTNERSHIPS
We intend to accelerate our penetration of the electronic commerce
marketplace through strategic partnerships with large system integrators and
technology vendors that have established market presence with Fortune 1000
companies, government entities and academic institutions. Our system integration
partners include PricewaterhouseCoopers, MCI Systemhouse and Cambridge
Technology Partners. We are also among the application vendors associated with
Microsoft's Commerce Alliance Program, developed to launch its electronic
commerce strategy.
LEVERAGE LEADING EDGE XML SOFTWARE TECHNOLOGY AND CONTENT MANAGEMENT TOOLS
Our XML software technology is designed to eliminate the need for expensive,
customized point-to-point integration of commercial data between buyers and
suppliers and to enable our solution to integrate with other electronic commerce
solutions, software applications and platforms. Once implemented, this
technology is expected to enable buyers and suppliers to exchange commercial
information and conduct commerce through our MARKETSITE PLATFORM using
self-defining business documents. In addition, our content management tools
allow us to quickly and cost-effectively convert raw supplier product data into
a consistent, normalized format for use on MARKETSITE. We believe that XML
software technology is emerging as the foundation of an industry standard for
business-to-business electronic commerce.
PRODUCTS AND SERVICES
Our Commerce Chain Solution is comprised of BUYSITE, the MARKETSITE PLATFORM
and MARKETSITE COMMERCE SERVICES.
COMMERCE ONE BUYSITE
The Commerce One BUYSITE product currently consists of two offerings:
BUYSITE, ENTERPRISE EDITION and BUYSITE, HOSTED EDITION. Both applications offer
Web-based procurement capabilities that are designed to enable companies to
reduce their indirect goods purchasing costs while increasing their overall
supply chain efficiency. Cost reductions are achieved through user-friendly
application functionality designed to reduce off contract, or "rogue,"
purchases, automate unnecessary manual processes, improve leverage with
suppliers and provide links to a dynamic trading partner community.
BUYSITE, ENTERPRISE EDITION is typically installed and maintained at the
customer site. Key components of BUYSITE, ENTERPRISE EDITION include:
- an easy to use, Web-based interface that requires limited training and is
readily localized for international requirements;
- a powerful multi-supplier catalog with advanced search capabilities that
allow easy access to the requested item or service;
- a robust workflow module that automates and controls the requisition/order
routing, approval and preparation processes;
- an easily-configured business rules module designed to implement each
customer's business processes;
- unique transaction capabilities that enable real-time connections to
suppliers for up-to-the-minute prices and availability, status and other
critical information; and
- the XML software technology that enables BUYSITE to readily integrate with
customers' enterprise resource planning systems.
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BUYSITE, HOSTED EDITION is designed to be offered by a commerce service
provider as a hosted service to customers that do not require an enterprise
application to be installed, BUYSITE, HOSTED EDITION includes added
functionality in the following areas:
- support for multiple buying organizations in a single hosted environment;
- system and site monitoring designed to handle large volumes of users in a
distributed multi-organization environment;
- multi-level administration designed to support the large number of
operators and system administrators inherent in a multiple enterprise,
shared environment; and
- billing support for the commerce service providers' unique business
requirements.
Both of these applications are built on Microsoft's industry-leading Windows
NT platform and have an open standards-based architecture that facilitates our
rapid development of new features and functions. By implementing the BUYSITE
procurement product, customers are able to access our MARKETSITE marketplaces.
COMMERCE ONE MARKETSITE PLATFORM
The MARKETSITE PLATFORM is the enabling technology that provides for the
creation and management of open, interactive marketplaces. Future releases of
MARKETSITE PLATFORM will leverage our XML software technology to enhance
real-time transaction exchange among members of a marketplace.
Commerce One MARKETSITE.NET is the first available, open
business-to-business marketplace portal deployed using the MARKETSITE PLATFORM.
Primary features of MARKETSITE.NET include:
- compatibility with multiple buying and selling applications;
- real-time exchange of purchase orders, price, availability, status and
other information; and
- automated aggregation, normalization and updating of multiple supplier
catalog content.
HOSTED APPLICATIONS AND BUSINESS SERVICES PLATFORM
Our MARKETSITE PLATFORM can host electronic commerce applications and
business services developed by Commerce One or third-party partners. A hosted
content and order management module called "Commerce One Supply Order" enables
smaller suppliers to integrate with a MARKETSITE marketplace in real-time. Users
of Commerce One Supply Order are able to publish their content on a MARKETSITE
marketplace using only a Web browser. In the future, we expect to add
third-party services including shipping, payment, travel and tax, and intend to
support new applications for the MARKETSITE PLATFORM.
AUTOMATED CONTENT MANAGEMENT
MARKETSITE COMMERCE SERVICES provide the tools to automate and aggregate
catalog content from multiple suppliers to create a scalable resource across the
marketplace. These tools provide both manual and automated options for acquiring
and aggregating the content from supplier catalogs.
PROFESSIONAL SERVICES
Our professional services organization helps customers maximize their
investments by providing tools and services that facilitate the Commerce Chain
Solution implementation process. By teaming with a range of leading services
partners, we deliver comprehensive systems integration, implementation,
technical support, supplier adoption, and education services and programs to
deploy our Commerce Chain Solution. Our professional services are grouped into
three catagories: implementation service packages, education and training
services, and support and maintenance services.
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SERVICE PACKAGES
QUICKSTART PROGRAM. The QuickStart Program is designed to provide support,
guidance, education and product consulting during the initial implementation
phase of the Commerce Chain Solution. The primary goal is to create a working
environment that can confirm and quantify the requirements by the project team.
Through the Quickstart Program, customers often develop the ability to use our
solution within the first six months of licensing the software.
TRANSACTIVE CONTENT SERVICES PROGRAM. The Transactive Content Services
Program accelerates the addition of suppliers into a MARKETSITE marketplace by
normalizing and aggregating catalog content from multiple suppliers. The program
provides tools, consulting and other resources necessary to implement electronic
commerce trading relationships with strategic suppliers.
SUPPLIER CONTENT MANAGEMENT SERVICES PROGRAM. The Supplier Content
Management Services Program provides processes and tools to replicate and
integrate data from multiple suppliers into a single catalog. Our automation
tools and services enable suppliers to provide content in a storable
environment, lowering the supplier's costs. We provide a methodology and tools
which offer a "publish once" content strategy that can be leveraged across many
buyers. Unlike competing solution providers, we accept catalog content in the
supplier's preferred format and then map the data into the buying customer's
preferred format.
EDUCATION AND TRAINING SERVICES
We are committed to delivering the knowledge and tools needed for the
successful implementation and deployment of the Commerce Chain Solution. We have
designed a comprehensive curriculum to meet the needs of our customers and
partners. The curriculum includes hands-on classes and Web-based training for
BUYSITE and MARKETSITE customers, methodology and process-centered seminars for
system integrators, detailed technical training for systems administrators, and
integration training for suppliers.
SUPPORT AND MAINTENANCE SERVICES
We have developed a portfolio of complementary support and maintenance
programs for our customers. Our customer support center uses on-line media
access, call tracking, and knowledge management systems, as well as remote
access to customer sites, to provide a comprehensive range of services. For the
successful ongoing operation of our solutions, we offer support programs
specifically designed for each BUYSITE customer and its suppliers.
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 partnerships is a fundamental
piece of our strategy as we expand our products and services and enter new
markets. Our strategic partners include the following:
BRITISH TELECOMMUNICATIONS
We have established a strategic relationship with British Telecommunications
in which we have:
- granted British Telecommunications a license to host the MARKETSITE
service within the United Kingdom;
- granted British Telecommunications the right to resell our BUYSITE
products to customers in the United Kingdom;
- received commitments that the British Telecommunications' electronic
business group will, for a limited period of time, promote MARKETSITE for
business-to-business electronic procurement of
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commoditized indirect goods in the United Kingdom. This service will be
marketed under the British Telecommunications brand and identified as
powered by Commerce One; and
- granted British Telecommunications a license for BUYSITE, ENTERPRISE
EDITION for its internal use.
In addition, British Telecommunications has invested $6.0 million in our
recent preferred stock financing and John Swingewood, director of the Internet
and Multimedia Group at British Telecommunications, is a member of our board of
directors.
NIPPON TELEGRAPH AND TELEPHONE
We have established a strategic relationship with Nippon Telegraph and
Telephone in which we have:
- licensed BUYSITE, ENTERPRISE EDITION and the MARKETSITE PLATFORM to Nippon
Telegraph and Telephone for internal use in the United States and Japan,
including an exclusivity arrangement within Japan. The exclusivity of
portions of the license is for a specified period of time;
- agreed to enter into a strategic relationship agreement with Nippon
Telegraph and Telephone relating to the establishment of sales, marketing
and distribution arrangements in Japan, as well as the creation of a
potential hosted MARKETSITE service; and
- agreed to establish a joint development relationship to develop electronic
commerce platform technologies for the Japanese market.
As of May 31, 1999, Nippon Telegraph and Telephone owned approximately
400,083 shares of our common stock that it received in exchange for its equity
stake in VEO Systems at the time of our acquisition of VEO Systems in January
1999.
PRICEWATERHOUSECOOPERS
In September 1998, we entered into a preferred marketing agreement with the
management consulting services group within PricewaterhouseCoopers. As part of
this agreement, this group has designated us as its preferred provider of
business-to-business electronic commerce solutions for indirect goods
procurement, and we have designated this group as a preferred consulting and
system integration partner. In addition, this group also provides us with
marketing support and has dedicated over ten of their product development
engineers to assist in the development of our next generation electronic
commerce solutions at our facilities. This agreement is for a term of three
years, and is then terminable upon 90 days notice.
MCI SYSTEMHOUSE
In July 1998, we entered into a three-year marketing agreement with MCI
Systemhouse, a wholly-owned subsidiary of MCI WorldCom. MCI Systemhouse has
agreed to work with us to market and implement our business-to-business
electronic commerce solutions for indirect goods procurement. MCI Systemhouse
made a $5.0 million equity investment in Commerce One through our preferred
stock financing in 1998.
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MICROSOFT CORPORATION
We are among the selected application vendors associated with Microsoft's
Commerce Alliance Program, developed to launch Microsoft's electronic commerce
strategy. This relationship fosters a range of benefits including participation
in Microsoft marketing activities and promotions, joint press releases,
developer conferences and access to pre-commercial releases of Microsoft
software programs. This relationship currently continues through at least
December 2000.
CUSTOMERS
As of May 31, 1999, we served organizations in a wide range of industries,
including government, utilities, finance, telecommunications, information
services, travel and transportation. Set forth below is a representative list of
our customers who have licensed our products:
DOMESTIC
Booz-Allen Hamilton
California State University, Fullerton
The County of Los Angeles
Eastman Chemical
Foundation Health
The Idaho Power Company
MCI WorldCom
Pacific Bell Network Integration
Pacific Gas and Electric Company
Promus Hotels
The SABRE Group
University of California, Los Angeles
Warner-Lambert
INTERNATIONAL
The Boots Company
British Telecommunications
Nippon Telegraph and Telephone
Schlumberger Oilfield Services
If one or more of our major customers were to substantially reduce or stop
their use of our products or services, or if we do not attract significant
numbers of new customers, our business, operating results and financial
condition would be harmed. In the first quarter of 1999, The SABRE Group,
Schlumberger Oilfield Services, The Idaho Power Company and British
Telecommunications each accounted for more than 10% of our revenues, and
together comprised approximately 79% of our total revenues. In 1998, MCI
WorldCom, Eastman Chemical, The County of Los Angeles and Foundation Health each
accounted for more than 10% of our revenues, and together comprised
approximately 75% of our total revenues.
The following case studies illustrate how some of our customers have used
the Commerce Chain Solution to address their indirect procurement needs.
COUNTY OF LOS ANGELES, CALIFORNIA. The County of Los Angeles is the largest
local government in the United States, with an annual budget of more than $12
billion and approximately 80,000 civil service employees. The county spends
nearly $700 million a year on the purchase of indirect goods and services to
meet the needs of 36 diverse departments, including county hospitals, police and
fire stations, and road works, that serve the needs of the county's nine million
people. Like other government organizations, many of the county's procurement
processes and procedures had been strained due to the lack of available
resources and technology. The county's goal was to implement an integrated,
Internet-based system for use by thousands of end-users and hundreds of
suppliers that would expand the local supply base and comply with the
procurement objectives of small- and minority-
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owned businesses. The county also required an automated system that would allow
delegation based on clearly-defined business rules to enable distributed desktop
requisition and procurement.
After evaluating numerous electronic commerce solutions, the County of Los
Angeles determined that the Commerce One solution was most suitable. The county
also worked with MCI Systemhouse's consultants to create an implementation that
efficiently utilized business rules and processes that were resident in the
county's enterprise resource planning system.
THE SABRE GROUP INC. SABRE is a world leader in the electronic distribution
of travel, travel-related services, and information technology solutions for the
travel and transportation industries. Through SABRE's global distribution
system, more than one-third of the world's travel is booked annually. These
bookings are channeled through a comprehensive system of 30,000 travel agencies,
and 420 airlines, 50 car rental companies, 40,000 hotel properties and various
railways tour companies, passenger ferries and cruise lines on the supplier
side.
Our strategic relationship with SABRE as a complementary software provider
concerns SABRE Business Travel Solutions, a desktop solution for booking travel
that is used by corporations and travel agencies. SABRE Business Travel
Solutions will be fully integrated into the Commerce Chain Solution so customers
can automate the procurement of travel services directly through the Commerce
One BUYSITE solution. We believe the ability to book travel directly through a
solution like SABRE Business Travel Solutions will be a significant use of our
solution for many of our current and future customers.
SCHLUMBERGER OILFIELD SERVICES. Schlumberger Oilfield Services is a
business segment of Schlumberger Limited, a worldwide leader in technical
services with 67,000 employees, operations in more than 100 countries and 1998
revenues exceeding $11.8 billion. As a leading global provider of services and
technology to the international petroleum industry, Schlumberger Oilfield
Services' employees are frequently mobile or off-site at customer locations.
Schlumberger management sought a global electronic procurement system to
centralize and automate orders from widespread field locations and improve
accuracy and timeliness of the deliveries.
After reviewing alternatives, Schlumberger Oilfield Services chose our
solution. Through our solution's real-time, automated interaction with
suppliers, Schlumberger anticipates cost reductions by consolidating its
supplier base, improving order accuracy and field satisfaction and reducing
order cycle time and field inventories.
SUPPLIERS
As of May 31, 1999, Commerce One has agreements with 152 individual
suppliers to provide content on MARKETSITE.NET. Currently, 98 of these suppliers
provide content and are able to conduct commerce on MARKETSITE.NET, nine of
which have sold goods or services on MARKETSITE.NET to date.
TECHNOLOGY
SCALABLE ARCHITECTURE
We are able to leverage our Microsoft Windows distributed Internet
applications framework into a unified architecture enabling us to focus on
creating additional business functionality in our solutions, rather than
building and maintaining complex infrastructure code. Additionally, we have
designed our solution to be able to grow our infrastructure through the simple
addition of low-cost systems that utilize Intel microprocessors and the
Microsoft Windows NT operating system. This framework allows us to leverage
technologies such as message queueing, security services, and coordination and
distribution of transactions, components and services.
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XML SOFTWARE TECHNOLOGY PLATFORM
We utilize the XML software technology platform to create an XML server that
enables the creation and secure transmission of XML documents over the Internet.
This server also provides software development capabilities for the creation of
new XML document-based services. In addition, we have developed language that
extends base XML documents. We have also created a common business library
designed to enable a common language-based framework for uniting disparate
business document types. We believe that XML software technology is emerging as
a foundation of an industry standard for business-to-business electronic
commerce.
PROVEN DEVELOPMENT METHODOLOGY
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 C++ and Java to build reusable components and
designs. This methodology also helps reduce the risks inherent in developing
complex system, and helps us design our solutions to meet the needs of our
trading partners.
SALES AND MARKETING
We market and sell our products and services to organizations through a
direct sales force. Our sales offices are located in the United States, the
United Kingdom, France and Switzerland. Since 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 Fortune 1000 enterprises and their suppliers and have initiated
vertical sales strategies targeted at the utilities, telecommunications,
government and oil and gas markets.
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.
We have entered into a strategic relationship with British
Telecommunications which, among other things, provides that British
Telecommunications will act as a reseller of our BUYSITE solution in its market.
In addition, our system integrators, including the management consulting
services group within PricewaterhouseCoopers, MCI Systemhouse and Cambridge
Technology Partners, provide us with sales and marketing support.
PricewaterhouseCoopers has designated us as its preferred provider of business-
to-business electronic commerce solutions for indirect goods procurement. See
"Strategic Relationships" for more information about this relationship. In
addition, we may in the future enter into other relationships designed to
support the adoption of our products and services with third parties, including
additional telecommunications companies, system integrators, software companies
and others, that may have substantial installed customer bases, development or
sales and marketing resources. These relationships may involve such third
parties in the resale of our products and services as do certain of our existing
relationships, and may involve joint development of new or enhanced products and
services.
As of May 31, 1999, we had 77 employees in our sales and marketing
department.
INTELLECTUAL PROPERTY RIGHTS
Our future success depends in part on our proprietary rights and technology.
We rely on a combination of copyright, trademark and trade secret laws, employee
and third-party nondisclosure
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agreements and other methods to protect our proprietary rights. In connection
with the acquisition of VEO Systems, we acquired three patent applications
relating to XML software technology.
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. These third-party product licenses may not
continue to be available to us on commercially reasonable terms and we may not
be able to successfully integrate such third-party products into our solutions.
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 applications. We also
face indirect competition from potential customers' internal development efforts
and have to overcome potential customers' reluctance to move away from existing
systems and processes.
Our current and potential competitors include Ariba, Clarus, Concur,
Connect, Harbinger, IBM, Intellisys, Microsoft, Netscape, Oracle, PeopleSoft,
SAP and TRADE'ex. In addition, there are a number of companies developing and
marketing business-to-business electronic 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 enterprise resource planning vendors, that are expected to
sell their procurement products along with their application suites. These
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
electronic 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 currently
compete favorably with our competitors in these areas.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do and may enter into
strategic or commercial relationships with larger, more established and
well-financed companies. Some of our competitors may be able to secure alliances
with customers and affiliates on more favorable terms, devote greater resources
to marketing and promotional campaigns and devote substantially more resources
to systems development than we do. In addition, new technologies and the
expansion of existing technologies may increase competitive pressures on us. We
cannot assure you that we will be able to compete successfully against current
and future competitors, and competitive pressures faced by us could harm our
business operating results and financial condition.
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EMPLOYEES
As of May 31, 1999, we had 244 full-time employees, 92 of whom were engaged
in product development, 77 in sales and marketing, 58 in professional services
and 17 in general administration. None of our employees is represented by a
labor union or a collective bargaining agreement. We have not experienced any
work stoppages and consider our relations with our employees to be good.
FACILITIES
We lease a total of approximately 46,000 square feet of office space in two
buildings, one located in Walnut Creek, California and one in Mountain View,
California. We conduct our research and development activities at both
locations. We also lease sales offices in the United States, Switzerland, the
United Kingdom and France. We believe our current facilities and available
additional space will be adequate through at least 2000 and we may need to
locate additional space to meet our needs thereafter.
LEGAL PROCEEDINGS
Although we are not currently a party to any litigation, we may from time to
time become involved in litigation relating to claims arising from our ordinary
course of business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning our executive
officers and directors as of May 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
Mark B. Hoffman........................... 52 Chairman of the Board, Chief Executive Officer and President
Peter F. Pervere.......................... 52 Vice President and Chief Financial Officer
Charles Donchess.......................... 44 Vice President, Marketing and Business Development
Mark S. Biestman.......................... 42 Vice President, Worldwide Sales
Kirby Coryell............................. 49 Vice President, Operations
Samuel C. Prather......................... 45 Vice President, Engineering
Carl O. Falk.............................. 49 Vice President, Procurement Solutions
Thomas J. Gonzales, II.................... 32 Director, Vice President and Chief Technology Officer
Robert M. Tarkoff......................... 30 Vice President, General Counsel and Secretary
Asim Abdullah............................. 35 Vice President and Director
Jay M. Tenenbaum.......................... 55 Chief Scientist and Director
John V. Balen(1).......................... 38 Director
William B. Elmore(2)...................... 46 Director
Kenneth C. Gardner........................ 48 Director
William J. Harding(2)..................... 51 Director
John P. Swingewood........................ 43 Director
Jeffrey T. Webber(1)...................... 46 Director
</TABLE>
- --------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
- --------------------------------------------------------------------------------
MARK B. HOFFMAN has served as President, Chief Executive Officer and
Chairman of the board of directors of Commerce One since December 1996. Prior to
joining Commerce One, Mr. Hoffman served as Chief Executive Officer and
President of Sybase, Inc., a company which he co-founded in 1984. Mr. Hoffman
currently serves on the board of directors and compensation committee of
Intraware, Inc. Mr. Hoffman earned a B.S. degree in Engineering from the U.S.
Military Academy at West Point and an M.B.A. degree from the University of
Arizona.
PETER F. PERVERE joined Commerce One in April 1997 as Vice President and
Chief Financial Officer. Prior to joining Commerce One, Mr. Pervere was at
Sybase, Inc. from October 1987 to April 1997, serving as Vice President and
Corporate Controller from 1991 to 1997. Mr. Pervere holds a B.A. degree in
History from Stanford University.
CHARLES DONCHESS has served as Vice President, Marketing of Commerce One
since December 1996. Prior to joining Commerce One, Mr. Donchess was Vice
President of Marketing and Business Development at Aurum Software, Inc., a
leading provider of sales information software, from March 1995 to November
1996. Prior to his tenure at Aurum Software, Inc., Mr. Donchess worked at
Sybase, Inc. from August 1989 to November 1994, most recently as Vice President
and General Manager of workgroup products from January 1994 to November 1994.
Mr. Donchess holds a B.A. degree from Brown University.
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MARK S. BIESTMAN joined Commerce One in November 1997 as Vice President,
Worldwide Sales. Prior to joining Commerce One, Mr. Biestman was Vice President
of Western United States Sales for Netscape Communications Corporation from July
1995 to November 1997. Prior to his tenure of Netscape Communications
Corporation, Mr. Biestman served as Vice President of Telecommunication Sales of
Oracle Corporation from November 1994 to July 1995. From November 1993 to
November 1994, Mr. Biestman served as Vice President of Worldwide Sales of
Metaphor, Inc. Mr. Biestman serves as a member of the board of directors and
compensation committee of Prologic Management Systems, Inc. Mr. Biestman holds
an A.B. degree in Economics from the University of California, Berkeley.
KIRBY CORYELL has served as Vice President, Operations of Commerce One since
January 1997. Prior to joining Commerce One, Mr. Coryell was Vice President of
Manufacturing at NEC Technologies, Inc. from September 1995 to January 1997.
From September 1993 to September 1995, Mr. Coryell was Vice President of
Worldwide Operations of AST Research, Inc. Mr. Coryell holds a B.S. degree in
Mechanical Engineering from the University of Cincinnati.
SAMUEL C. PRATHER joined Commerce One as Vice President, Engineering in
December 1998. Prior to joining Commerce One, Mr. Prather was the Vice President
of Engineering at Resolute Software from February 1998 to December 1998 where he
built electronic commerce performance tools and products. Prior to joining
Resolute, Mr. Prather served as Senior Research and Development Manager at
Hewlett-Packard from October 1984 to February 1998, managing a wide variety of
software development programs and a business-to-consumer electronic commerce
service. Mr. Prather holds a B.S. degree in Electrical Engineering from the
University of Oklahoma.
CARL O. FALK joined Commerce One in May 1998 as Vice President, Product
Marketing and Procurement Solutions. Prior to joining Commerce One, Mr. Falk was
President of ACQUION, Inc., the Internet procurement subsidiary of Harbinger
Corporation, a worldwide supplier of electronic commerce software and services,
from August 1997 to May 1998. Prior to his tenure at Harbinger Corporation, Mr.
Falk was Vice President and General Manager of Fluor Daniel, Inc. from May 1989
to May 1994, when he founded ACQUION and became its President, a position he
held until August 1997 when ACQUION was sold to Harbinger. Mr. Falk holds a B.S.
degree in Mechanical Engineering from the University of Cincinnati and a J.D.
degree from Salmon Chase College of Law, N.K.U.
THOMAS J. GONZALES, II co-founded Commerce One in January 1994. He currently
serves as Vice President and Chief Technology Officer, a position he has held
since September 1996, and has also been a member of the board of directors since
April 1998. From January 1994 to September 1996, Mr. Gonzales served as
President and Chairman of the board of directors of Commerce One. Mr. Gonzales
attended the University of California, Berkeley.
ROBERT M. TARKOFF joined Commerce One in February 1999 as Vice President,
General Counsel and Secretary. Prior to joining Commerce One, Mr. Tarkoff was an
associate at the law firm of Wilson Sonsini Goodrich & Rosati from August 1995
to January 1999 where he served as outside counsel to Commerce One. Mr. Tarkoff
received a B.A. degree from Amherst College in Political Science and Economics
and a J.D. degree from Harvard University.
ASIM ABDULLAH joined Commerce One as a Vice President and as a member of the
board of directors in January 1999. Prior to joining Commerce One, Mr. Abdullah
was the President and Chief Executive Officer of VEO Systems, Inc., from January
1997 to January 1999. Prior to joining VEO Systems, Inc., Mr. Abdullah was the
Executive Director of CommerceNet from January 1996 to January 1999. Prior to
his tenure at CommerceNet, Mr. Abdullah was the Manager of Development Relations
for Taligent from August 1993 to December 1995. Mr. Abdullah holds B.S. degrees
in Electrical and Computer Engineering from the University of Michigan and an
M.S. degree in Engineering Management from Stanford University.
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JAY M. TENENBAUM joined Commerce One as Chief Scientist and a member of the
board of directors in January 1999. Prior to joining Commerce One, Dr. Tenenbaum
was the Chairman of the board of directors and Chief Scientist of VEO Systems,
Inc. from January 1998 to January 1999. Prior to joining VEO Systems, Inc., Dr.
Tenenbaum formed CommerceNet, an industry association for Internet commerce,
where he served as Chairman of the board of directors and Chief Executive
Officer from May 1996 to January 1998. Prior to founding CommerceNet, Dr.
Tenenbaum served as Vice President of Strategic Technology for VeriFone, Inc.
from November 1995 to May 1996. In February 1991, Dr. Tenenbaum founded E.I.T.,
a company that engages in security and payment solutions for the Internet, where
he served as Chairman of the board of directors and Chief Executive Officer,
until November 1995. He holds B.S. and M.S. degrees in Electrical Engineering
from the Massachusetts Institute of Technology and a Ph.D. in Electrical
Engineering and Computer Science from Stanford University.
JOHN V. BALEN has served as a member of the board of directors of Commerce
One since December 1996 and as a member of Commerce One's compensation committee
since April 1999. Since September 1995, Mr. Balen has been a Principal at Canaan
Partners, a nationally focused, private venture capital firm. From June 1985 to
June 1995, Mr. Balen served as a Managing Director of Horsley Bridge Partners, a
private equity investment management firm. Mr. Balen currently serves on the
board of directors and compensation committee of Intraware, Inc. Mr. Balen has a
B.S. degree in Electrical Engineering and an M.B.A. from Cornell University.
WILLIAM B. ELMORE has served as a member of the board of directors of
Commerce One since October 1997 and as a member of Commerce One's audit
committee since April 1999. Since December 1995, Mr. Elmore has been a Manager
of Foundation Capital Management, L.L.C., the general partner of Foundation
Capital, L.L.P., a venture capital firm focused on early-stage information
technology companies. From 1987 to 1995, he was a General Partner of Inman &
Bowman, a venture capital firm. Mr. Elmore serves on the boards of directors of
Wind River Systems, Inc. and Onyx Software and on the board of directors and
compensation committee of Pilot Network Services. Mr. Elmore received his B.S.
and M.S. in Electrical Engineering from Purdue University and his M.B.A. from
Stanford University.
KENNETH C. GARDNER has served as a member of the board of directors of
Commerce One since September 1996. Since June 1995, Mr. Gardner has been
President and Chief Executive Officer of Sagent Technology, Inc. Prior to his
tenure at Sagent, Mr. Gardner served as Vice President of Products at Borland
International from April 1994 to June 1995. He is on the board of directors of
Data Sage, ObjectSwitch Corporation and Sagent. Mr. Gardner received a B.S.
degree in Finance from the University of Louisville.
WILLIAM J. HARDING has served as a member of the board of directors of
Commerce One since December 1996 and as a member of Commerce One's audit
committee since April 1999. Since 1994, Dr. Harding has been a General Partner
of Morgan Stanley Dean Witter Venture Partners. Prior to joining Morgan Stanley,
Dr. Harding was a General Partner of J.H. Whitney & Co. from 1985 to 1993. Dr.
Harding currently also serves on the board of directors and compensation
committee of ScanSoft, Inc. Dr. Harding received a B.S. degree in Engineering
Mathematics and an M.S. degree in Systems Engineering from the University of
Arizona and a Ph.D. in Engineering from Arizona State University.
JOHN P. SWINGEWOOD has served as a member of the board of directors of
Commerce One since April 1999. Mr. Swingewood currently serves as Director of
Internet and Multimedia Group of British Telecommunications, a position he has
held since October 1997. From October 1992 to October 1997, Mr. Swingewood
served as General Manager of Broadcast Services, a division of British
Telecommunications, Mr. Swingewood received his First Class Honors Degree in
Electronics from University of Surrey, United Kingdom.
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JEFFREY T. WEBBER has served as a member of the board of directors and
compensation committee of Commerce One since 1995. Mr. Webber co-founded R.B.
Webber & Company, a company which provides strategic planning consulting
services to high technology companies, where he has served as President since
1991. He also serves as a General Partner of The Entrepreneurs' Fund, an early
stage venture capital fund, which position he has held since 1997. Mr. Webber
also serves on the board of directors of Sybase, Inc. and Sagent Technology,
Inc. Mr. Webber holds a B.A. degree from Yale University.
CLASSIFIED BOARD
Our certificate of incorporation provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, prior to the
consummation of the offering, two of the nominees to the board will be elected
to one-year terms, two will be elected to two-year terms and three will be
elected to three-year terms. Thereafter, directors will be elected for
three-year terms. Messrs. Abdullah, Gonzales and Tenenbaum have been designated
Class I directors whose term expires at the 2000 annual meeting of stockholders.
Messrs. Gardner, Harding and Swingewood have been designated Class II directors
whose term expires at the 2001 annual meeting of stockholders. Messrs. Balen,
Elmore, Hoffman and Webber have been designated Class III directors whose term
expires at the 2002 annual meeting of stockholders. See "Description of Capital
Stock-- Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions."
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been duly elected and qualified.
There are no family relationships among any of our directors, officers or key
employees.
BOARD COMMITTEES
We established an audit committee in April 1999 and compensation committee
in October 1996.
Our audit committee consists of Messrs. Elmore and Harding. The audit
committee reviews our internal accounting procedures and consults with and
reviews the services provided our independent accountants.
Our compensation committee currently consists of Messrs. Balen and Webber.
The compensation committee reviews and recommends to the board of directors the
compensation and benefits of our employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to establishing the compensation committee, the board of directors as
a whole performed the functions delegated to the compensation committee. No
member of the board of directors or the compensation committee serves as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of directors
or compensation committee.
DIRECTOR COMPENSATION
Directors do not currently receive any cash compensation from us for their
service as members of the board of directors. Under our amended and restated
1995 stock plan and 1997 incentive stock option plan, directors are eligible to
receive stock option grants at the discretion of the board of directors or other
administrator of the plan. See "Incentive Stock Plans."
During 1995, the board granted options to purchase an aggregate of 75,000
shares to Mr. Webber at an exercise price per share of $0.14. During 1996, the
board granted options to purchase an aggregate of 37,500 and 481,562 shares to
Messrs. Gardner and Hoffman, respectively, at an exercise price per share of
$0.20 and $0.22, respectively. During 1998 and 1999, the board granted options
to purchase an aggregate of 15,000 shares and 15,000 shares, respectively, to
Mr. Hoffman at exercise prices per share of $1.40 and $4.00, respectively.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The table below summarizes the compensation earned for services rendered to
us in all capacities for the fiscal year ended December 31, 1998 by our named
executive officers, specifically, our chief executive officer and our next four
most highly compensated executive officers who earned more than $100,000 during
the fiscal year ended December 31, 1998. The amounts listed under the column
captioned "All Other Compensation" represents group life insurance premiums paid
by us.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL -------------
COMPENSATION SECURITIES
-------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- -------------------------------------------------- ------------- ----------- ------------- ---------------------
<S> <C> <C> <C> <C>
Mark B. Hoffman .................................. $ 155,688 -- 15,000 --
Chairman of the Board, Chief Executive Officer
and President
Peter F. Pervere ................................. 146,125 -- 15,000 $ 752
Vice President and Chief Financial Officer
Charles Donchess ................................. 164,333 -- 25,000 573
Vice President, Marketing and Business
Development
Mark S. Biestman ................................. 175,000 $ 162,829 140,000 --
Vice President, Worldwide Sales
Kirby Coryell .................................... 156,562 -- 15,000 777
Vice President, Operations
</TABLE>
- --------------------------------------------------------------------------------
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OPTION GRANTS IN LAST FISCAL YEAR
The following table describes certain information regarding stock options
granted to each of the named executive officers in the fiscal year ended
December 31, 1998, including the potential realizable value over the ten-year
term of the options, based on assumed rates of stock appreciation of 5% and 10%,
compounded annually. These assumed rates of appreciation comply with the rules
of the Securities and Exchange Commission and do not represent our estimate of
future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of our common stock. In addition, the deemed
value for the date of grant was determined after the date of grant solely for
financial accounting purposes.
In the fiscal year ended December 31, 1998, we granted options to purchase
up to an aggregate of 1,222,750 shares to employees, directors and consultants.
All options were granted under our 1997 incentive stock option plan at exercise
prices at the fair market value of our common stock on the date of grant, as
determined in good faith by the board of directors. All options have a term of
ten years. Optionees may pay the exercise price by cash, check, promissory note
or delivery of already-owned shares of our common stock. All options are
immediately exercisable upon grant; however, any unvested shares are subject to
repurchase by us at their cost if the optionee's service terminates. All option
shares vest over four years, with 25% of the option shares vesting one year
after the option grant date, and the remaining option shares vesting ratably
each month for the next 36 months.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO PRICE APPRECIATION FOR
OPTIONS EMPLOYEES EXERCISE DEEMED VALUE PER OPTION TERM
GRANTED IN LAST PRICE SHARE ON DATE OF EXPIRATION ----------------------
NAME (#) FISCAL YEAR ($/SHARE) GRANT DATE 5% 10%
- --------------------------------- ----------- ------------- ----------- ------------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark B. Hoffman.................. 15,000 1.2% $ 1.40 $ 4.32 07/01/08 $ 84,552 $ 147,075
Peter F. Pervere................. 15,000 1.2 1.40 4.32 07/01/08 84,552 147,075
Charles Donchess................. 25,000 2.0 0.60 2.62 01/21/08 91,693 154,890
Mark S. Biestman................. 125,000 10.2 0.60 2.62 01/21/08 458,463 774,451
15,000 1.2 1.40 4.32 07/01/08 84,552 147,075
Kirby Coryell.................... 15,000 1.2 1.40 4.32 07/01/08 84,552 147,075
</TABLE>
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<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table describes for the named executive officers their option
exercises for the fiscal year ended December 31, 1998, and exercisable and
unexercisable options held by them as of December 31, 1998. No options were
exercised by the named executive officers during the fiscal year ended December
31, 1998.
The "Value of Unexercised In-the-Money Options at Fiscal Year End" is based
on a value of $6.78 per share, the fair market value of our common stock as of
December 31, 1998, as determined by the board of directors, less the per share
exercise price, multiplied by the number of shares issued upon exercise of the
option. All options were granted under our 1997 incentive stock option plan and
amended and restated 1995 stock option plan. All options are immediately
exercisable; however, as a condition of exercise, the optionee must enter into a
stock restriction agreement granting us the right to repurchase the shares
issuable by such exercise at their cost if the optionee's employment terminates.
The shares vest over four years, with 25% of the shares vesting one year after
the grant date and the remaining shares vesting ratably each month thereafter.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-
UNEXERCISED OPTIONS AT MONEY OPTIONS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)
------------------------ ------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Mark B. Hoffman................................ 15,000 -- $ 80,700 --
Peter F. Pervere............................... 77,500 -- 479,450 --
Charles Donchess............................... 125,000 -- 792,500 --
Mark S. Biestman............................... 140,000 -- 853,200 --
Kirby Coryell.................................. 77,500 -- 479,450 --
</TABLE>
- --------------------------------------------------------------------------------
55
<PAGE>
INCENTIVE STOCK PLANS
1997 INCENTIVE STOCK OPTION PLAN
Our 1997 incentive stock option plan provides for the granting to employees
of incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986 and for the granting to employees, outside directors and
consultants of nonstatutory stock options. The board of directors approved the
stock option plan in November 1997, and the stockholders approved the stock
option plan in December 1997. The board of directors approved an amendment to
the stock option plan in April 1999 and our stockholders approved the amendment
in June 1999. Unless terminated sooner, the stock option plan will terminate
automatically in 2007. As of May 31, 1999, 2,063,331 shares of common stock were
subject to outstanding options previously granted under this plan. A total of
1,704,587 shares of common stock is reserved for future issuance of options, for
outstanding options previously granted and in addition, plus annual increases
equal to the lesser of:
- 1,250,000 shares;
- 5% of the outstanding shares on such date; or
- a lesser amount determined by the board.
The board of directors or a committee of the board of directors may
administer the stock option plan. The board or a committee of the board has the
power to determine:
- the terms of the options granted, including the exercise price;
- the number of shares subject to each option;
- the exercisability of the options; and
- the form of consideration payable upon such exercise.
The stock option plan provides that if we merge with or into another
corporation or sell substantially all of our assets, each outstanding option
will be assumed or substituted for by the successor corporation. If the
outstanding options are not assumed or substituted by the successor corporation,
then they will become fully vested and exercisable.
AMENDED AND RESTATED 1995 STOCK OPTION PLAN
Our amended and restated 1995 stock option plan provides for the granting to
employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986 and for the granting to employees and consultants
of nonstatutory stock options. The board of directors and the stockholders
approved the amended and restated 1995 stock option plan in October 1995. Unless
terminated sooner, the amended and restated 1995 stock option plan will
terminate automatically in 2005. As of May 31, 1999, a total of 623,453 shares
of common stock are reserved for issuance pursuant to the exercise of options
outstanding under the amended and restated 1995 stock option plan, although no
future stock option grants will be made under the plan.
The board of directors or a committee of the board of directors may
administer the amended and restated 1995 stock option plan. The board or a
committee of the board has the power to determine:
- the terms of the options granted, including the exercise price;
- the number of shares subject to each option;
- the exercisability of the options; and
- the form of consideration payable upon such exercise.
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The amended and restated 1995 stock option plan provides that if we merge
with or into another corporation or sell substantially all of our assets, each
outstanding option will be assumed or substituted for by the successor
corporation.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted our 1999 employee stock purchase plan in
April 1999 and our stockholders approved this plan in June 1999. A total of
750,000 shares of common stock has been reserved for issuance under the purchase
plan, plus annual increases equal to the lesser of:
- 300,000 shares;
- 1.5% of the outstanding shares on such date; or
- a lesser amount determined by the board on the first day of each fiscal
year.
The purchase plan, which is intended to qualify under Section 423 of the
Internal Revenue Code of 1986 contains successive twenty-four month offering
periods. The offering periods generally start on the first trading day on or
after May 15 and November 15 of each year, except for the first such offering
period which commences on the first trading day on or after the effective date
of this offering and ends on the last trading day on or before November 15,
1999.
Employees are eligible to participate if they are employed by us or any
participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, the following employees may not be granted
options to purchase stock under the purchase plan:
- any employee who immediately after grant owns stock possessing 5% or more
of the total combined voting power or value of all classes of our capital
stock, or
- any employee whose rights to purchase stock under all of our employee
stock purchase plans accrues at a rate which exceeds $25,000 worth of
stock for each calendar year.
Participants may purchase common stock through payroll deductions of up to
15% of the participant's compensation. The maximum number of shares a
participant may purchase during a single offering period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is 85% of the lower of the fair market value
of the common stock at the beginning of the offering period and the end of each
purchase period.
The purchase plan provides that, if we merge with or into another
corporation or sell substantially all of our assets, each outstanding option may
be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date will
be set, which will occur before the proposed sale or merger.
The purchase plan will terminate in 2009. The board of directors has the
authority to amend or terminate the purchase plan, except that no such action
may adversely affect any outstanding rights to purchase stock.
1999 DIRECTOR OPTION PLAN
Non-employee directors are entitled to participate in our 1999 director
option plan. The board of directors adopted the director plan in April 1999 and
the stockholders approved it in June 1999, but it will not become effective
until the date of this offering. The director plan has a term of ten years,
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unless terminated sooner by the board. A total of 150,000 shares of common stock
have been reserved for issuance under the director plan.
The director plan provides for the automatic grant of 15,000 shares of
common stock to each non-employee director on the date on which such person
first becomes a non-employee director. After the 15,000 share option is granted
to the non-employee director, he or she shall automatically be granted an option
to purchase 7,500 shares each year on the date of our annual stockholder's
meeting, if on such date he or she shall have served on the board for at least
six months. Each option shall have a term of ten years, and shall be fully
vested and exercisable as of the date of grant. The exercise price of all
options shall be 100% of the fair market value per share of the common stock,
generally determined with reference to the closing price of the common stock as
reported on the Nasdaq National Market on the date of grant.
Options granted under the director plan must be exercised within three
months of the end of the optionee's tenure as a director, or within twelve
months after such director's termination by death or disability, but not later
than the expiration of the option's ten year term.
401(k) PLAN
In January 1997, we adopted a 401(k) plan covering our full-time employees
located in the United States. The 401(k) plan is intended to qualify under
Section 401(k) of the Internal Revenue Code of 1986. Consequently, contributions
to the 401(k) plan by employees or by us, and the investment earnings thereon,
are not taxable to employees until withdrawn from the 401(k) plan. Consequently,
contributions by us, if any, will be deductible by us when made. Employees may
elect to reduce up to 15% of their current compensation by up to the statutorily
prescribed annual limit, which was $10,000 in 1998, and to have the amount of
such reduction contributed to the 401(k) plan. The 401(k) plan permits, but does
not require, additional matching contributions to the 401(k) plan by us on
behalf of all participants in the 401(k) plan. To date, we have not made any
contributions to the 401(k) plan.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Effective January 1999, we entered into employment agreements with each of
Messrs. Abdullah and Tenenbaum pursuant to which each is entitled to a base
salary of $160,000 plus a bonus of up to 50% of his base salary. Under these
agreements, if either of Messrs. Abdullah or Tenenbaum is terminated not for
cause or as a result of constructive termination, he will be entitled to the
payment of six months of his base salary and twelve months of vesting
acceleration for his options.
We also entered into change of control severance agreements with certain of
our executive officers that commenced in January 1999. These agreements provide
that if there is a change of control of Commerce One, and any of such executive
officers are involuntarily terminated without cause within 12 months following
the change of control or the announcement of such change of control, he will be
provided the following:
- a cash payment equal to 50% of his annual compensation plus a pro rata
payment of the then current year bonus award based on the target bonus for
him;
- 100% of his health, dental and life insurance, including benefits paid to
any dependents, through the earlier of six months from the date of his
termination or the date he becomes covered by another employer's group
health, dental or life insurance plans providing comparable benefits and
coverage; and
- one year of additional vesting for his outstanding stock options.
Under our 1997 incentive stock option plan and 1999 director option plan, if
the options outstanding under such plans are not assumed or substituted in a
change-of-control merger or asset
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<PAGE>
sale, each outstanding option will vest and become exercisable in full. In
addition, under our 1999 director option plan, if the options are assumed or
substituted and the optionee's service is terminated other than upon a voluntary
resignation, the options become fully vested.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether our bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and executive
officers, in addition to indemnification provided for in our bylaws. These
agreements, among other things, provide for indemnification of our directors and
executive officers for expenses, judgments, fines and settlement amounts
incurred by any such person in any action or proceeding arising out of such
person's services as a director or executive officer or at our request. We
believe that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
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CERTAIN TRANSACTIONS
Since January 1, 1996, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount involved exceeds $60,000 and in which any director,
executive officer or holder of more than 5% of our common stock had or will have
a director or indirect interest other than:
- compensation arrangements, which are described where required under
"Management;" and
- the transactions described below.
SERIES B PREFERRED STOCK FINANCING ROUND. In December 1996 and January
1997, we sold shares of Series B preferred stock, at a purchase price of $4.10
per share, to the following investors, among others:
- 76,829 shares to Mark B. Hoffman, our Chairman of the Board, Chief
Executive Officer and President;
- 19,823 shares to entities affiliated with Jeffrey Webber. Mr. Webber is a
member of our board of directors; and
- 2,439 shares to Kenneth Gardner, a member of our board of directors.
WARRANTS TO PURCHASE SERIES B PREFERRED STOCK. In connection with a bridge
loan made in September 1996, we issued warrants to purchase 121 shares of Series
B preferred stock to Kenneth Gardner, and warrants to purchase 365 shares of
Series B preferred stock to entities affiliated with Jeffrey Webber, at an
exercise price of $4.10 per share.
SERIES C PREFERRED STOCK FINANCING ROUND. In October and December 1997, we
sold shares of Series C preferred stock, at a purchase price of $5.20 per share,
and warrants to purchase shares of Series C preferred stock, at an exercise
price of $10.40 per share, to the following investors, among others:
- 288,462 shares and warrants to purchase 72,115 shares to an entity
affiliated with Canaan Partners, a 5% shareholder of our stock. John V.
Balen, a principal at Canaan Partners, is a member of our board of
directors;
- 288,462 shares and warrants to purchase 72,115 shares to entities
affiliated with Morgan Stanley Venture Partners, a 5% shareholder of our
stock. William J. Harding, a General Partner of Morgan Stanley Venture
Partners, is a member of our board of directors;
- 59,134 shares and warrants to purchase 14,783 shares to entities
affiliated with Jeffrey Webber; and
- 25,830 shares and warrants to purchase 6,457 shares to Mark Hoffman.
SERIES D PREFERRED STOCK FINANCING ROUND. In August 1998, we sold shares of
Series D preferred stock, at a purchase price of $6.98 per share, to the
following investors, among others:
- 143,336 shares to an entity affiliated with Canaan Partners;
- 93,168 shares to entities affiliated with Morgan Stanley Venture Partners;
- 71,668 shares to The Entrepreneurs' Fund, an entity affiliated with
Jeffrey Webber; and
- 71,667 shares to entities affiliated with Foundation Capital, a 5%
shareholder of our stock. William B. Elmore, a member of Foundation
Capital Management, L.L.C., the general partner of Foundation Capital,
L.L.P., is a member of our board of directors.
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WARRANTS TO PURCHASE SERIES D PREFERRED STOCK. In connection with a bridge
loan made in July 1998, we issued warrants to purchase 3,581 shares of our
Series D preferred stock at an exercise price of $6.98 per share, to each of
Mark Hoffman and The Entrepreneurs' Fund, L.P.
SERIES E PREFERRED STOCK FINANCING ROUND. In April 1999, we sold shares of
Series E preferred stock, at a purchase price of $9.06 per share, to the
following investors, among others:
- 110,375 shares to an entity affiliated with Canaan Partners;
- 33,112 shares to entities affiliated with Morgan Stanley Venture Partners;
- 30,352 shares to entities affiliated with Jeffrey Webber; and
- 662,252 shares to an entity affiliated with British Telecommunications,
our strategic partner. In addition, according to the terms of the
financing, British Telecommunications appointed to our board of directors
John Swingewood, its director of the Internet and multimedia group. For
more information on our relationship with British Telecommunications, see
"Business--Strategic Relationships--British Telecommunications."
CONSULTING SERVICES RENDERED BY R.B. WEBBER & COMPANY. We are currently
under an agreement with R.B. Webber & Company, a management consulting firm, of
which Jeffrey Webber, a member of our board of directors, is President. As of
May 31, 1999, we owe approximately $63,000 to R.B. Webber & Company for
consulting services rendered in 1998 and 1999.
LOANS TO A STOCKHOLDER. On November 7, 1996, we made a loan to Tom
Gonzales, Sr. our former Executive Vice President, of $56,000 bearing 9%
interest per year to enable Mr. Gonzales, Sr. to repay certain personal tax
liabilities. As of May 31, 1999, this loan has been repaid in full. Mr.
Gonzales, Sr. was terminated in April 1998, at which time we executed a
settlement agreement providing that each of us release the other from any and
all claims in any way arising from or related to Mr. Gonzales, Sr.'s former
employment relationship with us.
In April 1999, we entered into a letter agreement with Mr. Gonzales, Sr. in
which we agreed to loan to Mr. Gonzales, Sr. $5,000,000 as an inducement for Mr.
Gonzales, Sr. to enter into a lock-up agreement in connection with this
offering. By executing the lock-up agreement, Mr. Gonzales, Sr. agreed that,
with certain exceptions, he will not offer, sell, contract to sell or otherwise
dispose of any common stock or any convertible securities for a period of 180
days after the date of this prospectus without the prior written consent of
Credit Suisse First Boston Corporation. We will loan Mr. Gonzales, Sr. the funds
on the next business day following the closing of this offering. The loan is for
a term of one year, will bear interest at a rate equal to the prime rate, is
non-recourse to Mr. Gonzales, Sr. and will be secured by all of our common stock
held by Mr. Gonzales, Sr.
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PRINCIPAL STOCKHOLDERS
The table on the following page sets forth information regarding the
beneficial ownership of our common stock as of May 31, 1999, by the following
individuals or groups:
- each person or entity who is known by us to own beneficially more than 5%
of our outstanding stock;
- each of the named executive officers;
- each of our directors; and
- all directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder listed in the
following table is c/o Commerce One, Inc., 1600 Riviera Avenue, Walnut Creek,
California 94596. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power for all shares of common stock held by them.
Applicable percentage ownership in the following table is based on
17,942,799 shares of common stock outstanding as of May 31, 1999, as adjusted to
reflect the conversion of all outstanding shares of preferred stock upon the
closing of this offering.
Any shares issued upon exercise of options, warrants or other rights to
acquire our capital stock that are presently outstanding or granted in the
future or reserved for future issuance under our stock plans will further dilute
new public investors.
The numbers shown in the table below assume no exercise by the underwriters
of their over-allotment option. We have granted the underwriters an option to
purchase up to 450,000 shares to cover over-allotments, if any.
PRINCIPAL STOCKHOLDERS TABLE
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OUTSTANDING
NUMBER OF SHARES ------------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED OFFERING OFFERING
- ------------------------------------------------------ ----------------- ----------- -----------
<S> <C> <C> <C>
Entities affiliated with Canaan Partners.............. 1,345,996 7.47% 6.40%
Entities affiliated with Morgan Stanley Dean Witter
Venture Partners.................................... 1,218,565 6.76 5.80
Entities affiliated with Foundation Capital, L.P...... 1,153,398 6.35 5.45
Thomas J. Gonzales, II................................ 957,369 5.34 4.57
Asim Abdullah......................................... 600,125 3.34 2.87
Mark S. Biestman...................................... 172,207 * *
Kirby Coryell......................................... 147,759 * *
Charles Donchess...................................... 190,000 1.05 *
Mark B. Hoffman(1).................................... 611,522 3.40 2.92
Peter F. Pervere...................................... 115,000 * *
Jay M. Tenenbaum(2)................................... 600,125 3.34 2.87
John V. Balen......................................... -- -- --
William B. Elmore..................................... -- -- --
Kenneth C. Gardner.................................... 46,795 * *
William J. Harding.................................... -- -- --
John P. Swingewood.................................... -- -- --
Jeffrey T. Webber(3).................................. 406,014 2.25 1.94
All directors and officers as a group
(17 persons)........................................ 4,149,719 21.96 18.95
</TABLE>
- --------------
* Less than 1% of the outstanding shares of common stock.
(1) Includes 1,350 shares held by each the Andrew Mark Hoffman 1993 Trust dated
3/30/99 and the Annie Eleanor Hoffman 1993 Trust dated 3/30/99. Andrew and
Annie Hoffman, beneficiaries of these trusts, are children of Mr. Hoffman.
(2) Includes 360,075 shares held by Arlene Tenenbaum 1997 Irrevocable Trust
dated November 7, 1997 and 240,050 shares held by Arlene Tenenbaum, spouse
of Mr. Tenenbaum.
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<PAGE>
(3) Includes 121,976 shares held by Lighthouse Second Nineteen Hundred
Ninety-Nine Fund, a fund held for the benefit of Mr. Webber, 14,410 shares
held by Jeffrey T. Webber and Judith Jordan Webber, trustees of the Webber
Living Trust 3/23/95, 14,369 shares held by Judith Jordan Webber, spouse of
Mr. Webber, of which 241 shares are issuable upon the exercise of warrants
exercisable within 60 days of May 31, 1999, and 174,958 shares held by the
Entrepreneurs' Fund of which 18,546 shares are issuable upon exercise of
warrants exercisable within 60 days of May 31, 1999.
The shares shown for Canaan Partners and Morgan Stanley Dean Witter Venture
Partners each include 72,115 shares issuable upon exercise of warrants to
purchase common stock exercisable within 60 days of May 31, 1999. The shares
shown below also include exercisable warrants for: (1) Foundation Capital, L.P.,
216,346 shares, and (2) Kenneth C. Gardner, 121 shares.
The shares shown above include shares issuable upon exercise of options to
purchase common stock exercisable within 60 days of May 31, 1999, some shares of
which are subject to repurchase by us should the holder terminate employment
with us, as follows: (1) Mark S. Biestman, 170,000 shares, of which 120,000 are
subject to repurchase; (2) Kirby Coryell, 107,500 shares, of which 79,792 are
subject to repurchase; (3) Charles Donchess, 190,000 shares, of which 113,959
shares are subject to repurchase; (4) Mark B. Hoffman, 30,000 shares, of which
13,245 shares are subject to repurchase; (5) Peter F. Pervere, 102,500 shares,
of which 56,563 shares are subject to repurchase; (6) Kenneth C. Gardner, 37,500
shares, of which 10,156 shares are subject to repurchase; (7) Jeffrey T. Webber,
75,000 shares, of which 75,000 shares are subject to repurchase; and (8) all
directors and officers as a group, 952,500 shares.
In addition, the following relationships exist between four members of our
board of directors and principal stockholders:
- Mr. Balen is a principal of Canaan Equity Partners, L.L.C., the general
partner of Canaan Equity, L.P., Canaan S.B.I.C., L.P., Canaan Capital
Limited Partnership and Canaan Capital Offshore Limited Partnership, C.V.
Mr. Balen disclaims beneficial ownership of the shares held by Canaan
Equity L.P., Canaan S.B.I.C., L.P., Canaan Capital Limited Partnership and
Canaan Capital Offshore Limited Partnership, C.V., except for his
pecuniary interest arising from his interest as a principal of Canaan
Equity Partners, L.L.C., the general partner of Canaan Equity Partners,
L.P., Canaan S.B.I.C., L.P., Canaan Capital Limited Partnership and Canaan
Capital Offshore Limited Partnership, C.V. Mr. Balen is a member of the
board of directors of Commerce One.
- Dr. Harding is a general partner of Morgan Stanley Venture Partners II,
L.P., the general partner of Morgan Stanley Venture Capital Fund II Annex,
L.P. and Morgan Stanley Venture Investors Annex, L.P. Dr. Harding
disclaims beneficial ownership of the shares held by Morgan Stanley
Venture Capital Fund II Annex, L.P. and Morgan Stanley Venture Investors
Annex, L.P., except for his pecuniary interest arising from his interest
as a general partner of Morgan Stanley Venture Partners II, L.P., the
general partner of Morgan Stanley Venture Capital Fund II Annex, L.P. and
Morgan Stanley Venture Investors Annex, L.P. Dr. Harding is a member of
the board of directors of Commerce One.
- Mr. Elmore is a member of Foundation Capital Management, L.L.C., the
general partner of Foundation Capital, L.L.P. and Foundation Capital
Entrepreneurs Fund, L.L.C. Mr. Elmore disclaims beneficial ownership of
the shares held by Foundation Capital, L.L.P. and Foundation Capital
Entrepreneurs Fund, L.L.C., except for his pecuniary interest arising from
his interest as a member of Foundation Capital Management, L.L.C., the
general partner of Foundation Capital, L.L.P. and Foundation Capital
Entrepreneurs Fund, L.L.C. Mr. Elmore is a member of the board of
directors of Commerce One.
- Mr. Swingewood is the Director of the Internet and Multimedia Group of
British Telecommunications, plc. Mr. Swingewood disclaims beneficial
ownership of the shares held by Forres Holding Limited, a wholly owned
subsidiary of British Telecommunications. Mr. Swingewood is a member of
the board of directors of Commerce One.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, we will be authorized to issue
250,000,000 shares of common stock, $0.0001 par value, and 10,000,000 shares of
undesignated preferred stock, $0.0001 par value. The following description of
our capital stock does not purport to be complete and is subject to and
qualified in its entirety by our certificate of incorporation and bylaws, which
are included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.
COMMON STOCK
As of May 31, 1999, there were 17,942,799 shares of common stock outstanding
which were held of record by approximately 110 stockholders, as adjusted for the
reverse two-for-one stock split of all outstanding common stock, and assuming
conversion of all outstanding shares of convertible preferred stock into an
aggregate of 12,214,216 shares of common stock upon the closing of this
offering.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The holders of common stock
have no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the common stock. Wilson
Sonsini Goodrich & Rosati, Professional Corporation, counsel to us, shall opine
that the shares of common stock to be issued upon the closing of this offering,
when issued and sold in the manner described in this prospectus and in
accordance with the resolutions adopted by the board of directors, will be fully
paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. We cannot predict the effect of the
issuance of any shares of preferred stock upon the rights of holders of the
common stock until the board of directors determines the specific rights of the
holders of such preferred stock. However, the effects could include one or more
of the following:
- restricting dividends on the common stock;
- diluting the voting power of the common stock;
- impairing the liquidation rights of the common stock; or
- delaying or preventing a change in control of us without further action by
the stockholders.
Upon the closing no shares of preferred stock will be outstanding, and we
have no present plans to issue any shares of preferred stock.
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<PAGE>
WARRANTS
At May 31, 1999, there were warrants outstanding to purchase 13,781 shares
of Series B preferred stock, 646,790 shares of Series C preferred stock, and
43,409 shares of Series D preferred stock, which are convertible in the
aggregate into 703,980 shares of common stock.
REGISTRATION RIGHTS
The holders of the registrable securities, that is, 12,214,216 shares of
common stock and the holders of warrants to purchase preferred stock convertible
into 703,980 shares of common stock, are entitled to certain rights with respect
to registration of such shares under the Securities Act. These rights are
provided under the terms of an agreement between the holders of registrable
securities and us. Beginning 180 days following the date of this prospectus,
holders of at least 50% of the then outstanding registrable securities may
require on up to two occasions that we register their shares for public resale.
We are obligated to register these shares only if the outstanding registrable
securities have an anticipated public offering price of at least $20,000,000.
Also, holders of registrable securities may require on two separate occasions
within any twelve month period that we register their shares for public resale
on Form S-3 or similar short-form registration if the value of the securities to
be registered is at least $3,000,000, however we may defer such registration for
120 days in view of market conditions. Furthermore, in the event we elect to
register any of our shares of common stock for purposes of effecting any public
offering, the holders of registrable securities are entitled to include their
shares of common stock in the registration, but we may reduce the number of
shares proposed to be registered in view of market conditions. These
registration rights have been waived in this offering. All expenses in
connection with any registration, other than underwriting discounts and
commissions, will be paid by us. All registration rights will terminate five
years following the consummation of this offering, or, for each holder of
registrable securities, at the time the holder is entitled to sell all of its
shares in any 90 day period under Rule 144 of the Securities Act.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following more difficult:
- the acquisition of us by means of a tender offer;
- acquisition of us by means of a proxy contest or otherwise; or
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to first
negotiate with our board. We believe that the benefits of increased protection
of our potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure us outweigh the disadvantages of
discouraging such proposals because negotiation of such proposals could result
in an improvement of their terms.
ELECTION AND REMOVAL OF DIRECTORS. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term, one
class being elected each year by our stockholders. See "Management--Classified
Board." This system of dividing directors into three classes may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us because it generally makes it more difficult for
stockholders to replace a majority of the directors.
STOCKHOLDER MEETINGS. Under our bylaws, only the board of directors, the
chairman of the board and the president may call special meetings of
stockholders.
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<PAGE>
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws establish advance notice procedures for stockholder
proposals and the nomination of candidates for election as directors, other than
nominations made by or at the direction of the board of directors or a committee
of the board.
DELAWARE ANTITAKEOVER LAW. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an "interested stockholder" is
a person who, together with affiliates and associates, owns or within three
years prior to the determination of interested stockholder status, did own, 15%
or more of a corporation's voting stock. The existence of this provision may
have an anti-takeover effect on transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT. Our certificate of
incorporation eliminates the right of stockholders to act by written consent
without a meeting.
ELIMINATION OF CUMULATIVE VOTING. Our certificate of incorporation and
bylaws do not provide for cumulative voting in the election of directors.
UNDESIGNATED PREFERRED STOCK. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of us. These and other provisions may have the effect
of deferring hostile takeovers or delaying changes in control or management of
us.
AMENDMENT OF CHARTER PROVISIONS. The amendment of any of the above
provisions would require approval by holders of at least 66 2/3% of the
outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Boston EquiServe,
L.P. of Massachusetts.
NASDAQ NATIONAL MARKET LISTING
We have applied for the listing of our shares on The Nasdaq National Market
under the symbol "CMRC."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to us.
After the offering 20,942,799 shares of our common stock will be
outstanding, assuming that the underwriters do not exercise the over-allotment
option. Of these shares, all of the 3,000,000 shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, unless these shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act. The remaining shares of common
stock held by existing shareholders are "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be
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<PAGE>
sold in the public market only if registered or if they qualify for an exemption
from registration under Rules 144 or 701 under the Securities Act, which rules
are summarized below.
The following table shows approximately when the 17,942,799 shares of our
common stock that are not being sold in this offering but which will be
outstanding when this offering is complete will be eligible for sale in the
public market:
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET
<TABLE>
<CAPTION>
At the effective date........................................................... 129,176
<S> <C>
180 days after the effective date............................................... 12,101,837
January 15, 2000................................................................ 2,315,122
April 19, 2000.................................................................. 3,396,664
</TABLE>
Resale of 7,937,247 of the restricted shares that will become available for
sale in the public market starting 180 days after the effective date will be
limited by volume and other resale restrictions under Rule 144 because the
holders are our affiliates.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year is entitled to sell, within any three-month
period, a number of shares that is not more than the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 209,500 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the sale
on Form 144 is filed.
Sales under Rule 144 must also comply with manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchase shares from us under a
stock option plan or other written agreement can resell those shares 90 days
after the effective date of this offering in reliance on Rule 144, but without
complying with some of the restrictions, including the holding period, contained
in Rule 144. As of May 31, 1999, 1,114,476 shares outstanding had been issued as
a result of exercise of stock options. Of these shares, 833,293 shares will be
vested and exercisable and will be able to be resold after the 90 day period,
subject to the lock-up agreements described below.
LOCK-UP AGREEMENTS
Executive officers, directors, shareholders and optionees who will hold an
aggregate of shares of our common stock after this offering will sign
lock-up agreements under which they will agree not to transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for shares of common stock, for a period of
180 days
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<PAGE>
after the date of this prospectus. Transfers or dispositions can be made sooner
with the prior written consent of Credit Suisse First Boston.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 12,214,216 shares of our
common stock and holders of 703,980 shares of our common stock issuable upon
conversion of warrants, assuming such warrants are converted, will be entitled
to rights to registration of their shares under the Securities Act. After
registration, these shares will become freely tradeable without restrictions
under the Securities Act. Any sales of securities by these shareholders could
have a material adverse effect on the trading price of our common stock.
STOCK OPTIONS
Immediately after this offering we intend to file a registration statement
under the Securities Act covering shares of common stock subject to outstanding
options or reserved for issuance under our stock option plans. Each year as the
number of shares reserved for issuance under our 1997 incentive stock plan, 1999
employee stock purchase plan and 1999 director option plan increases, we will
file an amendment to the registration statement covering the additional shares.
As of May 31, 1999, options to purchase 3,222,515 shares of common stock were
issued and outstanding and 2,604,587 shares were reserved for future issuance
under our stock plans. When the lock-up agreements described above expire,
options to purchase 1,135,536 shares of common stock will become fully vested
and, when exercised, these shares will be freely tradable, based on the number
of options outstanding as of May 31, 1999. This registration statement is
expected to be filed and become effective as soon as practicable after the
effective date of this offering. Accordingly, shares registered under that
registration statement will, upon the optionee's exercise and subject to vesting
provisions and Rule 144 volume limitations applicable to our affiliates, be
available for sale in the open market immediately after the 180 day lock-up
agreements expire.
WARRANTS
Upon consummation of the initial public offering, warrants to purchase
691,785 shares of common stock will terminate unless exercised, and warrants to
purchase 12,195 shares of common stock will remain outstanding. The warrants
which remain outstanding after this offering will have the registration rights
described above.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 concerning the common stock offered by this prospectus.
This prospectus, which constitutes a part of the registration statement, does
not contain all of the information set forth in the registration statement or
the exhibits and schedules which is part of the registration statement. For
further information about us and our common stock, see the registration
statement and the attached exhibits and schedules. Any document we file may be
read and copied at the Commission's public reference rooms in Washington, D.C.,
New York, New York and Chicago, Illinois. Please call the Commission at
1-800-SEC-0330 for further information about the public reference rooms. Our
filings with the Commission are also available to the public from the
Commission's Web site at http:\\www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the Commission. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the Commission's
public reference rooms, and the Web site of the Commission referred to above.
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UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, we have agreed to sell to the underwriters named below, for whom
Credit Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette Securities
Corporation and U.S. Bancorp Piper Jaffray Inc. are acting as representatives,
the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Underwriters Number of Shares
- ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
Credit Suisse First Boston Corporation..........................................................
Donaldson, Lufkin & Jenrette Securities Corporation ............................................
U.S. Bancorp Piper Jaffray Inc..................................................................
----------------
Total.......................................................................................
----------------
----------------
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering, if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option from the date of this
prospectus to purchase on a pro rata basis up to 450,000 additional shares at
the initial public offering price less the underwriting discounts and
commissions. The option may be exercised only to cover over-allotments of common
stock.
The underwriters propose to offer the shares to the public initially at the
public offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $ per share. The underwriters
and selling group members may allow a discount of $ per share on sales to
other broker/dealers. After the initial public offering, the public offering
price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Total
------------------------------
Without With
Per Share Over-allotment Over-allotment
----------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by us...................... $ $ $
Expenses payable by us................................................. $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We, our officers and directors and several other stockholders have agreed
that we will not offer, sell, contract to sell, announce our intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the
Commission a registration statement under the Securities Act relating to, any
additional shares of common stock or securities convertible into or exchangeable
or exercisable for any
69
<PAGE>
of our shares without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
in the case of issuances by us upon the exercise of employee stock options
outstanding on the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price to the public, up to shares of the common stock for employees,
directors and other persons associated with us that have expressed an interest
in purchasing common stock in the offering. The number of shares available for
sale to the general public in the offering will be reduced by the amount these
persons purchase the reserved shares. Any reserved shares not purchased will be
offered by the underwriters to the general public on the same terms as the other
shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act or to contribute to payments which the underwriters may be
required to make for that indemnity.
We have applied to list our shares on The Nasdaq Stock Market's National
Market under the symbol "CMRC."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price has been determined by negotiation
between the representatives and us. The principal factors considered in
determining the public offering price included:
- the information in this prospectus and available to the representatives;
- the history and the prospects for the industry in which we will compete;
- our management's ability;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the common stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representatives to reclaim a selling concession from a
syndicate member when the common stock originally sold by such syndicate member
is purchased in a syndicate covering transaction to cover syndicate short
positions. These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Individuals affiliated with Credit Suisse First Boston Corporation purchased
an aggregate of 11,036 shares of our Series E preferred stock for a total
purchase price of $99,990. In addition, Credit Suisse First Boston received from
us a fee of approximately $1,200,000 for acting as placement agent in connection
with the private placement of our Series E preferred stock.
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NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities regulatory authority.
Purchasers are advised to seek legal advice prior to any resale of the common
stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that:
- the purchaser is entitled under applicable provincial securities laws to
purchase such common stock without the benefit of a prospectus qualified
under such securities laws;
- where required by law, the purchaser is purchasing as principal and not as
agent; and
- the purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named in
this prospectus, may be located outside of Canada and, as a result, it may not
be possible for Canadian purchasers to serve process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the SECURITIES ACT (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. Such report must be in
the form attached to British Columbia Securities Commission Blanket Order BOR
#95/17, a copy of which may be obtained from us. Only one such report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors for information concerning the tax consequences of an investment in the
common stock in their particular circumstances and for information concerning
the eligibility of the common stock for investment by the purchaser under
relevant Canadian legislation.
71
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the Underwriters by
Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Menlo Park,
California. As of the date of this prospectus, investment partnerships composed
of certain current and former members of and persons associated with Wilson
Sonsini Goodrich & Rosati, Professional Corporation, as well as certain
individual attorneys of this firm, beneficially own an aggregate of 29,794
shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and financial statement schedule as of December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998,
and the financial statements of VEO Systems for the year ended December 31,
1998, as set forth in their reports. We have included our financial statements
in the prospectus and elsewhere in the registration statement in reliance on
Ernst & Young LLP's reports, given on their authority as experts in accounting
and auditing.
The financial statements of VEO Systems as of December 31, 1997 and for the
period from January 16, 1997 (inception) through December 31, 1997 included in
this prospectus have been so included in reliance on the report, which contains
an explanatory paragraph relating to Commerce One's ability to continue as a
going concern, of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in auditing and accounting.
72
<PAGE>
COMMERCE ONE, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Commerce One, Inc.:
Report of Ernst & Young LLP, Independent Auditors.................................... F-2
Consolidated Balance Sheets.......................................................... F-3
Consolidated Statements of Operations................................................ F-4
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders'
Equity (Deficit)................................................................... F-5
Consolidated Statements of Cash Flows................................................ F-6
Notes to Consolidated Financial Statements........................................... F-7
VEO Systems, Inc.:
Report of Ernst & Young LLP, Independent Auditors.................................... F-22
Report of PricewaterhouseCoopers LLP................................................. F-23
Balance Sheets....................................................................... F-24
Statements of Operations............................................................. F-25
Statements of Stockholders' Equity (Deficit)......................................... F-26
Statements of Cash Flows............................................................. F-27
Notes to Financial Statements........................................................ F-28
Selected Unaudited ProForma Condensed Combined Financial Information:
Introduction......................................................................... F-35
Statements of Operations............................................................. F-36
Notes to Selected Unaudited Pro Forma Condensed Combined Financial Information....... F-37
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & 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, 1997 and 1998, and the related consolidated
statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit), and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Commerce One, Inc. at December 31, 1997 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Walnut Creek, California
March 5, 1999, except for Note 8, as to which the date is
June , 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon the
effectiveness of the stock split and approval of the certificate of
incorporation in the state of Delaware as described in Note 8 to the
consolidated financial statements.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
June 2, 1999
F-2
<PAGE>
COMMERCE ONE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
-------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
--------- --------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 9,367 $ 15,138 $ 7,839
Accounts receivable, less allowances of $70, $295 and $295 at
December 31, 1997 and 1998 and March 31, 1999, respectively... 234 1,200 1,068
Prepaid expenses and other current assets....................... 551 629 745
--------- --------- -----------
Total current assets.............................................. 10,152 16,967 9,652
Property and equipment, net....................................... 1,512 2,590 3,096
Note receivable from Veo Systems, Inc............................. -- 950 --
Intangible assets, net............................................ -- -- 18,065
--------- --------- -----------
Total assets...................................................... $ 11,664 $ 20,507 $ 30,813
--------- --------- -----------
--------- --------- -----------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings under bank line of credit............................ $ 750 $ -- $ --
Accounts payable................................................ 662 709 1,124
Accrued compensation and related expenses....................... 239 352 568
Current portion of capital lease obligations.................... 280 448 466
Current portion of notes payable................................ 302 876 886
Deferred revenue................................................ 174 1,168 1,024
Other current liabilities....................................... 551 1,637 2,220
--------- --------- -----------
Total current liabilities......................................... 2,958 5,190 6,288
Capital lease obligations......................................... 359 309 212
Notes payable..................................................... 737 1,587 1,389
Commitments
Redeemable convertible preferred stock, no par value, issuable in
series: 20,745,976 shares authorized; 4,344,450, 8,777,829 and
9,177,912 shares issued and outstanding at December 31, 1997 and
1998 and March 31, 1999, respectively (none pro forma)
(aggregate liquidation preference of $51,558 at December 31,
1998)........................................................... 20,650 50,432 53,403 $ --
Stockholders' equity (deficit):
Convertible preferred stock, no par value; 22,000,000 shares
authorized (including 20,745,976 shares designated as
redeemable convertible preferred stock): 336,840 shares issued
and outstanding at December 31, 1997 and 1998 and March 31,
1999, (none pro forma) (aggregate liquidation preference of
$500 at December 31, 1998).................................... 487 487 487 --
Common stock, no par value; 50,000,000 shares authorized;
3,222,066, 3,299,068 and 5,499,255 shares issued and
outstanding at December 31, 1997 and 1998 and March 31, 1999,
respectively (15,014,007 pro forma)........................... 159 3,165 23,592 77,482
Deferred stock compensation..................................... -- (1,848) (3,246) (3,246)
Accumulated deficit............................................. (13,686) (38,765) (51,254) (51,254)
Accumulated other comprehensive loss............................ -- (50) (58) (58)
--------- --------- ----------- -------------
Total stockholders' equity (deficit).............................. (13,040) (37,011) (30,479) $ 22,924
--------- --------- ----------- -------------
-------------
Total liabilities, redeemable convertible preferred stock and
stockholders' equity (deficit).................................. $ 11,664 $ 20,507 $ 30,813
--------- --------- -----------
--------- --------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
COMMERCE ONE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License fees............................ $ 152 $ 742 $ 1,633 $ 5 $ 1,456
Services................................ 660 1,004 930 120 648
--------- --------- --------- ----------- -----------
Total revenues............................ 812 1,746 2,563 125 2,104
--------- --------- --------- ----------- -----------
Cost of revenues.......................... 782 2,887 4,369 674 1,668
--------- --------- --------- ----------- -----------
Gross profit (loss)....................... 30 (1,141) (1,806) (549) 436
Operating expenses:
Sales and marketing..................... 862 6,055 13,108 2,511 4,078
Product development..................... 516 2,172 6,839 1,157 3,362
General and administrative.............. 432 1,805 1,941 331 827
Purchased in-process research and
development........................... -- -- -- -- 3,037
Amortization of deferred stock
compensation.......................... -- -- 1,102 99 584
Amortization of goodwill and other
intangible assets..................... -- -- -- -- 875
--------- --------- --------- ----------- -----------
Total operating expenses.................. 1,810 10,032 22,990 4,098 12,763
--------- --------- --------- ----------- -----------
Loss from operations...................... (1,780) (11,173) (24,796) (4,647) (12,327)
Interest income (expense), net............ (25) 9 156 15 16
--------- --------- --------- ----------- -----------
Net loss.................................. $ (1,805) $ (11,164) $ (24,640) $ (4,632) $ (12,311)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Net loss per share:
Basic and diluted....................... $ (0.69) $ (4.21) $ (8.21) $ (1.58) $ (2.64)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Pro forma basic and diluted............. $ (2.60) $ (0.87)
--------- -----------
--------- -----------
Shares used in calculation of net loss per
share:
Basic and diluted....................... 2,618 2,679 3,053 2,966 4,723
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Pro forma basic and diluted............. 9,469 14,175
--------- -----------
--------- -----------
</TABLE>
See accompanying notes
F-4
<PAGE>
COMMERCE ONE, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------
REDEEMABLE SERIES A
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------------- --------------------- ----------------------- DEFERRED STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT COMPENSATION
---------- ----------- --------- ---------- ---------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995... -- $ -- 296,440 $ 428 2,575,000 $ 10 $ --
Issuance of common stock...... -- -- -- -- 12,500 3 --
Issuance of common stock for
services.................... -- -- -- -- 64,702 10 --
Issuance of Series A
convertible preferred stock,
net of issuance costs....... -- -- 40,400 59 -- -- --
Issuance of Series B
redeemable convertible
preferred stock, net of
issuance costs.............. 1,780,488 7,251 -- -- -- -- --
Accretion of redeemable
preferred stock............. -- 7 -- -- -- -- --
Net loss and comprehensive
loss........................ -- -- -- -- -- -- --
---------- ----------- --------- ---------- ---------- ----------- -------
Balances at December 31, 1996... 1,780,488 7,258 336,840 487 2,652,202 23 --
Issuance of common stock upon
exercise of stock options... -- -- -- -- 569,864 136 --
Issuance of Series C
redeemable convertible
preferred stock, net of
issuance costs.............. 2,560,304 13,262 -- -- -- -- --
Issuance of Series B
redeemable convertible
preferred stock upon
exercise of warrants........ 3,658 15 -- -- -- -- --
Accretion of redeemable
preferred stock............. -- 115 -- -- -- -- --
Net loss and comprehensive
loss........................ -- -- -- -- -- -- --
---------- ----------- --------- ---------- ---------- ----------- -------
Balances at December 31, 1997... 4,344,450 20,650 336,840 487 3,222,066 159 --
Issuance of common stock upon
exercise of stock options... -- -- -- -- 77,002 56 --
Issuance of Series D
redeemable convertible
preferred stock, net of
issuance costs.............. 4,433,379 29,343 -- -- -- -- --
Accretion of redeemable
preferred stock............. -- 439 -- -- -- -- --
Deferred stock compensation... -- -- -- -- -- 2,950 (2,950)
Amortization of deferred stock
compensation................ -- -- -- -- -- -- 1,102
Foreign currency translation
adjustment.................. -- -- -- -- -- -- --
Net loss........................ -- -- -- -- -- -- --
---------- ----------- --------- ---------- ---------- ----------- -------
Comprehensive loss.............. -- -- -- -- -- -- --
---------- ----------- --------- ---------- ---------- ----------- -------
Balances at December 31, 1998... 8,777,829 50,432 336,840 487 3,299,068 3,165 (1,848)
Issuance of common stock upon
exercise of stock options
(unaudited)................. -- -- -- -- 250,019 103 --
Issuance of shares in
connection with acquisition
of Veo Systems, Inc.
(unaudited)................. 400,083 2,793 -- -- 1,962,355 18,358 --
Repurchase of common stock
from terminated employees
(unaudited)................. -- -- -- -- (12,187) (16) --
Accretion of redeemable
preferred stock
(unaudited)................. -- 178 -- -- -- -- --
Deferred stock compensation
(unaudited)................. -- -- -- -- -- 1,982 (1,982)
Amortization of deferred stock
compensation (unaudited).... -- -- -- -- -- -- 584
Foreign currency translation
adjustment (unaudited)...... -- -- -- -- -- -- --
Net loss (unaudited).......... -- -- -- -- -- -- --
---------- ----------- --------- ---------- ---------- ----------- -------
Comprehensive loss
(unaudited)................. -- -- -- -- -- -- --
---------- ----------- --------- ---------- ---------- ----------- -------
Balances at March 31, 1999
(unaudited)................... 9,177,912 $ 53,403 336,840 $ 487 5,499,255 $ 23,592 $ (3,246)
---------- ----------- --------- ---------- ---------- ----------- -------
---------- ----------- --------- ---------- ---------- ----------- -------
<CAPTION>
ACCUMULATED
OTHER
ACCUMULATED COMPREHENSIVE
DEFICIT LOSS TOTAL
------------ ----------------- ---------
<S> <C> <C> <C>
Balances at December 31, 1995... $ (595) $ -- $ (157)
Issuance of common stock...... -- -- 3
Issuance of common stock for
services.................... -- -- 10
Issuance of Series A
convertible preferred stock,
net of issuance costs....... -- -- 59
Issuance of Series B
redeemable convertible
preferred stock, net of
issuance costs.............. -- -- --
Accretion of redeemable
preferred stock............. (7) -- (7)
Net loss and comprehensive
loss........................ (1,805) -- (1,805)
------------ ----- ---------
Balances at December 31, 1996... (2,407) -- (1,897)
Issuance of common stock upon
exercise of stock options... -- -- 136
Issuance of Series C
redeemable convertible
preferred stock, net of
issuance costs.............. -- -- --
Issuance of Series B
redeemable convertible
preferred stock upon
exercise of warrants........ -- -- --
Accretion of redeemable
preferred stock............. (115) -- (115)
Net loss and comprehensive
loss........................ (11,164) -- (11,164)
------------ ----- ---------
Balances at December 31, 1997... (13,686) -- (13,040)
Issuance of common stock upon
exercise of stock options... -- -- 56
Issuance of Series D
redeemable convertible
preferred stock, net of
issuance costs.............. -- -- --
Accretion of redeemable
preferred stock............. (439) -- (439)
Deferred stock compensation... -- -- --
Amortization of deferred stock
compensation................ -- -- 1,102
Foreign currency translation
adjustment.................. -- (50) (50)
Net loss........................ (24,640) -- (24,640)
------------ ----- ---------
Comprehensive loss.............. -- -- (24,690)
------------ ----- ---------
Balances at December 31, 1998... (38,765) (50) (37,011)
Issuance of common stock upon
exercise of stock options
(unaudited)................. -- -- 103
Issuance of shares in
connection with acquisition
of Veo Systems, Inc.
(unaudited)................. -- -- 18,358
Repurchase of common stock
from terminated employees
(unaudited)................. -- -- (16)
Accretion of redeemable
preferred stock
(unaudited)................. (178) -- (178)
Deferred stock compensation
(unaudited)................. -- -- --
Amortization of deferred stock
compensation (unaudited).... -- -- 584
Foreign currency translation
adjustment (unaudited)...... -- (8) (8)
Net loss (unaudited).......... (12,311) -- (12,311)
------------ ----- ---------
Comprehensive loss
(unaudited)................. -- -- (12,319)
------------ ----- ---------
Balances at March 31, 1999
(unaudited)................... $ (51,254) $ (58) $ (30,479)
------------ ----- ---------
------------ ----- ---------
</TABLE>
See accompanying notes.
F-5
<PAGE>
COMMERCE ONE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................ $ (1,805) $ (11,164) $ (24,640) $ (4,632) $ (12,311)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 130 470 1,026 280 403
Purchased in-process research and development..... -- -- -- -- 3,037
Amortization of deferred stock compensation....... -- -- 1,102 99 584
Amortization of goodwill and other intangible
assets.......................................... -- -- -- -- 875
Issuance of common stock for services............. 10 -- -- -- --
Changes in operating assets and liabilities:
Accounts receivable............................. (212) (21) (966) (134) 719
Prepaid expenses and other current assets....... (119) (425) (78) 11 (46)
Accounts payable................................ 182 476 47 (224) 415
Accrued compensation and related expenses....... 117 84 113 (12) (184)
Other current liabilities....................... 222 312 1,086 220 326
Deferred revenue................................ 197 (337) 994 246 (144)
--------- --------- --------- --------- ---------
Net cash used in operating activities............... (1,278) (10,605) (21,316) (4,146) (6,326)
INVESTING ACTIVITIES:
Purchase of property and equipment, net............. (286) (924) (1,560) (53) (743)
Note receivable from Veo Systems, Inc............... -- -- (950) -- --
Acquisition of Veo Systems, Inc., net of cash
acquired.......................................... -- -- -- -- (42)
--------- --------- --------- --------- ---------
Net cash used in investing activities............... (286) (924) (2,510) (53) (785)
FINANCING ACTIVITIES:
Borrowings under bank line of credit................ -- 750 -- -- --
Proceeds from issuance of preferred stock........... 7,310 13,277 29,343 -- --
Issuance of common stock, net....................... 3 136 56 1 87
Proceeds from borrowings on notes payable........... 227 955 1,014 -- --
Payments on notes payable........................... (94) (160) (340) (132) (188)
Payments on capital lease obligations............... (1) (173) (426) (94) (79)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities........................................ 7,445 14,785 29,647 (225) (180)
--------- --------- --------- --------- ---------
Effect of foreign currency translation on cash and
cash equivalents.................................. -- -- (50) (14) (8)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents.... 5,881 3,256 5,771 (4,438) (7,299)
Cash and cash equivalents at beginning of period.... 230 6,111 9,367 9,367 15,138
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period.......... $ 6,111 $ 9,367 $ 15,138 $ 4,929 $ 7,839
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURES:
Interest paid..................................... $ 30 $ 192 $ 461 $ 82 $ 138
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred................ $ 50 $ 763 $ 554 $ 370 $ --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Deferred compensation related to stock option
grants.......................................... $ -- $ -- $ 2,950 $ 826 $ 1,982
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Conversion of borrowings under bank line of credit
to note payable................................. $ -- $ -- $ 750 $ -- $ 750
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Acquisition of VEO Systems, Inc. with preferred
stock, common stock and assumption of stock
options......................................... $ -- $ -- $ -- $ -- $ 21,151
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes.
F-6
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Commerce One, Inc. (the "Company") was incorporated in the State of
California in 1994. The Company provides business-to-business electronic
commerce solutions that link buyers and suppliers of indirect goods and services
into real-time trading communities over the Internet.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The Company has incurred significant losses since inception. Its activities
to date have been financed primarily through private placements of equity
securities. The Company may seek to raise additional capital through the
issuance of debt or equity securities. However, there can be no assurance that
the Company will be able to obtain additional financing on acceptable terms, if
at all.
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 average exchange rate prevailing during the
period. Gains and losses resulting from the translation of the foreign
subsidiaries' financial statements are reported as a separate component of
stockholders' equity. Net gains and losses resulting from foreign exchange
transactions were not significant during any of the periods presented.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial information as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 is unaudited but includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of its consolidated financial position at that
date and its consolidated results of operations and cash flows for those
periods. Operating results for the three months ended March 31, 1999 are not
necessarily indicative of results that may be expected for any future periods.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which consist of cash and highly liquid
short-term investments with insignificant interest rate risk and original
maturities of three months or less at date of purchase, are stated at cost,
which approximates fair value.
F-7
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 and office equipment--three years; furniture and fixtures--five 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 over the shorter of the expected useful life
or the related lease term (see Note 4).
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with
Financial Accounting Standards Board ("FASB") Statement 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. Through March 31, 1999,
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 and cash equivalents and accounts
receivable. The Company maintains its cash with two domestic financial
institutions.
For the years ended December 31, 1996 and 1997, one customer accounted for
10% and 12%, respectively, of the Company's revenues. For the year ended
December 31, 1998, four customers accounted for 12%, 18%, 21% and 24% of the
Company's revenues. At December 31, 1997 and 1998, these customers accounted for
20% and 13%, respectively, of accounts receivable. The Company performs ongoing
credit evaluations of its customers and does not require collateral or
guarantees. Management establishes an allowance for doubtful accounts when it
appears accounts receivable will not be collectible, and such losses to date
have been within management's expectations.
REVENUE RECOGNITION
The Company recognizes revenues from license agreements upon delivery and
acceptance of the software if there is persuasive evidence of an arrangement,
collection is probable, the fee is fixed or determinable, and there is
sufficient vendor-specific objective evidence to support allocating the total
fee to all elements of multiple-element arrangements. If an acceptance period is
required, license revenues are recognized upon the earlier of customer
acceptance or the expiration of the acceptance period.
The Company recognizes revenues from professional services as the services
are provided. If a transaction includes both license and service elements, the
license fee is recognized on delivery and acceptance of the software, provided
services do not include significant customization or modification
F-8
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of the base product, and the payment terms for licenses are not subject to
additional acceptance criteria. In cases where license fee payments are
contingent on the acceptance of services, recognition of revenues is deferred
for both the license and the service elements until the acceptance criteria are
met. Software maintenance revenues are recognized ratably over the term of the
support contract, typically one year.
Effective January 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as amended by Statement of Position
98-4 ("SOP 98-4") which were issued by the American Institute of Certified
Public Accountants ("AICPA"). The Company believes its current revenue
recognition policies and practices are consistent with SOP 97-2 and SOP 98-4.
Additionally, the AICPA issued SOP 98-9 in December 1998, which provides certain
amendments to SOP 97-2, and is effective for transactions entered into beginning
January 1, 2000. Full implementation guidelines for this standard have not yet
been issued. Once available, such implementation guidelines could lead to
unanticipated changes in the Company's current revenue recognition policies,
which changes could affect the timing of the Company's future revenues and
results of operations.
Deferred revenue consists of prepaid fees for services 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 Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123") (Note 5).
INCOME TAXES
The Company accounts for income taxes in accordance with FASB Statement 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 FASB Statement No. 128, "Earnings per Share"
("FAS 128"). 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 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.
Pro forma net loss per share has been computed as described above and also
gives effect, under Securities and Exchange Commission guidance, to the
conversion of preferred shares not included above that will automatically
convert to common shares upon completion of the Company's initial public
offering, using the if-converted method (Note 5).
F-9
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The calculation of historical and pro forma basic and diluted net loss per
share is as follows (in thousands, expect share and per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Historical:
Net loss................................ $ (1,805) $ (11,164) $ (24,640) $ (4,636) $ (12,311)
Preferred stock accretion............... (7) (115) (439) (61) (178)
--------- --------- --------- ----------- -----------
Loss applicable to common
stockholders.......................... $ (1,812) $ (11,279) $ (25,079) $ (4,697) $ (12,489)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Weighted average shares of common stock
outstanding........................... 2,618 2,818 3,257 3,223 4,950
Less: Weighted average shares subject to
repurchase............................ -- (139) (204) (257) (227)
--------- --------- --------- ----------- -----------
Weighted average shares of common stock
outstanding used in computing basic
and diluted net loss per share........ 2,618 2,679 3,053 2,966 4,723
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Basic and diluted net loss per share.... $ (0.69) $ (4.21) $ (8.21) $ (1.58) $ (2.64)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Pro forma:
Net loss................................ $ (1,805) $ (11,164) $ (24,640) $ (4,636) $ (12,311)
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Weighted average shares used in
computing basic and diluted net loss
per share (from above)................ 3,053 4,723
Adjustment to reflect the effect of the
assumed conversion of preferred stock
from the date of issuance............. 6,416 9,452
--------- -----------
Weighted-average shares used in
computing pro forma basic and diluted
net per loss share.................... 9,469 14,175
--------- -----------
--------- -----------
Pro forma basic and diluted net loss per
share................................. $ (2.60) $ (0.87)
--------- -----------
--------- -----------
</TABLE>
If the Company had reported net income, the calculation of historical and
pro forma diluted earnings per share would have included approximately an
additional 112,000, 394,000, 1,360,000, 1,120,000, and 3,054,000 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, 1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999,
respectively.
F-10
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components in financial statements. The only item of other
comprehensive income (loss) which the Company currently reports is foreign
currency translation adjustments, which are included in accumulated other
comprehensive income (loss) in the consolidated statements of redeemable
convertible preferred stock and stockholders' equity (deficit).
The FASB issued Statement No. 131 ("FAS 131") "Disclosure about Segments of
an Enterprise and Related Information," which establishes standards for the way
public business enterprises report information in annual statements and interim
financial reports regarding operating segments, products and services,
geographic areas, and major customers. This statement is effective for financial
statements for periods beginning after December 15, 1997. The Company adopted
FAS 131 in the year ended December 31, 1998 and operates in one business
segment, which is business-to-business electronic commerce solutions for
creating dynamic trading communities over the Internet.
RECLASSIFICATIONS
Certain prior amounts have been reclassified to conform to current year
presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Computer and office equipment............................... $ 1,688 $ 3,632
Furniture and fixtures...................................... 169 223
Leasehold improvements...................................... 159 258
--------- ---------
2,016 4,113
Less accumulated depreciation and amortization.............. 504 1,523
--------- ---------
$ 1,512 $ 2,590
--------- ---------
--------- ---------
</TABLE>
F-11
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
3. NOTES PAYABLE
In May 1998, the Company entered into a loan agreement with a bank which
provides for a line of credit of $1,500,000, plus 75% of the Company's net
accounts receivable balance, up to a total of $3,000,000. Borrowings under the
line of credit bear interest at the bank's prime rate plus 1.0% (8.75% at
December 31, 1998). No borrowings were outstanding under the line of credit at
December 31, 1998. The loan agreement also provides for a revolving equipment
loan facility in the amount of $1,500,000. Borrowings under the equipment loan
facility bear interest at the bank's prime rate plus 1.5% (9.25% at December 31,
1998) and are to be repaid in monthly installments of principal and interest
over 36 months. Borrowings outstanding under the equipment facility at December
31, 1998 amounted to $1,371,000. The equipment facility is secured by
substantially all of the assets of the Company. In addition, the Company is
required to keep on deposit with the bank a minimum of $2,000,000. In connection
with the loan agreement, the Company granted the bank a warrant to purchase
6,446 shares of Series D preferred stock. The Company deemed the fair value of
the warrant to be minimal. The loan agreement expires on January 31, 2001.
In January 1997, the Company entered into revolving line of credit with the
same bank for the purchase of equipment. The agreement provided for borrowings
of up to $750,000 at 1.5% above the bank's prime rate (10% at December 31,
1997). In September 1998, the entire principal balance under the revolving line
of credit was repaid from proceeds of borrowings under the equipment loan
facility.
In 1997 and 1998, the Company entered into notes payable agreements with two
leasing companies. The notes accrue interest monthly based on effective interest
rates ranging from 13.75% to 15.01% and mature at various dates from January
2000 to December 2001. The notes are secured by the equipment acquired with the
proceeds from these notes. The principal amount outstanding at December 31, 1998
under these notes is $1,092,000.
Principal maturities of notes payable as of December 31, 1998 are as
follows: 1999--$876,000; 2000--$898,000; and 2001--$689,000.
4. LEASE OBLIGATIONS
The Company leases its principal office facilities under a non-cancelable
operating lease. Rent expense amounted to $199,000, $428,000 and $587,000 for
the years ended December 31, 1996, 1997 and 1998, respectively.
Capital lease obligations represent the present value of future rental
payments under capital lease agreements for equipment. The original cost and
accumulated depreciation on the equipment under capital leases is $813,000 and
$174,000, respectively, at December 31, 1997 and $1,367,000 and $610,000,
respectively, at December 31, 1998.
F-12
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
4. LEASE OBLIGATIONS (CONTINUED)
Future minimum payments under capital and operating leases at December 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1999..................................................................... $ 622 $ 649
2000..................................................................... 317 223
2001..................................................................... 24 --
----- -----
Total minimum lease payments............................................. 963 $ 872
-----
-----
Less amounts representing interest....................................... 206
-----
Present value of minimum lease payments.................................. 757
Less current portion of capital lease obligations........................ 448
-----
$ 309
-----
-----
</TABLE>
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Preferred stock consists of the following by series:
<TABLE>
<CAPTION>
SHARES ISSUED
-------------------------------
DECEMBER 31,
AUTHORIZED -------------------- MARCH 31,
SERIES SHARES 1997 1998 1999
- ----------------------------------------------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
A convertible.................................. 673,680 336,840 336,840 336,840
B redeemable convertible....................... 3,595,976 1,784,146 1,784,146 1,784,146
C redeemable convertible....................... 6,450,000 2,560,304 2,560,304 2,560,304
D redeemable convertible....................... 10,700,000 -- 4,433,379 4,833,462
--------- --------- --------- ---------
21,419,656 4,681,290 9,114,669 9,514,752
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The holders of the Series A, Series B, Series C and Series D preferred stock
are entitled to receive annual noncumulative dividends of $.12, $.328, $.40 and
$.56 per share, respectively, when and if declared by the Board of Directors.
These dividends are in preference to any declaration or payment of any dividend
on the common stock of the Company. No such dividends have been declared through
March 31, 1999.
Each share of the Series A, Series B, Series C and Series D preferred stock
is convertible, at the holder's option, into one share of the Company's common
stock, subject to certain antidilution provisions. The preferred stock will be
automatically converted into common stock based on the then applicable
conversion rate upon completion of an initial public offering of the Company's
common stock with proceeds to the Company of a minimum of $40 million at a
minimum offering price of
F-13
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
$13.96 per share. The holders of preferred stock are entitled to the number of
votes equal to the number of shares of common stock into which their preferred
stock is convertible.
At any time after November 30, 2003, or with the approval of the holders of
a majority of the then outstanding shares of the Series B, Series C and Series D
preferred stock, the Company may be required to redeem all or any part of the
then outstanding shares of Series B, Series C and Series D preferred stock at a
price equal to $4.45 per share, $5.72 per share and $7.68 per share,
respectively, plus all declared but unpaid dividends on such shares. The Company
is not required to redeem Series B, Series C or Series D preferred stock in
excess of one-third of the aggregate redemption prior to July 31, 2003, in
excess of two-thirds prior to July 31, 2004 or 100% prior to July 31, 2005. The
excess of the redemption value over the carrying value is being accreted by
periodic charges to the accumulated deficit over the period prior to the
redemption dates.
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of the Series A, Series B, Series C and Series D preferred stock
have a liquidation preference of $1.4844 $4.10, $5.20 and $6.9766 per share,
respectively, up to a maximum of three times that amount per share if available
for distribution, over holders of common stock plus any declared but unpaid
dividends.
WARRANTS
The Company had the following warrants outstanding at December 31, 1998 to
purchase shares of preferred stock:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PREFERRED PRICE PER EXPIRATION OF
SHARES STOCK SHARE WARRANTS
- ---------- ---------- ----------- ---------------------------------------------------------
<C> <C> <C> <S>
13,781 Series B $ 4.10 December 2003
6,730 Series C $ 5.20 Earlier of September 2007, or close of an initial public
offering
511,738 Series C $ 10.40 Earlier of October 2007, or close of an initial public
offering
128,331 Series C $ 10.40 Earlier of December 2007, or close of an initial public
offering
6,446 Series D $ 6.98 Earlier of May 2008, or close of an initial offering
36,246 Series D $ 6.98 Earlier of September 2008, or close of an initial public
offering
7,163 Series D $ 6.98 Earlier of December 2008, or close of an initial public
offering
- ----------
710,435
- ----------
- ----------
</TABLE>
STOCK OPTIONS
Under the Company's 1995 and 1997 Stock Option Plans ("the Plans"),
2,700,000 shares of common stock have been reserved for the issuance of
incentive stock options (ISO) or non-statutory
F-14
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
stock options (NSO) to employees, officers, directors, and consultants. The ISOs
may be granted at a price per share not less than the fair market value on the
date of the grant. The NSOs may be granted at a price per share not less than
85% of the fair market value at the date of grant. Options granted under the
Plans are exercisable over a maximum term of ten years from the date of grant
and generally vest over periods of up to four years. Under the 1995 Plan, 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. The repurchase rights lapse over the
period that the underlying options vest. Shares issued under the 1995 Plan are
also subject to various restrictions as to resale.
A summary of the Company's stock option activity under the plans is set
forth below:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
----------- -----------------
<S> <C> <C>
Outstanding at December 31, 1995.................................................. 75,000 $ 0.14
Granted......................................................................... 1,032,687 0.26
Canceled........................................................................ (12,500) 0.14
----------- -----
Outstanding at December 31, 1996.................................................. 1,095,187 0.26
Granted......................................................................... 571,925 0.40
Exercised....................................................................... (569,864) 0.24
Canceled........................................................................ (131,021) 0.30
----------- -----
Outstanding at December 31, 1997.................................................. 966,227 0.34
Granted......................................................................... 1,222,750 1.16
Exercised....................................................................... (77,002) 0.34
Canceled........................................................................ (223,032) 0.64
----------- -----
Outstanding at December 31, 1998.................................................. 1,888,943 0.84
Granted and assumed (unaudited)................................................. 1,520,334 2.44
Exercised (unaudited)........................................................... (250,019) 0.48
Canceled (unaudited)............................................................ (138,680) 0.92
----------- -----
Outstanding at March 31, 1999 (unaudited)......................................... 3,020,578 $ 1.67
----------- -----
----------- -----
Exercisable and vested at December 31, 1998....................................... 590,522 $ 0.46
----------- -----
----------- -----
Exercisable and vested at March 31, 1999 (unaudited).............................. 1,360,423 $ 0.44
----------- -----
----------- -----
Outstanding shares of common stock subject to repurchase at December 31, 1998..... 130,015
-----------
-----------
Outstanding shares of common stock subject to repurchase at March 31, 1999
(unaudited)..................................................................... 194,348
-----------
-----------
</TABLE>
F-15
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------
OPTIONS EXERCISABLE
AND VESTED
------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE CONTRACTUAL PRICE PER PRICE PER
PRICES NUMBER LIFE (YEARS) SHARE NUMBER SHARE
- ----------- --------- ------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C>
0$.14-$0.40.. 711,263 7.86 $ 0.34 406,366 $ 0.30
0$.52-$0.60.. 494,076 8.98 $ 0.60 125,978 $ 0.60
1$.20-$1.80.. 683,604 9.53 $ 1.52 58,178 $ 1.30
--------- ---------
1,888,943 590,522
--------- ---------
--------- ---------
</TABLE>
The Company recorded deferred stock compensation of approximately $2,950,000
during the year ended December 31, 1998 and $1,982,000 during the three months
ended March 31, 1999 representing the difference between the exercise price and
the deemed fair value of the Company's common stock on the grant date for
certain of the Company's stock options granted to employees. In the absence of a
public market for the Company's common stock, the deemed fair value was based on
the price per share of recent preferred stock financings, less a discount to
give effect to the superior rights of the preferred stock. These amounts are
being amortized by charges to operations over the vesting periods of the
individual stock options using a graded vesting method. Such amortization
amounted to approximately $1,102,000 for the year ended December 31, 1998 and
approximately $584,000 for the three months ended March 31, 1999.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1998, the Company has reserved shares of capital stock for
future issuance as follows:
<TABLE>
<CAPTION>
COMMON PREFERRED
STOCK STOCK
------------ ----------
<S> <C> <C>
Convertible preferred stock, including effect of preferred stock warrants.............. 10,040,003 --
Stock options outstanding.............................................................. 1,888,943 --
Stock options available for grant...................................................... 164,191 --
Warrants to purchase preferred stock................................................... -- 925,334
------------ ----------
12,093,137 925,334
------------ ----------
------------ ----------
</TABLE>
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK BASED COMPENSATION
Pro forma information regarding results of operations and net loss per share
is required by FAS 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 FAS 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 6.0%, 6.2% and 5.8%
for the years ended December 31, 1996, 1997 and 1998, respectively, no dividend
yield or volatility factors of the expected
F-16
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
market price of the Company's common stock, and a weighted-average expected life
of the option of 4.5 years.
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.
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under those plans
calculated using the minimum value method of FAS 123, the Company's historical
net loss applicable to common stockholders and basic and diluted net loss per
share would have been increased to the pro forma amounts indicated below (in
thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net loss applicable to common stockholders--pro forma........... $ (1,820) $ (11,302) $ (25,562)
--------- --------- ---------
--------- --------- ---------
Net loss per share--pro forma................................... $ (0.70) $ (4.22) $ (8.37)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The weighted average fair value of options granted, which is the value
assigned to the options under FAS 123, was $0.06, $0.10 and $2.98 for options
granted during the years ended December 31, 1996, 1997 and 1998, respectively.
The pro forma impact of options on the net loss for the years ended December
31, 1996, 1997 and 1998 is not representative of the effects on net income
(loss) for future years, as future years will include the effects of additional
years of stock option grants.
6. INCOME TAXES
There has been no provision of U.S. federal, state, or foreign income taxes
for any period as the Company has incurred operating losses in all periods.
The effective income tax rate differs from the U.S. federal statutory rate
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Income tax expense (benefit)................................... (34.0)% (34.0)% (34.0)%
State taxes.................................................... (6.0)% (6.0)% (6.0)%
Losses producing no current tax benefit........................ 40.0% 40.0% 40.0%
--------- --------- ---------
Income tax provision (benefit)................................. -- -- --
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-17
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
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):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 5,094 $ 12,687
Capitalized research and development................... -- 474
Other.................................................. 254 642
--------- ---------
Total gross deferred tax assets.......................... 5,348 13,803
Less valuation allowance................................. (5,348) (13,803)
--------- ---------
Net deferred tax assets.................................. $ -- $ --
--------- ---------
--------- ---------
</TABLE>
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. During the years
ended December 31, 1997 and 1998, the valuation allowance on deferred tax assets
increased by $4,373,000 and $8,455,000, respectively.
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $32,723,000, which expire in the
years 2009 through 2018. The Company also had net operating loss carryforwards
for state income tax purposes of approximately $16,646,000 expiring in years
2002 through 2003. There can be no assurance that the Company will realize the
benefit of the net operating loss carryforwards.
Utilization of the Company's net operating loss is subject to a substantial
annual limitation due to the ownership change limitation provided by the
Internal Revenue Code and similar state provisions. Such an annual limitation
could result in the expiration of the net operating loss before utilization.
7. PROFIT SHARING PLAN
The Company has a profit sharing plan and trust under Section 401(k) of the
Internal Revenue Code which covers substantially all employees. Eligible
employees may contribute amounts to the plan via payroll withholdings, subject
to certain limitations. The Company does not match contributions by plan
participants.
8. SUBSEQUENT EVENTS
ACQUISITION
Effective January 15, 1999, the Company acquired VEO Systems, Inc. ("VEO
Systems"), a company specializing in the creation of extensible markup language
technology applications, in a transaction accounted for as a purchase. The
consolidated financial statements include the operating results of VEO Systems
from the date of acquisition. The purchase consideration was approximately
F-18
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
$23.2 million consisting of 1,962,355 shares of common stock with a value of
$13.3 million, 400,083 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 value of $2.8 million, stock options to acquire 825,771 shares of common stock
with a value $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 Systems under a note receivable during 1998. Contingent
consideration of an additional $400,000 in cash will be paid if certain
employees remain employed through January 2000.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on deemed fair values as follows (in thousands):
<TABLE>
<S> <C>
Cash............................................................... $ 358
Accounts receivables and other assets.............................. 823
Intangibles assets:
Purchased technology............................................. 2,274
Assembled workforce.............................................. 541
Tradenames/patents............................................... 693
Goodwill......................................................... 15,432
---------
Total intangible assets............................................ 18,940
---------
Purchased in-process research and development charged to operations
in the three months ended March 31, 1999......................... 3,037
---------
Total purchase consideration....................................... $ 23,158
---------
---------
</TABLE>
Goodwill arising from the acquisition will be amortized on a straight-line
basis over five years. Other intangible assets will be amortized over their
estimated useful lives ranging from two to five years. As of March 31, 1999,
accumulated amortization amounted to $875,000.
Purchased in-process research and development consists of a single project,
the development of a set of software tools which are being designed to enable
applications developers to generate programs to interface with the XML document
interchange and transport server. These tools will be integrated into our
products in late 1999. The Company's management is primarily responsible for
estimating the fair value of the purchased in-process research and development.
The Company estimated the revenues, costs and resulting net cash flows from the
project, and discounted the net cash flows back to their net present value.
These estimates were based on several assumptions, including those summarized
below. The resultant value was then adjusted to reflect only the value creation
effort of VEO Systems prior to the acquisition and further reduced by the
estimated value of core technology, which was included in capitalized purchased
technology.
Revenues and operating profit attributable to the in-process research and
development were estimated over a five-year projection period. The resulting
projected net cash flows were discounted to their present value using a discount
rate of 30%, which was calculated based on the weighted average cost of capital,
adjusted for the technology risk associated with the purchased in-process
research and
F-19
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
development. The technology risk was considered to be significant due to the
rapid pace of technological change in the electronic commerce industry.
The following unaudited pro forma adjusted summary represents the
consolidated results of operations for the year ended December 31, 1998 as if
the acquisition of VEO Systems had occurred January 1, 1998 and are not intended
to be indicative of future results (in thousands, except per share amounts):
<TABLE>
<S> <C>
Pro forma adjusted net revenue.................................... $ 5,353
Pro forma adjusted net loss....................................... $ (30,903)
Pro forma adjusted net loss per share--basic and diluted.......... $ (7.73)
Number of shares used in pro forma share calculation--basic and
diluted......................................................... 3,998
</TABLE>
The pro forma results of operations include historical operations of the
Company and VEO Systems adjusted to reflect certain pro forma adjustments,
including amortization of goodwill and other intangible assets arising from the
acquisition and do not include the charge for purchased in-process research and
development of $3,037,000 since it is a non-recurring charge. 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.
SERIES E PREFERRED STOCK
In April 1999, the Company sold 2,758,819 shares of Series E redeemable
convertible preferred stock with gross proceeds to the Company of approximately
$24,994,900.
PROPOSED PUBLIC OFFERING OF COMMON STOCK
On April 9, 1999, the Board of Directors authorized the Company to proceed
with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, all of the outstanding preferred stock
will automatically convert to common stock. The unaudited pro forma
stockholders' equity (deficit) at March 31, 1999 gives effect to the conversion
of all outstanding shares of convertible preferred stock at that date into
9,514,752 shares of common stock upon the completion of the offering.
STOCK SPLIT
On April 9, 1999, the Board of Directors approved, subject to stockholder
approval, a one-for-two reverse stock split of issued and outstanding common and
preferred stock to be effective prior to the completion of the initial public
offering of its common stock. All common and preferred share prices, and amounts
associated with rights, preferences, dividends and privileges in the
accompanying financial statements have been retroactively adjusted to reflect
the stock split. In addition, the Board of Directors authorized an increase in
the number of authorized shares of common stock to 250,000,000 and a decrease in
the number of authorized shares of preferred stock to 10,000,000 shares, subject
to stockholder approval.
F-20
<PAGE>
COMMERCE ONE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1999 AND FOR THE THREE MONTHS ENDED MARCH 31, 1998
AND 1999 IS UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
1997 INCENTIVE STOCK OPTION PLAN
Subsequent to December 31, 1998, the Company's Board of Director's reserved,
subject to stockholder approval, an additional 2,600,000 shares of common stock
for issuance of stock options under the 1997 Incentive Stock Option Plan.
1999 DIRECTOR OPTION PLAN
On April 9, 1999, the Company's Board of Directors adopted, subject to the
stockholder approval, the 1999 Director Option Plan and reserved an aggregate of
150,000 shares of common stock for grants of stock options under such plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1999 Employee Stock Purchase Plan was adopted by the Board of
Directors on April 9, 1999, subject to stockholder approval, to be effective
upon the completion of the Company's initial public offering of its common
stock. The Company has reserved a total of 750,000 shares of common stock for
issuance under the 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.
F-21
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
VEO Systems, Inc.
We have audited the accompanying balance sheet of VEO Systems, Inc. as of
December 31, 1998 and the related statements of operations, stockholders' equity
(deficit), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VEO Systems, Inc. at
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
March 5, 1999
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
VEO Systems, Inc.:
In our opinion, the accompanying balance sheet and the related statements of
operations, stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of VEO Systems, Inc. (a company in the
development stage) at December 31, 1997, and the result of its operations and
cash flows for the period from January 16, 1997 (date of inception) to December
31, 1997, in conformity with generally accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses and
negative cash flows from operations since inception which raises substantial
doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ PricewaterhouseCoopers LLP
San Jose, California
May 8, 1998, except for the last paragraph of Note 10,
as to which the date is August 21, 1998
F-23
<PAGE>
VEO SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................... $ 1,444 $ 619
Accounts receivable, less allowance for doubtful accounts of $13 in 1997 and $16 in 1998.... 307 582
Prepaid expenses and other current assets................................................... 17 3
--------- ---------
Total current assets.......................................................................... 1,768 1,204
Property and equipment, net................................................................... 74 169
Other assets.................................................................................. 43 18
--------- ---------
Total assets.................................................................................. $ 1,885 $ 1,391
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities.................................................... $ 182 $ 225
Accrued compensation and related expenses................................................... 26 80
Capital lease obligation.................................................................... 4 --
Notes payable to stockholders............................................................... -- 750
Note payable to Commerce One, Inc........................................................... -- 950
Deferred revenue............................................................................ 294 --
--------- ---------
Total current liabilities..................................................................... 506 2,005
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, no par value; 423,334 shares authorized, issued and outstanding
at December 31, 1997 and 1998 (liquidation preference of $2,120 at December 31, 1998)..... 2,042 2,042
Common stock, no par value; 10,000,000 shares authorized; 1,565,000 and 1,396,750 shares
issued and outstanding at December 31, 1997 and 1998, respectively........................ 150 154
Deferred compensation....................................................................... (126) (92)
Notes receivable from stockholders.......................................................... (34) --
Accumulated deficit......................................................................... (653) (2,718)
--------- ---------
Total stockholders' equity (deficit).......................................................... 1,379 (614)
--------- ---------
Total liabilities and stockholders' equity (deficit).......................................... $ 1,885 $ 1,391
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
F-24
<PAGE>
VEO SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 16, 1997
(INCEPTION) YEAR ENDED
THROUGH DECEMBER DECEMBER 31,
31, 1997 1998
----------------- ------------
<S> <C> <C>
Services.......................................................................... $ 998 $ 2,790
Cost of revenues.................................................................. 613 1,161
----- ------------
Gross profit...................................................................... 385 1,629
Operating expenses:
Sales and marketing............................................................. 21 794
Product development............................................................. 272 1,174
General and administrative...................................................... 841 1,786
----- ------------
Total operating expenses.......................................................... 1,134 3,754
----- ------------
Loss from operations.............................................................. (749) (2,125)
Interest income (expense), net.................................................... (6) 10
Rental income..................................................................... 102 50
----- ------------
Net loss.......................................................................... $ (653) $ (2,065)
----- ------------
----- ------------
</TABLE>
See accompanying notes.
F-25
<PAGE>
VEO SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK RECEIVABLE
---------------------- ---------------------- DEFERRED FROM
SHARES AMOUNT SHARES AMOUNT COMPENSATION STOCKHOLDERS
--------- ----------- --------- ----------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock at inception..... -- $ -- 1,565,000 $ 15 $ -- $ --
Issuance of common stock for notes
receivable from stockholders............ -- -- 300,000 3 -- (3)
Repurchase of common stock via forgiveness
of notes receivable from stockholders... -- -- (300,000) (3) -- 3
Issuance of Series A convertible preferred
stock for note receivable from
stockholder, net of issuance costs...... 90,000 119 -- -- -- (119)
Additional contribution by Series A
preferred stockholder................... -- 12 -- -- -- --
Repayment of note receivable from
stockholder via services rendered....... -- -- -- -- -- 85
Issuance of Series B convertible preferred
stock, net of issuance costs............ 333,334 1,911 -- -- -- --
Deferred compensation related to issuance
of common stock......................... -- -- -- 135 (135) --
Amortization of deferred compensation..... -- -- -- -- 9 --
Net loss and comprehensive loss........... -- -- -- -- -- --
--------- ----------- --------- ----- ------ ------
Balances at December 31, 1997............. 423,334 2,042 1,565,000 150 (126) (34)
Issuance of common stock upon exercise of
stock options........................... -- -- 500 -- -- --
Issuance of common stock in exchange for
services................................ -- -- 10,000 6 -- --
Repurchase of common stock................ -- -- (178,750) (2) -- --
Amortization of deferred compensation..... -- -- -- -- 34 --
Repayment of note receivable from
stockholder via services rendered....... -- -- -- -- -- 34
Net loss and comprehensive loss........... -- -- -- -- -- --
--------- ----------- --------- ----- ------ ------
Balances at December 31, 1998............. 423,334 $ 2,042 1,396,750 $ 154 $ (92) $ --
--------- ----------- --------- ----- ------ ------
--------- ----------- --------- ----- ------ ------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------- ---------
<S> <C> <C>
Issuance of common stock at inception..... $ -- $ 15
Issuance of common stock for notes
receivable from stockholders............ -- --
Repurchase of common stock via forgiveness
of notes receivable from stockholders... -- --
Issuance of Series A convertible preferred
stock for note receivable from
stockholder, net of issuance costs...... -- --
Additional contribution by Series A
preferred stockholder................... -- 12
Repayment of note receivable from
stockholder via services rendered....... -- 85
Issuance of Series B convertible preferred
stock, net of issuance costs............ -- 1,911
Deferred compensation related to issuance
of common stock......................... -- --
Amortization of deferred compensation..... -- 9
Net loss and comprehensive loss........... (653) (653)
------------- ---------
Balances at December 31, 1997............. (653) 1,379
Issuance of common stock upon exercise of
stock options........................... -- --
Issuance of common stock in exchange for
services................................ -- 6
Repurchase of common stock................ -- (2)
Amortization of deferred compensation..... -- 34
Repayment of note receivable from
stockholder via services rendered....... -- 34
Net loss and comprehensive loss........... (2,065) (2,065)
------------- ---------
Balances at December 31, 1998............. $ (2,718) $ (614)
------------- ---------
------------- ---------
</TABLE>
See accompanying notes.
F-26
<PAGE>
VEO SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 16, 1997
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
----------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.......................................................................... $ (653) $ (2,065)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................................... 11 56
Amortization of deferred compensation........................................... 9 34
Interest contribution by Series A preferred stockholder......................... 12 --
Allowance for doubtful accounts................................................. 13 3
Issuance of common stock and cancellation of note receivable in exchange for
services...................................................................... 85 40
Changes in operating assets and liabilities:
Accounts receivable........................................................... (320) (278)
Prepaid expenses and other current assets..................................... (17) 14
Other assets.................................................................. (44) (3)
Accounts payable and accrued liabilities...................................... 151 43
Accrued compensation and related expenses..................................... 26 54
Deferred revenue.............................................................. 294 (294)
------ -------------
Net cash used in operating activities............................................. (433) (2,396)
INVESTING ACTIVITIES
Purchase of property and equipment, net........................................... (46) (123)
------ -------------
Net cash used in investing activities............................................. (46) (123)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock......................................... 1,911 --
Proceeds from borrowings on notes payable......................................... -- 1,700
Proceeds from short-term loan..................................................... 100 --
Repayment of short-term loan...................................................... (100) --
Issuance (repurchase) of common stock, net........................................ 15 (2)
Payments on capital lease obligation.............................................. (3) (4)
------ -------------
Net cash provided by financing activities......................................... 1,923 1,694
------ -------------
Increase (decrease) in cash and cash equivalents.................................. 1,444 (825)
Cash and cash equivalents at beginning of period.................................. -- 1,444
------ -------------
Cash and cash equivalents at end of period........................................ $ 1,444 $ 619
------ -------------
------ -------------
SUPPLEMENTAL DISCLOSURES:
Interest paid................................................................... $ 12 $ 2
------ -------------
------ -------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligation incurred............................................... $ 7 $ --
------ -------------
------ -------------
Property and equipment purchased under accounts payable......................... $ 31 $ --
------ -------------
------ -------------
Issuance of Series A preferred stock in exchange for note receivable from
stockholder................................................................... $ 131 $ --
------ -------------
------ -------------
Deferred compensation related to issuance of common stock....................... $ 135 $ --
------ -------------
------ -------------
</TABLE>
See accompanying notes.
F-27
<PAGE>
VEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
VEO Systems, Inc. (the "Company") was incorporated in the state of
California on January 16, 1997 under the name of CommerceNet Services, Inc. and
in March 1998 amended its name to VEO Systems, Inc. The Company operates in one
business segment, which is the development of a business integration platform
for communicating with customers and suppliers over the Internet. The Company
was in the development stage during 1997.
ACQUISITION BY COMMERCE ONE, INC.
Effective January 15, 1999, all of the Company's outstanding preferred and
common stock was acquired by Commerce One, Inc. ("Commerce One"). Prior to the
closing of the transaction, all of the Company's outstanding warrants were
exercised (Note 5). During 1998, Commerce One advanced $950,000 in cash to the
Company under a note payable, which was due in July 1999 with interest at 6% per
annum. The note was canceled in connection with the acquisition. The financial
statements do not include any adjustments to the recorded amounts of assets and
liabilities which may result from this transaction.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which consist of cash and highly liquid
short-term investments with insignificant interest rate risk and original
maturities of three months or less at date of purchase, are stated at cost,
which approximates fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over estimated useful lives of three to five years.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards 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. To date, 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 statements of operations.
F-28
<PAGE>
VEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
Costs related to advertising and promotion are charged to sales and
marketing expense as incurred. Advertising and promotion expense for 1997 and
1998 was $5,000 and $43,000, respectively.
CONCENTRATION OF CREDIT RISK AND CREDIT EVALUATIONS
Financial instruments which potentially subject the Company to
concentrations of risk include cash and cash equivalents and accounts
receivable. The Company's cash is invested in deposits with one financial
institution and such deposits may, at times, be in excess of insured limits.
Management believes that the financial institution which holds the Company's
cash and cash equivalents is financially sound and, accordingly, represents
minimal credit risk.
At December 31, 1997 and 1998, three and one customers accounted for 77% and
44%, respectively, of accounts receivable. For 1997 and 1998, six and two
customers accounted for 93% and 90%, respectively, of the Company's revenue. The
Company extends credit to customers for services performed and does not require
collateral or guarantees. Management establishes an allowance for doubtful
accounts for estimated uncollectible receivables, and such losses to date have
been within management's expectations.
REVENUE RECOGNITION
In August 1997, the Company was awarded a cost reimbursement government
contract by National Institute of Standards and Technology ("NIST") in the
amount of $4,800,000 for the period from October 1, 1997 through September 30,
1999. For 1997 and 1998, actual reimbursable costs incurred related to the
contract totaled $132,000 and $1,432,000, respectively, which amounts were
recorded as revenue as the costs were incurred.
The Company has also recognized revenue in connection with services provided
to non-governmental organizations. Revenue is generally recognized as milestones
are reached or on a percentage of completion basis based on costs incurred.
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 makes the pro forma disclosures required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS
123"). The effect of applying the fair value method under FAS 123 to the
Company's stock options would result in pro forma net losses that are not
materially different from the historical amounts reported.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards 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.
F-29
<PAGE>
VEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income," which establishes standards for reporting
and displaying comprehensive income and its components in the financial
statements. The Company has no items of other comprehensive income and,
accordingly, its net loss is equal to its comprehensive loss.
The Financial Accounting Standards Board issued Statement No. 131 ("SFAS
131"), "Disclosure about Segments of an Enterprise and Related Information,"
which establishes standards for the way public business enterprises report
information in annual statements and interim financial reports regarding
operating segments, products and services, geographic areas, and major
customers. The Company adopted SFAS 131 in 1998. The Company operates in one
business segment.
RECENT ACCOUNTING PRONOUNCEMENT
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Development or Obtained for
Internal Use." The Company is reviewing the impact of SOP 98-1, which will be
effective for the year ending December 31, 1999.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to current year
presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
----- ---------
<S> <C> <C>
Computer equipment............................................................. $ 34 $ 123
Property and fixtures.......................................................... 48 56
Software....................................................................... 2 28
--- ---------
84 207
Less accumulated depreciation.................................................. 10 38
--- ---------
$ 74 $ 169
--- ---------
--- ---------
</TABLE>
3. NOTES PAYABLE TO STOCKHOLDERS
In May 1998, the Company issued 6% convertible subordinated debentures in
the principal amount of $750,000 due December 31, 1998 to four investors in
exchange for cash. The investors also received attached warrants to acquire
12,501 shares of preferred stock. In connection with the acquisition by Commerce
One, the debentures were converted into 125,000 shares of the Company's Series B
preferred stock and the warrants were exercised.
F-30
<PAGE>
VEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. LEASE OBLIGATIONS
The Company leases its principal office facilities under a non-cancelable
operating lease. Rent expense amounted to $155,000 and $462,000 for 1997 and
1998, respectively.
Future minimum payments under operating leases at December 31, 1998 were as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
- -------------------------------------------------------------------------------------
<S> <C>
1999............................................................................... $ 752
2000............................................................................... 447
---------
Total minimum lease payments......................................................... $ 1,199
---------
---------
</TABLE>
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK
At December 31, 1997 and 1998, the Company had 90,000 and 333,334 shares of
Series A and B convertible preferred stock, respectively, authorized, issued and
outstanding. The holders of the Series A and B convertible preferred stock were
entitled to receive annual noncumulative dividends of $0.067 and $0.30 per
share, respectively, when and if declared by the Board of Directors. These
dividends were in preference to any declaration or payment of any dividend on
the common stock of the Company. As of December 31, 1998, no dividends had been
declared.
Each share of Series A and Series B preferred stock was convertible, at the
holder's option, subject to antidilution provisions, into the number of fully
paid and nonassessable shares of common stock, which resulted from dividing the
original issue price per share for each class of preferred stock by the
conversion price in effect at the time of conversion, which is $1.3375 and $6.00
for Series A and B preferred stock, respectively. The preferred stock was to be
automatically converted into common stock based on the then applicable
conversion rate upon completion of an initial public offering of the Company's
common stock with proceeds to the Company of a minimum of $7.5 million. The
holders of preferred stock were entitled to the number of votes equal to the
number of shares of common stock into which their preferred stock was
convertible.
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of the Series A and B preferred stock had a liquidation preference
of $1.3375 and $6.00 per share, respectively, over holders of common stock plus
any declared but unpaid dividends. After payment had been made to the holders of
the Series A and B preferred stock, the entire remaining assets and funds of the
Company legally available for distribution, if any, would have been distributed
ratably among the holders of Series A and B preferred and common stocks assuming
conversion of all preferred stock.
COMMON STOCK REPURCHASE AGREEMENT:
In 1997, the Company issued 1,565,000 shares of restricted common stock to
certain employees at a price of $0.01 per share. Under the stock purchase
agreement, the Company has the option to repurchase unvested common shares in
the event the employees cease to be employed by the Company. The Company's
repurchase rights generally lapse at a rate of 1/4 after the first 12 months and
1/48th for each month of full time employment with the Company until all shares
are released from the repurchase plan. At December 31, 1998, 610,000 unvested
common shares are subjected to repurchase.
F-31
<PAGE>
VEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTIONS
Under the Company's 1997 Stock Option Plan ("1997 Plan"), 981,500 shares of
common stock have been reserved for the issuance of incentive stock options
(ISO) or non-statutory stock options (NSO) to employees, officers, directors,
and consultants of the Company. The ISOs may be granted at a price per share not
less than the fair market value on the date of the grant. The NSOs may be
granted at a price per share not less than 85% of the fair market value at the
date of grant. Options granted under the 1997 Plan are exercisable over a
maximum term of ten years from the date of grant and generally vest over periods
of up to four years.
A summary of the Company's stock option activity under the plan is set forth
below:
<TABLE>
<CAPTION>
WEIGHTAED- AVERAGE
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
----------- -----------------
<S> <C> <C>
Granted......................................................... 165,000 $ 0.21
----------- ------
Outstanding at December 31, 1997................................ 165,000 0.21
Granted..................................................... 665,000 0.60
Exercised................................................... (500) 0.60
Canceled.................................................... (139,000) 0.43
----------- ------
Outstanding at December 31, 1998................................ 690,500 $ 0.54
----------- ------
----------- ------
Exercisable and vested at December 31, 1998..................... 89,427 $ 0.47
----------- ------
----------- ------
Available for grant at December 31, 1998........................ 290,500
-----------
-----------
</TABLE>
The weighted-average fair value at grant date of options granted during 1998
was $0.15 per share.
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AND
OPTIONS OUTSTANDING
------------------------------------------- VESTED
WEIGHTED- ----------------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF CONTRACTUAL EXERCISE PRICE EXERCISE PRICE
EXERCISE PRICES NUMBER LIFE (YEARS) PER SHARE NUMBER PER SHARE
- --------------- --------- --------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ 0.01 70,000 8.96 $ 0.01 19,323 $ 0.01
$ 0.60 620,500 9.50 $ 0.60 70,104 0.60
--------- -----------
690,500 89,427
--------- -----------
--------- -----------
</TABLE>
F-32
<PAGE>
VEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
WARRANTS
The Company had the following warrants outstanding at December 31, 1998 to
purchase shares of capital stock:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES CLASS OF STOCK PER SHARE EXPIRATION OF WARRANTS
- ----------- ----------------- --------------- -------------------------------------------------------------------
<C> <S> <C> <C>
3,500 Common stock $ 1.00 Earlier of November 2002, or close of an initial public offering or
merger event
12,501 Preferred stock $ 0.60 Earlier of May 2003, or close of an initial public offering or
merger event
- -----------
16,001
- -----------
- -----------
</TABLE>
All warrants were exercised in January 1999 in connection with the
acquisition of the Company by Commerce One.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1998, the Company had reserved capital shares for future
issuance as follows:
<TABLE>
<CAPTION>
COMMON PREFERRED
STOCK STOCK
---------- -----------
<S> <C> <C>
Convertible preferred stock, including effect
of preferred stock warrants......................................... 435,835 --
Stock option plan..................................................... 981,000 --
Warrants.............................................................. 3,500 12,501
---------- -----------
1,420,335 12,501
---------- -----------
---------- -----------
</TABLE>
6. INCOME TAXES
There has been no provision of U.S. federal, state, or foreign income taxes
for any period as the Company has incurred losses in all periods.
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):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1998
---------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................................. $ 97 $ 986
Deferred revenue.................................................. 118 --
Research credits.................................................. 30 72
Other............................................................. 16 16
---------- ------------
Total gross deferred tax assets..................................... 261 1,074
Less valuation allowance............................................ (261) (1,074)
---------- ------------
Net deferred tax assets............................................. $ -- $ --
---------- ------------
---------- ------------
</TABLE>
F-33
<PAGE>
VEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
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. During the years
ended December 31, 1997 and 1998, the valuation allowance on deferred tax assets
increased by $261,000 and $813,000, respectively.
At December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $2,505,000, which expire in the
years 2012 and 2018. There can be no assurance that the Company will realize the
benefit of the net operating loss carryforwards.
Utilization of the Company's net operating loss may be subject to a
substantial annual limitation due to the ownership change limitation provided by
the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss before
utilization.
7. RELATED PARTY TRANSACTIONS
In 1997, the Company issued 90,000 shares of Series A convertible preferred
stock in exchange for $119,480 receivable from a stockholder. The receivable is
reduced on a monthly basis as services are provided to the Company by the
stockholder. In addition, the Company provided $26,500 of consulting services to
this stockholder in 1997.
The Company entered into an arrangement to reimburse a stockholder for
operating expenses paid on behalf of the Company as a reduction to the note
receivable from stockholder balance. The total reimbursement approximated
$85,000 and $34,000 in 1997 and 1998, respectively.
One of the Company's preferred stockholders subleases office space from the
Company for which the Company recorded $50,000 in rental income in 1998. The
Company recorded revenue of $115,000 and $315,000 during 1997 and 1998 from the
stockholder in connection with a service contract.
8. PROFIT SHARING PLAN
The Company has a profit sharing plan and trust under Section 401(k) of the
Internal Revenue Code which covers substantially all employees. Eligible
employees may contribute amounts to the plan via payroll withholdings, subject
to certain limitations. The Company does not match contributions by plan
participants.
F-34
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The selected unaudited pro forma condensed combined financial information
for the Company set forth below gives effect to the acquisition of VEO Systems,
Inc. ("VEO Systems"). The historical financial information set forth below has
been derived from, and is qualified by reference to, the financial statements of
the Company and VEO Systems and should be read in conjunction with those
financial statements and the notes thereto included elsewhere herein. The
selected unaudited pro forma combined financial information presents the
combined results of operations of the companies for the year ended December 31,
1998, giving effect to the acquisition of VEO Systems as if such acquisition had
been consummated as of January 1, 1998 under the purchase method of accounting.
Pro forma condensed combined balance sheet information has not been presented
because the assets and liabilities of VEO Systems are included in the Company's
unaudited consolidated balance sheet at March 31, 1999, which is included
elsewhere herein. The selected unaudited pro forma condensed combined financial
information reflects certain adjustments, including adjustments to reflect the
amortization of goodwill and other intangible assets resulting from the
acquisition. The information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Financial Statements--the Company and VEO Systems, Inc." The selected unaudited
pro forma condensed combined financial information does not purport to represent
what the consolidated results of operations or financial condition of the
Company would actually have been if the VEO Systems acquisition had in fact
occurred on such date or to project the future consolidated results of
operations or financial condition of the Company.
F-35
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
--------------------------
HISTORICAL BUSINESS
-------------------------------------- COMBINATION
COMMERCE ONE VEO SYSTEMS COMBINED ADJUSTMENTS COMBINED
------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
License fees.............................. $ 1,633 $ -- $ 1,633 $ -- $ 1,633
Services.................................. 930 2,790 3,720 -- 3,720
------------ ------------ ---------- ------------ ------------
Total revenues.............................. 2,563 2,790 5,353 -- 5,353
Cost of revenues............................ 4,369 1,161 5,530 -- 5,530
------------ ------------ ---------- ------------ ------------
Gross profit (loss)......................... (1,806) 1,629 (177) -- (177)
Operating expenses:
Sales and marketing....................... 13,108 794 13,902 -- 13,902
Product development....................... 6,839 1,174 8,013 -- 8,013
General and administrative................ 1,941 1,786 3,727 -- 3,727
Amortization of deferred stock
compensation............................ 1,102 -- 1,102 -- 1,102
Amortization of goodwill and other
intangible assets....................... -- -- -- (4,198) 4,198
------------ ------------ ---------- ------------ ------------
Total operating expenses.................... 22,990 3,754 26,744 (4,198) 30,942
------------ ------------ ---------- ------------ ------------
Loss from operations........................ (24,796) (2,125) (26,921) (4,198) (31,119)
Interest income (expense), net.............. 156 60 216 -- 216
------------ ------------ ---------- ------------ ------------
Net loss.................................... $ (24,640) $ (2,065) $ (26,705) $ (4,198) $ (30,903)
------------ ------------ ---------- ------------ ------------
------------ ------------ ---------- ------------ ------------
Pro forma net loss per share................ $ (8.07) $ (5.24) $ (7.73)
------------ ------------ ------------
------------ ------------ ------------
Shares used in computing
pro forma net loss per share.............. 3,053 394 3,998
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-36
<PAGE>
NOTES TO THE SELECTED UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The pro forma business combination adjustments for the statement of operations
for the year ended December 31, 1998 reflect the amortization of goodwill and
other intangible assets arising from the VEO Systems acquisition as follows:
<TABLE>
<CAPTION>
COST OVER THE
FAIR VALUE OF
NET ASSETS AMORTIZATION
ACQUIRED PERIOD
--------------- -----------
(IN THOUSANDS)
<S> <C> <C>
Goodwill........................................ $ 15,432 5 years
Developed technology............................ 536 2 years
Core technology................................. 1,738 4 years
Assembled Workforce............................. 541 2 years
Tradenames and patents.......................... 693 5 years
</TABLE>
The pro forma results of operations do not include the charge for purchased
research and development of $3,037,000 since it is a non-recurring charge.
Pro forma net loss per share is computed using the weighted average number
of shares of common stock outstanding for Commerce One and common stock
outstanding for VEO Systems adjusted for a conversion ratio of 2.4005 per share.
F-37
<PAGE>
[INSIDE BACK COVER OF PROSPECTUS]
The inside backcover cover of the prospectus begins with the caption "What
the industry is saying" and contains four testimonials from certain of our
customers, strategic partners and industry analysts. These testimonials read as
follows:
"Business-to-business e-commerce has been hindered by proprietary data and
protocol requirements and closed trading communities. By delivering an open
marketplace platform and partnering with key market makers, Commerce One is
positioned to be a catalyst for the creation of a global trading web."
--Tim Minahan,
Aberdeen Group, Inc.
IMPACT REPORT, MARCH 29, 1999
"Our alliance with Commerce One is an important step in BT's mission to help
European companies become effective e-businesses. BT's strategy of combining
its e-business expertise with the very best specialist procurement solutions
from the US and around the world is expected to reap significant benefits
for European organizations. It underpins BT's ambition to give the UK and
Europe the greatest e-business capability in the world."
--Eric Guilloteau,
General Manager, e-Business, BT
"By implementing Commerce One BuySite and MarketSite to streamline our
procurement process and improve efficiency, we have been able to better
aggregate our corporate purchases and drive closer relationships with our
suppliers."
--Eddie Page,
Purchasing Manager, Eastman Chemical
"We chose to form a strategic alliance with Commerce One because of their
innovative forward thinking vision in business-to-business electronic
commerce. Our participation in MarketSite.net, from Commerce One, allows us
to utilize leading XML technology, to present our products to our joint
customers. The direct integration of our website into MarketSite.net has
created a powerful channel to support our customers in their efforts to
contain costs through technology."
--Monica Luechtefeld,
Vice President of Contract Marketing, Office Depot
Our logo is at the bottom of this page.
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by Commerce One in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 17,904
NASD filing fee................................................. 5,675
Nasdaq National Market listing fee.............................. 95,000
Printing and engraving costs.................................... 150,000
Legal fees and expenses......................................... 325,000
Accounting fees and expenses.................................... 325,000
Blue Sky fees and expenses...................................... 5,000
Transfer Agent and Registrar fees............................... 5,000
Miscellaneous expenses.......................................... 71,421
---------
Total........................................................... $1,000,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article IX of the Registrant's Restated Certificate of Incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law.
Article VI of the Registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the Registrant if such
person acted in good faith and in a manner reasonably believed to be in and not
opposed to the best interest of the Registrant, and, in any criminal action or
proceeding, the indemnified party had no reason to believe his or her conduct
was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the Underwriters of the registrant and its executive officers and directors,
and by the registrant of the underwriters for certain liabilities, including
liabilities arising under the Securities Act, in connection with matters
specifically provided in writing by the Underwriters for inclusion in the
Registration Statement.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has issued unregistered
securities to a limited number of persons as described below:
(a) On January 18, 1994, Registrant issued and sold an aggregate of 50
shares of common stock to the founding officers and directors of the
Registrant for an aggregate purchase price of $2.00.
(b) On December 21, 1995, Registrant issued and sold an aggregate of
336,840 shares of Series A preferred stock to 23 investors for $1.4844 per
share or an aggregate of $500,025. The foregoing purchases and sales were
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof on the basis that the transaction did not involve a public offering.
II-1
<PAGE>
(c) On December 6, 1996, Registrant issued and sold an aggregate of
1,780,488 shares of Series B preferred stock and warrants to purchase 13,781
shares of Series B Preferred Stock to a total of 28 investors for $4.10 per
share, or an aggregate of $7,300,000. The foregoing purchases and sales were
exempt from registration under the Securities Act pursuant to Section 4(2)
thereof on the basis that the transaction did not involve a public offering.
(d) On October 7, 1997, October 10, 1997, October 17, 1997, October 31,
1997 and December 8, 1997, Registrant issued and sold an aggregate of
2,560,304 shares of Series C preferred stock, to a total of 38 investors and
warrants to purchase 640,069 shares of Series C Preferred stock for $5.20
per share, or an aggregate of $13,313,580. The foregoing purchases and sales
were exempt from registration under the Securities Act pursuant to Section
4(2) thereof on the basis that the transaction did not involve a public
offering.
(e) On August 10, 1998 and August 12, 1998, Registrant issued and sold
an aggregate of 4,433,379 shares of Series D preferred stock to a total of
30 investors for $6.9766 per share, or an aggregate of $30,929,912. The
foregoing purchases and sales were exempt from registration under the
Securities Act pursuant to Section 4(2) thereof on the basis that the
transaction did not involve a public offering.
(f) On January 15, 1999, Registrant issued and sold an aggregate of
400,083 shares of Series D' preferred stock to Nippon Telegraph and
Telephone for $5.00 per share, or an aggregate of $2,000,415. The foregoing
purchases and sales were exempt from registration under the Securities Act
pursuant to Section 4(2) thereof on the basis that the transaction did not
involve a public offering.
(g) On April 19, 1999, Registrant issued and sold an aggregate of
2,758,819 shares of Series E preferred stock to a total of 48 investors for
$9.06 per share, or an aggregate of $24,994,900. The foregoing purchases and
sales were exempt from registration under the Securities Act pursuant to
Section 4(2) thereof on the basis that the transaction did not involve a
public offering.
(h) As of May 31, 1999, an aggregate of 1,114,476 shares of common stock
had been issued upon exercise of options under the Registrant's Stock Option
Plans. Except as indicated above, none of the foregoing transactions
involved any underwriters, underwriting discounts or commissions, or any
public offering, and the Registrant believes that each transaction was
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701
pursuant to compensatory benefit plans and contracts relating to
compensation as provided under such Rule 701. The recipients in such
transactions represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with the Registrant, to
information about the Registrant.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1** Agreement and Plan of Reorganization by and among the
Registrant, Blackhawk Acquisition Corporation, VEO Systems,
Inc., the Shareholders named therein, and U.S. Bank Trust,
N.A., dated November 25, 1998.
3.1** Restated Certificate of Incorporation of the Registrant to be
in effect after the closing of the offering made under this
Registration Statement.
3.2** Bylaws of the Registrant to be in effect after the closing of
the offering made under this Registration Statement.
4.1** Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2** Form of 1997 Incentive Stock Option Plan and form of
agreements thereunder.
10.3** Form of 1999 Employee Stock Purchase Plan and form of
agreements thereunder.
10.4** Amended and Restated 1995 Stock Option Plan and form of
agreement thereunder.
10.5** Form of 1999 Director Option Plan and form of agreements
thereunder.
10.6** VEO Systems, Inc. Option Plan and form of agreement
thereunder.
10.7+** Master Software License and Services Agreement between the
Registrant and Nippon Telegraph and Telephone Corporation
dated April 16, 1999.
10.8+** Governance Agreement between the Registrant and British
Telecommunications, plc., dated March 26, 1999.
10.9+** Marketing Agreement between the Registrant and British
Telecommunications, plc., dated March 26, 1999.
10.10+** MarketSite License Agreement between the Registrant and
British Telecommunications, plc., dated March 25, 1999.
10.11+** Amended and Restated Trading Agreement between the Registrant
and British Telecommunications, plc., dated March 25, 1999.
10.12+** Marketing Agreement between the Registrant and MCI Systemhouse
Corporation dated August 4, 1998.
10.13+** Agreement between the Registrant and PricewaterhouseCoopers
LLP dated September 2, 1998.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.3* Consent of Wilson Sonsini Goodrich & Rosati (see Exhibit 5.1).
24.1** Power of Attorney (see page II-6).
27.1** Financial Data Schedule.
</TABLE>
- --------------
+ Certain portions of this exhibit have been granted confidential treatment by
the Commission. The omitted portions have been separately filed with the
Commission.
* To be filed by amendment.
** Previously filed.
II-3
<PAGE>
(b) Consolidated Financial Statement Schedules
The following consolidated financial statement schedule of the Registrant is
filed as part of this Registration Statement and should be read in conjunction
with the Consolidated Financial Statements and attached Notes.
<TABLE>
<CAPTION>
SCHEDULE PAGE
- --------------------------------------------------------------------------------------- -----
<S> <C>
II--Valuation and Qualifying Accounts.................................................. II-8
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Walnut Creek, State of California, on the 3rd day of June, 1999.
<TABLE>
<S> <C> <C>
COMMERCE ONE, INC.
By: /s/ MARK B. HOFFMAN
-----------------------------------------
MARK B. HOFFMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ MARK B. HOFFMAN Officer and Chairman of
- ------------------------------ the Board (Principal June 3, 1999
MARK B. HOFFMAN Executive Officer)
Vice President and Chief
* Financial Officer
- ------------------------------ (Principal Financial June 3, 1999
PETER F. PERVERE Officer)
*
- ------------------------------ Director June 3, 1999
ASIM ABDULLAH
*
- ------------------------------ Director June 3, 1999
JOHN V. BALEN
*
- ------------------------------ Director June 3, 1999
WILLIAM B. ELMORE
*
- ------------------------------ Director June 3, 1999
KENNETH C. GARDNER
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
- ------------------------------ Director
THOMAS GONZALES
*
- ------------------------------ Director June 3, 1999
WILLIAM J. HARDING
- ------------------------------ Director
JOHN SWINGEWOOD
*
- ------------------------------ Director June 3, 1999
JAY M. TENENBAUM
*
- ------------------------------ Director June 3, 1999
JEFFREY T. WEBBER
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ MARK B. HOFFMAN
-------------------------
MARK B. HOFFMAN
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
COMMERCEONE, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ACCOUNTS RECEIVABLE ALLOWANCES
<TABLE>
<CAPTION>
BALANCES AT CHARGED TO BALANCES AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1996................................ $ -- $ 25 $ -- $ 25
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Year ended December 31, 1997................................ $ 25 $ 60 $ (15) $ 70
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
Year ended December 31, 1998................................ $ 70 $ 251 $ (26) $ 295
----------- ------------ ----------- ------------
----------- ------------ ----------- ------------
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- --------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1** Agreement and Plan of Reorganization by and among the
Registrant, Blackhawk Acquisition Corporation, VEO Systems,
Inc., the Shareholders named therein, and U.S. Bank Trust,
N.A., dated November 25, 1998.
3.1** Restated Certificate of Incorporation of the Registrant to be
in effect after the closing of the offering made under this
Registration Statement.
3.2** Bylaws of the Registrant to be in effect after the closing of
the offering made under this Registration Statement.
4.1** Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2** Form of 1997 Incentive Stock Option Plan and form of
agreements thereunder.
10.3** Form of 1999 Employee Stock Purchase Plan and form of
agreements thereunder.
10.4** Amended and Restated 1995 Stock Option Plan and form of
agreement thereunder.
10.5** Form of 1999 Director Option Plan and form of agreements
thereunder.
10.6** VEO Systems, Inc. Option Plan and form of agreement
thereunder.
10.7+** Master Software License and Services Agreement between the
Registrant and Nippon Telegraph and Telephone Corporation
dated April 16, 1999.
10.8+** Governance Agreement between the Registrant and British
Telecommunications, plc., dated March 26, 1999.
10.9+** Marketing Agreement between the Registrant and British
Telecommunications, plc., dated March 26, 1999.
10.10+** MarketSite License Agreement between the Registrant and
British Telecommunications, plc., dated March 25, 1999.
10.11+** Amended and Restated Trading Agreement between the Registrant
and British Telecommunications, plc., dated March 25, 1999.
10.12+** Marketing Agreement between the Registrant and MCI Systemhouse
Corporation dated August 4, 1998.
10.13+** Agreement between the Registrant and PricewaterhouseCoopers
LLP dated September 2, 1998.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.3* Consent of Wilson Sonsini Goodrich & Rosati (see Exhibit 5.1).
24.1** Power of Attorney (see page II-6).
27.1** Financial Data Schedule.
</TABLE>
- --------------
+ Certain portions of this exhibit have been granted confidential treatment by
the Commission. The omitted portions have been separately filed with the
Commission.
* To be filed by amendment.
** Previously filed.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Consolidated Financial Data" and to the use of our report dated March
5, 1999 (except for Note 8, as to which the date is June , 1999) with respect
to the consolidated financial statements of Commerce One, Inc. as of December
31, 1997 and 1998 and for each of the three years in the period ended December
31, 1998 and our report dated March 5, 1999 with respect to the financial
statements of VEO Systems, Inc. as of December 31, 1998 and for the year then
ended, in the Registration Statement (Form S-1), as amended, and the related
Prospectus of Commerce One, Inc. for the registration of shares of its common
stock.
Our audits also included the financial statement schedule of Commerce One,
Inc. listed in Item 16(b). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Walnut Creek, California
June , 1999
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the
effectiveness of the stock split and approval of the certificate of
incorporation in the state of Delaware as described in Note 8 to the
consolidated financial statements.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
June 2, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated May 8, 1998, except for the last paragraph of Note 10, as to
which the date is August 21, 1998, relating to the financial statements of VEO
Systems, Inc., which appear in such Registration Statement. We also consent to
the reference to us under the heading "Experts" in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
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PricewaterhouseCoopers LLP
San Jose, California
June 2, 1999
