<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
AMENDMENT NO. 2
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) JANUARY 7, 2000.
COMMERCE ONE, INC.
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 333-76987 680322810
----------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1600 RIVIERA AVENUE, SUITE 200, WALNUT CREEK, CALIFORNIA 94596
--------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (925) 941-6022
--------------
N/A
-----------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
This Amendment on Form 8-K/A/A is being filed for the purpose of
amending and restating Exhibits 99.1 and 99.2 to the Registrant's Current
Report on Form 8-K filed January 20, 2000, as previously amended by the
Registrant's Current Report on Form 8-K/A filed March 22, 2000.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION
AND EXHIBITS
(a) FINANCIAL STATEMENTS
Included herein as Exhibit 99.1 to this Current Report on Form 8-K/A
are the balance sheets of Mergent Systems, Inc. as of December 31, 1999 and
1998, and the related statements of operations, shareholders' equity, and cash
flows for the years then ended.
(b) PRO FORMA FINANCIAL INFORMATION
The following documents appear as Exhibit 99.2 to this Current Report
on Form 8-K/A and are incorporated herein by reference:
(1) Unaudited Pro Forma Condensed Combining Balance Sheet
as of December 31, 1999;
(2) Unaudited Pro Forma Condensed Combining Statement of
Operations for the Year ended December 31, 1999; and
(3) Notes to the Unaudited Pro Forma Condensed Combining
Financial Information.
(c) EXHIBITS.
2.1* Agreement and Plan of Reorganization, dated December 23,
1999, by and among Commerce One, Inc., Gavel Acquisition
Corporation, Mergent Systems, Inc., and other related parties.
27.1** Financial Data Schedule
99.1 Audited Financial Statements of Mergent Systems, Inc.
99.2 Unaudited Pro Forma Condensed Combining Financial
Information
* Incorporated by reference to Exhibit 2.1 to the Registrant's
Form 8-K filed January 20, 2000.
** Incorporated by reference to Exhibit 27.1 to the
Registrant's Form 8K/A filed March 22, 2000.
-1-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
COMMERCE ONE, INC.
/s/ Robert M. Tarkoff
Robert M. Tarkoff
Vice President, General Counsel and
Secretary
Date: March 23, 2000
-2-
<PAGE>
COMMERCE ONE, INC.
CURRENT REPORT ON FORM 8-K/A
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1* Agreement and Plan of Merger and Reorganization
dated December 23, 1999, by and among Commerce
One, Inc., Gavel Acquisition Corporation,
Mergent Systems, Inc. and other related parties.
27.1** Financial Data Schedule
99.1 Audited Financial Statements of Mergent Systems,
Inc.
99.2 Unaudited Pro Forma Condensed Combining
Financial Information
* Incorporated by reference to Exhibit 2.1 to the Registrant's Form 8-K
filed January 20, 2000.
** Incorporated by reference to Exhibit 27.1 to the Registrant's
Form 8K/A filed March 22, 2000.
-3-
<PAGE>
Exhibit 99.1
Index to Financial Statements
of Mergent Systems, Inc.
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..........................................2
Financial Statements
Balance Sheets.............................................................................3
Statements of Operations...................................................................4
Statements of Shareholders' Equity.........................................................5
Statements of Cash Flows...................................................................6
Notes to Financial Statements..............................................................7
</TABLE>
1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
Mergent Systems, Inc.
We have audited the accompanying balance sheets of Mergent Systems, Inc. as of
December 31, 1999 and 1998, and the related statements of operations,
shareholders' equity, and cash flows for the years 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mergent Systems, Inc. at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
March 1, 2000
2
<PAGE>
Mergent Systems, Inc.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
--------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,116,728 $ 82,906
Deferred income tax assets - 18,760
Prepaid expenses and other current assets 53,467 9,952
--------------------------------------
Total current assets 1,170,195 111,618
Property and equipment, net 186,830 27,007
Other assets 66,760 -
--------------------------------------
Total assets $ 1,423,785 $ 138,625
======================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 178,466 $ 48,674
Deferred revenue 60,000 60,000
Current portion of capital lease obligations 3,354 -
--------------------------------------
Total current liabilities 241,820 108,674
Capital lease obligations 3,890 -
Commitments
Shareholders' equity:
Convertible preferred stock, $0.001 par value, issuable in series:
4,287,500 shares authorized; 4,285,909 shares issued and
outstanding at December 31, 1999 (aggregate liquidation
preference of $4,897,937 at December 31, 1999) 2,448,970 -
Common stock, $0.001 par value; 15,000,000 shares authorized;
5,336,501 and 3,400,001 shares issued and outstanding at
December 31, 1999 and 1998, respectively 1,336,832 64,022
Deferred stock compensation (977,723) (28,203)
Notes receivable from shareholders (40,000) (22,500)
Retained earnings (accumulated deficit) (1,590,004) 16,632
--------------------------------------
Total shareholders' equity 1,178,075 29,951
--------------------------------------
Total liabilities and shareholders' equity $ 1,423,785 $ 138,625
======================================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Mergent Systems, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998
------------------------------------------
<S> <C> <C>
Revenues:
License fees $ 20,000 $ -
Services 12,500 120,920
------------------------------------------
Total revenues 32,500 120,920
Operating expenses:
Sales and marketing 459,668 92,086
Product development 373,472 7,718
General and administrative 532,255 48,795
Amortization of deferred stock compensation 284,560 6,172
------------------------------------------
Total operating expenses 1,649,955 154,771
------------------------------------------
Loss from operations (1,617,455) (33,851)
Interest income, net 10,819 3,344
------------------------------------------
Net loss before income taxes (1,606,636) (30,507)
Benefit for income taxes - 16,940
------------------------------------------
Net loss $ (1,606,636) $ (13,567)
==========================================
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Mergent Systems, Inc.
Statements of Shareholders' Equity
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK DEFERRED
------------------------- ------------------------------ STOCK
SHARES AMOUNT SHARES AMOUNT COMPENSATION
------------------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997 - $ - 3,000,001 $ 7,147 $ -
Issuance of common stock for
notes receivable - - 400,000 56,875 (34,375)
Amortization of deferred stock
compensation - - - - 6,172
Net loss and comprehensive loss - - - - -
------------------------- ------------- -------------- --------------
Balances at December 31, 1998 - - 3,400,001 64,022 (28,203)
Issuance of Series A preferred
stock 3,675,183 2,100,000 - - -
Conversion of promissory notes
to Series A preferred stock 610,726 348,970 - - -
Issuance of common stock for
cash and notes receivable,
net of issuance costs. - - 2,061,500 710,910 (659,680)
Issuance of common stock in
exchange for technology - - 500,000 160,000 (160,000)
Exercise of stock options by
consultant - - 50,000 17,500 -
Repurchase of common stock - - (675,000) (30,000) -
Deferred stock compensation - - - 414,400 (414,400)
Amortization of deferred stock
compensation - - - - 284,560
Net loss and comprehensive loss - - - - -
---
------------------------- ------------- -------------- --------------
Balances at December 31, 1999 4,285,909 $2,448,970 5,336,501 $1,336,832 $ (977,723)
========================================================= ==============
<CAPTION>
NOTES
RECEIVABLE
FROM ACCUMULATED
SHAREHOLDERS DEFICIT TOTAL
------------------------------ ---------------
<S> <C> <C> <C>
Balances at December 31, 1997 $ - $ 30,199 $ 37,346
Issuance of common stock for
notes receivable (22,500) - -
Net loss and comprehensive loss - (13,567) (13,567)
--------------- ------------------------------
Balances at December 31, 1998 (22,500) 16,632 29,951
Issuance of Series A preferred
stock - - 2,100,000
Conversion of promissory notes
to Series A preferred stock - - 348,970
Issuance of common stock for
cash and notes receivable,
net of issuance costs (40,000) - 11,230
Exercise of stock options by
external consultant - - 17,500
Repurchase of common stock 22,500 - (7,500)
Deferred stock compensation - - -
Amortization of deferred stock
compensation - - 284,560
Net loss and comprehensive loss - (1,606,636) (1,606,636)
--------------- ------------- ---------------
Balances at December 31, 1999 $ (40,000) $(1,590,004) $ 1,178,075
=============== ============= ===============
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
Mergent Systems, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998
----------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,606,636) $ (13,567)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 19,775 4,262
Amortization of deferred stock compensation 284,560 6,172
Amortization of external consultant stock compensation 14,500 -
Changes in operating assets and liabilities:
Deferred tax asset 18,760 (18,760)
Prepaid expenses and other assets (110,275) 38,874
Accounts payable and accrued liabilities 129,792 39,608
Deferred revenue - 40,000
----------------------------------------
Net cash provided by (used in) operating activities (1,249,524) 96,589
INVESTING ACTIVITIES
Purchases of property and equipment (172,354) (23,074)
----------------------------------------
Net cash used in investing activities (172,354) (23,074)
FINANCING ACTIVITIES
Net proceeds from issuance of notes payable 348,970 -
Proceeds from issuance of preferred stock 2,100,000 -
Proceeds from issuance of common stock, net 14,230 -
Repurchase of common stock (7,500) -
----------------------------------------
Net cash provided by financing activities 2,455,700 -
----------------------------------------
Increase in cash and cash equivalents 1,033,822 73,515
Cash and cash equivalents at beginning of period 82,906 9,391
----------------------------------------
Cash and cash equivalents at end of period $ 1,116,728 $ 82,906
========================================
SUPPLEMENT DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 4,283 $ -
========================================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Equipment purchased under capital lease obligations $ 7,244 $ -
========================================
Issuance of common stock for notes receivable $ 40,000 $ 22,500
========================================
Cancellation of notes receivable on repurchase of common stock $ (22,500) $ -
========================================
Conversion of notes payable into Series A preferred stock $ 348,970 $ -
========================================
Deferred stock compensation $ 1,234,080 $ 34,375
========================================
</TABLE>
SEE ACCOMPANYING NOTES.
6
<PAGE>
Mergent Systems, Inc.
Notes to Financial Statements
December 31, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Mergent Systems, Inc. (the "Company"), formerly Epistemics, Inc., was
incorporated in the State of California and operates in one business segment
which is the development and sale of software and services designed to
create, operate and maintain product information systems and industry
catalogue management applications for market makers and infomediaries in
electronic commerce.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make certain 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
The Company considers all highly liquid investments with an original maturity
from date of purchase of three months or less to be cash and cash
equivalents. The Company's cash and cash equivalents consist of a checking
account and money market account.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets, generally three to five years. Equipment under
capital leases is amortized over the shorter of the estimated useful life of the
asset or the life of the lease.
SOFTWARE DEVELOPMENT COSTS
Development costs incurred in the research and development of new software
products are expensed as incurred until technological feasibility in the form of
a working model has been established. To date, the Company's software
development projects have been completed concurrent with the establishment of
technological feasibility, and, accordingly, all software development costs have
been charged to product development expense in the accompanying statements of
operations.
7
<PAGE>
DRAFT 03/21/00
Mergent Systems, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company generates revenue through software licenses and professional
services. The Company licenses its products directly to end-users.
Professional services revenues include maintenance and support, and consulting
services performed for those customers that license the Company's products.
License revenues are recognized when a noncancelable license agreement has been
signed, the product has been installed, the fees are fixed and determinable,
collectibility is probable and vendor-specific objective evidence exists to
allocate the total fee to elements of the arrangement.
Maintenance and support revenues, which consist of fees for ongoing technical
support and product updates, are recognized ratably over the term of the
maintenance contract. Revenues related to professional services, typically
training and consulting services, are recognized as services are performed.
Deferred revenue includes license fees for which payment has been received but
delivery or performance has not occurred.
CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS
For the year ended December 31, 1999, a single customer accounted for all
revenues recognized. For the year ended December 31, 1998, another customer
accounted for 98% of revenues. All of the Company's operations to date have
been concentrated in the United States and relate to one product, iMerge.
STOCK-BASED COMPENSATION
The Company accounts for employee stock option grants using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 and has
adopted the disclosure-only alternative of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
8
<PAGE>
Mergent Systems, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"), which
requires the use of the liability method in accounting for income taxes. Under
SFAS 109, deferred tax assets and liabilities are measured based on differences
between the financial reporting and tax bases of assets and liabilities using
enacted tax rates and laws that are expected to be in effect when the
differences are expected to reverse.
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-----------------------------------------
<S> <C> <C>
Computer equipment and software $ 132,516 $ 30,620
Furniture and other equipment 78,351 649
-----------------------------------------
210,867 31,269
Less accumulated depreciation 24,037 4,262
-----------------------------------------
$ 186,830 $ 27,007
=========================================
</TABLE>
3. LEASE OBLIGATIONS
The Company leases its facilities under a non-cancelable operating lease which
expires in May 2001. The lease requires the Company to pay operating costs,
including property taxes, normal maintenance and insurance. Rent expense under
operating lease arrangements for the year ended December 31, 1999 and 1998
totaled approximately $9,500 and $1,845, respectively.
Capital lease obligations represent the present value of future rental payments
under a capital lease agreement for computer equipment. The original cost and
accumulated amortization on the equipment under the capital lease is $7,244 and
$302, respectively, at December 31, 1999.
9
<PAGE>
DRAFT 03/21/00
Mergent Systems, Inc.
Notes to Financial Statements (continued)
3. LEASE OBLIGATIONS (CONTINUED)
Future minimum payments under these capital and operating leases at December 31,
1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-----------------------------------------
<S> <C> <C>
Year ending December 31,
2000 $ 4,212 $ 432,000
2001 4,211 144,000
-----------------------------------------
Total minimum lease payment 8,423 $ 576,000
Less amounts representing interest 1,179 =======
--------------------
Present value of minimum lease payments 7,244
Less current portion of capital lease obligations 3,354
--------------------
$ 3,890
====================
</TABLE>
4. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
CONVERSION
Each share of Series A preferred stock is convertible into one
fully paid and nonassessable shares of common stock. The conversion rate is
subject to adjustment from time to time. Additionally, conversion is
automatic upon the closing of a qualified public offering of common stock
with net proceeds of at least $15,000,000, or a public offering price of not
less than $5.00 per share.
DIVIDENDS
The holders of shares of Series A convertible preferred stock are entitled to
receive dividends at the rate of $0.0457 per annum on each outstanding share
of Series A convertible preferred stock (as adjusted for any stock dividends,
combinations or splits with respect to such shares). Dividends are payable in
preference and priority to any payment of any dividend on common stock of the
Company. Such dividends are payable only when, as and if declared by the
Board of Directors, but only out of funds that are legally available, and are
noncumulative. No dividends have been declared or paid as of December 31,
1999.
10
<PAGE>
DRAFT 03/21/00
Mergent Systems, Inc.
Notes to Financial Statements (continued)
4. SHAREHOLDERS' EQUITY (CONTINUED)
CONVERTIBLE PREFERRED STOCK (CONTINUED)
LIQUIDATION PREFERENCE
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, the holders of Series A convertible
preferred stock are entitled to receive, prior and in preference to any
distribution of the assets of the Company to the holders of common stock, by
reason of their ownership, an amount equal to the sum of $1.1428 for each
share of Series A convertible preferred stock plus any declared but unpaid
dividends with respect to such shares. If the aggregate proceeds available
for distribution exceed $100,000,000, the holders of the Series A convertible
preferred stock are entitled to receive an amount equal to only $0.5714 for
each share of Series A convertible preferred stock. The remaining assets, if
any, are to be distributed ratably to the holders of common and preferred
stock on an as-if-converted-to-common stock basis. If the assets and funds
distributed among the holders of the preferred stock are insufficient to
permit the payment to holders of the full preferential amount, then all
assets and funds of the Company are to be distributed ratably among the
holders of the Series A convertible preferred stock, in proportion to the
preferential amount each such holder is otherwise entitled to receive.
VOTING
The holders of preferred stock are entitled to the number of votes equal to
the number of shares of common stock into which each share of preferred stock
could be converted.
ANTIDILUTION PROVISIONS
The conversion price of the Company's preferred stock is subject to
adjustment to prevent dilution in the event that the Company issues
additional shares of preferred stock, common stock or common stock
equivalents at a purchase price less than the then-effective conversion
price. However, without triggering antidilution adjustments, the Company may
issue to directors, officers, employees, or consultants shares of common
stock that are reserved for issuance under the Company's stock option plan or
in connection with financing or other transactions which involve
consideration and which are approved by the Board of Directors.
11
<PAGE>
DRAFT 03/21/00
Mergent Systems, Inc.
Notes to Financial Statements (continued)
4. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
The Company has reserved 2,876,500 shares of common stock under the 1999 Stock
Option Plan (the "Plan"). The Plan provides for incentive stock options to be
granted to employees, at an exercise price not less than 100% of the fair value
at the grant date as determined by the Board of Directors, unless the optionee
is a 10% shareholder, in which case the option price will not be less than 110%
of such fair market value. The Plan also provides for nonqualified stock options
to be issued to employees and consultants at an exercise price of not less than
85% of the fair value at the grant date. Options granted generally have a
maximum term of 10 years from grant date, are exercisable upon vesting, unless
otherwise designated for early exercise by the Board of Directors at the time of
grant, and generally vest over a 4-year period with a 25% cliff vesting after
one year and then ratably on a monthly basis for the remaining 3 years. Options
exercised early are subject to the vesting provisions mentioned above and any
unvested shares are subject to repurchase at the original price upon termination
of employment, death, or disability. The repurchase right lapses upon vesting.
As of December 31, 1999, there were no shares subject to repurchase under the
Plan.
A summary of the stock option activity is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------------------
WEIGHTED-
NUMBER AVERAGE
OF EXERCISE PRICE PER
SHARES SHARE
--------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1998 - $ -
Granted 1,260,000 0.07
Exercised (50,000) 0.06
Canceled - -
--------------------------------------------
Outstanding at December 31, 1999 1,210,000 $ 0.06
============================================
</TABLE>
No options were exercisable at December 31, 1999.
As of December 31, 1999, options to purchase 1,616,500 shares of common stock
were available for future grant under the Plan.
As of December 31, 1999, the weighted-average grant date fair value of options
granted in the year were $1.43 per share, the range of exercise prices was $0.01
- - $0.20 per share, and the weighted-average remaining contractual life of
options outstanding was 9.79 years.
12
<PAGE>
DRAFT 03/21/00
Mergent Systems, Inc.
Notes to Financial Statements (continued)
4. SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK ISSUED TO FOUNDER AND OFFICERS OF THE COMPANY
To date, the Company has issued 3,375,000 shares of common stock to the
founder and officers of the Company at $0.02 per share. The shares are
subject to repurchase rights which allow the Company to repurchase the shares
at the original purchase price in the event of termination of employment.
This repurchase right expires over a range of periods from 1 to 3 years. At
December 31, 1999, 2,790,800 shares were subject to repurchase.
Of this amount, 500,000 shares were issued in exchange for technology and
know-how provided by a founder. The Company recorded the intrinsic value of
this option with a charge to deferred stock compensation of $160,000,
which amount is being amortized by charges to operations over the vesting
period using a graded vesting method. Such amortization amounted to $93,038
for the year ended December 31, 1999.
Also part of the common stock issued to founders and officers was 2,000,000
shares of restricted common stock purchased at a price of $0.02 per share.
These shares were purchased with a $40,000 full-recourse promissory note that
bears interest at 6% per annum.
OPTIONS ISSUED TO CONSULTANTS
The Company granted options under the Plan for a non-employee to purchase
50,000 shares of common stock at an exercise price of $0.06 per share, for
consulting services. The fair value of these options was determined to be
$17,500 using a Black-Scholes option pricing model with the following
assumptions: weighted-average risk fee interest rate of 6.0%,
weighted-average contractual life of 2.5 years, 70% volatility and no
dividend yield, and the Company recorded this amount as consulting expense
during the year ended December 31, 1999 as the options were fully vested as
of that date.
DEFERRED STOCK COMPENSATION
The Company recorded additional deferred stock compensation of $1,074,080 and
$34,375 during the years ended December 31, 1999 and 1998, respectively,
representing the difference between the exercise price and the deemed fair
value for financial accounting purposes of certain of the Company's stock
options granted to employees. This amount is being amortized by a charge to
operations over the vesting periods of the individual stock options using a
graded vesting method. Such amortization amounted to $197,694 and $6,172 for
the years ended December 31, 1999 and 1998, respectively.
13
<PAGE>
DRAFT 03/21/00
Mergent Systems, Inc.
Notes to Financial Statements (continued)
4. SHAREHOLDERS' EQUITY (CONTINUED)
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires the use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals or exceeds the market price of the underlying
common stock on the grant date, no compensation expense is recorded.
Pro forma information regarding net income (loss) is required by SFAS 123. Under
this method, the estimated fair value of the options is amortized over the
options' vesting period which would result in an increase in net loss of
approximately $33,000 for the year ended December 31, 1999.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions: risk-free interest rate of 6.0%, expected life of the option of 4
years, expected volatility of 0.7%, and no expected dividend yield.
5. INCOME TAXES
Significant components of the provision for income taxes attributable to
operations are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1999
------- --------
<S> <C> <C>
Current:
Federal $ 12,991 $ (18,760)
State 7,849 -
------- --------
Total Current 20,840 (18,760)
Deferred:
Federal (17,852) 18,760
State - -
------- --------
Total deferred (17,852) 18,760
------- --------
Total $ 2,988 $ -
======= ========
</TABLE>
A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of operations is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1999
------- --------
<S> <C> <C>
U.S. federal taxes (benefit)
at statutory rate -34.0% -34.0%
State -6.0% -3.6%
Valuation Allowance 175.4% 36.4%
Impacted of Graduated
Federal Rate -108.5% -
Other 1.3% 1.2%
------- --------
Total 28.20% 0.00%
======= ========
</TABLE>
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:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-----------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 457,921 $ -
Other 138,206 37,311
-----------------------------------------
Total deferred tax assets 596,127 37,311
Valuation allowance (596,127) (18,551)
-----------------------------------------
Net deferred tax assets $ - $ 18,760
=========================================
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if any, of
which the timing and amount are uncertain. Accordingly, the net deferred tax
assets have been fully offset by a valuation allowance. The valuation allowance
increased by $577,576 during the year ended December 31, 1999.
14
<PAGE>
DRAFT 03/21/00
Mergent Systems, Inc.
Notes to Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
As of December 31, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $1,238,000 which begins
to expire in the year 2019. The Company had net operating loss carryforwards for
state income tax purposes of approximately $616,000 expiring in 2004.
Utilization of the Company's net operating loss carryforwards may be subject to
substantial annual limitation due to the ownership change limitation provided by
the Internal Revenue Code and a similar state provision. Such an annual
limitation could result in the expiration of the net operating loss
carryforwards before utilization.
6. RETIREMENT PLAN
The Company has a defined contribution plan for all full-time employees which
qualifies under Section 401(k) of the Internal Revenue Code. Under the terms of
the plan, employees may contribute up to 15%, subject to Internal Revenue
Service limitation, of their annual compensation. The 401(k) plan does not
provided for matching contributions from the Company.
7. IMPACT OF YEAR 2000 (UNAUDITED)
The Company evaluated its internal and network systems and software products
and has experienced no significant disruptions in mission critical
information technology systems, non-information technology systems, or
software products. The Company believes those systems and products
successfully responded to the Year 2000 date change. Remediation costs
incurred to date have not been material.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly. However, failure to fully identify all Year 2000
dependencies in the Company's existing systems, in the systems of its suppliers,
and the systems of its financial institutions could have material adverse
consequences.
15
<PAGE>
DRAFT 03/21/00
Mergent Systems, Inc.
Notes to Financial Statements (continued)
8. SUBSEQUENT EVENTS
On January 7, 2000, Commerce One, Inc. acquired all of the Company's
outstanding preferred and common stock. Commerce One issued approximately
870,828 shares of unregistered common stock and approximately $10.0 million
of cash to the Company's common and preferred shareholders in this
transaction and assumed all outstanding stock options of the Company. No
adjustments to the recorded amounts of assets or liabilities which may result
from this transaction have been included in the accompanying financial
statements.
16
<PAGE>
Exhibit 99.2
Unaudited Pro Forma Condensed Combining Financial Information
The unaudited pro forma condensed combining financial information for
Commerce One, Inc. ("Commerce One") set forth below gives effect to the
acquisition of Mergent Systems, Inc. ("Mergent"). The historical financial
information has been derived from, and is qualified by reference to, the
condensed consolidated financial information of Commerce One for the period
ended December 31, 1999 and the financial statements of Mergent included
elsewhere herein and should be read in conjunction with those financial
statements and the notes thereto. The unaudited pro forma condensed combining
statement of operations data for the year ended December 31, 1999 set forth
below give effect to the acquisition as if it occurred on January 1, 1999.
The unaudited pro forma condensed combining balance sheet as of December 31,
1999 set forth below gives effect to the acquisition of Mergent as if it
occurred on that date. The information set forth below should be read in
conjunction with the consolidated financial statements and notes thereto of
Commerce One which will be included in its Annual Report on Form 10-K for the
year ended December 31, 1999 to be filed with the Securities and Exchange
Commission. The unaudited pro forma condensed combining financial information
does not purport to represent what the consolidated results of operations or
financial condition of Commerce One would actually have been if the Mergent
acquisition had in fact occurred on such dates or the future consolidated
results of operations or financial condition of Commerce One.
1
<PAGE>
Commerce One, Inc.
Unaudited Pro Forma Condensed Combining Balance Sheet
December 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------- -------------- ---------------
MERGENT PRO FORMA PRO FORMA
COMMERCE ONE SYSTEMS, INC. BUSINESS COMBINED
DECEMBER 31, DECMBER 31, COMBINATION DECEMBER 31,
1999 1999 COMBINED ADJUSTMENTS 1999
----------------- --------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $51,792 $ 1,117 $52,909 (3) $ (10,000) $42,909
Short-term investments 72,814 - 72,814 72,814
Accounts receivable, net 15,845 - 15,845 15,845
Prepaid expenses and other
current assets 4,656 53 4,709 4,709
----------------- --------------- --------------- -------------- ---------------
Total current assets 145,107 1,170 146,277 (10,000) 136,277
Property and equipment, net 11,892 187 12,079 12,079
Other assets - 67 67 67
Intangibles assets, net 227,611 - 227,611 (1)(3) 141,877 369,488
----------------- --------------- --------------- -------------- ---------------
Total assets $384,610 $1,424 $386,034 $131,877 $517,911
================= =============== =============== ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,885 $ 179 $ 7,064 $ $ 7,064
Accrued compensation and related 3,972 - 3,972 3,972
expenses
Current portion of capital lease 274 3 277 277
obligation
Current portion of notes payable 411 - 411 411
Deferred revenue 40,414 60 40,474 40,474
Other current liabilities 15,671 - 15,671 (3) 268 15,939
----------------- --------------- --------------- -------------- ---------------
Total current liabilities 67,627 242 67,869 268 68,137
Capital lease obligations - 4 4 4
Notes payable 262 - 262 262
Stockholders' equity:
Convertible preferred stock - 2,449 2,449 (5) (2,449) -
Common Stock 423,839 1,337 425,176 (1)(3)(5) 136,592 561,768
Deferred stock compensation (4,110) (978) (5,088) (5) 978 (4,110)
Note receivable from stockholders - (40) (40) (5) 40 -
Accumulated deficit (102,556) (1,590) (104,146)(1)(5) (3,552) (107,698)
Accumulated other comprehensive loss (452) - (452) - (452)
----------------- --------------- --------------- -------------- ---------------
Total stockholder' equity 316,721 1,178 317,899 131,609 449,508
----------------- --------------- --------------- -------------- ---------------
Total liabilities and stockholders' equity $384,610 $ 1,424 $386,034 $131,877 $517,911
================= =============== =============== ============== ===============
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL
INFORMATION.
2
<PAGE>
Unaudited Pro Forma Condensed Combining Statements of Operations
Year ended December 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------
MERGENT PRO FORMA
COMMERCE ONE SYSTEMS, INC. BUSINESS PRO FORMA
DECEMBER 31, DECEMBER 31, COMBINATION DECEMBER 31,
1999 1999 COMBINED ADJUSTMENTS 1999
---------------- ------------------ -------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues:
License fees $24,571 $ 20 $24,591 $ - $24,591
Services 8,986 13 8,999 - 8,999
---------------- ------------------ -------------- --------------- ----------------
Total revenues 33,557 33 33,590 - 33,590
Cost of revenues:
License fees 484 - 484 - 484
Services 15,586 - 15,586 - 15,586
---------------- ------------------ -------------- --------------- ----------------
Total cost of revenue 16,070 - 16,070 - 16,070
Gross profit 17,487 33 17,520 - 17,520
Operating expenses:
Sales and marketing 31,547 460 32,007 - 32,007
Product development 20,496 374 20,870 - 20,870
General and administrative 5,050 532 5,582 5,582
Purchased in-process research and
development 9,374 - 9,374 - 9,374
Amortization of deferred stock
compensation 2,323 285 2,608 - 2,608
Amortization of goodwill and
other intangible assets 11,133 - 11,133(2) 28,882 40,015
---------------- ------------------ -------------- --------------- ----------------
Total operating expenses 79,923 1,651 81,574 28,882 110,456
---------------- ------------------ -------------- --------------- ----------------
Loss from operations (62,436) (1,618) (64,054) (28,882) (92,936)
Interest income, net 3,302 11 3,313 - 3,313
Provision for income taxes 4,188 - 4,188 - 4,188
---------------- ------------------ -------------- --------------- ----------------
Net loss $(63,322) $(1,607) $(64,929) $(28,882) $(93,811)
================ ================== ============== =============== ================
Basic and diluted net loss per share $(2.60) $(3.72)
================ ================
Number of shares used in calculation of
basic and diluted net loss per
share (4) 24,374 25,245
=================== ================
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL
INFORMATION.
3
<PAGE>
Notes to Unaudited Pro Forma Condensed Combining Financial Information
Commerce One acquired Mergent on January 7, 2000 in a transaction accounted
for as a purchase. The total purchase cost was approximately $148.2 million
consisting of approximately 871,000 shares of Commerce One common stock with
a fair value of approximately $122.6 million, the assumption of outstanding
stock options with a fair value of approximately $15.3 million, cash of $10.0
million and transaction costs of approximately $268,000.
Pro forma adjustments for the unaudited pro forma condensed combining balance
sheet as of December 31, 1999 and statements of operations for the period ended
December 31, 1999 are as follows:
1. To reflect the preliminary allocation of the purchase cost.
The total estimated purchase price for the acquisition has been allocated
on a preliminary basis to assets and liabilities of Mergent based on
management's best estimates of their fair value with the excess costs
over the net assets acquired allocated to goodwill. The preliminary
allocation has resulted in a charge for purchased in-process research
and development estimated to be $5.1 million and estimated goodwill
and identified intangible assets of $141.9 million which is being
amortized over a period of one to five years. This allocation is subject
to change pending a final analysis of the value of the assets acquired
and liabilities assumed.
2. To reflect amortization of goodwill and other intangible assets resulting
from the acquisition.
The pro forma condensed combining statement of operations for the year
ended December 31, 1999 does not include the charge for purchased
research and development of approximately $5.1 million since it is
considered a non-recurring charge. The charge will be recorded by
Commerce One in the three months ended March 31, 2000.
3. To reflect the acquisition of all of the outstanding stock of Mergent.
4. Basic and diluted net loss per share has been adjusted to reflect the
issuance of approximately 871,000 shares of Commerce One common stock, as
if these shares had been outstanding for the entire period. Dilutive
options and warrants are excluded from the computation as their effect is
antidilutive.
5. To reflect the elimination of the historical shareholder's equity accounts
of Mergent.
4
