<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 000-26453
---------
COMMERCE ONE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 68-0322810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4440 Rosewood Drive
Pleasanton, CA 94588
(Address of principal executive offices)
(925) 520-6000
(Registrant's telephone number, including area code)
Indicate by check (X) whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of August 4, 2000, there were 162,002,048 shares of the registrant's
Common Stock outstanding.
<PAGE>
COMMERCE ONE, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three and six
month periods ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations Risk Factors 8
Item 3. Quantitative and Qualitative Disclosures of Market Risk 27
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 28
</TABLE>
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Commerce One, Inc.
Condensed Consolidated Balance Sheet
(In thousands, unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 204,290 $ 51,792
Short term investments 40,535 72,814
Accounts receivable, net 48,090 15,845
Prepaid expenses and other current assets 10,801 4,656
--------- --------
Total current assets 303,716 145,107
Property and equipment, net 38,205 11,892
Goodwill and other intangible assets, net 325,139 227,611
Investments and other assets 9,750 --
--------- ---------
Total assets $ 676,810 $ 384,610
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,442 $ 6,885
Accrued compensation and related expenses 14,925 3,972
Current portion of capital lease obligations 57 274
Current portion of notes payable 373 411
Deferred revenue 62,293 40,414
Other current liabilities 24,278 15,671
--------- ---------
Total current liabilities 114,368 67,627
Notes payable 104 262
Stockholders equity:
Common stock, $0.0001, 250,000 shares authorized; 161,089 and
149,936 issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 767,268 423,839
Deferred stock compensation (15,107) (4,110)
Accumulated deficit (189,348) (102,556)
Accumulated other comprehensive loss (475) (452)
--------- ---------
Total stockholders' equity 562,338 316,721
--------- ---------
Total liabilities and stockholders' equity $ 676,810 $ 384,610
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
Commerce One, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License fees $ 40,953 $ 2,270 $ 68,074 $ 3,726
Services 21,751 1,932 29,639 2,580
--------- --------- --------- ----------
Total revenues 62,704 4,202 97,713 6,306
Costs and expenses:
Cost of license fees 973 -- 2,072 --
Cost of services 20,327 3,096 31,143 4,764
Sales and marketing 31,230 6,319 50,434 10,397
Product development 20,769 3,609 34,923 6,971
General and administrative 5,628 923 9,314 1,750
Purchased in-process research and development -- -- 5,142 3,037
Amortization of deferred stock compensation 4,127 663 8,326 1,247
Amortization of goodwill and other intangible
assets 22,509 1,049 44,404 1,924
--------- --------- --------- ----------
Total costs and expenses 105,563 15,659 185,758 30,090
--------- --------- --------- ----------
Loss from operations (42,859) (11,457) (88,045) (23,784)
Interest income, net 1,182 217 2,723 233
--------- --------- --------- ----------
Loss before income taxes (41,677) (11,240) (85,322) (23,551)
Provision for income taxes 1,470 586 1,470 586
--------- --------- --------- ----------
Net loss $ (43,147) $(11,826) $(86,792) $(24,137)
========= ========= ========= ==========
Basic and diluted net loss per share $ (0.28) $ (0.11) $ (0.57) $ (0.26)
========= ========= ========= ==========
Shares used in calculation of basic and 155,064 103,410 153,250 94,314
diluted net loss per share ========= ========= ========= ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
Commerce One, Inc.
Condensed Consolidated Statement of Cash Flows
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
---- ----
<S> <C> <C>
Operating activities:
Net loss $ (86,792) $ (24,137)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,962 902
Purchased in-process research and development 5,142 3,037
Amortization of deferred stock compensation 8,323 1,247
Amortization of goodwill and other intangible assets 44,369 1,924
Changes in operating assets and liabilities:
Accounts receivable (32,245) (1,048)
Prepaid expenses and other current assets (6,052) (2,128)
Accounts payable 5,429 1,833
Accrued compensation and related expenses 10,953 453
Other current liabilities 8,420 495
Deferred revenue 21,879 13,819
---------- ----------
Net cash used in operating activities (16,612) (3,603)
Investing activities:
Purchase of property and equipment (30,088) (2,352)
Proceeds from the maturity of short term investments 32,339 --
Business combinations, net of cash acquired (28,391) (42)
Other investments (9,750) --
---------- ----------
Net cash used in investing activities (35,890) (2,394)
Financing activities:
Advances for purchase of common stock -- 5,000
Proceeds from issuance of preferred stock, net -- 27,774
Proceeds from issuance of common stock, net 205,500 1,142
Payments on notes payable (196) (405)
Payments on capital lease obligations (221) (261)
---------- ----------
Net cash provided by financing activities 205,083 33,250
Effect of foreign currency translation on cash and cash
equivalents (83) (45)
---------- ----------
Increase in cash and cash equivalents 152,498 27,208
Cash and cash equivalents at the beginning of period 51,792 15,138
---------- ----------
Cash and cash equivalents at the end of period $ 204,290 $ 42,346
========== ==========
Supplemental disclosures:
Interest paid $ 79 $ 229
========== ==========
Noncash investing and financing activities:
Deferred compensation related to stock option grants $ 8,326 $ 1,982
========== ==========
Conversion of borrowings under bank line of credit to
notes payable $ -- $ 750
========== ==========
Issuance of preferred stock, common stock and
assumption of stock options in connection with
business combinations $ 137,929 $ 21,151
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
COMMERCE ONE, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principals
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
consisting of normal recurring adjustments, considered necessary for a fair
presentation have been included. Operating results for the interim periods
presented are not necessarily indicative of the results to be expected for any
subsequent quarter or for the entire year ending December 31, 2000.
The Company has one business segment which provides
business-to-business electronic commerce solutions that use the Internet to link
buyers and sellers of business goods and services into real-time trading
communities.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1999.
2. BASIC AND DILUTED NET LOSS 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 that may be repurchased, and excludes any dilutive effects of
options, warrants, and convertible securities. Potentially dilutive issuances
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 automatically converted
to common shares upon completion of the Company's initial public offering, using
the if-converted method.
The calculation of historical and pro forma basic and diluted net loss
per share is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Historical:
Net loss $ (43,147) $(11,826) $(86,792) $(24,137)
Preferred stock accretion -- (291) -- (469)
--------- --------- --------- ---------
Loss applicable to common stockholders $ (43,147) $(12,117) $(86,792) $(24,606)
========= ========= ========= =========
Weighted average shares of common
stock outstanding 156,905 34,752 155,206 32,406
Less: Weighted average shares subject
to repurchase (1,841) (2,004) (1,956) (1,806)
--------- --------- --------- ---------
Weighted average shares of common
stock outstanding used in computing
basic and diluted net loss per share 155,064 32,748 153,250 30,600
========= ========= ========= =========
Basic and diluted net loss per share $ (0.28) $ (0.37) $ (0.57) $ (0.80)
========= ========= ========= =========
<PAGE>
Pro forma:
Net loss $ (43,147) $(11,826) $(86,792) $(24,137)
========= ========= ========= =========
Weighted average shares used in
computing basic and diluted net loss
per share (from above) 155,064 32,748 153,250 30,600
Adjustment to reflect the effect of
the assumed conversion of preferred
stock from the date of issuance -- 70,662 -- 63,714
--------- --------- --------- ---------
Weighted average shares used in
computing pro forma basic and
diluted net loss per share 155,064 103,410 153,250 94,314
========= ========= ========= =========
Pro forma basic and diluted net loss
per share $ (0.28) $ (0.11) $ (0.57) $ (0.26)
========= ========= ========= =========
</TABLE>
3. STOCKHOLDERS' EQUITY
Stock Split
On March 13, 2000, the Board of Directors approved a two-for-one stock
split of common stock. The stock split was effected as a stock dividend for
stockholders of record as of March 24, 2000. All common share and per share
information included in the accompanying financial statements has been restated
to give effect to the stock split which was effective April 19, 2000.
4. COMPREHENSIVE INCOME (LOSS)
Financial Accounting Standards Board (SFAS) No. 130 "Reporting
Comprehensive Income", establishes standards of reporting and display of
comprehensive income and its components of net income and "Other Comprehensive
Income". "Other Comprehensive Income" refers to revenues, expenses and gains and
losses that are not included in net income but rather are recorded directly in
stockholders' equity. The components of comprehensive loss for the three months
ended and six months ended June 30, 2000 and 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net loss $ (43,147) $(11,826) $(86,792) $(24,137)
Unrealized gain (loss) on investments (9) -- 11 --
Foreign currency translation adjustment 90 (37) (34) (45)
--------- --------- --------- ---------
Comprehensive loss $(43,066) $(11,863) $(86,815) $(24,182)
</TABLE>
5. ACQUISITIONS
On June 20, 2000, Commerce One agreed to acquire publicly traded
AppNet, Inc. (APNT), a premier provider of end-to-end Internet professional
services. The acquisition will be structured as a tax-free, stock-for-stock
exchange and will be accounted for as a purchase transaction. The estimated
purchase consideration is approximately $1.648 billion consisting of
27,198,000 shares of common stock with a fair value of $1.266 billion and
assumed options to acquire 7,300,000 shares of common stock with a fair value
of $367.1 million. Commerce One may also be required to issue an additional
274,000 shares of common stock in connection with contingent consideration
obligations from previous acquisitions by AppNet.
A total of approximately $45.7 million of the purchase consideration
will be allocated to other intangible assets, including assembled workforce
($28.0 million), customer contracts and backlog ($11.9 million), internal
proprietary software ($3.5 million), covenant not-to-compete ($2.3 million)
and a total of approximately $1.445 billion of the purchase consideration
will be allocated to goodwill with these amounts being amortized over periods
of one to three years.
On January 7, 2000, the Company acquired Mergent Systems, Inc.
(Mergent), a company specializing in enabling infomediaries and Global 3000
companies to create, operate, and manage product information systems and
aggregated multivendor catalogs for e-commerce. The purchase consideration was
approximately $148.4 million consisting of 1,742,190 shares of common stock with
a fair value of $122.6 million, assumed options to acquire 219,010 shares of
common stock with a fair value of $15.3 million and approximately $10.0 million
in cash paid to the Mergent stockholders.
We estimated that approximately $5.1 million of the $148.4 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, 2000. A total of approximately $8.8 million of the purchase
consideration was allocated to other intangible assets, including purchased
technology ($7.9 million), assembled workforce ($373,000) and tradenames/patent
($555,000) and a total of approximately $133.1 million of the purchase
consideration was allocated to goodwill with these amounts being amortized over
periods of one to five years.
6. INVESTMENTS
<PAGE>
The Company has made several strategic investments in privately held
companies. The Company holds less than a 20% interest and does not have a
significant influence over their investee companies. These investments are
recorded at cost.
7. GENERAL MOTORS AGREEMENT
In January 2000, we entered into agreements with General Motors to create
and operate the GM TradeXchange, an Internet-based trading exchange owned by GM
that enables buying and selling over the Internet by GM, its dealers and its
suppliers. The agreements governing the GM TradeXchange currently provide that
Commerce One and GM will share equally in the net revenues generated by the GM
TradeXchange, after the repayment of both parties expenses, for an anticipated
ten-year term. The GM TradeXchange agreements also provided for the
restructuring of Commerce One into a holding company and the issuance of
28,800,000 shares of common stock to GM. Of these 28,800,000 shares, 14,400,000
shares will be held in escrow until the GM TradeXchange has repaid the
accumulated investments by both Commerce One and GM in developing the GM
TradeXchange. The shares issued to GM will generally not be freely transferable
for three years and would be subject to standstill restrictions that will
restrict GM's ability to acquire more than 19.9% of the Company's outstanding
stock during the first three years of the relationship or more than 25.0%
thereafter. GM is also entitled to certain registration rights with respect to
the shares after the initial three year period. The closing of the GM
TradeXchange agreements remains subject to certain customary closing conditions,
including requisite regulatory clearance, and has been delayed pending the
negotiations described below.
Subsequent to the execution of the GM TradeXchange agreements, Commerce
One and GM have entered into negotiations with Ford Motor Company,
DaimlerChrysler and Oracle Corporation concerning the possible creation of a
broader business-to-business e-commerce exchange for the automotive industry.
Such an exchange would integrate or combine the GM TradeXchange with an
Internet-based trading exchange being developed by Ford and Oracle Corporation.
The parties have not, however, reached agreement on the specific terms and
conditions governing the creation of the exchange, the responsibilities of the
parties with respect to the exchange, or the extent to which the parties,
including Commerce One, will receive equity in the exchange and share in the
revenues of the exchange. In addition, such an agreement would also require
regulatory clearance.
We cannot assure you that the parties will reach an agreement for a
broader trading exchange on mutually acceptable terms and conditions or that
such an agreement would receive regulatory clearance. Further, if such an
agreement is not reached, we cannot assure you that the GM TradeXchange
agreements will receive regulatory clearance and close in a timely fashion, or
at all. For more information concerning certain risks associated with the GM
TradeXchange or a broader exchange for the automotive industry, see the Risk
Factors section of this Form 10-Q.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Background
Commerce One is a leading provider of business-to-business electronic
commerce solutions that link buyers and suppliers of goods and services into
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, Inc. and embarked on an aggressive product development effort,
which culminated in the release of the BUYSITE and MARKETSITE products in April
1998. In March 1999, we were incorporated under the laws of the state of
Delaware. We released subsequent versions of the BUYSITE and MARKETSITE products
in November 1998, April 1999 and December 1999.
Source of Revenues
<PAGE>
We generate revenues from multiple sources. License fees are
generated from licensing the BUYSITE, MARKETSITE, auction and content
management products to end-user organizations, primarily Fortune 1000
enterprises and major international enterprises. Professional service fees
are received from BUYSITE and MARKETSITE licensees and their suppliers for
enterprise resource planning system integration, content aggregation, project
management and other related services. Training revenues are generated from
providing in-house and on-site training to customers who have licensed
Commerce One products. Software maintenance revenues are generated from
product licensees based on an annual amount. Network services revenues are
generated from MARKETSITE subscription fees, hosting services fees, auction
fees, marketplace transaction fees and revenue sharing from partners who
generate revenue from their marketplaces deployed on the Commerce One
products. MARKETSITE subscription fees are received from BUYSITE licensees,
as well as other customers, for the right to access services built on the
MARKETSITE software platform. Auction fees are received from customers who
conduct auctions utilizing Commerce One's auction services. Hosting services
fees are received for Commerce One hosting the BUYSITE and/or the MARKETSITE
products that are licensed to certain customers. Revenue sharing is received
from partners who have licensed the BUYSITE, MARKETSITE and/or auction
products and share a portion of revenues generated with Commerce One. These
amounts are typically based on a percentage of gross revenues earned by the
partner through leveraging the Commerce One solution. 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 network services
revenue, either through services we provide directly to our customers or
through revenue sharing with our partners.
Revenue Recognition
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 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.
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 dependent on 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 and MarketSite subscription fees are recognized ratably
over the term of the support contract, typically one year. Transaction fees are
recognized as earned.
RECENT EVENTS
Strategic Relationship with SAP AG
On June 14, 2000, we entered into agreements with SAP AG to jointly
develop and deliver the next-generation e-business marketplace solution for
the Internet economy. The agreements provide that technology and
applications will be provided by SAP and then delivered by Commerce One, SAP
and SAPMarkets through joint development, sales and marketing, beginning
immediately. In connection with those agreements, we agreed to sell up to
$250 million worth of our common stock to SAP. Upon the signing of the
agreements, we issued 3,851,233 shares of our common stock to SAP for an
aggregate purchase price of $175 million. We have agreed that in the event
that we and SAP enter into a definitive strategic alliance agreement, and if
certain other conditions are met, then we will sell an additional $75 million
of our common stock to SAP at a purchase price equal to the average closing
price of our common stock as reported on The Nasdaq Stock Market for the 29
trading day period prior to such sale.
Strategic Relationship with General Motors
In January 2000, we entered into agreements with General Motors to create
and operate the GM TradeXchange, an Internet-based trading exchange owned by GM
that enables buying and selling over the Internet by GM, its dealers and its
suppliers. The agreements governing the GM TradeXchange currently provide that
Commerce One and GM will share equally in the net revenues generated by the GM
TradeXchange, after the repayment of both parties expenses, for an anticipated
ten-year term. The GM TradeXchange agreements also provided for the
restructuring of Commerce One into a holding company and the issuance of
28,800,000 shares of common stock to GM. Of these 28,800,000 shares, 14,400,000
shares will be held in escrow until the GM TradeXchange has repaid the
accumulated investments by both Commerce One and GM in developing the GM
TradeXchange. The shares issued to GM will generally not be freely transferable
for three years and would be subject to standstill restrictions that will
restrict GM's ability to acquire more than 19.9% of the Company's outstanding
stock during the first three years of the relationship or more than 25.0%
thereafter. GM is also entitled to certain registration rights with respect to
the shares after the initial three year period. The closing of the GM
TradeXchange agreements remains subject to certain customary closing conditions,
including requisite regulatory clearance, and has been delayed pending the
negotiations described below.
<PAGE>
Subsequent to the execution of the GM TradeXchange agreements, Commerce
One and GM have entered into negotiations with Ford Motor Company,
DaimlerChrysler and Oracle Corporation concerning the possible creation of a
broader business-to-business e-commerce exchange for the automotive industry.
Such an exchange would integrate or combine the GM TradeXchange with an
Internet-based trading exchange being developed by Ford and Oracle Corporation.
The parties have not, however, reached agreement on the specific terms and
conditions governing the creation of the exchange, the responsibilities of the
parties with respect to the exchange, or the extent to which the parties,
including Commerce One, will receive equity in the exchange and share in the
revenues of the exchange. In addition, such an agreement would also require
antitrust clearance from the Federal Trade Commission or Department of Justice.
We cannot assure you that the parties will reach an agreement for a
broader trading exchange on mutually acceptable terms and conditions or that
such an agreement would receive regulatory clearance. Further, if such an
agreement is not reached, we cannot assure you that the GM TradeXchange
agreements will receive regulatory clearance and close in a timely fashion, or
at all. For more information concerning certain risks associated with the GM
TradeXchange or a broader exchange for the automotive industry and antitrust
concerns, see the Risk Factors section of this Form 10-Q.
Acquisition of AppNet, Inc.
On June 20, 2000, Commerce One agreed to acquire publicly traded
AppNet, Inc., a premier provider of end-to-end Internet professional services.
The acquisition will be structured as a tax-free, stock-for-stock exchange, and
will be accounted for as a purchase transaction. Commerce One will issue 0.8
shares of registered common stock for each outstanding share of AppNet and
will assume all outstanding stock options and other rights to acquire AppNet
common stock. The transaction is scheduled to close during the third quarter of
2000. For more information concerning certain risks associated with the AppNet
acquisition, see the Risk Factors section of this Form 10-Q.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Revenue
Total revenues for the three months ended June 30, 2000, increased to
approximately $62.7 million compared to $4.2 million in the three months ended
June 30, 1999. In the three months ended June 30, 2000, no customers accounted
for more than 10% of our revenue and in the three months ended June 30, 1999,
four customers accounted for 27%, 12%, 12% and 11% of our revenue.
License revenues for the three months ended June 30, 2000, increased to
approximately $41.0 million compared to $2.3 million in the three months ended
June 30, 1999. The increase in revenues from license fees resulted from an
increase in new customers who purchased and accepted the BUYSITE and MARKETSITE
products.
Services revenues include revenue from professional services, network
services, maintenance fees, and/or training fees. Services revenues increased
to approximately $21.7 million for the three months ended June 30, 2000,
compared to $1.9 million for the three months ended June 30, 1999. The
increase in services revenues resulted from an increase in consulting
services provided at an increased number of customer sites as well as an
increase in network services revenue--principally revenue generated from the
use of the auction product and subscription fees.
Cost of Revenues
Cost of revenues, consisting of cost of services and costs of license
fees, were approximately $21.3 million in the three months ended June 30,
2000, compared to $3.1 million in the three months ended June 30, 1999.
Cost of services, which primarily consists of consulting, customer
support and training costs, were $20.3 million compared to $3.1 million in
the three months
<PAGE>
ended June 30, 2000 and 1999, respectively. The increase in cost of services
resulted primarily from an increase in personnel related expenses due to the
hiring and training of consulting, support and training personnel in the United
States, Europe and Asia Pacific.
Cost of license fees for the three months ended June 30, 2000, of $1.0
million consisted of royalties due to third parties related to the use of third
party software. Cost of license fees also includes software media and
duplication and software documentation costs, although these costs have not been
material to date.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries,
benefits and commissions, and the costs of seminars, promotional materials,
trade shows and other sales and marketing programs. Sales and marketing expenses
were approximately $31.2 million and $6.3 million for the three months ended
June 30, 2000 and 1999, respectively. The increase in 2000 was primarily
attributable to an overall increase in the number of sales and marketing
personnel as well as an increase in marketing related activity. The number of
employees engaged in sales and marketing increased to 331 at June 30, 2000 from
110 at June 30, 1999. The increase in 2000 was also attributable to increased
commission expense, travel related expense resulting from increased sales
activity and allocated overhead expenses. We expect 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 were approximately $20.8 million and $3.6 million, for the three months
ended June 30, 2000 and 1999, respectively. The increase in product development
expenses during 2000 was primarily attributable to personnel and consulting
related expenses to support development of the BUYSITE and MARKETSITE products
and other strategic initiatives. The overall number of employees engaged in
product development was 391 at June 30, 2000 and 119 at June 30, 1999. We
believe that investments in product development are essential to our future
success and expect 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 were approximately $5.6 million
and $0.9 million for the three months ended June 30, 2000 and 1999,
respectively. The increase was primarily attributable to an increase in
personnel related expenses and additional legal cost associated with our portal
joint ventures. The number of employees engaged in general and administrative
functions increased to 183 at June 30, 2000 from 25 at June 30, 1999. We expect
general and administrative expenses to increase in future periods.
Amortization of Deferred Stock Compensation
Amortization of deferred stock compensation totaled approximately $4.1
million and $0.6 million in the three months ended June 30, 2000 and 1999,
respectively. The increase in the amortization of deferred stock compensation
in the current period is related to the vesting schedule for certain options
assumed in the acquisitions of CommerceBid and Mergent as well as certain
options granted to employees of CommerceBid and Mergent at exercise prices
less than the deemed fair market value on the grant date. The deferred stock
compensation is being amortized over the vesting period of the related
options using a graded vesting method. The vesting period of the options
range from three to four years.
Amortization of Goodwill and Other Intangible Assets
<PAGE>
Amortization of goodwill and other intangible assets was $22.5 million
for the three months ended June 30, 2000 which was attributable to the
amortization of goodwill and other purchased intangible assets resulting from
the acquisitions of Veo Systems, Inc. and CommerceBid during 1999 and Mergent
Systems in January 2000.
We expect to incur quarterly charges through January 2004 to
amortization of goodwill and other intangible assets, from Veo Systems, Inc.,
Commerce Bid and Mergent Systems, of approximately $22.0 million related to
these acquisitions. In the event of future acquisitions, we anticipate the
amortization of goodwill and other intangible assets will increase.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenue
Total revenues for the six months ended June 30, 2000, increased to
approximately $97.7 million compared to $6.3 million in the six months ended
June 30, 1999. In the six months ended June 30, 2000, no customers accounted
for more than 10% of our revenue and in the six months ended June 30, 1999,
three customers accounted for 24%, 11% and 11% of our revenue.
License revenues for the six months ended June 30, 2000, increased to
approximately $68.1 million compared to $3.7 million in the six months ended
June 30, 1999. The increase in revenues from license fees resulted from an
increase in new customers who purchased and accepted the BUYSITE and
MARKETSITE products.
Services revenues include revenue from professional services, network
services, maintenance fees and training fees. Services revenues increased to
approximately $29.6 million for the six months ended June 30, 2000, compared
to $2.6 million for the six months ended June 30, 1999. The increase in
services revenues resulted from an increase in consulting services provided
at an increased number of customer sites as well as an increase in network
services revenue--principally revenue generated from the use of the auction
product and subscription fees.
Cost of Revenues
Cost of revenues, consisting of cost of services and costs of license
fees, were approximately $33.2 million in the six months ended June 30, 2000,
compared to $4.8 million in the six months ended June 30, 1999.
Cost of services, which primarily consists of consulting, customer
support and training costs, were $31.1 million compared to $4.8 million in the
six months ended June 30, 2000 and 1999, respectively. The increase in cost of
services resulted primarily from an increase in personnel related expenses due
to the hiring and training of consulting, support and training personnel in the
United States, Europe and Asia Pacific.
Cost of license fees for the six months ended June 30, 2000, of $2.1
million consisted of royalties due to third parties related to the use of
third party software. Cost of license fees also includes software media and
duplication and software documentation costs, although these costs have not
been material to date.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of employee salaries,
benefits and commissions, and the costs of seminars, promotional materials,
trade shows and other sales and marketing programs. Sales and marketing
expenses were approximately $50.4 million and $10.4 million for the six
months ended June 30, 2000 and 1999, respectively. The increase in 2000 was
primarily attributable to an overall increase in the number of sales and
marketing personnel as well as an increase in marketing related activity. The
number of employees engaged in sales and marketing increased to 331 at June
30, 2000 from 110 at June 30, 1999. The increase in 2000 was also
attributable to increased commission expense, travel related expense
resulting from increased sales activity and allocated overhead expenses. We
expect 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
<PAGE>
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 were approximately $34.9 million and $7.0 million, for the six months
ended June 30, 2000 and 1999, respectively. The increase in product development
expenses during 2000 was primarily attributable to personnel and consulting
related expenses to support development of the BUYSITE and MARKETSITE products
and other strategic initiatives. The overall number of employees engaged in
product development was 391 at June 30, 2000 and 119 at June 30, 1999. We
believe that investments in product development are essential to our future
success and expect 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 were approximately $9.3 million
and $1.8 million for the six months ended June 30, 2000 and 1999, respectively.
The increase was primarily attributable to an increase in personnel related
expenses and additional legal cost associated with our portal joint ventures.
The number of employees engaged in general and administrative functions
increased to 183 at June 30, 2000 from 25 at June 30, 1999. We expect general
and administrative expenses to increase in future periods.
Purchased In-Process Development
On January 7, 2000, the Company acquired Mergent Systems, Inc., a company
specializing in enabling infomediaries and Global 3000 companies to create,
operate, and manage product information systems and aggregated multivendor
catalogs for e-commerce. The purchase consideration was approximately $148.4
million consisting of 1,742,190 shares of common stock with a fair value of
$122.6 million, assumed options to acquire 219,010 shares of common stock with a
fair value of $15.3 million and approximately $10.0 million in cash paid to the
Mergent stockholders.
We estimated that approximately $5.1 million of the $148.4 million
purchase consideration represented purchased in-process research and development
that has not yet reached technological feasibility and has no alternative future
use. Accordingly, we charged this amount to operations in the six months ended
June 30, 2000. A total of approximately $8.8 million of the purchase
consideration was allocated to other intangible assets, including purchased
technology ($7.9 million), assembled workforce ($373,000) and tradenames/patents
($555,000) and a total of approximately $133.1 million of the purchase
consideration was allocated to goodwill with these amounts being amortized over
periods of one to five years.
Purchased in-process research and development consists of two projects:
(1) the development of an enterprise application that enables fast, easy
electronic catalog creation, product information management and aggregation for
both infomediaries and large corporations who automate their procurement
processes and (2) the development of a new feature which will enable users to
get unstructured HTML files in a form that can be utilized by the enterprise
application. These applications 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 product or service can be produced to meet its design
requirements, including functions, features and technical performance
requirements.
The value of the acquired in-process technology was computed using a
discounted cash flow analysis on the anticipated income stream of the related
product revenues. The discounted cash flow analysis was based on management's
forecast of future revenues, cost of revenues, and operating expenses related to
the products and technologies purchased from Mergent. The calculation of value
was then adjusted to reflect only the value creation efforts of Mergent prior to
the close of the acquisition. At the time of the acquisition, the product was
approximately 75%
<PAGE>
complete with approximately $300,000 in estimated costs remaining, the majority
of which are expected to be incurred in 2000. The technology is expected to be
available for use in our products in the latter half of 2000 and have a
technology life of approximately 3.5 years. The resultant value of in-process
technology was further reduced by the estimated value of core technology, which
was included in capitalized developed technology.
The discount rates selected for estimating future discounted cash flows
for the core and in-process technology were 18% and 24%, 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.
Amortization of Deferred Stock Compensation
Amortization of deferred stock compensation totaled approximately $8.3
million and $1.2 million in the six months ended June 30, 2000 and 1999,
respectively. The increase in the amortization of deferred stock compensation
in 2000 is related to the vesting schedule for certain options assumed in the
acquisitions of CommerceBid and Mergent as well as certain options granted to
employees of CommerceBid and Mergent at exercise prices less than the deemed
fair market value on the grant date. The deferred stock compensation is being
amortized over the vesting period of the related options using a graded
vesting method. The vesting period of the options range from three to four
years.
Amortization of Goodwill and Other Intangible Assets
Amortization of goodwill and other intangible assets was $44.4 million
for the six months ended June 30, 2000 which was attributable to the
amortization of goodwill and other purchased intangible assets resulting from
the acquisitions of Veo Systems, Inc. and CommerceBid during 1999 and Mergent
Systems in January 2000.
We expect to incur quarterly charges through January 2004 to
amortization of goodwill and other intangible assets, from Veo Systems, Inc.,
Commerce Bid and Mergent Systems, of approximately $22.0 million related to
these acquisitions. In the event of future acquisitions, we anticipate the
amortization of goodwill and other intangible assets will increase.
LIQUIDITY AND CAPITAL RESOURCES
We have historically satisfied our cash requirements primarily through
issuances of equity securities and lease and debt financing. On July 7, 1999, we
closed an initial public offering and concurrent private placement of our common
stock which resulted in net proceeds of approximately $92.5 million.
Net cash used in operating activities totaled approximately $16.6 million
for the six months ended June 30, 2000 as compared to net cash used in operating
activities of approximately $3.6 million in the six months ended June 30, 1999.
Cash used in operating activities for the six months ended June 30, 2000 and
1999 resulted primarily from the net losses in the respective quarters which was
partially offset by the amortization of goodwill and other intangible assets
associated with the acquisitions of VEO Systems, CommerceBid and Mergent
Systems, purchased in-process research and development associated with the
acquisition of Mergent Systems, in the current year, and deferred revenue.
Net cash used in investing activities totaled approximately $35.9 million
for the six months ended June 30, 2000 as compared to approximately $2.4 million
for the six months ended June 30, 1999. The uses in each period resulted from
the acquisition of capital assets, primarily computer and office equipment, as
well as the acquisition of Mergent Systems in the current year. We anticipate an
increase in our capital expenditures consistent with anticipated growth in
operations, infrastructure and personnel.
<PAGE>
Net cash provided by financing activities totaled approximately $205.1
million for the six months ended June 30, 2000 as compared to approximately
$33.3 million used in financing activities in the six months ended June 30,
1999. The cash provided in the six months ended June 30, 2000 resulted
primarily from the investment made pursuant to our partnership with SAP, AG
of $175 million, as well as proceeds from the issuance of common stock upon
the exercise of employee stock options.
As of June 30, 2000, our principal sources of liquidity included
approximately $244.8 million of cash, cash equivalents and short term
investments.
We believe that our available cash resources together with the net
proceeds from our public offering and the concurrent private placement in July
1999 will be sufficient to finance our presently anticipated operating losses
and working capital expenditure requirements for at least the next twelve
months. Our future liquidity and capital requirements will depend upon numerous
factors. The rate of expansion of our operations in response to potential growth
opportunities and competitive pressures will affect our capital requirements as
will funding of continued net losses and substantial negative cash flows.
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.
NEW ACCOUNTING PRONOUCEMENTS
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB
101 provides guidance on the recognition, presentation and disclosure of revenue
in financial statements of all public registrants. Any change in the Company's
revenue recognition policy resulting from the interpretation of SAB 101 would be
reported as a change in accounting principle in the quarter ending December 31,
2000. While the Company has not fully assessed the impact of the adoption of SAB
101, it believes that implementation of SAB 101 will not have a material adverse
impact on its existing revenue recognition policies or its reported results of
operations for fiscal 2000.
RISK FACTORS
Forward-Looking Statements
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are based upon
current expectations that involve risks and uncertainties. Any statements
contained herein that are not statements of historical facts may be deemed to be
forward-looking statements. For example, words such as "may", "will", "should",
"estimates", "predicts", "potential", "continue", "strategy", "believes",
"anticipates", "plans", "expects", "intends", and similar expressions are
intended to identify forward-looking statements.
These statements also include statements concerning our agreements
with General Motors and discussions with other automotive companies
concerning the establishment of an electronic exchange for the automotive
industry, the establishment of other electronic exchanges, the growth of our
business and related matters. Our actual results and the timing of certain
events may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, regulatory delays and issues,
competitive pressures, difficulties in growing our business to meet our
commitments, technical challenges and those discussed in this "Risk Factors"
section and the risks discussed in our other Securities Exchange Commission
("SEC") filings, including our Registration Statement on Form S-1
<PAGE>
declared effective on July 1, 1999 by the SEC (File No. 333-76987), in our
Annual Report on Form 10-K filed March 30, 2000 with the SEC (File No.
000-26453) and in our Registration Statement on Form S-4 filed July 26, 2000
with the SEC (File No. 333-41836).
IF THE CONDITIONS TO THE MERGER WITH APPNET ARE NOT MET, THE MERGER WILL NOT
OCCUR
In June 2000, Commerce One executed definitive agreements to acquire
AppNet, Inc., a premier provider of end-to-end Internet professional services.
Several conditions must be satisfied or waived to complete the merger between
Commerce One and AppNet. These conditions include, among others:
- AppNet's stockholders must vote a majority of the outstanding shares of AppNet
common stock for the adoption of the merger agreement and approval of the
merger;
- the registration statement on Form S-4 relating to the registration of the
shares of Commerce One to be issued in the merger must be effective with the
Securities and Exchange Commission;
- no law, regulation or order preventing the completion of the merger may be in
effect;
- the applicable waiting periods under antitrust laws must expire or be
terminated;
- each Company (Commerce One and AppNet) must receive an opinion of tax counsel
that the merger will qualify as a tax-free reorganization; and
- the shares of Commerce One common stock that the AppNet stockholders receive
in the merger must be authorized for listing on The Nasdaq Stock Market's
National Market.
Commerce One cannot assure you that each of these conditions will be
satisfied. If the conditions are not satisfied or waived, the merger will not
occur or will be delayed, and Commerce One may lose some or all of the intended
benefits of the merger.
COMMERCE ONE HAS A LIMITED OPERATING HISTORY, A HISTORY OF LOSSES AND MAY NEVER
BE PROFITABLE
Commerce One incurred net losses of $63.3 million, $24.6 million and
$11.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively, and $86.8 million for the six months ended June 30, 2000. As of
June 30, 2000, Commerce One had an accumulated deficit of $189.3 million.
In addition, Commerce One has a limited operating history that makes it
difficult to forecast Commerce One's future operating results. Commerce One
expects in 2000 to (a) substantially increase its sales and marketing, product
development and general and administrative expenses and (b) experience increased
costs associated with the issuance of equity securities and the amortization of
intangible assets as a result of the acquisition of AppNet, Inc. and other
transactions. As a result, Commerce One will need to generate significant
additional revenues to achieve and maintain profitability in the future.
Although Commerce One's revenues have grown in recent quarters, Commerce One
cannot be certain that such growth will continue or that it will achieve
sufficient revenues for profitability.
THE QUARTERLY FINANCIAL RESULTS OF COMPANIES IN COMMERCE ONE'S INDUSTRIES ARE
PRONE TO SIGNIFICANT FLUCTUATIONS AND THIS COULD CAUSE ITS STOCK PRICE TO FALL
Commerce One believes that quarter-to-quarter comparisons of its
revenues and operating results are not necessarily meaningful, and that such
comparisons may not be accurate indicators of future performance. The operating
results of companies in the electronic commerce industry have in the past
experienced significant quarter-to-quarter fluctuations which may adversely
affect the combined company. As with other companies in this industry, Commerce
One's operating expenses, which include sales and marketing, product development
and general and administrative expenses, are based on its expectations of future
revenues and are relatively fixed in the short term. As a result of Commerce
One's acquisition of AppNet, Commerce One's fixed expenses will increase
substantially. Further, if AppNet's existing agreements with clients are
terminated before it completes engagements, or if it is
<PAGE>
unable or otherwise does not enter into new engagements, the combined company's
revenues will decline. If Commerce One's revenues for a quarter fall below its
expectations and Commerce One is not able to quickly reduce spending in
response, its operating results for that quarter would be harmed. It is likely
that in some future quarter its operating results may be below the expectations
of public market analysts and investors and, as a result, the price of its
common stock may fall.
COMMERCE ONE'S FUTURE SUCCESS DEPENDS UPON ITS GLOBAL TRADING WEB PARTNERS
DEVELOPING AND OPERATING SUCCESSFUL MARKETSITE MARKETPLACES
Commerce One has established strategic relationships with various
companies that have licensed Commerce One's Buysite and MarketSite products in
order to create MarketSite marketplaces. Commerce One cannot assure you that
these companies will be able to implement its products and services effectively,
that they will develop and launch MarketSite marketplaces or that buyers and
suppliers will participate in their MarketSite marketplaces. These companies may
encounter delays in launching their MarketSite marketplaces, in fully deploying
these marketplaces and in achieving supplier participation in their
marketplaces. Many of the companies that have agreed to launch MarketSites, or
have indicated that they will launch MarketSites, have not yet done so.
Additionally, although Commerce One's technology architecture is designed to
support the development of trading communities that can operate with each other,
these marketplaces may not in fact operate with each other. If these or any
other MarketSite marketplaces are not successful, Commerce One's business,
operating results and financial condition will suffer.
IF COMMERCE ONE'S JOINT PRODUCT DEVELOPMENT RELATIONSHIPS ARE NOT SUCCESSFUL ITS
BUSINESS COULD SUFFER
Commerce One has entered into relationships with various companies to
jointly develop new software products. In particular, Commerce One recently
entered into a non-binding memorandum of understanding with SAP AG to jointly
develop and market a comprehensive software solution for the
business-to-business electronic commerce marketplace. These joint development
and marketing relationships can be difficult to implement and may not succeed
for various reasons, including:
- cultural differences between the companies and their respective
employees;
- difficulties in coordinating sales and marketing efforts;
- technical obstacles to combining existing software products or
developing new compatible products; and
- the need to divert significant management attention, technical and
sales personnel and capital to these relationships.
Commerce One cannot assure you that these joint development and
marketing relationships lead to successful new products, greater market
penetration or increased revenues for Commerce One.
THE DEVELOPMENT OF LARGE, INDUSTRY OR GEOGRAPHICALLY SPECIFIC MARKETPLACES OR
EXCHANGES ENTAILS CERTAIN RISKS FOR COMMERCE ONE
Many of the MarketSite marketplaces are intended to be very large and to
include many of the most significant companies in the particular industry or
region they address. These marketplaces include the proposed exchange with
General Motors and potentially Ford, DaimlerChrysler and other automotive
manufacturers. The development of these large trading exchanges will entail
significant risks for Commerce One. These risks include the diversion of a
significant portion of Commerce One's management, technical and sales personnel
to develop the exchange; technical hurdles associated with developing an
exchange on this scale and integrating it with companies' existing computer
systems and those of other parties; antitrust issues arising from the creation
of the exchanges; difficulties reaching agreements with the founders of the
exchanges and other parties concerning the establishment and development of the
exchanges; and all of the other risks of creating such exchanges described
elsewhere in this Risk Factors section. These exchanges, including the proposed
automotive exchange, may not be successfully established or operated. If
<PAGE>
Commerce One is not able to manage these risks, its business, results of
operations and financial condition will suffer.
ANTITRUST SCRUTINY OF BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE EXCHANGES MAY
ADVERSELY AFFECT COMMERCE ONE'S BUSINESS
The establishment and operation of business-to-business electronic
commerce exchanges may raise issues under U.S. and foreign antitrust laws. The
Federal Trade Commission and Department of Justice's Antitrust Division have
recently informally requested information from certain exchanges about how these
exchanges plan to operate. The European Union can also be expected to review
major business-to-business exchanges for compliance with European competition
law. In addition, the proposed automotive exchange among Commerce One, General
Motors, Ford, DaimlerChrysler and certain other companies has filed notification
filings with the FTC and DOJ under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 with respect to the business it proposes to conduct. To the extent
that U.S. or foreign antitrust regulators take adverse action with respect to
business-to-business electronic commerce exchanges or establish rules or
regulations governing these exchanges, or that there is a perception that
regulators may do any of the foregoing, the establishment and growth of the
exchanges may be delayed. Commerce One's revenues may suffer as a result.
BECAUSE COMMERCE ONE'S INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO
ENTRY, COMMERCE ONE CANNOT ASSURE YOU THAT IT WILL BE ABLE TO COMPETE
EFFECTIVELY
The market for Internet-based, business-to-business electronic commerce
solutions is extremely competitive. Commerce One expects competition to
intensify as current competitors expand their product offerings and new
competitors enter the market. 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, Commerce One's
customers and partners may become competitors in the future. Increased
competition is likely to result in price reductions, lower average sales prices,
reduced margins, longer sales cycles and a decrease or loss of Commerce One's
market share, any of which could harm its business, operating results or
financial condition.
Commerce One's competitors include Ariba, Freemarkets, i2, Oracle,
PurchasePro, SAP and VerticalNet. Certain of these competitors have announced
plans to jointly offer business-to-business electronic commerce solutions to
potential customers. These joint efforts could intensify the competitive
pressure in Commerce One's market. Many of Commerce One's 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 and customer
relationships, greater brand recognition and greater financial, marketing and
other resources than Commerce One has. In addition, competitors may be able to
develop products and services that are superior to its products and services,
that achieve greater customer acceptance or that have significantly improved
functionality as compared to its existing and future products and services. The
business-to-business electronic commerce solutions offered by competitors may be
perceived by buyers and suppliers as superior to Commerce One's.
The market for professional services is intensely competitive and is
becoming more competitive. AppNet's competitors include e-business professional
services providers, large information technology consulting services providers,
electronic commerce software and service providers, and Internet access and
service providers. Some of AppNet's competitors have longer operating histories
and client relationships, greater financial, technical, marketing and public
relations resources, larger client bases and greater brand or name recognition
than it has. Its competitors may also be able to respond more quickly to
technological developments and changes in clients' needs. In addition, there are
relatively low barriers to entry into AppNet's business. AppNet does not own any
technologies that preclude or inhibit competitors from entering its markets. Its
competitors may independently develop and patent or copyright technologies that
are superior or substantially similar to its technologies. The costs to develop
and provide e-business professional services are low.
<PAGE>
COMMERCE ONE MAY NOT BE ABLE TO HIRE AND RETAIN SUFFICIENT SALES, MARKETING,
SERVICES AND TECHNICAL PERSONNEL THAT IT NEEDS TO SUCCEED BECAUSE THESE
PERSONNEL ARE LIMITED IN NUMBER AND IN HIGH DEMAND
If Commerce One fails to hire and retain sufficient numbers of sales,
marketing, services and technical personnel, its business, operating results and
financial condition would be harmed. Competition for qualified sales, marketing,
services and technical personnel is intense as these personnel are in limited
supply, and it might not be able to hire and retain sufficient numbers of such
personnel to grow its business. Commerce One needs to substantially expand
Commerce One's sales operations and marketing efforts, both domestically and
internationally, in order to increase market awareness and sales of Commerce
One's BuySite and MarketSite products and the related services Commerce One
offers. Commerce One will also need to significantly increase its technical and
services staff to support the growth of its business and its increasing
commitments to other parties. In particular, Commerce One will need to hire a
significant number of technical personnel with various skill sets to establish
and operate the large industry specific exchanges. Although Commerce One intends
to increase the size of its technical and services staff through the acquisition
of AppNet, AppNet's personnel may not remain with AppNet prior to, or with the
combined company after the closing of the acquisition.
In addition, the market price of Commerce One's common stock has
fluctuated substantially since its initial public offering in July 1999.
Consequently, potential employees may perceive Commerce One's equity incentives
such as stock options as less attractive and current employees whose options are
no longer priced below market value may choose not to remain employed with
Commerce One. In that case, Commerce One's ability to attract employees will be
adversely affected. Furthermore, a substantial portion of the equity incentives
previously granted to AppNet's officers will accelerate and become substantially
vested upon the closing of the merger. New options granted to AppNet's officers
or other employees at the current market price of Commerce One's common stock
may not be sufficient to retain these employees. Finally, should Commerce One's
stock price substantially decline, the retention value of stock options granted
since Commerce One's initial public offering will decline and Commerce One's
employees may choose not to remain with the company.
COMMERCE ONE HAS EXPERIENCED SIGNIFICANT GROWTH IN RECENT PERIODS AND FAILURE TO
MANAGE THIS GROWTH COULD STRAIN ITS MANAGEMENT AND OTHER RESOURCES
Commerce One's ability to successfully offer products and services and
implement its 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 management and resources. Commerce One has increased, and plans
to continue to increase, the scope of Commerce One's operations at a rapid rate.
Commerce One's headcount has grown and will continue to grow substantially. At
June 30, 2000, Commerce One had a total of 1,319 employees and at December 31,
1999 had a total of 594 employees. As a result of the proposed merger with
AppNet, Commerce One will add over 1,200 employees. Similarly, AppNet has grown
rapidly. AppNet's total number of employees has increased from eight as of March
15, 1998 to approximately 1,166 as of March 31, 2000. In addition, Commerce One
expects to continue to hire a significant number of new employees in the near
future. To manage future growth effectively, Commerce One must maintain and
enhance its financial and accounting systems and controls, integrate new
personnel and manage expanded operations. Commerce One may not be able to do
this effectively.
CURRENT AND FUTURE ACQUISITIONS, INCLUDING THE PROPOSED ACQUISITION OF APPNET,
MAY ADVERSELY AFFECT COMMERCE ONE'S BUSINESS
As part of Commerce One's business strategy, it has made and expects to
continue to make acquisitions of businesses that offer complementary products,
services and technologies. In June 2000, Commerce One signed a definitive
agreement to acquire AppNet, Inc., a provider of end-to-end Internet
professional services. Commerce One's acquisitions are and will be accompanied
by the risks commonly encountered in acquisitions of businesses. Such risks
include, among other things, the possibility that Commerce One pays more than
the acquired business is worth, the difficulty of integrating the operations and
personnel of the acquired business into
<PAGE>
its business, the potential disruption of Commerce One's
ongoing business, the distraction of management from Commerce One's business,
the inability of management to maximize Commerce One's financial and strategic
position, and the impairment of relationships with employees and customers. In
addition, we also risk not closing acquisitions we announce, such as AppNet.
Commerce One has limited experience acquiring businesses, and may not acquire
such businesses on favorable terms or be able to integrate such organizations
into its business successfully. Further, the financial consequences of Commerce
One's acquisitions and investments may include potentially dilutive issuances of
equity securities, one-time write-offs, amortization expenses related to
goodwill and other intangible assets and the incurrence of contingent
liabilities. These risks could have a material adverse effect on Commerce One's
business, financial condition and results of operations.
COMMERCE ONE'S LENGTHY SALES CYCLE COULD CAUSE DELAYS IN REVENUE GROWTH
The period between Commerce One's initial contact with a potential
customer and the purchase of its products and services is often long and may
have delays associated with the lengthy budgeting and approval process of
Commerce One's customers. Historically, Commerce One's typical sales cycle has
been approximately three to six months. This lengthy cycle could have a negative
impact on the timing of Commerce One's revenues, especially its realization of
any transaction based revenues.
Commerce One believes that a customer's decision to purchase its
products and services is discretionary, involves a significant commitment of
resources, and is influenced by customer budgetary cycles. To successfully sell
its products and services, Commerce One generally must educate potential
customers regarding the use and benefit of its products and services, which can
require significant time and resources. Many of Commerce One's potential
customers are large enterprises that generally take longer to make significant
business decisions.
COMMERCE ONE'S FUTURE REVENUES DEPEND UPON COMMERCE ONE'S ABILITY TO INCREASE
BUSINESS SERVICE AND TRANSACTION FEE REVENUE FROM ITS MARKETSITE MARKETPLACES
To date, Commerce One has derived a substantial portion of its revenues
from licensing its MarketSite and BuySite products to customers and providing
related implementation, support and maintenance services. A significant portion
of these revenues have come from the recognition of one-time license fees by
customers. Although Commerce One's revenues from business services has grown
recently, Commerce One's transaction-based revenue has been immaterial to date.
Commerce One's business model calls for a significant portion of its revenues in
the future to be derived from business services and transaction based fees. If
such revenues do not materialize, Commerce One's business will suffer.
COMMERCE ONE'S CUSTOMER BASE IS CONCENTRATED AND ITS SUCCESS DEPENDS IN PART ON
ITS ABILITY TO RETAIN EXISTING CUSTOMERS
In 1999, Toronto Dominion accounted for 21% of Commerce One's total
revenues, Singapore Telecommunications accounted for 15%, and British
Telecommunications accounted for 11%. In the first quarter of 2000, Endesa
Marketplace SA accounted for 16% of Commerce One's total revenues and Portugal
Telecom accounted for 12%. In the second quarter of 2000, no customers accounted
for more than 10% of Commerce One's total revenues. The significant contribution
of these customers to Commerce One's revenues in the periods described generally
reflects the payment by these customers of large one-time license fees to
Commerce One. Commerce One does not have long-term contractual commitments from
any of its current customers and its customers may terminate their contracts
with Commerce One with little or no advance notice and without significant
penalty to them. As a result, Commerce One cannot assure you that any of its
current customers will be customers in future periods. A customer termination
would not only result in lost revenues, but also the loss of customer references
that are necessary for securing future customers.
IF SUPPLIERS DO NOT PARTICIPATE IN THE MARKETSITE MARKETPLACES, COMMERCE ONE'S
BUSINESS MAY BE ADVERSELY AFFECTED
MarketSite marketplaces will be attractive to suppliers only if a
significant number of buyers are willing to purchase goods and services through
the MarketSite
<PAGE>
marketplaces. 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. Suppliers may not remain in the MarketSite marketplaces or join
these communities in sufficient numbers to make them successful.
COMMERCE ONE DEPENDS UPON CONTINUING ITS RELATIONSHIP WITH THIRD-PARTY
INTEGRATORS WHO SUPPORT ITS SOLUTIONS
Commerce One's success depends upon the acceptance and successful
integration by customers and their suppliers of its BuySite and MarketSite
products. Commerce One's current customers and potential customers and their
related suppliers often rely on third-party systems integrators such as Andersen
Consulting, PricewaterhouseCoopers and Cambridge Technology Partners and others
to develop, deploy and manage their Internet-based, business-to-business
electronic commerce platforms and solutions. Commerce One and its customers will
need to continue to rely on these systems integrators even as Commerce One
increases the size of its professional services organization. If large systems
integrators fail to continue to support Commerce One's solution or commit
resources to Commerce One, if any of its customers or suppliers are not able to
successfully integrate its solution or if Commerce One is unable to adequately
train its existing systems integration partners, its business, operating results
and financial condition could suffer.
COMMERCE ONE'S STRATEGY OF STRATEGIC RESELLING THROUGH PARTNERS MAY NOT BE
SUCCESSFUL
Commerce One has established strategic relationships with companies
that resell Commerce One's existing BuySite and Marketsite applications to its
customers. These relationships are new and this strategy is unproven. Commerce
One cannot assure you that any of these companies, or those it may appoint in
the future, will be able to resell its product solution sets to a sufficient
number of customers, or that those customers will purchase Commerce One's
applications and more importantly, connect into MarketSite marketplaces.
Further, Commerce One may encounter disagreements from time to time with
companies concerning the terms of their reseller agreements. To date, a few of
Commerce One's partners have been unsuccessful in reselling its BuySite
products. If Commerce One's current or future strategic partners are not able to
successfully resell its BuySite products, its business will suffer.
COMMERCE ONE'S EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO
COMMERCE ONE'S BUSINESS AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH
THE COMPANY IN THE FUTURE
Commerce One's future success depends upon the continued service of
Commerce One's executive officers and other key personnel, and none of Commerce
One's current executive officers other than Jay M. Tenenbaum, its Senior Vice
President and Chief Scientist, are bound by an employment agreement for any
specific term. Any of Commerce One's officers may leave the Company in the
future. In particular, the services of Mark Hoffman, Commerce One's Chief
Executive Officer, Robert Kimmitt, its President, and Chuck Donchess, its
Executive Vice President and Chief Strategy Officer, would be difficult to
replace. If Commerce One loses the services of one or more of its executive
officers or key employees, or if one or more of them decides to join a
competitor or otherwise compete directly or indirectly with Commerce One, its
business, operating results and financial condition would be seriously harmed.
COMMERCE ONE INTENDS TO CONTINUE TO EXPAND ITS INTERNATIONAL OPERATIONS AND
THESE EFFORTS MAY NOT BE SUCCESSFUL IN GENERATING ADDITIONAL REVENUES
Commerce One has generated significant international revenues and is
planning to increase its international operations and sales efforts. However,
Commerce One may not be able to continue to increase international revenues and
the risks of international sales and operations may harm Commerce One.
International business involves inherent risks, and Commerce One
anticipates the risks that may affect us include:
- unexpected changes in regulatory requirements and tariffs that may
<PAGE>
be imposed on electronic commerce
- seasonal reductions in business activity
- difficulties in staffing and managing foreign offices as a result of,
among other things, distance, language and cultural differences
- longer payment cycles and greater difficulty in accounts receivable
collection
- potentially harmful tax consequences, including withholding tax
issues
- fluctuating exchange rates
- price controls or other restrictions on foreign currency
- difficulties in obtaining export and import licenses
In addition, Commerce One has only limited experience in marketing,
selling and supporting its products and services in foreign countries. This may
be more difficult or take longer than Commerce One anticipates 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.
COMMERCE ONE'S MARKET MAY UNDERGO RAPID TECHNOLOGICAL CHANGE AND THIS CHANGE MAY
MAKE COMMERCE ONE'S PRODUCTS AND SERVICES OBSOLETE OR CAUSE COMMERCE ONE TO
INCUR SUBSTANTIAL COSTS TO ADAPT TO THESE CHANGES
If the market for Commerce One's products and services fails to develop
and grow or Commerce One fails to gain acceptance in this market, such failure
would harm its business, operating results and financial condition. Commerce
One's market is characterized by rapidly changing technology, evolving industry
standards and frequent new product announcements. To be successful, Commerce One
must adapt to the rapidly changing market by continually improving the
performance, features and reliability of its products and services or else its
products and services may become obsolete. Commerce One also could incur
substantial costs to modify its products, services or infrastructure in order to
adapt to these changes. Commerce One's business, operating results and financial
condition could be harmed if it incurs significant costs without adequate
results, or is unable to adapt rapidly to these changes.
SECURITY RISKS OF ELECTRONIC COMMERCE MAY DETER FUTURE USE OF COMMERCE ONE'S
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 Internet in general, could significantly harm Commerce One's
business, operating results and financial condition. Advances in computer
capabilities, new discoveries in the field of cryptography, or other
developments may not be sufficient to prevent a compromise or breach of the
algorithms it uses to protect content and transactions on MarketSite
marketplaces or proprietary information in its databases. Anyone who is able to
circumvent Commerce One's security measures could misappropriate proprietary,
confidential customer information or cause interruptions in its operations.
Commerce One 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.
AppNet provides e-business services that rely on encryption and
authentication technology licenses from third parties to provide the security
and authentication needed to safely transmit confidential information. Although
it has designed and implemented a variety of network security measures,
unauthorized access, computer viruses, accidental or intentional acts and other
disruptions may
<PAGE>
occur. AppNet's e-business outsourcing centers may experience delays or service
interruptions as a result of the accidental or intentional acts of Internet
users, current and former employees or others. Such acts could potentially
jeopardize the security of confidential information, such as credit card and
bank account numbers, stored in AppNet's and its clients' computer systems. Such
a breach in security could result in liability and in the loss of existing
clients or the deterrence of potential clients. Although AppNet plans to
continue using industry-standard security measures, such measures have been
circumvented in the past, and may be circumvented in the future. The costs
required to eliminate computer viruses and alleviate other security problems
could be prohibitively expensive, and efforts to address such problems could
result in delays or interruption of service to its clients.
FAILURE TO EXPAND INTERNET INFRASTRUCTURE COULD LIMIT COMMERCE ONE'S 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 Commerce
One's products and services, could grow more slowly or decline. Commerce One's
ability to increase the speed and scope of its services to customers is
ultimately limited by and depends upon the speed and reliability of both the
Internet and its customers' internal networks. Consequently, the emergence and
growth of the market for its services depends upon improvements being made to
the entire Internet as well as to its individual customers' networking
infrastructures to alleviate overloading and congestion. If these improvements
are not made, the ability of Commerce One's customers to utilize its solution
will be hindered, and its business, operating results and financial condition
may suffer.
CONTINUED ADOPTION OF THE INTERNET AS A METHOD OF CONDUCTING BUSINESS IS
NECESSARY FOR COMMERCE ONE'S FUTURE GROWTH
The market for Internet-based, business-to-business electronic commerce
products is relatively new and is evolving rapidly. Commerce One's 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 procurement and fulfillment functions. 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. The failure of the Internet to continue to develop as a commercial or
business medium or of significant numbers of buyers and suppliers to conduct
business-to-business commerce on the Internet would harm Commerce One's
business, operating results and financial condition.
IF COMMERCE ONE RELEASES PRODUCTS CONTAINING DEFECTS, COMMERCE ONE MAY NEED TO
HALT FURTHER SHIPMENTS UNTIL IT FIXES THE DEFECTS, AND ITS BUSINESS AND
REPUTATION MAY BE HARMED
Products as complex as Commerce One's often contain unknown and
undetected errors or performance problems. Many defects are frequently found
during the period immediately following introduction and initial shipment of new
products or enhancements to existing products. Although Commerce One attempts to
resolve all errors that Commerce One believes would be considered serious by its
customers before shipment to them, its 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 Commerce One's business and reputation.
In the past, defects in Commerce One's products have delayed their shipments
after those products have been commercially introduced. While these delays have
not been material to date, undetected errors or performance problems in its
existing or future products may be discovered in the future and known errors
currently considered minor may in the future be considered serious by its
customers.
IF COMMERCE ONE'S POTENTIAL CUSTOMERS ARE NOT WILLING TO SWITCH TO OR ADOPT ITS
ELECTRONIC COMMERCE SOLUTION, ITS GROWTH AND REVENUES WILL BE LIMITED
<PAGE>
The failure to generate a large customer base would harm Commerce One's
growth and revenues. This failure could occur for several reasons. Some of
Commerce One's 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 Commerce One's competitors for
electronic commerce solutions may be reluctant to replace their current solution
and adopt its solution. As a result, Commerce One's efforts to create a larger
customer base may be more difficult than expected even if it is deemed to offer
products and services superior to those of its 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 Commerce One's solution, which could harm
its business, operating results and financial condition.
APPNET'S REVENUES MAY FLUCTUATE BECAUSE THEY ARE PRIMARILY GENERATED ON A
PROJECT-BY-PROJECT BASIS AND PROJECTS CAN BE TERMINATED
If AppNet's existing agreements with clients are terminated before the
engagements are complete, or if AppNet is unable to enter into new engagements,
AppNet's business, financial condition or results or operations could be
materially adversely affected. AppNet derives its revenues primarily from fees
for services generated on a project-by-project basis. These projects vary in
size, scope and duration. A client that accounts for a significant portion of
AppNet's revenues in a particular period may not account for a similar portion
of Commerce One's revenues in future periods. A client may or may not engage
AppNet for further services once a project is completed. As a result, AppNet's
revenues are not recurring from period to period, which makes them more
difficult to predict.
APPNET CONTRACTS CONTAIN PRICING RISKS
Generally, AppNet has charged its clients for the time, materials and
expenses incurred during the course of an engagement. However, the combined
company intends to increase the percentage of its work that is billed at a fixed
rate. Although AppNet has experience pricing and managing fixed-price contracts,
if the combined company underestimates the resources and time required to
complete projects, it could be subject to cost overruns leading to losses on
engagements.
IF THIRD PARTIES CLAIM THAT COMMERCE ONE INFRINGES UPON THEIR INTELLECTUAL
PROPERTY, ITS ABILITY TO USE CERTAIN TECHNOLOGIES AND PRODUCTS COULD BE LIMITED
AND IT MAY INCUR SIGNIFICANT COSTS TO RESOLVE THESE CLAIMS
Litigation regarding intellectual property rights is common in the
Internet and software industries. Commerce One expects third-party infringement
claims involving Internet technologies and software products and services to
increase. If an infringement claim is filed against Commerce One, it may be
prevented from using certain technologies and may incur significant costs to
resolve the claim.
Commerce One has in the past received letters suggesting that it is
infringing the intellectual rights of others and it may from time to time
encounter disputes over rights and obligations concerning intellectual property.
Although Commerce One believes that its intellectual property rights are
sufficient to allow it to market its existing products without incurring
liability to third parties, its products and services may be found to infringe
on the intellectual property rights of third parties.
In addition, Commerce One has agreed, and may agree in the future, to
indemnify customers against claims that its products infringe upon the
intellectual property rights of others. Commerce One could incur substantial
costs in defending itself and its customers against infringement claims. In the
event of a claim of infringement, Commerce One and its customers may be required
to obtain one or more licenses from third parties. Commerce One or its customers
may not be able to obtain necessary licenses from third parties at a reasonable
cost or at all.
FAILURE TO PROTECT INTELLECTUAL PROPERTY RIGHTS OR MAINTAIN RIGHTS TO USE
LICENSED INTELLECTUAL PROPERTY COULD HAVE ADVERSE EFFECTS
<PAGE>
In connection with AppNet's e-business professional services, it
develops intellectual property for its clients. AppNet frequently assigns
ownership of such intellectual property to the client and retains only a license
for limited uses. Issues relating to ownership of and rights to use such
intellectual property can be complicated. AppNet may become involved in disputes
that affect its ability to resell or reuse this intellectual property. In
addition, many projects involve the use of material that is confidential or
proprietary client information. The successful assertion of one or more large
claims against AppNet by its clients or other third parties could have a
material adverse effect.
BECAUSE THE PROTECTION OF COMMERCE ONE'S PROPRIETARY TECHNOLOGY IS LIMITED,
COMMERCE ONE'S PROPRIETARY TECHNOLOGY COULD BE USED BY OTHERS
Commerce One's success depends, in part, upon Commerce One's
proprietary technology and other intellectual property rights. To date, Commerce
One has relied primarily on a combination of copyright, patent, trade secret,
and trademark laws, and nondisclosure and other contractual restrictions on
copying and distribution to protect Commerce One's proprietary technology.
Commerce One has no issued patents to date. Commerce One may not be able to
protect its intellectual property rights adequately in the United States or
abroad.
Furthermore, litigation may be necessary to enforce Commerce One's
intellectual property rights, to protect its 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 its business,
operating results and financial condition.
COMMERCE ONE'S MARKETSITE MARKETPLACES MAY NOT FUNCTION AS EFFECTIVELY WHEN
HANDLING HIGH VOLUMES OF TRANSACTIONS
As the volume of transactions on Commerce One's MarketSite marketplaces
increases, participants in these marketplaces may experience slower response
times or other problems. In addition, participants in Commerce One's MarketSite
marketplaces will depend upon Internet service providers, telecommunications
companies and their computer networks to access these marketplaces. Each of
these has experienced performance problems in the past and could experience
similar problems in the future. Any delays in the response time of Commerce
One's MarketSite marketplaces or other performance problems could adversely
affect customer usage and adoption of its solutions.
COMMERCE ONE MAY NOT HAVE ADEQUATE BACK-UP SYSTEMS, AND A DISASTER COULD DAMAGE
COMMERCE ONE'S OPERATIONS
Commerce One currently does not have a disaster recovery plan in effect
and does not have fully redundant systems for service at an alternate site. A
disaster could severely harm Commerce One's business because its service could
be interrupted for an indeterminate length of time. Commerce One's operations
depend upon Commerce One's ability to maintain and protect its computer systems
in its principal facilities in Pleasanton, Santa Clara, Mountain View and
Cupertino, California, which exist on or near known earthquake fault zones.
Commerce One also depends upon third parties to host most of its MarketSite
marketplaces and some of these third parties are also located in the same
earthquake fault zones. Although these systems are designed to be fault
tolerant, they are vulnerable to damage from fire, floods, earthquakes, power
loss, telecommunications failures and similar events.
In the event AppNet's hardware malfunctions and its back-up systems
fail, it may not be able to maintain its standard of service to its customers.
If AppNet was unable to provide e-business outsourcing services at either of its
e-business outsourcing centers, it would materially adversely impact its ability
to continue to provide the type of e-business outsourcing services processed
through that center.
THE COMBINED COMPANY MAY HAVE POTENTIAL LIABILITY TO CLIENTS WHO ARE
DISSATISFIED WITH ITS PROFESSIONAL SERVICES
<PAGE>
Commerce One and AppNet design, develop, implement and manage
electronic commerce solutions that are crucial to the operation of their
clients' businesses. Defects in the solutions they develop could result in
delayed or lost revenues, adverse customer reaction and negative publicity or
require expensive corrections, any of which could have a material adverse effect
on the combined company's business, financial condition or results of
operations. Clients who are not satisfied with these services could bring claims
against Commerce One and AppNet for substantial damages. Any claims asserted
could exceed the level of the combined company's insurance. There can be no
assurance that the insurance that the combined company carries will continue to
be available on economically reasonable terms, or at all. The successful
assertion of one or more large claims that are uninsured, exceed insurance
coverage or result in changes to insurance policies, including premium
increases, could have a material adverse effect on the combined company's
business, financial condition or results of operations.
ADDITIONAL GOVERNMENT REGULATIONS MAY INCREASE COMMERCE ONE'S 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 Commerce One's business, operating results and financial condition by
increasing its costs and administrative burdens. It may take years to determine
whether and how existing laws such as those governing antitrust, intellectual
property, privacy, libel, consumer protection and taxation apply to the
Internet.
Laws and regulations directly applicable to communications or commerce
over the Internet are becoming more prevalent. Commerce One must comply with new
regulations in both Europe and the United States, as well as any other
regulations adopted by other countries where it 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 and may harm Commerce One's business,
operating results and financial condition.
COMMERCE ONE'S OPERATIONS MAY CONTINUE TO PRODUCE A NEGATIVE CASH FLOW;
CONSEQUENTLY, IF IT CANNOT RAISE ADDITIONAL CAPITAL, COMMERCE ONE MAY NOT BE
ABLE TO FUND ITS CONTINUED OPERATIONS
Since Commerce One's inception, cash used in its operations has
substantially exceeded cash received from its operations, and Commerce One
expects this trend to continue in the future. Commerce One currently anticipates
that its available cash resources will be sufficient to meet its anticipated
working capital and capital expenditure requirements for at least the next
twelve months. However, these resources may not be sufficient for anticipated or
unanticipated working capital and capital expenditure requirements for this
period. Factors that may vary significantly affect whether Commerce One's cash
resources are sufficient to meet its needs for the period indicated. These
factors include Commerce One's expectation that it will continue to incur net
losses and its continuing incurrence of substantial negative cash flow. If
adequate funds are not available or are not available on acceptable terms,
Commerce One may not be able to take advantage of its opportunities, develop new
products or services, fund its continued operations, or otherwise respond to
unanticipated competitive pressures. Any additional financing that Commerce One
may need may not be available on favorable terms, if at all.
INTERNET RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY MAY
DEPRESS COMMERCE ONE'S 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 Commerce One's common stock, without
regard to its operating performance. Due to this volatility, the market price of
Commerce One's common stock could significantly decrease at any time.
FUTURE SALES OF COMMERCE ONE COMMON STOCK, INCLUDING THOSE ISSUED IN THE MERGER
WITH APPNET, MAY DEPRESS COMMERCE ONE'S STOCK PRICE
<PAGE>
If Commerce One's stockholders or optionees sell substantial amounts of
its common stock in the public market, the market price of the common stock
could fall. On June 30, 2000, Commerce One had 161.1 million shares of common
stock outstanding. Of these shares, approximately 157.5 million shares are
currently available for sale in the public market. Commerce One will also issue
up to approximately 27.2 million freely tradable shares to AppNet's stockholders
in the proposed merger with AppNet. In addition, shares of common stock issued
upon the exercise of options and warrants, including those assumed in the
merger, may generally be sold in the public market without restriction.
A total of 3.8 million shares of Commerce One's common stock will first
become eligible under the federal securities laws in the public market on June
14, 2001. In addition, up to an additional 28.8 million shares of common stock
may be issued to General Motors or General Motors and Ford in connection with
the creation of an exchange for the automotive industry, which shares will
eligible for sale under the federal securities laws beginning one year after the
date they are issued.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
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" on page 15.
INTEREST RATE RISK
At June 30, 2000, we had cash, cash equivalents and short term
investments of approximately $244.8 million, compared to $42.3 million at June
30, 1999, which consist of cash and highly liquid investments. These investments
may be subject to interest rate risk and will decrease in value if market
interest rates decrease. A hypothetical increase or decrease in market interest
rates by 10 percent from the market interest rates at June 30, 2000 would cause
the fair market value of our cash and cash equivalents to change by an
immaterial amount. Declines in interest rates over time will, however, reduce
our interest income.
FOREIGN CURRENCY EXCHANGE RATE RISK
Substantially all of our revenues recognized to date have been
denominated in U.S. dollars, a significant portion of which has been realized
outside of the United States. To the extent that we engage in international
sales denominated in U.S. dollars, an increase in the value of the U.S. dollar
relative to foreign currencies could make our products 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.
EQUITY PRICE RISK
We do not own any significant equity investments. Therefore, we believe
we are not currently exposed to any direct equity price risk.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 14, 2000, Commerce One and SAP Aktiengesellschaft entered
into a stock purchase agreement (and related agreements) providing for
Commerce One's sale of up to $250 million worth of its common stock to SAP
AG. Upon the signing of the stock purchase agreement, Commerce One issued
3,851,233 shares of its Common Stock to SAP AG for an aggregate purchase
price of $175 million. The issuance was exempt from registration pursuant to
Regulation D under the Securities Act of 1933, as amended, because of the
limited number of investors, the sophistication and accreditation of the
investor, and the manner in which the transaction was conducted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Commerce One, Inc. was held on May 31, 2000.
(b) Election of Directors:
(i) The following nominees were elected to hold office as Class I
directors of Commerce One, Inc, until 2003:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld Abstentions
<S> <C> <C> <C>
Thomas J. Gonzales, II 53,835,042 140,228 0
Robert M. Kimmitt 53,901,645 73,625 0
Jay M. Tenenbaum 53,912,164 63,106 0
</TABLE>
(ii) Incumbent Class II directors whose term expires in 2001 are as
follows:
Kenneth C. Gardner
William J. Harding
David H.J. Furniss
Noriyoshi Osumi
(iii) Incumbent Class III directors whose term expires in 2002 are
as follows:
Mark B. Hoffman
John V. Balen
William B. Elmore
Jeffrey T. Webber
(c) The following matters were voted upon at the meeting:
(i) The approval of an amendment to the Company's 1997 Incentive
Stock Plan to increase the number of shares reserved for
issuance under the plan by 3,500,000 to 34,371,926 shares.
Votes For 24,411,478
Votes Against 6,132,787
Abstentions 45,101
Broker Nonvote 23,385,904
(ii) The approval of an amendment to the Company's 1999 Employee
Stock Purchase Plan to (a) increase the number of shares
reserved for issuance under the plan by 3,700,000 to
9,346,924 shares and (b) increase the amount of the annual
increase, in the number of shares available for grant thereunder
to the least of (i) 7 million shares, (ii) 4% of the outstanding
shares of Common Stock of Commerce One, or (iii) such number
of shares as determined by Commerce One's board of directors.
Votes For 25,627,106
Votes Against 4,923,763
Abstentions 38,497
Broker Nonvote 23,385,904
(iii) The approval of an amendment to the Company's Amended and
Restated Certificate of Incorporation to (a) increase the
authorized number of shares of common stock by 700 million
shares to an aggregate of 950 million shares and (b)
increase the authorized number of shares of preferred stock
by 40 million shares to an aggregate of 50 million shares.
Votes For 26,054,263
Votes Against 4,502,718
Abstentions 32,385
Broker Nonvote 23,385,904
(vi) The ratification of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending
December 31, 2000.
<TABLE>
<S> <C>
Votes For 53,918,975
Votes Against 33,360
Abstentions 22,935
</TABLE>
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
3.3 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Commerce One, Inc. dated July 17, 2000.
3.4 Certificate of Correction to the Amended and Restated Certificate
of Incorporation of Commerce One, Inc. dated July 31, 2000.
10.19 Stand-alone Stock Option Agreement between Robert M. Kimmitt and
Commerce One, Inc. dated as of April 14, 2000.
10.20 Relocation Loan Agreement between Robert M. Kimmitt and Commerce
One, Inc., dated May 17, 2000.
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The following reports where filed on Form 8-K during the three months
ended June 30, 2000:
<TABLE>
<CAPTION>
FORM FILING DATE EVENT REPORTED
<S> <C> <C>
8-K June 28, 2000 Share Purchase Agreement dated
June 14, 2000 between Commerce
One, Inc. and SAP AG
8-K June 29, 2000 Agreement and Plan of Merger and
Reorganization, dated June 20, 2000,
by and among Commerce One, Inc., Constitution
Acquisition Corporation and AppNet, Inc.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
COMMERCE ONE, INC.
Dated: August 14, 2000 /s/ Peter F. Pervere
---------------------------------
Peter F. Pervere
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
Dated: August 14, 2000 /s/ Mark B. Hoffman
---------------------------------
Mark B. Hoffman
Chief Executive Officer and
Chairman of the Board (Principal
Executive Officer)
