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 SEPTEMBER 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 November 6, 2000, there were 193,100,837 shares of the registrant's Common
Stock outstanding.
COMMERCE ONE, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION 3
Item 1. Financial Statements (Unaudited) 3
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three and
nine month periods ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 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 26
PART II OTHER INFORMATION 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
COMMERCE ONE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, December 31,
2000 1999
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 308,087 $ 51,792
Short term investments 46,581 72,814
Accounts receivable, net 127,475 15,845
Prepaid expenses and other current assets 18,499 4,656
---------- ----------
Total current assets 500,642 145,107
Property and equipment, net 79,082 11,892
Goodwill and other intangible assets, net 1,725,983 227,611
Investments and other assets 13,898 --
---------- ----------
Total assets $ 2,319,605 $ 384,610
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,843 $ 6,885
Accrued compensation and related expenses 55,342 3,972
Current portion of capital lease obligations 48 274
Current portion of notes payable 1,127 411
Deferred revenue 94,504 40,414
Other current liabilities 57,967 15,671
---------- ----------
Total current liabilities 240,831 67,627
Notes payable 3,592 262
Stockholders' equity:
Common stock, $0.0001, 250,000 shares authorized; 191,170 and 149,936 issued
and outstanding September 30, 2000 and December 31, 1999, respectively 2,505,773 423,839
Deferred stock compensation (179,772) (4,110)
Accumulated deficit (249,994) (102,556)
Accumulated other comprehensive loss (825) (452)
---------- ----------
Total stockholders' equity 2,075,182 316,721
---------- ----------
Total liabilities and stockholders' equity $ 2,319,605 $384,610
========== ========
See notes to condensed consolidated financial statements.
Commerce One, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
License fees $65,863 $ 7,778 $ 133,937 $11,504
Services 46,821 2,585 76,460 5,165
------- ------ ------- ------
Total revenues 112,684 10,363 210,397 16,669
Costs and expenses:
License fees 1,887 278 3,959 278
Services 37,613 4,490 68,756 9,254
Sales and marketing 49,970 9,361 100,404 19,758
Product development 26,693 5,353 61,616 12,324
General and administrative 11,239 1,226 20,553 2,976
Purchased in-process research and development -- -- 5,142 3,037
Amortization of deferred stock compensation 4,496 531 12,822 1,778
Amortization of goodwill and other intangible assets 43,282 1,053 87,686 2,977
------- ------ ------- ------
Total costs and expenses 175,180 22,292 360,938 52,382
------- ------ ------- ------
Loss from operations (62,496) (11,929) (150,541) (35,713)
Interest income, net 2,772 1,573 5,495 1,806
------- ------ ------- ------
Net loss before income taxes (59,724) (10,356) (145,046) (33,907)
Provision for income taxes 922 - 2,392 586
------- ------ ------- ------
Net loss $(60,646) $(10,356) $(147,438) $(34,493)
======= ======= ======== =======
Basic and diluted net loss per share $ (0.37) $ (0.17) $ (0.94) $ (0.84)
======= ======= ======== =======
Shares used in calculation of basic and
diluted net loss per share 165,537 62,484 157,401 41,826
======= ======= ======== =======
See notes to condensed consolidated financial statements.
Commerce One, Inc.
Condensed Consolidated Statement of Cash Flows
(In thousands)
(unaudited)
Nine months ended
September 30,
2000 1999
---- ----
Operating activities:
Net income $ (147,438) $ (34,493)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 7,716 1,581
Purchased in-process research and development 5,142 3,037
Amortization of deferred stock compensation 12,882 1,778
Amortization of goodwill and other intangible assets 87,686 2,977
Change in assets and liabilities:
Accounts receivable, net (63,661) (5,990)
Prepaid and other current assets (10,431) (1,980)
Accounts payable 20,671 1,760
Accrued compensation and related expenses 37,129 1,966
Other current liabilities 6,656 1,045
Deferred revenue 54,090 18,846
--------- --------
Net cash provided by (used in) operating activities 10,442 (9,473)
Investing activities:
Purchase of property and equipment, net (56,998) (4,516)
Purchase of short term investments (43,472) -
Proceeds from the maturity of short term investments 69,334 -
Note receivable from stockholder - (5,000)
Business combinations, net of cash acquired (6,605) (42)
Other investments (8,536) -
--------- --------
Net cash used in investing activities (46,277) (9,558)
Financing activities:
Proceeds from issuance of preferred stock, net - 27,774
Proceeds from issuance of common stock, net 292,645 94,442
Payments on notes payable (287) (1,688)
Payments on capital lease obligations (226) (386)
--------- --------
Net cash provided by financing activities 292,132 120,142
Effect of foreign currency translation on cash and cash
equivalents (2) (88)
--------- --------
Net increase in cash 256,295 101,023
--------- --------
Cash balance at beginning of period 51,792 15,138
--------- --------
Cash balance at September 30, $ 308,087 $ 116,161
========== ========
Supplemental disclosures:
Interest paid $ 126 $ 302
========== ========
Noncash investing and financing activities:
Deferred compensation related to stock option grants
and options assumed in business combinations $ 12,821 $ 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 $ 1,789,289 $ 21,151
========== ========
Conversion of convertible preferred stock into
common stock $ -- $ 81,955
========== ========
See notes to condensed consolidated financial statements.
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.
We have 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 our 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.
The calculation of historical basic and diluted net loss per share
is as follows (in thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
Historical:
Net loss $ (60,646) $ (10,356) $ (147,438) $ (34,493)
Preferred stock accretion -- -- -- (469)
--------- --------- ---------- ---------
Loss applicable to common stockholders $ (60,646) $ (10,356) $ (147,438) $ (34,962)
Weighted average shares of common stock
outstanding 167,089 65,124 159,219 43,434
Less: Weighted average shares that may be
repurchased (1,552) (2,640) (1,818) (1,608)
--------- --------- ---------- ---------
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share 165,537 62,484 157,401 41,826
========= ========= ========== =========
Basic and diluted net loss per share $ (0.37) $ (0.17) $ (0.94) $ (0.84)
========= ========= ========== =========
3. STOCKHOLDERS' EQUITY
Stock Split
On March 13, 2000, our 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 nine months ended September 30, 2000 and 1999 were as follows (in
thousands):
Three months ended Nine months ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Net loss $(60,646) $(10,356) $(147,438) $(34,493)
Unrealized loss on investments (431) -- (661) --
Foreign currency translation adjustment 82 (43) 288 (88)
--------- -------- ---------- --------
Comprehensive loss $(60,995) $(10,399) $(147,811) $(34,581)
======== ======== ========= ========
5. ACQUISITIONS
On September 13, 2000, we acquired publicly traded AppNet, Inc.
(APNT), a premier provider of end-to-end Internet professional services. The
acquisition was structured as a tax-free, stock-for-stock exchange and has
been accounted for as a purchase transaction. The purchase consideration was
approximately $1.647 billion consisting of 27,887,000 shares of common stock
with a fair value of $1.629 billion and assumed options to acquire 7,231,304
shares of common stock with a fair value of $363.1 million. We may also be
required to issue approximately 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
was allocated to other intangible assets, including assembled workforce ($28.0
million), customer contracts and backlog ($11.9 million), internal proprietary
software ($3.5 million) and covenant not-to-compete ($2.3 million), a total of
approximately $169.2 million was allocated to deferred compensation and a total
of approximately $1.393 billion of the purchase consideration was allocated to
goodwill with these amounts being amortized over periods of one to three years.
On January 7, 2000, we 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 Systems 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
We have made several strategic investments in privately held companies.
We hold less than a 20% interest in each of these companies and do not have a
significant influence over these 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 for the sharing of revenues generated by the GM
TradeXchange, the issuance of up to 28.8 million shares of our common stock
to GM, the restructuring of Commerce One into a holding company and other
related matters. 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.
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 beginning on page 15.
8. NEW ACCOUNTING PRONOUNCEMENTS
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. All registrants are expected to apply the
accounting and disclosures described in SAB 101, and any changes resulting
from SAB 101 must be reported as a change in accounting principle in the
quarter ending December 31, 2000. The adoption of SAB 101 will not have a
material effect on our financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (Statement 133). Statement 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. In June 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133," which amended Statement No. 133 by deferring the
effective date to the fiscal year beginning after June 30, 2000. In June
2000, the FASB issued Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an Amendment to FASB Statement
No. 133" which amended Statement 133 with respect to four specific issues. We
are required to adopt Statement 133 as amended, for the year ending December
31, 2001. We do not expect that the adoption of Statement 133 will have a
material effect on our consolidated financial position or results of
operations.
We adopted Statement of Position 97-2, "Software Revenue Recognition"
(SOP 97-2) and Statement of Position 98-4 "Deferral of the Effective Date of
a Provision of SOP 97-2, Software Revenue Recognition" (SOP 98-4) as of
January 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for recognizing
revenue on software transactions and supersede Statement of Position 91-1,
"Software Revenue Recognition". The adoption of SOP 97-2 and SOP 98-4 did not
have a material impact on our consolidated financial results.
In December 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions" (SOP
98-9). SOP 98-9 amends S0P 98-4 to extend the deferral of the application of
certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years
beginning after March 15, 1999. The adoption of SOP 98-9 did not have a
material impact on our consolidated financial results.
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.
Source of Revenues
We generate revenues from multiple sources. License fees are generated
from licensing our BUYSITE, MARKETSITE, NET MARKET MAKER, auction and content
management software products to end-user organizations, primarily Fortune 1000
enterprises and major international enterprises. Professional service fees are
received from BUYSITE, MARKETSITE, NET MARKET MAKER and auction 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, the MARKETSITE, the NET MARKET MAKER
and/or the auction products that are licensed to certain customers. Revenue
sharing is received from partners who have licensed the BUYSITE, MARKETSITE, NET
MARKET MAKER 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 September 18, 2000 we finalized our 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 issued 5,059,546 shares of
our common stock to SAP for an aggregate purchase price of $250 million.
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
for the sharing of
revenues generated by the GM TradeXchange, the issuance of up to 28.8 million
shares of our common stock to GM, the restructuring of Commerce One into a
holding company and other related matters. 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.
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 beginning on page 15.
Acquisition of AppNet, Inc.
On September 13, 2000, we acquired publicly traded AppNet, Inc.
(APNT), a premier provider of end-to-end Internet professional services. The
acquisition was structured as a tax-free, stock-for-stock exchange and has
been accounted for as a purchase transaction. The purchase consideration was
approximately $1.647 billion consisting of 27,887,000 shares of common stock
with a fair value of $1.629 billion and assumed options to acquire 7,231,304
shares of common stock with a fair value up to $363.1 million. We may also be
required to issue approximately an additional 274,000 shares of common stock
in connection with contingent consideration obligations from previous
acquisitions by AppNet.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue
Total revenues for the three months ended September 30, 2000,
increased to approximately $112.7 million compared to $10.4 million in the
three months ended September 30, 1999. In the three months ended September
30, 2000, no customers accounted for more than 10% of our revenue and in the
three months ended September 30, 1999, three customers, Singapore
Telecommunications, British Telecommunications and Siemens, accounted for
36%, 17% and 11% of our revenue, respectively.
License revenues for the three months ended September 30, 2000,
increased to approximately $65.9 million compared to $7.8 million in the three
months ended September 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 $46.8 million for the three months ended September 30, 2000,
compared to $2.6 million for the three months ended September 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, was approximately $39.5 million in the three months ended September 30,
2000, compared to $4.8 million in the three months ended September 30, 1999.
Cost of services, which primarily consists of consulting, customer
support and training costs, was $37.6 million compared to $9.3 million in the
three months ended September 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 and to a lesser degree,
personnel related expenses resulting from the acquisition of AppNet on September
13, 2000.
Cost of license fees for the three months ended September 30, 2000 of
$1.9 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 $50.0 million and $9.4 million for the three months ended
September 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 at September 30, 2000 increased to 535
from 117 at September 30, 1999. This increase includes 64 employees added in
connection with the AppNet acquisition. The increase in expense 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 $26.7 million and $5.4 million, for the three months
ended September 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, MARKETSITE,
NET MARKET MAKER and auction products and other strategic initiatives. The
overall number of employees engaged in product development was 445 at September
30, 2000 and 150 at September 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 $11.2 million
and $1.2 million for the three months ended September 30, 2000 and 1999,
respectively. The increase was primarily attributable to an increase in
personnel related expenses and additional legal costs associated with our portal
joint ventures. The number of employees engaged in general and administrative
functions increased to 490 at September 30, 2000 from 28 at September 30, 1999.
This increase includes 254 employees added in connection with the AppNet
acquisition. We expect general and administrative expenses to increase in future
periods.
Amortization of Deferred Stock Compensation
Amortization of deferred stock compensation totaled approximately $4.5
million and $0.5 million in the three months ended September 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, Mergent and to a lesser degree,
AppNet, 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 $43.3 million
for the three months ended September 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, Mergent
Systems in January 2000 and AppNet in September 2000.
We expect to incur quarterly charges through September 2003 to
amortization of goodwill and other intangible assets, from Veo Systems, Commerce
Bid, Mergent Systems and AppNet of approximately $146.0 million a quarter
related to these acquisitions. After September 2003, we expect to incur
quarterly charges of approximately $8.0 million to amortization of goodwill and
other intangible assets, from the Veo Systems, Inc, Commerce Bid and Mergent
Systems acquisitions. In the event of future acquisitions, we anticipate the
amortization of goodwill and other intangible assets will increase.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue
Total revenues for the nine months ended September 30, 2000,
increased to approximately $210.4 million compared to $16.7 million in the
nine months ended September 30, 1999. In the nine months ended September 30,
2000, no customers accounted for more than 10% of our revenue and in the nine
months ended September 30, 1999, two customers, Singapore Telecommunications
and British Telecommunications, accounted for 38% and 10% of our revenue,
respectively.
License revenues for the nine months ended September 30, 2000,
increased to approximately $134.0 million compared to $11.5 million in the nine
months ended September 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 $76.4 million for the nine months ended September 30, 2000,
compared to $5.2 million for the nine months ended September 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 was approximately $72.7 million in the nine months
ended September 30, 2000, compared to $9.5 million in the nine months ended
September 30, 1999.
Cost of services was $68.7 million compared to $9.3 million in the nine
months ended September 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 and to a lesser degree, personnel related
expenses resulting from the acquisition of AppNet on September 13, 2000.
Cost of license fees for the nine months ended September 30, 2000 of
$4.0 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 were approximately $100.4 million and
$19.8 million for the nine months ended September 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 at September 30, 2000 increased to 535 from 117 at September 30, 1999.
This increase includes 64 employees added in connection with the AppNet
acquisition. The increase in expense in 2000 was also attributable to increased
commission expense, travel related expense resulting from increased sales
activity and allocated overhead expenses.
Product Development Expenses
Product development expenses were approximately $61.6 million and $12.3
million, for the nine months ended September 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 445 at September
30, 2000 and 150 at September 30, 1999.
General and Administrative Expenses
General and administrative expenses were approximately $20.6 million
and $3.0 million for the nine months ended September 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 490 at September 30, 2000 from 28 at September 30, 1999.
This increase includes 254 employees added in connection with the AppNet
acquisition.
Purchased In-Process Development
On January 7, 2000, we 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 Systems 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 nine months ended
September 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 Systems. The calculation of
value was then adjusted to reflect only the value creation efforts of Mergent
Systems prior to the close of the acquisition. At the time of the acquisition,
the product was approximately 75% 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 $12.8
million and $1.8 million in the nine months ended September 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, Mergent Systems and to a lesser degree, AppNet, as
well as certain options granted to employees of CommerceBid and Mergent Systems
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 $87.7 million
for the nine months ended September 30, 2000 which was attributable to the
amortization of goodwill and other purchased intangible assets resulting from
the acquisitions of Veo Systems and CommerceBid during 1999, Mergent Systems in
January 2000 and AppNet in September 2000.
We expect to incur quarterly charges through September 2003 to
amortization of goodwill and other intangible assets, from Veo Systems, Commerce
Bid, Mergent Systems and AppNet, of approximately $146.0 million a quarter
related to these acquisitions. After September 2003, we expect to incur
quarterly charges of approximately $8.0 million to amortization of goodwill and
other intangible assets, from the Veo Systems, Inc, Commerce Bid and Mergent
Systems 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.
Net cash provided by operating activities totaled approximately
$10.4 million for the nine months ended September 30, 2000 as compared to net
cash used in operating activities of approximately $9.5 million in the nine
months ended September 30, 1999. Cash provided by operating activities for
the nine months ended September 30, 2000 resulted primarily from the net
losses in the respective quarters which was offset by an increase in deferred
revenue as well as the amortization of goodwill and other intangible assets
associated with the acquisitions of VEO Systems, CommerceBid, Mergent Systems
and AppNet, and purchased in-process research and development associated with
the acquisition of Mergent Systems. Net cash used in operating activities for
the nine months ended September 30, 1999 resulted primarily from the net loss
in the respective quarters partially offset by deferred revenue and the
amortization of goodwill and deferred compensation and purchased in-process
research and development associated with the VEO Systems acquisition.
Net cash used in investing activities totaled approximately $46.3
million for the nine months ended September 30, 2000 as compared to
approximately $9.6 million for the nine months ended September 30, 1999. The
use in the current period resulted from the acquisition of capital assets,
primarily computer and office equipment. Net cash used in investing
activities during the nine months ended September 30, 1999 resulted from the
purchase of property and equipment and note receivables from stockholders. We
anticipate an increase in our capital expenditures consistent with
anticipated growth in operations, infrastructure and personnel.
Net cash provided by financing activities totaled approximately $292.1
million for the nine months ended September 30, 2000 as compared to
approximately $120.1 million provided by financing activities in the nine months
ended September 30, 1999. The cash provided in the nine months ended September
30, 2000 resulted primarily from the investment made pursuant to our partnership
with SAP, AG of $250 million, as well as proceeds from the issuance of common
stock upon the exercise of employee stock options. The cash provided in the nine
months ended September 30, 1999 resulted from proceeds from the issuance of
preferred stock and common stock upon the exercise of employee stock options.
As of September 30, 2000, our principal sources of liquidity included
approximately $354.7 million of cash, cash equivalents and short-term
investments.
We believe that our available cash resources 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 PRONOUNCEMENTS
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. All registrants are expected
to apply the accounting and disclosures described in SAB 101, and any changes
resulting from SAB 101 must be reported as a change in accounting principle
in the quarter ending December 31, 2000. The adoption of SAB 101 will not
have a material effect on our financial statements.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" (Statement 133). Statement 133
establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. In June 1999, the FASB issued Statement No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133," which amended Statement No. 133 by deferring the
effective date to the fiscal year beginning after June 30, 2000. In June
2000, the FASB issued Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an Amendment to FASB Statement
No. 133" which amended Statement 133 with respect to four specific issues. We
are required to adopt Statement 133 as amended, for the year ending December
31, 2001. We do not expect that the adoption of Statement 133 will have a
material effect on our consolidated financial position or results of
operations.
We adopted Statement of Position 97-2, "Software Revenue Recognition"
(SOP 97-2) and Statement of Position 98-4 "Deferral of the Effective Date of
a Provision of SOP 97-2, Software Revenue Recognition" (SOP 98-4) as of
January 1, 1998. SOP 97-2 and SOP 98-4 provide guidance for recognizing
revenue on software transactions and supersede Statement of Position 91-1,
"Software Revenue Recognition". The adoption of SOP 97-2 and SOP 98-4 did not
have a material impact on our consolidated financial results.
In December 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions" (SOP
98-9). SOP 98-9 amends S0P 98-4 to extend the deferral of the application of
certain passages of SOP 97-2 provided by SOP 98-4 through fiscal years
beginning after March 15, 1999. The adoption of SOP 98-9 did not have a
material impact on our consolidated financial results.
RISK FACTORS
This Form 10-Q and the documents incorporated by reference into this
Form 10-Q contain forward-looking statements within the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 with
respect to our financial condition and results of operations and business.
Statements 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 regarding our agreements with General
Motors, Ford and DaimlerChrysler concerning the establishment of an
electronic exchange for the automotive industry, the establishment of other
exchanges, the growth of our business and related matters. These
forward-looking statements are based upon current expectations, and are not
guarantees of future performance and are subject to risks and uncertainties
that could cause actual results to differ materially from the results
contemplated by 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 filings with
the Securities and Exchange Commission incorporated by reference into this
Form 10-Q. An investment in our common stock involves a high degree of risk.
In evaluating our stock, you should carefully consider the discussion of risk
and uncertainties below.
WE HAVE A LIMITED OPERATING HISTORY, A HISTORY OF LOSSES AND HAVE YET TO
ACHIEVE PROFITABLE.
We 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
$147.4 million for the nine months ended September 30, 2000. As of September 30,
2000, we had an accumulated deficit of $250.0 million.
In addition, we have a limited operating history that makes it
difficult to forecast our future operating results. We expect to continue to
substantially increase our sales and marketing, product development and general
and administrative expenses and experience increased costs associated with the
issuance of equity securities and the amortization of intangible assets as a
result of our recent acquisition of AppNet, Inc., a provider of end-to-end
Internet professional services, and other transactions. As a result, we will
need to generate significant additional revenues to achieve and maintain
profitability in the future. Although our revenues have grown in recent
quarters, we cannot be certain that such growth will continue or that we will
achieve sufficient revenues for profitability.
THE QUARTERLY FINANCIAL RESULTS OF COMPANIES IN OUR INDUSTRIES ARE PRONE TO
SIGNIFICANT FLUCTUATIONS AND THIS COULD CAUSE OUR STOCK PRICE TO FALL.
We believe that quarter-to-quarter comparisons of our revenues and
operating results are not necessarily meaningful, and that such comparisons
may not be accurate indicators of future performance. The operating results
of companies in the electronic commerce industry have in the past experienced
significant quarter-to-quarter fluctuations which may adversely affect us. As
with other companies in this industry, our operating expenses, which include
sales and marketing, product development, general and administrative
expenses and amortization of intangible assets and deferred stock
compensation, are based on our expectations of future revenues and are
relatively fixed in the short term. Our fixed expenses will increase
substantially as a result of our recent acquisition of AppNet, whose former
business now largely makes up the business of our Global Services division.
Further, our revenues will decline if AppNet's existing agreements with
clients, which are now administered by Global Services, are terminated before
engagements can be completed, of if Global Services is unable or otherwise
does not enter into new engagements. If our revenues for a quarter fall below
our expectations and we are not able to quickly reduce spending in response,
our operating results for that quarter would be harmed. It is likely that in
some future quarter our operating results may be below the expectations of
public market analysts and investors and, as a result, the price of our
common stock may fall.
OUR FUTURE SUCCESS DEPENDS UPON OUR GLOBAL TRADING WEB PARTNERS DEVELOPING AND
OPERATING SUCCESSFUL E-MARKETPLACES.
We have established strategic relationships with various companies
that have licensed our Buysite and MarketSite products in order to create
e-marketplaces. We cannot assure you that these companies will be able to
implement our products and services effectively, that they will develop and
launch e-marketplaces or that buyers and suppliers will participate in their
e-marketplaces. These companies may encounter delays in launching their
e-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 our technology
architecture is designed to support the development of trading communities
that can operate with each other, these marketplaces may not in fact operate
with each other. If these or any other e-marketplaces are not successful, our
business, operating results and financial condition will suffer.
IF OUR JOINT PRODUCT DEVELOPMENT RELATIONSHIPS ARE NOT SUCCESSFUL OUR
BUSINESS COULD SUFFER.
We have entered into relationships with various companies to jointly
develop new software products. In particular, we recently entered into an
agreement 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:
- operating 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.
We cannot assure you that these joint development and marketing
relationships will lead to successful new products, greater market penetration
or increased revenues for us.
THE DEVELOPMENT OF LARGE, INDUSTRY OR GEOGRAPHICALLY SPECIFIC MARKETPLACES OR
EXCHANGES ENTAILS CERTAIN RISK FOR US.
Many of the e-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
Covisint, an exchange owned primarily by General Motors, Ford and
DaimlerChrysler. The development of these large trading exchanges will entail
significant risks for us. These risks include:
- the diversion of a significant portion of our 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 we are not able to manage these risks,
our business, results of operations and financial condition will suffer.
In addition, the establishment and operation of these exchanges may
raise issues under U.S. and foreign antitrust laws. To the extent that U.S. or
foreign antitrust regulators take adverse action or establish rules or
regulations with respect to the proposed exchange or business-to-business
e-commerce exchanges in general, the establishment and growth of such exchanges
may be delayed. Our revenues may suffer as a result.
BECAUSE OUR INDUSTRY IS HIGHLY COMPETITIVE AND HAS LOW BARRIERS TO ENTRY, WE
CANNOT ASSURE YOU THAT WE WILL BE ABLE TO COMPETE EFFECTIVELY.
The market for Internet-based, business-to-business electronic commerce
solutions is extremely competitive. We expect competition to intensify as
current competitors expand their product offerings and new competitors enter the
market. Because there are relatively low barriers to entry in the electronic
commerce market, competition from other established and emerging companies may
develop in the future. In addition, our customers and partners may become
competitors in the future. Increased competition is likely to result in price
reductions, lower average sales prices, reduced margins, longer sales cycles and
a decrease or loss of our market share, any of which could harm our business,
operating results or financial condition.
Our competitors include Ariba, Freemarkets, i2, Oracle, PurchasePro,
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 our market. Many
of our competitors have, and new potential competitors may have, more experience
developing Internet-based software and end-to-end purchasing solutions, larger
technical staffs, larger customer bases, more established distribution channels
and customer relationships, greater brand recognition and greater financial,
marketing and other resources than we have. In addition, competitors may be able
to develop products and services that are superior to our products and services,
that achieve greater customer acceptance or that have significantly improved
functionality as compared to our existing and future products and services. The
business-to-business electronic commerce solutions offered by competitors may be
perceived by buyers and suppliers as superior to ours.
Our Global Services division, whose business is largely the former
business of AppNet, faces intense and growing competition in the professional
services market. Its 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 its 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. Global Services' 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 its business. Global
Services 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.
WE MAY NOT BE ABLE TO HIRE AND RETAIN SUFFICIENT SALES, MARKETING, SERVICES AND
TECHNICAL PERSONNEL THAT WE NEED TO SUCCEED BECAUSE THESE PERSONNEL ARE LIMITED
IN NUMBER AND IN HIGH DEMAND.
If we fail to hire and retain sufficient numbers of sales, marketing,
services and technical personnel, our business, operating results and financial
condition will be harmed. Competition for qualified sales, marketing, services
and technical personnel is intense as these personnel are in limited supply, and
we may not be able to hire and retain sufficient numbers of such personnel to
grow our business. We need to substantially expand our sales operations and
marketing efforts, both domestically and internationally, in order to increase
market awareness and sales of our BuySite and MarketSite products and the
related services that we offer. We will also need to significantly increase our
technical and services staff to support the growth of our business and our
increasing commitments to other parties. In particular, we will need to hire a
significant number of
technical personnel with various skill sets to establish and operate the
large industry specific exchanges. Although we increased the size of our
technical and services staff through the acquisition of AppNet, these
employees may not remain with our organization in the future.
In addition, the market price of our common stock has fluctuated
substantially since its initial public offering in July 1999. Consequently,
potential employees may perceive our 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 with our organization. In that case, our
ability to attract employees will be adversely affected. Furthermore, a
substantial portion of the equity incentives previously granted to AppNet's
officers accelerated and became substantially vested upon the closing of the
acquisition. New options granted to these officers or other employees of AppNet
at the current market price of our common stock may not be sufficient to retain
these employees. Finally, should our stock price substantially decline, the
retention value of stock options granted since our initial public offering will
decline and our employees may choose not to remain with our organization.
WE MAY NOT BE ABLE TO EFFECTIVELY REDEPLOY APPNET'S PROFESSIONAL SERVICES
PERSONNEL INTO OUR BUSINESS.
We intend to gradually redeploy certain of AppNet's professional
services personnel from AppNet's historical business to our business, both
through Commerce One Global Services and our wider organization. In order for
this redeployment to be successful, we will need to retain these personnel,
incentivize them to work in our business and train many of them to implement
our MarketSite and BuySite products and build customized services for our
e-marketplaces. Further, as we shift personnel from AppNet's historical
business to our business, we may realize decreasing revenues from AppNet's
business. The revenues that we realize from redeploying these personnel to
our business may be less than the revenues generated from their activities at
AppNet. The redeployment of these personnel may also be expensive. We may not
be able to successfully redeploy these personnel and a failed redeployment
may have a material adverse effect on our business, results of operations or
financial condition.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN RECENT PERIODS AND FAILURE TO MANAGE
THIS GROWTH COULD STRAIN OUR MANAGEMENT AND OTHER RESOURCES.
Our ability to successfully offer products and services and implement
our business plan in a rapidly evolving market requires an effective planning
and management process. Future expansion efforts could be expensive and put a
strain on management and resources. We have increased, and plan to continue to
increase, the scope of our operations at a rapid rate. Our headcount has grown
and will continue to grow substantially. At September 30, 2000, we had a total
of 3,216 employees, including the addition of 1,454 employees as a result of the
AppNet acquisition, and at December 31, 1999 we had a total of 594 employees. In
addition, we expect to continue to hire a significant number of new employees in
the near future. To manage future growth effectively, we must maintain and
enhance our financial and accounting systems and controls, integrate new
personnel and manage expanded operations. We may not be able to do this
effectively.
WE MAY NOT BE ABLE TO INTEGRATE ACQUISITIONS INTO OUR BUSINESS EFFECTIVELY.
As part of our business strategy, we have made and expect to continue
to make acquisitions of businesses that offer complementary products, services
and technologies such as our recent acquisition of AppNet, a provider of
end-to-end Internet professional services. We have limited experience acquiring
businesses, and may not acquire such businesses on favorable terms or be able to
integrate such organizations into our business successfully. Our acquisitions
are and will be accompanied by the risks commonly encountered in acquisitions of
businesses, including, among other things:
- the possibility that we pay more than the acquired business is worth;
- the difficulty of integrating the operations and personnel of the
acquired business into our business;
- the difficulty of integrating service and product offerings;
- the difficulty of integrating technology, back office, accounting and
financial systems;
- the potential disruption of our ongoing business;
- the distraction of management from our business;
- the inability of management to maximize our financial and strategic
position; and
- the impairment of relationships with, and difficulty of retaining,
employees and customers.
Further, our acquisitions and investments may have financial
consequences such as:
- potentially dilutive issuances of equity securities;
- one-time write-offs;
- incurrence of contingent liabilities; and
- increased net loss resulting from the purchase method of accounting for
acquisitions, such as that of AppNet, pursuant to which we incur
amortization expenses related to goodwill, other intangible assets,
and deferred stock compensation.
These risks could have a material adverse effect on our business,
financial condition and results of operations.
OUR LENGTHY SALES CYCLE COULD CAUSE DELAYS IN REVENUE GROWTH.
The period between our initial contact with a potential customer and
the purchase of our products and services is often long and may have delays
associated with the lengthy budgeting and approval process of our customers.
Historically, our typical sales cycle has been approximately three to six months
and potentially longer in the case of larger, industry-focused exchanges. This
lengthy cycle could have a negative impact on the timing of our revenues,
especially our realization of any transaction-based revenues.
We believe that a customer's decision to purchase our products and
services is discretionary, involves a significant commitment of resources, and
is influenced by customer budgetary cycles. To successfully sell our products
and services, we generally must educate potential customers regarding the use
and benefit of our products and services, which can require significant time and
resources. Many of our potential customers are large enterprises that generally
take longer to make significant business decisions.
OUR FUTURE REVENUES DEPEND UPON OUR ABILITY TO INCREASE BUSINESS SERVICE AND
TRANSACTION FEE REVENUE FROM OUR E-MARKETPLACES.
To date, we have derived a substantial portion of our revenues from
licensing our 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 our revenues from business services has grown recently, our
transaction-based revenue has been immaterial to date. Our business model calls
for a significant portion of our revenues in the future to be derived from
business services and transaction based fees. If such revenues do not
materialize, our business will suffer.
OUR CUSTOMER BASE IS CONCENTRATED AND OUR SUCCESS DEPENDS IN PART ON OUR ABILITY
TO RETAIN EXISTING CUSTOMERS.
In calendar 1999, Toronto Dominion accounted for 21% of our total
revenues, Singapore Telecommunications accounted for 15%, and British
Telecommunications accounted for 11%. In the third quarter of 2000, no
customers accounted for more than 10% of our total revenues. The significant
contribution of these customers to our revenues in the periods described
generally reflects the payment by these customers of large one-time license
fees to us. We do not have long-term contractual commitments from any of our
current customers and our customers may terminate their contracts with us
with little or no advance notice and without significant penalty to them. As
a result, we cannot assure you that any of our current customers will be
customers in future periods. A customer termination would not only result in
lost revenues, but
also the loss of customer references that are necessary for securing future
customers.
IF SUPPLIERS DO NOT PARTICIPATE IN THE E-MARKETPLACES, OUR BUSINESS MAY
BE ADVERSELY AFFECTED.
E-marketplaces will be attractive to suppliers only if a
significant number of buyers are willing to purchase goods and services through
the e-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 e-marketplaces or
join these communities in sufficient numbers to make them successful.
WE DEPEND UPON CONTINUING OUR RELATIONSHIP WITH THIRD-PARTY INTEGRATORS WHO
SUPPORT OUR SOLUTIONS.
Our success depends upon the acceptance and successful integration by
customers and their suppliers of our BuySite and MarketSite products. Our
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. We and our customers will need to continue to rely on
these systems integrators even as we increase the size of our professional
services organization. If large systems integrators fail to continue to support
our solution or commit resources to us, if any of our customers or suppliers are
not able to successfully integrate our solution or if we are unable to
adequately train our existing systems integration partners, our business,
operating results and financial condition could suffer.
OUR STRATEGY OF STRATEGIC RESELLING THROUGH PARTNERS MAY NOT BE SUCCESSFUL.
We have established strategic relationships with companies that resell
our existing BuySite and Marketsite applications to our customers. These
relationships are new and this strategy is unproven. We cannot assure you that
any of these companies, or those we may appoint in the future, will be able to
resell our product solution sets to a sufficient number of customers, or that
those customers will purchase our applications and more importantly, connect
into e-marketplaces. Further, we may encounter disagreements from time
to time with companies concerning the terms of their reseller agreements. To
date, a few of our partners have been unsuccessful in reselling our BuySite
products. If our current or future strategic partners are not able to
successfully resell our BuySite products, our business will suffer.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
Our future success depends upon the continued service of our executive
officers and other key personnel, and none of our current executive officers
other than Jay M. Tenenbaum, our Senior Vice President and Chief Scientist, are
bound by an employment agreement for any specific term. Any of our officers may
leave our organization in the future. In particular, the services of Mark
Hoffman, our Chief Executive Officer, Robert Kimmitt, our President, and Chuck
Donchess, our Executive Vice President and Chief Strategy Officer, would be
difficult to replace. If we lose the services of one or more of our executive
officers or key employees, or if one or more of them decides to join a
competitor or otherwise compete directly or indirectly with us, our business,
operating results and financial condition would be seriously harmed.
WE INTEND TO CONTINUE TO EXPAND OUR INTERNATIONAL OPERATIONS AND THESE EFFORTS
MAY NOT BE SUCCESSFUL IN GENERATING ADDITIONAL REVENUES.
We have generated significant international revenues and are planning
to increase our international operations and sales efforts. However, we may not
be able to continue to increase international revenues and the risks of
international sales and operations may harm us.
International business involves inherent risks, and we anticipate the
risks that may affect us include:
- unexpected changes in regulatory requirements and tariffs that may 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; and
- foreign antitrust regulation.
In addition, we have only limited experience in marketing, selling and
supporting our products and services in foreign countries. This may be more
difficult or take longer than we anticipate especially due to international
problems, such as language barriers or currency exchange issues, and the fact
that the Internet infrastructure in such foreign countries may be less advanced
than the Internet infrastructure in the United States.
OUR MARKET MAY UNDERGO RAPID TECHNOLOGICAL CHANGE AND THIS CHANGE MAY MAKE OUR
PRODUCTS AND SERVICES OBSOLETE OR CAUSE US TO INCUR SUBSTANTIAL COSTS TO ADAPT
TO THESE CHANGES.
If the market for our products and services fails to develop and
grow or we fail to gain acceptance in this market, this failure would harm
our business, operating results and financial condition. Our market is
characterized by rapidly changing technology, evolving industry standards and
frequent new product announcements. To be successful, we must adapt to the
rapidly changing market by continually improving the performance, features
and reliability of our products and services or else our products and
services may become obsolete. We could also incur substantial costs to modify
our products, services or infrastructure in order to adapt to these changes.
Our business, operating results and financial condition could be harmed if we
incur significant costs without adequate results, or are unable to adapt
rapidly to these changes.
SECURITY RISKS OF ELECTRONIC COMMERCE MAY DETER FUTURE USE OF OUR PRODUCTS AND
SERVICES.
A fundamental requirement to conduct Internet-based,
business-to-business electronic commerce is the secure transmission of
confidential information over public networks. Failure to prevent security
breaches of the e-marketplaces, or well publicized security breaches
affecting the Internet in general, could significantly harm our business,
operating results and financial condition. Advances in computer capabilities,
new discoveries in the field of cryptography, or other developments may not be
sufficient to prevent a compromise or breach of the algorithms we use to protect
content and transactions on e-marketplaces or proprietary information
in our databases. Anyone who is able to circumvent our security measures could
misappropriate proprietary, confidential customer information or cause
interruptions in our operations. We may be required to incur significant costs
to protect against security breaches or to alleviate problems caused by
breaches. Further, a well-publicized compromise of security could deter people
from using the Internet to conduct transactions that involve transmitting
confidential information.
Our Global Services division 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. Unauthorized access, computer viruses, or the accidental or
intentional acts of Internet users, current and former employees or others could
jeopardize the security of confidential information and create delays or service
interruptions at the Global Services e-business outsourcing centers. Such
disruptions or breaches in security
could result in liability and in the loss of existing clients or the deterrence
of potential clients.
FAILURE TO EXPAND INTERNET INFRASTRUCTURE COULD LIMIT OUR FUTURE GROWTH.
The recent growth in Internet traffic has caused frequent periods of
decreased performance, and if Internet usage continues to grow rapidly, its
infrastructure may not be able to support these demands and its performance and
reliability may decline. If outages or delays on the Internet occur frequently
or increase in frequency, overall Internet usage, including usage of our
products and services, could grow more slowly or decline. Our ability to
increase the speed and scope of our services to customers is ultimately limited
by and depends upon the speed and reliability of both the Internet and our
customers' internal networks. Consequently, the emergence and growth of the
market for our services depends upon improvements being made to the entire
Internet as well as to its individual customers' networking infrastructures to
alleviate overloading and congestion. If these improvements are not made, the
ability of our customers to utilize our solution will be hindered, and our
business, operating results and financial condition may suffer.
CONTINUED ADOPTION OF THE INTERNET AS A METHOD OF CONDUCTING BUSINESS IS
NECESSARY FOR OUR FUTURE GROWTH.
The market for Internet-based, business-to-business electronic commerce
products is relatively new and is evolving rapidly. Our future revenues and any
future profits depend upon the widespread acceptance and use of the Internet as
an effective medium of business-to-business commerce, particularly as a medium
to perform 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 our business, operating results and
financial condition.
IF WE RELEASE PRODUCTS CONTAINING DEFECTS, WE MAY NEED TO HALT FURTHER SHIPMENTS
UNTIL WE FIX THE DEFECTS, AND OUR BUSINESS AND REPUTATION MAY BE HARMED.
Products as complex as ours 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 we attempt to resolve all errors
that we believe would be considered serious by our customers before shipment to
them, our products are not error-free. These errors or performance problems
could result in lost revenues or delays in customer acceptance and would be
detrimental to our business and reputation. In the past, defects in our 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 our existing or future products may be discovered in
the future and known errors currently considered minor may in the future be
considered serious by our customers. Any delays in releasing new products, due
to defects, the need for further enhancements or otherwise, could adversely
affect our revenues.
IF OUR POTENTIAL CUSTOMERS ARE NOT WILLING TO SWITCH TO OR ADOPT OUR ELECTRONIC
COMMERCE SOLUTION, OUR GROWTH AND REVENUES WILL BE LIMITED.
The failure to generate a large customer base would harm our growth and
revenues. This failure could occur for several reasons. Some of our
business-to-business electronic commerce competitors charge their customers
large fees upon the execution of customer agreements. Businesses that have made
substantial up-front payments to our competitors for electronic commerce
solutions may be reluctant to replace their current solution and adopt our
solution. As a result, our efforts to create a larger customer base may be more
difficult than expected even if it is deemed to offer products and services
superior to those of our competitors. Further, because the business-to-business
electronic commerce market is new and
underdeveloped, potential customers in this market may be confused or uncertain
about the relative merits of each electronic commerce solution or which
electronic commerce solution to adopt, if any. Confusion and uncertainty in the
marketplace may inhibit customers from adopting our solution, which could harm
our business, operating results and financial condition.
IF THIRD PARTIES CLAIM THAT WE INFRINGE UPON THEIR INTELLECTUAL PROPERTY, OUR
ABILITY TO USE CERTAIN TECHNOLOGIES AND PRODUCTS COULD BE LIMITED AND WE MAY
INCUR SIGNIFICANT COSTS TO RESOLVE THESE CLAIMS.
Litigation regarding intellectual property rights is common in the
Internet and software industries. We expect third-party infringement claims
involving Internet technologies and software products and services to increase.
If an infringement claim is filed against us, we may be prevented from using
certain technologies and may incur significant costs to resolve the claim.
We have in the past received letters suggesting that we are infringing
the intellectual rights of others and we may from time to time encounter
disputes over rights and obligations concerning intellectual property. Although
we believe that our intellectual property rights are sufficient to allow us to
market our existing products without incurring liability to third parties, our
products and services may be found to infringe on the intellectual property
rights of third parties.
In addition, we have agreed, and may agree in the future, to indemnify
customers against claims that our products infringe upon the intellectual
property rights of others. We could incur substantial costs in defending
ourselves and our customers against infringement claims. In the event of a claim
of infringement, we and our customers may be required to obtain one or more
licenses from third parties. We or our customers may not be able to obtain
necessary licenses from third parties at a reasonable cost or at all.
FAILURE TO PROTECT INTELLECTUAL PROPERTY RIGHTS OR MAINTAIN RIGHTS TO USE
LICENSED INTELLECTUAL PROPERTY COULD HAVE ADVERSE EFFECTS.
In connection with its e-business professional services, our Global
Services division develops intellectual property for its clients. Global
Services 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. Global
Services 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 Global Services by its clients or other third parties could have
a material adverse effect on it.
BECAUSE THE PROTECTION OF OUR PROPRIETARY TECHNOLOGY IS LIMITED, OUR PROPRIETARY
TECHNOLOGY COULD BE USED BY OTHERS.
Our success depends, in part, upon our proprietary technology and other
intellectual property rights. To date, we have relied primarily on a combination
of copyright, patent, trade secret, and trademark laws, and nondisclosure and
other contractual restrictions on copying and distribution to protect our
proprietary technology. We have no issued patents to date. We may not be able to
protect our intellectual property rights adequately in the United States or
abroad.
Furthermore, litigation may be necessary to enforce our intellectual
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Such litigation could result in substantial costs
and diversion of resources and could harm our business, operating results and
financial condition.
WE MAY NOT HAVE ADEQUATE BACK-UP SYSTEMS, AND A DISASTER COULD DAMAGE OUR
OPERATIONS.
We currently do not have a disaster recovery plan in effect and do not
have fully redundant systems for service at an alternate site. A disaster could
severely harm our business because our service could be interrupted for an
indeterminate length of time. Our operations depend upon our ability to maintain
and protect our computer systems in our principal facilities in Pleasanton,
Santa Clara, Mountain View and Cupertino, California, which exist on or near
known earthquake fault zones. We also depend upon third parties to host most of
its e-marketplaces and some of these third parties are also located in
the same earthquake fault zones. Although these systems are designed to be fault
tolerant, they are vulnerable to damage from fire, floods, earthquakes, power
loss, telecommunications failures and similar events.
In the event our Global Services division's hardware malfunctions and
its back-up systems fail, it may not be able to maintain its standard of service
to its customers. If Global Services 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.
WE MAY HAVE POTENTIAL LIABILITY TO CLIENTS WHO ARE DISSATISFIED WITH OUR
PROFESSIONAL SERVICES.
We 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 our business, financial
condition or results of operations. Clients who are not satisfied with these
services could bring claims against us for substantial damages. Any claims
asserted could exceed the level of our insurance. There can be no assurance that
the insurance we carry 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 our business, financial condition or results
of operations.
ADDITIONAL GOVERNMENT REGULATIONS MAY INCREASE OUR COSTS OF DOING BUSINESS.
The laws governing Internet transactions remain largely unsettled. The
adoption or modification of laws or regulations relating to the Internet could
harm our business, operating results and financial condition by increasing our
costs and administrative burdens. It may take years to determine whether and how
existing laws such as those governing antitrust, intellectual property, privacy,
libel, consumer protection and taxation apply to the Internet.
Laws and regulations directly applicable to communications or commerce
over the Internet are becoming more prevalent. We must comply with new
regulations in both Europe and the United States, as well as any other
regulations adopted by other countries where we may do business. The growth and
development of the market for online commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad, as
well as new laws governing the taxation of Internet commerce. Compliance with
any newly adopted laws may prove difficult and may harm our business, operating
results and financial condition.
INTERNET RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY MAY
DEPRESS OUR STOCK PRICE.
The stock market and specifically the stock prices of Internet related
companies have been very volatile. This volatility is often not related to the
operating performance of the companies. This broad market volatility and
industry volatility may reduce the price of our common stock, without regard to
our operating performance. Due to this volatility, the market price of our
common stock could significantly decrease at any time.
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 September 30, 2000, we had cash, highly liquid investments and
short-term investments of approximately $354.7 million, compared to $116.2
million at September
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 September 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, we issued 3,851,233
shares of our Common Stock to SAP AG for an aggregate purchase price of $175
million. On September 18, 2000, we issued an additional 1,208,313 shares of
our Common Stock to SAP AG for an aggregate purchase price of $75 million.
Both issuances were exempt from registration pursuant to Section 4(2) of 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 transactions were conducted.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.21+ Strategic Alliance Agreement, dated September 18,
2000, by and between Commerce One, Inc., SAP AG and
SAP Markets, Inc.
10.22 Senior Management Agreement, dated June 20, 2000, by
and Between Commerce One, Inc. and Ken S. Bajaj
27.1 Financial Data Schedule
+ The registrant is seeking confidential treatment of certain portions of this
exhibits from the Commission. The omitted portions have been separately filed
with the Commission.
(b) Reports on Form 8-K
The following reports where filed on Form 8-K during the three months
ended September 30, 2000:
FORM FILING DATE EVENT REPORTED
8-K 9/28/00 Agreement and Plan
of Reorganization and
Merger, dated June 20, 2000
by and among Commerce One,
Inc., Constitution
Acquisition Corporation and
AppNet, Inc.
8-K 7/31/00 Agreement and Plan of Reorganization and
Merger, dated June 20, 2000 by and among
Commerce One, Inc., Constitution
Acquisition Corporation and AppNet, Inc.
And related Financial Statements
8-K 7/26/00 Request for information regarding the
proposed automotive exchange among
Commerce One, Inc., General Motors,
Ford, DaimlerChrysler and certain other
Companies was made by the Federal Trade
Commission and Antitrust Division of the
Department of Justice
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: November 14, 2000 /s/ Peter F. Pervere
---------------------------------
Peter F. Pervere
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
Dated: November 14, 2000 /s/ Mark B. Hoffman
---------------------------------
Mark B. Hoffman
Chief Executive Officer and
Chairman of the Board (Principal
Executive Officer)