** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

** **
| **(MARK ONE)** |   |                                                                                      |
|----------------|--------|-------------------------------------------------------------------------------------------|
|           |   |                                                                                      |
| **ý**     |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the fiscal year ended December 31,2002**

 

**OR**

** **
| **o** |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------|-----------------------------------------------------------------------------------------------|

 

**FOR THE TRANSITION PERIODFROM            TO            **

 

**Commission file number 000-26453**

 

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**COMMERCE ONE, INC.**

(Exact name ofRegistrant as Specified in its Charter)

 
| **Delaware**                                                               |   | **94-3392885**                           |
|----------------------------------------------------------------------------|--------|------------------------------------------|
| (State or  Other Jurisdiction of Incorporation or Organization)            |   | (I.R.S.  Employer Identification Number) |
|                                                                       |   |                                     |
| **4440 Rosewood Drive**                                                    |
| **Pleasanton, CA 94588**                                                   |
| (Address of  Principal Executive Offices including Zip Code)               |
|                                                                       |   |                                     |
| **(925) 520-6000**                                                    |
| (Registrant’s  Telephone Number, Including Area Code)                 |
|                                                                       |   |                                     |
| Securities  registered pursuant to Section 12(b) of the Act: **None** |
|                                                                       |
| Securities  registered pursuant to Section 12(g) of the Act:          |
| **Common Stock, $0.001 par value** (title of  class)                       |

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes ý  No o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of Registrant’s knowledge, indefinitive proxy or information statements incorporated by reference inPart III of this Form 10-K, or any amendment to thisForm 10-K. o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes ý  No o

 

The aggregate market value of voting stockheld by non-affiliates of the registrant as of June 30, 2002 was $86,865,000based upon the last sales price reported for such date on The Nasdaq StockMarket’s National Market. For purposes of this disclosure, shares of CommonStock held by persons who hold more than 5% of the outstanding shares of CommonStock and shares held by officers and directors of the registrant, have beenexcluded in that such persons may be deemed to be affiliates. Thisdetermination is not necessarily conclusive.

 

As of March 3, 2002, there were 29,276,716shares of the registrant’s Common Stock outstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

The registrant has incorporated by referenceinto Part III of this Form 10-K portions of its proxy statement forthe registrant’s Annual Meeting of Stockholders to be held on May 28,2003.

 

 

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**COMMERCE ONE, INC.**

**ANNUAL REPORT ON FORM 10-K**

 

**INDEX**

 
| **Part I.**        |                                                                                            |
|--------------------|-------------------------------------------------------------------------------------------------|
| Item 1.            | Description of Business                                                                         |
| Item 2.            | Description of Property                                                                         |
| Item 3.            | Legal Proceedings                                                                               |
| Item 4.            | Submission of Matters to a Vote of Security  Holders                                            |
| **Part II.**       |                                                                                            |
| Item 5.            | Market for the Registrant’s Common Stock  and Related Stockholder Matters                  |
| Item 6.            | Selected Financial Data                                                                         |
| Item 7.            | Management’s Discussion and Analysis of  Financial Condition and Results of Operations     |
| Item 7A.           | Quantitative and Qualitative Disclosure  About Market Risks                                     |
| Item 8.            | Consolidated Financial Statements                                                               |
| Item 9.            | Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure           |
| **Part  III.**     |                                                                                            |
| Item 10.           | Directors and Executive Officers of the  Registrant                                             |
| Item 11.           | Executive Compensation                                                                          |
| Item 12.           | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters |
| Item 13.           | Certain Relationships and Related  Transactions                                                 |
| Item 14            | Controls and Procedures                                                                         |
| **Part  IV.**      |                                                                                            |
| Item 15            | Exhibits, Financial Statement Schedules and  Reports on Form 8-K                                |
| **Signatures**     |
| **Exhibit  Index** |

 

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**PART I**

 

**FORWARD-LOOKING STATEMENTS**

 

**FORWARD-LOOKING STATEMENTS**

 

*This Form 10-Kcontains forward-looking statements. These forward-looking statements include, but are not limited to, thefollowing: the anticipated leadership of Commerce One as a provider of webservices solutions; management’s belief that our available cash resources willbe sufficient to finance our expected operating losses and working capitalrequirements through the 2003 calendar year; the expected decrease in cashexpenditures as a result of, among other things, our expense reduction efforts;our ability to reduce expenses adequately to allow us to have sufficient cashto finance our expected operating losses and working capital requirementsthrough the 2003 calendar year; the expected growth of our business and relatedmatters; the development and expected growth of a market for the Commerce OneConductor**ä  platform and other new products andsolutions; the benefits of our product offering, including but not limited tostatements regarding the ability of our products to provide efficiencies andcost savings associated with automating business processes; the ability of ourCommerce One Conductor platform to integrate effectively with third partysoftware applications; our ability to compete favorably with our competitors;the necessity of investing in product development for future success; theexpectation that product development, sales, marketing, and administrativeexpenses will decrease in future periods; the potential benefits and/or gainsassociated with our restructuring efforts and divestitures; the potentialbenefits associated with outsourcing certain development work related to ourproducts; the expected outcome of certain litigation and other disputes,including without limitation those related to our real estate obligations; theextent and timing of our expected restructuring charges; the expected impact ofvarious accounting rules and pronouncements; whether we file additional patentapplications; and the effect of interest rate, foreign currency exchange rateand equity price fluctuations. The words “believe,” “expect,” “intend,” “plan,”“project,” “will” and similar words and phrases as they relate to Commerce Onealso identify forward-looking statements. Such statements reflect the currentviews and assumptions of Commerce One and are not guarantees of futureperformance. These statements are subject to various risks and uncertainties.Our actual results could differ materially from those anticipated in theseforward-looking statements as a result of the risk factors described in thisForm 10-K, including those under the heading “Risk Factors.” Commerce Oneexpressly disclaims any obligation to release publicly any updates or revisionsto any forward-looking statements to reflect any changes in expectations, orany change in events or circumstances on which those statements are based,unless otherwise required by law**.***

 

*Commerce One, Inc., together with Commerce One Operations, Inc andtheir wholly-owed subsidiaries, is hereinafter sometimes referred to as “theRegistrant,” “the Company,” “Commerce One,” “we” and “us.”*

 

 

**ITEM 1.****                        DESCRIPTIONOF BUSINESS**

 

**OVERVIEW**

 

Commerce One is a technology company that specializes in software andservices that allow companies to conduct business more efficiently throughbusiness process automation and web service solutions.  The goal of our technology, products, andservices is to make business processes and interactions more efficient and toautomate business functions.  From itsinception, Commerce One has focused on providing advanced technologiesthat help global businesses collaborate with their partners, customers andsuppliers over the internet.

 

Commerce One’s newest product offerings—the Commerce One ConductorTMplatform, supporting set of packaged Supplier Relationship Management(SRM) applications, and planned Composite Process Templates—represent our nextgeneration of collaborative solutions designed to help our customers optimizetheir technology investments and improve the functionality of their existingsoftware applications.

 

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Our worldwide headquarters are located at 4440 Rosewood Drive,Pleasanton, CA 94588. We can be reached at 925.520.6000 and info@commerceone.com.

 

***Commerce One Vision***

 

Using standards-based technology, our goal is to develop and deliversoftware and services that allow companies to conduct business more efficientlyand enable smooth transactions between trading partners.  From our inception, we have strived to makebusiness processes more efficient, less expensive, and, ultimately, moreprofitable through automation.

 

***Commerce OneConductor Platform***

 

The premise of our new Commerce One Conductor platform is to reduce thetechnological limitations on business processes.  Many companies currently build entire business processes aroundthe capabilities or limitations of their existing software applications.  The Commerce One Conductor platform isdesigned instead to allow software applications to conform to optimal businesspractices.  The Commerce One Conductorplatform and supporting suite of SRM applications allow businesses to automatetheir business processes more broadly, and to tailor new capabilities to theirneeds more quickly, than other technologies previously have allowed.

 

We believe that one of the largest costs in business today, and one ofthe greatest opportunities for savings, is the connection, composition andcreation of relationships between unlinked or poorly linked internal andexternal software systems.  As businessnetworks expand, the complexity of the systems and applications that must worktogether expands even more rapidly.  Formany companies, without an infrastructure to manage and automate theconnectivity between disparate software components, the effort required tomaintain these connections places a tremendous and costly strain on availableinformation technology resources.  TheCommerce One Conductor platform is designed to enable businesses to effectivelyconnect, compose and collaborate business processes between disparate internaland external applications, systems and enterprises.

 

The Commerce One Conductor platform is comprised of the following keyelements:

 

**Conductor Registry****Ô** - The Conductor Registry solution stores allof the components that can be used to create applications. These are stored asservices that can be used in any combination. The Registry further maintainsconnectivity relationships, transformation maps, and security requirements.

 

**Collaborative Interoperability Engine****ä (CIE) -**The software-based CIE determinesthe flow of messaging in and out of the Registry. The Interoperability Engineis a pure services-oriented integration structure, designed to allow virtuallyany application functionality or protocol to be configured to respond to anyvariety of services standard.

 

**Conductor Process Manager****ä (CPM)** - The CPM contains a run-time enginewhich orchestrates the processes and functions of applications that run on theCommerce One Conductor platform.

 

**Graphical Process Builder****ä (GPB)** - The GPB allows a user to visuallyconstruct composite applications from the resources listed and defined in theRegistry. Processes can be reused or combined to create new functionality or toleverage different registry resources.

 

**Design Center****Ô -** The Design Center feature provides toolsrequired to extend and manipulate Conductor applications, including theGraphical Process Builder, UI components, Common Object

 

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Framework, and XML tools.

 

**Systems Management** -The Systems Management component handles end-to-end message tracking, componentmonitoring, topology management, installation, configuration, and initial dataloading for participating services.

 

***Commerce OneComposite Processes***

 

The Commerce One Conductor platform enables its users to build newfunctionality from their existing resources and to construct new applicationson an as-needed basis.  We aredeveloping a series of composite processes for specific industries tocomplement the Commerce One Conductor platform.  These will be designed as software-based processes to allowautomation of certain functions common to industry groups.

 

***Commerce OneSupplier Resource Management (SRM) Applications***

 

Commerce One SRM applications, consisting of our Commerce One BuyÔand Commerce One SourceÔ suites, giveprocurement organizations visibility and control over enterprise sourcing andprocurement processes. They are designed to reduce cycle times, lower transactioncosts, and achieve optimal prices for a wide variety of goods and services.

 

By working in combination with the Commerce One Conductor platform,these core SRM applications can connect to disparate external systems and drawon existing information technology resources to meet new and existing businessneeds.  The SRM suites include thefollowing applications:

 

•                    Sourcing - supports management ofrequests for proposals and bids from suppliers, negotiations, supplierperformance management and activity reports.

•                    Auction - allows forward andreverse auctions for buying and selling goods and services.

•                    Contract Management – providestools for creation, review, negotiation, award and management

•                    Supplier Self Service - providesorder information, product availability, confirmations, notices and payments.

•                    Contract Labor - tracks usage andexpenses on contractors.

•                    Trading Partner Connectivity -links enterprise applications and trading partners.

•                    Procurement - Enables enterprisesto purchase goods from electronic marketplaces.

 

***Xpress ConsumerPackaged Goods (CPG) Solutions***

 

The CommerceOne Xpressä solutions are anintegrated suite of implementation tools, training, and business processconsulting services that help CPG companies quickly gain entry into the UCCnetGLOBALregistryTM (a not-for-profit organization that provides item registry anddata synchronization based on industry-developed standards).  Combining content management and syndicationapplications with training and focused business planning services, Xpresssolutions address immediate UCCnet integration needs and provide a platform forfull data syndication to marketplaces, electronic procurement, or supplierapplications.  Through the XpressMessengerä and Xpress Conveyorämodular solutions, the Xpress suite allows an enterprise to manage theprocesses necessary for full participation in UCCnet.

 

**COMMERCE ONE GLOBALSERVICES**

 

Commerce One Global Services providescomprehensive design, planning, analysis, systems integration, implementation,technical support, and operations services to help deliver Commerce Onesolutions to global organizations. Commerce One Global Services has been integral in deploying the betaform of the Commerce

 

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One Conductor platform with certain customers(our “early adopter” customers) to help them automate critical businessprocesses across their enterprises, as well as deploying, implementing andintegrating Commerce One’s sourcing, procurement and auction applications forour customers.  In addition to thesedeployment services, Commerce One also offers training, known as “KnowledgeServices,” which leads the development and deployment of technical, functionaland end-user education for Commerce One customers and partners. In addition,the Knowledge Services group provides learning solutions on Commerce Oneproducts to internal audiences. This training provides the knowledge and toolsneeded for the implementation and deployment of Commerce One products.

 

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**GLOBALCUSTOMER SUPPORT**

 

Our technical support group providesday-to-day maintenance and support programs to help our customers and partnersidentify, manage and resolve their issues. Using on-line access, call trackingand knowledge management systems, technical support provides a comprehensiverange of services.  We currently havetechnical support offices located in the USA, France and Japan.

 

**STRATEGICRELATIONSHIPS**

 

We have entered into several strategicrelationships that are integral to developing our products.  The continued establishment of strategicrelationships is a fundamental piece of our strategy as we evolve our productsand services and enter new markets, and the continuation of our existingrelationships is critical to our ability to continue to deliver our productsand services in a cost-effective manner. We have strategic development and/ormarketing relationships with various technology companies including Contivo,Inc., Actional Corporation, Cognos, jCatalog Software AG, andUCCNet.  In addition to these relationships, we continue minorco-development work of joint solutions with SAP AG, and we market those jointsolutions primarily to the electronic marketplace sector.

 

**RESEARCHAND DEVELOPMENT**

 

Commerce One continues to invest in researching and developing newproducts and services.  During the yearended December 31, 2002, Commerce One incurred total product developmentexpenses of approximately $76.9 million. Our product-development team employs the latest software designprinciples to guide the development of our products. Our methodology allows usto exploit the capabilities of the Java programming language and the J2EEstandards to build reusable components and designs. Our design principles anddevelopment practices help reduce the risks inherent in developing complexsystems, and help us design our solutions to meet the needs of our customersand trading partners.

 

Key strategic areas in product development in 2002 focused on:

 

•                         Thedevelopment of our web services-based platform, Commerce One Conductor, whichwas released for general availability in March 2003.

 

•                         The development and release of the firstversion of our Commerce One Source suite, which includes the Sourcing, ContractManagement and Auction products.

 

•                         The expansion of our Commerce One Buy suite,which included updated releases of the Procurement, Contract Labor, SupplierOrder Management and xCBL Mailbox products.

 

•                         The integration of Commerce One Buy andSource, resulting in the SRM 5.0 suite release.

 

In January of2003, we entered into a relationship with Satyam Computer Services Limited(“Satyam”) whereby we outsource to Satyam certain development work relating tosome of our enterprise applications.  Satyam plans to perform much ofthis development work in India.  This relationship is designed toallow us to continue to maintain our enterprise applications while reducing ouroperating expenses through headcount reductions.

 

 During 2003,we plan to continue our focus on our Commerce One Conductor platform productand continued support for industry standards and the adoption of xCBLÔtechnology, our open library of business documents.

 

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**SALESAND MARKETING**

 

We market andsell our products and services to organizations primarily through direct salesforces, which generate substantially all of our license revenues.  As of December 31, 2002, we had 149employees in our sales and marketing departments. Our sales offices are locatedin the United States, the United Kingdom, France, Germany, Singapore, SouthKorea, Hong Kong and Japan. Because our products and services touch uponmultiple departments within an organization, our sales efforts are directed atmultiple decision makers, frequently including the chief financial officer,chief information officer, chief technology officer, chief procurement officerand the vice presidents of lines of business. Our customer base at December 31, 2002 was comprised of internationalFortune 1000 companies, as well as electronic marketplace exchange operators.We target our sales efforts at large enterprise companies and their suppliersand have initiated vertical sales strategies targeted at the consumer productsgoods, retail, manufacturing, automotive, and financial services sectors**.**

 

Our indirectsales force consists of resellers and distributors, primarily in internationallocations. We also have a royalty-sharing relationship with SAP AG for the saleof our joint solutions targeted at electronic commerce marketplace.  In addition, we have agreements with somethird party integrators, which require us to pay referral fees to thoseintegrators for their sale of our products and services.  Thus far, we have not generated substantialrevenues from such referral arrangements.

 

Our marketingactivities include seminar programs, trade shows, web-site programs, publicrelation events and direct mailings. We are also engaged in an on-going effortto maintain relationships with key industry analysts.

 

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**INTELLECTUALPROPERTY RIGHTS**

 

Our future success depends in part on ourproprietary rights and technology. We rely on a combination of patent,copyright, trademark and trade secret laws, employee and third-partynondisclosure agreements and other methods to protect our proprietary rights.To date, we own three U.S. patents and we have approximately 64 patentapplications pending in the U.S.  Wealso pursue patents internationally.

 

We have fourteen trademark registrations inthe United States.****** Our registered and unregistered trademarksand service marks include:  CommerceOne, Powering the Business Internet, Commerce One 6.0, Commerce One Conductor,Many Markets. One Source, Commerce One Source, Commerce One 5.0, Commerce OneBuy, Commerce One Buy ASP Edition, Commerce One Collaborative Platform,Commerce One Xpress, Commerce One Xpress Start, Commerce One Xpress Conveyor,Community Manager, Process Manager, Web Services Framework, TransactionManager, Business Intelligence Framework, XML Common Business Library, GlobalTrading Web, GTW, Commerce One.net, xCBL MailBox, MarketSite, eLink, Net MarketMaker, XML Development Kit, xDK, XML Commerce Connector, xCC, BuySite, xCBL,RoundTrip, Commerce Chain, and SupplyOrder. Enterprise Buyer and MarketSet aretrademarks of Commerce One and SAP AG. We also pursue trademark registrations internationally.

 

It may be possible for unauthorized thirdparties to copy certain portions of our products or reverse engineer or obtainand use information that we regard as proprietary. In addition, we occasionallylicense the use of source code to certain of our applications to customersunder limited conditions.  While ouragreements with these customers contain various provisions designed to protectour intellectual property rights in such code, such access to source codesubjects us further to risks of potential infringement.  In addition, some of our agreements with ourcustomers and development partners contain residual clauses regardingconfidentiality. These provisions may curtail our ability to limit access toour intellectual property rights in the future.  In addition, the laws of some foreign countries do not protectproprietary rights to the same extent as do the laws of the United States.

 

We license and will continue to licensecertain products integral to our products and services from third parties,including products which are integrated with our software code and used withour products to provide key functionality. We cannot be assured that these third party product licenses willcontinue to be available to us on commercially reasonable terms or that we willbe able to successfully integrate such third party products into our solutions.Such product licenses may expose us to increased risks, including risksassociated with the assimilation of new products, claims of infringementresulting from the use of such third party products, the diversion of resourcesfrom the development of our products, the inability to generate revenues fromnew products sufficient to offset associated acquisition costs, and themaintenance of uniform, appealing products. The inability to maintain any ofthese licenses could result in delays in development or services untilequivalent products can be identified, licensed and integrated. Any such delayscould harm our business, operating results and financial condition.

 

**COMPETITION**

 

Our industry remains intensely competitive and is changingrapidly.  Our primary source ofcompetition comes from independent vendors of web-services based softwaresolutions, as well as vendors of procurement, sourcing and related softwareapplications and services.  We also faceindirect competition from the internal development efforts of existing andpotential customers.  Our current andpotential competitors include, without limitation:

 

•                    Current B2B enterprise softwarevendors (i2 Technologies, Ariba, Inc., BroadVision, Inc.),

 

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which offer software applications to automate specific businessprocesses.  Many of these companies haveannounced that they have developed or will develop more connectivity featuresto allow cross-enterprise business processes;

•                    Enterprise Applications Integrators(EAI), such as Vitria Technology, Inc., Tibco Software, Inc., and SeeBeyondTechnology Corporation, along with Applications Servers such as IBM/webShare,webMethods, Inc., and BEA Systems, Inc. These companies link systems using adapters and/or structured rules andare often used by companies looking to integrate internal systems and, in somecases, external systems.

•                    Enterprise Resource Planning (ERP)vendors, such as PeopleSoft, Inc., SAP AG, Oracle Corporation, and MicrosoftCorporation.

 

In addition, several industry analysts arepromoting composite applications as a key technology trend.  As a result, several major vendors havebegun promoting wide varieties of composite applications capabilities.

 

Commerce One will face competition from theabove vendors, some of which have significantly greater resources, to establishitself in the web services and composite applications market and will need toovercome customers’ reluctance to adopt new technology.

 

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We believe that the principal competitivefactors for web services and composite applications solutions are breadth andscope of solution, ease of interoperability with new and existing informationtechnology systems, ease-of-implementation, and total cost of ownership. Webelieve we compete favorably with our competitors in these areas.

 

**EMPLOYEES**

 

As of December 31, 2002, we had 779full-time employees, 302 of whom were engaged in product development, 149 insales and marketing, 234 in professional services and 94 in generaladministration. In addition, in January 2003, we announced and implemented asubsequent restructuring that is planned to reduce our total number ofemployees to approximately 350 by March 31, 2003.  Our future success depends, in part, on our continuing ability toattract, train and retain highly qualified technical, sales and managerialpersonnel. We cannot guarantee that we will be able to recruit and retainsufficient qualified personnel. None of our employees are represented by alabor union, and we are not a party to any collective bargaining agreements. Wehave not experienced any work stoppages and consider our relations with ouremployees to be good.

 

**AVAILABLEINFORMATION**

 

Our AnnualReport on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form8-K and amendments to reports filed pursuant to Section 13(a) and 15(d) of the Securities Exchange Actof 1934, as amended, are available on the Securities ExchangeCommission website (http://www.sec.gov), at the SEC’s Public Reference Room at450 Fifth Street, NW, Washington, DC 20549, or by calling the SEC at1-800-SEC-0330.

 

**RISKFACTORS**

 

***If we are not able to raise additionalcapital, our revenues do not meet our expectations or we encounterunanticipated expenses, our cash position may not be sufficient to sustain ourbusiness operations through the 2003 calendar year***

 

As of December 31, 2002, we had approximately $112.9million in cash and cash equivalents, restricted cash and investments.  Of this amount, $77.3 million representsunrestricted cash and short-term investments that we can use tofund operations.  Because our businessoperations currently use more cash than is generated, the cash used eachquarter substantially reduces the cash available to fund our continuingoperations and future capital requirements. During the quarter ended March 31, 2003, we expect to utilizeapproximately $39 million of our cash reserves.  We expect that our cash outflows will decrease thereafter as aresult of our reductions in force and our continuing expense reductionefforts.   However, if our revenues(particularly our license revenues pertaining to our new Commerce One Conductorplatform product) do not meet our expectations, we will be required to adequatelyreduce our operating expenses or obtain additional financing in order to havesufficient cash to sustain our business through the 2003 calendar year.

 

A significantportion of our long-term liabilities consists of real estate lease obligations,many of which we acquired in conjunction with our acquisitions of othercompanies, which utilize a significant portion of our cash reserves.  Much of the office space we now have underlease is no longer needed for our current operations.  This remaining unoccupied space is located in areas where the realestate market has been severely weakened, and the space was leased at ratessignificantly higher than the current real estate market in those locationswill support.  We have been unsuccessfulin subleasing much of this remaining unoccupied space.  If we are unable to renegotiate and/orsettle our existing lease obligations on favorable terms, our cash positionwill be severely weakened.  In addition,we may face cash outlays as a result of settlement or resolution of real estateobligations that are larger than expected or significantly higher than the rentobligation for a particular period, and which will negatively impact our cashposition.

 

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In addition,the current unfavorable market for equity or debt financing makes itincreasingly difficult to raise additional funding, and our ability to secureadditional funding may largely depend on our ability to renegotiate our realestate lease obligations.  If our revenuesdo not meet our expectations, we are unable to obtain additional financing, orwe encounter expenses or cash outlays that are larger than expected, ourremaining cash reserves may not be sufficient to sustain our businessoperations through the 2003 calendar year. If we do not have sufficient cash to fund our current operations, we mayneed to explore other alternatives such as further restructuring the business,reducing or discontinuing operations, or filing for bankruptcy protection.

 

***If we are unable toresolve pending and potential real estate litigation on favorable terms, ourcash position, and our ability to fund continuing operations, will be severelyharmed.***

 

We currentlyhave contractual commitments to lease approximately 430,000 square feet ofoffice space in North America, of which 60,000 square feet has beensubleased.  Approximately 143,000 squarefeet of this leased space is unoccupied and is no longer needed for our currentoperations.  This remaining unoccupiedspace is located in areas where the real estate market has been severelyweakened, and the space was leased at rates significantly higher than thecurrent real estate market in those locations will support.  We have been unsuccessful in subleasing muchof this remaining unoccupied space.   Wehave stopped paying rent in a number of these locations and are now engaged inlitigation with several landlords.  See“Pending Litigation.”  We are presentlyengaged in discussions with those landlords in an effort to reach amicablesettlements, and we are also seeking to reach agreements with other landlordsbefore they file legal claims.  In theevent these discussions prove unsuccessful, in whole or in part, we will likelyface legal claims from each of the landlords with whom we have failed to reachagreement.

 

As of December31, 2002, our aggregate real estate obligations through March 2011 wereapproximately $102 million.  These leaseobligations are held by a relatively small number of landlords.  If some or all of these landlords obtainadverse judgments against the Company through litigation, our cash position,and our ability to fund ongoing operations, will be severely harmed.  An adverse judgment could have a materialadverse effect on our cash position and our ability to fund ouroperations.  In such event, we may needto explore other alternatives such as further restructuring the business,reducing or discontinuing operations, or filing for bankruptcy protection.

 

***We have a limited operating history and ahistory of losses.***

 

We incurred netlosses of  **$**589.8 million, $2,584.1 million, and $344.9 for the yearsended December 31, 2002, 2001 and 2000, respectively.  We will need to generate significant additional revenues to avoidlosses in the future.  If we do notdecrease our losses in the future, our business may suffer in a number of ways,including increased difficulties in obtaining additional capital, selling ourproducts and services (since nearly all customers require future support) andfunding our continued operations.

 

***Our continued viability largely depends uponthe success of our new Commerce One Conductor platform, which is untested inthe marketplace.***

 

As our business model has moved towardenterprise software solutions (i.e., sales to companies for their own internaluse) and away from our historical focus on electronic marketplaces, we havedeveloped a new composite application platform, called Commerce OneConductor.  The Commerce One Conductor platform was released forgeneral availability in March of 2003. The Commerce One Conductor platform and related solutions are theprimary focus of Commerce One’s development and sales efforts, and ourcontinued viability as a company depends upon our ability to release anddeliver the products in a timely fashion and to establish a market for thisrelatively new category of products. Given the ongoing downturn in enterprisetechnology spending, the complexity and youth of our new technology, and theintense competition among enterprise software providers, our ability togenerate a significant and sustainable market demand for our new solutions isuncertain.  During the 2002 fiscal year,revenues from sales of the Company’s earlier generation of enterprise softwareapplications, Commerce One 5.0, represented a relatively small percentage ofour license revenues and we have continued to experience long salescycles.  If we do not sell a significantnumber of our new

 

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Commerce One Conductor platform, ourrevenues, and hence our business, will be significantly harmed.

 

In addition, we depend on strategicrelationships with certain technology providers for important functionality inour Commerce One Conductor platform. Some of these technology providers are relatively new and have limitedoperating histories.     While our agreements with theseproviders contain various provisions protecting Commerce One’s interests, therecan be no guarantee that this technology will remain available to us onreasonable terms, if at all, in the long term.  If we cannot maintainthese relationships on reasonable terms, it may be difficult or costly toreplace such technology and our revenues, and hence our business, may beharmed.

 

***The current downturn in general economicconditions and current global conflict may decrease our revenues.***

 

The currentdownturn and uncertainty in global economic and market conditions havedecreased and may continue to decrease demand for our products and services. Ifthe current economic downturn continues or worsens, our business, financialcondition and results of operations could be seriously harmed.  In addition, the September 11, 2001terrorist attacks in the United States, the subsequent U.S. military operationsin Afghanistan, Iraq and potential future related events may adversely affectour business.  Primarily as a result ofeconomic conditions, spending on enterprise software has been dramaticallyreduced across industries.  As a result,we have experienced decreased demand and may continue to experience decreaseddemand for our products and services. In addition, the economic downturn has made it increasingly difficultfor companies, in particular technology companies, to raise capital.  If general economic conditions do notimprove, we may not be able sufficiently increase revenues or raise capital tocontinue operations, regardless of our operating expense reductions and theintroduction of new products.

 

***Delays in development and delivery schedulesof Commerce One solutions or products may result in delay or loss of revenue.***

 

Delays in thedevelopment and delivery of Commerce One products and solutions may result incustomer dissatisfaction and delay, or loss of product revenues. We cannot becertain of our ability to deliver our products and solutions in a timely manneror to continue shipping them.  Delaysmay result from a number of factors, including extended product-developmentcycles and product defects.  Inaddition, products as complex as ours often contain unknown and undetectederrors or performance problems.  Thesedefects are frequently found during the period immediately following theintroduction and initial shipment of new products or enhancements to existingproducts. Although we attempt to resolve all errors that we believe would beconsidered serious by our customers before shipment to them, our products arenot error-free. These errors or performance problems could result in lostrevenues or delays in customer acceptance and would be detrimental to ourbusiness and reputation.  For example,we recently released our new Commerce One Conductorä platform for general availability in March 2003.  If we are unable, for technological or otherreasons, to deliver new products or enhancements of existing products in atimely manner, or if new products such as our Commerce One Conductor platformor new versions of existing products do not achieve customer acceptance or aresubject to errors or performance problems, our business would be seriouslyharmed.

 

***We expectlittle or no future revenues from our relationship with SAP.****** If we do not significantly increase our revenue from new and otherexisting customers, our operating results will be significantly harmed in thefuture.***

 

In 2000, weentered into a strategic alliance agreement with SAP to jointly develop, marketand sell e-commerce software products. A substantial portion of our license revenues in 2000, 2001 and 2002were derived from this relationship, but such revenues have decreasedsignificantly as our relationship has changed overtime.  In 2002, $19.7 million of our$28.6 million in license revenues and $6.5 million of our $76.9 million inservice revenues came from SAP.  Inaddition, SAP played an important role in selling our products to SAP’srelatively large installed customer base. As a result of changes in our relationship with SAP, and changes in

 

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the marketplace, we do not expect to receivesignificant revenues, if any, from SAP in 2003 or thereafter.  We cannot assure you that we will receiveany other benefits from our relationship with SAP in the future or that ourcommercial relationship with SAP AG will continue in the future.  If we do not increase our revenue from newand other existing customers, our operating results will be significantlyharmed in 2003 and the future.

 

***Our revenues are volatile and difficult topredict***.

 

Our revenues andoperating results are difficult to forecast and may fluctuate substantiallyfrom quarter to quarter due to a number of factors, including the following:

 

•             we expect that most of our license revenues willbe derived from the sale of new and unproven products and as a result, thedemand for and the price that customers are willing to pay for such productsand related services are difficult to predict;

•             our sales cycle is relatively long, sometimes sixmonths or longer, and may result from delays associated with our customers’budgeting and approval process that are difficult to predict;

•             customers may unexpectedly postpone or cancelpurchases of our products and services;

•             a significant portion of our revenues has in thepast been derived from a small number of license sales that typically arecompleted during the last few weeks of the quarter;

•             the size of licensing transactions can varysignificantly;and

•             we have a limited operating history from which topredict our revenues and operating expenses.

 

If our revenuesfall below our expectations, our business operating results and financialcondition are likely to be harmed significantly.

 

***Our restructuringinitiatives and divestitures may not achieve our desired results and couldresult in business distractions that could harm our business.***

 

We implemented restructuring plans throughout2002 and have announced and implemented further restructuring plans in early2003. The primary objectives of our restructuring plans have been to reduce ouroperating expenses and to focus on new products.  We also implemented certain strategic initiatives designed tostrengthen our operations.  These plansinclude without limitation, reductions in our workforce and facilities,improved alignment of our organization around our core business objectives andrealignment of our sales force, professional services and general andadministrative functions. Workforce reductions temporarily impact our remainingemployees, including those directly responsible for sales or services, whichmay affect their productivity and hence, our future revenues. In addition, thefailure to retain and effectively manage remaining employees could increase ourcosts and hurt our development and sales efforts.

 

In addition, recently we have divestedcertain services operations, including Commerceone.net, our hosted servicesoffering.  While we believe that suchdivestitures benefit us by reducing overall costs and allowing us to focus onour core business objectives, such divestitures reduce overall revenue in theshort term.  For example, during 2002,we recognized a total of $11.8 million from services provided byCommerceone.net. As a result of the divestiture of this division, we will nolonger receive revenues from these operations. Additionally, divestitures could cause disruption for our remaining andtransitioning employees, reducing overall productivity.

 

In addition, workforce reductions, strategy changes and divestitures mightaffect our ability to close revenue transactions with our customers andprospects.  Failure to achieve thedesired results of our strategic initiatives could harm our business, operatingresults and financial condition.

 

***Our strategy ofoutsourcing development and maintenance of certain products to an offshorepartner may not achieve the desired cost reductions or other expected resultsand could harm our business.***

 

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In the course of restructuring initiatives during 2002 and in early2003, we reduced our engineering headcount significantly.  In early 2003, we entered into anoutsourcing agreement with Satyam Computer Services Limited***,*** a softwaredevelopment firm located in India, to perform product development work forcertain of our software applications. Although we believe that this partnership will be beneficial to theCompany by allowing it to continue development of certain enterprise softwareapplications while reducing overall operating expenses, this partnership isrelatively new and untested for the Company and may require significant timeand effort in the beginning stages to ensure a productive relationship.  As a result, we cannot assure you that thisarrangement will produce the desired cost reductions in the short term, if atall.

 

In addition,while we have implemented various quality control measures in our outsourcingagreement with Satyam Computer Services Limited, we cannot guarantee the leveland quality of service provided by such third party.  If our outsourcing partner does not provide the expected results,our customers may experience quality problems and we may experience negativecustomer reaction, adverse publicity, or even legal claims.  If such problems are significant, our reputation,financial condition and ultimately our business may be harmed.

 

Additionally,providing broad access to our software code and related intellectual propertyto an offshore entity increases the opportunity for infringement of the patent,trademark, copyright and trade secret rights in our softwareproducts.  This is particularly true if a significant portion of thedevelopment work is performed in India, where intellectual property protectionsdiffer from those in the United States and may be difficult to enforce.  If our intellectual property rights areinfringed, we may need to engage in costly litigation efforts to enforce suchrights.  As a result, our financialcondition and business may be substantially harmed.

 

***Our stock could bede-listed by the Nasdaq Stock Market’s National Market, which could cause adecline in our stock price, hinder our stockholders’ ability to trade theirshares and undermine our ability to raise capital.***

 

Our stock price has fallen substantially during the past twenty-fourmonths and traded below one dollar per share for a number of consecutive daysduring the year.  On September16, 2002, we implemented a one-for-ten reverse split of our issued andoutstanding shares of common stock.  The reverse split was effective on September 16, 2002and the Company’s stock closed the following day at $2.37 per share.

 

As of the date of this filing, our stock is trading significantly belowthe level at which it traded immediately following the reverse split.  It is possible that our stock price willcontinue to decline and/or trade below one dollar per share in the future.  If Commerce One stock were to trade belowone dollar for thirty consecutive trading days, and did not trade at or aboveone dollar per share for ten consecutive trading days during the following 180calendar days, our stock could be de-listed by the Nasdaq Stock Market’sNational Market.  De-listing could makeour stock more difficult to trade, reduce the trading volume of our stock, andfurther depress our stock price. De-listing also could weaken our ability to secure financing in thecapital markets, which could materially impact our business operations andfinancial condition.  In addition,should the Company implement another reverse split, the volatility of our stockcould increase significantly because a second reverse split would severelyreduce the number of Company shares in the market and magnify the effect oflarge sales or purchases of our stock.

 

***Our services revenueand operating results will suffer if we are not able to maintain our prices andutilization rates for our professional services.***

 

The rates we are able to charge for our professional services and theutilization, or chargeability, of our professional services organization are alarge component of our overall gross margin, and therefore our operatingresults. Accordingly, if we are not able to maintain the rates we charge forour professional services or an appropriate utilization rate for ourprofessionals, we will not be able to sustain our gross margin and ouroperating results will suffer.  Inparticular, due to the introduction of our new Commerce One Conductor platform,we have entered into arrangements with a limited number of  “early adopter” customers (customers whohave agreed

 

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to use the beta form of the product) where certain of our services areoffered without charge or at significantly reduced fees, reducing our overallgross margins.  If we are unable toreplace such limited offerings with substantial services projects at our normalrates, then our services revenues, utilization rates and gross margins fromservices will suffer.  The rates we areable to charge for our professional services are affected by a number offactors, including our customers’ perceptions of our ability to add valuethrough our professional services, competition, the introduction of newservices or products by us or our competitors, the pricing policies of ourcompetitors and general economic conditions. Our utilization rates are alsoaffected by a number of factors, including seasonal trends, primarily as aresult of our hiring cycle and holiday and summer vacations, our ability totransition employees from completed projects to new engagements, our ability toforecast demand of our professional services and thereby maintain anappropriate headcount, and our ability to manage attrition. If we are unable tomaintain our prices and utilization rates for our professional services, ourmargins and our operating results will be harmed.

 

***Our gross margins may decline.***

 

In most cases, our license revenues have ahigher gross margin percent than our services revenues.  Our services revenues represented asignificant percentage of total revenues in 2002, representing 73% of totalrevenues for the year.  To the extentthat services revenues continue to increase as a percentage of our totalrevenues, our overall gross margin will continue to decline.  If we are not successful in increasingrevenues from license fees, or we are not successful in increasing the grossmargin of our services fees, our overall gross margins will suffer. Forexample, we expect that most of our license revenues in 2003 will be derivedfrom the sale of our new Commerce One Conductor platform, which was releasedfor general availability in March of 2003 and is untested in the market.  If we are not able to generate significantlicense fees from our new solutions, our gross margins will suffer. Our expensesrelated to the cost of licenses sold are relatively fixed in the near term, andif our license revenues continue to decline any further, such a decline wouldhave a disproportionately adverse impact on our gross margins reported in thenear term.

 

***Our industry is highly competitive and haslow barriers to entry, and we cannot assure you that we will be able to competeeffectively.***

 

Because the market for business processautomation and web services solutions is extremely competitive, we may suffer aloss of business and a reduction in the prices we can charge for our productsand services.  We have experienced competitive price pressure overthe last year and the average license fee for our products has decreasedsubstantially over time due to the economic downturn and the shift of our focusto the highly competitive market of enterprise softwareapplications.  We expect competition to intensify as currentcompetitors expand their product offerings and new competitors enter themarket. There are relatively low barriers to entry in the business processautomation and web services market, and competition from other established andemerging companies may develop in the future. In addition, our customers andpartners may become competitors in the future. Increased competition is likelyto result in price reductions, lower average sales prices, reduced margins,longer sales cycles and a decrease or loss of our market share, any of whichcould harm our business, operating results or financial condition. Ourcompetitors include Ariba, Inc., Freemarkets, Inc., i2 Technologies, OracleCorporation, PeopleSoft, Inc., SAP AG, Verticalnet Software LLC, andwebMethods, Inc., among others. Our Global Services division competes againstmany consulting companies, including many of our integration partners.  Certain of these competitors jointly offerbusiness process automation and web services solutions to potential customers.These joint efforts could intensify the competitive pressure in our market.Many of our competitors, and new potential competitors may have a longeroperating history, larger technical staffs, larger customer bases, moreestablished distribution channels and customer relationships, greater brandrecognition and greater financial, marketing and other resources than we have.In addition, competitors may be able to develop products and services that aresuperior to our products and services, that achieve greater customer acceptanceor that have significantly improved functionality as compared to our

 

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existing and future products and services.The solutions offered by competitors may be perceived by buyers and suppliersas superior to ours.

 

***Our executiveofficers and certain key personnel are critical to our business and theseofficers and key personnel may not remain with us in the future.***

 

Our futuresuccess depends upon the continued service of our executive officers and otherkey personnel, and none of our current executive officers are bound by anemployment agreement for any specific term. Any of our officers may leave ourorganization in the future. In particular, the services of Mark Hoffman, ourChairman of the Board, Chief Executive Officer and President would be difficultto replace.  If we lose the services ofone or more of our executive officers or key employees, or if one or more ofthem decides to join a competitor or otherwise compete directly or indirectlywith us, our business, operating results and financial condition may beseriously harmed.

 

***We face credit risksbecause of the concentration and nature of some of our customers.***

 

Some of our customers are small emerging growth companies with limitedcredit operating histories that are operating at a loss and have limited accessto capital.  With the significantdownturn in the economy and uncertainty relating to the prospects for near-termeconomic growth, some of these customers may represent a credit risk.  In addition, a small number of our customershistorically have accounted for a significant amount of our accountsreceivable.  AtDecember 31, 2002, no customers accounted for more than 10% of theCompany’s gross accounts receivable balance. At December 31, 2001, twocustomers accounted for 13% and 12%, respectively, of our gross accountsreceivable balance.  If our customersexperience financial difficulties, we may have difficulty collecting on ouraccounts receivable and our cash position would suffer.

 

***Sales of a substantial number of shares ofour common stock by certain of our stockholders could cause the market price ofour common stock to decline and make it more difficult for us to raisefinancing***

 

A substantialpercentage of our outstanding common stock is held by stockholders that arecurrently subject to contractual provisions that restrict their ability to sellall or a portion of their shares of our common stock.  These stockholders are SAP AG, which beneficially ownsapproximately 20% of our outstanding common stock, and Ford Motor Company andGeneral Motors Corporation, which each own approximately 4.9%****of our outstanding common stock.  Most of the contractual restrictions onthese stockholders’ ability to sell their shares will terminate in mid to late2003.  In addition, these stockholders possesscertain registration rights that will, in certain circumstances, require us toregister these stockholders’ resale of their shares.  As a result, these stockholders may be able to sell a significantnumber of shares of our common stock on the open market in a short period oftime.  These sales, or the perceptionthat these sales may occur, could cause the market price of our common stock todecline and could make it more difficult for us to raise equity financing inthe future.

 

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***Wedepend upon creating relationships with third-party systems integrators tosupport our new solutions.***

 

Our successdepends upon the acceptance and successful integration by customers and theirsuppliers of our products. Our current and potential customers and theirrelated suppliers often rely on third-party systems integrators such asAccenture, EDS, Computer Sciences Corporation, PricewaterhouseCoopers LLP andothers to develop, deploy and manage their business-to-business connectivityplatforms and solutions. We and our customers will need to continue to rely onthese systems integrators, particularly in light of the recent downsizings ofour Global Services division, which competes with these systems integrators tosome extent.  Thus far, systems integrators are largely unfamiliarwith our Commerce One Conductor platform, as it is a new product that wasreleased in March 2003.  If we are unable to generate support of ournew solutions, particularly our Commerce One Conductor platform, from largesystems integrators or if any of our customers or suppliers are not able tosuccessfully integrate our solutions, our business, operating results andfinancial condition could suffer.

 

In addition, wecannot control the level and quality of service provided by our current andfuture third-party integrators.  Whileour agreements with those integrators normally include provisions designed toensure quality, those provisions are often difficult to enforce and cannotguarantee acceptable quality in all cases. If our customers experience quality problems arising from installationof our software by these third parties, we may experience negative customerreactions, adverse publicity, or even legal claims.  If such problems are significant, our reputation, financialcondition and ultimately our business may be harmed.

 

***Ourstrategy of reselling our products through our strategic relationships may notbe successful.***

 

We have established strategic relationships with companies that reselland distribute our products to our customers, primarily in internationallocations. This strategy is unproven and, to date, some of our partners havebeen unsuccessful in reselling our products. In addition, because many of our resellers are operators of electronicmarketplaces, their ability to resell our products will suffer if they areunsuccessful in generating customers for their electronic marketplace’s orfunding their continued operations. If any of our current or future resellersare not able to successfully resell our products, our business will suffer.

 

***We may not be able toretain and hire qualified personnel.***

 

Our future performance depends on the continued service and our abilityto hire our management, engineering, sales and marketing personnel.  Our ability to retain key employees may beharder, given recent adverse changes in our business, and the decline in themarket price of our common stock.  Inaddition, new hires may require extensive training before they achieve desiredlevels of productivity.  If we fail toretain our key employees or to attract other highly qualified personnel, ourbusiness will suffer.

 

***Managing operationsin a changing environment could strain our management and other resources.***

 

Our ability to successfully offer products and services and implementour business plan in a rapidly evolving market requires an effective planningand management process.  Over the pasttwo years, we experienced significant growth in our workforce and expenditures,followed by a significant decline. These changes place a strain on our managerial resources and make planningmore difficult.  While we manage theserapid changes, we must also compete effectively and manage our operations bymaintaining and enhancing our financial and accounting systems and controls,and integrating new and existing personnel. If we cannot effectively manage and plan in this rapidly changingenvironment, our operations may suffer.

 

***We may not be able to integrate previouslyacquired entities into our business effectively and prior acquisitions maycontinue to have negative financial consequences.***

 

As part of our business strategy, we have made and may in thefuture make acquisitions of businesses that offer complementary products, servicesand  technologies.  We have limited experience with

 

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business acquisitions, and may not acquire such businesses on favorableterms or be able to integrate such organizations into our businesssuccessfully. For example, in 2001, 2002 and the first quarter of 2003, weengaged in divestures of certain business units acquired in the AppNetacquisition that were not integrated into our overall strategy of developingand implementing our core products. Our acquisitions are subject to the riskscommonly encountered in acquisitions of businesses, including, among otherthings, difficulty in integrating operations and personnel, and the difficultyin integrating technology and services into our product and service offerings.

 

Further, ouracquisitions and investments may have negative financial consequences.  For example, in accordance with generallyaccepted accountingprinciples, we conduct an impairment analysis of our intangible assets such asgoodwill annually or whenever an event or change in circumstances occurs whichwould indicate potential impairment. Our acquisitions typically have included a significant amount ofgoodwill.  If we discover significantimpairment to the value of the goodwill as a result of any of these tests, wewould be required to record a corresponding non-cash impairment charge againstour earnings that could negatively affect our reported profitability and ourstock price.  We have recognizedimpairment related to the value of intangible assets acquired throughacquisitions and investments in 2001 and 2002. These impairments have resulted in non-cash charges of $1,712.8 millionin 2001 and $373.6 million in 2002.  Wemay recognize additional impairments in the future on the remaining intangibleassets and investments.

 

In addition, companies acquired by us may not have audited financialstatements, detailed financial statements or any degree of internal controls.An audit subsequent to any successful completion of an acquisition may revealmatters of significance, including issues regarding revenues, expenses,liabilities, contingent or otherwise, technology, products, services orintellectual property. We may not be successful in overcoming these or anyother significant risks and the failure to do so could have a material adverseeffect on our business, financial condition and results of operations.

 

***Because our businessis partially international, we face numerous obstacles in other countries.***

 

Our business relies heavily on our international operations to manageour international sales.  Internationalbusiness involves inherent difficulties and costs that may affect us oradversely affect our business or results of operations, including:

 

•                         longer payment cycles andgreater difficulty in accounts receivable collection;

 

•                         difficultiesin staffing and managing foreign offices as a result of, among other things,distance, language, costs and cultural differences;

 

•                         theimpact of recessions in economies outside the United States;

 

•                         theimpact of different employment laws in other countries, including withoutlimitation laws providing for significant severance payments and benefits undercertain circumstances;

 

•                         the global impact of armed orpolitical conflicts;

 

•                         political instability;

 

•                         price controls or otherrestrictions on foreign currency;

 

•                         potentiallyharmful tax consequences, including withholding tax issues;

 

•                         fluctuating exchange andtariff rates;

 

•                         difficulty in protectingintellectual property;

 

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•                  difficulties inobtaining export and import licenses;

 

•                  foreignantitrust regulation; and

 

•                  inadequatetechnical and other infrastructure.

 

We also haveonly limited experience in marketing, selling, implementing and supporting ourproducts and services outside the United States.  These difficulties may adversely affect our business.

 

***Product liability claims or other claimsregarding the performance of our products or the nature of our services may beharmful to our reputation and business.***

 

We may be subject to product liability claimsor other claims regarding the performance of our products, even though ourlicense agreements typically seek to limit our exposure to such claims, becausethe contract provisions of our license agreements may not be sufficient topreclude all potential claims. Similarly, we design, develop, implement and manage e-commerce solutionsthat are often crucial to the operation of our customers’ businesses. Customerswho are not satisfied with these services could bring claims against us forsubstantial damages. Additionally, our general liability insurance may beinadequate to protect us from all liabilities that we may face. The successfulassertion of one or more large claims that are uninsured, exceed insurancecoverage or result in changes to insurance policies, including premiumincreases, could have a material adverse effect on our business, financialcondition or results of operations. We could be required to spend significanttime and money litigating these claims, or where necessary, to pay significantdamages.  Such claims could also resultin lost revenues, adverse publicity and negative customer reaction.  As a result, any claim, whether successfulor not, could harm our reputation, operating results, financial condition andultimately our business.

 

***If third partiesclaim that we infringe upon their intellectual property rights, our ability touse certain technologies and products could be limited and we may incursignificant costs to resolve these claims.***

 

Our businessdepends upon intellectual property, and litigation regarding intellectualproperty rights is common in the Internet and software industries.  Intellectual property ownership issues maybe complicated by the fact that our Global Services division frequentlydevelops intellectual property for its clients and, in order to carry outprojects, frequently receives confidential client information.  If an intellectual property infringementclaim is filed against us, we may be prevented from using certain technologiesand may incur significant costs to resolve the claim.  In addition, we generally indemnify customers against claims thatour products infringe upon the intellectual property rights of others. We couldincur substantial costs in defending ourselves and our customers againstinfringement claims. In the event of a claim of infringement, we and ourcustomers may be required to obtain one or more licenses from third parties. Weor our customers may not be able to obtain necessary licenses from thirdparties at a reasonable cost, or at all.

 

***Because theprotection of our proprietary technology is limited, our proprietary technologycould be used by others.***

 

Our successdepends, in part, upon our proprietary technology and other intellectualproperty rights.  To date, we haverelied primarily on a combination of copyright, patent, trade secret, andtrademark laws, and nondisclosure and other contractual restrictions on copyingand distribution to protect our proprietary technology. We have three issuedpatents to date. We may not be able to protect our intellectual property rightsadequately in the United States or abroad. In particular, we sometimes license the use of the source code tocertain of our applications to our customers on a limited basis.  We also have entered into an outsourcingagreement with Satyam Computer Services Limited, an offshore entity, whichallows such entity broad access to certain of our applications.  While we have included many contractualprovisions in such agreements designed to limit the use of such code and

 

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to protect our intellectualproperty rights, we cannot assure you that such protections are sufficient toprevent infringement.  In addition, somecountries outside the United States have less stringent protections onintellectual property and our rights may be difficult to enforce in suchjurisdictions.  Furthermore, litigationmay be necessary to enforce our intellectual property rights, to protect ourtrade secrets, to determine the validity and scope of the proprietary rights ofothers, or to defend against claims of infringement or invalidity. Suchlitigation could result in substantial costs and diversion of resources andcould harm our business, operating results and financial condition.

 

***Our participation in organizations creating web services standardsentails certain risks to our intellectual property.***

 

We participatein a number of organizations for the purpose of establishing standards in theevolving web services area.  While webelieve that our participation benefits Commerce One by allowing us toinfluence standards in a way that is favorable for our technology, ourparticipation also presents certain risks to the intellectual property rightsin our technology.  These risks includebut are not limited to the fact that these organizations generally requireparticipating companies to reveal certain aspects of their intellectualproperty and to provide a limited grant of intellectual property rights toother participating companies.  Suchrequirements can increase the risk of potential infringement on ourintellectual property rights in our technology.

 

***Securityrisks of the internet may deter future use of our products and services.***

 

Fundamental tothe use of our solutions is the secure transmission of confidential informationover public networks. Failure to prevent security breaches relating to the useof our products, or well-publicized security breaches affecting the internet ingeneral, could significantly harm our business, operating results and financialcondition. Advances in computer capabilities, new discoveries in the field ofcryptography, or other developments may not be sufficient to prevent acompromise or breach of the algorithms we use to protect content andtransactions on electronic marketplaces or proprietary information in ourdatabases. In addition to our own security systems, we rely on encryption andauthentication technology licenses from third parties. Unauthorized access,computer viruses, or the accidental or intentional acts of internet users,current and former employees or others could jeopardize the security ofconfidential information and create delays or interruptions in our services oroperations, including our hosting services. We have in the past been impactedby global computer viruses, and have incurred costs to resolve suchviruses.  In the future, we may berequired to incur significant costs to protect against security breaches or toalleviate problems caused by breaches. In addition, such disruptions orbreaches in security could result in liability and in the loss of existingclients or the deterrence of potential clients or transactions.

 

***Wemay not have adequate back-up systems, and a disaster could damage ouroperations.***

 

We do not have fully redundant systems forservice at an alternate site. A disaster could severely harm our businessbecause our service could be interrupted for an indeterminate length of time.Our operations depend upon our ability to maintain and protect our computersystems at our principal facility in Pleasanton, California, which exist on ornear known earthquake fault zones. We also depend upon third parties to hostmost electronic marketplaces and some of these third parties are also locatedin the same earthquake fault zones. Although these systems are designed to befault tolerant, they are vulnerable to damage from fire, floods, earthquakes,power loss, acts of terrorism, telecommunications failures and similar events.In addition, our facilities in California could be subject to electricalblackouts if California faces another power shortage similar to that of2001.  Although we do have a backupgenerator, which would maintain critical operations, this generator could fail.Furthermore, blackouts could disrupt the operations of our affectedfacilities.  Disruptions in our internalbusiness operations could harm our business by resulting in delays, disruptionof our customers’ business, loss of data, and loss of customer confidence.

 

***Wemay lose money in other companies we have invested in.***

 

We have investedin numerous technology  companies,usually in connection with license contracts

 

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and arrangements. Inparticular, we have invested in various privately held companies, many of whichare still in the start-up or development stage. These investments areinherently risky because the markets for technologies or products they haveunder development are typically in the early stages and may never develop. Wehave incurred losses in the past and, in 2002, we recorded investment losses ofapproximately $3.9 million related to investments in these companies. Due tothe recent economic and market downturn, particularly in the United States, anddifficulties that may be faced by some of these companies, our investmentportfolio could be further impaired.

 

***Provisions of our charter documents andDelaware law could make it more difficult for a third party to acquire us.***

 

Our certificateof incorporation and bylaws contain provisions, which could make it harder fora third party to acquire us without the consent of our Board of Directors.Among other things, our Board of Directors has adopted a shareholder rightsplan, or “poison pill,” which would significantly dilute the ownership of ahostile acquirer. In addition, Section 203 of the Delaware GeneralCorporation Law limits business combination transactions with 15% stockholdersthat have not been approved by the Board of Directors. We also have enteredinto agreements with some of our strategic investors that, to an extent, limittheir ability to attempt to acquire us without board approval. All of theseprovisions make it more difficult for a third party to acquire us withoutnegotiation. These provisions may apply even if the offer may be consideredbeneficial by our stockholders.

 

***Changes in accounting standards and in theway we charge for licenses could affect our future operating results.***

 

In October 1997,the American Institute of Certified Public Accountants issued its Statement ofPosition 97-2, “Software Revenue Recognition,” and later amended its positionby its Statement of Position 98-4 and Statement of Position 98-9. Based on ourinterpretation of the AICPA’s position, we believe our current revenuerecognition policies and practices are consistent with Statement of Position 97-2,Statement of Position 98-4 and Statement of Position 98-9. However,interpretations of these standards continue to be issued. Futureinterpretations could lead to unanticipated changes in our current revenuerecognition practices, which could materially adversely affect our business,financial condition and operating results.

 

The Securitiesand Exchange Commission and the Financial Accounting Standards Board are alsocurrently reviewing the accounting standards related to other areas. Anychanges to these accounting standards, or the way these standards areinterpreted or applied, could require us to change the way we account for anyother aspects of our business in a manner that could adversely affect ourreported financial results.

 

**ITEM2.****                        DESCRIPTIONOF PROPERTY**

 

We lease office space in approximately 15cities in North America and 5 cities internationally. Our corporateheadquarters is located in Pleasanton, California, where we currently leaseapproximately 153,000 square feet of office space.  We currently have contractual commitments to lease approximately430,000 square feet of office space in North America, of which 60,000 squarefeet had been subleased and 143,000 square feet remains unoccupied. We believeour current facilities will be more than adequate to address our space needsthrough at least the end of 2003.  Theseleases expire at varying dates through 2011.

 

**ITEM3.****                        LEGALPROCEEDINGS**

 

We currentlyare a party to various legal proceedings, including those noted below.  While management currently believes that theultimate outcome of these proceedings will not have a material adverse effecton our results of operations, litigation is subject to inherent uncertainties,and unfavorable rulings could occur. Depending on the amount and timing, an unfavorable outcome of some orall of these matters could have a material adverse effect on our cash flows,business, results of operations or financial position.  

 

*Securitieslitigation*

 

On June 19,2001, an alleged securities class action, captioned *Cameron v. Commerce One, Inc., et al.*, was filedagainst Commerce One, several company officers and directors (the “IndividualDefendants”),

 

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and the threelead underwriters in the Commerce One initial public offering (“IPO”) in theUnited States District Court for the Southern District of New York.  Various plaintiffs have filed similaractions asserting virtually identical allegations against more than 200 othercompanies. The lawsuits against Commerce One and other companies have beencoordinated for pretrial purposes with these other related lawsuits and havebeen assigned the collective caption *In reInitial Public Offering Securities Litigation.*

 

On April 19,2002, plaintiffs’ lawyers for the consolidated lawsuits filed an amendedcomplaint consisting of a set of “Master Allegations” and individual amendedcomplaints against the various defendants, including Commerce One and theIndividual Defendants.  The amendedcomplaint alleges violations of Section 11 and Section 15 of the Securities Actof 1933, Section 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”),and Section 10(b) of the Exchange Act (and Rule 10b-5, promulgated thereunder)as a result of alleged conduct of the underwriters of the IPO to engage in ascheme to underprice the IPO and then artificially inflate our stock price inthe aftermarket. The complaint seeks unspecified damages on behalf of apurported class of purchasers of common stock between July 1, 1999 and June 15,2001. On July 15, 2002, the issuer and individual defendantsfiled an omnibus motion to dismiss addressing issues generally applicable tothe defendants as a group.  On October 9, 2002, the district court enteredan order dismissing all of the living individual Commerce One officersand directors from the case without prejudice. On February 16, 2003, thedistrict court entered an order denying most of the defenses asserted by thedefendants in the omnibus motion to dismiss and allowing most of the case toproceed.

 

In February 2003, CommerceOne, along with its Chief Executive Officer and former Chief Financial Officer,were named as defendants in a similar class-action matter in Florida, *Liu v. Credit Suisse First Boston et al.,*United States District Court, Southern District of Florida.  In that case, the plaintiff alleges thatvarious investment banks, issuer companies, and individuals violated securitieslaws by engaging in a scheme to under-price initial public offerings and thenartificially inflate prices of those stocks in the aftermarket.  It is presently unclear whether or not thislatest action will be consolidated with the other coordinated actions infederal court in New York.  TheCompany believes that it has meritorious defenses to these securities lawsuitsand will defend itself vigorously.

 

*Real Estate Litigation*

 

On November13, 2002, the Company was named as a defendant in an action for breach oflease, entitled *Marriott Plaza AssociatesL.P. v. Commerce One, Inc.*, Superior Court of California, County ofSanta Clara.  The action alleges thatCommerce One breached its commercial real estate lease for office space inSanta Clara, California.  The Complaintdoes not quantify the damages it seeks, but instead seeks all unpaid rent owingat the time of trial.  If the trialoccurs during 2003, we expect the claim for back rent to range between $1.5 and$4.1 million, depending on the date of the trial.  As of March 31, 2003, Commerce One’s full lease obligation withMarriott Plaza (including back rent and future rent through February 2006) isapproximately $11.5 million.

 

In addition tothe above, we have stopped paying rent with respect to various of our otherreal estate leases in connection with our attempts to negotiate with thelandlords to reduce or eliminate our long-term real estate obligations.  The total long-term lease obligations forthese locations, including future rent through March 2011, is approximately$50.0 million in the aggregate.  In thefirst quarter of 2003, the landlords for premises that we lease in California,Maryland and Massachusetts filed unlawful detainer actions against the Companyto repossess the premises.  While noneof these unlawful detainer actions has sought monetary damages, it is likelythat each landlord in the locations where we have stopped paying renteventually will file a lawsuit to recover past and future rentpayments unless we are able to reach settlement agreements in the near future.

 

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Risks related toour real estate obligations, some of which could also evolve into materiallitigation matters, are described in more detail in the sections of this Form10K entitled “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and in the section entitled “Risk Factors.”

 

6

 

**ITEM4.****                        SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters were submitted to a vote ofsecurity holders during the fourth quarter of 2002.

 

**PART II**

 

**ITEM5.****                        MARKETFOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS**

 

Our common stock is traded on the NasdaqStock Market’s National Market under the symbol “CMRC.” The price per sharereflected in the table below represents the range of low and high sale pricesfor our common stock as reported on the Nasdaq Stock Market’s National Marketcommencing January 1, 2001 for the quarters indicated.

 

|                             |   | **High** |   | **Low** |   |
|----------------------------------|--------|----------|--------|---------|--------|
| Fiscal 2001:                     |   |     |   |    |   |
| Quarter Ended March 31, 2001     |   | $        | 364.70 |    | $      | 78.10 |   |
| Quarter Ended June 30, 2001      |   | $        | 139.40 |    | $      | 29.90 |   |
| Quarter Ended September 30, 2001 |   | $        | 56.00  |    | $      | 20.90 |   |
| Quarter Ended December 31, 2001  |   | $        | 42.40  |    | $      | 23.80 |   |
| Fiscal 2002:                     |   |     |   |    |   |
| Quarter Ended March 31, 2002     |   | $        | 41.90  |    | $      | 15.60 |   |
| Quarter Ended June 30, 2002      |   | $        | 15.80  |    | $      | 3.80 |   |
| Quarter Ended September 30, 2002 |   | $        | 7.40   |    | $      | 2.08 |   |
| Quarter Ended December 31, 2002  |   | $        | 5.47   |    | $      | 2.59 |   |

 

The information above reflects a one-for-ten reverse stock split onSeptember 16, 2002, effected by issuing one post-split share for every tenpre-split shares to each stockholder of record as of July 22, 2002.  All fractional shares resulting from thereverse stock split were cashed out.

 

We have never paid cash dividends on ourcapital stock. We currently intend to retain all earnings, if any, for use inour business and do not anticipate paying any cash dividends in the foreseeablefuture.

 

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The closing price of Commerce One’s commonstock as reported on the Nasdaq Stock Market’s National Market on March 3, 2003was $1.62.  As of March 3, 2003, we had1,803 stockholders of record of our common stock and a substantially greaternumber of beneficial owners of our common stock.

 

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**ITEM6.****                        SELECTEDFINANCIAL DATA**

 

**CONSOLIDATEDSTATEMENT OF OPERATIONS DATA: (In thousands, except per share data)**

** **
|                                                                  |   | **YEARS  ENDED DECEMBER 31,** |     |
|-----------------------------------------------------------------------|--------|-------------------------------|----------|
|                                                                  |   | **2002**                      |     | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| Revenues:                                                             |   |                          |     |   |   |   |   |   |   |   |   |
| License fees                                                          |   | $                             | 28,597   |   | $ | 130,917 |   | $ | 223,277 |   | $ | 24,571 |   | $ | 1,633 |   |
| Services                                                              |   | 76,932                        |     | 277,652 |   | 178,519 |   | 8,986 |   | 930 |   |
|                                                                  |   |                          |     |   |   |   |   |   |   |   |   |
| Total revenues (1)                                                    |   | 105,529                       |     | 408,569 |   | 401,796 |   | 33,557 |   | 2,563 |   |
| Costs and expenses:                                                   |   |                          |     |   |   |   |   |   |   |   |   |
| Cost of license fees (2)                                              |   |                          | 192,406  |   |   | 662,315 |   |   | 14,910 |   | 484 |   | — |   |
| Cost of services                                                      |   | 68,233                        |     | 228,023 |   | 139,746 |   | 15,586 |   | 4,369 |   |
| Sales and marketing                                                   |   | 78,945                        |     | 183,412 |   | 168,647 |   | 31,546 |   | 13,108 |   |
| Product development                                                   |   | 76,922                        |     | 118,159 |   | 102,676 |   | 20,496 |   | 6,839 |   |
| General and administrative                                            |   | 25,615                        |     | 116,621 |   | 43,236 |   | 5,050 |   | 1,941 |   |
| Purchased in-process research and development                         |   | —                        |     | 4,548 |   | 5,142 |   | 9,374 |   | — |   |
| Stock compensation                                                    |   | 8,728                         |     | 98,302 |   | 39,820 |   | 2,324 |   | 1,102 |   |
| Restructuring costs and other                                         |   | 22,947                        |     | 126,605 |   | — |   | — |   | — |   |
| Amortization of goodwill and other  intangible assets                 |   | 11,867                        |     | 332,789 |   | 233,183 |   | 11,133 |   | — |   |
| Impairment of intangible assets, fixed  assets and equity investments |   | 214,082                       |     | 1,120,464 |   | — |   | — |   | — |   |
| Total costs and expenses                                              |   | 699,745                       |     | 2,991,238 |   | 747,360 |   | 95,993 |   | 27,359 |   |
| Loss from operations                                                  |   | (594,216                      | )        | (2,582,669 | ) | (345,564 | ) | (62,436 | ) | (24,796 | ) |
| Interest income and other, net                                        |   | 4,681                         |     | 7,571 |   | 7,017 |   | 3,302 |   | 156 |   |
| Net loss before income taxes                                          |   | (589,535                      | )        | (2,575,098 | ) | (338,547 | ) | (59,134 | ) | (24,640 | ) |
| Provision for income taxes                                            |   | 301                           |     | 9,001 |   | 6,400 |   | 4,188 |   | — |   |
| Net loss                                                              |   | $                             | (589,836 | ) | $ | (2,584,099 | ) | $ | (344,947 | ) | $ | (63,322 | ) | $ | (24,640 | ) |
|                                                                  |   |                          |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per share

                           |   | $                             | (20.33   | ) | $ | (103.02 | ) | $ | (20.52 | ) | $ | (7.36 | ) | $ | (13.45 | ) |
| Shares used in calculation of basic and  diluted net loss per share   |   | 29,011                        |     | 25,084 |   | 16,807 |   | 8,605 |   | 1,832 |   |

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|   |   |                                                                                                                                                                |   |   |    |   |   |    |   |   |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|--------|--------|
| (1)    |   | Revenues from related parties                                                                                                                                       |   | $      | 32,022  |   | $      | 97,741  |   | $      | 52,512 |   | $ | 2,078 |   | $ | — |   |
| (2)    |   | Includes  charges for the impairment and amortization of the Technology Agreement with  Covisint (see Notes 4 and 11 of Notes to Consolidated Financial Statements) |   | $      | 190,396 |   | $      | 647,500 |   | $      | 5,700  |   | $ | — |   | $ | — |   |
|        |        |                                                                                                                                                                     |        |        |         |        |        |         |        |        |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a) Certain reclassifications have been made to prior year balances inorder to conform to the current year presentation.

 

(b) We implemented Statementof Financial Accounting Standards (SFAS) No. 142 on January 1, 2002, whichrequires that goodwill (including assembled workforce) no longer be amortized,but tested for impairment on at least an annual basis.    For a further discussion of SFAS 142, seeNote 4 to the Consolidated Financial Statements, “Goodwill, Long Lived Assetand Other Intangible Assets,” Part II, Item 8, incorporated here by reference. 

 

**BALANCESHEET: (In thousands)**

 
|                                                     |   | **DECEMBER  31,** |    |
|----------------------------------------------------------|--------|-------------------|---------|
|                                                     |   | **2002**          |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
| Cash, restricted cash, cash equivalents and  investments |   | $                 | 112,893 |   | $ | 288,153 |   | $ | 341,440 |   | $ | 124,606 |   | $ | 15,138 |   |
| Working capital                                          |   | 24,574            |    | 180,411 |   | 245,963 |   | 77,480 |   | 11,777 |   |
| Total assets                                             |   | 159,422           |    | 828,941 |   | 3,070,555 |   | 384,610 |   | 20,507 |   |
| Long term liabilities                                    |   | 46,947            |    | 56,005 |   | 4,339 |   | 262 |   | 1,896 |   |
| Redeemable convertible preferred stock                   |   | —            |    | — |   | — |   | — |   | 50,432 |   |
| Total stockholder’s equity (deficit)                |   | $                 | 47,490  |   | $ | 623,815 |   | $ | 2,799,411 |   | $ | 316,721 |   | $ | (37,011 | ) |
|                                                          |        |                   |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(a) Certain reclassifications have been made to prior year balances inorder to conform to the current year presentation.

 

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**ITEM 7.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

**Background**

 

Commerce One is a technology company that specializes in software andservices that allow companies to conduct business more efficiently throughbusiness process automation and web services solutions.  Our softwareprovides the technology and infrastructure that enable companies to conductbusiness processes via the Internet or Intranets and to manage their supplier,partner and customer relationships more effectively.  Commerce One’sservices operations support these software solutions and help companies takemaximum advantage of the efficiencies that these solutions can offer. Together, our software and services allow companies to automate businessfunctions that traditionally involved costly and time-consuming phone calls andpaperwork.

 

In the fourth quarter of 2002, we released the beta version of theCommerce One ConductorTM platform, a web services based platformdesigned to simplify automation of business processes, which is intended to beour primary product offering.  The CommerceOne Conductor platform was released for general availability in March of 2003.

 

We were founded as Distrivision in 1994, changed our name to CommerceOne in 1997, and re-incorporated into Delaware in 1999.  On July 11, 2001,we reorganized into a holding company structure.  As part of thereorganization, the stockholders of the “old” Commerce One (now ourwholly-owned subsidiary Commerce One Operations, Inc.) became stockholders ofthe “new” Commerce One.  The financial results reported in this Annual Reporton Form 10-K include, as applicable, the historical financial results of newCommerce One after the reorganization and the historical financial results ofold Commerce One prior to the reorganization.  The reorganization isdescribed more fully in Note 11 of Notes to Consolidated FinancialStatements.  Our worldwide headquartersare located at 4440 Rosewood Drive, Pleasanton, CA 94588. We can be reached at925.520.6000 and info@commerceone.com.

 

**Source of Revenues**

 

We generate revenues from multiple sources. License fees are generatedfrom licensing our software solutions primarily to end-user organizationsthrough our direct sales force, and, to a lesser extent, to certain third-partyproduct distributors and resellers (primarily in international locations). Services revenues are generated from professional consulting, softwaremaintenance, revenue-sharing arrangements with customers, and other relatedservices. Revenues from revenue-sharing arrangements have not been asignificant portion of total services revenues to date and are not expected tobe significant in the future.

 

In 2001, 2002 and the first quarter of 2003, we downsized our GlobalServices division, which provides professional services to third parties,through reductions in force and divestitures.  Although consultingservices remain a substantial portion of our revenues, these actions havecontributed to a general decline in the overall revenues received from ourconsulting services in the past several quarters.  We expect this decline in revenue to continue through at leastthe first quarter of 2003.

 

The portion of our license and service revenues attributable to salesoutside the United States continues to be a substantial portion of our overallrevenues. In 2002, approximately 35% of our license and service revenues werederived from sales outside United States, compared to 34% in 2001.

 

For the year ended December 31, 2002,  transactions with SAP accounted for approximately

 

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24.8% of our total revenues and transactions with one customeraccounted for 11.0% of the Company’s total revenues compared to the year endedDecember 31, 2001 where transactions with SAP accounted for 19.4% of theCompany’s total revenues.  For the yearsended 2002 and 2001, no other customer accounted for more than 10% of theCompany’s total revenues.  Additionally,for the year ended December 31, 2000, no customer accounted for more than 10%of the Company’s total revenues.

 

***Significant Trends AffectingOur Business***

 

*Industry Dynamics—Decline in EnterpriseSpending*.  Theenterprise software industry is characterized by several trends that may have amaterial impact on our strategic planning, results of operations and financialcondition.  One key trend has been thedecline in spending on enterprise software as a result of the weakened globaleconomy and uncertainty due to recent international events.  This decline in enterprise spending has hada direct and significant adverse impact on our ability to generate licenserevenues from new and existing customers. The decline in spending has also been coupled with increased competitionin our industry resulting in significant downward pricing pressure on ourproducts.  Taken together, these trendshave resulted in a significant reduction in new sales and declining averageselling prices for the products we do sell.

 

*New Product Introduction*.  We launched the Commerce One Conductorplatform, our new product, in March of 2003. However, due to the recent timing of this release and the length of oursales cycle that can take an average of four to six months, it could takeseveral quarters before we receive significant license revenue from thisproduct, if at all.  In the interim, itmay be difficult to sell our Supplier Relationship Management applications, dueto customer concerns over committing to such applications in light of the newCommerce One Conductor release. If we are not successful in selling CommerceOne Conductor to current and new customers, our license revenues will beadversely affected.

 

*Dependence on SAP—Loss of Future SAP Revenues*.  We have historically relied for asubstantial portion of our license revenue on our relationship with SAP.  In 2002, SAP accounted for $19.7 million ofour $28.6 million in license revenue. In addition, SAP has been an important source of new customers for us byproviding us with an opportunity to sell our products to the relatively largeinstalled base of SAP customers.  Asdiscussed in more detail in the section below called “Relationship with SAP,”we received no license revenue from SAP in the fourth quarter of 2002 and donot expect to derive any significant revenues from SAP in 2003, or thereafter,or to have direct access through SAP to its installed based of customers.

 

*Cash Flows From Operations*.  We have undertaken and are continuing topursue a number of measures to reduce cash-related expenses that affect ourcash flows from operations.  Thesemeasures include significant headcount reduction, renegotiating our real estatelease obligations and divesting certain businesses that we believe are notcritical to our core product initiatives. While these efforts helped reduce total expenses from cost of sales,sales and marketing, product development, and general and administrativeexpenses from $1,308.5 million in 2001 to $442.1 million in 2002, ouroperations are still drawing upon our cash reserves.  If we do not significantly decrease our cash expenses, increasecash revenues or obtain additional financing, we will continue to havesignificant negative cash flows from operations.

 

*Liquidity*.  We had cash and cash equivalents andinvestments of approximately $112.9 million at December 31, 2002, of which$77.3 million was unrestricted cash and short-term investments that can be usedto fund operations.  In the quarterended March 31, 2003, we expect that our operations will use approximately $39million of our cash reserves.  Basedupon our current plans and expectations for revenues and expenses, we believethat our available cash resources will be sufficient to finance our presentlyanticipated operating losses and working capital expenditure requirementsthrough the 2003 calendar year.  However, plans and future events are inherently uncertain.  Should our levels of revenue (particularlyour license revenues pertaining to our new Commerce One Conductor platformproduct) and cash, cash equivalents and investments fall short of ourexpectations, we will take action to further reduce our operating expenses,primarily through reductions of personnel-related costs, and we believe suchaction, if needed, will allow us to have sufficient cash to finance ourexpected operating losses and working capital requirements through the 2003calendar year.  The forecasts of theperiods of time through which our financial resources will be adequate tosupport our operations and the forecasts regarding our ability to reduce ourexpenses to allow us to have adequate cash resources through 2003 areforward-looking statements that involve risks and uncertainties, and actualresults could vary materially as a result of various factors, including withoutlimitation our ability to sell and gain acceptance in the market of our newCommerce One Conductor platform product, our ability to significantly reduceour real estate lease obligations, our future revenues and expenses, growth orcontraction of operations and general economic pressures and other factorsdescribed in the section entitled “Risk Factors.”  See “Liquidity and Capital Resources.” 

 

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*Revenue Mix*.  Our business model relies on our ability togenerate revenue from license fees and, to a lesser extent, from the serviceswe provide.  Revenues from license fees,though a lower overall percentage of our revenues, have relatively higher grossmargins than revenues from services. Because our revenue from license fees has declined more significantlythan service revenue, the percentage of our revenues from the sale of lowermargin services increased in 2002.  Weexpect this trend to continue in the short term unless we are able tosuccessfully generate significant sales of our Commerce One Conductor platformproduct, which was released in March 2003.

 

# **CriticalAccounting Policies and Estimates**

 

The preparation of consolidated financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses.  Onan on-going basis, we evaluate estimates, including those related to revenuerecognition, software product returns, warranty obligations, uncollectibleaccounts receivable and long-lived assets. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about amount and timing ofrevenues and expenses, the carrying values of assets and the recorded amountsof liabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates and such estimates may change if the underlying conditions orassumptions change.

 

We believe that these significant judgments affect the followingcritical accounting policies used in the preparation of our consolidatedfinancial statements.

 

#### ***Revenue recognition andrelated accounting policies***

 

Our revenue recognition policies are consistent with Statement ofPosition 97-2 “Software Revenue Recognition,” as modified by Statement ofPosition 98-9.

 

Revenues from license agreements for our software products arerecognized upon delivery of the software if there is persuasive evidence of anarrangement, collection is probable and the fee is fixed or determinable. Inthe limited circumstances where our software is licensed to third partiesthrough indirect sales channels (primarily in international locations), licensefees are generally recognized as revenue, under the “sell-through method,” whenthe criteria described above have been met and the reseller has sold thesoftware to an end user customer. While generally we do not license softwareunder barter or concurrent arrangements, whenever software has been licensedunder such arrangements, we have recognized revenue equal to the net monetaryamounts to be received by us.

 

We reduce licenserevenue to reflect estimated product returns. While as a matter of contract andgeneral practice, we do not accept the return of software products after theexpiration of any acceptance periods, unforeseen contractual disputes withcustomers may require us to accept the return of a product***.  ***Managementuses a percentage of trailing license revenue in order to calculate therequired reserve balance.  Theappropriate percentage is determined by analyzing information pertaining topast customer issues or disputes for particular products.  Our reserves have decreased significantlyover the past twelve months due to lower license revenue.  Should our actual product returns be greaterthan our estimates, revisions to the product return allowance would be requiredwhich may lead to a decrease in license revenue.

 

We charge estimated product warranty costs to cost of licenses at thetime revenue is recognized.

 

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While we engage in extensiveproduct quality programs and processes prior to the release of software,unforeseen product errors may exist in our products that may require us toincur costs to correct or replace the affected products.  We create the warranty reserve by analyzingactual work performed pursuant to warranty disputes in previous quarters, themix of our product offerings and the relative amount of time those productshave been generally available.  Shouldwarranty claims, and therefore our actual costs, be greater than our estimates,revisions to the estimated warranty costs would be required which may lead toan increase in cost of license for the affected period.

 

Revenues from professional services contracts are generally recognizedon a time and material basis.  However,when we perform work on a fixed price basis, revenue is recognized on thepercentage-of-completion method, with costs and estimated profits recorded aswork is performed.  Provisions forestimated losses on uncompleted contracts are made in the period in which suchlosses are determined. Changes in contract performance and estimatedprofitability, including final contract settlements, may result in revisions tocosts and revenues, which are recognized in the period in which the revisionsare determined.

 

If a customer transaction includes both software license and serviceselements, or the rights to multiple software products, the total arrangementfee is allocated to each of the elements using the residual method, under whichrevenue is allocated to undelivered elements based on vendor-specific objectiveevidence of the fair values of such undelivered elements and the residualamounts of revenue are allocated to the delivered elements.

 

Revenue is recognized using contract accounting for arrangementsinvolving significant customization or modifications of the software or whereprofessional services are considered necessary to the functionality of thesoftware. Revenue from these software and services arrangements is recognizedusing the percentage-of-completion method by utilizing specific milestones inorder to assess the progress achieved.

 

Software maintenance revenues and subscription fees are recognizedratably over the term of the related contract, typically one year.

 

Network service fees (transaction fees, hosting fees and revenuesharing), have not been significant and are not expected to be material in thefuture.  Revenues related to transactionfees and revenue sharing are recognized as earned based on customertransactions.  Revenues related tohosting fees are recognized ratably over the term of the related contracts,typically one year.

 

Deferred revenue consists of prepaid licenses fees as well as prepaidfees for services, subscription fees, and maintenance and support agreements.

 

# ***Allowance for doubtful accounts***

 

We maintain anallowance for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments.  Factors that management considers in determining the allowancefor doubtful accounts include the current credit worthiness of the customer, prior payment history and the age ofthe receivables.  We willperiodically assess whether our realization differs substantially from ourestimates to refine our assumptions. During 2002, we decreased the balance of our allowance for doubtfulaccounts primarily due to a decrease in our accounts receivable balance relatedto an overall revenue decline.  If the financial condition ofour customers were to deteriorate, resulting in an impairment of their abilityto make such payments, increases in the allowance may berequired.

 

# ***Long-lived assets and Goodwill***

 

In accordance with the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” and SFAS No. 142, “Goodwill and Other

 

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Intangible Assets,” we periodically assess the carrying value of ourlong-lived assets including property and equipment, goodwill, our TechnologyAgreement with Covisint and other identified intangible assets forimpairment.  An impairment assessment isperformed whenever events or changes in circumstances indicate that thecarrying value of an asset may not be recoverable.  Impairment indicators include, but are not limited to, our netbook value as compared to market capitalization, significant negative industryand economic trends, a significant decline in our stock price for a sustainedperiod and significant under performance relative to historical and projectedfuture operating results.  In assessingthe recoverability of the current carrying value of goodwill and otherintangible assets, we must make assumptions regarding the estimated future cashflows attributable to these assets.  Inaddition we must make assumptions regarding discount rates to determine thefair value of the respective assets. We have typically relied on valuationexperts to assist in the analysis of these factors. If these estimates or theirrelated assumptions change in the future, we may be required to recordimpairment charges for these assets not previously recorded which could have asignificant impact on our operating results. In 2002, we recorded impairment charges of $394.0 million related toproperty and equipment, goodwill and other intangible assets.

 

***RestructuringAccrual***

 

We have undergone multiple restructuring transactions during 2001 and2002.  In accordance with EmergingIssues Task Force Issue (referred to as EITF) No. 94-3 “Liability Recognition for Certain EmployeeTermination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring),” the cost associated with thesetransactions have been charged to restructuring expense in the period in whichwe committed to the restructuring plan. The charges relating to the consolidation and closing of facilities andasset dispositions required significant estimates to determine the amount offuture payments to be accrued as a part of the restructuring activity.  A change in the circumstances related to theplan for closure of the facilities could result in additional charges or thereversal of prior charges taken.  Dueprimarily to negotiated lease terminations for space vacated due to variousrestructurings, amounts previously charged to restructuring costs ofapproximately $5.7 million were reversed during the quarter ended December 31,2002, reducing the net expense for restructuring recorded in the quarter endingDecember 31, 2002.

 

InJune 2002, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards No. 146, “Accounting for Costs Associated withExit or Disposal Activities.”  SFAS No. 146 addresses financial accountingand reporting for costs associated with exit or disposal activities andnullifies Emerging Issues Task Force (referred to as EITF) Issue No. 94-3“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring”).  SFAS No. 146 requires that a liability for a cost associatedwith an exit or disposal activity be recognized when the liability is incurred,not at the date of an entity’s commitment to an exit plan, as required underEITF Issue No. 94-3.   The provisions of SFAS No. 146 are effective forexit or disposal activities initiated after December 31, 2002.  Theadoption of SFAS No. 146 may affect the timing of recognizing futurerestructuring costs and the amounts recognized under such costs.

 

# **Relationshipwith SAP**

 

***CommercialRelationship***

 

Commerce One has had a strategic relationship with SAP since 2000.  Over the course of the relationship, SAP hasaccounted for a significant portion of our license revenue.  However, the relationship has changedsignificantly over time.  As a result ofthese changes and changes in the marketplace, the revenues we derive from ourrelationship with SAP have declined substantially.  We do not expect to derive significant revenues, if any, from SAPin 2003 or thereafter.  To the extent wedo receive any revenues from SAP in the future, we expect that such revenueswill relate to ongoing maintenance and support fees as opposed to license fees.

 

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Commerce One’s strategic relationship with SAP commenced on September18, 2000, when the Company entered into a strategic alliance agreement with SAPAG to jointly develop, market and sell the MarketSet suite of applications andthe Enterprise Buyer procurement applications. These products were primarily targeted at electronic marketplace customers,a market which has since declined substantially.  This agreement provided that either party licensing the jointlydeveloped products to its customers would owe a royalty to the other party.  The amount of the royalty was generallybased on a percentage of the total license fee paid by the customer.

 

SAP historically has made non-refundable royalty prepayments toCommerce One, which the Company has recorded as deferred revenue as paymentsare received.  As SAP incurs theobligation to pay royalties to Commerce One, these royalties are creditedagainst this deferred revenue and recognized as revenue by Commerce One.  Prepayments received from SAP and includedin deferred revenue totaled approximately $10.2 million and $33.8 million as ofDecember 31, 2002 and 2001, respectively. When Commerce One licenses one of the jointly developed products to itscustomers, it pays a royalty to SAP in connection with the sale.  These royalty payments are recorded as areduction of license or support revenue, as appropriate.  In 2002, 2001 and 2000, we made royaltypayments to SAP of approximately $1.3 million, $16.9 million and $10.5 million,respectively.

 

During 2001, Commerce One and SAP amended these agreements to providefor different rights to resell certain technology included in the jointlydeveloped products and for varying royalty rates and maintenance fees dependingon the particular product, category of customer and other factors.

 

Effective January 1, 2002, the Company amended its strategic allianceagreement with SAP to simplify its royalty payment provisions and to provideSAP with an unlimited right to resell the jointly developed products on a fixedfee basis, as well as a right to resell certain other Commerce One technologyon an original equipment manufacturer basis, for the first three quarters of2002.  In exchange, SAP reported to us atotal of approximately $20.7 million, primarily attributable to license fees,as well as related support and maintenance. We credited the aggregate fee of approximately $20.7 million against theprior prepayments by SAP, which had been recorded as deferred revenue.  Commerce One recognized the license andmaintenance revenue ratably over the three-quarter period ending September 30,2002.  The amendment provided thatduring this three-quarter period, Commerce One would pay SAP a royalty feebased upon a fixed percentage of the total license fee for jointly developedproducts sold by Commerce One, if any. The amendment further provided that the agreement would default to thehistorical royalty structure in the event the parties failed to agree on a newpayment schedule by September 30, 2002. Commerce One and SAP have not renegotiated the royalty payments, andtherefore the parties will revert to the historical royalty structure whenpayments, if any, are due.

 

The parties entered into a subsequent amendment effective December 20,2002 in which the parties clarified Commerce One’s support obligations forprior versions of the Marketset product, granted reciprocal rights todistribute certain connector technology related to the Marketset product on aroyalty-free basis, and resolved certain outstanding payment issues relating toservices and maintenance fees for certain joint customers.

 

SAP’s license royalty payments to Commerce One historically haveconstituted a substantial portion of the Company’s revenues, including during2002 and 2001.  Historically, SAP wasinstrumental in assisting us with selling the jointly developed products,MarketSet and Enterprise Buyer, to SAP’s customer base.  However, these royalty payments havedeclined in the past year with the decline of the market for electronicmarketplace solutions.  In 2002, 2001and 2000, SAP reported royalties to us of approximately $24.3 million,****$79.1 million and $44.6 million,respectively, of which license revenues were approximately $19.7 million**,** $68.3 million and $44.1 million,respectively.

 

Commerce One and SAP have each phased out the jointly developedEnterprise Buyer procurement products and replaced such products with its ownsuccessor procurement products.  As aresult, corresponding revenues received from SAP for the sale of such productshave ceased, and we do not expect to receive

 

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any future revenues from the sale of these products by SAP.  Similarly, revenues from the MarketSetproduct, primarily targeted at the electronic marketplace sector, have declinedsubstantially and we do not expect to receive significant future licenserevenues, if any, from the sale of this product by SAP.  Accordingly, and as a result of theexpiration of the fixed fee arrangement referenced above, Commerce One does notanticipate that it will continue to generate significant revenues, if any, fromSAP in 2003 or thereafter.

 

The Companyalso has generated revenue from its relationship with SAP by performingprofessional services as a subcontractor to SAP, primarily on softwareimplementation engagements where the Company has jointly sold MarketSet orEnterprise Buyer to an SAP customer. SAP also has completed professionalservices for the Company by acting as a subcontractor, primarily in relation tothe jointly sold MarketSet or Enterprise Buyer products.  These revenues and expenses have declinedover time and we expect they will continue to decline commensurate with thedecline in license sales of the parties’ joint solutions.

 

The Company also has generated revenue from its relationship with SAPby providing technical customer support and maintenance services to jointcustomers.  In 2002, support of suchcustomers represented a substantial percentage of the Company’s total supportand maintenance revenue.  Amountsreceived from SAP include payments based on a certain percentage of totalsupport and maintenance fees received by SAP from the customer.  In addition, we amended the strategicalliance agreement on January 1, 2002 to provide that SAP would pay us $500,000per quarter for certain support obligations relating to Marketset.  Under the terms of that agreement, the fixedpayment is scheduled to cease on September 30, 2003. As a result, and as aresult of the decline in license sales of the parties’ joint solutions, weexpect revenues received from SAP for technical support and maintenance todecline substantially in 2003.  If weare unable to replace such revenues with substantial support and maintenancerevenue related to the sale of our new products, our overall revenues will beharmed.

 

***Equity Relationship***

 

At the time we entered into the strategic alliance agreement with SAPin 2000, we sold 505,955 shares of our common stock to SAP for an aggregatepurchase price of approximately $250 million.

 

Subsequently, in 2001, we sold an additional 4,748,477 shares of ourcommon stock to SAP for an aggregate purchase price of approximately $225million.

 

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In connection with our issuance of common stock to SAP, we entered intovarious agreements that restrict SAP’s ability to acquire more than 23% of ouroutstanding common stock or otherwise attempt to acquire control of CommerceOne, restrict its transfer of the shares of common stock that it purchased fromus and, in very limited ways, affect SAP’s ability to vote its shares of ourcommon stock.  We also granted SAP certainrights to require us to register the resale of its shares of our common stock,certain pro rata rights to acquire additional shares of our common stock andthe right to have a designee appointed to our board of directors or to send anobserver to our board of directors meetings. As of December 31, 2002, SAP has not exercised its right to have such adesignee appointed, but has exercised its right to send an observer to ourboard of directors meetings.

 

As of December 31, 2002, through its purchases from us and on the openmarket, SAP beneficially owned approximately 20% of our outstanding common stock.

 

**LIQUIDITY AND CAPITALRESOURCES**

 

We had cash and cash equivalents and investments of approximately$112.9 million at December 31, 2002 compared to approximately $288.2 million atDecember 31, 2001.  The amounts as ofDecember 31, 2002 included approximately $35.6 million that collateralizedcertain of our obligations related to operating lease agreements for computerequipment and office facilities, potential workers compensation claims and anoutstanding note payable.  The amountsas of December 31, 2001 included approximately $14.3 million thatcollateralized certain of our obligations related to operating lease agreementsfor office facilities, potential workers compensation claims and the guaranteeof a personal home mortgage of an executive officer. As of December 31, 2002,we had $77.3 million in unrestricted cash and short-term investments that couldbe used to fund our operations.

 

 

*Net Cash Used in Operating Activities*

 

Net cash used in operating activities totaled approximately $217.5million for 2002, as compared to net cash used in operating activities ofapproximately $267.0 million and $0.1 million for 2001 and 2000,respectively.  Cash used in operatingactivities for 2002 resulted primarily from the net loss in 2002, excludingnon-cash charges for amortization, depreciation, and impairment charges forfixed assets, the equity investment held in Covisint, goodwill and otherintangible assets. The payment of outstanding accounts payable, accruedcompensation and other current liabilities, along with a decrease in deferredrevenue contributed to additional cash used in operations.

 

*Net Cash Provided by Investing Activities*

 

Net cash provided by investing activities totaled approximately $92.3million for 2002, as compared to cash used in investing activities of $10.9million and $137.1 million in 2001 and 2000, respectively.  Cash provided by investing activitiesrelated to the maturities of short-term investments, proceeds fromdivestitures, and the sale of fixed assets. This was partially offset by thepurchase of short-term investments and purchases of property andequipment.  Our net capital expenditureswere approximately $6.5 million for 2002, $39.5 million for 2001 and $79.2million for 2000. Our capital expenditures have historically consisted ofpurchases of computer hardware and software, office furniture and equipment andleasehold improvements.

 

*Net Cash Provided by Financing Activities*

 

Net cash provided by financing activities totaled approximately $7.3million for 2002, compared to $255.1 million in 2001 and $300.9 million in2000.  The cash provided in 2002resulted from the exercise of employee stock options, stock purchased throughthe  employee stock purchase plan andcash proceeds drawn

 

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from a note payable to Silicon Valley Bank entered into during thefourth quarter of 2002, offset by the payment of the outstanding balance of ourloan from Microsoft in the amount of $19 million and the payment of the loan toa former officer that we assumed upon his termination. The cash provided in2001 resulted primarily from the $219.3 million in net proceeds from theissuance of common stock to SAP, as well as proceeds from the issuance ofcommon stock upon the exercise of employee stock options and cash proceedsdrawn from an interest free loan in connection with the alliance agreemententered into with Microsoft Corporation during the first quarter of 2001. Thecash from financing in 2000 resulted primarily from the $249.8 million in netproceeds from the issuance of common stock to SAP and the issuance of commonstock upon the exercise of employee stock options.

 

*Contractual Obligations*

 

The following summarizes our contractual obligations as of December 31,2002, and the effects such obligations are expected to have on our liquidityand cash flows in certain future periods after December 31, 2002 (inthousands):

 
|                                       |   | **Total** |    | **Less than  one year** |   | **1 to 3  years** |   | **4 years  and   thereafter** |   |
|--------------------------------------------|--------|-----------|---------|-------------------------|--------|-------------------|--------|-------------------------------|--------|
| Non-cancelable operating lease obligations |   | $         | 102,095 |                    | $      | 26,005            |   | $                             | 49,875 |   | $ | 26,215 |   |
| Silicon Valley Bank Note Payable           |   | 25,000    |    | —                  |   | 25,000            |   | —                        |   |
| Total                                      |   | $         | 127,095 |                    | $      | 26,005            |   | $                             | 74,875 |   | $ | 26,215 |   |
|                                            |        |           |         |                         |        |                   |        |                               |        |  |  |  |  |  |  |  |  |

 

*Real Estate Obligations*

 

Commerce One presently occupies office space in seven locationsthroughout the United States, although much of that space isunderutilized.  In addition, we havelease commitments in seven other locations that we no longer use.  We have succeeded in subleasing some of oursurplus office space.  However, thedepressed real estate market has hindered our ability to find subtenants inseveral other locations, and much of our office space remains fully or partiallyvacant.  In a number of locations,including some which we still occupy, we have stopped paying rent as we attemptto renegotiate and/or settle our lease obligations with various landlords.  As a consequence, some landlords haveinitiated litigation, and it is likely that others will file claims in the nearfuture.  The pending litigation isdescribed under Item 3. (Legal Proceedings) of this Form 10-K.

 

Collectively, as of December 31, 2002, our long-term non-cancelableobligations for future rents payable through March 2011 were approximately$102.1 million.  This amount includes$34.7 million which was accrued as restructuring costs as of December 31,2002.  As of December 31, 2002, we hadapproximately $112.9 million in cash and cash equivalents and short-terminvestments.  Of this amount, $77.3million represented unrestricted cash and short-term investments*.* During the quarter ended March 31, 2003, we expect that we will utilizeapproximately $39.0 million of our cash reserves.  Unless we achieve positive cash flow from our operations, webelieve that our ability to renegotiate some or all of our lease obligationswill materially impact our capability to fund our continuing operations.  In addition, if we are able to reachagreements with our various landlords to settle or reduce our real estateobligations, those agreements likely will require us to make significant cashpayments to the landlords in the near term, which may have a material effect onour cash position.

 

We have no significant capital commitments or obligations other thanthose described in the analysis above. We do not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, which would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes.  Further, wehave not guaranteed any obligations of unconsolidated entities nor have we anycommitment or

 

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intent to provide additional funding to any such entity.

 

*Sources of Liquidity and Capital*

 

We have historically satisfied our cash requirements primarily throughthe issuances of equity securities and, to a significantly lesser extent, throughdebt financing.

 

On March 15, 2001, we entered into an alliance agreement with Microsoftin connection with the marketing, promotion and optimization of Commerce Oneproducts using Microsoft technology. To support the optimization, Microsoftmade a two-year, interest free loan of $19.0 million to us.  This loan was originally due on March 15,2003 but would become immediately payable in the event we breached certainprovisions of the loan agreement or alliance agreement.

 

On March 22, 2002, Commerce One and Microsoft terminated the allianceagreement and revised the terms of the loan agreement.  The note was repaid in full to Microsoft onOctober 3, 2002.

 

On October 23, 2002, we executed an agreement with Silicon Valley Bankfor a credit facility of up to $25.0 million.  The loan facility is due byNovember 29, 2005 or upon the earlier default by Commerce One, which isgenerally defined in the agreement to include the following:  failure to pay any obligationto Silicon Valley Bank under the agreement within three (3) days of the duedate; failure of the Company to maintain its legal existence and good standingwhere such failure could materially impact the value of the loan collateral;failure to provide certain financial information to the bank within thetime periods prescribed by the contract; failure to pay taxes where suchpayment obligations are not subject to good faith dispute; theplacement of any uncorrected material lien or seizure judgmentagainst the Company’s assets; any material change in the value of the assetscollateralizing the loan; the filing of an insolvency proceeding; anyjudgment or accelerated payment obligation exceeding $3,000,000; or amaterial misstatement or misrepresentation in the loan application.  The loan facility bears interest at a rate betweenone-half and three-quarters of a point below the Silicon Valley Bank’s primerate (3.75% at the time of the filing of this Form 10-K).  In the fourthquarter of 2002, Commerce One drew $25.0 million against the credit facility.  All amounts drawn by Commerce One are fullysecured by a cash collateral account with Silicon Valley Bank and as a result,the loan does not result in any net additional unencumbered cash to CommerceOne.

 

Based upon ourcurrent plans and expectations for revenues and expenses, we believe that ouravailable cash resources will be sufficient to finance our presentlyanticipated operating losses and working capital requirements through the 2003calendar year.**  **SAP has historically provided significant revenues tous ($24.3 million, $79.1 million and $44.6 million in 2002, 2001 and 2000,respectively).  We do not expectsignificant revenues from SAP, if any, in 2003.  We announced a restructuring on January 30, 2003, which willreduce the overall headcount to approximately 350 by March 31, 2003.  Furthermore, we expect to use approximately$39 million in cash to fund our operations in the first quarter of 2003.  Should our levels of revenue (particularlyour license revenues pertaining to our new Commerce One Conductor platformproduct) and cash, cash equivalents and investments fall short of ourexpectations, we will take action to further reduce our operating expenses,primarily through reductions of personnel-related costs, and we believe suchaction, if needed, will allow us to have sufficient cash to finance ourexpected operating losses and working capital requirements through the 2003calendar year.  Such actions may involvefurther reductions in force and other operating expense reductions.  Our future liquidity and capitalrequirements will depend on numerous factors including our ability to sell andgain acceptance in the market of our new Commerce One Conductor platformproduct, our ability to significantly reduce our real estate lease obligations,our future revenues and expenses, growth or contraction of operations andgeneral economic pressures.   We mayneed to seek to sell additional equity or debt securities or secure a bank lineof credit.  The sale of additionalequity or convertible debt securities is likely to result in additionaldilution to our stockholders.  We cannotassure you that any financing arrangements will be available in amounts or onterms acceptable to us, if at all.  Thecurrent unfavorable market for equity or debt financing makes it increasinglydifficult to raise additional funding. In addition, our ability to secure additional funding may largely dependon our ability to renegotiate our real estate obligations.   The forecasts of the periods of timethrough which our financial resources will be adequate to support ouroperations and the forecasts regarding our ability to reduce our expenses toallow us to have adequate cash resources through 2003 are forward-lookingstatements that involves risks and uncertainties, and actual results could varymaterially as a result of the factors described in this paragraph and in thesection entitled “Risk Factors.”

 

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###### **RESULTS OF OPERATIONS**

 

The following table sets forth the results of operations for theCompany expressed as a percentage of total revenues for the years endedDecember 31, 2002, 2001 and 2000. The Company’s historical operatingresults are not necessarily indicative of the results for any future period.

 

**COMMERCEONE, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

** **
|                                                                  |   | **YEARS  ENDED DECEMBER 31,** |   |
|-----------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                  |   | **2002**                      |   | **2001** |   | **2000** |   |
| Revenues:                                                             |   |                          |   |   |   |   |   |
| License fees                                                          |   | 27                            | %      | 32 | % | 56 | % |
| Services                                                              |   | 73                            | %      | 68 | % | 44 | % |
| Total revenues                                                        |   | 100                           | %      | 100 | % | 100 | % |
| Costs and expenses:                                                   |   |                          |   |   |   |   |   |
| Cost of license fees                                                  |   | 182                           | %      | 162 | % | 4 | % |
| Cost of services                                                      |   | 65                            | %      | 56 | % | 35 | % |
| Sales and marketing                                                   |   | 75                            | %      | 45 | % | 42 | % |
| Product development                                                   |   | 73                            | %      | 29 | % | 25 | % |
| General and administrative                                            |   | 24                            | %      | 29 | % | 11 | % |
| Purchased in-process research and  development                        |   | —                        |   | 1 | % | 1 | % |
| Stock compensation                                                    |   | 8                             | %      | 24 | % | 10 | % |
| Restructuring costs and other                                         |   | 22                            | %      | 31 | % | — |   |
| Amortization of goodwill and other  intangible assets                 |   | 11                            | %      | 81 | % | 58 | % |
| Impairment of intangible assets, fixed  assets and equity investments |   | 203                           | %      | 274 |   | — |   |
| Total costs and expenses                                              |   | 663                           | %      | 732 | % | 186 | % |
| Loss from operations                                                  |   | (563                          | )%     | (632 | )% | (86 | )% |
| Interest income and other, net                                        |   | 4                             | %      | 2 | % | 2 | % |
| Provision for income taxes                                            |   | 0                             | %      | 2 | % | 2 | % |
| Net loss                                                              |   | (559                          | )%     | (632 | )% | (86 | )% |

 

YEARS ENDED DECEMBER 31, 2002, 2001 and 2000.

 

***Revenue***

 

Total revenues for 2002 decreased to approximately $105.5 millioncompared to $408.6 million for 2001 and $401.8 million for 2000.

 

Licenserevenues for 2002 decreased to approximately $28.6 million compared to $130.9million for 2001 and $223.3 million in 2000. In 2002, the decrease in license revenues relative to prior yearsprimarily resulted from significantly fewer opportunities to license electronicmarketplaces, the focus of the Company’s previous generation of products; asignificant slowdown in technology spending coupled with the continued generaleconomic downturn; and intense competition in the SRM market, to which theCompany was a relatively new entrant in 2002; all of which resulted in fewercustomer orders and lower average selling prices.  Approximately $19.7 million of our total $28.6 million in licensefees in 2002 was recorded as revenue from

 

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SAP pursuantto the fixed fee arrangement with SAP for the first three quarters of2002.  These fees were credited againstprior prepayments to Commerce One, which previously were recorded as deferredrevenue.  As a result, such fees did notprovide us with any net additional cash at the time the revenue was recognized.  Direct license sales of our products,including our SRM applications, represented a relatively small percentage ofthe total license fees for the 2002 fiscal year. We expect a substantialdecrease in license revenues in 2003 as compared to 2002, as license revenuesfrom SAP are expected to be substantially decreased or eliminated, and sales ofour current products are expected to decrease in light of the general releaseof the new Commerce One Conductor platform, as we introduce and develop themarket for the Commerce One Conductor platform.

 

Services revenues for 2002 decreased to $76.9 million compared to$277.7 million in 2001 and $178.5 million in 2000. The percentage ofour revenues attributable to professional services in 2002 decreasedsignificantly compared to 2001, but professional services remained the largestportion of our overall revenue.**** This decrease resulted primarily from thedownsizing of the Global services division through reductions in force anddivestitures of various Global Services divisions, a reduction in the amountsreceived from various historical revenue-sharing arrangements, continuedtermination and reduction of support and maintenance agreements by existingcustomers, particularly our electronic marketplace customers, and a decrease inrevenues from maintenance and hosting services commensurate with the overalldecline in license revenues.  We expectthat services revenues may decline further in the short term primarily as aresult of the divestiture of our marketplace service division that took placein January 2003 and the decrease in the number of employees in our professionalservice division.  In addition, our newCommerce One Conductor platform product was released for general availabilityin March 2003, and we do not expect it to generate significant servicesengagements or maintenance revenues in the short term until the product is morebroadly used by our customers.

 

In January2003, we closed the sale of CommerceOne.net, our marketplace services business,consisting of auction services, subscription services, content services andhosting services, to eScout.  During2002, we recognized a total of approximately $11.8 million in services revenuefrom CommerceOne.net related services. Subsequent to this sale, Commerce One no longer offers these servicesand therefore will not receive any future revenues related to these services.

 

Payments received from our strategic alliance with SAP constituted asubstantial portion of our total revenues during the years 2002, 2001 and2000.  Total revenues received from SAPwere approximately $26.1 million, $79.1 million and $44.6 million for the years2002, 2001 and 2000, respectively, of which license revenues were approximately$19.7 million, $68.3 million and $44.1 million.  We do not expect to receive significant revenues from SAP in 2003or thereafter.

 

***Cost of Revenues***

 

Cost of revenues consisting of cost of services and cost of licenseswere approximately $260.6 million, or 247% of total revenues, in 2001;$890.3 million, or 218% of total revenues, in 2000; and $154.7 million, or39% of total revenues, in 2000.

 

Cost of license fees was $192.4 million for 2002, compared to$662.3 million for 2001 and $14.9 million for 2000. In 2002, cost oflicense fees was primarily composed of charges related to the impairment of theTechnology Agreement with Covisint of approximately $180.0 million and theamortization of the cost of the Technology Agreement with Covisint ofapproximately $10.4 million.  In 2001,cost of license fees included charges related to the impairment of theTechnology Agreement with Covisint of approximately $592.3 million and theamortization of the cost of Technology Agreement with Covisint of approximately$55.2 million.  We currently estimatethat the amortization of the Technology Agreement with Covisint will beapproximately $0.5 million per quarter over the remaining eight-year****term of the agreement

 

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Cost of services, which primarily consists of consulting, personnel andrelated cost, software maintenance and training costs, was $68.2 millionfor 2002, $228.0 million for 2001 and $139.7 million for 2000. Thedecrease in cost of services in 2002 resulted primarily from the decrease inpersonnel-related expenses resulting from the downsizing of the Global Servicesdivision through reductions in force and divestitures of certain businesssegments.

 

As of December 31, 2002, the overall number of employees working in ourGlobal Services division was 234, a significant decrease from 640 as ofDecember 31, 2001.  Pursuant to ourrestructuring announced in January 2003, this number further decreased toapproximately 169 at March 1, 2003. Consistent with the decrease in the size ofour professional services organization, we expect a decline in professionalservices costs over the next few quarters.

 

***Salesand Marketing Expenses***

 

Sales and marketing expenses consist primarily of personnel and relatedcost and commissions, and the costs of seminars, promotional materials, tradeshows and other sales and marketing programs. Sales and marketing expenses wereapproximately $78.9 million for 2002, $183.4 million for 2001 and$168.6 million for 2000. The decrease in 2002 was primarily attributableto an overall decrease in the average number of sales and marketing personnelduring the year, as well as a decrease in marketing-related activity related toproduct user conferences held during the year. The number of employees engaged in sales and marketing wasapproximately149 at December 31, 2002 compared to approximately 395 atDecember 31, 2001 and 642 at December 31, 2000.  Pursuant to our restructuring announced inJanuary 2003, this number further decreased to approximately 84 at March 1,2003.  We expect that sales andmarketing expenses will decrease over the next year primarily as a result of adecrease in the number of employees in this area as part of our corporaterestructuring efforts.

 

***Product-DevelopmentExpenses***

 

Product-developmentexpenses consist primarily of personnel and related costs associated with ourproduct-development efforts. In 2002, these expenses related primarily to thedevelopment of our new Commerce One Conductor platform product, as well ascertain expenses pertaining to ongoing development of our SRMapplications.  Product-developmentexpenses were approximately $76.9 million for 2002, $118.2 millionfor 2001 and $102.7 million for 2000. The decrease in product-development expenses was primarily attributableto an overall decrease in the average number of product-development personnelemployed during the year and decreased consulting-related expenses to supportdevelopment of our products.

 

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The overall number of employees engaged in product-developmentdecreased to 302 at December 31, 2002, compared to 588 atDecember 31, 2001 and 561 at December 31, 2000. Pursuant to ourrestructuring announced in January 2003, this number further decreased toapproximately 202 at March 1, 2003.

 

In January 2003, we entered into an outsourcing arrangement with SatyamComputer Services Limited.  Pursuant tothis agreement, Satyam will provide certain support, maintenance and productdevelopment services with respect to our SRM applications, including ourCommerce One Buy and Commerce One Source products.

 

Despite additional costs associated with our outsourcing agreement withSatyam, we expect total product development expenses to decrease in 2003 due tothe significant reduction in the number of employees engaged in productdevelopment.

 

***General andAdministrative Expenses***

 

General and administrative expenses consist primarily of employeesalaries and related expenses for executive, administrative and financepersonnel. General and administrative expenses were approximately$25.6 million for 2002, $116.6 million for 2001 and $43.2 millionfor 2000. The decrease in 2002 was primarily attributable to an overalldecrease in the average number of general and administrative personnel employedduring the year.  The number ofemployees engaged in general and administrative functions was 94 at December 31,2002, compared to 273 at December 31, 2001 and 571 at December 31,2000.  Pursuant to our restructuringannounced in January 2003, this number further decreased to approximately 56 byMarch 1, 2003.  We expect general andadministrative expenses will decrease over the next year due primarily to thedecrease in the average number of employees in this area as a result of theserestructuring efforts.

 

***Stock Compensation***

 

Stock compensation expenses result from the grant of stock options,grant of restricted common stock and sales of stock to employees at exercise orsales prices below the deemed fair market value of our common stock.

 

Stock compensation expense was approximately $8.7 million in 2002,$98.3 million in 2001 and $39.8 million in 2000.  The decrease in stock compensation expense in 2002 was primarilyattributable to the cancellation of certain options assumed in the acquisitionsof Appnet and Mergent due to the termination of the related employees.  The remaining deferred stock compensation fornon-cancelled options will continue to be amortized over the original vestingperiods of three to four years. The expense related to a restricted stock grantmade to our employees in May 2001 is being amortized over a two-year vestingperiod.

 

On January 30, 2003, Commerce One announced that we recently discoveredthat we had overstated the company’s stock compensation expense for thequarters ended March 31, 2002, June 30, 2002 and September 30, 2002, resultingin a net loss for those periods that was slightly better than previouslyreported.  The stock compensationexpense for these periods was less than previously reported by approximately$10.6 million in the third quarter of 2002, $8.8 million in the second quarterof 2002 and $8.9 million in the first quarter of 2002.  This overstatement related to non-cash stockcompensation expenses for certain employees from prior acquisitions no longeremployed with us, but for whom we continued to amortize the expense.  Afteradjusting the results in

 

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these quarters to correctly reflect the lower expense, the adjusted netloss on a GAAP basis for the third quarter of 2002 was reduced to $36.3 millionor $1.25 per share, for the second quarter of 2002 was reduced to $62.3million, or $2.15 per share, and for the first quarter of 2002 was reduced to$211.7 million, or $7.36 per share.  Wealso discovered that we had overstated our deferred stock compensation expensefor the fiscal years ended 2000 and 2001 by amounts that were immaterial to thefinancial results for those periods.

 

***Restructuring Costsand Other***

 

Beginning in 2001, we implemented multiple restructuring plans (the“Plans”) aimed at significantly reducing our annual operating expenses whilerealigning our resources around our core product initiatives. The restructuringcosts under the Plans were estimated at $126.6 million. Collectively, the Plansincluded the costs associated with the termination of approximately 2,070employees.  These costs covered suchitems as separation pay, outplacement services and benefit continuation.  Costs also included the termination ofcertain office leases, the divestiture of certain parts of our Global Servicesdivision, the consolidation or closure of certain facilities and the write-downof the carrying value of computers and equipment used by terminated employees.

 

In April 2002, management approved and began to implement a corporaterestructuring plan (the “First Plan”) aimed at streamlining our coststructure.  Included in the plan were costs related toseverance pay, outplacement services, benefits continuation, write-down of thecarrying value of computers and equipment used by employees terminated, officeclosures and the termination of certain office leases.  The plan included staff reductions totalingapproximately 500 employees from all areas of the company.  The restructuring charges relating to thisplan were estimated at $15.9 million and were recorded during the quarter endedJune 30, 2002.  This restructuring planwas aimed at reducing our annual payroll and facilities related expenses byapproximately $80 million.

 

In October 2002, management approved and began to implement anadditional corporate restructuring plan (the “Second Plan”) aimed at furtherreducing operating expenses while focusing our resources on our core product,the Commerce One Conductor platform. The restructuring charges related to the SecondPlan were estimated at $12.0 million and were recorded during the quarter endedDecember 31, 2002.  The Second Planincluded the costs associated with the termination of approximately 400employees including severance pay, outplacement services and benefitcontinuation, the termination of certain office leases, the consolidation orclosure of certain facilities and the write-down of the carrying value ofcomputers and equipment used by terminated employees.  This restructuring plan was aimed at reducing our annual payrolland facilities related expenses by approximately $68 million.

 

Subsequently,in January 2003, management approved and began to implement an additionalcorporate restructuring plan, again focused on reducing operatingexpenses.  Pursuant to this plan, weterminated approximately 430 employees, resulting in approximately 350employees as of March 31, 2003.  Therestructuring charges associated with this action were estimated at $11 millionand are expected to be recorded in the first quarter of 2003.

 

Thefollowing table summarizes the activity related to the restructuring liabilityfor the year ended December 31, 2002, (in thousands):

 

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|                                                                     |   | **Accrued   restructuring   costs at   December 31,  2001** |   | **Amounts  charged to  restructuring  costs and  other** |   | **Amounts reversed** |   | **Amounts   paid or written off** |    | **Accrued   restructuring   costs at   December 31,  2002** |    |
|--------------------------------------------------------------------------|--------|-------------------------------------------------------------|--------|----------------------------------------------------------|--------|---------------------------|--------|----------------------------------------|---------|-------------------------------------------------------------|---------|
| Lease cancellations and commitments                                      |   | $                                                           | 50,889 |                                                     | $      | 4,600                     |   | $                                      | (10,452 | )                                                           | $       | (10,293 | ) | $ | 34,744 |   |
| Termination payments to employees and  related costs                     |   | 4,515                                                       |   | 23,749                                                   |   | (193                      | )      | (26,558                                | )       | 1,513                                                       |    |
| Write-off on disposal of assets and related  costs                       |   | 440                                                         |   | 5,404                                                    |   | (161                      | )      | (5,570                                 | )       | 113                                                         |    |
| Total restructure accrual and other                                      |   | $                                                           | 55,844 |                                                     | $      | 33,753                    |   | $                                      | (10,806 | )                                                           | $       | (42,421 | ) | $ | 36,370 |   |
| Less non-current accrued restructuring  charges                          |   |                                                        |   |                                                     |   |                      |   |                                   |    | $                                                           | (21,947 | ) |
| Accrued restructuring charges included  within other accrued liabilities |   |                                                        |   |                                                     |   |                      |   |                                   |    | $                                                           | 14,423  |   |

 

### *Lease cancellations and commitments*

 

# **In the second and fourth quarters of 2002, we incurredrestructuring charges of approximately $0.5 million and $4.1 million,respectively, for facilities consolidated or closed in the United States,Europe and Asia.  These offices wereresponsible for the sale of our software products, professional services orcustomer support.  These restructuringcharges reflect the remaining contractual obligations under facility leases netof anticipated sublease income from the date of facility abandonment to the endof the lease term.  In addition, thecharges include $3.7 million of changes in management assumptions regardingsub-lease income.  Amounts reversed aremainly related to early lease settlement negotiations for certain leasedproperties, resulting in a reversal of $5.7 million, and changes in managementassumptions regarding broker fees in connection with assumed sub-lease income,resulting in a reversal of $1.3 million. Certain facilities continued in use during the completion of therestructuring.  For those facilities, wecontinued to record monthly rent expense to operations until the facilitieswere available for sub-lease or were abandoned.  Accrued restructuring costs related to lease cancellations andcommitments as of December 31, 2002 were approximately $34.7 million, of which$21.9 million related to non-current obligations.**

 

# **In conjunction with our restructuring efforts, in 2002 andthe first quarter of 2003, we paid a total of approximately $6.9 million insettlements with landlords to substantially reduce or eliminate variouslong-term real estate obligations.**

 

### *Termination payments to employees and related costs*

 

In the second and fourth quarters of 2002, weincurred restructuring charges of approximately $13.3 million and $8.3 million,respectively, for the termination of approximately 900 employees to cover costssuch as separation pay, outplacement services and benefit continuation.  The separation payments and terminationbenefits were accrued and charged to restructuring costs in the period thatboth the benefit amounts were determined and such amounts were communicated tothe affected employees.  The employeereductions occurred in all areas of the Company and, as of December 31, 2002,all of the employees had been notified and the majority of these terminationshad been completed.  We expect that theaccrued termination payments of approximately $1.5 million accrued as ofDecember 31, 2002 will be fully paid during 2003.

 

### *Write-off on disposal of assets and**related costs*

 

In the second and fourth quarters of 2002, we incurred restructuringcharges of approximately $2.0 million and $3.4 million, respectively, relatedto the carrying values of equipment and leasehold improvements abandoned inconnection with the restructuring. Included in the assets disposed of and charged to restructuring

 

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costs are personal computers and equipment used by terminatedemployees, office equipment and leasehold improvements in connection withclosure or consolidation of facilities and subsidiaries in the United States,Asia and Europe. Substantially all identified assets had been taken out ofservice and were held for disposal at the end of the respective quarter inwhich the charge was taken. We expect the restructuring costs of approximately$0.1 million accrued as of December 31, 2002 will be fully utilized during2003.

 

### *Costs associated with divestiture of certain businesses*

 

In October 2001, we executed an asset sale to Beaconfire ConsultingInc., a company composed of former Commerce One employees.  In consideration of the assets sold, wereceived a note receivable with a face value of approximately $0.4 million dueon September 30, 2006, that bears an annual interest rate of 8%, receivable ona quarterly basis.  Subject to certaincriteria, we also have the right to receive a 4% and 4.5% annual share of futurerevenues of Beaconfire Consulting for the two and succeeding three years,respectively, payable on a quarterly basis and beginning at the end of, andincluding payment for, the quarter ending December 31, 2001.

 

In October 2001, we executed a stock transfer and asset sale withEdgar, Dunn & Company, Inc., a company composed of former Commerce Oneemployees.  In connection with thisagreement, we received a 10% minority interest in Edgar, Dunn & Company,Inc., and two notes receivable with face values totaling $1.3 million that aredue by September 30, 2004.  The notesbear an annual interest rate of 7.5%, receivable on a quarterly basis.  Subject to certain criteria, we also havethe rights to an annual revenue share of 6% of the future revenues of Edgar,Dunn & Company, Inc., for the four-year period following the closing inOctober 2001.

 

On January 9, 2002, we executed an asset sale agreement with ConnectiveCommerce Company LLC, a Massachusetts limited liability company composed offormer Commerce One employees.  Inconnection with this agreement, we received cash of approximately $2.4 millionand a note receivable with a face value of approximately $4.0 million due onDecember 31, 2004, that bears a quarterly interest rate of 1.75%, receivable ona quarterly basis commencing September 30, 2002.  On October 15, 2002, we agreed to modify the note agreement withConnective Commerce to decrease the payments in 2003 and to forgive interest onthe principal balance for 2003.

 

On February 21, 2002, we executed a stock purchase agreement withCommerce One E-Government Solutions, Inc., a Delaware corporation and awholly-owned subsidiary of the Company, and eGov Holdings, Inc., a Delawarecorporation composed of former Company employees.  In consideration for the sale of 100% of the outstanding common stockof Commerce One E-Government Solutions, Inc to eGov Holdings, Inc., we receivedcash consideration of approximately $8.4 million.

 

On January 24, 2003, we executed the sale and license of certain assetsand liabilities, including customer commitments, related to CommerceOne.net,the Company’s marketplace services business consisting of auction services,subscription services, content services and hosting services, with eScout LLC,a privately held limited liability company. In connection with the closing of this transaction, we received notesreceivable with an aggregate face value of approximately $2.0 million,membership interests in eScout and the right to receive a portion ofCommerceOne.net revenues over the next four years not to exceed $0.5 million inthe aggregate.  The note receivablebears a quarterly interest rate of 1.5% with payments due each quarter with thefinal payment due on January 24, 2005. Fifteen percent (15%) of the aggregate purchase price is held in escrowuntil January 2004 as security for any claims related to a breach of theCompany’s representations, warranties and covenants.

 

As a result of the business divestitures completed in the fourthquarter of 2001, we recorded a loss on divestiture of $0.8 million that wascharged to restructuring costs and other in the fourth quarter of 2001.  As a result of the business divestiturescompleted in the first quarter of 2002, we recorded a gain of approximately

 

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$2.3 million based on thecash proceeds received from the sale of E-Government Solutions, Inc, which wasapplied to the restructuring accrual in the first quarter of 2002.** **Werecognized total revenues of approximately $98.7 million in 2001 from ourprofessional services operations within our Global Services division which weredisposed of in the fourth quarter of 2001 and the first quarter of 2002.  We recognized total revenues ofapproximately $11.8 million in 2002 from the CommerceOne.net operations, whichwere divested in January 2003.

 

InJune 2002, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards ("SFAS") No. 146, “Accounting forCosts Associated with Exit or Disposal Activities.”  SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force (referred to asEITF) Issue No. 94-3 “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring”). SFAS No. 146 requires that a liability for a costassociated with an exit or disposal activity be recognized when the liabilityis incurred, not at the date of an entity’s commitment to an exit plan, asrequired under EITF Issue No. 94-3.   The provisions of SFAS No. 146 areeffective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 may affect the timing of recognizing futurerestructuring costs and the amounts recognized under such costs.  We will recognize cost associated with therestructuring that occurred in the first quarter of 2003 in accordance withSFAS No. 146.

 

## ***Amortizationof Intangible Assets***

 

Amortization of intangible assets totaled approximately $11.9 millionin 2002, $332.8 million in 2001 and $233.2 million in 2000.  The amortization of intangible assetsresulted from the acquisitions of Exterprise in 2001 and Mergent and AppNetduring 2000. The decrease in amortization is a result of impairments of variousintangible assets and also certain intangible assets being subsumed by goodwillas part of the adoption of SFAS No. 141 "Business Combinations".  Goodwill is no longer amortized inaccordance with SFAS No. 142.  See Note4 of the Consolidated Financial Statements incorporated herein by reference.

 

## ***Impairmentof Long Lived and Other Intangible Assets***

 

Under SFAS No. 142, intangible assets with finite lives that continueto be amortized should be reviewed for impairment in accordance with SFAS No.144. An impairment assessment is required whenever events or changes incircumstances indicate that the carrying value may not be recoverable. During the quarter ended March 31, 2002, we identified indicators of possibleimpairment relating to the Technology Agreement with Covisint.  Theimpairment indicators included, but were not limited to, significant negativeindustry and economic trends, which resulted in a reduction of forecasted cashflows related to the Technology Agreement.

 

In accordance with SFAS No. 144 we performed, with the assistance ofindependent valuation experts, an impairment test of the carrying value of theTechnology Agreement to determine whether any impairment existed.  We determined that the sum of the expectedundiscounted cash flows attributable to the Technology Agreement was less thanits carrying value and that an impairment write-down was required. Accordingly, we calculated the estimated fair value of the intangible asset bysumming the present value of the expected cash flows over its life.  Theimpairment was calculated by deducting the present value of the expected cashflows from the carrying value. This assessment resulted in an impairmentwrite-down of $145.8 million in relation to the Technology Agreement, which wascharged to cost of license fees during the quarter ended March 31, 2002.

 

During the quarter ended December 31, 2002, we identified indicators ofpossible impairment relating to the Covisint equity investment, property andequipment and intangible assets other than goodwill.  These indicators included, but were not limited to, a history ofnegative cash flows and operating losses and significant negative industry andeconomic trends.  We performed, with theassistance of independent valuation experts, an impairment test of the carryingvalue of these long-lived and intangible assets to determine whether anyimpairment existed.  We determined thatthe sum of the expected undiscounted cash flows attributable to the assets wasless than the carrying value of the assets and that an impairment existed.  We determined fair value

 

45

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for long-lived assets by using market values when available.  If no market existed for the asset, we usedindependent valuation experts to calculate fair value as the sum of thediscounted cash flows attributable to the assets.  The impairment was calculated by deducting the established fairvalue from the carrying value.  Thisassessment resulted in an impairment write-down of $20.5 million for property,plant, and equipment, $9.5 million for intangible assets other than goodwill,and $34.2 million for the Covisint Technology agreement during the quarterended December 31, 2002.

 

## ***Impairmentof Goodwill***

 

Effective July 1, 2001, we adopted certain provisions of Statement ofFinancial Standards (“SFAS”) No. 141, and effective January 1, 2002, we adoptedthe full provisions of SFAS No. 141 and SFAS No. 142.  SFAS No. 141requires business combinations initiated after June 30, 2001 to be accountedfor using the purchase method of accounting, and broadens the criteria forrecording intangible assets apart from goodwill.  We evaluated goodwilland other intangible assets acquired prior to June 30, 2001 using thetransition criteria of SFAS No. 141, which resulted in $15.7 million of otherintangible assets (comprised entirely of assembled workforce) being subsumedinto goodwill as of January 1, 2002.  SFAS No. 142 requires that purchasedgoodwill and certain indefinite-lived intangible assets no longer be amortized,but instead be tested for impairment at least annually.

 

SFAS No. 142 prescribes a two-phase process for impairment testing ofgoodwill.  The first phase, required to be completed by June 30, 2002,screens for impairment.  The second phase (if necessary), required to becompleted by December 31, 2002, measures the impairment.  We completed thefirst phase impairment analysis of goodwill during the first quarter of 2002and found no instance of impairment of recorded goodwill.

 

During the fourth quarter of 2002, we prepared our required SFAS 142impairment test.  Our fair value,established using the market method, was below its carrying value as ofDecember 31, 2002, indicating that a potential impairment to goodwillexisted.  We were then required tocalculate the potential impairment by establishing the fair value of goodwilland subtracting this fair value from the carrying value of goodwill.  In accordance with FAS No. 142, the fairvalue of goodwill is an implied value. The fair value of goodwill is calculated by subtracting the fair valueof the net assets of Commerce One (other than goodwill) from the fair value ofCommerce One.   The fair value of netassets includes determining the fair value of any unrecognized intangibleassets.  We engaged an independentvaluation firm to assist us in establishing fair values for any unrecognizedintangible assets.  The impairment wasthen calculated by deducting the fair value of goodwill from the carrying valueof goodwill.  This calculation resultedin an impairment write-down of $179.8 million.

 

***Interest Income andOther, net***

 

Interest income and other, net, decreased byapproximately $2.9 million to $4.7 million in 2002 from 2001 and increased byapproximately $0.6 million to $7.6 million in 2001 from 2000.  The decrease in interest income and other,net, for 2002 was primarily attributable to a lower average cash and investmentbalance in 2002 compared to 2001, along with the general decline in averageinterest rates during 2002.  Theincrease in 2001 from 2000 was due mainly to an increase in interest income dueto higher average cash and investment balances during 2001 compared to 2000.

 

***Provisionfor Income Taxes***

 

The income tax provision for 2002, 2001 and 2000 is the result ofwithholding and income taxes generated in certain foreign jurisdictions.

 

Realization of our net deferred tax assets is dependent upon thegeneration of sufficient taxable income in future years in appropriate taxjurisdictions to obtain benefit from the reversal of temporary differences and

 

46

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from net operating loss carryforwards. Due to the uncertainty of theamount and timing of future taxable income, we have provided a full valuationallowance against the net deferred tax assets.

 

***Acquisitions***

 

In May 2001, we acquired Exterprise, Inc. (“Exterprise”) a provider ofplatform solutions that enable the development and deployment of e-commerceapplications for corporations.  Theacquisition was structured as a common stock for common stock merger and wasaccounted for as a purchase transaction. The purchase consideration was approximately $66.3 million, consistingof approximately 720,000 shares of common stock with a fair value of approximately$60.7 million, assumption of options to acquire approximately 25,800 shares ofcommon stock with a fair value of $2.5 million and transaction costs ofapproximately $3.1 million.

 

Effective September 13, 2000, we acquired publicly tradedAppNet, Inc. (“AppNet”), a provider of end-to-end Internet professionalservices. The acquisition was accounted for as a purchase transaction. Thepurchase consideration was approximately $1,653.3 million consisting of2,788,728 shares of common stock with a fair value of approximately$1.266 billion and assumption of option to acquire approximately0.7 million options of common stock with a fair value of approximately$363.1 million, and transaction costs of approximately $24.0 million.

 

During 2001, we issued an additional 85,779 shares of its common stockto certain former stockholders and employees of AppNet.  The fair value of these shares wasapproximately $11.5 million, which amount was charged against relatedliabilities we assumed in connection with the acquisition.

 

Effective January 7, 2000, we acquired Mergent Systems, Inc.(“Mergent”), a company specializing in enabling companies to create, operate,and manage product information systems and aggregated multivendor catalogs fore-commerce, in a transaction accounted for as a purchase. The purchaseconsideration was approximately $148.4 million consisting of 174,219shares of common stock with a fair value of $122.6 million, assumption ofoptions to acquire 21,901 options with a fair value of $15.3 million,$238,000 of assumed liabilities, transaction costs of $250,000, andapproximately $10.0 million in cash to the Mergent stockholders in thistransaction.

 

**NEW ACCOUNTINGPRONOUNCEMENTS**

 

InJune 2002, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards ("FASB") No. 146, “Accounting forCosts Associated with Exit or Disposal Activities.”  SFAS No. 146addresses financial accounting and reporting for costs associated with exit ordisposal activities and nullifies Emerging Issues Task Force (referred to asEITF) Issue No. 94-3 “Liability Recognition for Certain Employee TerminationBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).”  SFAS No. 146 requires that a liability for a costassociated with an exit or disposal activity be recognized when the liabilityis incurred, not at the date of an entity’s commitment to an exit plan asrequired under EITF Issue No. 94-3. The provisions of SFAS No. 146 areeffective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 may affect the timing of recognizing futurerestructuring costs and the amounts recognized under such costs. SFAS No. 146is not expected to have a material impact on the Consolidated FinancialStatements.

 

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In November 2002, the FASB issued FIN 45, "Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others." FIN 45 requires that the Company recognize the fair value forguarantee and indemnification arrangements issued or modified by the Companyafter December 31, 2002, if these arrangements are within the scope of theinterpretation.   In addition, the Companymust continue to monitor the conditions that are subject to the guarantees andindemnifications, as required under previously existing GAAP principles inorder to identify if a loss has occurred. If the Company determines it isprobable that a loss has occurred then any such estimable loss would berecognized under those guarantees and indemnifications.   For further discussion of FIN 45, see Note1 to the Consolidated Financial Statements, “Other Recent AccountingPronouncements,” Part II, Item 8, incorporated here by reference.  

 

**ITEM7A.****               QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS**

 

The following discusses our exposure to market risk related to changesin interest rates, foreign currency exchange rates and equity prices. Thisdiscussion contains forward-looking statements that are subject to risks anduncertainties. Actual results could vary materially as a result of a number offactors including those set forth in “Risk Factors” beginning on page 11.

 

***Interest Rate Risk***

 

As of December 31, 2002, we had totalrestricted and unrestricted cash, highly liquid investments and short-terminvestments of approximately $112.9 million. These investments may be subjectto interest rate risk and will decrease in value if market interest ratesdecrease. A hypothetical increase or decrease in market interest rates by10 percent from the market interest rates at December 31, 2002 would causethe fair market value of our cash and cash equivalents to change by animmaterial amount. Declines in interest rates over time will, however, reduce ourinterest income.

 

As of December 31, 2002, all of the Company’s short-term investmentshave a contractual maturity date that is less than one year from December 31,2002. The following summarizes the fair value of the Company’s short-terminvestments at December 31, 2002 (amounts in thousands):

 

|                        |   | **Fair  Market Value** |   |
|-----------------------------|--------|------------------------|--------|
| Government  notes and bonds |   | $                      | 8,930  |   |
| Certificates  of deposit    |   | 26                     |   |
|                        |   | $                      | 8,956  |   |

 

***ForeignCurrency Exchange Rate Risk***

 

Substantiallyall of our revenues recognized to date have been denominated in U.S. dollars, asignificant portion of which have been transacted with customers outside theUnited States. To the extent that we engage in international sales denominatedin U.S. dollars, an increase in the value of the U.S. dollar relative toforeign currencies could make our products more expensive in internationalmarkets. We will continue to monitor our exposure to currency fluctuations andalthough we have never used financial hedging techniques to date, we may usethem in the future to minimize the effect of these fluctuations. Nevertheless,we cannot assure you that these fluctuations will not harm our business in thefuture.

 

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***EquityPrice Risk***

 

From time to time, we have made investments in private companies,particularly private companies that are our strategic partners or customers. Asof December 31, 2002, our investment in private companies had a carryingvalue of approximately $5.0 million. If these companies do not complete initialpublic offerings or are not acquired by publicly traded companies or for cash,we may not be able to liquidate these investments. In addition, even if we areable to sell these investments we cannot assure you that we will recoup ourinvestment or that we will not be required to sell these investments at a loss.** **Wehave sold certain investments at a loss over the past year. The recent generaldecline in the Nasdaq Stock Market’s National Market and the market prices ofpublicly traded technology companies, as well as any potential further declinesin the future, will continue to adversely affect our ability to realize areturn of our capital on most of these investments.

 

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**ITEM8.        CONSOLIDATED FINANCIALSTATEMENTS**

** **
|                                                                                                                                                        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Report of Ernst and Young LLP,  Independent Auditors                                                                                                   |
| Consolidated Financial Statements;                                                                                                                          |
| Consolidated Balance Sheets as of December 31, 2002 and 2001                                                                                           |
| Consolidated Statements of Operations for  the Years Ended December 31, 2002, 2001 and 2000                                                            |
| Consolidated Statements of Redeemable  Convertible Preferred Stock and Stockholders’ Equity for the Years Ended  December 31, 2002, 2001 and 2000 |
| Consolidated Statements of Cash Flows for  the Years Ended December 31, 2002, 2001 and 2000                                                            |
|                                                                                                                                                        |
| Notes to Consolidated Financial Statements                                                                                                                  |

 

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**REPORTOF ERNST AND YOUNG LLP, INDEPENDENT AUDITORS**

 

The Board of Directors and Stockholders

Commerce One, Inc.

 

We have audited the accompanying consolidated balance sheets ofCommerce One, Inc. as of December 31, 2002 and 2001, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the three years in the period ended December 31, 2002.  Our audits also included the financialstatement schedule listed in the Index at Item 15.  These consolidated financial statements and financial statementschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these consolidated financial statements andfinancial statement schedule based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofCommerce One, Inc. at December 31, 2002 and 2001, and the consolidated resultsof its operations and its cash flows for each of the three years in the periodended December 31, 2002, in conformity with accounting principles generallyaccepted in the United States.  Also inour opinion, the related financial statement schedule, when considered inrelation to the basic consolidated financial statements taken as a whole,presents fairly in all material respects the information set forth therein.

 

As discussed in Notes 1 and 4 to the consolidated financial statements,in 2002 Commerce One, Inc. changed its method of accounting for goodwill andcertain other purchased intangible assets.

 
|   | /s/  Ernst & Young LLP |
|--------|---------------------------------|

 

Walnut Creek, California

January 27, 2003

 

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**COMMERCEONE, INC.**

 

**CONSOLIDATED BALANCESHEETS**

**(In thousands, except share, and per sharedata)**

** **
|                                                                                                                                                          |   | **DECEMBER  31,** |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                                                                          |   | **2002**          |    | **2001** |   |
| ASSETS                                                                                                                                                        |   |              |    |   |   |
| Current assets:                                                                                                                                               |   |              |    |   |   |
| Cash and cash equivalents                                                                                                                                     |   | $                 | 73,753  |   | $ | 192,547 |   |
| Short term investments                                                                                                                                        |   | 3,510             |    | 81,346 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $6.0 million at December 31, 2002 and $24.1 million at  December 31, 2001 (1)                 |   | 7,373             |    | 45,877 |   |
| Prepaid expenses and other current assets                                                                                                                     |   | 4,923             |    | 9,762 |   |
| Total current assets                                                                                                                                          |   | 89,559            |    | 329,532 |   |
| Restricted cash, cash equivalents and short  term investments                                                                                                 |   | 35,630            |    | 14,260 |   |
| Property and equipment, net                                                                                                                                   |   | 9,761             |    | 64,908 |   |
| Goodwill, net                                                                                                                                                 |   | —            |    | 164,679 |   |
| Other intangible assets, net                                                                                                                                  |   | 18,449            |    | 244,855 |   |
| Investments and other assets                                                                                                                                  |   | 6,023             |    | 10,707 |   |
| Total assets                                                                                                                                                  |   | $                 | 159,422 |   | $ | 828,941 |   |
|                                                                                                                                                          |   |              |    |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                     |   |              |    |   |   |
| Current liabilities:                                                                                                                                          |   |              |    |   |   |
| Accounts payable                                                                                                                                              |   | $                 | 3,104   |   | $ | 23,773 |   |
| Accrued compensation and related expenses                                                                                                                     |   | 8,338             |    | 17,960 |   |
| Deferred revenue (2)                                                                                                                                          |   | 23,546            |    | 57,367 |   |
| Other current liabilities (3)                                                                                                                                 |   | 29,997            |    | 50,021 |   |
| Total current liabilities                                                                                                                                     |   | 64,985            |    | 149,121 |   |
|                                                                                                                                                          |   |              |    |   |   |
| Notes payable                                                                                                                                                 |   | 25,000            |    | 19,000 |   |
| Non-current accrued restructuring charges                                                                                                                     |   | 21,947            |    | 37,005 |   |
|                                                                                                                                                          |   |              |    |   |   |
| Commitment and Contingencies                                                                                                                                  |   |              |    |   |   |
| Stockholders’ equity:                                                                                                                                    |   |              |    |   |   |
| Common stock, par value $0.0001, 95,000,000  shares authorized; 29,276,716 and 28,752,021 issued and outstanding at  December 31, 2002 and 2001, respectively |   | 3,674,645         |    | 3,723,419 |   |
| Deferred stock compensation                                                                                                                                   |   | (4,385            | )       | (66,772 | ) |
| Note receivable from stockholder                                                                                                                              |   | (129              | )       | (129 | ) |
| Accumulated other comprehensive loss                                                                                                                          |   | (1,203            | )       | (1,101 | ) |
| Accumulated deficit                                                                                                                                           |   | (3,621,438        | )       | (3,031,602 | ) |
| Total stockholders’ equity                                                                                                                               |   | 47,490            |    | 623,815 |   |
| Total liabilities and stockholders’ equity                                                                                                               |   | $                 | 159,422 |   | $ | 828,941 |   |
|                                                                                                                                                          |   |              |    |   |   |
|                                                                                                                                                               |   |              |    |   |   |
| Amounts included above from related parties  (Note 10):                                                                                                       |   |              |    |   |   |
| (1) Accounts receivable, net                                                                                                                                  |   | $                 | 947     |   | $ | 1,669 |   |
| (2) Deferred revenue                                                                                                                                          |   | $                 | 11,138  |   | $ | 35,458 |   |
| (3) Other current liabilities                                                                                                                                 |   | $                 | 418     |   | $ | 4,114 |   |

 

See accompanying notes.

 

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**COMMERCE ONE, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inthousands, except per share data)**

 
|                                                                  |   | **YEARS  ENDED DECEMBER 31,** |     |
|-----------------------------------------------------------------------|--------|-------------------------------|----------|
|                                                                  |   | **2002**                      |     | **2001** |   | **2000** |   |
| Revenues:                                                             |   |                          |     |
| License  fees                                                         |   | $                             | 28,597   |   | $ | 130,917 |   | $ | 223,277 |   |
| Services                                                              |   | 76,932                        |     | 277,652 |   | 178,519 |   |
| Total revenues (1)                                                    |   | 105,529                       |     | 408,569 |   | 401,796 |   |
| Costs and expenses:                                                   |   |                          |     |   |   |   |   |
| Cost of license fees (2)                                              |   | 192,406                       |     | 662,315 |   | 14,910 |   |
| Cost of services                                                      |   | 68,233                        |     | 228,023 |   | 139,746 |   |
| Sales and marketing                                                   |   | 78,945                        |     | 183,412 |   | 168,647 |   |
| Product development                                                   |   | 76,922                        |     | 118,159 |   | 102,676 |   |
| General and administrative                                            |   | 25,615                        |     | 116,621 |   | 43,236 |   |
| Purchased in-process research and  development                        |   | —                        |     | 4,548 |   | 5,142 |   |
| Stock compensation                                                    |   | 8,728                         |     | 98,302 |   | 39,820 |   |
| Restructuring costs and other                                         |   | 22,947                        |     | 126,605 |   | — |   |
| Amortization of goodwill and other  intangible assets                 |   | 11,867                        |     | 332,789 |   | 233,183 |   |
| Impairment of intangible assets, fixed  assets and equity investments |   | 214,082                       |     | 1,120,464 |   | — |   |
| Total costs and expenses                                              |   | 699,745                       |     | 2,991,238 |   | 747,360 |   |
| Loss from operations                                                  |   | (594,216                      | )        | (2,582,669 | ) | (345,564 | ) |
| Interest income and other, net                                        |   | 4,681                         |     | 7,571 |   | 7,017 |   |
| Net loss before income taxes                                          |   | (589,535                      | )        | (2,575,098 | ) | (338,547 | ) |
| Provision for income taxes                                            |   | 301                           |     | 9,001 |   | 6,400 |   |
| Net loss                                                              |   | $                             | (589,836 | ) | $ | (2,584,099 | ) | $ | (344,947 | ) |
| Basic and diluted net loss per share                                  |   | $                             | (20.33   | ) | $ | (103.02 | ) | $ | (20.52 | ) |
| Shares used in calculation of net loss per  share                     |   | 29,011                        |     | 25,084 |   | 16,807 |   |
|                                                                  |   |                          |     |   |   |   |   |

----

| (1) | Revenue from related parties (Note 10)                                                                                   |   | $ | 32,022  |   | $ | 97,741  |   | $ | 52,512 |   |
|-----|--------------------------------------------------------------------------------------------------------------------------|--------|---|---------|--------|---|---------|--------|---|--------|--------|
| (2) | Includes  charges for the impairment  and  amortization of the Technology  Agreement with Covisint (Notes 4 and 11) |   | $ | 190,396 |   | $ | 647,500 |   | $ | 5,700  |   |

 

See accompanying notes.

 

53

----

 

**COMMERCEONE, INC.**

 

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

(In thousands, except share data)

 
|                                                                                               |             |       |       | **Deferred   Stock   Compensation** |      | **Note   Receivable   from   Shareholder** |   | **Accumulated   Other Comprehensive   Loss** |   | **Accumulated   Deficit** |   | **Total**  |   |
|----------------------------------------------------------------------------------------------------|------------------|------------|------------|-------------------------------------|-----------|--------------------------------------------|--------|----------------------------------------------|--------|---------------------------|--------|------------|--------|
|                                                                                               |             |       |
|                                                                                               | **Common Stock** |       |
|                                                                                               | **Shares**       |       | **Amount** |                                |
| BALANCES AT DECEMBER 31, 1999                                                                      |             | 14,993,648 |       | $                                   | 423,839   |                                       | $      | (4,110                                       | )      | $                         | — |       | $      | (452 | ) | $ | (102,556 | ) | $ | 316,721 |   |
| Issuance of common stock upon exercise of stock options                                            |             | 803,304    |       | 40,407                              |      | —                                     |   | —                                       |   | —                    |   | —     |   | 40,407 |   |
| Issuance of common stock under employee stock purchase plan                                        |             | 198,534    |       | 11,221                              |      | —                                     |   | —                                       |   | —                    |   | —     |   | 11,221 |   |
| Issuance of shares in connection with business combinations                                        |             | 2,988,970  |       | 1,774,339                           |      | (169,166                                   | )      | —                                       |   | —                    |   | —     |   | 1,605,173 |   |
| Notes receivable from shareholder assumed in business combination                                  |             | —     |       | —                              |      | —                                     |   | (133                                         | )      | —                    |   | —     |   | (133 | ) |
| Payment of note receivable from stockholder assumed in business  combination                       |             | —     |       | —                              |      | —                                     |   | 4                                            |   | —                    |   | —     |   | 4 |   |
| Sale of common in connection with strategic partnerships, net of  issuance cost                    |             | 505,955    |       | 249,783                             |      | —                                     |   | —                                       |   | —                    |   | —     |   | 249,783 |   |
| Contractual obligation to issue common stock in connection with  Covisint agreement                |             | 2,880,000  |       | 880,200                             |      | —                                     |   | —                                       |   | —                    |   | —     |   | 880,200 |   |
| Deferred stock compensation                                                                        |             | —     |       | 20,174                              |      | (20,174                                    | )      | —                                       |   | —                    |   | —     |   | — |   |
| Amortization of deferred stock compensation                                                        |             | —     |       | —                              |      | 39,820                                     |   | —                                       |   | —                    |   | —     |   | 39,820 |   |
| Issuance of warrants for services                                                                  |             | —     |       | 1,524                               |      | —                                     |   | —                                       |   | —                    |   | —     |   | 1,524 |   |
| Net loss                                                                                           |             | —     |       | —                              |      | —                                     |   | —                                       |   | —                    |   | (344,947   | )      | (344,947 | ) |
| Foreign currency translation adjustment                                                            |             | —     |       | —                              |      | —                                     |   | —                                       |   | (323                      | )      | —     |   | (323 | ) |
| Unrealized loss on investments                                                                     |             | —     |       | —                              |      | —                                     |   | —                                       |   | (39                       | )      | —     |   | (39 | ) |
| Comprehensive loss                                                                                 |             |       |       |                                |      |                                       |   |                                         |   |                      |   |       |   | (345,309 | ) |
|                                                                                               |             |       |       |                                |      |                                       |   |                                         |   |                      |   |       |   |   |   |
| BALANCES AT DECEMBER 31, 2000                                                                      |             | 22,370,411 |       | 3,401,487                           |      | (153,630                                   | )      | (129                                         | )      | (814                      | )      | (447,503   | )      | 2,799,411 |   |
| Issuance of common stock upon exercise of stock options                                            |             | 429,331    |       | 6,961                               |      | —                                     |   | —                                       |   | —                    |   | —     |   | 6,961 |   |
| Repurchase of common stock from terminated employees                                               |             | (17,416    | )          | (59                                 | )         | —                                     |   | —                                       |   | —                    |   | —     |   | (59 | ) |
| Issuance of common stock under employee stock purchase plan                                        |             | 291,330    |       | 11,664                              |      | —                                     |   | —                                       |   | —                    |   | —     |   | 11,664 |   |
| Issuance of common stock and assumption of stock options in  connection with business combinations |             | 807,858    |       | 74,768                              |      | (2,181                                     | )      | —                                       |   | —                    |   | —     |   | 72,587 |   |
| Issuance of restricted common stock to employees                                                   |             | 187,915    |       | 14,099                              |      | (14,099                                    | )      | —                                       |   | —                    |   | —     |   | — |   |
| Forfeiture of restricted common stock by employees upon termination                                |             | (65,885    | )          | (4,836                              | )         | 4,836                                      |   | —                                       |   | —                    |   | —     |   | — |   |
| Sale of common stock to SAP, net of issuance cost                                                  |             | 4,748,477  |       | 219,335                             |      | —                                     |   | —                                       |   | —                    |   | —     |   | 219,335 |   |
| Amortization of deferred stock compensation                                                        |             | —     |       | —                              |      | 98,302                                     |   | —                                       |   | —                    |   | —     |   | 98,302 |   |
| Net Loss                                                                                           |             | —     |       | —                              |      | —                                     |   | —                                       |   | —                    |   | (2,584,099 | )      | (2,584,099 | ) |
| Foreign currency translation adjustment                                                            |             | —     |       | —                              |      | —                                     |   | —                                       |   | 120                       |   | —     |   | 120 |   |
| Unrealized loss on investments                                                                     |             | —     |       | —                              |      | —                                     |   | —                                       |   | (407                      | )      | —     |   | (407 | ) |
| Comprehensive loss                                                                                 |             |       |       |                                |      |                                       |   |                                         |   |                      |   |       |   | (2,584,386 | ) |
|                                                                                               |             |       |       |                                |      |                                       |   |                                         |   |                      |   |       |   |   |   |
| BALANCES AT DECEMBER 31, 2001                                                                      |             | 28,752,021 |       | 3,723,419                           |      | (66,772                                    | )      | (129                                         | )      | (1,101                    | )      | (3,031,602 | )      | 623,815 |   |
| Issuance of common stock upon exercise of stock options                                            |             | 215,382    |       | 3,163                               |      | —                                     |   | —                                       |   | —                    |   | —     |   | 3,163 |   |
| Repurchase of common stock from terminated employees                                               |             | (9,661     | )          | (53                                 | )         | —                                     |   | —                                       |   | —                    |   | —     |   | (53 | ) |
| Issuance of common stock under employee stock purchase plan                                        |             | 358,760    |       | 2,275                               |      | —                                     |   | —                                       |   | —                    |   | —     |   | 2,275 |   |
| Forfeiture of restricted common stock by employees upon termination                                |             | (39,786    | )          | (2,958                              | )         | 2,958                                      |   | —                                       |   | —                    |   | —     |   | — |   |
| Additional issuance cost on sale of common stock to SAP                                            |             | —     |       | (500                                | )         | —                                     |   | —                                       |   | —                    |   | —     |   | (500 | ) |
| Deferred compensation forfeited                                                                    |             | —     |       | (50,701                             | )         | 50,701                                     |   | —                                       |   | —                    |   | —     |   | — |   |
| Amortization of deferred stock compensation                                                        |             | —     |       | —                              |      | 8,728                                      |   | —                                       |   | —                    |   | —     |   | 8,728 |   |
| Net loss                                                                                           |             | —     |       | —                              |      | —                                     |   | —                                       |   | —                    |   | (589,836   | )      | (589,836 | ) |
| Foreign currency translation adjustment                                                            |             | —     |       | —                              |      | —                                     |   | —                                       |   | (490                      | )      | —     |   | (490 | ) |
| Unrealized gain on investments                                                                     |             | —     |       | —                              |      | —                                     |   | —                                       |   | 388                       |   | —     |   | 388 |   |
| Comprehensive loss                                                                                 |             |       |       |                                |      |                                       |   |                                         |   |                      |   |       |   | (589,938 | ) |
|                                                                                               |             |       |       |                                |      |                                       |   |                                         |   |                      |   |       |   |   |   |
| BALANCES AT DECEMBER 31, 2002                                                                      |             | 29,276,716 |       | $                                   | 3,674,645 |                                       | $      | (4,385                                       | )      | $                         | (129   | )          | $      | (1,203 | ) | $ | (3,621,438 | ) | $ | 47,490 |   |

 

See accompanying notes.

 

54

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**COMMERCEONE OPERATIONS, INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In thousands)**

** **
|                                                                                                                |   | **YEARS  ENDED DECEMBER 31,** |     |
|---------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|----------|
|                                                                                                                |   | **2002**                      |     | **2001** |   | **2000** |   |
| **Operating activities:**                                                                                           |   |                          |     |   |   |   |   |
| Net loss                                                                                                            |   | $                             | (589,836 | ) | $ | (2,584,099 | ) | $ | (344,947 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities:                                    |   |                          |     |   |   |   |   |
| Depreciation and amortization                                                                                       |   | 30,733                        |     | 45,375 |   | 15,339 |   |
| Purchased in-process research and  development                                                                      |   | —                        |     | 4,548 |   | 5,142 |   |
| Amortization of cost of Technology  Agreement with Covisint                                                         |   | 10,428                        |     | 55,188 |   | 5,689 |   |
| Amortization of deferred stock compensation                                                                         |   | 8,728                         |     | 98,302 |   | 39,820 |   |
| Amortization of goodwill and other intangible  assets                                                               |   | 11,867                        |     | 332,789 |   | 233,184 |   |
| Impairment of goodwill and other intangible  assets                                                                 |   | 189,344                       |     | 1,098,869 |   | — |   |
| Impairment of Technology Agreement with  Covisint                                                                   |   | 179,968                       |     | 592,334 |   | — |   |
| Write down of investment in Covisint                                                                                |   | 4,255                         |     | 21,595 |   | — |   |
| Loss on other investments                                                                                           |   | 248                           |     | 2,958 |   | 2,994 |   |
| Loss on disposal of property and equipment                                                                          |   | —                        |     | 26,914 |   | — |   |
| Impairment of property and equipment                                                                                |   | 20,483                        |     | — |   | — |   |
| Other                                                                                                               |   | 977                           |     | — |   | — |   |
| Changes in operating assets and  liabilities:                                                                       |   |                          |     |   |   |   |   |
| Restricted cash and investments                                                                                     |   | (30,184                       | )        | — |   | — |   |
| Accounts receivable, net                                                                                            |   | 29,972                        |     | 111,366 |   | (91,043 | ) |
| Prepaid and other current assets                                                                                    |   | 7,980                         |     | 8,221 |   | (8,402 | ) |
| Accounts payable                                                                                                    |   | (20,014                       | )        | (5,075 | ) | 13,654 |   |
| Accrued compensation and related expenses                                                                           |   | (9,622                        | )        | (27,390 | ) | 26,612 |   |
| Other current liabilities                                                                                           |   | (28,981                       | )        | (28,780 | ) | 29,967 |   |
| Deferred revenue                                                                                                    |   | (33,821                       | )        | (57,078 | )  | 71,894 |   |
| Non-current accrued restructuring charges                                                                           |   | —                        |     | 37,005 |   | — |   |
| Net cash used in operating activities                                                                               |   | (217,475                      | )        | (266,958 | ) | (97 | )  |
| **Investing  activities:**                                                                                          |   |                          |     |   |   |   |   |
| Purchase of property and equipment, net                                                                             |   | (6,503                        | )        | (39,491 | ) | (79,158 | ) |
| Proceeds from maturities of short term  investments                                                                 |   | 130,550                       |     | 204,709 |   | 82,880 |   |
| Purchase of short term investments                                                                                  |   | (43,964                       | )        | (173,954 | ) | (136,357 | ) |
| Business combinations, net of cash acquired                                                                         |   | —                        |     | (2,499 | )  | 8,773 |   |
| Additional costs of Technology Agreement  with Covisint, net                                                        |   | —                        |     | (2,815 | )  | — |   |
| Proceed from divestitures                                                                                           |   | 10,734                        |     | — |   | — |   |
| Other investments                                                                                                   |   | 1,569                         |     | 3,191 |   | (13,199 | ) |
| Net cash provided by (used in) investing  activities                                                                |   | 92,386                        |     | (10,859 | ) | (137,061 | ) |
| **Financing  activities**:                                                                                          |   |                          |     |   |   |   |   |
| Proceeds from issuance of common stock, net                                                                         |   | 4,885                         |     | 237,901 |   | 301,411 |   |
| Proceeds from borrowings on notes payable                                                                           |   | 25,423                        |     | 19,000 |   | — |   |
| Payments on notes payable and capital lease  obligations                                                            |   | (23,053                       | )        | (1,846 | ) | (533 | ) |
| Net cash provided by financing activities                                                                           |   | 7,255                         |     | 255,055 |   | 300,878 |   |
| Effect of foreign currency translation on  cash and cash equivalents                                                |   | (960                          | )   | 120 |   | (323 | ) |
| Net (decrease) increase in cash                                                                                     |   | (118,794                      | )        | (22,642 | )  | 163,397 |   |
| Cash balance at beginning of period                                                                                 |   | 192,547                       |     | 215,189 |   | 51,792 |   |
| Cash balance at end of period                                                                                       |   | $                             | 73,753   |   | $ | 192,547 |   | $ | 215,189 |   |
|                                                                                                                |   |                          |     |   |   |   |   |
| **Supplemental  disclosures:**                                                                                      |   |                          |     |   |   |   |   |
| Interest paid                                                                                                       |   | $                             | 946      |   | $ | 351 |   | $ | 235 |   |
| Cash paid for income taxes                                                                                          |   | $                             | 2,620    |   | $ | 4,307 |   | $ | 4,590 |   |
| Non-cash investing and financing  activities:                                                                       |   |                          |     |   |   |   |   |
| Deferred stock compensation                                                                                         |   | $                             | —   |   | $ | 9,263 |   | $ | 20,174 |   |
| Unrealized loss on investments                                                                                      |   | $                             | 388      |   | $ | 407 |   | $ | 39 |   |
| Issuance of preferred stock, common stock  and assumption of stock options in connection with business combinations |   | $                             | —   |   | $ | 74,768 |   | $ | 1,774,339 |   |
| Deferred stock compensation related to  stock option grants and options assumed in business combinations            |   | $                             | —   |   | $ | 2,181 |   | $ | 12,821 |   |
| Valuation of common stock to be issued in  connection with Technology Agreement with Covisint                       |   | $                             | —   |   | $ | — |   | $ | 849,350 |   |
| Common stock warrant issued in connection  with services provided                                                   |   | $                             | —   |   | $ | — |   | $ | 1,524 |   |
| Common stock issued in connection with  equity interest in Covisint                                                 |   | $                             | —   |   | $ | — |   | $ | 30,850 |   |

 

See accompanying notes.

 

55

----

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**1. SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

***DESCRIPTIONOF THE COMPANY***

 

The Company was founded as Distrivision in 1994, and changed its nameto Commerce One in 1997, and re-incorporated into Delaware in 1999.  On July 11, 2001, the Company completed itsreorganization into a holding company structure.  Commerce One is a technology company that specializes in softwareand services that allow companies to conduct business more efficiently throughbusiness process automation and web services solutions.  The Company’ssoftware provides the technology and infrastructure that enable companies toconduct business processes via the Internet or Intranets and to manage theirsupplier, partner and customer relationships more effectively.  CommerceOne’s services operations support these software solutions and help companiestake maximum advantage of the efficiencies that these solutions canoffer.  Together, the Company’s software and services allow companies toautomate business functions that traditionally involved costly andtime-consuming phone calls and paperwork.

 

***BASISOF PRESENTATION***

 

At December31, 2002, the Company has $112.9 million cash and cash equivalents andinvestments, of which $77.3 million is unrestricted and available to fundoperations, $24.6 million working capital and $3,621.4 million accumulateddeficit.  Furthermore, the Companyexpects to use approximately $39 million in cash to fund its operations in thefirst quarter of 2003.  To date, theCompany has funded its operations from revenue and equity financing.  The Company plans to fund its current levelof operations from a combination of available unrestricted cash and cashequivalents, investments and revenue. However, plans and future events are inherently uncertain.  Therefore, should the Company’s levels of revenueand cash, cash equivalents and investments fall short of the Company's expectations,the Company will take action to further reduce its operating expenses,primarily through reductions of personnel-related costs, and the Companybelieves such action, if needed, will allow the Company to have sufficient cashto finance its expected operating losses and working capital requirementsthrough the 2003 calendar year.

 

The consolidated financial statements include the accounts of theCompany and its wholly owned subsidiaries. All significant inter-companyaccounts and transactions have been eliminated in consolidation.  Certain previously reported amounts havebeen reclassified to conform to the current presentation format.

 

The functional currency of the Company’s foreign subsidiaries is thelocal currency. The Company translates all assets and liabilities to U.S.dollars at the current exchange rates as of the applicable balance sheet date.Revenue and expenses are translated using the average exchange rate for theperiod. Gains and losses resulting from the translation of the foreign subsidiaries’financial statements are reported as a separate component of accumulatedcomprehensive other income (loss) in stockholders’ equity. Net gains and lossesresulting from foreign exchange transactions, which are recorded in thestatement of operations, were not significant during any of the periodspresented.

 

***USEOF ESTIMATES***

 

The preparation of the consolidated financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Actual results could differfrom those estimates. Significant estimates and assumptions made bymanagement involve revenue recognition, the establishment of provisions for baddebts and warranty, the determination of the fair value of stock awards toemployees for purposes of the pro forma disclosures. the valuation of goodwill,other intangible assets, fixed assets, and equity investments, and the restructuringaccruals related to office closures.

 

56

----

 

***CASHAND CASH EQUIVALENTS***

 

Cash equivalents are highly liquid investments with insignificantinterest rate risk and maturities of 90 days or less at the date of purchaseand are stated at amounts that approximate fair value. Cash equivalents consistprincipally of investments in short-term money market instruments andcertificates of deposit.

 

***SHORTTERM INVESTMENTS***

 

Short-term investments consist principally of commercial paper,corporate notes and bonds, government notes and bonds and certificates ofdeposit with maturities greater than 90 days and are stated at amountsthat approximate fair value.

 

The Company accounts for its short term investments in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 115, “Accountingfor Certain Investments in Debt and Equity Securities.”  Management determines the appropriateclassification of debt securities at the time of purchase and reevaluates suchdesignation as of each balance sheet date.

 

The Company has classified its short-term investments asavailable-for-sale. Available-for-sale investments are recorded at fair valuebased on quoted market prices at December 31, 2002 and 2001, with unrealizedgains and losses reported as other comprehensive income (loss) and includedwithin accumulated other comprehensive income (loss) in the statement ofstockholders’ equity. Realized gains and losses, which have been immaterial todate, are included in interest and other income and are derived using thespecific identification method for determining the cost of investments sold.Dividend and interest income is recognized when earned.

 

As of December 31, 2002, all of the Company’s short-term investments havea contractual maturity date that is less than one year from December 31, 2002.The following summarizes the fair value of the Company’s short-term investmentsat December 31, 2002 (amounts in thousands):

 
|                        |   | **Amortized   Cost** |   | **Gross   Unrealized   Gains** |   | **Gross   Unrealized   Losses** |   | **Fair Value** |   |
|-----------------------------|--------|----------------------|--------|--------------------------------|--------|---------------------------------|--------|----------------|--------|
| Government  notes and bonds |   | $                    | 8,928  |                           | $      | 2                               |   | $              | — |   | $ | 8,930 |   |
| Certificates  of deposit    |   | 26                   |   | —                         |   | —                          |   | 26             |   |
|                        |   | $                    | 8,954  |                           | $      | 2                               |   | $              | — |   | $ | 8,956 |   |
|                             |        |                      |        |                                |        |                                 |        |                |        |  |  |  |  |  |  |  |  |

 

Short-terminvestments as of December 31, 2002 included approximately $26,000 and $5.4 millionin certificates of deposit and government notes and bonds, respectively, whichcollateralized certain of the Company’s obligations related to operating leaseagreements for office facilities.

 

The following summarizes the fair value of the Company’s short-terminvestments at December 31, 2001 (amounts in thousands):

 
|                        |   | **Amortized   Cost** |   | **Gross   Unrealized   Gains** |   | **Gross   Unrealized   Losses** |   | **Fair Value** |   |
|-----------------------------|--------|----------------------|--------|--------------------------------|--------|---------------------------------|--------|----------------|--------|
| Commercial  paper           |   | $                    | 30,916 |                           | $      | 28                              |   | $              | — |   | $ | 30,944 |   |
| Government  notes and bonds |   | 32,973               |   | 13                             |   | (2                              | )      | 32,984         |   |
| Corporate  notes and bonds  |   | 20,648               |   | 27                             |   | —                          |   | 20,675         |   |
| Certificates  of deposit    |   | 11,003               |   | —                         |   | —                          |   | 11,003         |   |
|                        |   | $                    | 95,540 |                           | $      | 68                              |   | $              | (2     | ) | $ | 95,606 |   |

 

57

----

 

Short-term investments as of December 31, 2001 included approximately$8.0 million and $6.3 million in certificates of deposit and government notesand bonds, respectively, which collateralized certain of the Company’sobligations related to operating lease agreements for office facilities,potential workers compensation claims and guarantees of a personal homemortgage for an executive officer.

 

***RESTRICTED CASH,CASH EQUIVALENTS, AND SHORT TERM INVESTMENTS***

 

Restricted cash, cash equivalents, and short-term investments totaled$35.6 million and $14.3 million as of December 31, 2002 and 2001,respectively.  In 2002, these amountscollateralize the Company’s obligations related to operating lease agreementsfor office facilities and a bank note payable. In 2001, these amounts collateralized the Company’s obligations relatedto operating lease agreements for office facilities, potential workercompensation claims, and the guarantee of a personal home mortgage for anexecutive officer.

 

***PROPERTYAND EQUIPMENT***

 

Property and equipment are stated at cost less accumulated depreciation.Depreciation is computed using the straight-line method over the estimateduseful lives of the related assets as follows: computer equipment, officeequipment, furniture and fixtures aredepreciated over three years, and leasehold improvements are depreciated over the shorter ofthe remaining term of the related lease or the estimated economic useful lifeof the improvement. Equipment acquired under capital leases is depreciated overthe shorter of the expected useful life or the related lease term.

 

***GOODWILLAND OTHER INTANGIBLE ASSETS***

 

Goodwill and other intangible assets result from business combinationsaccounted for under the purchase method and intellectual property that iscomprised of the cost incurred filing for original patents. Intangible assetsrelated to acquired technology, trademarks, patents and other intangible assetsacquired through business combinations are being amortized on a straight-linemethod over the estimated useful life of the related asset, generally one tofive years, and intellectual property related to original patents is beingamortized over an estimated useful life of ten years.  Effective July 1, 2001 the Company adopted certainprovisions of SFAS 141, “Business Combinations”, and on January 1, 2002, theCompany adopted the full provisions of SFAS 141 and SFAS 142, “Goodwill andOther Intangible Assets.” SFAS 141 requires that the purchase method ofaccounting be used for all business combinations initiated after June 30, 2001,and also specifies the criteria for the recognition of intangible assetsseparately from goodwill. Under the new rules, goodwill is no longer amortizedbut is subject to an impairment test at least annually. SFAS 141 specificallyidentified assembled workforce as an intangible asset that is not to berecognized apart from goodwill and it was subsumed into goodwill on January 1,2002. Other intangible assets that meet the new criteria continue to beamortized over their useful lives.  In2002, goodwill was evaluated for impairment and deemed to be fully impaired asof December 31, 2002. The Company also evaluates potential impairments of itslong-lived assets, including intangibles. When the Company determines that the carrying value of long-lived assetsmay not be recoverable based upon the existence of one or more indicators ofimpairment, the Company evaluates the expected undiscounted cash flows relatedto the assets.  If these cash flows areless than the carrying value of the assets, the Company measures the impairmentusing discounted cash flows.

 

***LONG-LIVED ASSETS***

 

The Company adopted SFAS144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” onJanuary 1, 2002. SFAS 144 supersedes SFAS 121, “Accounting for the Impairmentof Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The primaryobjectives of SFAS 144 are to develop one accounting model based on theframework established in SFAS 121 for long-lived assets to be disposed of bysale, and to address significant implementation issues.

 

Long-lived assets, otherthan goodwill, are  reviewed forimpairment whenever events or changes

 

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in circumstances indicate thatthe carrying amount of the assets might not be recoverable. The Company doesnot perform a periodic assessment of assets for impairment in the absence ofsuch information or indicators. Conditions that would necessitate an impairmentassessment include a significant decline in the observable market value of anasset, a significant change in the extent or manner in which an asset is used,or a significant adverse change that would indicate that the carrying amount ofan asset or group of assets is not recoverable. For long-lived assets to beheld and used, the Company recognizes an impairment loss only if its carryingamount is not recoverable through its undiscounted cash flows and measures theimpairment loss based on the difference between the carrying amount and fairvalue. Long-lived assets held for sale are reported at the lower of cost orfair value less costs to sell.

 

***SOFTWAREDEVELOPMENT COSTS***

 

The Company accounts for software development costs in accordance withthe Financial Accounting Standards Board (referred to as “FASB”) No. 86,“Accounting for the Costs of Computer Software to be Sold, Leased, or OtherwiseMarketed,” under which certain software development costs incurred subsequentto the establishment of technological feasibility are capitalized and amortizedover the estimated lives of the related products. Technological feasibility isestablished upon completion of a working model. Development costs incurredsubsequent to the establishment of technological feasibility have not beensignificant, and all software development costs have been charged to productdevelopment expense in the accompanying consolidated statements of operations.

 

***CONCENTRATIONOF CREDIT RISK AND CREDIT EVALUATIONS***

 

Financial instruments which potentially subject the Company toconcentrations of risk include cash, cash equivalents, short-term investmentsand accounts receivable. The Company’s investment policies limit cashequivalents and short-term investments to short-term, low riskinvestments.  Cash and cash equivalents,short-term investments are held with a domestic financial institution with highcredit standing. For the year ended December 31, 2002, transactions withSAP AG (“SAP”) accounted for approximately 24.8% of the Company’s totalrevenues. For the year ended December 31, 2002, one other customer accountedfor more than 11% of the Company’s total revenues. For the year ended December31, 2001, transactions with SAP accounted for approximately 19.4% of theCompany’s total revenues. For the years ended December 31, 2001 and 2000,no other customer accounted for more than 10% of the Company’s total revenues.  At December 31, 2002, no customersaccounted for more than 10% of the Company’s gross accounts receivablebalance.  At December 31, 2001, twocustomers accounted for 13% and 12% of the Company’s gross accounts receivablebalance. The Company performs ongoing credit evaluations of its customers anddoes not typically require collateral or guarantees. Management maintainsallowances for doubtful accounts for estimated losses resulting from theinability of the Company’s customers to make required payments.  If the financial condition of the Company’scustomers were to deteriorate, resulting in an impairment of their ability tomake such payments, increases in the allowance may be required.

 

#### ***REVENUE RECOGNITION***

 

The Company’s revenue recognition policies are consistent withStatement of Position 97-2 “Software Revenue Recognition,” as modified byStatement of Position 98-9.

 

Revenues from license agreements for software products are recognizedupon delivery of the software if there is persuasive evidence of anarrangement, collection is probable and the fee is fixed or determinable. Whensoftware is licensed to third parties through indirect sales channels,generally license fees are recognized as revenue under the sell-through method,when the criteria described above have been met and the reseller has sold thesoftware to an end-user customer. While the Company generally does not licensesoftware under barter or concurrent arrangements, whenever software has beenlicensed under such arrangements the Company has recognized revenue equal tothe net monetary amounts to be received by the Company.

 

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The Company reduces license revenue to reflect estimated productreturns.  While as a matter of contractand general practice, the Company does not accept the return of softwareproducts after the expiration of any acceptance period, unforeseen contractualdisputes with customers may require us to accept the return of a product.  Should actual product returns differ fromestimates, revisions to the product return allowance would be required.

 

The Company charges estimated product warranty costs to cost oflicenses at the time revenue is recognized. While the Company engages in extensive product quality programs and processesprior to the release of software, unforeseen product errors may exist in ourproducts that may require us to incur costs to correct or replace the affectedproducts.  Should actual costs differfrom its estimates, revisions to the estimated warranty costs would berequired.

 

Revenues from professional services contracts are generally recognizedon a time and material basis.  However,when contracts have a fixed price revenue is recognized on thepercentage-of-completion method, with costs and estimated profits recorded aswork is performed.  Provisions forestimated losses on uncompleted contracts are made

 

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in the period in which such losses are determined. Changes in contractperformance and estimated profitability, including final contract settlements,may result in revisions to costs and revenues, which are recognized in theperiod in which the revisions are determined.

 

If a customer transaction includes both software license and serviceselements or the rights to multiple software products, the total arrangement feeis allocated to each of the elements using the residual method, under whichrevenue is allocated to undelivered elements based on vendor specific objectiveevidence of the fair values of such undelivered elements and the residualamounts of revenue are allocated to the delivered elements.

 

Revenue is recognized using contract accounting for arrangementsinvolving significant customization or modifications of the software or whereprofessional services are considered necessary to the functionality of thesoftware. Revenue from these software and services arrangements is recognizedusing the percentage of completion method.

 

Software maintenance revenues, subscription and hosting fees arerecognized ratably over the term of the related contract, typically one year,in accordance with revenue recognition criteria.

 

Network service fees (transaction fees and revenue sharing), which havenot been significant, are recognized as earned based on customer transactions.

 

Deferred revenue consists of license fees for which revenue recognitioncriteria have not been met and prepaid fees for services, subscription fees,and maintenance and support agreements.

 

***STOCK-BASEDCOMPENSATION***

 

The Company generally has three categories of employee stock-basedawards: restricted stock, stock options and a stock purchase plan, which aremore fully described in “Note 11 — Stockholders’ Equity.” The Companyaccounts for employee stock options using the intrinsic value method inaccordance with Accounting Principles Board Opinion No. 25 “Accounting forStock Issued to Employees” (“APB 25”) and has adopted the disclosure-onlyalternative of SFAS No. 123, “Accounting for Stock-Based Compensation” asamended by SFAS No. 148, “Accounting for Stock-Based Compensation –Transition and Disclosure.” Under the intrinsic value method, the Company hasonly recorded stock-based compensation resulting from restricted stock issuedand options assumed in various prior period acquisitions.

 

Restrictedstock is measured at fair value on the date of grant based on the number ofshares granted and the quoted price of the Company’s common stock. Such valueis recognized as an expense ratably over the corresponding employee serviceperiod. To the extent restricted stock or restricted stock units are forfeitedprior to vesting, the corresponding previously recognized expense is reversedas an offset to “Stock-based compensation.” Stock-based compensation associatedwith restricted stock was $2.7 million during 2002.

 

The following table illustrates the effect onnet income and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS 123 as amended by SFAS 148 to stock-basedemployee compensation (in thousands except per share data):

 

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|                                                                                                                  |   | **Years ended December 31,** |     |
|-----------------------------------------------------------------------------------------------------------------------|--------|------------------------------|----------|
|                                                                                                                  |   | **2002**                     |     | **2001** |   | **2000** |   |
| Net income – as reported                                                                                         |   | $                            | (589,836 | ) | $ | (2,584,099 | ) | $ | (344,947 | ) |
| Add:   Stock-based compensation cost, included in the determination of net  income as reported                   |   | 8,728                        |     | 98,302 |   | 39,820 |   |
| Deduct: Total stock-based employee  compensation expense determined under the fair value based method for all  awards |   | (42,344                      | )        | 120,723 |   | (543,710 | ) |
| Proforma net loss                                                                                                     |   | $                            | (623,452 | ) | $ | (2,365,074 | ) | $ | (848,837 | ) |
| Loss per share:                                                                                                       |   |                         |     |   |   |   |   |
| Basic and diluted – as reported                                                                                  |   | (20.33                       | )        | (103.02 | ) | (20.52 | ) |
| Basic and diluted – pro forma                                                                                    |   | (21.49                       | )        | (94.29 | ) | (50.50 | ) |

 

Theweighted average fair value of stock options granted during 2002, 2001 and 2000was $4.33, $40.80 and $470.60, respectively.The weighted-average fairvalue for stock options granted were calculated using the Black-Scholesoption-pricing model based on the following assumptions:

 
|                                     |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Volatility                               |   | 148      | %      | 146      | %      | 135      | %      |
| Weighted-average estimated life          |   | 3 years  |   | 3 years  |   | 3 years  |   |
| Weighted-average risk-free interest rate |   | 4.6      | %      | 5.0      | %      | 6.2      | %      |
| Dividend yield                           |   | —   |   | —   |   | —   |   |

 

The weighted average fair value of shares issued under the employeestock purchase plan during 2002, 2001, and 2000 was $5.26, $68.06, and $273.65,respectively. The weighted-average fair value of shares issued under theemployee stock purchase plan was calculated using the Black-Scholesoption-pricing model based on the following assumptions:

 
|                                     |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Volatility                               |   | 148      | %      | 146      | %      | 135      | %      |
| Weighted-average estimated life          |   | 6 months |   | 6 months |   | 6 months |   |
| Weighted-average risk-free interest rate |   | 4.6      | %      | 5.0      | %      | 6.2      | %      |
| Dividend yield                           |   | —   |   | —   |   | —   |   |

 

***ADVERTISING***

 

Advertising costs are expensed as incurred. Advertising expense wasapproximately $779,000, $5,981,000 and $9,368,000 for the years ended December31, 2002, 2001 and 2000, respectively.

 

***INCOMETAXES***

 

The Company accounts for income taxes in accordance with SFASNo. 109, “Accounting for Income Taxes,” which requires the use of theliability method in accounting for income taxes.  Under this method, deferred tax assets and liabilities aremeasured using enacted tax rates and laws that will be in effect when thedifferences are expected to reverse.

 

***NETLOSS PER SHARE***

 

Basic and diluted net loss per share information for all periods ispresented under the requirements of SFAS No. 128, “Earnings per Share.”Basic earnings per share has been computed using the weighted-average number ofshares of common stock outstanding during the period, less shares subject torepurchase and forfeiture, and excludes any dilutive effects of options,warrants, and convertible securities. Potentially dilutive securities have alsobeen excluded from the computation of diluted net loss per share as theirinclusion would be antidilutive.

 

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The calculation of basic and diluted net loss per share is as follows(in thousands, expect per share data):

 
|                                                                                                        |   | **YEARS  ENDED DECEMBER 31,** |     |
|-------------------------------------------------------------------------------------------------------------|--------|-------------------------------|----------|
|                                                                                                        |   | **2002**                      |     | **2001** |   | **2000** |   |
| Net loss                                                                                                    |   | $                             | (589,836 | ) | $ | (2,584,099 | ) | $ | (344,947 | ) |
| Weighted average shares of common stock  outstanding                                                        |   | 29,074                        |     | 25,250 |   | 16,964 |   |
| Less: weighted average shares subject to  repurchase and forfeiture                                         |   | (63                           | )        | (166 | ) | (157 | ) |
| Weighted average shares of common stock  outstanding used in computing basic and diluted net loss per share |   | 29,011                        |     | 25,084 |   | 16,807 |   |
| Basic and diluted net loss per share                                                                        |   | $                             | (20.33   | ) | $ | (103.02 | ) | $ | (20.52 | ) |

 

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#### ***If the Company had reported net income, the calculation of dilutedearnings per share would have included, approximately, an additional 584,000,2,327,300, and 2,223,100 common equivalent shares related to outstanding stockoptions and warrants not included above (determined using the treasury stockmethod) for the years ended December 31, 2002, 2001 and 2000,respectively.***

 

***COMPREHENSIVE LOSS***

 

Comprehensive loss is comprised of net loss and other comprehensiveincome (loss). Other comprehensive income (loss) includes certain changes instockholders’ equity that are excluded from net loss. Other comprehensiveincome (loss) includes unrealized gains and losses and currency translationadjustments. At December 31, 2002 and 2001 cumulative unrealized losses totaled$0.1 million and $0.4 million, respectively, and cumulative currencytranslation adjustments totaled $1.1 million and $0.7 million, respectively.Comprehensive income (loss) for the years ended December 31, 2002, 2001 and2000 has been reflected in the Consolidated Statements of Stockholders’ Equity.

#### *** ***

#### ***EFFECTS OF NEW ACCOUNTINGSTANDARDS***

 

InJune 2002, the Financial Accounting Standards Board (“FASB”) issued Statementof Financial Accounting Standards No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities.”  SFAS No. 146 addresses financialaccounting and reporting for costs associated with exit or disposal activitiesand nullifies Emerging Issues Task Force (referred to as EITF) Issue No. 94-3“Liability Recognition for Certain Employee Termination Benefits and OtherCosts to Exit an Activity (including Certain Costs Incurred in aRestructuring)”.  SFAS No. 146 requires that a liability for a costassociated with an exit or disposal activity be recognized when the liabilityis incurred, not at the date of an entity’s commitment to an exit plan asrequired under EITF Issue No. 94-3. The provisions of SFAS No. 146 areeffective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS No. 146 may affect the timing of recognizing futurerestructuring costs and the amounts recognized under such costs. SFAS No. 146is not expected to have a material impact on the Consolidated FinancialStatements.

 

In November 2002, the FASB issued FIN 45, “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others”. FIN 45 requires that the Company recognize the fairvalue for guarantee and indemnification arrangements issued or modified by theCompany after December 31, 2002, if these arrangements are within thescope of the Interpretation. In addition, the Company must continue to monitorthe conditions that are subject to the guarantees and indemnifications, asrequired under previously existing generally accepted accounting principles, inorder to identify if a loss has occurred. If the Company determines it isprobable that a loss has occurred then any such estimable loss would berecognized under those guarantees and indemnifications. Some of the softwarelicenses granted by the Company contain provisions that indemnify licensees ofthe Company’s software from damages and costs resulting from claims allegingthat the Company’s software infringes the intellectual property rights of athird party. The Company has historically received only a limited number ofrequests for indemnification under these provisions and has not been requiredto make material payments pursuant to these provisions. Accordingly, theCompany has not recorded a liability related to these indemnificationprovisions. The Company does not have any guarantees or indemnificationarrangements other than the indemnification clause in some of its softwarelicenses. The Company will be required to implement the provisions ofFIN 45 as of January 1, 2003 and does not believe that FIN 45will have a material impact on its financial position, results of operations orcash flows.

 

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***REVERSE STOCK SPLIT***

 

OnSeptember 16, 2002, the Company completed a reverse stock split where ten sharesof common stock outstanding were converted into one share of common stock. Allreferences in the consolidated financial statements and notes thereto withrespect to the number of shares, per share amounts and market prices of theCompany’s common stock have been restated to reflect the effect of the reversestock split.

 

**2.  ACCOUNTS RECEIVABLE**

 

Accounts receivable consists of the following (in thousands):

 
|                                |   | **DECEMBER  31,** |   |
|-------------------------------------|--------|-------------------|--------|
|                                |   | **2002**          |   | **2001** |   |
| Accounts receivable                 |   | $                 | 10,347 |   | $ | 59,390 |   |
| Unbilled accounts receivable        |   | 3,027             |   | 10,564 |   |
|                                |   | 13,374            |   | 69,954 |   |
| Less accounts receivable allowances |   | 6,001             |   | 24,077 |   |
|                                |   | $                 | 7,373  |   | $ | 45,877 |   |

 

 

Unbilled accounts receivable result from professional services providedto customers that have not yet been formally invoiced as of the reporting date.Such amounts are generally invoiced within fifteen business days of the end ofthe period in which services are provided.

 

**3.  PROPERTY AND EQUIPMENT**

 

Property and equipment consists of the following (in thousands):

 
|                                            |   | **DECEMBER  31,** |   |
|-------------------------------------------------|--------|-------------------|--------|
|                                            |   | **2002**          |   | **2001** |   |
| Computer and office equipment                   |   | $                 | 7,417  |   | $ | 74,825 |   |
| Furniture and fixtures                          |   | 2,344             |   | 24,635 |   |
| Leasehold improvements                          |   | —            |   | 15,660 |   |
| Work in process                                 |   | —            |   | 674 |   |
|                                            |   | 9,761             |   | 115,794 |   |
| Less accumulated depreciation and  amortization |   | —            |   | 50,886 |   |
|                                            |   | $                 | 9,761  |   | $ | 64,908 |   |

 

Depreciation expense was approximately $30.7million in 2002, $45.4 million in 2001 and $15.3 million in 2000. In accordancewith SFAS 144 (See Note 4), an impairment charge was recorded forall long-lived assets whose carrying value exceeded their estimated fair value.As a result, the Company recorded impairment charges of $20.5 million forproperty and equipment during the year ended December 31, 2002 to reduce thebook value to the estimated fair value.

 

**4.  GOODWILL, LONG LIVED ASSETS AND OTHERINTANGIBLE ASSETS**

 

Other intangible assets, which result from acquisitions accounted forunder the purchase method and the Covisint Technology Agreement entered into inDecember 2000, consists of the following (in thousands):

 

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|                          |   | **DECEMBER  31,** |   |
|-------------------------------|--------|-------------------|--------|
|                          |   | **2002**          |   | **2001** |   |
| Covisint Technology Agreement |   | $                 | 15,943 |   | $ | 267,215 |   |
| Core and developed technology |   | 1,431             |   | 34,742 |   |
| Assembled workforce           |   | —            |   | 29,273 |   |
| Customer contracts            |   | —            |   | 7,900 |   |
| Other                         |   | 1,075             |   | 16,519 |   |
|                          |   | 18,449            |   | 355,649 |   |
| Less accumulated amortization |   | —            |   | (110,794 | ) |
| Other intangible assets, net  |   | $                 | 18,449 |   | $ | 244,855 |   |

 

Changesin the net carrying amount of goodwill in 2002 are as follows (in thousands):

 
| Balance  as of December 31, 2001                                                    |   | $        | 164,679 |   |
|-------------------------------------------------------------------------------------|--------|----------|---------|--------|
| Reclassification of intangible asset – assembled workforce into  goodwill, net |   | 15,700   |    |
| Exterprise goodwill adjustment for final purchase accounting                        |   | (545     | )       |
| Impairment                                                                          |   | (179,834 | )       |
| Balance as of December 31, 2002                                                     |   | $        | —  |   |

 

Changesin the net carrying amount of goodwill in 2001 are as follows (in thousands):

 
| Balance as of December 31, 2000                          |   | $          | 1,511,035 |   |
|----------------------------------------------------------|--------|------------|-----------|--------|
| Goodwill recorded from the purchase of Exterprise        |   | 54,786     |      |
| Appnet goodwill adjustment for final purchase accounting |   | (687       | )         |
| Impairment                                               |   | (1,095,335 | )         |
| Goodwill amortization                                    |   | (305,120   | )         |
| Balance as of December 31, 2001                          |   | $          | 164,679   |   |

 

Amortizationexpense of our goodwill and other intangible assets are as follows (inthousands):

 
|                                               |   | **December 31,** |   |
|----------------------------------------------------|--------|------------------|--------|
|                                               |   | **2002**         |   | **2001** |   | **2000** |   |
| Goodwill amortization                              |   | $                | — |   | $ | 305,120 |   | $ | 212,993 |   |
| Covisint technology agreement amortization         |   | 10,428           |   | 55,188 |   | 5,689 |   |
| Acquisition related intangible asset  amortization |   | 11,824           |   | 27,669 |   | 20,190 |   |
| Intellectual property amortization                 |   | 43               |   | — |   | — |   |
| Total                                              |   | $                | 22,295 |   | $ | 387,977 |   | $ | 238,872 |   |

 

Intangible assets related to acquired technology, trademarks, patentsand other intangible assets acquired through business combinations are beingamortized on a straight-line basis over the estimated useful life of therelated asset, generally one to five years, and intellectual property relatedto original patents is being amortized over an estimated useful life of tenyears.

 

Theexpected future annual amortization expense of our other intangible assets isas follows (in thousands):

 

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| **For the Year Ending December 31,** |   | **Amortization    Expense** |   |
|--------------------------------------|--------|-----------------------------|--------|
| 2003                                 |   | $                           | 2,584  |   |
| 2004                                 |   | 2,584                       |   |
| 2005                                 |   | 2,584                       |   |
| 2006                                 |   | 2,107                       |   |
| Thereafter                           |   | 8,590                       |   |
| Total expected future amortization   |   | $                           | 18,449 |   |

 

In accordance with SFAS 141 and 142, the Company discontinued theamortization of goodwill and assembled workforce beginning January 1,2002.  A reconciliation of previouslyreported net income (loss) and earnings per share to the amounts adjusted forthe exclusion of goodwill amortization and the amortization of assembledworkforce is as follows (in thousands, except per share amounts):

 
|                             |   | **For the years ended December 31,** |     |
|----------------------------------|--------|--------------------------------------|----------|
|                             |   | **2002**                             |     | **2001** |   | **2000** |   |
| Net Loss:                        |   |                                 |     |   |   |   |   |
| Reported net loss                |   | $                                    | (589,836 | ) | $ | (2,584,099 | ) | $ | (344,947 | ) |
| Goodwill amortization            |   | —                               |     | 305,120 |   | 212,993 |   |
| Assembled workforce amortization |   | —                               |     | 9,959 |   | 4,189 |   |
| Adjusted net loss                |   | $                                    | (589,836 | ) | $ | (2,269,020 | ) | $ | (127,765 | ) |

 
|                                          |   | **For the years ended December 31,** |   |
|-----------------------------------------------|--------|--------------------------------------|--------|
|                                          |   | **2002**                             |   | **2001** |   | **2000** |   |
| Basic and diluted loss per share:             |   |                                 |   |   |   |   |   |
| Reported net loss                             |   | $                                    | (20.33 | ) | $ | (103.02 | ) | $ | (20.52 | ) |
| Goodwill amortization                         |   | —                               |   | 12.16 |   | 12.67 |   |
| Assembled workforce amortization              |   | —                               |   | 0.40 |   | 0.25 |   |
| Adjusted basic and diluted net loss per share |   | $                                    | (20.33 | ) | $ | (90.46 | ) | $ | (7.60 | ) |

 

Under SFAS No. 142, intangible assets with finite lives that continueto be amortized should be reviewed for impairment in accordance with SFAS No.144. An impairment assessment is required whenever events or changes incircumstances indicate that the carrying value may not be recoverable. During the quarter ended March 31, 2002, the Company identified indicators ofpossible impairment relating to the Technology Agreement with Covisint. The impairment indicators included, but were not limited to, significant negativeindustry and economic trends, which resulted in a reduction of forecasted cashflows related to the Technology Agreement.

 

In accordance with SFAS No. 144, the Company performed, with theassistance of independent valuation experts, an impairment test of the carryingvalue of the Technology Agreement to determine whether any impairmentexisted.  The Company determined thatthe sum of the expected undiscounted cash flows attributable to the TechnologyAgreement was less than its carrying value and that an impairment write-downwas required.  Accordingly, the Company calculated the estimated fairvalue of the intangible asset by summing the present value of the expected cashflows over its life.  The impairment was calculated by deducting thepresent value of the expected cash flows from the carrying value. Thisassessment resulted in an impairment write-down of $145.8 million in relationto the Technology Agreement, which was charged to cost of license fees duringthe quarter ended March 31, 2002.

 

During the quarter ended December 31, 2002, the Company identifiedindicators of possible impairment relating to property, plant, and equipmentand intangible assets other than goodwill. These indicators included but were not limited to a history of negative cashflows and operating losses and significant negative industry and economictrends.  The Company performed, with theassistance of independent valuation

 

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experts, an impairment test of the carrying value of these long-livedand intangible assets to determine whether any impairment existed.  The Company determined that the sum of theexpected undiscounted cash flows attributable to the assets was less than thecarrying value of the assets and that an impairment existed.  The Company determined fair value forlong-lived assets by using market values when available.  If no market existed for the asset, theCompany used independent valuation experts to calculate fair value as the sumof the discounted cash flows attributable to the assets.  The impairment was calculated by deductingthe established fair value from the carrying value.  As a result, the Company recorded impairment charges of $20.5million for property and equipment, $9.5 million for intangible assets otherthan goodwill, and $34.2 million for the Covisint Technology agreement duringthe year ended December 31, 2002.

 

Effective July 1, 2001, the Company adopted certain provisions ofStatement of Financial Standards (“SFAS”) No. 141, and effective January 1,2002, the Company adopted the full provisions of SFAS No. 141 and SFAS No.142.  SFAS No. 141 requires business combinations initiated after June 30,2001 to be accounted for using the purchase method of accounting, and broadensthe criteria for recording intangible assets apart from goodwill.  TheCompany evaluated its goodwill and other intangible assets acquired prior toJune 30, 2001 using the transition criteria of SFAS No. 141, which resulted in$15.7 million of other intangible assets (comprised entirely of assembledworkforce) being subsumed into goodwill as of January 1, 2002.  SFAS No.142 requires that purchased goodwill and certain indefinite-lived intangibleassets no longer be amortized, but instead be tested for impairment at leastannually.

 

During thefourth quarter of 2002, the Company prepared its required SFAS 142 impairmenttest.  The Company’s fair value,established using the market method, was below its carrying value as ofDecember 31, 2002, indicating that a potential impairment to goodwillexisted.  The Company then calculatedthe potential impairment by establishing the fair value of goodwill andsubtracting this fair value from the carrying value of goodwill.  In accordance with FAS No. 142, the fairvalue of goodwill is an implied value and is calculated by subtracting the fairvalue of the net assets of the Company (other than goodwill) from the fairvalue of the Company.  The fair value ofnet assets includes determining the fair value of any unrecognized intangible assets.  The Company engaged an independent valuationfirm in order to establish fair values for any unrecognized intangibleassets.  The impairment was thencalculated by deducting the fair value of goodwill from the carrying value ofgoodwill.  This calculation resulted inan impairment charge of $179.8 million, which brought the carryingvalue of goodwill to zero.

 

During 2001, in accordance with the provisions of SFAS No. 121,“Accounting for the Impairment of Long Lived Assets and for Long Lived Assetsto be Disposed of,” the Company performed, with the assistance of independentvaluation experts, impairment tests to determine whether any impairmentexisted.  The Company determined thatthe sum of the expected undiscounted cash flows attributable to certain of itsintangible assets was less than the carrying value of those intangibleassets.  Accordingly, the Companycalculated the estimated fair value of the assets by summing the present valueof the expected cash flows over the life of the assets.  The impairment was calculated by deductingthe present value of the expected cash flows from the carrying value of theintangible assets.  Based on the resultsof these tests, the Company determined that the carrying values of goodwill andother intangible assets related to AppNet, the Technology Agreement withCovisint, and CommerceBid were not recoverable and therefore had sufferedimpairment.

 

This assessment resulted in write-downs during the second quarter of2001 of $1,098.9 million to record the amount by which the carrying amounts ofthe goodwill and other intangible assets related to AppNet and CommerceBidexceeded their respective fair values. Further, an impairment write-down of $592.3 million was recorded inrelation to the Technology Agreement with Covisint, and this amount was chargedto cost of license fees.

 

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**5.  INVESTMENTS AND OTHER ASSETS**

 

Investments and other assets consists of the following (in thousands):

 
|                                  |   | **DECEMBER  31,** |   |
|---------------------------------------|--------|-------------------|--------|
|                                  |   | **2002**          |   | **2001** |   |
| Investment  in Covisint               |   | $                 | 5,000  |   | $ | 9,255 |   |
| Non-current prepaid software licenses |   | 308               |   | 592 |   |
| Other                                 |   | 715               |   | 860 |   |
|                                  |   | $                 | 6,023  |   | $ | 10,707 |   |

 

The Company has made several strategic investments in privately heldcompanies and two publicly traded companies and has an investment in Covisint(Note 11). The Company owns less than a 5% interest in these companies and doesnot have a significant influence over these companies. Investments in publiclytraded companies are carried at fair value, based on quoted market prices, withunrealized gains and losses recorded in equity. Investments in privatecompanies are recorded at cost. These investments are periodically evaluatedfor declines in value that are considered other than temporary.  During the fiscal year 2002, the Companyrecorded an investment loss of $4.3 million related to the investment inCovisint. This loss was partially offset by an approximate $0.4 million gainfrom the sale of the investments in publicly traded companies.  As a result, the Company recorded totalinvestment losses of approximately $3.9 million.

 

**6.  OTHER CURRENT LIABILITIES**

 

Other accrued liabilities consist of the following (in thousands):

 
|                                                 |   | **DECEMBER  31,** |   |
|------------------------------------------------------|--------|-------------------|--------|
|                                                 |   | **2002**          |   | **2001** |   |
| Accrued  restructuring costs                         |   | $                 | 14,423 |   | $ | 18,839 |   |
| Income taxes payable                                 |   | 4,688             |   | 10,055 |   |
| Royalty, referral, and marketing commitment  payable |   | 1,821             |   | 5,225 |   |
| Accruals related to business combinations            |   | —            |   | 5,112 |   |
| Professional fees (legal, tax, and  accounting)      |   | 1,040             |   | 1,189 |   |
| Customer deposits                                    |   | 157               |   | — |   |
| Deferred rent                                        |   | 2,578             |   | 1,786 |   |
| Other                                                |   | 5,290             |   | 7,815 |   |
| Total other current liabilities                      |   | $                 | 29,997 |   | $ | 50,021 |   |

 

***ACCRUEDRESTRUCTURING COST***

 

In April 2002, management approved and began to implement a corporaterestructuring plan (the “First Plan) aimed at streamlining the Company’s coststructure.  Included in the plan were costs related toseverance pay, outplacement services, benefits continuation, write-down of thecarrying value of computers and

 

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equipmentused by terminated employees, office closures and the termination of certainoffice leases.  The plan included staffreductions totaling approximately 500 employees from all areas of the company.  The restructuring charges relating to thisplan were estimated at $15.9 million and were recorded during the quarter endedJune 30, 2002.

 

In October 2002, management approved and began to implement anadditional corporate restructuring plan (the “Second Plan”) aimed at furtherreducing operating expenses while focusing our resources on our core product,the Commerce One Conductor platform. The restructuring charges related to the SecondPlan were estimated at $12.0 million and were recorded during the quarter endedDecember 31, 2002.  The Second Planincluded the costs associated with the termination of approximately 400employees including severance pay, outplacement services and benefitcontinuation, the termination of certain office leases, the consolidation orclosure of certain facilities and the write-down of the carrying value ofcomputers and equipment used by terminated employees.

 

Thefollowing table summarizes the activity related to the restructuring liabilityfor the year ended December 31, 2002, (in thousands):

 
|                                                                     |   | **Accrued   restructuring    costs at   December 31,   2001** |   | **Amounts   charged to   restructuring   costs and   other** |   | **Amounts   reversed** |   | **Amounts   paid or    written off** |     | **Accrued   restructuring    costs at    December 31,   2002** |    |
|--------------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|------------------------|--------|-------------------------------------------|----------|--------------------------------------------------------------------------|---------|
| Lease cancellations and commitments                                      |   | $                                                                  | 50,889 |                                                         | $      | 4,600                  |   | $                                         | (10,452) |                                                                     | $       | (10,293) |   | $ | 34,744 |   |
| Termination  payments to employees  and related costs                    |   | 4,515                                                              |   | 23,749                                                       |   | (193)                  |   | (26,558)                                  |     | 1,513                                                                    |    |
| Write-off on disposal of assets and related  costs                       |   | 440                                                                |   | 5,404                                                        |   | (161                   | )      | (5,570                                    | )        | 113                                                                      |    |
| Total restructure accrual and other                                      |   | $                                                                  | 55,844 |                                                         | $      | 33,753                 |   | $                                         | (10,806  | )                                                                        | $       | (42,421 | ) | $ | 36,370 |   |
| Less non-current accrued restructuring  charges                          |   |                                                               |   |                                                         |   |                   |   |                                      |     | $                                                                        | (21,947 | ) |
| Accrued restructuring charges included  within other accrued liabilities |   |                                                               |   |                                                         |   |                   |   |                                      |     | $                                                                        | 14,423  |   |

 

*Lease cancellations and commitments*

 

In the second and fourth quarters of 2002,the Company incurred restructuring charges of approximately $0.5 million and$4.1 million, respectively, for facilities consolidated or closed in the UnitedStates, Europe and Asia.  These officeswere responsible for the sale of our software products, professional servicesor customer support.  Theserestructuring charges reflect the remaining contractual obligations underfacility leases net of anticipated sublease income from the date of facilityabandonment to the end of the lease term. In addition, the charges include $3.7 million of changes in managementassumptions regarding sub-lease income. Amounts reversed are mainly related to early lease settlementnegotiations for certain leased properties resulting in a reversal of $5.7million and changes in management assumptions regarding broker fees inconnection with assumed sub-lease income resulting in a reversal of $1.3million.  Certain facilities continuedin use during the completion of the restructuring.  For those facilities, we continued to record monthly rent expenseto operations until the facilities were available for sub-lease or wereabandoned.  Accrued restructuring costsrelated to lease cancellations and commitments as of December 31, 2002 wereapproximately $34.7 million of which $21.9 million related to non-currentobligations.

 

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### *Termination payments to employees and relatedcosts*

 

In the second and fourth quarters of 2002, weincurred restructuring charges of approximately $13.3 million and $8.3 million,respectively, for the termination of approximately 900 employees to cover costssuch as separation pay, outplacement services and benefit continuation.  The separation payments and terminationbenefits were accrued and charged to restructuring costs in the period thatboth the benefit amounts were determined and such amounts were communicated tothe affected employees.  The employeereductions occurred in all areas of the Company. As of December 31, 2002, all ofthe employees had been notified and the majority of these terminations had beencompleted.  The Company expects that theaccrued termination payments of approximately $1.5 million as of December 31,2002 will be fully paid during 2003.

 

In the first quarter of 2003, the Companyterminated approximately 430 employees bringing the total workforce down toapproximately 350 employees.

 

### *Write-off ondisposal of assets and**related costs*

 

In the second and fourth quarters of 2002, the Company incurredrestructuring charges of approximately $2.0 million and $3.4 million,respectively, related to the carrying values of equipment and leaseholdimprovements abandoned in connection with the restructuring.  Included in the assets disposed of andcharged to restructuring costs are personal computers and equipment used byterminated employees, office equipment and leasehold improvements in connectionwith closure or consolidation of facilities and subsidiaries in the UnitedStates, Asia and Europe. We expect the restructuring costs of approximately$0.1 million accrued as of December 31, 2002 will be fully utilized during2003.

 

In 2001, the Company implemented multiple restructuring plans (the“2001 Plans”) in order to significantly reduce its annual operating expenses whilerealigning Commerce One’s resources around its core product initiatives. Therestructuring costs in 2001 were estimated at $126.6 million. Collectively, the2001  costs were associated with thetermination of approximately 2,070 employees to cover costs such as separationpay, outplacement services and benefit continuation and also the termination ofcertain office leases, the divestiture of certain parts of the Company’s GlobalServices division, the consolidation or closure of certain facilities and thewrite-down of the carrying value of computers and equipment used by employeesterminated.

 

Thefollowing table summarizes the activity related to the restructuring liabilityfor the year ended December 31, 2001, (in thousands):

 
|                                                                     |   | **Accrued   restructuring    costs at December 31,  2000** |   | **Amounts   charged to   restructuring   costs and   other** |   | **Amounts   reversed** |    | **Amounts   paid or    written off** |   | **Accrued   restructuring    costs at    December 31,   2001** |    |
|--------------------------------------------------------------------------|--------|-----------------------------------------------------------------|--------|--------------------------------------------------------------|--------|------------------------|---------|-------------------------------------------|--------|--------------------------------------------------------------------------|---------|
| Lease cancellations and commitments                                      |   | $                                                               | — |                                                         | 68,860 |                   | $       | —                                    |   | $                                                                        | (17,971 | ) | $ | 50,889 |   |
| Termination payments to employees and  related costs                     |   | —                                                          |   | 30,790                                                       |   | —                 |    | (26,275                                   | )      | 4,515                                                                    |    |
| Write-off on disposal of assets and related  costs                       |   | —                                                          |   | 30,418                                                       |   | (4,321                 | )  | (25,657                                   | )      | 440                                                                      |    |
| Costs associated with divestiture of  certain businesses                 |   | —                                                          |   | 858                                                          |   | —                 |    | (858                                      | )      | —                                                                   |    |
| Total restructure accrual and other                                      |   | $                                                               | — |                                                         | $      | 130,926                |    | $                                         | (4,321 | )                                                                   | $       | (70,761 | ) | $ | 55,844 |   |
| Less non-current accrued restructuring  charges                          |   |                                                            |   |                                                         |   |                   |    |                                      |   | $                                                                        | (37,005 | ) |
| Accrued restructuring charges included  within other accrued liabilities |   |                                                            |   |                                                         |   |                   |    |                                      |   | $                                                                        | 18,839  |   |
|                                                                          |        |                                                                 |        |                                                              |        |                        |         |                                           |        |                                                                          |         |  |  |  |  |  |

 

### *Lease cancellations and commitments*

 

In the first, second and fourth quarters of2001, the Company incurred total restructuring charges of approximately $9.4million, $33.6 million and $25.9 million, respectively, for facilities consolidatedor closed in the United States, Europe and Asia.  These offices were primarily responsible for the sale of oursoftware products,

 

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professional services or customersupport.  These restructuring chargesreflect the remaining contractual obligations under facility leases net ofanticipated sublease income from the date of facility abandonment to the end ofthe lease term.  Certain facilitiescontinued in use during the completion of the restructuring for which wecontinued to record monthly rent expense until the facilities were availablefor sub-lease or were abandoned. Accrued restructuring costs related to lease cancellations andcommitments as at December 31, 2001 were approximately $50.9 million of whichnon-current amounts accrued were approximately $37.0 million.

 

*Termination payments to employees and relatedcosts*

 

In the first, second and fourth quarters of2001, the Company incurred restructuring charges of approximately $4.7 million,$15.9 million and $10.2 million, respectively, for the termination ofapproximately 2,070 employees to cover costs such as separation pay,outplacement services and benefit continuation.  The separation payments and termination benefits were accrued andcharged to restructuring costs in the period that both the benefit amounts weredetermined and such amounts were communicated to the affected employees.  The employee reductions came from all areasof the Company and, as of December 31, 2001, all of the employees affected hadbeen notified and the majority of these terminations had been completed.

 

*Write-off on disposal of assets and related costs*

 

In the second and fourth quarters of 2001, the Company incurred restructuring charges of approximately $12.5million and $17.9 million, respectively, related to the carrying values ofequipment and leasehold improvements abandoned in connection with therestructuring and exit costs associated with the anticipated liabilities forestimated customer claims resulting from the divestiture of certain operationswithin the Global Servicesdivision.  Included within the assetsdisposed of and charged to restructuring costs were personal computers andequipment used by employees terminated, office equipment and leaseholds in connectionwith closure or consolidation of facilities and subsidiaries in the UnitedStates, Asia and Europe.

 

Included within the second quarter of 2001 charge of $12.5 million wereamounts associated with the anticipated liabilities for estimated customerclaims resulting from the divestiture of certain operations within the Company's Global Services divisionwhich were no longer core to theCompany's business.  The amountsaccrued were based on the Company's estimationof the likely costs associated with the exit of certain service contracts.  In the fourth quarter of 2001, the Companyreevaluated this liability based on the actual customer claims received,amounts paid and the successful execution of certain exit activities.  TheCompany reduced the liability by $4.3 million with a correspondingcredit to the restructuring charge in the fourth quarter of 2001.

 

*Costs associated with divestiture of certainbusinesses*

 

As a result of the business divestitures completed in the fourthquarter of 2001, the Company recordeda loss on divestiture of $0.8 million that was charged to restructuring costsand other in the fourth quarter of 2001. As a result of the business divestitures completed in the first quarterof 2002 the Company recorded again of approximately $2.3 million based on the cash proceeds received from thesale of E-Government Solutions, Inc.  The Company recognized total revenuesof approximately $98.7 million in 2001 from our professional servicesoperations within the Global Services division which were disposed of in thefourth quarter of 2001 and the first quarter of 2002.

 

**7.  NOTES PAYABLE**

 

In October 2002, the Company repaid its loan from Microsoft Corporationin the principal amount of $19.0 million.  The Microsoft loan boreinterest at 7% per annum, payable quarterly, and was secured with a $19.0million cash collateral account. On October 23, 2002, the Company executed aLoan and Security Agreement with Silicon Valley Bank for a credit facility ofup to $25.0 million.  In the fourth quarter of 2002, Commerce One drew $25million against the  creditfacility.  The loan facility is due byNovember 29, 2005,

 

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or upon the earlier “default” by the Company, which is generallydefined in the agreement to include the following: failure to pay anyobligation to Silicon Valley Bank under the agreement within three (3) days ofthe due date; failure of the Company to maintain its legal existence and goodstanding where such failure could materially impact the value of the loancollateral; failure to provide certain financial information to the bankwithin the time periods prescribed by the contract; failure to pay taxes wheresuch payment obligations are not subject to good faith dispute; the placement ofany uncorrected material lien or seizure judgment against the Company’sassets; any material change in the value of the assets collateralizing theloan; the filing of an insolvency proceeding; any judgment or acceleratedpayment obligation exceeding $3,000,000; or a material misstatement ormisrepresentation in the loan application.    The loan facilitybears interest at a rate between one-half and three-quarters of a point belowthe Silicon Valley Bank’s prime rate (3.75% at December 31, 2002).   All amounts drawn by Commerce One are fullysecured by a cash collateral account with Silicon Valley Bank and do not resultin any net additional unencumbered cash to the Company.

 

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**8.  BUSINESS DIVESTITURE AND NOTES RECEIVABLE**

 

During 2001, 2002 and the first quarter of 2003, the Company completedthe divestiture of certain professional services divisions within its GlobalServices division.  These servicedivisions were initially acquired through the acquisition of AppNet inSeptember 2000, and were divested through management buy-outs of the division.

 

In October 2001, the Company executed an asset sale to BeaconfireConsulting Inc., a company composed of former Commerce One employees.  In consideration of the assets sold, theCompany received a note receivable with a face value of approximately $0.4million due on September 30, 2006, that bears an annual interest rate of 8%,receivable on a quarterly basis. Subject to certain criteria, the Company also has the right to receive a4% and 4.5% annual share of future revenues of Beaconfire Consulting for thetwo and succeeding three years, respectively, payable on a quarterly basisbeginning at the end of, and including payment for, the quarter ending December31, 2001.

 

In October 2001, the Company executed a stock transfer and asset salewith Edgar, Dunn & Company, Inc., a company composed of former Commerce Oneemployees.  In connection with thisagreement the Company received a 10% minority interest in Edgar, Dunn &Company, Inc., and two notes receivable with face values totaling $1.3 millionthat are due by September 30, 2004. The notes bear an annual interest rate of7.5%, receivable on a quarterly basis. Subject to certain criteria, the Company also has the rights to anannual revenue share of 6% of the future revenues of Edgar, Dunn & Company,Inc., for the four-year period following the closing in October 2001.

 

On January 9, 2002, the Company executed an asset sale agreement withConnective Commerce Company LLC, a Massachusetts limited liability companycomposed of former Commerce One employees. In connection with this agreement, the Company received cash ofapproximately $2.4 million and a note receivable with a face value ofapproximately $4.0 million due on December 31, 2004, that bears a quarterlyinterest rate of 1.75%, receivable on a quarterly basis commencing September30, 2002.  On October 15, 2002, theCompany agreed with Connective Commerce to modify the note agreement todecrease the payments in 2003 and to forgive interest on the principal balancefor 2003.

 

On February 21, 2002, the Company executed a stock purchase agreementwith Commerce One E-Government Solutions, Inc., a Delaware corporation and awholly-owned subsidiary of the Company, and eGov Holdings, Inc., a Delawarecorporation composed of former Company employees.  In consideration for the sale of 100% of the outstanding commonstock of Commerce One E-Government Solutions, Inc to eGov Holdings, Inc., theCompany received cash consideration of approximately $8.4 million.

 

On January 24, 2003, the Company executed the sale and license ofcertain assets and liabilities, including customer commitments, related toCommerceOne.net, the Company’s marketplace services business consisting of auctionservices, subscription services, content services and hosting services, witheScout LLC, a privately held limited liability company.  In connection with the closing of thistransaction, the Company received notes receivable with an aggregate face valueof approximately $2.0 million, membership interests in eScout and the right toreceive royalty payments over the four years following the closing of no morethan $0.5 million in the aggregate.  Thenote receivable bears a quarterly interest rate of 1.5% with payments due eachquarter with the final payment due on January 24, 2005.  Fifteen percent (15%) of the aggregatepurchase price is held in escrow until January 2004as security for anyclaims related to a breach of the Company’s representations, warranties andcovenants.  During 2002, the Companyrecognized service revenues totaling approximately $11.8 million fromCommerceOne.net related

 

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services.  Subsequent to thissale, Commerce One will no longer offer these services and therefore willreceive no future revenues related to these services.

 

At December 31, 2002, the assets and liabilities relating to theCompany’s marketplace service business were held for sale.  The following table summarizes the assetsand liabilities that were held for sale (in thousands) at December 31, 2002:

 

| Accounts receivable, net |   | $   | 507    |   |
|--------------------------|--------|-----|--------|--------|
| Fixed assets             |   | 653 |   |
| Prepaid expenses         |   | 30  |   |
| Deferred revenue         |   | $   | (1,122 | )      |

 

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**9.  COMMITMENTS AND CONTINGENCIES**

 

***LEASEOBLIGATIONS***

 

The Companyleases its principal office facilities under non-cancelable operating leaseswith escalating rent. Rent expense amounted to $16,460,000, $22,856,000 and$14,411,000 for the years ended December 31, 2002, 2001 and 2000,respectively.

 

Capital lease payments for computer equipment and future minimumpayments under operating leases, net of any contracted third-party sub-leaserental income at December 31, 2002 are as follows (in thousands):

 
| **YEARS  ENDING DECEMBER 31,**              |   | **Capital  Leases** |   | **Operating  Leases** |    | **Total** |   |
|---------------------------------------------|--------|---------------------|--------|-----------------------|---------|-----------|--------|
| 2003                                        |   | $                   | 351    |                  | $       | 27,115    |   | $ | 27,466 |   |
| 2004                                        |   | —              |   | 26,558                |    | 26,558    |   |
| 2005                                        |   | —              |   | 16,413                |    | 16,413    |   |
| 2006                                        |   | —              |   | 8,498                 |    | 8,498     |   |
| 2007                                        |   | —              |   | 8,121                 |    | 8,121     |   |
| Thereafter                                  |   | —              |   | 18,094                |    | 18,094    |   |
| Contracted third party sublease income      |   | —              |   | (2,704                | )       | (2,704    | )      |
| Total Estimated Cash Flows                  |   | 351                 |   | $                     | 102,095 |      | $      | 102,446 |   |
|                                        |   |                |   |                  |    |      |   |
| Less Imputed Interest                       |   | (8                  | )      |                  |    |      |   |
|                                        |   |                |   |                  |    |      |   |
| Present Value of net Minimum lease payments |   | 343                 |   |                  |    |      |   |
|                                        |   |                |   |                  |    |      |   |
| Less current portion                        |   | (343                | )      |                  |    |      |   |
|                                        |   |                |   |                  |    |      |   |
| Long-Term capital lease obligation          |   | $                   | — |                  |    |      |   |   |

 

Assets acquired under capital lease had anoriginal cost of $801,000, however during the quarter ended December 31, 2002all fixed assets were written down to their fair market value. As a result theassets acquired under capital leases had a book value of $88,000 and noaccumulated depreciation. Non-cancelable operating lease obligations include $34.7 million thatwas accrued as restructuring costs as at December 31, 2002.

 

***LEGAL PROCEEDINGS***

 

The Companycurrently is a party to various legal proceedings, including those notedbelow.  While the Company currentlybelieves that the ultimate outcome of these proceedings will not have amaterial adverse effect on our results of operations, litigation is subject toinherent uncertainties, and unfavorable rulings could occur.  Depending on the amount and timing, anunfavorable outcome of some or all of these matters could have a material adverseeffect on the Company’s cash flows, business, results of operations orfinancial position.  

 

***SecuritiesLitigation***

 

On June 19,2001, an alleged securities class action, captioned *Cameron v. Commerce One, Inc., et al.*,  was filed against Commerce One, severalcompany officers and directors (the “Individual Defendants”), and the threelead underwriters in the Commerce One initial public offering (“IPO”) in theUnited States District Court for the Southern District of New York.  Various plaintiffs have filed similaractions asserting virtually identical allegations against more than 200 othercompanies. The lawsuits against Commerce One and other companies have beencoordinated for pretrial purposes with these other related lawsuits and havebeen assigned the collective caption *In reInitial Public Offering Securities Litigation.*

 

On April 19,2002, plaintiffs’ lawyers for the consolidated lawsuits filed an amendedcomplaint consisting of a set of “Master Allegations” and individual amendedcomplaints against the various defendants,

 

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including Commerce One and the IndividualDefendants.  The amended complaintalleges violations of Section 11 and Section 15 of the Securities Act of 1933,Section 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”), andSection 10(b) of the Exchange Act (and Rule 10b-5, promulgated thereunder) as aresult of alleged conduct of the underwriters of the IPO to engage in a schemeto underprice the IPO and then artificially inflate our stock price in the aftermarket.The complaint seeks unspecified damages on behalf of a purported class ofpurchasers of common stock between July 1, 1999 and June 15, 2001. On July15, 2002, the issuer and individual defendants filed an omnibus motion todismiss addressing issues generally applicable to the defendants as agroup.  On October 9, 2002, the district court entered an order dismissingall of the living individual Commerce One officers and directors fromthe case without prejudice.  On February 16, 2003, the district courtentered an order denying most of the defenses asserted by the defendants in theomnibus motion to dismiss and allowing most of the case to proceed.

 

In February 2003, CommerceOne, along with its Chief Executive Officer and former Chief Financial Officer,were named as defendants in a similar class-action matter in Florida, *Liu v. Credit Suisse First Boston et al.,*United States District Court, Southern District of Florida.  In that case, the plaintiff alleges thatvarious investment banks, issuer companies, and individuals violated securitieslaws by engaging in a scheme to under-price initial public offerings and thenartificially inflate prices of those stocks in the aftermarket.

 

***Real Estate Litigation***

 

On November13, 2002, the Company was named as a defendant in an action for breach oflease, entitled *Marriott Plaza AssociatesL.P. v. Commerce One, Inc.*, Superior Court of California, County ofSanta Clara,.  The action alleges thatCommerce One breached its commercial real estate lease for office space inSanta Clara, California.  The Complaintdoes not quantify the damages it seeks, but instead seeks all unpaid rent owingat the time of trial.  If the trialoccurs during 2003, the Company expects the claim for back rent to rangebetween $1.5 and $4.1 million, depending on the date of the trial.  As of March 31, 2003, Commerce One’s fulllease obligation with Marriott Plaza (including back and future rent throughthe lease term of February 2006) is approximately $11.5 million.

 

In addition to the above, the Company has stopped paying rent withrespect to various other real estate leases in connection with attempts tonegotiate with the landlords to reduce or eliminate the Company’s long-termreal estate obligations.  The totallong-term lease obligations for these locations, including future rent throughMarch 2011, is approximately $50.0 million in the aggregate.  In the first quarter of 2003, the landlordsfor premises leased by the Company in California, Maryland and Massachusettsfiled unlawful detainer actions against the Company to repossess thepremises.  While none of these unlawfuldetainer actions has sought monetary damages, it is likely thateach landlord in the locations where we have stopped paying renteventually will file a lawsuit to recover past and future rentpayments unless the Company is able to reach settlement agreements in the nearfuture.

 

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**10. RELATED PARTY TRANSACTIONS**

 

Commerce One’s strategic relationship with SAP commenced on September18, 2000, when the Company entered into a strategic alliance agreement with SAPAG to jointly develop, market and sell the MarketSet suite of applications andthe Enterprise Buyer procurement applications. These products were primarily targeted at electronic marketplacecustomers, a market which has since declined substantially.  This agreement provided that either partylicensing the jointly developed products to its customers would owe a royaltyto the other party.  The amount of theroyalty was generally based on a percentage of the total license fee paid bythe customer.

 

SAP historically has made non-refundable royalty prepayments toCommerce One, which the Company has recorded as deferred revenue as paymentsare received.  As SAP incurs theobligation to pay royalties to Commerce One, these royalties are recognized asrevenue.  Prepayments received from SAPand included in deferred revenue totaled approximately $10.2 million and $33.8million as of December 31, 2002 and 2001, respectively.  When Commerce One licenses one of thejointly developed products to its customers, it pays a royalty to SAP inconnection with the sale.  These royaltypayments are recorded as a reduction of license or support revenue, asappropriate.  In 2002, 2001 and 2000,the Company made royalty payments to SAP of approximately $1.3 million, $16.9million and $10.5 million, respectively.

 

During 2001,Commerce One and SAP amended these agreements to provide for different rightsto resell certain technology included in the jointly developed products and forvarying royalty rates and maintenance fees depending on the particular product,category of customer and other factors.

 

EffectiveJanuary 1, 2002, the Company amended its strategic alliance agreement with SAPto simplify its royalty payment provisions and to provide SAP with an unlimitedright to resell the jointly developed products on a fixed fee basis, as well asa right to resell certain other Commerce One technology on an OEM basis, forthe first three quarters of 2002.  Inexchange, SAP reported to the Company a total of approximately $20.7 million,primarily attributable to license fees, as well as related support andmaintenance.  Commerce One credited theaggregate fee of approximately $20.7 million against SAP’s prior prepaymentswhich were previously recorded as deferred revenue.  Commerce One recognized the license and maintenance fees ratablyover the three-quarter period ending September 30, 2002.  The amendment provided that during thisthree-quarter period, Commerce One would pay SAP a royalty fee based upon afixed percentage of the total license fee for jointly developed products soldby Commerce One, if any.  The amendmentfurther provided that the agreement would default to the historical royalty structurein the event the parties failed to agree on a new payment schedule by September30, 2002.  Commerce One and SAP have notrenegotiated the royalty payments, and therefore the parties will revert to thehistorical royalty structure when payments are due.

 

The parties entered into a subsequent amendment effective December 20,2002 in which the parties clarified Commerce One’s support obligations forprior versions of the Marketset product, granted reciprocal rights todistribute certain connector technology related to the Marketset product on aroyalty-free basis, and resolved certain outstanding payment issues relating toservices and maintenance fees for certain joint customers.

 

SAP’s license royalty payments to Commerce One historically have constituteda substantial portion of the Company’s revenues, including during 2002 and2001. Historically, SAP was instrumental in assisting the Company with sellingthe jointly developed products, MarketSet and Enterprise Buyer, to SAP’scustomer

 

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base.  However, these royalty payments have declined in the past yearwith the decline of the market for electronic marketplace solutions.  In 2002, 2001 and 2000, SAP reportedroyalties to the Company of approximately $24.3 million,****$79.1 million and $44.6 million,respectively, of which license revenues were approximately $19.7 million**,** $68.3 million and $44.1 million,respectively.

 

Commerce One and SAP have each phased out the jointly developedEnterprise Buyer procurement products and replaced such products with its ownsuccessor procurement products.  As aresult, corresponding revenues received from SAP for the sale of such productshave ceased, and the Company does not expect to receive any future revenues fromthe sale of these products by SAP. Similarly, revenues from the MarketSet product, primarily targeted atthe electronic marketplace sector, have declined substantially and the Companydoes not expect to receive significant future license revenues, if any, fromthe sale of this product by SAP.

 

The Company also has generated revenue from its relationship with SAPby performing professional services as a subcontractor to SAP, primarily onsoftware implementation engagements where the Company has jointly soldMarketSet or Enterprise Buyer to an SAP customer. SAP also has completedprofessional services for the Company by acting as a subcontractor, primarilyin relation to the jointly sold MarketSet or Enterprise Buyer products.

 

The Company also has generated revenue from its relationship with SAPby providing technical customer support and maintenance services to jointcustomers.  In 2002, support of suchcustomers represented a substantial percentage of the Company’s total supportand maintenance revenue.  Amountsreceived from SAP include payments based on a certain percentage of totalsupport and maintenance fees received by SAP from the customer.  In addition, the Company amended thestrategic alliance agreement on January 1, 2002 to provide that SAP would payCommerce One $500,000 per quarter for certain support obligations relating toMarketset.  Under the terms of thatagreement, the fixed payment is scheduled to cease on September 30, 2003.

 

During the years ended December 31, 2002, 2001 and 2000, the Companyrecognized revenues with Covisint, LLC (“Covisint”), a business-to-businesselectronic marketplace for the procurement of goods and services by automakers,their suppliers and others.  The Companyholds a two percent equity interest in Covisint and under the terms of aTechnology Agreement with Covisint (see Note 11), the Company indirectlylicenses software and provides professional services and software maintenanceto Covisint in exchange for cash compensation and a share of Covisint’selectronic marketplace revenue over a ten-year period.

 

During the years ended December 31, 2002, 2001 and 2000, the Companyrecognized revenue from transactions with NTT Corporation (“NTT”).  A member of the Company’s Board of Directorscurrently serves as an executive of an NTT subsidiary.

 

Amounts included in the consolidated financial statements in connectionwith the related party transactions described above are as follows (in thousands):

 
|                                                                   |   | **YEARS ENDING DECEMBER 31,** |   |
|------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                   |   | **2002**                      |   | **2001** |   | **2000** |   |
| Revenues:                                                              |   |                          |   |   |   |   |   |
| SAP                                                                    |   | $                             | 26,149 |   | $ | 79,111 |   | $ | 44,602 |   |
| Covisint                                                               |   | 5,011                         |   | 12,885 |   | 6,036 |   |
| NTT                                                                    |   | 862                           |   | 5,745 |   | 1,874 |   |
| Total                                                                  |   | $                             | 32,022 |   | $ | 97,741 |   | $ | 52,512 |   |
|                                                                   |   |                          |   |   |   |   |   |
| Professional consulting costs   included within Cost of services: |   |                          |   |   |   |   |   |
| SAP                                                                    |   | $                             | 2,237  |   | $ | 1,367 |   | $ | — |   |
| Total                                                                  |   | $                             | 2,237  |   | $ | 1,367 |   | $ | — |   |

 

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|                       |   | **DECEMBER 31,** |   |
|----------------------------|--------|------------------|--------|
|                       |   | **2002**         |   | **2001** |   |
| Accounts receivable:       |   |             |   |   |   |
| SAP                        |   | $                | 38     |   | $ | 874 |   |
| Covisint                   |   | 909              |   | 738 |   |
| NTT                        |   | —           |   | 57 |   |
| Total                      |   | $                | 947    |   | $ | 1,669 |   |
|                       |   |             |   |   |   |
| Deferred revenue:          |   |             |   |   |   |
| SAP                        |   | $                | 10,204 |   | $ | 33,863 |   |
| Covisint                   |   | —           |   | 72 |   |
| NTT                        |   | 934              |   | 1,523 |   |
| Total                      |   | $                | 11,138 |   | $ | 35,458 |   |
|                       |   |             |   |   |   |
| Other current liabilities: |   |             |   |   |   |
| SAP                        |   | $                | 418    |   | $ | 4,114 |   |
| Total                      |   | $                | 418    |   | $ | 4,114 |   |

 

**11. STOCKHOLDERS’EQUITY**

 

***STRATEGIC RELATIONSHIPWITH SAP AG***

 

On September 18, 2000, the Company entered into agreements with SAP AGto jointly develop and deliver the next generation of e-business marketplacesolutions.  In connection with thoseagreements, the Company issued 505,955 shares of common stock to SAP AG for anaggregate purchase price of $250 million.

 

On June 28, 2001, Commerce One and SAP AG entered into a furtherstock purchase agreement and related agreements that resulted in Commerce One’sissuance of 4,748,477 shares of its common stock to SAP AG at a purchase priceof $47.50 per share, for a total purchase price of approximately$225 million. The transaction was completed on August 6, 2001.   SAP AG owned a total of approximately 5.7million shares of Commerce One common stock as of December 31, 2002.

 

SAP AG is generally prohibited from transferring its shares for threeyears from the date of the closing, although it may sell up to 10% of itsshares during the first year after the closing, up to 30% during the secondyear and up to 50% during the third year, subject to certain limitations onopen market sales and transfers to persons who after the transfer will hold inexcess of 10% of Commerce One’s voting power. These restrictions on transferterminate on the earliest to occur of a change of control of Commerce One, thetermination of the strategic alliance agreement (other than as a result of amaterial breach of the strategic alliance agreement by SAP AG) and the thirdanniversary of the agreements. SAP AG is also prohibited from transferring theshares to a competitor of Commerce One for six years from the closing date,except in open market transactions. Commerce One has a right of first refusalon any private sale of shares by SAP AG for 54 months following the closing.

 

SAP AG also agreed to certain standstill restrictions that, for threeyears following the date of share purchase agreement, generally restrict SAPAG’s ability to acquire more than 23% of Commerce One’s outstanding commonstock, seek control of Commerce One, or participate in groups with respect tothe holding or voting of Commerce One’s stock. The standstill obligationsterminate prior to three years from the date of the share purchase agreementupon the occurrence of certain events, such as a change of control of CommerceOne or the acquisition of more than 15% of Commerce One by certain namedcompetitors of SAP AG.  These

 

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obligations are also suspendedin the event of an offer for such a change of control or acquisition, but willbe reinstated if the offer is withdrawn or terminated. SAP AG also remainssubject to the

 

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operation of Commerce One’sshareholder rights plan, or “poison pill”, which was amended to permit SAP AGto beneficially own shares of Commerce One common stock up to the 23%standstill limit.

 

Until the earlier of three years from the closing or the end of thestandstill period, SAP AG has the right to participate to maintain its prorata ownership of Commerce One’s outstanding shares in the event Commerce Oneissues additional securities in a private transaction. In addition, SAP AGis entitled to certain registration rights, after one year with respect toshares purchased by SAP AG from Commerce One prior to the transaction, andafter two years with respect to the other shares it currently owns, sharesacquired in the transaction and any shares it acquires from Commerce One in thefuture. SAP AG also received the right to nominate a director for electionto Commerce One’s board of directors for as long as SAP AG owns tenpercent or more of Commerce One’s common stock. If SAP AG is entitled tonominate a director but no director is nominated or available to attend ameeting of Commerce One’s board of directors, SAP AG may send an observerto attend. SAP AG also generally agreed to vote its shares in proportionwith the other stockholders of Commerce One only with respect to nominees toCommerce One’s board of directors and stockholder proposals to amend or rescindCommerce One’s rights plan or SAP AG’s standstill agreement during thestandstill period. There are no other restrictions on SAP AG’s votingrights.

 

***STOCKHOLDERS’ RIGHTSAGREEMENT***

 

In March 2001, the Board of Directors of the Company approved aStockholders’ Rights Plan. Under the plan, Commerce One issued a dividend ofone right for each share of common stock of the Company held by stockholders ofrecord as of the close of business on April 30, 2001. The rights tradewith Commerce One’s common stock. Each right entitles stockholders to purchasea fractional share of Commerce One’s preferred stock for an exercise price of$700. However, the rights are not immediately exercisable and will generallybecome exercisable if a person or group acquires beneficial ownership of15 percent or more of Commerce One’s common stock or commences a tender orexchange offer upon consummation of which such person or group wouldbeneficially own 15 percent or more of Commerce One’s common stock. Therights will become exercisable by holders, other than the unsolicited thirdparty acquirer, for shares of Commerce One or of the third party acquirerhaving a value of twice the right’s then-current exercise price. The rights areredeemable by Commerce One and will expire on April 30, 2011. The RightsPlan was not adopted in response to any effort to acquire control of theCompany.

 

***REORGANIZATION INTOA HOLDING COMPANY STRUCTURE***

 

During 2001, the Company completed its reorganization into a holdingcompany structure.  As part of thereorganization, the Stockholders of the “old” Commerce One (now thewholly-owned subsidiary Commerce One Operations, Inc.) became stockholders ofthe “new” Commerce One.

 

In December 2000, Commerce One Operations, Commerce One, Ford MotorCompany (Ford), General Motors Corporation (GM), DaimlerChrysler AG, RenaultS.A. and Nissan Motor Co., Ltd. entered into several agreements relatingto the formation of Covisint, LLC (“Covisint”), a business-to-businesselectronic marketplace for procurement of goods and services by automakers,their suppliers and others. In connection with the formation of Covisint, underthe terms of a Formation Agreement, Commerce One Operations agreed to undergo acorporate restructuring into a holding company. In addition, under the terms ofa Technology Agreement, Commerce One indirectly licenses software and providesprofessional services and support and maintenance services to Covisint inexchange for cash compensation and a share of Covisint’s electronic marketplacerevenue over a ten-year period.

 

In July 2001, Commerce One Operations completed the reorganization intoa holding company structure by means of a merger with and into a wholly-ownedsubsidiary of Commerce One, pursuant to an Agreement

 

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and Plan of Merger, datedApril 25, 2001 by and among Commerce One, New C1 Merger Corporation andCommerce One Operations.

 

Upon completion of the reorganization, Commerce One Operations became awholly owned subsidiary of Commerce One and changed its name to Commerce OneOperations, Inc. Holders of Commerce One Operations common stock (and theassociated right under Commerce One Operation’s stockholder rights plan)received one share of Commerce One common stock for each share of Commerce OneOperations common stock (and associated right) held by such stockholder priorto the reorganization.

 

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Commerce One continued the business of Commerce One Operations as theparent holding company of Commerce One Operations.

 

On the completion of the reorganization, Commerce One received anaggregate two percent equity interest in Covisint. Upon the execution of theFormation Agreement, Commerce One issued 1.44 million shares of its commonstock to Ford and 1.44 million shares of its common stock to GM.  Under the terms of the Formation Agreement,half of each of Ford’s and GM’s shares were held in escrow and were released toFord and GM in December 2002.  Prior tothe reorganization, the board of directors issued a dividend of one right underCommerce One’s stockholder rights plan per share of common stock held by Fordand General Motors.

 

In addition, pursuant to a Standstill and Stock Restriction Agreemententered into between Commerce One, Commerce One Operations, Ford and GM, all ofthe shares of stock issued to Ford and GM will generally be subject to transferrestrictions for three years subject to certain exceptions. Ford and GM alsoagreed to certain “standstill” restrictions that will generally limit theirability to acquire individually more than 9.95%, or collectively more than19.9%, of Commerce One’s outstanding common stock for three years, andindividually 12.5% and collectively 25% thereafter. In addition, for a periodof three years, Ford and GM generally agreed to vote their shares in accordancewith the recommendations of Commerce One’s Board of Directors with respect tonominees to the Board of Directors and increases in Commerce One authorizedcapital stock and amendments to stock option plans and employee stock purchaseplans approved by Commerce One’s Board of Directors. Under a RegistrationRights Agreement entered into between Commerce One, Ford and GM, Ford and GMare entitled to registration rights generally beginning after three years,subject to certain exceptions.

 

***STOCK OPTIONS***

 

In 1997, the Company adopted the Commerce One 1997 Incentive StockOption Plan, which plan was amended and restated in 1999 (the “1997Plan”).  In 1999, the Company adoptedthe 1999 Nonstatutory Stock Option Plan (the “1999 Plan”). In connection withvarious acquisitions, the Company assumed the VEO and CommerceBid stock optionplans in 1999, the Mergent and AppNet stock option plans in 2000 and theExterprise stock option plan in 2001. The Company terminated all the assumedplans upon the assumption and no further options will be granted under them. Asof December 31, 2002, the Company reserved an aggregate of 7,453,207shares of common stock for issuance pursuant to all of its stock option plansand one standalone nonstatutory stock option agreement.

 

All employees,including without limitation, independent contractors and directors areeligible to receive awards under the 1997 Plan.  Options granted under the 1997 Plan may be either incentive stockoptions or non-qualified stock options. The exercise price of incentive stockoptions granted under the 1997 Plan may not be less than the fair market valueof the shares of the Company’s common stock on the date of grant. However, the Administratorof the plan shall determine the exercise price of non-qualified stock options.The option holder may exercise unvested options and obtain shares of stock thatare subject to a repurchase option by the Company at the original exerciseprice in the event of the employee’s termination. As of December 31, 2002 theCompany had issued 2,504 shares of common stock subject to repurchase.  The repurchase rights lapse over the periodthat the underlying options vest.

 

Optionsgranted under the 1999 Plan may only be non-qualified stock options and theAdministrator shall determine the exercise price.

 

Under the Company’s 1999 Director Option Plan, 81,000**shares of common stock have been reservedfor grants of stock options under such plan. As of December 31, 2002,options to purchase 72,000 shares have been granted.  No grants were made pursuant to this plan in 2002.

 

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A summary of the Company’s stock option activity under all plans is setforth below:

 
|                                        |   | **NUMBER OF  SHARES** |   | **WEIGHTED-  AVERAGE  EXERCISE  PRICE  PER SHARE** |   |
|---------------------------------------------|--------|-----------------------|--------|----------------------------------------------------|--------|
| Outstanding at December 31, 1999            |   | 2,719,566             |   | $                                                  | 104.30 |   |
| Granted                                     |   | 2,902,381             |   | $                                                  | 501.00 |   |
| Exercised                                   |   | (803,301              | )      | $                                                  | 50.40  |   |
| Canceled                                    |   | (227,524              | )      | $                                                  | 296.30 |   |
| Outstanding at December 31, 2000            |   | 4,591,122             |   | $                                                  | 354.90 |   |
| Granted and assumed                         |   | 4,896,003             |   | $                                                  | 44.30  |   |
| Exercised                                   |   | (429,331              | )      | $                                                  | 16.20  |   |
| Canceled                                    |   | (3,684,763            | )      | $                                                  | 404.70 |   |
| Outstanding at December 31, 2001            |   | 5,373,031             |   | $                                                  | 58.90  |   |
| Granted and assumed                         |   | 3,783,592             |   | $                                                  | 4.82   |   |
| Exercised                                   |   | (215,382              | )      | $                                                  | 14.68  |   |
| Canceled                                    |   | (2,635,911            | )      | $                                                  | 57.42  |   |
| Outstanding at December 31, 2002            |   | 6,305,330             |   | $                                                  | 28.56  |   |
| Exercisable and vested at December 31, 2002 |   | 2,018,062             |   | $                                                  | 54.76  |   |

 
|                                                             |   | **Options  Outstanding**           |   | **Options  Exercisable  and Vested**                         |   |
|------------------------------------------------------------------|--------|------------------------------------|--------|--------------------------------------------------------------|--------|
| **Range of  Exercise Prices**                                    |   | **Number of  Outstanding  Option** |   | **Weighted-  Average  Remaining  Contractual  Life (Years)** |   | **Weighted  Average  Exercise  Price** |   | **Number of  Exercisable  Options** |   | **Weighted  Average  Exercise  Price  Per Share** |   |
| $     0.33 - $      3.32 |   | 2,082,886                          |   | 9.64                                                         |   | $ | 3.27 |   | 72,241 |   | $ | 2.31 |   |
| $     3.35 - $      7.40 |   | 1,460,620                          |   | 9.52                                                         |   | $ | 5.81 |   | 317,061 |   | $ | 6.88 |   |
| $     7.50 - $    28.10            |   | 1,092,037                          |   | 7.65                                                         |   | $ | 26.18 |   | 756,434 |   | $ | 26.55 |   |
| $   31.50 - $    33.60                       |   | 922,884                            |   | 8.87                                                         |   | $ | 33.57 |   | 349,717 |   | $ | 33.57 |   |
| $   34.80 - $   198.33                            |   | 593,438                            |   | 7.45                                                         |   | $ | 71.59 |   | 409,854 |   | $ | 74.23 |   |
| $212.50 - $1,044.38                                              |   | 153,465                            |   | 7.41                                                         |   | $ | 405.62 |   | 112,755 |   | $ | 407.13 |   |
|                                                             |   | 6,305,330                          |   | 8.89                                                         |   | $ | 28.56 |   | 2,018,062 |   | $ | 54.76 |   |

 

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***RESTRICTED COMMON STOCK***

 

In May 2001, theCompany issued 172,570 restricted shares of common stock to certainemployees.  The shares of restrictedcommon stock vest ratably over a two year period and are subject to forfeitureif an employee ceases employment prior to that time.  In 2002, 39,786 shares of restricted common stock were forfeiteddue to the cessation of employment by certain employees.  As of December 31, 2002, 11,142 shares ofrestricted common stock were outstanding and subject to forfeiture.

 

***1999EMPLOYEE STOCK PURCHASE PLAN***

 

Under the 1999 Employee Stock Purchase Plan, (“ESPP Plan”), the Companyissued 358,760 shares of common stock at a weighted average price of $6.32 pershare, 291,330 shares of common stock at a weighted average price of $40.00 pershare and 198,534 shares of common stock at a weighted average price of $56.50per share, in 2002, 2001 and 2000, respectively.  As of December 31, 2002, 1,419,026 shares of common stockhave been reserved for issuance under the ESPP Plan.  Eligible employees may purchase common stock at 85% of the lesserof the fair market value of the Company’s common stock on the first day of theapplicable two-year offering period or the last day of the applicable six monthpurchase period.

 

***DEFERRED STOCK-BASEDCOMPENSATION***

 

The Company did not record deferred stock compensation in 2002.  During 2002, the deferred stock compensationrecorded in relation to the restricted stock awards and options assumed inacquisitions in previous years was reduced by $3.0 million and $50.7 million,respectively, representing the deferred stock compensation recorded that wasforfeited by employees upon termination of their employment.  In the years ended December 31, 2001 and2000, the Company recorded deferred stock compensation of approximately $16.3million and $189.3 million, respectively, representing the difference betweenthe exercise price and the deemed fair value of restricted stock granted toemployees and options assumed in connection with the acquisitions.  These amounts are being amortized by chargesto operations over the vesting periods of the individual stock options andrestricted common stock awards.  Suchamortization amounted to approximately $8.7 million, $98.3 million and$39.8million for the years ended December 31, 2002, 2001 and 2000, respectively.

 

##### ***STOCK OPTION EXCHANGE PROGRAM***

 

OnMarch 5, 2001, the Company announced a voluntary stock option exchangeprogram for its employees. Under the program, employees were given theopportunity to elect to cancel outstanding stock options held by them inexchange for an equal number of replacement options to be granted at a futuredate. The elections to cancel options were effective on April 6, 2001. Theexchange resulted in the voluntary cancellation by 2,307 employees of optionsto purchase 2,458,505 shares of common stock with exercise prices ranging from$10.00 to $1,044.40 in exchange for the same number of replacement options. Thereplacement options were granted on October 8, 2001 and have the same terms andconditions as each optionee’s cancelled options, including the vestingschedule and expiration date of the cancelled options. The replacementoptions were granted at an exercise price of $28.10 per share of common stockon October 8, 2001. Employees were eligible to participate in the program; Boardmembers, former employees and consultants were ineligible to participate.

 

***WARRANTS***

 

In November 2000, the Company issued a warrant to a consultingfirm, in connection with services provided, to purchase 10,000 shares of commonstock at an exercise price of $1,109.20. The warrant is exercisable throughMarch 17, 2005. The fair value of the warrants was estimated using theBlack-Scholes

 

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option pricing model with thefollowing assumptions: risk free rate of 5.0%, weighted average contractuallife of 4.3 years, 106% volatility and no dividend yield, which resultedin a value of $1,524,000. This amount was charged to operations during the year2000.

 

**12. INCOME TAXES**

 

The following is a geographical breakdown of consolidated income (loss)before income taxes by income tax jurisdiction (in thousands):

 
|          |   | **YEARS  ENDED DECEMBER 31,** |     |
|---------------|--------|-------------------------------|----------|
|          |   | **2002**                      |     | **2001** |   | **2000** |   |
| United States |   | $                             | (589,572 | ) | $ | (2,626,787 | ) | $ | (308,411 | ) |
| Foreign       |   | 37                            |     | 51,689 |   | (30,136 | ) |
| Total         |   | $                             | (589,535 | ) | $ | (2,575,098 | ) | $ | (338,547 | ) |

 

There has been no provision for U.S. federal or state income taxes forany period as the Company has incurred operating losses in all periods. Duringthe years ended December 31, 2002, 2001 and 2000, the Company recordedforeign income tax provisions of $301,000, $9,001,000 and $6,400,000,respectively, relating to taxes withheld from customer payments and remitted toforeign taxing jurisdictions on the Company’s behalf and income taxes generatedin certain foreign jurisdictions.

 

A reconciliation of income taxes at the statutory federal income taxrate to net income taxes included in the accompanying statements of operationsis as follows:

 
|                                          |   | **YEARS  ENDED DECEMBER 31** |   |
|-----------------------------------------------|--------|------------------------------|--------|
|                                          |   | **2002**                     |   | **2001** |   | **2000** |   |
| US federal taxes (benefit) at statutory  rate |   | (35.0                        | )%     | (35.0 | )% | (35.0 | )% |
| State                                         |   | (5.2                         | )%     | (5.2 | )% | (5.3 | )% |
| Foreign                                       |   | 0.1                          | %      | 0.3 | % | 1.9 | % |
| Acquisition related charges                   |   | 30.2                         | %      | 30.0 | % | 24.7 | % |
| Valuation allowance                           |   | 10.0                         | %      | 10.2 | % | 15.6 | % |
| Total                                         |   | 0.1                          | %      | 0.3 | % | 1.9 | % |

 

Deferred income taxes reflect the net tax effects of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes.Significant components of the Company’s deferred tax assets are as follows (in thousands):

 
|                                       |   | **DECEMBER  31,** |    |
|--------------------------------------------|--------|-------------------|---------|
|                                       |   | **2002**          |    | **2001** |   |
| Deferred tax assets:                       |   |              |    |   |   |
| Net operating loss carryforwards           |   | $                 | 359,687 |   | $ | 239,607 |   |
| Capitalized research and development costs |   | 14,838            |    | 12,156 |   |
| Deferred revenue                           |   | 8,972             |    | 22,035 |   |
| Tax credit carryforwards                   |   | 13,155            |    | 9,516 |   |
| Accrued costs and expenses                 |   | 7,609             |    | 29,805 |   |
| Deferred tax assets                        |   | 404,261           |    | 313,119 |   |
| Less: valuation allowance                  |   | (400,298          | )       | (299,851 | ) |
| Total deferred tax assets                  |   | 3,963             |    | 13,268 |   |
| Deferred tax liabilities:                  |   |              |    |   |   |
| Other identified intangible assets         |   | (3,963            | )       | (13,268 | ) |
| Total deferred tax liabilities             |   | (3,963            | )       | (13,268 | ) |
| Net deferred tax assets                    |   | $                 | 0       |   | $ | 0 |   |

 

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Realization of deferred tax assets is dependent upon future earnings,if any, the timing and amount of which are uncertain. Accordingly, the netdeferred tax assets have been fully offset by a valuation allowance. Thevaluation allowance increased by $100,447,000, $154,008,000 and $102,829,000during 2002, 2001 and 2000 respectively.

 

The tax benefits associated with employee stock options provide adeferred tax benefit of $175 million as of December 31, 2002 whichhas been fully offset by a valuation allowance and will be credited toadditional paid-in capital when realized.

 

As of December 31, 2002, the Company had net operating losscarryforwards for federal income tax purposes of approximately $986,745,000,which expire in the years 2009 through 2022.

 

The Company also had net operating loss carryforwards for state incometax purposes of approximately $403,233,000 expiring in the years 2004 through2022.

 

In addition, the Company had federal and state tax credit carryforwardsof approximately $8,687,000 and $6,770,000 respectively, which expire in theyears 2012 through 2022.

 

Utilization of the Company’s net operating loss and tax creditcarryforwards may be subject to a substantial annual limitation due to theownership change limitations provided by the Internal Revenue Code and similarstate provisions. Such an annual limitation could result in the expiration ofthe net operating loss and tax credit carryforwards before utilization.

 

**13. PROFIT SHARING PLAN**

 

The Company has a profit sharing plan and trust underSection 401(k) of the Internal Revenue Code that covers substantially allemployees. Eligible employees may contribute amounts to the plan via payrollwithholdings, subject to certain limitations. The Company did not matchcontributions by plan participants during the year ended December 31,2000. The Company began matching employee contributions on January 1, 2001, butterminated the matching of employee contributions on May 31, 2002.

 

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**14. REVENUE BYGEOGRAPHIC AREA**

 

Revenue was derived from customers in the following geographic areas(in thousands):

 
|                           |   | **YEARS  ENDED DECEMBER 31,** |    |
|--------------------------------|--------|-------------------------------|---------|
|                           |   | **2002**                      |    | **2001** |   | **2000** |   |
| United States                  |   | $                             | 68,419  |   | $ | 270,630 |   | $ | 225,994 |   |
| Europe, Middle East and Africa |   | 30,805                        |    | 83,361 |   | 119,372 |   |
| Asia Pacific                   |   | 5,304                         |    | 28,319 |   | 47,419 |   |
| Other Americas                 |   | 1,001                         |    | 26,259 |   | 9,011 |   |
|                           |   | $                             | 105,529 |   | $ | 408,569 |   | $ | 401,796 |   |

 

**15. BUSINESSCOMBINATIONS**

 

***EXTERPRISE,INC.***

 

Effective May 25, 2001, the Company acquired Exterprise, Inc.(“Exterprise”), a provider of platform solutions that enable the developmentand deployment of e-commerce applications. The acquisition was structured as a common stock for common stock mergerand has been accounted for as a purchase transaction.  The purchase consideration was approximately $66.3 millionconsisting of approximately 720,000 shares of common stock with a fair value ofapproximately $60.7 million, assumption of option to acquire approximately25,800 shares of common stock with a fair value of $2.5 million and transactioncosts of approximately $3.1 million.

 

The Company estimated that approximately $4.5 million of the $66.3million purchase consideration represented purchased in-process research anddevelopment that had not yet reached technological feasibility and had noalternative future use.  Accordingly,this amount was charged to operations during the year.

 

The total purchase cost for the Exterprise acquisition has beenallocated to the acquired assets and assumed liabilities based upon estimatesof their fair value.  The followingtable depicts the total purchase cost and the allocation thereof (inthousands):

 

| Cash                                                                         |   | $      | 554    |   |
|------------------------------------------------------------------------------|--------|--------|--------|--------|
| Accounts receivable                                                          |   | 106    |   |
| Assumed liabilities                                                          |   | (6,103 | )      |
| Deferred compensation                                                        |   | 2,181  |   |
| Intangible assets:                                                           |   |   |   |
| Assembled workforce                                                          |   | 3,508  |   |
| Purchase technology                                                          |   | 5,187  |   |
| Patents                                                                      |   | 1,018  |   |
| Goodwill                                                                     |   | 55,307 |   |
| Total intangible assets                                                      |   | 65,020 |   |
| Purchased in-process research and  development charged to operations in 2001 |   | 4,548  |   |
| Total purchase cost                                                          |   | $      | 66,306 |   |

 

**16. SELECTEDQUARTERLY COMBINED FINANCIAL DATA (UNAUDITED)**

 

On January 30,2003, Commerce One announced that it recently discovered that it had overstatedthe

 

89

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company’s stock compensationexpense for the quarters ended March 31, 2002, June 30, 2002 and September 30,2002, resulting in a net loss for those periods that was less than previouslyreported.  The stock compensationexpense for these periods was lower than previously reported by approximately$10.6 million in the third quarter of 2002, $8.8 million in the second quarterof 2002 and $8.9 million in the first quarter of 2002.  This overstatement related to non-cash stockcompensation expenses for certain employees from prior acquisitions no longeremployed with the company, but for whom the company continued to amortize theexpense.  After adjusting the results inthese quarters to correctly reflect the lower expense, the adjusted net loss ona GAAP basis for the third quarter of 2002 was reduced to $36.3 million or$1.25 per share, for the second quarter of 2002 was reduced to $62.3 million or$2.15 per share and for the first quarter of 2002 was reduced to $211.7 millionor $7.36 per share.  The Company alsodiscovered that it had overstated its deferred stock compensation expense forthe fiscal years ended 2000 and 2001 by amounts that were immaterial to thefinancial results for those periods.

 

 

A summary of the Company’s quarterly financial results follows (inthousands, except per share data).

 

 
|                                 |   | **YEAR ENDED  DECEMBER  31, 2002  QUARTER ENDED** |     |
|--------------------------------------|--------|--------------------------------------------------------|----------|
|                                 |   | **March 31**                                           |     | **June 30** |   | **September  30** |   | **December  31** |   |
| Total revenues                       |   | $                                                      | 31,755   |   | $ | 27,837 |   | $ | 26,423 |   | $ | 19,514 |   |
| Total cost of licenses and services  |   | 174,476                                                |     | 21,950 |   | 17,337 |   | 46,876 |   |
| Loss from operations                 |   | $                                                      | (213,481 | )* | $ | (62,696 | )* | $ | (36,584 | )* | $ | (281,455 | ) |
| Net loss                             |   | $                                                      | (211,681 | )* | $ | (62,333 | )* | $ | (36,340 | )* | $ | (279,482 | ) |
| Basic and diluted net loss per share |   | $                                                      | (7.36    | )** | $ | (2.15 | )** | $ | (1.25 | )** | $ | (9.57 | ) |

 
|                                 |   | **YEAR ENDED  DECEMBER  31, 2001  QUARTER ENDED** |     |
|--------------------------------------|--------|--------------------------------------------------------|----------|
|                                 |   | **March 31**                                           |     | **June 30** |   | **September  30** |   | **December  31** |   |
| Total revenues                       |   | $                                                      | 170,273  |   | $ | 101,251 |   | $ | 81,086 |   | $ | 55,959 |   |
| Total cost of licenses and services  |   | 102,831                                                |     | 682,954 |   | 57,941 |   | 46,612 |   |
| Loss from operations                 |   | $                                                      | (228,739 | ) | $ | (2,066,266 | ) | $ | (119,271 | ) | $ | (168,393 | ) |
| Net loss                             |   | $                                                      | (228,534 | ) | $ | (2,068,258 | ) | $ | (119,020 | ) | $ | (168,287 | ) |
| Basic and diluted net loss per share |   | $                                                      | (10.21   | ) | $ | (90.25 | ) | $ | (4.51 | ) | $ | (5.90 | ) |

 

----

*These amounts differ from amounts previously reported by $10.6million, $8.8 million and $8.9 million for the third, second and firstquarters, respectively, as a result of the above mentioned over statement ofstock compensation expense.

 

**These amounts differ from amounts previously reported by $0.36,$0.31, and $0.31 for the third, second and first quarters, respectively.

 

**ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE**

 

None.

 

90

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**PART III**

 

**ITEM 10.****                      DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information required by this item with respect to identification ofdirectors and officers is incorporated by reference from Commerce One’sdefinitive Proxy Statement (“Proxy Statement”) for the Annual Meeting ofStockholders to be held on May 28, 2003 under the captions “The Board” and“Executive Officers and Key Employees,” respectively.

 

The information required by this item with respect to the informationrequired under Item 405 of Regulation S-K is incorporated by referencefrom the Proxy Statement under the caption “Section 16(a) BeneficialOwnership Reporting Compliance.”

 

**ITEM11.****                      EXECUTIVECOMPENSATION**

 

The information required by this Item is incorporated by reference fromthe Proxy Statement under the caption “Executive Compensation.”

 

**ITEM 12.****                      SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

 

The information required under this Item is incorporated by referencefrom the Proxy Statement under the captions “Security Ownership of Managementand Principal Stockholders” and “Equity Compensation Plans.”

 

**ITEM 13.****                      CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The information required under this Item is incorporated by referencefrom the Proxy Statement under the captions “Certain Relationships and RelatedTransactions” and “Compensation Committee Interlocks and InsiderParticipation.”

 

**ITEM14.****                      CONTROLSAND PROCEDURES**

 

(a)           *Evaluationof Disclosure Controls and Procedures*.  Within 90 days prior to the date of this annual report, wecarried out an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures (as defined in Rules 13a-14(c) and 15d-14(c) ofthe Securities Exchange Act of 1934, as amended).  Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our current disclosure controls and proceduresare effective in timely alerting them to material information relating to usand our subsidiaries required to be included in our periodic SEC filings.

 

(b)           *Changesin Internal Controls*.  Therehave been no significant changes in our internal controls or, to our knowledge,in other factors that could significantly affect internal controls subsequentto the date we carried out this evaluation.

 

91

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**PART IV**

 

**ITEM 15.       EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

(a)           DOCUMENTSFILED AS PART OF THE REPORT

 

1. FINANCIAL STATEMENTS

 

Our consolidated financial statements are set forth in Item 8 of thisAnnual Report on Form 10-K.

 

2. FINANCIAL STATEMENT SCHEDULES

 

The following financial statement schedule of Commerce One for each ofthe years ended December 31, 2002, 2001 and 2000 should be read inconjunction with the Consolidated Financial Statements, and related notesthereto, of Commerce One.

 

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Schedule II—Valuation and Qualifying Accounts

 

Schedules other than those listed above have been omitted as they areeither not required, not applicable, or the information has otherwise beenshown in the consolidated financial statements or notes thereafter.

 

3. EXHIBITS

 

The exhibits listed on the accompanying index to exhibits immediatelyfollowing the financial statement schedule are filed as part of, orincorporated by reference into, this Form 10-K.

 

**EXHIBIT INDEX**

** **
| **EXHIBIT NUMBER** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                                        |
|--------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 3.1(1)             |   | Restated Certificate of Incorporation of  New Commerce One Holding, Inc.                                                                                                                                                                                                                                               |
| 3.2                |   | Certificate of Amendment, dated September  16, 2002 to Certificate of Incorporation.                                                                                                                                                                                                                                   |
| 3.3(10)            |   | Amended and Restated Bylaws of the  Registrant.                                                                                                                                                                                                                                                                        |
| 4.1(1)             |   | Specimen Common Stock Certificate.                                                                                                                                                                                                                                                                                     |
| 4.2(1)             |   | Amended and Restated Preferred Stock Rights  Agreement, dated as of July 11, 2001, between Commerce One, Inc., New  Commerce One Holding, Inc. and Fleet National Bank including the form of  Rights Certificate and the Rights attached thereto as Exhibits B and C,  respectively.                                   |
| 10.1(2)            |   | Form of Indemnification Agreement between  the Registrant and each of its directors and officers.                                                                                                                                                                                                                      |
| 10.2(2)            |   | Form of 1997 Incentive Stock Option Plan  and form of agreements thereunder.                                                                                                                                                                                                                                           |
| 10.3(2)            |   | Form of 1999 Employee Stock Purchase Plan  and form of agreements thereunder.                                                                                                                                                                                                                                          |
| 10.4(3)            |   | 1999 Nonstatutory Stock Option Plan and  form of agreements thereunder.                                                                                                                                                                                                                                                |
| 10.5(2)            |   | Form of 1999 Director Option Plan and form  of agreements thereunder.                                                                                                                                                                                                                                                  |
| 10.6(2)            |   | Master Software License and Services  Agreement between the Registrant and NTT Communications, dated April 16,  1999.                                                                                                                                                                                                  |
| 10.7(2)            |   | Stock Purchase and Master Strategic  Relationship Agreement between the Registrant and NTT Communications, dated  June 1999.                                                                                                                                                                                           |
| 10.8(4)            |   | Amended and Restated Standstill and Stock  Restriction Agreement by and among Commerce One, Inc., New Commerce One  Holding, Inc. and SAP AG dated June 28, 2001.                                                                                                                                                      |
| 10.9(4)            |   | Investor Rights Agreement by and between  Commerce One, Inc., New Commerce One Holding, Inc. and SAP AG dated June 28,  2001.                                                                                                                                                                                          |   |
| 10.10(5)           |   | Formation Agreement dated December 8, 2000  by and among Commerce One, Inc., Ford Motor Company, General Motors  Corporation, New Commerce One Holding, Inc. (solely for the purposes of  Section 11.3 thereof) Daimler Chrysler AG and (solely for the purposes of  section 2.4, 11.2 and 11.9 thereof) Covisint LLC. |   |
| 10.11(5)           |   | Standstill and Stock Restriction Agreement dated  December 8, 2000 by and among Commerce One, Inc., Ford Motor Company, General  Motors Corporation and New Commerce One Holding, Inc.                                                                                                                                 |   |
| 10.12(5)           |   | Registration Rights Agreement dated  December 8, 2000 by and among Commerce One, Inc., Ford Motor Company, General  Motors Corporation and New Commerce One Holding, Inc.                                                                                                                                         |   |
| 10.13(6)           |   | Stand-alone Stock Option Agreement between  Robert M. Kimmitt and Commerce One, Inc., dated as of April 14, 2000.                                                                                                                                                                                                      |   |
| 10.14(6)           |   | Relocation Loan Agreement between Robert M.  Kimmitt and Commerce One, Inc. dated May 17, 2000.                                                                                                                                                                                                                        |   |
|                    |        |                                                                                                                                                                                                                                                                                                                        |  |  |  |

 

93

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| 10.14.1(7) |   | First Amended Relocation Loan Agreement  between Robert M. Kimmitt and Commerce One, Inc. dated January 31, 2001.                                                                    |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15(8)   |   | Strategic Alliance Agreement dated  September 18, 2000 by and between Commerce One, Inc., SAP and SAP Markets,  Inc.                                                                 |
| 10.16(10)  |   | Strategic Alliance Agreement Amendment No.  2, dated April 10, 2001 by and between Commerce One Operations, Inc., SAP and  SAP Markets, Inc.                                         |
| 10.17(10)  |   | Strategic Alliance Agreement Amendment No.  3, dated June 29, 2001 by and between Commerce One Operations, Inc., SAP and  SAP Markets, Inc.                                          |
| 10.18(12)  |   | Strategic Alliance Agreement Amendment No.  4, effective as of January 1, 2002 by and between Commerce One Operations,  Inc., SAP and SAP Markets, Inc.                              |
| 10.19      |   | Strategic Alliance Agreement Amendment No.  5, effective as of December 20, 2002, by and between Commerce One Operations,  Inc., SAP and SAP Markets, Inc. *                         |
| 10.20(9)   |   | AppNet Systems, Inc. 1999 Stock Incentive  Plan.                                                                                                                                     |
| 10.21(9)   |   | AppNet Systems, Inc. 1998 Stock Option and  Incentive Plan.                                                                                                                          |
| 10.22(9)   |   | Century Computing, Incorporated Incentive  Stock Option Plan.                                                                                                                        |
| 10.23(7)   |   | Form of Change of Control Severance  Agreement.                                                                                                                                      |
| 10.24(7)   |   | Form of Amendment No. 1 to Change of Control  Severance Agreement.                                                                                                                   |
| 10.25(11)  |   | Employee Loan Agreement between Commerce  One, Inc., and Dennis H. Jones, dated August 22, 2001.                                                                                     |
| 10.26(13)  |   | Separation Agreement by and between  Commerce One Operations, Inc. and Dennis H. Jones, dated June 20, 2002.                                                                         |
| 10.27      |   | Rental Lease Agreement between Commerce One  Operations, Inc. and Narry Singh, dated September 9, 2002.                                                                              |
| 10.28(13)  |   | Severance Agreement by and between Commerce  One Operations, Inc. and Charles Boynton, dated July 29, 2002.                                                                          |
| 10.29(12)  |   | Promissory Note, dated March 22, 2002,  executed by Commerce One, Inc. in favor of Microsoft Capital Corporation.                                                                    |
| 10.30(12)  |   | Collateral Account Notification and  Acknowledgment between Commerce One, Inc. and Microsoft Capital Corporation.                                                                    |
| 10.31(14)  |   | Loan and Security Agreement, effective  October 23, 2002, by and between Silicon Valley Bank and Commerce One  Operations, Inc.                                                      |
| 10.32      |   | Office Lease Agreement, signed August 27, 1999, by and  between Marriott Plaza Associates L.P. and CommerceBid.com.                                                        |
| 10.33      |   | Amendment No. 1 to office lease, effective October 20, 2000, by  and between Marriott Plaza Associates L.P. and Commerce One, Inc.  (successor-in-interest to CommerceBid.com). |
| 10.34      |   | Amendment No. 2 to office lease, effective December 7, 2000  by, and between Marriott Plaza Associates L.P. and Commerce One, Inc.                                         |
| 10.35      |   | Amendment No. 3 to office lease, effective October 25,  2001, by and between Marriott Plaza Associates L.P. and Commerce One,  Inc.                                   |
| 21.1       |   | List of Subsidiaries of Registrant.                                                                                                                                                  |
| 23.1       |   | Consent of Ernst & Young LLP, Independent  Auditors.                                                                                                                             |
| 24.1       |   | Power of Attorney (see page 96 )                                                                                                                                                     |
| 99.1       |   | Certification of the Chief Executive  Officer and Chief Financial Officer of Commerce One pursuant to section 906  of the Sarbanes Oxley Act.                                        |

 

----

| (1)    |   | Incorporated by reference to Commerce One’s  Form 8-A (File No. 000-32979) filed on July 11, 2001.                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                         |
| (2)    |   | Incorporated by reference to Commerce One’s  Registration Statement of Form S-1 (File No. 333-76987), declared effective  July 1, 1999. |
|   |   |                                                                                                                                         |
| (3)    |   | Incorporated by reference to Commerce One’s  Form S-8 (File No. 333-33328), filed on March 27, 2000.                                    |

 

94

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| (4)    |   | Incorporated by reference to Commerce One’s  Current Report on Form 8-K (File No. 333-58558), filed on July 10, 2001.                                                            |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                  |
| (5)    |   | Incorporated by reference to Commerce One’s  Current Report on Form 8-K (File No. 000-26453), filed on December 29, 2000.                                                        |
|   |   |                                                                                                                                                                                  |
| (6)    |   | Incorporated by reference to Commerce One’s  Quarterly Report on Form 10-Q (File No. 000-26453), filed on August 14, 2000.                                                       |
|   |   |                                                                                                                                                                                  |
| (7)    |   | Incorporated by reference to Commerce One’s  Annual Report on Form 10-K (File No. 000-26453), filed on April 2, 2001.                                                            |
|   |   |                                                                                                                                                                                  |
| (8)    |   | Incorporated by reference to Commerce One’s  Quarterly Report on Form 10-Q (File No. 000-26453), filed on November 14,  2000.                                                    |
|   |   |                                                                                                                                                                                  |
| (9)    |   | Incorporated by reference to Commerce One’s  Form S-8 (File No. 333-46254), filed on September 20, 2000.                                                                         |
|   |   |                                                                                                                                                                                  |
| (10)   |   | Incorporated by reference to Commerce One’s  Quarterly Report on Form 10-Q (File No. 000-32979), filed on August 14, 2001.                                                       |
|   |   |                                                                                                                                                                                  |
| (11)   |   | Incorporated by reference to Commerce One’s Quarterly Report on Form  10-Q (File No. 000-32979), filed on November 14, 2001.                                                     |
|   |   |                                                                                                                                                                                  |
| (12)   |   | Incorporated by reference to Commerce One’s Annual Report on Form  10-K (File No. 000-32979), filed April 1, 2002.                                                               |
|   |   |                                                                                                                                                                                  |
| (13)   |   | Incorporated by reference to Commerce One’s Quarterly Report on Form  10-Q (File No. 000-32979), filed on August 14, 2002.                                                       |
|   |   |                                                                                                                                                                                  |
| (14)   |   | Incorporated by reference to Commerce One’s Quarterly Report on Form  10-Q (File No. 000-32979), filed on November 14, 2002.                                                     |
|   |   |                                                                                                                                                                                  |
| *      |   | Portions of this exhibit have been omitted pending a determination by  the Securities and Exchange Commission as to whether these portions should be  granted confidential treatment. |

 

 
|                                                                           |   |                              |
|--------------------------------------------------------------------------------|--------|-----------------------------------|
| (b)                                                                            |   | **REPORTS ON FORM 8-K**           |
|                                                                           |   |                              |
|                                                                           |   |                              |
| No reports on Form 8-K were filed during the quarter ended December  31, 2002. |
|                                                                           |   |                              |
| (c)                                                                            |   | **EXHIBITS**                      |
|                                                                           |   |                              |
| See Item 15(a)(3), above.                                                      |
|                                                                           |   |                              |
| (d)                                                                            |   | **FINANCIAL STATEMENT SCHEDULES** |
|                                                                           |   |                              |
| See Item 8, above.                                                             |

 

95

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----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

Dated: March 31, 2003

 
|   | COMMERCE ONE, INC. |                                          |
|--------|--------------------|-----------------------------------------------|
|   | By:                | /s/ MARK B.  HOFFMAN                          |   |
|   |               | Mark B. Hoffman                               |   |
|   |               | *Chairman  and Chief Executive  Officer* |
|        |                    |                                               |  |  |

 

**POWEROF ATTORNEY**

 

KNOW ALL PERSONS BY THESE PRESENT, that each person whose signatureappears below constitutes and appoints Charles Boynton and Mark Hoffman, his orher attorneys-in-fact, each with the power of substitution, for him or her inany and all capacities, to sign any amendments to this Annual Report onForm 10-K, and to file the same, with exhibits thereto and other documentsin connection therewith, with the Securities and Exchange Commission, herebyratifying and conforming all that said attorney-in-fact, or his or hersubstitute or substitutes, may do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **Signature**          |   | **Title**                                   |   | **Date**       |
|------------------------|--------|---------------------------------------------|--------|----------------|
|                   |   |                                        |   |           |
| /s/ MARK B. HOFFMAN    |   | Chief Executive Officer and Chairman of the |   | March 31, 2003 |
| Mark B. Hoffman        |   | Board (Principal Executive Officer)         |   |           |
|                   |   |                                        |   |           |
|                   |   |                                        |   |           |
| /s/ CHARLES BOYNTON    |   | Senior Vice President and Chief Financial   |   | March 31, 2003 |
| Charles Boynton        |   | Officer (Principal Financial and            |   |           |
|                   |   | Accounting Officer)                         |   |           |
|                   |   |                                        |   |           |
| /s/ JOHN V. BALEN      |   | Director                                    |   | March 31, 2003 |
| John V. Balen          |   |                                        |   |           |
|                   |   |                                        |   |           |
| /s/ KENNETH C. GARDNER |   | Director                                    |   | March 31, 2003 |
| Kenneth C. Gardner     |   |                                        |   |           |
|                   |   |                                        |   |           |
| /s/ WILLIAM J. HARDING |   | Director                                    |   | March 31, 2003 |
| William J. Harding     |   |                                        |   |           |
|                   |   |                                        |   |           |
| /s/ ROBERT M. KIMMITT  |   | Director                                    |   | March 31, 2003 |
| Robert M. Kimmitt      |   |                                        |   |           |
|                   |   |                                        |   |           |
| /s/ IRV LICHTENWALD    |   | Director                                    |   | March 31, 2003 |
| Irv Lichtenwald        |   |                                        |   |           |

 

96

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| /s/ TOSHIMUNE OKIHARA |   | Director |   | March 31, 2003 |
|-----------------------|--------|----------|--------|----------------|
| Toshimune Okihara     |   |     |   |           |
|                  |   |     |   |           |
| /s/ JACK ACOSTA       |   | Director |   | March 31, 2003 |
| Jack Acosta           |   |     |   |           |
|                  |   |     |   |           |
| /s/ ALEX S. VIEUX     |   | Director |   | March 31, 2003 |
| Alex S. Vieux         |   |     |   |           |

 

97

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**CERTIFICATIONS**

 

I,Mark B. Hoffman, certify that:

 

1.I have reviewed this annual report on Form 10-K of Commerce One, Inc.;

 

2.Based on my knowledge, this annual report does not contain any untrue statementof a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this annual report;

 

3.Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;

 

4.The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this annual report is being prepared;

 

b)evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of this annualreport (the “Evaluation Date”); and

 

c)presented in this annual report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.The registrant’s other certifying officers and I have disclosed, based on ourmost recent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

b)any fraud, whether or not material, that involves management or other employeeswho have a significant role in the registrant’s internal controls; and

 

6.The registrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  March 31, 2003 |
|-----------------------|
|                  |
|                  | /s/  Mark B. Hoffman |   |
|                  | Mark  B. Hoffman |
|                  | Chief  Executive Officer |

 

98

----

 

I,Charles R. Boynton, certify that:

 

1.I have reviewed this annual report on Form 10-K of Commerce One, Inc.;

 

2.Based on my knowledge, this annual report does not contain any untrue statementof a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this annual report;

 

3.Based on my knowledge, the financial statements, and other financialinformation included in this annual report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this annual report;

 

4.The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this annual report is being prepared;

 

b)evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of this annualreport (the “Evaluation Date”); and

 

c)presented in this annual report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.The registrant’s other certifying officers and I have disclosed, based on ourmost recent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)all significant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)any fraud, whether or not material, that involves management or other employeeswho have a significant role in the registrant’s internal controls; and

 

6.The registrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  March 31, 2003 |
|-----------------------|
|                  |
|                  | /s/  Charles D. Boynton |   |
|                  | Charles  D. Boynton |
|                  | Chief  Financial Officer |

 

99

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**COMMERCEONE, INC.**

**SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS**

 

**ACCOUNTS RECEIVABLEALLOWANCES (in thousands)**

** **
|                         |   | **Balances  at  Beginning  of Period** |   | **Acquisitions** |   | **Charged to  Costs and  Expenses** |   | **Charged  to  Revenues  and  Cost of  Revenues** |   | **Deductions** |   | **Balances  at  End of  Period** |   |
|------------------------------|--------|----------------------------------------|--------|------------------|--------|-------------------------------------|--------|---------------------------------------------------|--------|----------------|--------|----------------------------------|--------|
| Year ended December 31, 2000 |   | $                                      | 493    |             | $      | 9,154                               |   | $                                                 | 2,657  |           | $      | 500                              |   | $ | (4,639 | ) | $ | 8,165 |   |
| Year ended December 31, 2001 |   | $                                      | 8,165  |             | $      | —                              |   | $                                                 | 32,924 |           | $      | 14,807                           |   | $ | (31,819 | ) | $ | 24,077 |   |
| Year ended December 31, 2002 |   | $                                      | 24,077 |             | $      | —                              |   | $                                                 | (5,454 | )              | $      | (479                             | )      | $ | (12,143 | ) | $ | 6,001 |   |

 

100

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**EXHIBITINDEX**

** **
| **EXHIBIT NUMBER** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                                                        |
|--------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                                                   |
| 3.1(1)             |   | Restated Certificate of Incorporation of  New Commerce One Holding, Inc.                                                                                                                                                                                                                                               |
| 3.2                |   | Certificate of Amendment, dated September  16, 2002 to Certificate of Incorporation.                                                                                                                                                                                                                                   |
| 3.3(10)            |   | Amended and Restated Bylaws of the  Registrant.                                                                                                                                                                                                                                                                        |
| 4.1(1)             |   | Specimen Common Stock Certificate.                                                                                                                                                                                                                                                                                     |
| 4.2(1)             |   | Amended and Restated Preferred Stock Rights  Agreement, dated as of July 11, 2001, between Commerce One, Inc., New  Commerce One Holding, Inc. and Fleet National Bank including the form of  Rights Certificate and the Rights attached thereto as Exhibits B and C,  respectively.                                   |
| 10.1(2)            |   | Form of Indemnification Agreement between  the Registrant and each of its directors and officers.                                                                                                                                                                                                                      |
| 10.2(2)            |   | Form of 1997 Incentive Stock Option Plan  and form of agreements thereunder.                                                                                                                                                                                                                                           |
| 10.3(2)            |   | Form of 1999 Employee Stock Purchase Plan  and form of agreements thereunder.                                                                                                                                                                                                                                          |
| 10.4(3)            |   | 1999 Nonstatutory Stock Option Plan and  form of agreements thereunder.                                                                                                                                                                                                                                                |
| 10.5(2)            |   | Form of 1999 Director Option Plan and form  of agreements thereunder.                                                                                                                                                                                                                                                  |
| 10.6(2)            |   | Master Software License and Services  Agreement between the Registrant and NTT Communications, dated April 16,  1999.                                                                                                                                                                                                  |
| 10.7(2)            |   | Stock Purchase and Master Strategic  Relationship Agreement between the Registrant and NTT Communications, dated  June 1999.                                                                                                                                                                                           |
| 10.8(4)            |   | Amended and Restated Standstill and Stock  Restriction Agreement by and among Commerce One, Inc., New Commerce One  Holding, Inc. and SAP AG dated June 28, 2001.                                                                                                                                                      |
| 10.9(4)            |   | Investor Rights Agreement by and between  Commerce One, Inc., New Commerce One Holding, Inc. and SAP AG dated June 28,  2001.                                                                                                                                                                                          |   |
| 10.10(5)           |   | Formation Agreement dated December 8, 2000  by and among Commerce One, Inc., Ford Motor Company, General Motors  Corporation, New Commerce One Holding, Inc. (solely for the purposes of  Section 11.3 thereof) Daimler Chrysler AG and (solely for the purposes of  section 2.4, 11.2 and 11.9 thereof) Covisint LLC. |   |
| 10.11(5)           |   | Standstill and Stock Restriction Agreement  dated December 8, 2000 by and among Commerce One, Inc., Ford Motor Company,  General Motors Corporation and New Commerce One Holding, Inc.                                                                                                                                 |   |
| 10.12(5)           |   | Registration Rights Agreement dated  December 8, 2000 by and among Commerce One, Inc., Ford Motor Company,  General Motors Corporation and New Commerce One Holding, Inc.                                                                                                                                         |   |
| 10.13(6)           |   | Stand-alone Stock Option Agreement between  Robert M. Kimmitt and Commerce One, Inc., dated as of April 14, 2000.                                                                                                                                                                                                      |   |
| 10.14(6)           |   | Relocation Loan Agreement between Robert M.  Kimmitt and Commerce One, Inc. dated May 17, 2000.                                                                                                                                                                                                                        |   |
| 10.14.1(7)         |   | First Amended Relocation Loan Agreement  between Robert M. Kimmitt and Commerce One, Inc. dated January 31, 2001.                                                                                                                                                                                                      |   |
| 10.15(8)           |   | Strategic Alliance Agreement dated  September 18, 2000 by and between Commerce One, Inc., SAP and SAP Markets,  Inc.                                                                                                                                                                                                   |   |
| 10.16(10)          |   | Strategic Alliance Agreement Amendment No.  2, dated April 10, 2001 by and between Commerce One Operations, Inc., SAP and  SAP Markets, Inc.                                                                                                                                                                           |   |
| 10.17(10)          |   | Strategic Alliance Agreement Amendment No.  3, dated June 29, 2001 by and between Commerce One Operations, Inc., SAP and  SAP Markets, Inc.                                                                                                                                                                            |   |
| 10.18(12)          |   | Strategic Alliance Agreement Amendment No.  4, effective as of January 1, 2002 by and between Commerce One Operations,  Inc., SAP and SAP Markets, Inc.                                                                                                                                                                |   |
| 10.19              |   | Strategic Alliance Agreement Amendment No.  5, effective as of December 20, 2002, by and between Commerce One Operations,  Inc., SAP and SAP Markets, Inc. *                                                                                                                                                           |   |
|                    |        |                                                                                                                                                                                                                                                                                                                        |  |  |  |

 

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| 10.20(9)  |   | AppNet Systems, Inc. 1999 Stock Incentive  Plan.                                                                                                                                     |
|-----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.21(9)  |   | AppNet Systems, Inc. 1998 Stock Option and  Incentive Plan.                                                                                                                          |
| 10.22(9)  |   | Century Computing, Incorporated Incentive  Stock Option Plan.                                                                                                                        |
| 10.23(7)  |   | Form of Change of Control Severance  Agreement.                                                                                                                                      |
| 10.24(7)  |   | Form of Amendment No. 1 to Change of  Control Severance Agreement.                                                                                                                   |
| 10.25(11) |   | Employee Loan Agreement between Commerce  One, Inc., and Dennis H. Jones, dated August 22, 2001.                                                                                     |
| 10.26(13) |   | Separation Agreement by and between  Commerce One Operations, Inc. and Dennis H. Jones, dated June 20, 2002.                                                                         |
| 10.27     |   | Rental Lease Agreement between Commerce One  Operations, Inc. and Narry Singh, dated September 9, 2002.                                                                              |
| 10.28(13) |   | Severance Agreement by and between Commerce  One Operations, Inc. and Charles Boynton, dated July 29, 2002.                                                                          |
| 10.29(12) |   | Promissory Note, dated March 22, 2002,  executed by Commerce One, Inc. in favor of Microsoft Capital Corporation.                                                                    |
| 10.30(12) |   | Collateral Account Notification and  Acknowledgment between Commerce One, Inc. and Microsoft Capital Corporation.                                                                    |
| 10.31(14) |   | Loan and Security Agreement, effective  October 23, 2002, by and between Silicon Valley Bank and Commerce One  Operations, Inc.                                                      |
| 10.32     |   | Office Lease Agreement, signed August 27, 1999, by and  between Marriott Plaza Associates L.P. and CommerceBid.com.                                                        |
| 10.33     |   | Amendment No. 1 to office lease, effective October 20, 2000, by  and between Marriott Plaza Associates L.P. and Commerce One, Inc. (successor-in-interest  to CommerceBid.com). |
| 10.34     |   | Amendment No. 2 to office lease, effective December 7, 2000  by, and between Marriott Plaza Associates L.P. and Commerce One, Inc.                                         |
| 10.35     |   | Amendment No. 3 to office lease, effective October 25,  2001, by and between Marriott Plaza Associates L.P. and Commerce One,  Inc.                                   |
| 21.1      |   | List of Subsidiaries of Registrant.                                                                                                                                                  |
| 23.1      |   | Consent of Ernst & Young LLP,  Independent Auditors.                                                                                                                             |
| 24.1      |   | Power of Attorney (see page 96 )                                                                                                                                                     |
| 99.1      |   | Certification of the Chief Executive  Officer and Chief Financial Officer of Commerce One pursuant to section 906  of the Sarbanes Oxley Act.                                        |

 

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| (1)    |   | Incorporated by reference to Commerce One’s  Form 8-A (File No. 000-32979) filed on July 11, 2001.                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                         |
| (2)    |   | Incorporated by reference to Commerce One’s  Registration Statement of Form S-1 (File No. 333-76987), declared effective  July 1, 1999. |
|   |   |                                                                                                                                         |
| (3)    |   | Incorporated by reference to Commerce One’s  Form S-8 (File No. 333-33328), filed on March 27, 2000.                                    |
|   |   |                                                                                                                                         |
| (4)    |   | Incorporated by reference to Commerce One’s  Current Report on Form 8-K (File No. 333-58558), filed on July 10, 2001.                   |
|   |   |                                                                                                                                         |
| (5)    |   | Incorporated by reference to Commerce One’s  Current Report on Form 8-K (File No. 000-26453), filed on December 29, 2000.               |
|   |   |                                                                                                                                         |
| (6)    |   | Incorporated by reference to Commerce One’s  Quarterly Report on Form 10-Q (File No. 000-26453), filed on August 14, 2000.              |
|   |   |                                                                                                                                         |
| (7)    |   | Incorporated by reference to Commerce One’s  Annual Report on Form 10-K (File No. 000-26453), filed on April 2, 2001.                   |
|   |   |                                                                                                                                         |

 

| 102 |
|-----|

 

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| (8)    |   | Incorporated by reference to Commerce One’s  Quarterly Report on Form 10-Q (File No. 000-26453), filed on November 14,  2000.                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                  |
| (9)    |   | Incorporated by reference to Commerce One’s  Form S-8 (File No. 333-46254), filed on September 20, 2000.                                                                         |
|   |   |                                                                                                                                                                                  |
| (10)   |   | Incorporated by reference to Commerce One’s  Quarterly Report on Form 10-Q (File No. 000-32979), filed on August 14, 2001.                                                       |
|   |   |                                                                                                                                                                                  |
| (11)   |   | Incorporated by reference to Commerce One’s Quarterly Report on Form  10-Q (File No. 000-32979), filed on November 14, 2001.                                                     |
|   |   |                                                                                                                                                                                  |
| (12)   |   | Incorporated by reference to Commerce One’s Annual Report on Form  10-K (File No. 000-32979), filed April 1, 2002.                                                               |
|   |   |                                                                                                                                                                                  |
| (13)   |   | Incorporated by reference to Commerce One’s Quarterly Report on Form  10-Q (File No. 000-32979), filed on August 14, 2002.                                                       |
|   |   |                                                                                                                                                                                  |
| (14)   |   | Incorporated by reference to Commerce One’s Quarterly Report on Form  10-Q (File No. 000-32979), filed on November 14, 2002.                                                     |
|   |   |                                                                                                                                                                                  |
| *      |   | Portions of this exhibit have been omitted pending a determination by  the Securities and Exchange Commission as to whether these portions should be  granted confidential treatment. |

 

103

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