**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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** **

**FORM 10-K**

 

**(MARK ONE)**

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

** **

**For thefiscal year ended December 31, 2001**

 

**OR**

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

** **

**FOR THETRANSITION PERIOD FROM                  TO**

 

**Commissionfile number 000-26453**

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**COMMERCE ONE, INC.**

(Exact name of Registrant 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, $0.0001 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 of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of Registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K, or any amendment to this Form 10-K. o

 

The aggregate market value of voting stock held bynon-affiliates of the registrant as of March 1, 2002, was $419,731,567based 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 1, 2002 there were 288,864,571 shares ofthe registrant’s Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The registrant has incorporated by reference intoPart III of this Form 10-K portions of its proxy statement for theregistrant’s Annual Meeting of Stockholders to be held on May 29, 2002.

 

 

**COMMERCEONE, INC.**

**ANNUALREPORT ON FORM 10-K**

 

**INDEX**

 
| **Part I.**       |                                                                                        | Page   |
|-------------------|---------------------------------------------------------------------------------------------|--------|
| Item 1.           | Description of Business                                                                     | 3      |
| Item 2.           | Description of Property                                                                     | 17     |
| Item  3.          | Legal  Proceedings                                                                          | 17     |
| Item  4.          | Submission  of Matters to a Vote of Security Holders                                        | 18     |
| **Part II.**      |                                                                                        |   |
| Item  5.          | Market  for the Registrant’s Common Stock and Related Stockholder Matters              | 18     |
| Item 6.           | Selected Financial Data                                                                     | 19     |
| Item  7.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 20     |
| Item  7A.         | Quantitative  and Qualitative Disclosure About Market Risks                                 | 33     |
| Item 8.           | Financial Statements                                                                        | 34     |
| Item  9.          | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure       | 63     |
| **Part III.**     |                                                                                        |   |
| Item  10.         | Directors  and Executive Officers of the Registrant                                         | 64     |
| Item 11.          | Executive Compensation                                                                      | 64     |
| Item  12.         | Security  Ownership of Certain Beneficial Owners and Management                             | 64     |
| Item  13.         | Certain  Relationships and Related Transactions                                             | 64     |
| **Part IV.**      |                                                                                        |   |
| Item 14.          | Exhibits, Financial Statement Schedules and  Reports on Form 8-K                            | 64     |
| **Signatures**    |
| **Exhibit Index** |                                                                                        |

 

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**PART I**

 

**FORWARD-LOOKINGSTATEMENTS**

 

**FORWARD-LOOKINGSTATEMENTS**

 

*This Form 10-K containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended. Statements that are not statements of historical fact may bedeemed to be forward-looking statements. These forward-looking statementsinclude, but are not limited to, the following: statements concerning theanticipated leadership of Commerce One as a provider of e-commerce solutions;the expected growth of our business and related matters; statements regardingthe benefits of our product offering; including but not limited to statementsregarding the ability of our products to provide efficiences and cost savingsassociated with on-line purchasing and supplier management; and through theestablishment and/or use of on-line trading communities; the ability of ourapplications and platform to integrate effectively with third party softwareapplications;our ability to compete favorably with our competitors; statementsregarding our ability to compete in the market place generally; statementsregarding our expectations as to the likely sources of our future revenue; thenecessity of investing in product development for future success; the expectationthat product development expenses will not increase substantially in futureperiods and that sales, marketing, and administrative expenses will decrease;the quarterly charges we expect to incur from amortizing short-lived intangibleassets as a result of our acquisitions and in the event of future acquisitions;statements regarding the potential benefits and/or gains associated with ourrestructuring efforts and divestitures; management’s belief that our availablecash resources will be sufficiant to finance our operations for at least thenext twelve months; the outcome of certain litigation; and the effect ofinterest rate, foreign currency exchange rate and equity price fluctuations.The words “believe,”“expect,”“intend,”“plan,”“project,”“will” and similar wordsand phrases as they relate to Commerce One also identify forward-lookingstatements. Such statements reflect the current views and assumptions ofCommerce One and are not guarantees of future performance. These statements aresubject to various risks and uncertainties. Our actual results could differmaterially from those anticipated in these forward-looking statements as aresult of the risk factors described in this Form 10-K, including thoseunder the heading “Risk Factors.” Commerce One expressly disclaims anyobligation to release publicly any updates or revisions to any forward-lookingstatements to reflect any changes in expectations, or any change in events orcircumstances on which those statements are based, unless otherwise required bylaw.*

 

*CommerceOne, Inc. is hereinafter sometimes referred to as “the Registrant,” “theCompany,” “Commerce One,” “we” and “us.”*

 

**ITEM1.****                        DESCRIPTIONOF BUSINESS**

 

**OVERVIEW**

 

Commerce One is a technology company that specializesin business-to-business electronic commerce. Commerce One’s software provides the technology and infrastructure thatenable companies to conduct sourcing and purchasing transactions via theInternet or Intranets and to manage their supplier relationships moreeffectively.  Commerce One’s servicesoperations support these software solutions and help companies take maximumadvantage of the efficiencies that on-line purchasing and supplier managementcan offer.  Together, Commerce One’s softwareand services allow companies to automate business functions that traditionallyinvolved costly and time-consuming phone calls and paperwork.

 

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

 

**COMMERCE ONE’S VISION**

 

Commerce One is committed to enabling smoothinteractions between trading partners. Standards-based communication is centralto their goal.

 

**Open Platform**

 

Through XMLÔtechnology, we have created an open architecture for all Commerce Onesolutions. The XML Common Business LibraryÔ(xCBL) enables integration and interoperability between disparate systems andapplications within a company’s own IT infrastructure, and with a company’strading partners.  XML technologyenables the creation and secure transmission of XML documents over theInternet.

 

**Scalable Architecture**

 

                By combining our Internetapplications framework into a unified architecture, we are able to focus oncreating additional business functions in our solutions, rather than buildingand maintaining complex infrastructure code. We have also designed oursolutions to be able to grow our infrastructure through the simple addition oflow-cost systems. This framework allows us to leverage technologies such asresource pooling, message queuing, security services, and coordination anddistribution of transactions, components and services.

 

 

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**Interoperability**3⁄4**The GlobalTrading Web****ä**

 

Our open architecture allows Commerce One’s solutionsto communicate with one another and with other compatible applications.  The centerpiece of this interoperabilityframework is the Global Trading WebÔnetwork.  Founded by Commerce One in1999, the Global Trading Web network is a worldwide business-to-businesstrading community. This global network of e-marketplaces promotes theacceleration of global trade with reduced costs for business-service providers,buyers and suppliers. These e-marketplaces interoperate around the globethrough our open and scalable XML-based standards, allowing regional tradingpartners and industry-specific players to streamline business-to-businessprocesses and global supply chain strategies.

 

# **COMMERCE ONE ENTERPRISE SOLUTIONS**

 

**Commerce One 5.0**Ô

 

Commerce One’s flagship enterprise offering3⁄4theCommerce One 5.0Ô suite3⁄4was released duringJanuary 2002 and combines several different software applications that aredesigned to help companies save money by streamlining their purchasing,sourcing and supplier-management processes. The Commerce One 5.0 suite helps enterprises automate these processesthrough the stages of sourcing, negotiating, procurement, fulfillment, andpayment.

 

The Commerce One 5.0 suite is composed of applicationsand a platform that enables the applications to communicate with each other,and with other compatible systems.  Theapplication suite, in turn, consists of two main components ***-***(1) sourcingapplications, and (2) procurement applications.

 

Commerce One’s sourcing applications help companiesbetter manage their supplier relationships. For example, these applications enable businesses to quickly create,complete, and manage on-line requests for supplier proposals (RFP’s), comparesupplier pricing and performance, monitor product status, run forward andreverse auctions, and customize the supplier-management process to meet theirparticular needs.

 

Our procurement applications facilitate on-line buyingand selling through: an advanced search engine that navigates multiple suppliercatalogues; an application that manages orders and invoice processing withvarious suppliers; a feature that enables third-party software applications tobe incorporated into the on-line purchasing process; a feature that allowsbuyers and suppliers to check the status of orders; an application that enablescompanies to customize the software to meet their particular needs in theirspecific industries or geographic regions; a purchasing function that allowspurchasers from anywhere in the business enterprise to access the on-lineprocurement process from their desktop computers; and various other featuresdesigned to make the on-line buying and selling run smoothly and efficiently.

 

Recognizing that many businesses prefer to maketechnology investments in steps or according to specific needs, Commerce Oneseparately sells and supports the applications that constitute Commerce One5.0.  These modular applications includethe following:

 

###### **Commerce One Source**Ô

 

***The Commerce OneSource***Ôsuite enables businesses to find, evaluate, and manage suppliers according to avariety of criteria tailored to each business enterprise.  The Source suite is designed to optimizesupplier relationships and lower the overall cost of buying goods and services.

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TheSource suite consists of the following products:

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***•***               Sourcing - supports RFXmanagement, negotiations, supplier performance management and activity reports.

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

***•***             Sourcing Intelligence - letsenterprises conduct in-depth analyses of spending and supplier performance.

*** ***

###### **Commerce One Buy**Ô

 

The Commerce One BuyÔsuite automates the procurement process. Integrating into both legacy ERP systems and suppliers’ back-officeapplications, Commerce One Buy is built to provide real-time tracking ofavailability and order status. Commerce One Buy can help companies obtain the best possible pricing and reduceassociated costs and cycle-times.

 

TheBuy suite consists of the following products:

 

•               Auction - allows forward and reverseauctions for buying and selling.

•               Supplier Self Service - provides orderinformation, product availability, confirmations, notices and payments.

•               ContractLabor - tracks usage and expenses on contractors.

•               TradingPartner Connectivity - links enterprise applications and trading partners.

•               Procurement- Enables enterprises to purchase goods from e-marketplaces.

 

# **Commerce One Collaborative Platform**Ô

 

The Commerce One 5.0 suite of applications is built onan integration and process management platform.  The Commerce One Collaborative PlatformÔlinks and orchestrates enterprise legacy applications with tradingpartners.  The platform providesreal-time information exchange to automate and streamline e-commerce activitieswithin and outside an enterprise. Its integratedbusiness process engine enables organizations to create unique process flowstailored to support industries, companies, and supplier relationships.  The Commerce One Collaborative Platform alsointegrates with existing enterprise applications, along with the full suite ofCommerce One procurement and e-commerce solutions, to automate the completesource-to-pay process.

 

###### **COMMERCEONE E-MARKETPLACE PRODUCTS**

 

The Commerce One e-marketplace solutions are an integratedset of products and services that allows our customers to build and rune-marketplace businesses focused on automating inter-company businessprocesses.  This solution is designed tocreate a network of interoperable marketplaces, trading communities, andcommerce portals, bringing together the world’s largest buyers andsuppliers.  Typical public e-marketplacecustomers are entities interested in building an e-marketplace as a business,or existing businesses that wish to take advantage of other e-marketplaces fortheir own operations, or both.

 

**Commerce One Collaborative Platform(formerly Marketsite**Ô)

 

The Commerce One Collaborative platform is our openfoundation for e-marketplaces. With its ability to interoperate with othersystems through its open and scalable architecture, the Collaborative Platformenables organizations to integrate business processes, legacy systems, andthird party applications and services within and across companies and otherenterprises.  The Collaborative Platformpowers the Global Trading Web, a worldwide business-to-business tradingcommunity.

 

**MarketSet**Ô

 

The MarketSetÔsuite, the joint e-marketplace offering from Commerce One and SAP AG and SAPMarkets (collectively, “SAP”), is designed to transform linear supply chainsinto collaborative communities to bring products to market more quickly, reducecosts, improve product profitability and strengthen customer and supplierrelationships. MarketSet offers integrated applications supporting end-to-endbusiness processes for procurement, order management, auctions, contentmanagement, planning, design, and analysis. The architecture of MarketSet makesthe e-marketplace open to virtually any buying, selling or enterpriseapplication on-ramp.

 

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**Commerce One Buy ASP Edition****Ô**

** **

This product is designed to enable small-andmedium-sized businesses to create trading communities with a smallerinfrastructure investment.  The productincludes a marketplace builder, a customizable user interface, a content engineand procurement components.

 

###### **COMMERCE ONE SERVICES**

 

Commerce One Global Services provides a criticalcomponent of our solution strategy by helping customers implement, operate andmanage their sourcing and procurement processes. Commerce One Global Servicesprovides comprehensive design, planning, analysis, systems integration,implementation, technical support, and operations services to help deliverCommerce One solutions to global organizations.

 

**StrategicAccount Management Group**

 

We deliver services to our e-marketplace partners andenterprise customers through an integrated framework called the Strategic Account Management Group (“SAM”).The SAM delivers a management structure and process that integrates allCommerce One streams of activity flowing into the exchanges and enterpriseswith the objective of maximizing their success. We believe that this structuredapproach to account management and planning has improved our ability to deploythe right resources against clearly defined and prioritized opportunities andchallenges.

 

**PrimaryServices Offerings**

 

***Commerce OneHosting Services.*** For buyers and suppliers who require a faster time to market or lowerinfrastructure investment, we offer full hosting services both internally andthrough our partners. These services allow Commerce One to further tailor itssolutions to the preferences and needs of particular customers.

 

***Commerce OneContent Services.*** Content Services provides the processes and the tools to automate and aggregatecatalog content from multiple suppliers to create a scalable resource acrossthe e-marketplace. Provided through our Content Refinery and Solutions tools,this solution provides both manual and automated options for acquiring andaggregating content from supplier catalogs. Advanced elements of this solutionprovide aggregation, search, and rationalization capabilities.

 

***Commerce OneKnowledge Services.*** Knowledge Services leads the development and deployment of technical,functional and end-user education for Commerce One customers and partners. Inaddition, Knowledge Services provides learning solutions on Commerce Oneproducts to internal audiences. This training provides the knowledge and toolsneeded for the successful implementation and deployment of Commerce Oneproducts.

 

***Commerce OneDeployment Services.*** Deployment Services provides a critical component of our solutionstrategy by deploying the sourcing and procurement products with customers. Theservices help customers implement, operate and manage their sourcing andprocurement processes.

 

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**GLOBALCUSTOMER SUPPORT**

 

Our Technical Support group provides day-to-daymaintenance and support programs to help our customers and partners identify, manageand resolve their issues. Using on-line access, call tracking and knowledgemanagement systems, Technical Support provides a comprehensive range ofservices.  We currently have TechnicalSupport offices located in the USA, France and Australia.

 

**STRATEGICRELATIONSHIPS**

 

We have entered into several strategic relationshipsthat are integral to establishing trading communities, implementing oursolutions and developing our products. The continued establishment of strategicrelationships is a fundamental piece of our strategy as we expand our productsand services and enter new markets. We have strategic development and marketingrelationships with Accenture, Compaq, Computer Sciences Corporation,PricewaterhouseCoopers, SAP, SeeBeyond and Sun Microsystems, among others. Weco-develop and market joint solutions with SAP.

 

Our regional and horizontal e-marketplace partnersinclude British Telecom; Banamex; Cable & Wireless Optus; DeutscheTelekom; NTT Communications; Sesami.Net; Citigroup and Swisscom AG. Ourpartners for vertical or “mega” exchanges include Covisint, Exostar,Trade-Ranger, Pantellos, Enporion, Quadrem, Forest Express, and eAEC.

 

**RESEARCHAND DEVELOPMENT**

 

Commerce One continues to invest in researching anddeveloping new products and services. Our product-development team employs object-oriented analysis and designprinciples to guide the development of an object-oriented system of softwarecode. Our methodology allows us to exploit the capabilities of object-orientedprogramming languages like Visual Basic, C++ and Java to build reusablecomponents and designs. This methodology also helps reduce the risks inherentin developing complex systems, and helps us design our solutions to meet theneeds of our customers and trading partners.

 

Key Strategic areas in product development in 2001focused on:

 

•       Integration of developed technologyacquired from Exterprise in May 2001, including the launch of a strategicsourcing application.

 

•                    Jointdevelopment initiatives with SAP relating to the launch of a major release ofMarketSet, the co-developed solution for marketplaces targeted at deliveringdirect goods and supply chain functionality.

 

•                    The launch ofa major release of Marketsite (now "Commerce One CollaborativePlatform"), our collaborative infrastructure for powering marketplaces andour enterprise application suite.

 

•                    Enhancement ofour technology for more efficient scalability and effective deployment.

 

•                    Enhancement ofour supplier and catalog service offerings with introduction of a concept forsupplier self-service.

 

During 2002, ourplans include continued support for industry standards and the adoption of xCBLÔtechnology, our open library ofbusiness documents.  We also plan tocontinue building upon our suite of applications in procurement and sourcing toautomate the entire source-to-pay process.

 

**SALESAND MARKETING**

 

We market and sell our products and services toorganizations through direct and indirect sales forces. As of December 31,2001, we had 395 employees in our sales and marketing departments. Our salesoffices are located in the United States, the United Kingdom, France,Switzerland and Singapore. 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 and vice president of procurement. We target oursales efforts at Global-2000 enterprises and their suppliers and have initiatedvertical sales strategies targeted at the automotive, utilities, healthcare,metals and mining, aerospace, and energy industries.

 

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Our indirect sales force consists of support from SAPto sell our joint solutions, as well as support from third-party integrators(including Accenture and PricewaterhouseCoopers) and e-marketplace resellersand distributors. We have a royalty-sharing relationship with SAP, and payreferral fees to some third party integrators, for their sale of our productsand services.

 

Our marketing activities include seminar programs,trade shows, Web-site programs, public relation events and direct mailings. Weare also engaged in an on-going effort to maintain relationships with keyindustry analysts.

 

**INTELLECTUALPROPERTY RIGHTS**

 

Our future success depends in part on our proprietaryrights and technology. We rely on a combination of patent, copyright, trademarkand trade secret laws, employee and third-party nondisclosure agreements andother methods to protect our proprietary rights. To date, we own two U.S.patents.  We also pursue patentsinternationally. We have filed and intend to file additional patentapplications on our other proprietary technology.

 

We have been granted eight trademark registrations inthe United States to date.  Ourregistered and unregistered trademarks and service marks include:  Commerce One, Powering the BusinessInternet, Many Markets. One Source., Commerce One Source, Commerce One 5.0,Commerce One Buy, Commerce One Buy ASP Edition, Commerce One CollaborativePlatform, Community Manager, Process Manager, Web Services Framework,Transaction Manager, Business Intelligence Framework, XML Common BusinessLibrary, Global Trading Web, GTW, Commerce One.net, xCBL MailBox, MarketSite, eLink,Net Market Maker, XML Development Kit, xDK, XML Commerce Connector, xCC,BuySite, xCBL, RoundTrip, Commerce Chain, and SupplyOrder. Enterprise Buyer andMarketSet are trademarks of Commerce One and SAPMarkets, Inc.  We also pursue trademark registrationsinternationally.

 

It may be possible for unauthorized third parties tocopy certain portions of our products or reverse engineer or obtain and useinformation that we regard as proprietary. Certain end-user license provisionsprotecting against unauthorized use, copying, transfer and disclosure of thelicensed program may be unenforceable under the laws of some foreign countries.In addition, the laws of some foreign countries do not protect proprietaryrights to the same extent as do the laws of the United States. Some of ouragreements with our customers and development partners contain residual clausesregarding confidentiality and contain clauses that allow these parties toobtain the source code for our products in certain circumstances. These provisionsmay curtail our ability to limit access to our intellectual property rights inthe future.

 

We license and will continue to license certainproducts integral to our products and services from third parties, includingproducts which are integrated with internally developed products and used withour products to provide key content and services. We cannot be assured thatthese third party product licenses will continue to be available to us oncommercially reasonable terms or that we will be able to successfully integratesuch third party products into our solutions. Such product licenses may exposeus to increased risks, including risks associated with the assimilation of newproducts, claims of infringement resulting from the use of such third party products,the diversion of resources from the development of our products, the inabilityto generate revenues from new products sufficient to offset associatedacquisition costs, and the maintenance of uniform, appealing products. Theinability to obtain any of these licenses could result in delays in sitedevelopment or services until equivalent products can be identified, licensedand integrated. Any such delays in site development or services could harm ourbusiness, operating results and financial condition.

 

**COMPETITION**

 

The market for our products is intensely competitive,subject to rapid change and significantly affected by new product introductionsand other market activities of industry participants. Our primary source ofdirect competition comes from independent software vendors of procurement,sourcing and related applications. We also face indirect competition frompotential customers’ internal development efforts and must  overcome potential customers’ reluctance tomove away from existing systems and processes.

 

Our current and potential competitors include withoutlimitation Ariba, Freemarkets, i2, Oracle, PeopleSoft, SAP, VerticalNet andWebMethods. In addition, there are a number of companies developing andmarketing business-to-

 

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businesse-commerce solutions targeted at specific vertical markets. Some of thesecompetitors offer Web-based solutions that are designed to enable an enterpriseto buy more effectively from its suppliers. Other competitors are alsoattempting to migrate their technologies to an Internet-enabled platform. Someof these competitors and potential competitors include ERP vendors that areexpected to sell their procurement products along with their applicationsuites. These ERP vendors have a significant installed customer base and havethe opportunity to offer additional products to those customers as additionalcomponents of their respective application suites.

 

We believe that the principal competitive factors forbusiness-to-business e-commerce solutions are breadth and scope of solution,depth of supplier content, interoperability with existing informationtechnology systems, scalability, functionality, ease-of-use,ease-of-implementation, total cost of ownership and installed base ofreferenceable customers. We believe we compete favorably with our competitorsin these areas.

 

**EMPLOYEES**

 

As of December 31, 2001, we had 1,896 full-timeemployees, 588 of whom were engaged in product development, 395 in sales andmarketing, 640 in professional services and 273 in general administration. Ourtotal full-time employee population has subsequently decreased to 1,672 as atMarch 1, 2002, due to ongoing divestitures of certain operations within ourGlobal Services division.  Our futuresuccess depends, in part, on our continuing ability to attract, train andretain highly qualified technical, sales and managerial personnel. We cannotguarantee that we will be able to recruit and retain sufficient qualifiedpersonnel. None of our employees are represented by a labor union and we arenot a party to any collective bargaining agreements. We have not experiencedany work stoppages and consider our relations with our employees to be good.

 

***RISK FACTORS***

 

***We have a limitedoperating history and a history of losses.***

 

We incurred net losses of$2,584.1 million, $344.9 million and $63.3 million for the yearsended December 31, 2001, 2000 and 1999, respectively. We also incurred a lossof $168.3 million for the quarter ended December 31, 2001. As of December31, 2001, we had an accumulated deficit of $3,031.6 million. We will needto generate significant additional revenues to avoid losses in the future.  If we do not decrease our losses in the future,our business may suffer in a number of ways, including increased difficultiesin obtaining additional capital, selling our products and services (sincenearly all customers require future support) and funding our continuedoperations.

 

***If we continue to usesubstantial cash, we may not be able to fund our continued operations or meetour future capital requirements.***

 

Because our business operationsuses more cash than it generates, the cash used each quarter substantiallyreduces the cash available to fund our operations and future capital requirements.  In addition, the current unfavorable marketfor equity or debt financing makes it increasingly difficult to raiseadditional funding.  If we do notachieve positive cash flow from our operations and future financing is notavailable, or are not available on acceptable terms, we may not be able to fundour continued operations.

 

***Our revenues arevolatile and difficult to predict***.

 

Our revenues and operatingresults are difficult to forecast and may fluctuate substantially from quarterto quarter due to a number of factors, including the following:

•                    a significant portion of our license revenues arederived from royalty payments earned through our strategic alliance with SAPand we may have limited visibility into such revenues in the fourth quarter of2002, until royalty information is provided to us by SAP at the end of thisquarter;

•                    a significant portion of our revenues has in thepast been derived from a small number of relatively large license sales; thesesales are typically completed during the last few weeks of the quarter;

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

•                    the size of licensing transactions can varysignificantly;

 

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

•                    the market may not accept our new products;

•                    our strategic relationships may change;

•                    our pricing policies and those of our competitorsmay change; and

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

 

If our revenues fall below ourexpectations, our operating results are likely to be harmed.

 

***The current downturnin general economic conditions may decrease our revenues.***

 

The current downturn and uncertainty in generaleconomic and market conditions have decreased and may continue to decreasedemand for our products and services. If the current economic downturncontinues or worsens, our business, financial condition and results ofoperations could be seriously harmed. In addition, the September 11, 2001 terrorist attacks in the UnitedStates, the subsequent U.S. military operations in Afghanistan, and potentialrelated events may adversely affect our business.  This uncertainty could further decrease demand for our productsand services and make it more difficult for us to raise debt or equityfinancing in the future. These outcomes, and other unforeseen and negativeoutcomes of these world events, would adversely affect our revenues, results ofoperations and financial condition.

 

***If we do not sell ournew Commerce One 5.0 solution and other solutions or products, our growth andrevenues will be limited.***

 

Our business model is shiftingto focus increasingly on enterprise software solutions (i.e., sales tocompanies for their own internal use) in addition to our historical focus one-marketplaces.  We face significantuncertainties that may affect our ability to sell Commerce One 5.0 and otherproducts, including the level of demand for this relatively new productcategory, the demand for or acceptance of our new products in particular, theability of our products to satisfy our customers or compete favorably withthose of our competitors, and the fact that businesses that have madesubstantial up-front payments to our competitors for enterprise solutions maybe reluctant to replace their current solution and adopt our solution.  If we do not sell significant numbers of ournew enterprise solutions, particularly Commerce One 5.0, our revenues, andhence our business, will suffer.

 

***Delays in shipment of Commerce One 5.0 andother solutions or products may result in delay or loss of revenue.***

 

Delays in shipping new productsand enhancements to existing products may result in client dissatisfaction anddelay, or loss of product revenues. Because Commerce One 5.0 is a new solution,we cannot be certain of our ability to ship it in a timely manner or tocontinue shipping it.  Delays may resultfrom a number of factors, including extended product-development cycles andproduct defects. Products as complex as ours often contain unknown andundetected errors or performance problems. These defects are frequently found during the period immediatelyfollowing the introduction and initial shipment of new products or enhancementsto existing products. Although we attempt to resolve all errors that we believewould be considered serious by our customers before shipment to them, ourproducts are not error-free. These errors or performance problems could resultin lost revenues or delays in customer acceptance and would be detrimental toour business and reputation. If we are unable, for technological or otherreasons, to ship new products or enhancements of existing products in a timelymanner in response to changing market conditions or client requirements, or ifnew products or new versions of existing products do not achieve marketacceptance, our business would be seriously harmed.

 

***If our relationshipwith SAP is unsuccessful, changes significantly or is terminated, our revenuesmay suffer.***

 

In 2000, we entered into astrategic alliance agreement with SAP to jointly develop, market and selle-commerce software products.  Inconnection with this agreement, our product development efforts with respect tocertain of our products have grown increasingly interdependent with SAP.  In addition, a substantial portion of ourlicense revenues in 2000 and 2001 were derived from this relationship.  We may in the future continue to derive asignificant portion of our license revenues from this relationship.

 

Strategic relationships such asthe one we have with SAP can be difficult to implement and maintain, and may notsucceed for various reasons including:

 

•    changes in strategic direction by one orboth companies;

**•   **technical obstacles to combining existingsoftware products or developing new compatible products;

•    changes or decreases in market or customerdemand for the relevant products;

•    difficulties in coordinating sales andmarketing efforts;

•    difficulties in structuring and maintainingrevenue sharing arrangements; and

•    operating differences between the companiesand their respective employees;

 

The scope of our relationshipwith SAP has changed over time and may change again in the future.  For example, in early 2002, Commerce One andSAP agreed that the two companies would continue to jointly develop, market andsell the MarketSet suite of products, but that the Enterprise Buyer procurementproducts would be phased out.

 

It is possible that ourrelationship with SAP will change again. In addition, the strategic alliance agreement may be terminated byCommerce One or SAP with relatively little notice, and we therefore cannotassure you the relationship will not terminate entirely in the future.  A change in or termination of ourrelationship with SAP could materially and adversely affect our productdevelopment, marketing and sales efforts and, ultimately, our revenues.

 

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***Our restructuringand other strategic initiatives may not achieve our desired results and couldresult in business distractions that could harm our business.***

 

We implemented restructuring plans throughout 2001.The primary objectives of our restructuring plans have been to reduce ouroperating expense run rate and to focus on new products.  We also implemented certain strategicinitiatives designed to strengthen our operations.  These plans include without limitation, reductions in ourworkforce and facilities, improved alignment of our organization around ourcore business objectives and realignment of our sales force, professionalservices and general and administrative functions. The workforce reductionscould temporarily impact our remaining employees, including those directlyresponsible for sales, which may affect our future revenues.  In addition, the failure to retain andeffectively manage remaining employees could increase our costs, and hurt ourdevelopment and sales efforts. Additionally, these changes might affect our ability to close revenuetransactions with our customers and prospects. Failure to achieve the desired results of our strategic initiativescould harm our business, operating results and financial condition.

 

***Our industry ishighly competitive and has low barriers to entry, and we cannot assure you thatwe will be able to compete effectively.***

 

Because the market forbusiness-to-business e-commerce solutions is extremely competitive, we maysuffer a loss of business and a reduction in the prices we can charge for ourproducts and services. 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 e-commerce market,and competition from other established and emerging companies may develop inthe future. In addition, our customers and partners may become competitors inthe future. Increased competition is likely to result in price reductions,lower average sales prices, reduced margins, longer sales cycles and a decreaseor loss of our market share, any of which could harm our business, operatingresults or financial condition. Our competitors include Ariba, Freemarkets, i2,Oracle, PeopleSoft, SAP, VerticalNet and WebMethods, among others. Our GlobalServices division competes against many consulting companies, including many ofour integration partners.  Certain of thesecompetitors jointly offer business-to-business e-commerce solutions topotential customers. These joint efforts could intensify the competitivepressure in our market. Many of our competitors, and new potential competitorsmay have a longer operating history, more experience developing Internet–basedsoftware and end-to-end purchasing solutions, larger technical staffs, largercustomer bases, more established distribution channels and customerrelationships, greater brand recognition and greater financial, marketing andother resources than we have. In addition, competitors may be able to developproducts and services that are superior to our products and services, thatachieve greater customer acceptance or that have significantly improvedfunctionality as compared to our existing and future products and services. Thebusiness-to-business e-commerce solutions offered by competitors may beperceived by buyers and suppliers as superior to ours. Some of the companieswith whom we have strategic relationships, such as SAP, compete with us in certainareas and may continue to compete with us.

*** ***

*** ***

*** ***

*** ***

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

 

The rates we are able to chargefor our professional services and the utilization, or chargeability, of ourprofessional services organization are a large component of our overall grossmargin, and therefore our operating results. Accordingly, if we are not able tomaintain the rates we charge for our professional services or an appropriateutilization rate for our professionals, we will not be able to sustain ourgross margin and our operating results will suffer. The rates we are able tocharge for our professional services are affected by a number of factors,including our customers’ perceptions of our ability to add value through ourprofessional services, competition, the introduction of new services orproducts by us or our competitors, the pricing policies of our competitors andgeneral economic conditions. Our utilization rates are also affected by anumber of factors, including seasonal trends, primarily as a result of ourhiring cycle and holiday and summer vacations, our ability to transition employeesfrom completed projects to new engagements, our ability to forecast demand ofour professional services and thereby maintain an appropriate headcount, andour ability to manage attrition.

 

***Our gross margins maydecline.***

 

In most cases, our license revenues have a highergross margin percent than our services revenues.  Thus, to the extent services revenues increase as a percentage ofour total revenues, our overall gross margin will likely decline. As a resultof our acquisition of AppNet Inc., a provider of end-to-end Internetprofessional services, our services revenues have increased as a percentage ofour total revenues in 2001. If we are not successful in increasing revenuesfrom license fees, or we are not successful in increasing the gross margin ofour services fees, our overall 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.

 

***The development of e-marketplaces orexchanges entails certain risk for us.***

 

Our strategy of establishing andpromoting the Global Trading Web and facilitating the development and operationof e-marketplaces is unproven and may not be successful. The companies that areusing our software and services to establish e-marketplaces have encounteredand may continue to encounter delays in launching their e-marketplaces, infully deploying these e-marketplaces and in achieving supplier participation intheir e-marketplaces. Additionally, although our technology architecture isdesigned to support the development of trading communities that can operatewith each other, these marketplaces may not in fact operate with each other ormay do so in an unsatisfactory manner.

 

Although our business model isincreasingly focused on enterprise solutions, our strategy of facilitating thedevelopment and operation of large trading exchanges continues to entail particularrisks for us. These risks include:

•               the diversion of a significant portion of ourmanagement, technical and sales personnel to develop these e-marketplaces;

•               delays in the commencement of significantoperations by these e-marketplaces;

•               failure by industry participants to adopt and usethese e-marketplaces;

•               difficulties in the hiring and retention ofskilled management for these e-marketplaces;

•               and all of the other risks of creating suche-marketplaces described elsewhere in this Risk Factors section.

 

If these e-marketplaces are notsuccessful, we may not generate all of the expected benefits from ourdevelopment efforts, including transaction and other network-servicesfees.  In addition, the establishmentand operation of these exchanges may raise issues under U.S. and foreignantitrust laws. To the extent that U.S. or foreign antitrust regulators takeadverse action or establish rules or regulations with respect to anyexchange or business-to-business e-commerce exchanges in general, the establishmentand growth of such exchanges may be delayed. If our e-marketplaces are notsuccessful, our business, operating results and financial condition willsuffer.

 

***We face credit risks because of theconcentration and nature of some of our customers.***

 

Someof our customers are small emerging growth companies with limited creditoperating histories that are operating at a loss and have limited access tocapital.  With the significant downturnin the economy and uncertainty relating to the prospects for near-term economicgrowth, some of these customers may represent a credit risk.  In addition, a small number of our customersaccount for a significant amount of our accounts receivable.  At December 31, 2001, twocustomers accounted for 13% and 12% of our gross accounts receivablebalance.  At December 31, 2000, nocustomer accounted for more than 10% of our gross accounts receivablebalance.  If our customers experience financialdifficulties, we may have difficulty

 

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collectingon our accounts receivable and our cash position would suffer.

 

***We depend upon continuing our relationshipwith third–party systems integrators who support our solutions.***

 

Our success depends upon theacceptance and successful integration by customers and their suppliers of ourproducts. Our current and potential customers, and their related suppliers,often rely on third–party systems integrators such as Accenture, ComputerSciences Corporation, PricewaterhouseCoopers and others to develop, deploy andmanage their business-to-business e-commerce platforms and solutions. We andour customers will need to continue to rely on these systems integrators,particularly in light of the recent down sizing of our Global Servicesdivision, which competes with these systems integrators to some extent. Iflarge systems integrators stop supporting our solution or committing resources to us, or if any of our customersor suppliers are not able to successfully integrate our solution, or if we areunable to adequately train our existing systems integration partners, ourbusiness, operating results and financial condition could suffer.

 

In addition, we cannot controlthe level and quality of service provided by our current and future third-partyintegrators.  While our agreements withthose integrators normally include provisions designed to ensure quality, thoseprovisions are often difficult to enforce and cannot guarantee acceptablequality in all cases.  If our customersexperience quality problems arising from installation of our software by thesethird parties, we may experience negative customer reactions, adversepublicity, or even legal claims.  Ifsuch problems are significant, our reputation, financial condition andultimately our business may be harmed.

 

***Our strategy of reselling through ourstrategic relationships may not be successful.***

 

We have established strategicrelationships with companies that resell and distribute our products to ourcustomers. 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 ofe-marketplaces, their ability to resell our products will suffer if they areunsuccessful in generating customers for their e-marketplaces or funding theircontinued operations. If any of our current or future resellers are not able tosuccessfully resell our products, our business will suffer.

 

***Our executive officersand certain key personnel are critical to our business and these officers andkey personnel may not remain with us in the future.***

 

Our future success depends uponthe continued service of our executive officers and other key personnel, andnone of our current executive officers is bound by an employment agreement forany specific term. Any of our officers may leave our organization in thefuture. In particular, the services of Mark Hoffman, our Chairman of the Boardand Chief Executive Officer and Dennis Jones, our Vice Chairman of the Boardand President, would be difficult to replace. If we lose the services of one ormore of our executive officers or key employees, or if one or more of themdecides to join a competitor or otherwise compete directly or indirectly withus, our business, operating results and financial condition may be seriouslyharmed.

 

***We may not be able to retain and hirequalified personnel.***

 

Ourfuture performance depends on the continued service and our ability to hire ourmanagement, engineering, sales and marketing personnel.  Our ability to retain key employees may beharder, given recent adverse changes in our business, particularly since themarket price of our common stock has fluctuated and declined substantiallysince our initial public offering in July 1999.  In addition, new hires may require extensive training before theyachieve desired levels of productivity. We may fail to retain our key employees or to attract other highlyqualified personnel.

 

***Managing growth and reductions in achanging environment could strain our management and other resources.***

 

Ourability to successfully offer products and services and implement our businessplan in a rapidly evolving market requires an effective planning and managementprocess.  Our workforce and expenditureshave grown rapidly and been reduced rapidly in the past two years.  These changes place a strain on ourmanagerial resources and make planning more difficult.  While we manage these rapid changes, we mustalso compete effectively and manage our operations by maintaining and enhancingour financial and accounting systems and controls, and integrating new andexisting personnel.  We also expect thatwe will be required to manage an increasing number of relationships withvarious customers and third parties.  Ifwe cannot effectively manage and plan in this rapidly changing environment, ouroperations would suffer.

 

***We may not be able to integrateacquisitions into our business effectively.***

 

As part of our businessstrategy, we have made and expect to continue making acquisitions of businessesthat offer complementary products, services and technologies.  We have limited experience with businessacquisitions, and may not acquire such businesses on favorable terms or be ableto integrate such organizations into our business successfully. For example, werecently engaged in divestures of certain business units acquired in the AppNetacquisition that were not 

 

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integrated into our overallstrategy of developing and implementing our core products. Our acquisitions aresubject to the risks commonly encountered in acquisitions of businesses,including, among other things:

 

•                    the difficulty of integrating the operations andpersonnel of the acquired business into our business;

•                    the difficulty of integrating service and productofferings;

•                    the difficulty of integrating technology, backoffice, accounting and financial systems;

•                    the potential disruption of our ongoing business;

•                    the distraction of management from our business;the inability of management to maximize our financial and strategic position;and

•                    the impairment of relationships with, anddifficulty of retaining, employees and customers.

 

Further, our acquisitions andinvestments may have negative financial consequences.  For example, we recently recognized a substantial impairment ofgoodwill and other intangible assets related to the AppNet and CommerceBidacquisitions and may recognize additional impairments in the future.  Relevant risks include:

 

•                    the possibility that we pay more than theacquired business is worth;

•                    potentially dilutive issuances of equitysecurities;

•                    incurrence of contingent liabilities;

•                    increased net loss resulting from the purchasemethod of accounting for acquisitions, under which we incur amortization expensesrelated to certain intangible assets and deferred stock compensation; and

•                    one-time write-offs, such as those for in-processresearch and development or impairment of intangibles and other long-livedassets.

 

In addition, potential companiesacquired by us may not have audited financial statements, detailed financialstatements or any degree of internal controls. An audit subsequent to anysuccessful completion of an acquisition may reveal matters of significance,including issues regarding revenues, expenses, liabilities, contingent orotherwise, technology, products, services or intellectual property. We may notbe successful in overcoming these or any other significant risks and thefailure to do so could have a material adverse effect on our business,financial condition and results of operations.

 

***Because our business isextensively international, we face numerous obstacles in other countries.***

 

Our business relies heavily onour international operations to manage our international sales.  International business involves inherentdifficulties that may affect us, including:

 

•                    unexpected changes in regulatory requirements andtariffs;

•                    the impact of recessions in economies outside theUnited States; the global impact of armed or political conflicts; politicalinstability;

•                    seasonal reductions in business activity;difficulties in staffing and managing foreign offices as a result of, amongother things, distance, language, costs and cultural differences; longerpayment cycles and greater difficulty in accounts receivable collection;

•                    price controls or other restrictions on foreigncurrency; potentially harmful tax consequences, including withholding taxissues; fluctuating exchange and tariff rates;

•                    difficulty in protecting intellectual property; difficultiesin obtaining export and import licenses;

•                    foreign antitrust regulation; and

•                    inadequate technical and other infrastructure.

 

We also have only limitedexperience in marketing, selling, implementing and supporting our products andservices outside the United States. These difficulties may adversely affect our business.

 

***Our market may undergorapid technological change and this change may make our products and servicesobsolete or cause us to incur substantial costs to adapt to these changes.***

 

Our market is characterized byrapidly changing technology, evolving industry standards and frequent newproduct announcements. To be successful, we must adapt to the rapidly changingmarket by continually improving the performance, features and reliability ofour products and services or else our products and services may becomeobsolete. We could also incur substantial costs to modify our products,services or infrastructure in order to adapt to these changes. Our business, 

 

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operating results and financialcondition could be harmed if we incur significant costs without adequateresults, or are unable to adapt rapidly to these changes.

 

***Product liabilityclaims or other claims regarding the performance of our products may be harmfulto our reputation and business.***

 

We may be subject to productliability claims or other claims regarding the performance of our products,even though our license agreements typically seek to limit our exposure to suchclaims, because the contract provisions of our license agreements may not besufficient to preclude all potential claims. Additionally, our generalliability insurance may be inadequate to protect us from all liabilities thatwe may face. We could be required to spend significant time and moneylitigating these claims, or where necessary, to pay significant damages.  Such claims could also result in lostrevenues, 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.

 

***We may have potential liability to clientswho are dissatisfied with our professional services.***

 

We design, develop, implementand manage e-commerce solutions that are often crucial to the operation of ourclients’ businesses. Defects in the solutions we develop could result indelayed or lost revenues, adverse customer reaction and negative publicity orrequire expensive corrections, any of which could have a material adverseeffect on our business, financial condition or results of operations. Clientswho are not satisfied with these services could bring claims against us forsubstantial damages. The successful assertion of one or more large claims thatare uninsured, exceed insurance coverage or result in changes to insurancepolicies, including premium increases, could have a material adverse effect onour business, financial condition or results of operations.

 

***If third parties claimthat we infringe upon their intellectual property rights, our ability to usecertain technologies and products could be limited and we may incur significantcosts to resolve these claims.***

 

Our business depends uponintellectual property, and litigation regarding intellectual property rights iscommon in the Internet and software industries. Intellectual property ownershipissues may be complicated by the fact that our Global Services divisionfrequently develops intellectual property for its clients and, in order tocarry out projects, 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 the protection of our proprietarytechnology is limited, our proprietary technology could be used by others.***

 

Our success depends, in part,upon our proprietary technology and other intellectual property rights. Todate, we have relied primarily on a combination of copyright, patent, tradesecret, and trademark laws, and nondisclosure and other contractualrestrictions on copying and distribution to protect our proprietary technology.We have two issued patents to date. We may not be able to protect ourintellectual property rights adequately in the United States or abroad.Furthermore, litigation may be necessary to enforce our intellectual propertyrights, to protect our trade secrets, to determine the validity and scope ofthe proprietary rights of others, or to defend against claims of infringementor invalidity. Such litigation could result in substantial costs and diversionof resources and could harm our business, operating results and financialcondition.

 

***Additional government regulations mayincrease our costs of doing business.***

 

The laws governing Internettransactions remain largely unsettled. The adoption or modification of laws orregulations relating to the Internet could harm our business, operating resultsand financial condition by increasing our costs and administrative burdens. Itmay take years to determine whether and how existing laws such as thosegoverning antitrust, intellectual property, privacy, libel, consumer protectionand taxation apply to the Internet.

 

Laws and regulations directlyapplicable to communications or commerce over the Internet are becoming moreprevalent. We must comply with new regulations in both Europe and the UnitedStates, as well as any other regulations

 

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adopted by other countries wherewe may do business. The growth and development of the market for onlinecommerce may prompt calls for more stringent consumer protection laws, both inthe United States and abroad, as well as new laws governing the taxation ofInternet commerce. Compliance with any newly adopted laws may prove expensiveand may harm our business, operating results and financial condition.

 

***Security risks of e-commerce may deterfuture use of our products and services.***

 

A fundamental requirement toconduct business-to-business e-commerce is the secure transmission ofconfidential information over public networks. Failure to prevent securitybreaches of e-marketplaces, or well-publicized security breaches affecting theInternet in general, could significantly harm our business, operating resultsand financial condition. Advances in computer capabilities, new discoveries inthe field of cryptography, or other developments may not be sufficient toprevent a compromise or breach of the algorithms we use to protect content andtransactions on e-marketplaces or proprietary information in our databases. Inaddition to our own security systems, our Global Services division relies onencryption and authentication technology licenses from third parties.Unauthorized access, computer viruses, or the accidental or intentional acts ofInternet users, current and former employees or others could jeopardize thesecurity of confidential information and create delays or interruptions in ourservices or operations, including our Global Services e-business outsourcingcenters. We have in the past been impacted by global computer viruses, such asNIMDA and the Code Red viruses, and have incurred  costs to resolve such viruses. In the future, we may be required to incur significant costs to protectagainst security breaches or to alleviate problems caused by breaches. Inaddition, such disruptions or breaches in security could result in liabilityand in the loss of existing clients or the deterrence of potential clients ortransactions.

 

***We may not have adequate back-up systems,and a disaster could damage our operations.***

 

We are in the process ofcreating a disaster recovery plan and 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 in our principal facilities in Pleasanton and Cupertino, California,which exist on or near known earthquake fault zones. We also depend upon thirdparties to host most  e-marketplaces andsome of these third parties are also located in the same earthquake faultzones. Although these systems are designed to be fault tolerant, they arevulnerable to damage from fire, floods, earthquakes, power loss,telecommunications failures and similar events. In addition, our facilities inCalifornia could be subject to electrical blackouts if California faces anotherpower shortage similar to that of 2001. Although we do have a backup generator, which  would  maintain criticaloperations, this generator could fail. Furthermore, blackouts could disrupt theoperations of our affected facilities. Disruptions in our internal business operations, Commerce One.net, orany of our hosted facilities could harm our business by resulting in delays,disruption of our customers’ business, loss of data, and loss of customerconfidence.

 

***Failure to expandInternet use could limit our future growth.***

 

Our business depends upon use ofthe Internet as an effective medium of business-to-business commerce.  The failure of the Internet to continue todevelop as a commercial or business medium for significant numbers of buyersand suppliers to conduct business commerce would harm our business, operating results and financial condition. Inaddition, the growth of the market for our services depends upon improvementsbeing made to the entire Internet as well as to our individual customers’networking infrastructures, to alleviate overloading and congestion. If theseimprovements are not made, the ability of our customers to use  our solution will be hindered, and ourbusiness, operating results and financial condition may suffer.

 

***We may lose money in other companies wehave invested in.***

 

We have and may continue toinvest  in numerous technologycompanies, usually in connection with license contracts 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 2001, we recorded investment losses ofapproximately $24.5 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.

 

 

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

 

Our certificate of incorporationand bylaws contain provisions which could make it harder for a third party toacquire us without the consent of our Board of Directors. Among other things,our Board of Directors has adopted a shareholder rights plan, or “poison pill,”which would significantly dilute the ownership of a hostile acquirer. Inaddition, Section 203 of the Delaware General Corporation Law limitsbusiness combination transactions with 15% stockholders that have not beenapproved by the Board of Directors. We also have entered into agreements withsome of our strategic investors that, to an extent, limit their ability toattempt to acquire us without board approval. All of these provisions make itmore difficult for a third party to acquire us without negotiation. Theseprovisions may apply even if the offer may be considered beneficial by somestockholders.

 

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

 

In October 1997, the AmericanInstitute of Certified Public Accountants issued its Statement of Position97-2, “Software Revenue Recognition,” and later amended its position by itsStatement 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 Position97-2, Statement of Position 98-4 and Statement of Position 98-9. However,interpretations of these standards continue to be issued by the accountingstandard setters. Future interpretations could lead to unanticipated changes inour current revenue recognition practices, which could materially adverselyaffect our business, financial condition and operating results.

 

Accounting standard setters,including the Securities and Exchange Commission and the Financial AccountingStandards Board, are also currently reviewing the accounting standards relatedto other areas. Any changes to these accounting standards, or the way thesestandards are interpreted or applied, could require us to change the way weaccount for any other aspects of our business in a manner that could adverselyaffect our reported financial results.

 

**ITEM 2.****                        DESCRIPTIONOF PROPERTY**

 

We lease office space in approximately 20 cities inNorth America and 20 cities in a variety of international markets. Ourcorporate headquarters is located in Pleasanton, California, where we currentlyoccupy approximately 160,000 square feet of office space. We currently subleasean aggregate of approximately 79,000 square feet of office space to thirdparties, and have an additional 291,000 square feet of office space availablefor sublease.  We believe our currentfacilities will be adequate to address our space needs through at least the endof 2002.

 

**ITEM3.****                        LEGALPROCEEDINGS**

 

On June 19, 2001, a putative securities classaction, captioned *Cameron v. CommerceOne, Inc., et al.,* Civil Action No. 01-CV-5575, was filedagainst the Company, several company officers and directors (the “IndividualDefendants”), and three underwriters in the Company’s initial public offering(“IPO”), in the U.S. District Court for the Southern District of New York. Thecomplaint alleges violations of Section 11 of the Securities Act of 1933(“Securities Act”) against all defendants, a violation of Section 15 ofthe Securities Act and Section 20(a) of the Securities Exchange Act of1934 (“Exchange Act”) against the Individual Defendants, and violations ofSection 12(a)(2) of the Securities Act and Section 10(b) of theExchange Act (and Rule 10b-5, promulgated thereunder) against theunderwriters. The complaint seeks unspecified damages on behalf of a purportedclass of purchasers of common stock between July 1, 1999 and June 15,2001.

 

On July 6, 2001, a similar complaint, captioned *Market Street Securities v. Commerce One, Inc.,*Civil Action 

 

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No. 1-01-CV-6138, was filed against the Company,the Individual Defendants, and several of the IPO underwriters in the SouthernDistrict of New York. The complaint is substantially identical to the *Cameron* complaint, except in that italleges violations of Section 10(b) of the Exchange Act (andRule 10b-5, promulgated thereunder) against all defendants, including theCompany and the Individual Defendants and the class period endsDecember 6, 2001.

 

Additional lawsuits were filed making substantiallyidentical allegations to those in the *Cameron*and *Market Street Securities*complaints.  Various plaintiffs havefiled similar actions asserting virtually identical allegations against morethan 300 other companies.  The lawsuitsagainst the Company have been coordinated for pretrial purposes with theseother related lawsuits, and have been assigned the collective caption In reInitial Public Offering Securities Litigation, Civil Action No. 21-MC-92.  The coordinated pretrial proceedings arepresently being overseen by Judge Shira A. Scheindlin.  As of March 27, 2002, no briefing schedulehas been established regarding the lawsuits against the Company.  The Company believes it has meritoriousdefenses to these securities lawsuits and will defend itself vigorously.

 

From time to time the Company is involved in otherdisputes and litigation in the normal course of business.

 

The Company does not believe that the outcome of anyof these disputes or litigation will have a material effect on the Company’sfinancial condition or results of operations. However, an unfavorable outcomeof some or all of these matters could have a material effect on the Company’sfinancial position or results of operations.

 

**ITEM 4.****                        SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters were submitted to a vote of securityholders during the fourth quarter of 2001.

 

**PARTII**

 

**ITEM 5.****                        MARKETFOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS**

 

Our common stock is traded on the NASDAQ NationalMarket under the symbol “CMRC.” The price per share reflected in the tablebelow represents the range of low and high sale prices for our common stock asreported on the NASDAQ National Market commencing January 1, 2000 for thequarters indicated.

 

|                             |   | **High** |   | **Low** |   |
|----------------------------------|--------|----------|--------|---------|--------|
| Fiscal 2000:                     |   |     |   |    |   |
| Quarter Ended March 31, 2000     |   | $        | 137.81 |    | $      | 67.75 |   |
| Quarter Ended June 30, 2000      |   | $        | 71.81  |    | $      | 33.69 |   |
| Quarter Ended September 30, 2000 |   | $        | 84.13  |    | $      | 38.38 |   |
| Quarter Ended December 31, 2000  |   | $        | 82.38  |    | $      | 17.94 |   |
| Fiscal 2001:                     |   |     |   |    |   |
| Quarter Ended March 31, 2001     |   | $        | 36.47  |    | $      | 7.81 |   |
| Quarter Ended June 30, 2001      |   | $        | 13.94  |    | $      | 2.99 |   |
| Quarter Ended September 30, 2001 |   | $        | 5.60   |    | $      | 2.09 |   |
| Quarter Ended December 31, 2001  |   | $        | 4.24   |    | $      | 2.38 |   |

 

The informationabove reflects a three-for-one stock split and a two-for-one stock split onDecember 23, 1999 and April 19, 2000, respectively, effected in theform of a stock dividend to each stockholder of record as of December 3,1999 and March 13, 2000, respectively.

 

We have never paid cash dividends on our capitalstock. We currently intend to retain any earnings, if any, for use in ourbusiness and do not anticipate paying any cash dividends in the foreseeablefuture.

 

The closing price of Commerce One’s common stock asreported on the NASDAQ National Market on March 1, 2002 was $1.84.  As of March 1, 2002, we had 1,690stockholders of record of our common stock and a substantially greater numberof beneficial owners of our common stock.

 

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**ITEM 6.****                        SELECTEDFINANCIAL DATA**

 

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

** **
|                                                               |   | **YEARS  ENDED DECEMBER 31,** |       |
|--------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                               |   | **2001**                      |       | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
| Revenues:                                                          |   |                          |       |   |   |   |   |   |   |   |   |
| License fees                                                       |   | $                             | 130,917    |   | $ | 223,277 |   | $ | 24,571 |   | $ | 1,633 |   | $ | 742 |   |
| Services                                                           |   | 277,652                       |       | 178,519 |   | 8,986 |   | 930 |   | 1,004 |   |
|                                                               |   |                          |       |   |   |   |   |   |   |   |   |
| Total revenues (1)                                                 |   | 408,569                       |       | 401,796 |   | 33,557 |   | 2,563 |   | 1,746 |   |
| Costs and expenses:                                                |   |                          |       |   |   |   |   |   |   |   |   |
| Cost of license fees (2)                                           |   |                          | 662,315    |   |   | 14,910 |   |   | 484 |   | — |   | — |   |
| Cost of services                                                   |   | 228,023                       |       | 139,746 |   | 15,586 |   | 4,369 |   | 2,887 |   |
| Sales and marketing                                                |   | 183,412                       |       | 168,647 |   | 31,546 |   | 13,108 |   | 6,055 |   |
| Product development                                                |   | 118,159                       |       | 102,676 |   | 20,496 |   | 6,839 |   | 2,172 |   |
| General and administrative                                         |   | 116,621                       |       | 43,236 |   | 5,050 |   | 1,941 |   | 1,805 |   |
| Purchased in-process research and development                      |   | 4,548                         |       | 5,142 |   | 9,374 |   | — |   | — |   |
| Stock compensation                                                 |   | 98,302                        |       | 39,820 |   | 2,324 |   | 1,102 |   | — |   |
| Restructuring costs and other                                      |   | 126,605                       |       | — |   | — |   | — |   | — |   |
| Amortization of goodwill and other intangible assets               |   | 332,789                       |       | 233,183 |   | 11,133 |   | — |   | — |   |
| Impairment of intangible assets and equity investments             |   | 1,120,464                     |       | — |   | — |   | — |   | — |   |
| Total costs and expenses                                           |   | 2,991,238                     |       | 747,360 |   | 95,993 |   | 27,359 |   | 12,919 |   |
| Loss from operations                                               |   | (2,582,669                    | )          | (345,564 | ) | (62,436 | ) | (24,796 | ) | (11,173 | ) |
| Interest income and other, net                                     |   | 7,571                         |       | 7,017 |   | 3,302 |   | 156 |   | 9 |   |
| Net loss before income taxes                                       |   | (2,575,098                    | )          | (338,547 | ) | (59,134 | ) | (24,640 | ) | (11,164 | ) |
| Provision for income taxes                                         |   | 9,001                         |       | 6,400 |   | 4,188 |   | — |   | — |   |
| Net loss                                                           |   | $                             | (2,584,099 | ) | $ | (344,947 | ) | $ | (63,322 | ) | $ | (24,640 | ) | $ | (11,164 | ) |
|                                                               |   |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and diluted net loss per share

                        |   | $                             | (10.30     | ) | $ | (2.05 | ) | $ | (0.74 | ) | $ | (1.35 | ) | $ | (0.70 | ) |
| Shares used in calculation of basic and diluted net loss per share |   | 250,838                       |       | 168,065 |   | 86,054 |   | 18,318 |   | 16,074 |   |

 

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

 

Certain previouslyreported amounts for the year ended December 31, 2000 have been reclassified toconform to the current presentation format.

 

**BALANCESHEET: (In thousands)**

** **
|                                              |   | **DECEMBER  31,** |    |
|---------------------------------------------------|--------|-------------------|---------|
|                                              |   | **2001**          |    | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
| Cash, cash equivalents and short term investments |   | $                 | 288,153 |   | $ | 341,440 |   | $ | 124,606 |   | $ | 15,138 |   | $ | 9,367 |   |
| Working capital                                   |   | 194,671           |    | 245,963 |   | 77,480 |   | 11,777 |   | 7,194 |   |
| Total assets                                      |   | 826,662           |    | 3,070,555 |   | 384,610 |   | 20,507 |   | 11,664 |   |
| Long term liabilities                             |   | 56,005            |    | 4,339 |   | 262 |   | 1,896 |   | 1,096 |   |
| Redeemable convertible preferred stock            |   | —            |    | — |   | — |   | 50,432 |   | 20,650 |   |
| Total stockholder’s equity (deficit)         |   | $                 | 623,815 |   | $ | 2,799,411 |   | $ | 316,721 |   | $ | (37,011 | ) | $ | (13,040 | ) |
|                                                   |        |                   |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

**OVERVIEW**

 

**Background**

 

Commerce One is aprovider of business-to-business electronic commerce solutions that link buyersand suppliers of goods and services into trading communities over the Internetand Intranets.  Recently our businessmodel has increasingly shifted focus toward enterprise software solutions(i.e., sales of solutions to companies for their internal use) in addition toour historical focus on trading communities.

 

We were founded asDistrivision in 1994, changed our name to Commerce One in 1997, andre-incorporated into Delaware in 1999. On July 11, 2001, we completed our reorganization into a holding companystructure.  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 financialresults reported in this Annual Report on Form 10-K include, as applicable, thefinancial results of Commerce One after the reorganization and the historicalfinancial results of Commerce One Operations prior to the reorganization.  The reorganization is described more fullyin Note 11 of Notes to Consolidated Financial Statements.

 

**Sourceof Revenues**

 

We generaterevenues from multiple sources. License fees are generated from licensing oursoftware solutions to end-user organizations, third-party product distributorsand resellers.  Services revenues aregenerated from professional consulting, software maintenance, applicationhosting, transaction and subscription fees, revenue-sharing arrangements withpartners, and other related services. Revenues from transactions, subscriptionfees and revenue-sharing arrangements have not been a significant portion oftotal services revenues to date.

 

We recentlydownsized our Global Services division, which provides professional services tothird parties, through reductions in force and divestitures. Although in recentquarters our services revenue has been a substantial portion of our overallrevenue, we expect a substantial decrease in service revenue over the next fewquarters as a result of the downsizing.

 

The portion of ourlicense and service revenues attributable to sales outside the United Statescontinues to be a substantial portion of our overall revenues, although it hasdecreased in the past year. In 2001, approximately 34% of our license andservice revenues were derived from sales outside United States, compared to 44%in 2000.

 

# **Critical Accounting Policies and Estimates**

 

The preparation ofconsolidated financial statements requires us to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses.  On an on-going basis, we evaluate estimates,including those related to revenue recognition, software product returns,warranty obligations, uncollectible accounts receivable and long-lived assets.  We base our estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about amount and timing of revenues and expenses, the carrying valuesof assets and the recorded amounts of liabilities that are not readily apparentfrom other sources.  Actual results maydiffer from these estimates and such estimates may change if the underlyingconditions or assumptions change.

 

We believe thatthese significant judgments affect the following critical accounting policiesused in the preparation of our consolidated financial statements.

 

#### ***Revenuerecognition***

 

Our revenuerecognition policies are consistent with Statement of Position 97-2 “SoftwareRevenue Recognition,” as modified by Statement of Position 98-9.

 

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Revenues from license agreements for our softwareproducts are recognized upon delivery of the software if there is persuasiveevidence of an arrangement, collection is probable and the fee is fixed ordeterminable. If an acceptance period is required, license revenues arerecognized upon the earlier of customer acceptance or the expiration of theacceptance period. When our software is licensed to third parties throughindirect sales channels, generally license fees are recognized as revenue,under the “sell-through method,” when the criteria described above have beenmet and the reseller has sold the software to an end user customer. Whilegenerally we do not license software under barter or concurrent arrangements,whenever software has been licensed under such arrangements, we have recognizedrevenue equal to the net monetary amounts 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. Should our actualproduct returns differ from estimates, revisions to the product returnallowance would be required.

 

We chargeestimated product warranty costs to cost of licenses at the time revenue isrecognized.  While we engage inextensive product quality programs and processes prior to the release ofsoftware, unforeseen product errors may exist in our products that may requireus to incur costs to correct or replace the affected products.  Should our actual costs differ from our estimates,revisions to the estimated warranty costs would be required.

 

Revenues fromprofessional services contracts are recognized on the percentage-of-completionmethod, with costs and estimated profits recorded as work is performed.  Provisions for estimated losses onuncompleted contracts are made in the period in which such losses aredetermined. Changes in contract performance and estimated profitability,including final contract settlements, may result in revisions to costs andrevenues, which are recognized in the period in which the revisions aredetermined.

 

If a customertransaction includes both software license and services elements, or the rightsto multiple software products, the total arrangement fee is allocated to eachof the elements using the residual method, under which revenue is allocated toundelivered elements based on vendor-specific objective evidence of the fairvalues of such undelivered elements and the residual amounts of revenue areallocated to the delivered elements.

 

Revenue isrecognized using contract accounting for arrangements involving significantcustomization or modifications of the software or where professional servicesare considered necessary to the functionality of the software. Revenue fromthese software and services arrangements is recognized using thepercentage-of-completion method.

 

Softwaremaintenance revenues and subscription fees are recognized ratably over the termof the related contract, typically one year.

 

Network servicefees (transaction fees, hosting fees and revenue sharing), have not beensignificant and are not expected to be material in the future.  Revenues related to transaction fees andrevenue sharing are recognized as earned based on customer transactions.  Revenues related to hosting fees arerecognized ratably over the term of the related contracts, typically one year.

 

Deferred revenueconsists of license fees for which revenue has been deferred and prepaid feesfor services, subscription fees, and maintenance and support agreements.

 

# ***Allowance for uncollectible accounts***

 

We maintain anallowance for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments.  If the financial condition of our customers were to deteriorate,resulting in an impairment of their ability to make such payments, increases inthe allowance may be required.  During2001, we increased our allowance for doubtful accounts due to an increase inmanagements’ estimate of uncollectible amounts due from customers.

# ** **

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# ***Long-lived assets***

 

In accordance withthe provisions of Statement of Financial Accounting Standards (“SFAS”) No. 121,“*Accounting for the impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed of,*” we periodicallyassess the carrying value of our long-lived assets including property, plantand equipment, goodwill, our Technology Agreement with Covisint and otheridentified intangible assets for impairment. An impairment assessment is performed whenever events or changes incircumstances indicate that the carrying value of an asset may not berecoverable.  Impairment indicatorsinclude, but are not limited to, our net book value as compared to marketcapitalization, significant negative industry and economic trends, asignificant decline in our stock price for a sustained period and significantunder performance relative to historical and projected future operatingresults.  In assessing therecoverability of the current carrying value of goodwill and other intangibleassets, we must make assumptions regarding the estimated future cash flows andother factors to determine the fair value of the respective assets.  If these estimates or their relatedassumptions change in the future, we may be required to record impairmentcharges for these assets not previously recorded.  In 2001, we recorded impairment charges related to certain prioracquisitions and a technology agreement we entered into with Covisint.

 

Effective as of January1, 2002, we adopted SFAS No. 142, “*Goodwilland Other Intangible Assets*,” and are now required to analyzegoodwill for impairment issues during the first six months of fiscal 2002, andthen on a periodic basis thereafter. Effective as of January 1, 2002, the Company adopted SFAS No. 144, *“Accounting for the Impairment or Disposal ofLong-Lived Assets.”* TheCompany will apply the provisions of SFAS No. 144 prospectively.

 

# **Stock Option Exchange Program**

 

On March 5, 2001,we announced a voluntary stock option exchange program for our 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 wereeffective on April 6, 2001.  The exchangeresulted in the voluntary cancellation by 2,307 employees of options topurchase 24,585,051 shares of common stock with exercise prices ranging from$1.00 to $104.44 per share in exchange for the same number of replacementoptions.  The replacement options weregranted on October 8, 2001 at an exercise price of $2.81 per share of commonstock, and have the same terms and conditions as each optionee’s cancelledoptions, including the historical vesting schedule and expiration date of thecancelled options.  Employees wereeligible to participate in the program; non-employee Board members, formeremployees and consultants were ineligible to participate.  We did not incur any compensation charge inconnection with the program.

 

# **Relationship with SAP**

 

***Commercial Relationship***

 

On September 18,2000, we entered into a strategic alliance agreement with SAP and SAPMarkets(collectively, “SAP”) to jointly develop, market and sell the MarketSet suiteof applications and the Enterprise Buyer procurement applications.  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.

 

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.

 

Effective January1, 2002, we amended our strategic alliance agreement with SAP to simplify itsroyalty payment provisions and to provide that SAP will have an unlimited rightto resell the jointly developed products, in addition to a right to resellcertain other Commerce One technology on an OEM basis, during the first threequarters of 2002 in return for an aggregate fee of approximately $20.7 million,comprised primarily of license fees, as well as associated maintenance andsupport.  These fees will be creditedagainst SAP’s prior pre-payments to Commerce One, which have been recorded byCommerce One as deferred revenue, and the license fees will be recognizedratably over the three-quarter period. The amendment provides that during thisthree-quarter period, Commerce One will pay SAP a royalty based upon a fixedpercentage of the total license fee for jointly developed products sold byCommerce One. The amendment further provides that the royalty payments for suchrights shall be renegotiated by the parties prior to September 30, 2002 and theagreement will default to the historical royalty structure in the event theparties fail to agree on a new payment schedule by that date.

 

The amendment further provides that each of theparties intend to phase out the jointly developed Enterprise Buyer procurementproducts and replace such products over time with its own successor procurementproducts.  As a result, we 

 

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anticipate thatcorresponding revenues received by Commerce One from SAP for the sale of suchproducts will decline in the future as the parties’ shift their focus to theirrespective procurement products.  Wefurther anticipate that revenues from the MarketSet product, primarily targetedat the e-marketplace sector, may decline over time as we shift our focus to ourother enterprise applications.

 

***Equity Relationship***

 

At the time we entered into the strategic allianceagreement with SAP in 2000, we sold 5,059,546 shares of our common stock to SAPfor an aggregate purchase price of approximately $250 million.

 

Subsequently, in2001, we sold an additional 47,484,767 shares of our common stock to SAP for anaggregate purchase price of approximately $225 million.

 

In connection withour issuance of common stock to SAP, we entered into various agreements thatrestrict SAP’s ability to acquire more than 23% of our outstanding common stockor otherwise attempt to acquire control of Commerce One, restrict its transferthe shares of common stock it purchased from us and, in very limited ways,affect SAP’s ability to votes its shares of our common stock.  We also granted SAP certain rights torequire us to register the resale of its shares of our common stock, certainpro rata rights to acquire additional shares of our common stock and the rightto have a designee appointed to our board of directors or to send an observerto our board of directors meetings.  Asof March 30, 2002, SAP has not exercised its right to have such a designeeappointed, but has exercised its right to send an observer to our board ofdirectors meetings.

 

As of December 31,2001, through its purchases from us and on the open market, SAP ownedapproximately 20%of our outstanding common stock.

 

***Revenues Resulting from**Royalty Arrangements with SAP***

 

SAP has beeninstrumental in assisting us with selling our jointly developed products,MarketSet and Enterprise Buyer, to its customer base.  We receive royalty payments from SAP whenever SAP sells thesejoint products to their customers.  Inthese instances, SAP typically licenses the product to its customer and thesale is documented by an agreement between SAP and the customer.  Commerce One and SAP have taken thisapproach for a variety of reasons, including administrative efficiency,particularly where the customer had an existing license relationship withSAP.  When Commerce One and SAP takethis approach, we record the royalty payment received from SAP in connection withthe sale to the customer as revenues received from SAP.

 

SAP’s royaltypayments to us constituted a substantial portion of our revenues in 2001 and2000.  In 2001 and 2000, SAP reportedroyalties to us of  approximately $79.1million and $44.6 million, respectively, of which license revenues wereapproximately $68.3 million and $44.1 million, respectively.  As described above under the terms of theamended strategic alliance agreement with SAP, effective January 1, 2002, SAPwill have an unlimited right to resell the jointly developed products, inaddition to a right to resell certain other Commerce One technology on an OEMbasis, during the first three quarters of 2002, in return for aggregate fees ofapproximately $20.7 million, comprised primarily of license fees, as well asassociated maintenance and support. These fees will be credited against SAP's prior prepayments to CommerceOne, which have been recorded by Commerce One as deferred revenue, and thelicense fees will be recognized ratably over the three-quarter period.

 

SAP has historicallymade non-refundable royalty prepayments to us, which we have recorded asdeferred revenue as payments are received. As SAP incurs the obligation to pay royalties to us, these royalties arecredited against this deferred revenue. Prepayments received from SAP and included in deferred revenue totaledapproximately $33.8 million and $35.9 million as of December 31, 2001 and 2000,respectively.

 

When we licenseone of the jointly developed products to our customers, we pay a royalty to SAPin connection with the sale.  We recordthe royalty payments due to SAP as a reduction of license or support revenue,as appropriate.  In 2001 and 2000, wemade royalty payments to SAP of approximately $16.9 million and $10.5 million,respectively.

 

We anticipate thatSAP’s contribution to our license revenues will decline over time as CommerceOne and SAP substitute the Enterprise Buyer procurement products with theparties’ respective successor procurement products and as we increase our focuson developing, marketing and selling our enterprise applications.

 

To a lesser extent, we have also generated revenuefrom our relationship with SAP by performing professional services as asubcontractor to SAP, primarily on software implementation engagements where wehave jointly sold MarketSet or Enterprise Buyer to an SAP customer. SAP hasalso completed professional services for us by acting as a 

 

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subcontractor, primarilyin relation to the jointly sold MarketSet or Enterprise Buyer products.  We also expect these revenues and expensesto decline over time.

 

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

 

The followingtable sets forth the results of operations for the Company expressed as apercentage of total revenues for the years ended December 31, 2001, 2000and 1999. The Company’s historical operating results are not necessarilyindicative of the results for any future period.

 

**COMMERCE ONE, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

** **
|                                                   |   | **YEARS  ENDED DECEMBER 31,** |   |
|--------------------------------------------------------|--------|-------------------------------|--------|
|                                                   |   | **2001**                      |   | **2000** |   | **1999** |   |
| Revenues:                                              |   |                          |   |   |   |   |   |
| License fees                                           |   | 32                            | %      | 56 | % | 73 | % |
| Services                                               |   | 68                            | %      | 44 | % | 27 | % |
| Total revenues                                         |   | 100                           | %      | 100 | % | 100 | % |
| Costs and expenses:                                    |   |                          |   |   |   |   |   |
| Cost of license fees                                   |   | 162                           | %      | 4 | % | 1 | % |
| Cost of services                                       |   | 56                            | %      | 35 | % | 47 | % |
| Sales and marketing                                    |   | 45                            | %      | 42 | % | 94 | % |
| Product development                                    |   | 29                            | %      | 25 | % | 61 | % |
| General and administrative                             |   | 29                            | %      | 11 | % | 15 | % |
| Purchased in-process research and development          |   | 1                             | %      | 1 | % | 28 | % |
| Stock compensation                                     |   | 24                            | %      | 10 | % | 7 | % |
| Restructuring costs and other                          |   | 31                            | %      | — |   | — |   |
| Amortization of goodwill and other intangible assets   |   | 81                            | %      | 58 | % | 33 | % |
| Impairment of intangible assets and equity investments |   | 274                           | %      | — |   | — |   |
| Total costs and expenses                               |   | 732                           | %      | 186 | % | 286 | % |
| Loss from operations                                   |   | (632                          | )%     | (86 | )% | (186 | )% |
| Interest income and other, net                         |   | 2                             | %      | 2 | % | 10 | % |
| Provision for income taxes                             |   | 2                             | %      | 2 | % | 13 | % |
| Net loss                                               |   | (632                          | )%     | (86 | )% | (189 | )% |

 

YEARS ENDED DECEMBER 31,2001, 2000 and 1999.

 

***Revenue***

 

Total revenues for2001 increased to approximately $408.6 million compared to$401.8 million for 2000 and $33.6 million for 1999.

 

License revenues for2001 decreased to approximately $130.9 million compared to$223.3 million for 2000.  Licenserevenues increased in 2000 when compared to license revenues of $24.6 millionin 1999.  In 2001, the decrease inlicense revenues primarily resulted from a significant slowdown in technologyorders spending coupled with a general economic downturn, a significantlylonger sales cycle and significantly fewer opportunities to licensee-marketplaces resulting in fewer and lower priced customer orders.

 

Service revenuesfor 2001 increased to $277.7 million compared to $178.5 million in2000 and $9.0 million in 1999. The percentage of our revenues attributableto professional services in 2001 increased significantly compared to 2000.  This resulted primarily from the acquisitionof AppNet, a professional services company, in September 2000, and due to alesser extent from an increase in both software maintenance and hostingservices revenues.  Following ouracquisition of AppNet, we consolidated its operations into our Global Servicesdivision.  Global Services provides 

 

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services in connectionwith the implementation of our software products.  The increase in the percentage of our revenues attributable toprofessional services resulted in a decline in our overall gross marginpercentage because services revenues carry a significantly lower gross marginthan license revenues.  If thispercentage increases in the future, our gross margins will decline further.

 

We recentlydownsized our Global Services division through reductions in force anddivestitures and, although in recent quarters our services revenues have been asubstantial portion of our overall revenues, we expect a substantial decreasein service revenues over the next few quarters as a result of the downsizing.

 

Royalty paymentsreceived from our strategic alliance with SAP constituted a substantial portionof our total revenues during the years 2001 and 2000.  Total revenues received from SAP were approximately $79.1 millionand $44.6 million for the years 2001 and 2000, respectively, of which licenserevenues were approximately $68.3 million and $44.1 million for the years 2001and 2000, respectively.

 

***Cost of Revenues***

 

Cost of revenuesconsisting of cost of services and cost of licenses were approximately$890.3 million, or 218% of total revenues, in 2001; $154.7 million,or 39% of total revenues, in 2000; and $16.1 million, or 48% of total revenues,in 1999.

 

Cost of licensefees was $662.3 million for 2001, compared to $14.9 million for 2000and $0.5 million for 1999. In 2001, cost of license fees was primarily composedof charges related to the impairment of the Technology Agreement with Covisintof approximately $592.3 million and the amortization of the cost of theTechnology Agreement with Covisint of approximately $55.2 million.  In 2000 cost of license fees includedcharges related to the amortization of the cost of Technology Agreement withCovisint of approximately $5.7 million. We currently estimate that the amortization of the Technology Agreementwith Covisint will be approximately $5.8 million per quarter over the remainingnine-year term of the agreement.  TheTechnology Agreement with Covisint is discussed more fully in Note 11 of Notesto Consolidated Financial Statements.

 

Cost of services,which primarily consists of consulting, software maintenance and trainingcosts, was $228.0 million for 2001, $139.7 million for 2000 and$15.6 million for 1999. The increase in cost of services resulted primarilyfrom an increase in personnel-related expenses due to the hiring and trainingof consulting, support and training personnel in the United States, Europe andAsia Pacific and personnel related expenses resulting from increased headcountdue to the acquisition of AppNet in September 2000.

 

As of December 31,2001 the overall number of employees working in our Global Services divisionwas 640, a significant decrease from 1,992 as of December 31, 2000.  Consistent with the decrease in the size ofour professional services organization, we expect a decline in professionalservices costs over the next few quarters.

 

***Sales and Marketing Expenses***

 

Sales andmarketing expenses consist primarily of employee salaries, benefits andcommissions, and the costs of seminars, promotional materials, trade shows andother sales and marketing programs. Sales and marketing expenses wereapproximately $183.4 million for 2001, $168.6 million for 2000 and$31.5 million for 1999. The increase in 2001 was primarily attributable toan overall increase in the average number of sales and marketing personnelduring the year as well as an increase in marketing related activity related toproduct user conferences held during the year. The number of employees engaged in sales and marketing was 395 atDecember 31, 2001 compared to 642 at December 31, 2000 and 146 atDecember 31, 1999. We expect that sales and marketing expenses willdecrease substantially over the next year primarily due to a decrease in thenumber of employees in this area as part of our corporate restructuring.

 

***Product-Development Expenses***

 

                Product-development expenses consist primarily ofpersonnel and related costs associated with our product-development efforts.Product-development expenses were approximately $118.2 million for 2001,$102.7 million for 2000 and $20.5 million for 1999.  The increase in product-development expenseswas primarily attributable to an overall increase in the average number ofproduct-development personnel employed during the year and increasedconsulting-related expenses to support development of our products.

 

 

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The overall numberof employees engaged in product-development increased slightly to 588 atDecember 31, 2001, compared to 561 at December 31, 2000 and 158 atDecember 31, 1999. We do not expect product-development expenses toincrease substantially over the next year.

 

***General and Administrative Expenses***

 

General andadministrative expenses consist primarily of employee salaries and relatedexpenses for executive, administrative and finance personnel. General andadministrative expenses were approximately $116.6 million for 2001,$43.2 million for 2000 and $5.1 million for 1999. The increase in2001 was primarily attributable to an overall increase in the average number ofgeneral and administrative personnel employed during the year, due to amongother things our acquisition of AppNet in September 2000, an increase invarious accounting and legal costs associated with operating our business andan increase in bad debt expense charged during the year for certainuncollectible customer accounts.  Thenumber of employees engaged in general and administrative functions was 273 atDecember 31, 2001, compared to 571 at December 31, 2000 and 90 atDecember 31, 1999. We expect general and administrative expenses willdecrease over the next year due primarily to an expected decrease in theaverage number of employees in this area as part of the corporaterestructuring.

 

***Purchased In-Process Research andDevelopment***

 

In May 2001, weacquired Exterprise, a provider of platform solutions that enable thedevelopment and deployment of e-commerce applications for corporations.  The acquisition was structured as a commonstock for common stock merger and was accounted for as a purchasetransaction.  The purchase considerationwas approximately $66.3 million, consisting of 7.2 million shares of commonstock with a fair value of approximately $60.7 million, assumption of option toacquire approximately 258,000 shares of common stock with a fair value of $2.5million and transaction costs of approximately $3.1 million.

 

We estimated thatapproximately $4.5 million of the $66.3 million purchase considerationrepresented purchased in-process research and development that had not yetreached technological feasibility and had no alternative future use.  Accordingly, this amount was charged tooperations in 2001.

 

The total purchasecost for the Exterprise acquisition has been allocated to the acquired assetsand assumed liabilities based upon estimates of their fair value.  The following table depicts the totalpurchase cost and the allocation thereof (in thousands):

 

| 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 |   |

 

Goodwill arisingfrom the acquisition was amortized on a straight-line basis over five yearsuntil December 31, 2001.  EffectiveJanuary 1, 2002 goodwill will be assessed for impairment under SFAS No. 142,“Goodwill and Other Intangible Assets.”

 

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Purchasedin-process research consisted of: (1) a Sourcing application and (2) the nextgeneration of proprietary technology related to Agent-based Process Engineplatforms (“APEx”).  The Sourcingapplication will incorporate functionality such as an electronic request for aquote, contract management, demand aggregation, supplier relationshipmanagement and management reporting, whereas the next generation APEx platformis being updated to increase processing speed and reliability.

 

The value of theacquired in-process technology was computed using a discounted cash flowanalysis on the anticipated income stream of the related purchased in-processresearch and development revenues.  Thediscounted cash flow analysis was based on management’s forecast of futurerevenues, cost of revenues, and operating expenses related to the technologiespurchased from Exterprise.  Thecalculation of value was then adjusted to reflect only the value creationefforts of Exterprise prior to the close of the acquisition.  At the time of acquisition, the MarketplaceSourcing and APEx platform products were estimated at being 60% and 25%complete, respectively.  The technologywas made available in our products during the first quarter of 2002 and bothare expected to have a technological life of approximately four years.  The resultant value of in-process technologywas further reduced by the estimated value of core technology, which wasincluded in capitalized developed technology.

 

The discount ratesselected for estimating future discounted cash flows for the core andin-process technology was 25% and 20%, respectively.  In the selection of the appropriate discount rates, considerationwas given to our estimated weighted average return on working capital and ourestimated weighted average return on assets. These discount rates are consistent with both our weighted average costof capital and the implied transaction discount rate.  The discount rate reflects both the risk factors associated witha company projecting high growth rates, improved profitability, and increasedrates of return associated with intangible assets.

 

***Stock Compensation***

 

Stock compensationexpenses result from the grant of stock options, grant of restricted commonstock and sales of stock to employees at exercise or sales prices below thedeemed fair market value of our common stock. Stock compensation expense wasapproximately $98.3 million in 2001, $39.8 million in 2000 and $2.3 million in1999.  The increase in stockcompensation expense in 2001 was primarily attributable to the vesting ofcertain options assumed in the acquisitions of AppNet and Exterprise, and thegrant of restricted common stock to employees. The deferred stock compensation is being amortized over the three tofour year vesting period of the related options using a graded vestingmethod.  We anticipate incurringdeferred stock compensation expense relating to these options of approximately$43 million in 2002.  The vesting periodof the options range from three to four years. The expense related to the restricted stock grant made to our employeesin May 2001 is being amortized on straight-line basis over a two-year vestingperiod.

 

***Restructuring Costs and Other***

 

In February 2001,management approved and began to implement a corporate restructuring plan (the“Plan”) aimed at streamlining our cost structure to better position us forgrowth and improved operating results. Included in the Plan were costs related to severance pay, outplacementservices, benefits continuation, office closure costs and the termination ofcertain office leases.  The Planincluded staff reductions totaling approximately 270 employees, which were completedwithin the first and second quarters of 2001. We incurred restructuring charges of approximately $14.1 million inconnection with the Plan in the first quarter of 2001.

 

In June 2001,management approved and began to implement a further corporate restructuringplan (the “Second Plan”) aimed at optimizing and streamlining the Company sothat we could effectively focus on our core e-business strategy.  Under the Second Plan, we estimated and chargedrestructuring costs of approximately $62.0 million in the second quarter of2001.  The Second Plan included thecosts associated with the termination of approximately 600 employees includingseverance pay, outplacement services and benefit continuation, estimatedcustomer claims resulting from the divestiture of certain operations within ourGlobal Services division, and also the termination of certain office leases,the consolidation or closure of certain facilities and the write-down of thecarrying value of computers and equipment used by terminated employees.

 

In October 2001,management approved and began to implement an additional restructuring program(the “Third Plan”), which included further staff reductions totalingapproximately 1,200 employees, to be completed within the fourth quarter of2001 and the first quarter of 2002.  Thereductions have been achieved through a reduction in force, attrition 

 

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and the divestiture of anumber of professional service operations within our Global Services divisionthat are not directly related to our core product offering.

 

Under the ThirdPlan, we chargeda further $54.8 million to restructuring expenses in relation to the costsassociated with terminating 1,200 employees, costs associated with thetermination of office leases, and the consolidation and closure of certainfacilities and subsidiaries.  Also inthe fourth quarter of 2001, we determined that amounts previously charged inthe second quarter of 2001 of approximately $4.3 million that related to estimatedcustomer claims resulting from the divestiture of certain professional servicesoperations within our Global Services division were no longer required, andthese amounts were credited to other costs in the fourth quarter of 2001.  The net charge to the restructure costs andother was therefore approximately $50.5 in the fourth quarter of 2001.

 

As part of theThird Plan, we completed the divestiture and liquidation of certainprofessional services operations within our Global Services division.  These service divisions were initially acquiredthrough the acquisition of AppNet Inc., in September 2000, and were eitherdivested through management buy-outs during the fourth quarter of 2001, or thefirst quarter of 2002, or ceased business operations.  The divestitures completed in connection with the Third Plan arediscussed in more detail below.  Werecognized total revenues of approximately $98.7 million in 2001 from ourprofessional services operations within our Global Services division, whichwere disposed of in the fourth quarter of 2001 and the first quarter of 2002under the Third Plan.

 

The following table summarizes the activityrelated to the restructuring liability for the year ended December 31, 2001,(in thousands):

 
|                                                     |   | **Amounts  charged to restructuring costs and  other** |    | **Amounts  reversed** |   | **Net  amounts charged to restructuring costs and  other** |   | **Amounts  paid or  written off** |    | **Accrued  restructuring  costs at  December 31,  2001** |   |
|----------------------------------------------------------|--------|--------------------------------------------------------|---------|-----------------------|--------|------------------------------------------------------------|--------|-----------------------------------|---------|----------------------------------------------------------|--------|
| Lease  cancellations and commitments                     |   | $                                                      | 68,860  |                  | $      | —                                                     |   | $                                 | 68,860  |                                                     | $      | (17,971 | ) | $ | 50,889 |   |
| Termination  payments to employees and related costs     |   | 30,790                                                 |    | —                |   | 30,790                                                     |   | (26,275                           | )       | 4,515                                                    |   |
| Write-off on  disposal of assets and related costs       |   | 30,418                                                 |    | (4,321                | )      | 26,097                                                     |   | (25,657                           | )       | 440                                                      |   |
| Costs associated  with divestiture of certain businesses |   | 858                                                    |    | —                |   | 858                                                        |   | (858                              | )       | —                                                   |   |
| Total                                                    |   | $                                                      | 130,926 |                  | $      | (4,321                                                     | )      | $                                 | 126,605 |                                                     | $      | (70,761 | ) | $ | 55,844 |   |

 

### Lease cancellations and commitments

 

In the first, second and fourth quarters of 2001 we incurred totalrestructuring charges of approximately $9.4 million, $33.6 million and $25.9million, respectively, for facilities consolidated or closed in the UnitedStates, Europe and Asia.  These officeswere primarily responsible for the sale of our software products, professionalservices or 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. Certain facilities continued in use during the completion of the restructuringfor which we continued to record monthly rent expense until the facilities wereavailable for 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.  We estimate that cash payments for leasecancellations and commitments, net of any sublease income, will beapproximately $13.9 million in 2002 and approximately $37 million fornon-current lease obligation payments which are payable through to July 2009.

 

### Termination payments to employees and related costs

 

In the first, second and fourth quarters of 2001, we incurredrestructuring charges of approximately $4.7 million, $15.9 million and $10.2million, respectively, for the termination of approximately 2,070 employees tocover costs such as separation pay, outplacement services and benefitcontinuation.  The separation paymentsand termination benefits were accrued and charged to restructuring costs in theperiod that both the benefit amounts were determined and such amounts

 

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werecommunicated to the affected employees. The employee reductions came from all areas of the Company and, as ofDecember 31, 2001, all of the employees affected under the Plan, Second Planand Third Plan had been notified and the majority of these terminations hadbeen completed.  We expect accruedrestructuring costs of approximately $4.5 million, as at December 31, 2001,will be fully paid during 2002.

 

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

 

In the second andfourth quarters of 2001, we incurred restructuring charges of approximately$12.5 million and $17.9 million, respectively, related to the carrying valuesof equipment 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 our Global Services division. Included within the assets disposed of and charged to restructuringcosts were personal computers and equipment used by employees terminated,office equipment and leaseholds in connection with closure or consolidation offacilities and subsidiaries in the United States, Asia and Europe.  All identified assets had been taken out ofservice and were held for disposal at the end of the quarter for which theywere identified for inclusion in the Second and Third Plans.

 

Included withinthe second quarter of 2001 charge of $12.5 million were amounts associated withthe anticipated liabilities for estimated customer claims resulting from thedivestiture of certain operations within our Global Services division whichwere no longer core to our business. The amounts accrued were based on our estimation of the likely costsassociated with the exit of certain service contracts.  In the fourth quarter of 2001, wereevaluated this liability based on the actual customer claims received,amounts paid and the successful execution of certain exit activities.  We reduced the liability by $4.3 millionwith a corresponding credit to the restructuring charge in the fourth quarterof 2001.  We expect accrued restructuring costs of approximately $0.4 million, asat December 31, 2001, will be fully paid in 2002.

 

### Costs associated with divestiture of certainbusinesses

 

In October 2001,we entered into and executed an asset sale to Beaconfire Consulting Inc., acompany composed of former Commerce One employees.  In consideration for the assets sold, we received a notereceivable with a face value of approximately $0.4 million due on September 30,2006, that bears an annual interest rate of 8% receivable on a quarterlybasis.  Subject to certain criteria, wealso have the rights to a 4% and 4.5% annual share of future revenues ofBeaconfire Consulting for the next 2 and succeeding 3 years, respectively,following the closing of this transaction.

 

Also in October2001, we entered into and executed a stock transfer and asset sale to Edgar, Dunn& Company, Inc., a company composed of former Commerce One employees.  In connection with this agreement, wereceived a 10% equity interest in Edgar, Dunn & Company, Inc., and twonotes receivable with face values totaling $1.3 million that are due by September30, 2004.  The notes bear an annualinterest rate of 7.5% receivable primarily on a quarterly basis.  Subject to certain criteria, we also havethe rights to an annual revenue share of 6% of the revenues of Edgar, Dunn& Company, Inc., for the four years following the closing of thistransaction.

 

On January 9,2002, we entered into and executed an asset sale agreement with ConnectiveCommerce Company LLC., a Massachusetts limited liability company, composed offormer Commerce One employees.  In connectionwith this agreement, the Company 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 February 21,2002, we entered into and executed a stock purchase agreement with Commerce OneE–Government Solutions, Inc., a Delaware corporation and a wholly–ownedsubsidiary of the Company, and eGov Holdings, Inc., a Delaware corporationcomposed of former Company employees. In consideration for the sale of 100% of the outstanding common stock ofCommerce One E-Government Solutions, Inc to eGov Holdings, Inc., we received cashconsideration of approximately $8.4 million.

 

As a result of thebusiness divestitures completed in the fourth quarter of 2001, we recorded aloss on divestiture of $0.8 million that was charged to restructuring costs andother in the fourth quarter of 2001.  Weestimate that as a result of the business divestitures completed in the firstquarter of 2002 we will record a gain of approximately $2.3 million based onthe cash proceeds received from the sale of E-Government Solutions, Inc.  We recognized total revenues ofapproximately $98.7 million in 2001 from our professional services operationswithin our Global Services division which were disposed of in the fourthquarter of 2001 and the first quarter of 2002 under the Third Plan.

 

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## ***Amortization of Goodwill and Other Intangible Assets***

 

Amortization ofgoodwill and other intangible assets totaled approximately $332.8 million in2001, $233.2 million in 2000 and $11.1 million in 1999.  The amortization of goodwill and otherintangible assets resulted from the acquisitions of Veo Systems and CommerceBidduring 1999, Mergent and AppNet during 2000, and Exterprise in May 2001.

 

## ***Impairment of Intangible Assets and Investments***

 

We periodicallyassess the impairment of long-lived assets including goodwill, the TechnologyAgreement with Covisint and other identified intangible assets.  An impairment assessment is performedwhenever events or changes in circumstances indicate that the carrying valuemay not be recoverable.  During thesecond quarter of 2001, we identified indicators of possible impairment of ourlong-lived assets.  The impairmentindicators included, but were not limited to, our net book value as compared tomarket capitalization, significant negative industry and economic trends, asignificant decline in our stock price for a sustained period and significantunderperformance relative to historical or projected future operating results.

 

In accordance withthe provisions of SFAS No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed of,” we performed, with theassistance of independent valuation experts, impairment tests to determinewhether any impairment existed.  Wedetermined that the sum of the expected undiscounted cash flows attributable tocertain of our intangible assets was less than the carrying value of thoseintangible assets.  Accordingly, wecalculated 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 then calculated bydeducting the present value of the expected cash flows from the carrying valueof the intangible assets.  Based on theresults of these tests, we 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 assessmentresulted in a write-down during 2001 of $1,098.9 million to record the amountby which the carrying amounts of the goodwill and other intangible assetsrelated to AppNet and CommerceBid exceeded their respective fair values.  Further, an impairment write-down of $592.3million was recorded in relation to the Technology Agreement with Covisint andthis amount was charged to cost of license fees in 2001.

 

We again performedan impairment analysis based on undiscounted cash flows to determine whetherany further impairment existed with regard to the carrying value of ourlong-lived assets in the third and fourth quarters of 2001.  We concluded that based on the results ofthese tests the carrying values of goodwill and other identified intangibleassets were still recoverable and therefore had not suffered any furtherimpairment.  We may record furtherimpairment charges in the future if impairment indicators exist and animpairment assessment indicates that the carrying value of our intangibleassets and investments are no longer recoverable.

 

We have madeseveral strategic investments in privately held companies and two publiclytraded companies. We own less than a 5% interest in each of these companies anddo not have a significant influence over these companies. Investments inpublicly traded companies are carried at fair value, based on quoted marketprices, with unrealized gains and losses recorded in equity. Investments inprivate companies are recorded at cost. These investments are periodicallyevaluated for declines in value which are considered other than temporary.During the year 2001 we recorded investment losses of approximately$24.5 million of which $21.6 million related to the investment inCovisint, $2.4 million related to investments in other privately held companiesand $0.5 million related to investments in publicly traded companies.  As at December 31, 2001 we held investmentsrecorded at approximately $9.5 million related to our investment in Covisintand other strategic investments.

 

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## ***Interest Income and Other, net***

###  

### Interestincome and other, net, increased by approximately $0.6 million to $7.6 millionin 2001 and increased by approximately $3.7 million to $7.0 million in2000.  The increase in interest, net,for 2001 was primarily attributable to interest income earned on higher averagecash and investment balances in 2001 compared to 2000, despite the generaldecline in average interest rates during 2001. The increase in 2000 was due mainly to an increase in interest incomedue to higher average cash and investment balances during 2000 compared to1999.

 

***Provision for Income Taxes***

 

The income taxprovision for 2001, 2000 and 1999 is the result of withholding and income taxesgenerated in certain foreign jurisdictions.

 

Realization of ournet deferred tax assets is dependent upon the generation of sufficient taxableincome in future years in appropriate tax jurisdictions to obtain benefit fromthe reversal of temporary differences and from net loss operating carryforwards. Due to the uncertainty of the amount and timing of future taxableincome, we have provided a full valuation allowance against the net deferredtax assets.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We had cash andcash equivalents and short-term investments of approximately $288.2 million atDecember 31, 2001 compared to approximately $341.4 million as at December 31,2000.  The amounts as of December 31,2001, included approximately $14.3 million which collateralized certain of ourobligations related to operating lease agreements for office facilities,potential workers compensation claims and guarantee of a personal home mortgageof an executive officer.

 

We havehistorically satisfied our cash requirements primarily through the issuances ofequity securities. In September 2000 and June 2001, we issued common stock toSAP for aggregate proceeds of approximately $250 million and $225 million,respectively.

 

On March 15, 2001we entered into an alliance agreement with Microsoft in connection with themarketing, promotion and optimization of Commerce One products using Microsofttechnology. To support the optimization, Microsoft made a two-year, interestfree loan of $19.0 million to us.  Thisloan was originally due on March 15, 2003 but would become immediately payablein the event we breached certain provisions of the loan agreement or allianceagreement.

 

On March 22, 2002,Commerce One and Microsoft terminated the alliance agreement and revised theterms of the loan agreement.  Under therevised terms, the $19.0 million loan is now due on April 1, 2003 and bears interestat 7% per annum, payable quarterly.  Theloan will become immediately due, however, if our cash, cash equivalents andshort-term investment balance falls below $125.0 million at any point duringthe term of the revised loan.  We havealso agreed to secure the loan with a $19.0 million cash collateral account.

 

Net cash used inoperating activities totaled approximately $267.0 million for 2001, as comparedto net cash used in operating activities of approximately $0.1 million for 2000and net cash provided by operating activities of approximately$3.8 million for 1999.  Cash usedin operating activities for 2001 resulted primarily from the net loss in 2001and a decrease in deferred revenues and accrued compensation and related expenseswhich was partly offset by the amortization of goodwill and other intangibleassets, amortization of deferred stock compensation and non-cash charges due tothe impairment of the Technology Agreement with Covisint, the impairment of theequity investment held in Covisint, and the goodwill associated with theacquisitions of CommerceBid and AppNet.

 

Net cash used ininvesting activities totaled approximately $10.9 million for 2001, as comparedto $137.1 million and $88.5 million in 2000 and 1999, respectively.  Cash used in investing activities relatedprimarily to the purchase of short-term investments, the purchase and sale ofproperty and equipment and additional costs of the Technology Agreement withCovisint.  This was partially offset bythe net proceeds from the maturity of short-term investments, disposal ofproperty and equipment and investment gains. Our net capital expenditures were approximately $39.5  million for 2001, $79.2 million for 2000 and$11.5 million for 1999. Our capital expenditures have historically consisted of

 

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purchases and capitalizedleases of computer hardware and software, office furniture and equipment andleasehold improvements

 

Net cash providedby financing activities totaled approximately $255.1 million for 2001, comparedto $300.9 million in 2000 and $121.4 million in 1999.  The cash provided in 2001 resulted primarily from the issuance ofcommon stock to SAP, as well as proceeds from the issuance of common stock uponthe exercise of employee stock options and cash proceeds drawn from an interestfree loan in connection with the alliance agreement entered into with MicrosoftCorporation during the first quarter of 2001. The cash from financing in 2000 resulted primarily from the issuance ofcommon stock to SAP and the issuance of common stock upon the exercise ofemployee stock options. The cash provided in 1999 resulted primarily from aninitial public offering and concurrent private placement of our common stockand the exercise of employee stock options.

 

The followingsummarizes our contractual obligations as at December 31, 2001, and the effectssuch obligations are expected to have on our liquidity and cash flows incertain future periods after December 31, 2001 (in thousands):

 
|                                        |   | **Total** |    | **Less than  one year** |   | **1 to 3  years** |   | **4 years  and   thereafter** |   |
|---------------------------------------------|--------|-----------|---------|-------------------------|--------|-------------------|--------|-------------------------------|--------|
| Non-cancelable  operating lease obligations |   | $         | 154,645 |                    | $      | 30,687            |   | $                             | 76,787 |   | $ | 47,171 |   |
| Microsoft loan                              |   | 19,000    |    | —                  |   | 19,000            |   | —                        |   |
| Total                                       |   | $         | 173,645 |                    | $      | 30,687            |   | $                             | 95,787 |   | $ | 47,171 |   |

 

Non-cancelableoperating leases obligations include $50.9 million which were accrued asrestructuring costs as of December 31, 2001 and are payable through to July2009.

 

We have nosignificant commitments or obligations other than these described in theanalysis above.  We do not have anyrelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or special purpose entities,which would have been established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes.  Further, we have not guaranteed anyobligations of unconsolidated entities nor have we any commitment or intent toprovide additional funding to any such entity.

 

We believe thatour available cash resources will be sufficient to finance our operating lossesand working capital expenditure requirements for at least the next twelvemonths. Our future liquidity and capital requirements will depend upon numerousfactors. The rate of expansion of our operations in response to potentialacquisition opportunities, growth opportunities and competitive pressures willaffect our capital requirements as will funding of continued net losses andsubstantial negative cash flows.  If wedo not decrease or reserve our negative cash flows we will be forced to seekadditional financing in the future.

 

If we requireadditional capital resources, we may seek to sell additional equity or debtsecurities or secure a bank line of credit. We currently have no committed bankcredit facility available.  The sale ofadditional equity or convertible debt securities could result in additionaldilution to our stockholders. We cannot assure you that any financingarrangements will be available in amounts or on terms acceptable to us, if atall.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

In June 2001, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 141 “BusinessCombinations” effective for fiscal years beginning after December 15,2001.  Under SFAS No. 141, pooling ofinterest is no longer an acceptable method of accounting for businesscombinations.  SFAS No. 141 alsodevelops further criteria for recognizing intangible assets separate fromgoodwill in a purchase transaction.  Wedo not expect the adoption of this statement to have a material impact on ourconsolidated financial statement.

 

In July 2001 theFASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.”  Under the guidance of SFAS No. 142, goodwilland indefinite lived intangible assets will no longer be amortized but will beperiodically 

 

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assessed for anyindication of impairment.  Separableintangible assets that are not deemed to have an indefinite life will continueto be amortized over their useful lives. The amortization provisions of SFAS No. 142 apply to goodwill andintangible assets acquired after June 30, 2001.  With respect to goodwill and intangible assets acquired prior toJuly 1, 2001, the provisions of SFAS No. 142 will be effective at January 1,2002.  During the transition period forgoodwill and intangible assets acquired on or before June 30, 2001 and thoseacquired after that date, pre-existing goodwill and intangibles are to beamortized during this transition period until adoption of SFAS No. 142, whereasany new goodwill and indefinite lived intangible assets acquired on or afterJuly 1, 2001 will be reviewed for future impairment indicators.  We expect that the adoption of SFAS No. 142in 2002 will result in a reduced operating charge for the amortization ofgoodwill and intangibles.  We have notyet determined whether we will incur additional impairment charges as a resultof the transition provisions of SFAS No. 142.

 

In August 2001,the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-lived Assets.”  SFAS No. 144establishes a single accounting model, based on the framework established inSFAS No. 121, for long-lived assets to be disposed of by sale.  Consistent with SFAS No. 121, SFAS No. 144continues to require a step approach for recognizing and measuring theimpairment of long-lived assets held for use. The statement is effective for financial statements issued for fiscalyears beginning after December 15, 2001. We have adopted the provisions of SFAS No. 144 effective from January 1,2002 and these provisions will be applied prospectively.  We do not expect the adoption of SFAS No.144will have a material effect on our consolidated financial position or results ofoperations.

 

**ITEM 7A.****               QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS**

 

The followingdiscusses our exposure to market risk related to changes in interest rates,foreign currency exchange rates and equity prices. This discussion containsforward-looking statements that are subject to risks and uncertainties. Actualresults could vary materially as a result of a number of factors includingthose set forth in “Risk Factors” beginning on page 9.

 

***InterestRate Risk***

 

As of December 31, 2001, we had cash, highly liquid investments andshort-term investments of approximately $288.2 million. These investments maybe subject to interest rate risk and will decrease in value if market interestrates decrease. A hypothetical increase or decrease in market interest rates by10 percent from the market interest rates at December 31, 2001 would causethe fair market value of our cash and cash equivalents to change by animmaterial amount. Declines in interest rates over time will, however, reduceour interest income.

 

***Foreign Currency Exchange Rate Risk***

 

Substantially allof 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.

 

***Equity Price Risk***

 

From time to time,we make investments in private companies, particularly private companies thatare strategic partners or customers of ours. As of December 31, 2001, ourinvestment in private companies had a carrying value of approximately $9.3million. If these companies do not complete initial public offerings or are notacquired by publicly traded companies, we may not be able to sell theseinvestments. In addition, even if we are able to sell these investments wecannot assure that we will be able to sell them at a gain or even recoup ourinvestment. The recent general decline in the NASDAQ Stock Market and themarket prices of publicly traded technology companies, as well as any furtherdeclines in the future, will adversely affect our ability to realize gains or areturn of our capital on many of these investments.

 

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**ITEM 8.        FINANCIALSTATEMENTS**

** **
|                                                                                                                                                                  | **Page** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| Report  of Ernst and Young LLP, Independent Auditors                                                                                                             | 35       |
| Consolidated Financial  Statements;                                                                                                                                   |     |
| Consolidated Balance Sheets  as of December 31, 2001 and 2000                                                                                                    | 36       |
| Consolidated  Statements of Operations for the Years Ended December 31, 2001, 2000 and  1999                                                                     | 37       |
| Consolidated  Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity  (Deficit) for the Years Ended December 31, 2001, 2000 and 1999 | 38       |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and  1999                                                                     | 40       |
|                                                                                                                                                                  |     |
| Notes to  Consolidated Financial Statements                                                                                                                           | 41       |

 

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**REPORT OF 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, 2001 and 2000, and the relatedconsolidated statements of operations, stockholders’ equity (deficit) and cashflows for each of the three years in the period ended December 31, 2001.  Our audits also included the financialstatement schedule listed in the Index at Item 14.  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, 2001 and 2000, and the consolidated resultsof its operations and its cash flows for each of the three years in the periodended December 31, 2001, 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 forththerein.  

 

/s/  Ernst & Young LLP

 

Walnut Creek, California

January 18, 2002,

Except for Notes 7, 8 and 10,

as to which the date is 

March 29, 2002

 

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**COMMERCE ONE, INC.**

** **

**CONSOLIDATED BALANCE SHEETS**

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

** **
|                                                                                                                                                                                                                                                             |   | **DECEMBER  31,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|---------|
|                                                                                                                                                                                                                                                             |   | **2001**          |    | **2000** |   |
| ASSETS                                                                                                                                                                                                                                                           |   |
| Current assets:                                                                                                                                                                                                                                                  |   |              |    |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                        |   | $                 | 192,547 |   | $ | 215,189 |   |
| Short term investments                                                                                                                                                                                                                                           |   | 95,606            |    | 126,251 |   |
| Accounts receivable, net (1)                                                                                                                                                                                                                                     |   | 43,598            |    | 154,858 |   |
| Prepaid expenses and other current assets                                                                                                                                                                                                                        |   | 9,762             |    | 16,470 |   |
| Total current assets                                                                                                                                                                                                                                             |   | 341,513           |    | 512,768 |   |
| Property and equipment, net                                                                                                                                                                                                                                      |   | 64,908            |    | 95,143 |   |
| Goodwill and other intangible assets, net                                                                                                                                                                                                                        |   | 409,534           |    | 2,416,230 |   |
| Investments and other assets                                                                                                                                                                                                                                     |   | 10,707            |    | 46,414 |   |
| Total assets                                                                                                                                                                                                                                                     |   | $                 | 826,662 |   | $ | 3,070,555 |   |
|                                                                                                                                                                                                                                                             |   |              |    |   |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                       |   |
| Current liabilities:                                                                                                                                                                                                                                             |   |              |    |   |   |
| Accounts payable (2)                                                                                                                                                                                                                                             |   | $                 | 23,773  |   | $ | 26,408 |   |
| Accrued compensation and related expenses                                                                                                                                                                                                                        |   | 17,960            |    | 44,825 |   |
| Current portion of notes payable                                                                                                                                                                                                                                 |   | —            |    | 1,856 |   |
| Deferred revenue (3)                                                                                                                                                                                                                                             |   | 55,088            |    | 112,308 |   |
| Other current liabilities (4)                                                                                                                                                                                                                                    |   | 50,021            |    | 81,408 |   |
| Total current liabilities                                                                                                                                                                                                                                        |   | 146,842           |    | 266,805 |   |
|                                                                                                                                                                                                                                                             |   |              |    |   |   |
| Notes payable                                                                                                                                                                                                                                                    |   | 19,000            |    | 4,339 |   |
| Non-current accrued restructuring charges                                                                                                                                                                                                                        |   | 37,005            |    | — |   |
|                                                                                                                                                                                                                                                             |   |              |    |   |   |
| Commitment and Contingencies                                                                                                                                                                                                                                     |   |              |    |   |   |
| Stockholders’ equity:                                                                                                                                                                                                                                       |   |              |    |   |   |
| Common stock, par value $0.0001, 950,000,000 shares authorized;  287,520,210 and 194,904,108 issued and outstanding at December 31, 2001 and  2000, respectively excluding 28,800,000 shares to be issued under contractual  obligations as of December 31, 2000 |   | 3,723,419         |    | 3,401,487 |   |
| Deferred stock compensation                                                                                                                                                                                                                                      |   | (66,772           | )       | (153,630 | ) |
| Note receivable from stockholder                                                                                                                                                                                                                                 |   | (129              | )       | (129 | ) |
| Accumulated other comprehensive loss                                                                                                                                                                                                                             |   | (1,101            | )       | (814 | ) |
| Accumulated deficit                                                                                                                                                                                                                                              |   | (3,031,602        | )       | (447,503 | ) |
| Total stockholders’ equity                                                                                                                                                                                                                                  |   | 623,815           |    | 2,799,411 |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                  |   | $                 | 826,662 |   | $ | 3,070,555 |   |
|                                                                                                                                                                                                                                                                  |   |              |    |   |   |
| Amounts included above from related parties (Note 10):                                                                                                                                                                                                           |   |              |    |   |   |
| (1) Accounts receivable, net                                                                                                                                                                                                                                     |   | $                 | 1,669   |   | $ | 2,485 |   |
| (2) Accounts payable                                                                                                                                                                                                                                             |   | $                 | —  |   | $ | 2 |   |
| (3) Deferred revenue                                                                                                                                                                                                                                             |   | $                 | 35,458  |   | $ | 42,024 |   |
| (4) Other current liabilities                                                                                                                                                                                                                                    |   | $                 | 4,114   |   | $ | 1,697 |   |

 

See accompanyingnotes.

 

36

----

 

**COMMERCEONE, INC.**

** **

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(In thousands, except per share data)**

 
|                                                                                                                                          |   | **YEARS  ENDED DECEMBER 31,** |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                                                                                          |   | **2001**                      |       | **2000** |   | **1999** |   |
| Revenues:                                                                                                                                     |   |                          |       |
| License fees                                                                                                                                  |   | $                             | 130,917    |   | $ | 223,277 |   | $ | 24,571 |   |
| Services                                                                                                                                      |   | 277,652                       |       | 178,519 |   | 8,986 |   |
| Total revenues (1)                                                                                                                            |   | 408,569                       |       | 401,796 |   | 33,557 |   |
| Costs and expenses:                                                                                                                           |   |                          |       |   |   |   |   |
| Cost of license fees (2)                                                                                                                      |   | 662,315                       |       | 14,910 |   | 484 |   |
| Cost of services                                                                                                                              |   | 228,023                       |       | 139,746 |   | 15,586 |   |
| Sales and marketing                                                                                                                           |   | 183,412                       |       | 168,647 |   | 31,546 |   |
| Product development                                                                                                                           |   | 118,159                       |       | 102,676 |   | 20,496 |   |
| General and administrative                                                                                                                    |   | 116,621                       |       | 43,236 |   | 5,050 |   |
| Purchased in-process research and development                                                                                                 |   | 4,548                         |       | 5,142 |   | 9,374 |   |
| Stock compensation                                                                                                                            |   | 98,302                        |       | 39,820 |   | 2,324 |   |
| Restructuring costs and other                                                                                                                 |   | 126,605                       |       | — |   | — |   |
| Amortization of goodwill and other intangible assets                                                                                          |   | 332,789                       |       | 233,183 |   | 11,133 |   |
| Impairment of intangible assets and investments                                                                                               |   | 1,120,464                     |       | — |   | — |   |
| Total costs and expenses                                                                                                                      |   | 2,991,238                     |       | 747,360 |   | 95,993 |   |
| Loss from operations                                                                                                                          |   | (2,582,669                    | )          | (345,564 | ) | (62,436 | ) |
| Interest income and other, net                                                                                                                |   | 7,571                         |       | 7,017 |   | 3,302 |   |
| Net loss before income taxes                                                                                                                  |   | (2,575,098                    | )          | (338,547 | ) | (59,134 | ) |
| Provision for income taxes                                                                                                                    |   | 9,001                         |       | 6,400 |   | 4,188 |   |
| Net loss                                                                                                                                      |   | $                             | (2,584,099 | ) | $ | (344,947 | ) | $ | (63,322 | ) |
| Basic and diluted net loss per share                                                                                                          |   | $                             | (10.30     | ) | $ | (2.05 | ) | $ | (0.74 | ) |
| Shares used in calculation of net loss per share                                                                                              |   | 250,838                       |       | 168,065 |   | 86,054 |   |
|                                                                                                                                               |   |                          |       |   |   |   |   |
| (1)     Revenue from  related parties (Note 10)                                                                           |   | $                             | 97,741     |   | $ | 52,512 |   | $ | 2,078 |   |
| (2)      Includes charges for the impairment  and  amortization of the Technology  Agreement with Covisint (Note 11) |   | $                             | 647,500    |   | $ | 5,700 |   | $ | — |   |

 

Seeaccompanying notes.

 

37

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**COMMERCE ONE, INC.**

** **

**CONSOLIDATED STATEMENTS OF REDEEMABLECONVERTIBLE PREFERRED**

**STOCK AND STOCKHOLDERS’ EQUITY(DEFICIT)**

**(In thousands, except share data)**
|                                                                                               |   | **Redeemable  Convertible  Preferred Stock** |   | **Convertible    Preferred Stock** |         | **Common  Stock** |      |
|----------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|------------------------------------|--------------|-------------------|-----------|
|                                                                                               |   | **Shares**                                   |   | **Amount**                         |         | **Shares**        |      | **Amount** |   | **Shares** |   | **Amount** |   |
| BALANCES AT  DECEMBER 31, 1998                                                                     |   | 52,666,974                                   |   | $                                  |  50,432 |              | 2,021,040 |   | $ |  487 |   | 19,794,408 |   | $ |  3,165 |   |
| Issuance of common  stock upon exercise of stock options                                           |   | —                                       |   | —                             |         | —            |      | — |   | 7,431,282 |   | 1,492 |   |
| Repurchase of  common stock from terminated employees                                              |   | —                                       |   | —                             |         | —            |      | — |   | (73,122) |   | (16) |   |
| Issuance of common  stock under employee stock purchase plan                                       |   | —                                       |   | —                             |         | —            |      | — |   | 653,076 |   | 1,943 |   |
| Issuance of shares  in connection with business combinations                                       |   | 2,400,498                                    |   | 2,793                              |         | —            |      | — |   | 16,352,442 |   | 238,258 |   |
| Issuance of series E preferred stock, net of  issuance costs                                       |   | 16,552,914                                   |   | 23,786                             |         | —            |      | — |   | — |   | — |   |
| Issuance of preferred stock upon exercise of  warrants                                             |   | 3,287,938                                    |   | 3,895                              |         | —            |      | — |   | — |   | — |   |
| Accretion of redeemable preferred stock                                                            |   | —                                       |   | 469                                |         | —            |      | — |   | — |   | — |   |
| Issuance of common stock in initial public  offering, net of issuance costs                        |   | —                                       |   | —                             |         | —            |      | — |   | 22,770,000 |   | 72,549 |   |
| Issuance of common stock in concurrent  private placement, net of issuance costs                   |   | —                                       |   | —                             |         | —            |      | — |   | 6,079,026 |   | 20,000 |   |
| Conversion of preferred stock to common  stock upon initial public offering, net of issuance costs |   | (74,908,324                                  | )      | (81,375                            | )            | (2,021,040        | )         | (487 | ) | 76,929,364 |   | 81,862 |   |
| Deferred stock compensation                                                                        |   | —                                       |   | —                             |         | —            |      | — |   | — |   | 4,586 |   |
| Amortization of deferred stock compensation                                                        |   | —                                       |   | —                             |         | —            |      | — |   | — |   | — |   |
| Net loss                                                                                           |   | —                                       |   | —                             |         | —            |      | — |   | — |   | — |   |
| Foreign currency translation adjustment                                                            |   | —                                       |   | —                             |         | —            |      | — |   | — |   | — |   |
| Unrealized loss on investments                                                                     |   | —                                       |   | —                             |         | —            |      | — |   | — |   | — |   |
| Comprehensive loss                                                                                 |   |                                         |   |                               |         |              |      |   |   |   |   |   |   |
|                                                                                               |   |                                         |   |                               |         |              |      |   |   |   |   |   |   |
| BALANCES AT DECEMBER 31, 1999                                                                      |   | —                                       |   | —                             |         | —            |      | — |   | 149,936,476 |   | $ | 423,839 |   |
| Issuance of common stock upon exercise of  stock options                                           |   | —                                       |   | —                             |         | —            |      | — |   | 8,033,044 |   | 40,407 |   |
| Issuance of common stock under employee  stock purchase plan                                       |   | —                                       |   | —                             |         | —            |      | — |   | 1,985,340 |   | 11,221 |   |
| Issuance of common stock and assumption of  stock options in connection with business combinations |   | —                                       |   | —                             |         | —            |      | — |   | 29,889,702 |   | 1,774,339 |   |
| Notes receivable from shareholder assumed in  business combination                                 |   | —                                       |   | —                             |         | —            |      | — |   | — |   | — |   |
| Sale of common stock in connection with  strategic partnerships, net of issuance costs             |   | —                                       |   | —                             |         | —            |      | — |   | 5,059,546 |   | 249,783 |   |
| Contractual obligation to issue common stock  in connection with Covisint agreements               |   | —                                       |   | —                             |         | —            |      | — |   | 28,800,000 |   | 880,200 |   |
| Deferred stock compensation                                                                        |   | —                                       |   | —                             |         | —            |      | — |   | — |   | 20,174 |   |
| Amortization of deferred stock compensation                                                        |   | —                                       |   | —                             |         | —            |      | — |   | — |   | — |   |
| Issuance of warrants for services                                                                  |   | —                                       |   | —                             |         | —            |      | — |   | — |   | 1,524 |   |
| Net loss                                                                                           |   | —                                       |   | —                             |         | —            |      | — |   | — |   | — |   |
| Foreign currency translation adjustment                                                            |   | —                                       |   | —                             |         | —            |      | — |   | — |   | — |   |
| Unrealized loss on investments                                                                     |   | —                                       |   | —                             |         | —            |      | — |   | — |   | — |   |
| Comprehensive loss                                                                                 |   |                                         |   |                               |         |              |      |   |   |   |   |   |   |
|                                                                                               |   |                                         |   |                               |         |              |      |   |   |   |   |   |   |
| BALANCES AT DECEMBER 31, 2000                                                                      |   | —                                       |   | —                             |         | —            |      | — |   | 223,704,108 |   | 3,401,487 |   |
| Issuance of common stock upon exercise of  stock options                                           |   | —                                       |   | —                             |         | —            |      | — |   | 4,293,315 |   | 6,961 |   |
| Repurchase of common stock from terminated  employees                                              |   | —                                       |   | —                             |         | —            |      | — |   | (174,163 | ) | (59 | ) |
| Issuance of common stock under employee  stock purchase plan                                       |   | —                                       |   | —                             |         | —            |      | — |   | 2,913,301 |   | 11,664 |   |
| Issuance of common stock and assumption of  stock options in connection with business combinations |   | —                                       |   | —                             |         | —            |      | — |   | 8,078,581 |   | 74,768 |   |
| Issuance of restricted common stock to  employees                                                  |   | —                                       |   | —                             |         | —            |      | — |   | 1,879,147 |   | 14,099 |   |
| Forfeiture of restricted common stock by  employees upon termination                               |   | —                                       |   | —                             |         | —            |      | — |   | (658,846 | ) | (4,836 | ) |
| Sale of common stock to SAP, net of issuance  costs                                                |   | —                                       |   | —                             |         | —            |      | — |   | 47,484,767 |   | 219,335 |   |
| Amortization of deferred stock compensation                                                        |   | —                                       |   | —                             |         | —            |      | — |   | — |   | — |   |
| Net loss                                                                                           |   | —                                       |   | —                             |         | —            |      | — |   | — |   | — |   |
| Foreign currency translation adjustment                                                            |   | —                                       |   | —                             |         | —            |      | — |   | — |   | — |   |
| Unrealized loss on investments                                                                     |   | —                                       |   | —                             |         | —            |      | — |   | — |   | — |   |
| Comprehensive loss                                                                                 |   |                                         |   |                               |         |              |      |   |   |   |   |   |   |
|                                                                                               |   |                                         |   |                               |         |              |      |   |   |   |   |   |   |
| BALANCES AT DECEMBER 31, 2001                                                                      |   | —                                       |   | $                                  |  — |              | —    |   | $ |  — |   | 287,520,210 |   | $ |  3,723,419 |   |
|                                                                                                    |        |                                              |        |                                    |              |                   |           |  |  |  |  |  |  |  |  |  |  |

See accompanyingnotes.

 

38

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**COMMERCE ONE, INC.**

**CONSOLIDATEDSTATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED**

**STOCKAND STOCKHOLDERS' EQUITY (DEFICIT)**

**(Inthousands, except share data)**

** **
|                                                                                               |   | **Deferred  Stock Compensation** |     | **Note   Receivable   From   Shareholder** |   | **Accumulated    Other   Comprehensive Loss** |   | **Accumulated    Deficit** |   | **Total**  |    |
|----------------------------------------------------------------------------------------------------|--------|----------------------------------|----------|--------------------------------------------|--------|-----------------------------------------------|--------|----------------------------|--------|------------|---------|
| BALANCES AT DECEMBER 31, 1998                                                                      |   | $                                | (1,848   | )                                          | — |                                          | $      | (50                        | )      | $          | (38,765 | ) | $ | (37,011 | ) |
| Issuance of common stock upon exercise of  stock options                                           |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 1,492      |    |
| Repurchase of common stock from terminated  employees                                              |   | —                           |     | —                                     |   | —                                        |   | —                     |   | (16        | )       |
| Issuance of common stock under employee  stock purchase plan                                       |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 1,943      |    |
| Issuance of shares in connection with  business combinations                                       |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 238,258    |    |
| Issuance of series E preferred stock, net of issuance costs                                        |   | —                           |     | —                                     |   | —                                        |   | —                     |   | —     |    |
| Issuance of preferred stock upon exercise of warrants                                              |   | —                           |     | —                                     |   | —                                        |   | —                     |   | —     |    |
| Accretion of redeemable preferred stock                                                            |   | —                           |     | —                                     |   | —                                        |   | (469                       | )      | (469       | )       |
| Issuance of common stock in initial public offering, net of issuance  costs                        |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 72,549     |    |
| Issuance of common stock in concurrent private placement, net of  issuance costs                   |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 20,000     |    |
| Conversion of preferred stock to common stock upon initial public  offering, net of issuance costs |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 81,375     |    |
| Deferred stock compensation                                                                        |   | (4,586                           | )        | —                                     |   | —                                        |   | —                     |   | —     |    |
| Amortization of deferred stock compensation                                                        |   | 2,324                            |     | —                                     |   | —                                        |   | —                     |   | 2,324      |    |
| Net loss                                                                                           |   | —                           |     | —                                     |   | —                                        |   | (63,322                    | )      | (63,322    | )       |
| Foreign currency translation adjustment                                                            |   | —                           |     | —                                     |   | (111                                          | )      | —                     |   | (111       | )       |
| Unrealized loss on investments                                                                     |   | —                           |     | —                                     |   | (291                                          | )      | —                     |   | (291       | )       |
| Comprehensive loss                                                                                 |   |                             |     |                                       |   |                                          |   |                       |   | (63,724    | )       |
|                                                                                               |   |                             |     |                                       |   |                                          |   |                       |   |       |    |
| BALANCES AT DECEMBER 31, 1999                                                                      |   | (4,110                           | )        | —                                     |   | (452                                          | )      | (102,556                   | )      | 316,721    |    |
|                                                                                               |   |                             |     |                                       |   |                                          |   |                       |   |       |    |
| Issuance of common stock upon exercise of stock options                                            |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 40,407     |    |
| Issuance of common stock under employee stock purchase plan                                        |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 11,221     |    |
| Issuance of common stock and assumption of stock options in  connection with business combinations |   | (169,166                         | )        | —                                     |   | —                                        |   | —                     |   | 1,605,173  |    |
| Notes receivable from shareholder assumed in business combination net  of issuance costs           |   | —                           |     | (133                                       | )      | —                                        |   | —                     |   | (133       | )       |
| Payment of note receivable from stockholder assumed in business  combination                       |   | —                           |     | 4                                          |   | —                                        |   | —                     |   | 4          |    |
| Sale of common stock in connection with strategic partnerships                                     |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 249,783    |    |
| Contractual obligation to issue common stock in connection with  Covisint agreements               |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 880,200    |    |
| Deferred stock compensation                                                                        |   | (20,174                          | )        | —                                     |   | —                                        |   | —                     |   | —     |    |
| Amortization of deferred stock compensation                                                        |   | 39,820                           |     | —                                     |   | —                                        |   | —                     |   | 39,820     |    |
| Issuance of warrants for services                                                                  |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 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                                                                      |   | $                                | (153,630 | )                                          | $      | (129                                          | )      | $                          | (814   | )          | $       | (447,503 | ) | $ | 2,799,411 |   |
| Issuance of common stock upon exercise of stock options                                            |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 6,961      |    |
| Repurchase of common stock from terminated employees                                               |   | —                           |     | —                                     |   | —                                        |   | —                     |   | (59        | )       |
| Issuance of common stock under employee stock purchase plan                                        |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 11,664     |    |
| Issuance of common stock and assumption of stock options in  connection with business combinations |   | (2,181                           | )        | —                                     |   | —                                        |   | —                     |   | 72,587     |    |
| Issuance of restricted common stock to employees                                                   |   | (14,099                          | )        | —                                     |   | —                                        |   | —                     |   | —     |    |
| Forfeiture of restricted common stock by employees upon termination                                |   | 4,836                            |     | —                                     |   | —                                        |   | —                     |   | —     |    |
| Sale of common stock to SAP net of issuance costs                                                  |   | —                           |     | —                                     |   | —                                        |   | —                     |   | 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                                                                      |   | $                                | (66,772  | )                                          | $      | (129                                          | )      | $                          | (1,101 | )          | $       | (3,031,602 | ) | $ | 623,815 |   |

 

See accompanyingnotes.

 

39

----

 

**COMMERCE ONE OPERATIONS, INC.**

** **

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands)**

** **
|                                                                                                                |   | **YEARS  ENDED DECEMBER 31,** |       |
|---------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                                                                |   | **2001**                      |       | **2000** |   | **1999** |   |
| **Operating  activities:**                                                                                          |   |                          |       |   |   |   |   |
| Net loss                                                                                                            |   | $                             | (2,584,099 | ) | $ | (344,947 | ) | $ | (63,322 | ) |
| Adjustments to reconcile net loss to net cash provided by operating  activities:                                    |   |                          |       |   |   |   |   |
| Depreciation and amortization                                                                                       |   | 45,374                        |       | 15,339 |   | 2,534 |   |
| Purchased in-process research and development                                                                       |   | 4,548                         |       | 5,142 |   | 9,374 |   |
| Amortization of cost of Technology Agreement with Covisint                                                          |   | 55,188                        |       | 5,689 |   | — |   |
| Amortization of deferred stock compensation                                                                         |   | 98,302                        |       | 39,820 |   | 2,324 |   |
| Amortization of goodwill and other intangible assets                                                                |   | 332,789                       |       | 233,184 |   | 11,133 |   |
| Non-cash charge for impairment of goodwill and other intangible  assets                                             |   | 1,098,869                     |       | — |   | — |   |
| Non-cash charge for impairment of Technology Agreement with Covisint                                                |   | 592,334                       |       | — |   | — |   |
| Non-cash charge for investment in Covisint                                                                          |   | 21,595                        |       | — |   | — |   |
| Non-cash charge for loss on other investments                                                                       |   | 2,958                         |       | 2,994 |   | — |   |
| Loss on disposal of property and equipment                                                                          |   | 26,914                        |       | — |   | — |   |
| Changes in operating assets and liabilities:                                                                        |   |                          |       |   |   |   |   |
| Accounts receivable, net                                                                                            |   | 111,366                       |       | (91,043 | ) | (14,058 | ) |
| Prepaid and other current assets                                                                                    |   | 8,221                         |       | (8,402 | ) | (3,867 | ) |
| Accounts payable                                                                                                    |   | (5,075                        | )          | 13,654 |   | 5,951 |   |
| Accrued compensation and related expenses                                                                           |   | (27,390                       | )          | 26,612 |   | 3,163 |   |
| Other current liabilities                                                                                           |   | (28,780                       | )          | 29,967 |   | 11,369 |   |
| Deferred revenue                                                                                                    |   | (57,078                       | )          | 71,894 |   | 39,246 |   |
| Non-current accrued restructuring charges                                                                           |   | 37,005                        |       | — |   | — |   |
| Net cash provided by (used in) operating activities                                                                 |   | (266,959                      | )          | (97 | ) | 3,847 |   |
| **Investing activities:**                                                                                           |   |                          |       |   |   |   |   |
| Purchase of property and equipment, net                                                                             |   | (39,491                       | )          | (79,158 | ) | (11,464 | ) |
| Proceeds from maturities of short term investments                                                                  |   | 204,709                       |       | 82,880 |   | 18,154 |   |
| Purchase of short term investments                                                                                  |   | (173,954                      | )          | (136,357 | ) | (91,259 | ) |
| Business combinations, net of cash acquired                                                                         |   | (2,499                        | )          | 8,773 |   | (3,889 | ) |
| Additional costs of Technology Agreement with Covisint, net                                                         |   | (2,815                        | )          | — |   | — |   |
| Other investments                                                                                                   |   | 3,191                         |       | (13,199 | ) | — |   |
| Net cash used in investing activities                                                                               |   | (10,859                       | )          | (137,061 | ) | (88,458 | ) |
| **Financing activities**:                                                                                           |   |                          |       |   |   |   |   |
| Proceeds from issuance of preferred stock, net                                                                      |   | —                        |       | — |   | 27,681 |   |
| Proceeds from issuance of common stock, net                                                                         |   | 237,901                       |       | 301,411 |   | 95,968 |   |
| Proceeds from borrowings on notes payable                                                                           |   | 19,000                        |       | — |   | — |   |
| Payments on notes payable                                                                                           |   | (1,746                        | )          | (298 | ) | (2,052 | ) |
| Payments on capital lease obligations                                                                               |   | (100                          | )          | (235 | ) | (221 | ) |
| Net cash provided by financing activities                                                                           |   | 255,055                       |       | 300,878 |   | 121,376 |   |
| Effect of foreign currency translation on cash and cash equivalents                                                 |   | 120                           |       | (323 | ) | (111 | ) |
| Net increase (decrease) in cash                                                                                     |   | (22,642                       | )          | 163,397 |   | 36,654 |   |
| Cash balance at beginning of period                                                                                 |   | 215,189                       |       | 51,792 |   | 15,138 |   |
| Cash balance at end of period                                                                                       |   | $                             | 192,547    |   | $ | 215,189 |   | $ | 51,792 |   |
|                                                                                                                |   |                          |       |   |   |   |   |
| **Supplemental disclosures:**                                                                                       |   |                          |       |   |   |   |   |
| Interest paid                                                                                                       |   | $                             | 351        |   | $ | 235 |   | $ | 384 |   |
| Cash paid for income taxes                                                                                          |   | $                             | 4,307      |   | $ | 4,590 |   | $ | 4,188 |   |
| Non-cash investing and financing activities:                                                                        |   |                          |       |   |   |   |   |
| Deferred stock compensation                                                                                         |   | $                             | 9,263      |   | $ | 20,174 |   | $ | 4,586 |   |
| Conversion of borrowings under bank line of credit to notes payable                                                 |   | $                             | —     |   | $ | — |   | $ | 750 |   |
| Unrealized loss on investments                                                                                      |   | $                             | 407        |   | $ | 39 |   | $ | 291 |   |
| Issuance of preferred stock, common stock and assumption of stock  options in connection with business combinations |   | $                             | 74,768     |   | $ | 1,774,339 |   | $ | 241,051 |   |
| Deferred stock compensation related to stock option grants and  options assumed in business combinations            |   | $                             | 2,181      |   | $ | 12,821 |   | $ | — |   |
| Conversion of convertible preferred stock into common stock                                                         |   | $                             | —     |   | $ | — |   | $ | 81,862 |   |
| 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 accompanyingnotes.

 

40

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**1.  SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

** **

***DESCRIPTION OF THE COMPANY***

*** ***

The Company wasfounded as Distrivision in 1994, and changed its name to Commerce One in 1997,and re-incorporated into Delaware in 1999. On July 11, 2001, the Company completed its reorganization into aholding company structure.  The Companyis a technology company that operates in one business segment that specializesin business-to-business electronic commerce. The Company’s software provides the technology and infrastructure thatenable companies to conduct purchasing transactions via the Internet orIntranets and to manage their supplier relationships more effectively.  The Company’s services operations supportthose software solutions and help companies take advantage of the efficienciesthat on-line purchasing and supplier management can offer.  Together, the Company’s software andservices allow companies to automate certain business functions that weretraditionally done through phone calls or paper.

 

***BASIS OF PRESENTATION***

*** ***

The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries. All significant intercompany accounts and transactions have beeneliminated in consolidation.  Certainpreviously reported amounts have been reclassified to conform to the currentpresentation format.

 

The functionalcurrency of the Company's foreign subsidiaries is the local currency. TheCompany translates all assets and liabilities to U.S. dollars at the currentexchange rates as of the applicable balance sheet date. Revenue and expensesare translated at the prior month ending exchange rate. Gains and lossesresulting from the translation of the foreign subsidiaries' financialstatements are reported as a separate component of accumulated comprehensiveother income (loss) in stockholders' equity. Net gains and losses resultingfrom foreign exchange transactions, which are recorded in the statement ofoperations, were not significant during any of the periods presented.

 

***USE OF ESTIMATES***

*** ***

The preparation ofthe consolidated financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the amounts reported in the financial statementsand accompanying notes. Actual results could differ from those estimates.

 

***CASH AND CASH EQUIVALENTS***

*** ***

Cash equivalentsare highly liquid investments with insignificant interest rate risk andmaturities of 90 days or less at the date of purchase and are stated at amountsthat approximate fair value. Cash equivalents consist principally ofinvestments in short-term money market instruments and certificates of deposit.

 

***SHORT TERM INVESTMENTS***

*** ***

Short terminvestments consist principally of commercial paper, corporate notes and bonds,government notes and bonds and certificates of deposit with maturities greaterthan 90 days and are stated at amounts that approximate fair value.

 

The Companyaccounts for its short term investments in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 115, "Accounting forCertain Investments in Debt and Equity Securities.”  Management determines the appropriate classification of debtsecurities at the time of purchase and reevaluates such designation as of eachbalance sheet date.

 

The Company hasclassified its short term investments as available-for-sale. Available-for-saleinvestments are recorded at fair value based on quoted market prices atDecember 31, 2001 and 2000, where available with unrealized gains and losses reportedas other comprehensive income (loss) and included within accumulated othercomprehensive income (loss) in the statement of stockholders' equity. Realizedgains and losses, which have been immaterial to date, are 

 

41

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included in interest andother income and are derived using the specific identification method fordetermining the cost of investments sold. Dividend and interest income isrecognized when earned.

 

The followingsummarizes the fair value of the Company's short-term investments atDecember 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 |   |

 

Short-terminvestments as of December 31, 2001, included approximately $8.0 million and$6.3 million in certificates of deposit and government bonds, respectively,which collateralized certain of the Company’s obligations related to operatinglease agreements for office facilities, potential workers compensation claimsand guarantees of a personal home mortgage for an executive officer.  

 

The followingsummarizes the fair value of the Company's short-term investments atDecember 31, 2000 (amounts in thousands):

 
|                       |   | **Amortized  Cost** |    | **Gross  Unrealized Gains** |   | **Gross  Unrealized Losses** |   | **Fair Value** |   |
|----------------------------|--------|---------------------|---------|-----------------------------|--------|------------------------------|--------|----------------|--------|
| Commercial paper           |   | $                   | 58,973  |                        | $      | —                       |   | $              | (84    | ) | $ | 58,889 |   |
| Government notes and bonds |   | 1,870               |    | —                      |   | (2                           | )      | 1,868          |   |
| Corporate notes and bonds  |   | 55,081              |    | 104                         |   | —                       |   | 55,185         |   |
| Certificates of deposit    |   | 10,316              |    | —                      |   | (7                           | )      | 10,309         |   |
|                       |   | $                   | 126,240 |                        | $      | 104                          |   | $              | (93    | ) | $ | 126,251 |   |

 

Short-term investments as of December 31, 2000included approximately $9.6 million in certificates of deposit whichcollateralized certain of the Company’s obligation related to operating leaseagreements for office facilities and potential workers compensation claims.

 

***PROPERTY AND EQUIPMENT***

*** ***

Property andequipment are stated at cost less accumulated depreciation and amortization.Depreciation and amortization are computed using the straight-line method overthe estimated useful lives of the related assets as follows: computer equipment,office equipment, furniture and fixtures—threeyears; and leasehold improvements—theshorter of the remaining term of the related leases or the estimated economicuseful lives of the improvements. Equipment under capital leases is amortizedto depreciation expense over the shorter of the expected useful life or therelated lease term.

 

***GOODWILL AND OTHER INTANGIBLE ASSETS***

*** ***

Goodwill and otherintangible assets result from business combinations accounted for under thepurchase method.  Goodwill is beingamortized on a straight-line basis over estimated useful lives of four to fiveyears. Intangible assets related to acquired technology, assembled workforce,trademarks, patents and other intangible assets are being amortized on astraight-line method over the estimated useful life of the related asset,generally one to five years.  TheCompany periodically evaluates potential impairments of its long-lived assets,including intangibles.  When the Companydetermines that the carrying value of long-lived assets may not be recoverablebased upon the existence of one or more 

 

42

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indicators of impairment,the Company evaluates the expected undiscounted cash flows related to theassets.  If these cash flows are lessthan the carrying value of the assets, the Company measures the impairmentusing discounted cash flows.

 

***SOFTWARE DEVELOPMENT COSTS***

*** ***

The Companyaccounts for software development costs in accordance with FASB No. 86,"Accounting for the Costs of Computer Software to be Sold, Leased, orOtherwise Marketed," under which certain software development costsincurred subsequent to the establishment of technological feasibility arecapitalized and amortized over the estimated lives of the related products. Technologicalfeasibility is established upon completion of a working model. Developmentcosts incurred subsequent to the establishment of technological feasibilityhave not been significant, and all software development costs have been chargedto product development expense in the accompanying consolidated statements ofoperations.

 

***CONCENTRATION OF CREDIT RISK AND CREDITEVALUATIONS***

*** ***

Financialinstruments, which potentially subject the Company to concentrations of risk,include cash, cash equivalents, short term investments and accounts receivable.The Company’s investment policies limit cash equivalents and short terminvestments to short-term, low risk investments.  Cash and cash equivalents, short-term investments are held withtwo domestic financial institutions with high credit standing. For the yearended December 31, 2001, transactions with SAP AG and SAP Markets (“SAP”)accounted for approximately 19.4% of the Company's total revenues. No othercustomer accounted for more than 10% of the Company’s total revenues during2001. For the year ended December 31, 2000, no customer accounted for morethan 10% of the Company’s total revenues and for the year ended December 31,1999, three customers accounted for 21%, 15% and 11% of the Company's revenues,respectively. At December 31, 2001, two customers accounted for 13% and12% of the Company’s gross accounts receivable balance.  At December 31, 2000, no customer accountedfor more than 10% of the Company’s gross accounts receivable balance. TheCompany performs ongoing credit evaluations of its customers and does nottypically require collateral or guarantees. Management maintains allowances fordoubtful accounts for estimated losses resulting from the inability of theCompany’s customers to make required payments. If the financial condition of the Company’s customers were todeteriorate, resulting in an impairment of their ability to make such payments,increases in the allowance may be required.

 

#### ***REVENUERECOGNITION***

 

The Company’s revenue recognition policies areconsistent with Statement of Position 97-2 "Software RevenueRecognition," as modified by Statement of Position 98-9.

 

Revenues from license agreements for our softwareproducts are recognized upon delivery of the software if there is persuasiveevidence of an arrangement, collection is probable and the fee is fixed ordeterminable. If an acceptance period is required, license revenues arerecognized upon the earlier of customer acceptance or the expiration of theacceptance period. When software is licensed to third parties through indirectsales channels, generally license fees are recognized as revenue, ‘under thesell-through method’, when the criteria described above have been met and thereseller has sold the software to an end user customer. While generally theCompany does not license software under barter or concurrent arrangements,whenever software has been licensed under such arrangements the Company hasrecognized revenue equal to the net monetary amounts to be received by theCompany. 

 

The Company reduces license revenue to reflectestimated product returns.  While as amatter of contract and general practice, we do not accept the return ofsoftware products after the expiration of any acceptance period, unforeseencontractual disputes with customers may require us to accept the return of aproduct.  Should actual product returnsdiffer from estimates, revisions to the product return allowance would berequired.  

 

The Company charges estimated product warranty coststo cost of licenses at the time revenue is recognized.  While the Company engages 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.  Should actual costs differ from itsestimates, revisions to the estimated warranty costs would be required.

 

Revenues fromprofessional services contracts are recognized on the percentage-of-completionmethod, with costs and estimated profits recorded as work is performed.  Provisions for estimated losses onuncompleted contracts are made 

 

43

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in the period in whichsuch losses 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 softwarelicense and services elements or the rights to multiple software products, thetotal arrangement fee is allocated to each of the elements using the residualmethod, under which revenue is allocated to undelivered elements based onvendor specific objective evidence of the fair values of such undeliveredelements and the residual amounts of revenue are allocated to the deliveredelements.

 

Revenue is recognized using contract accounting forarrangements involving significant customization or modifications of thesoftware or where professional services are considered necessary to thefunctionality of the software. Revenue from these software and servicesarrangements is recognized using the percentage of completion method.

 

Software maintenance revenues, subscription andhosting fees are recognized ratably over the term of the related contract,typically one year.

 

Network service fees (transaction fees and revenuesharing), which have not been significant, are recognized as earned based oncustomer transactions.

 

Deferred revenue consists of license fees for whichrevenue has been deferred and prepaid fees for services, subscription fees, andmaintenance and support agreements.

 

***STOCK-BASED COMPENSATION***

*** ***

The Company accounts for employee stock options usingthe intrinsic value method in accordance with Accounting Principles BoardOpinion No. 25 ("APB 25") and has adopted the disclosure-onlyalternative of SFAS No. 123, "Accounting for Stock-BasedCompensation.

 

***ADVERTISING***

*** ***

Advertising costs are expensed as incurred.Advertising expense was approximately $5,981,000, $9,368,000 and $332,000 for2001, 2000 and 1999, respectively.

 

***INCOME TAXES***

*** ***

The Company accounts for income taxes in accordancewith SFAS No. 109, "Accounting for Income Taxes," which requiresthe use of the liability method in accounting for income taxes. Under thismethod, deferred tax assets and liabilities are measured using enacted taxrates and laws that will be in effect when the differences are expected toreverse.

 

***NET LOSS PER SHARE***

*** ***

Basic and diluted net loss per share information forall periods is presented under the requirements of SFAS No. 128,"Earnings per Share." Basic earnings per share has been computedusing the weighted-average number of shares of common stock outstanding duringthe period, less shares subject to repurchase and forfeiture, and excludes anydilutive effects of options, warrants, and convertible securities. Potentiallydilutive securities have also been excluded from the computation of diluted netloss per share as their inclusion would be antidilutive.  

 

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

 

|                                                                                                        |   | **YEARS  ENDED DECEMBER 31,** |       |
|-------------------------------------------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                                                        |   | **2001**                      |       | **2000** |   | **1999** |   |
| Net loss                                                                                                    |   | $                             | (2,584,099 | ) | $ | (344,947 | ) | $ | (63,322 | ) |
| Preferred stock accretion                                                                                   |   | —                        |       | — |   | 469 |   |
| Loss applicable to common shareholders                                                                      |   | $                             | (2,584,099 | ) | $ | (344,947 | ) | $ | (63,791 | ) |
| Weighted average shares of common stock outstanding                                                         |   | 252,499                       |       | 169,642 |   | 87,500 |   |
| Less: weighted average shares subject to repurchase and forfeiture                                          |   | (1,661                        | )          | (1,577 | ) | (1,446 | ) |
| Weighted average shares of common stock outstanding used in computing  basic and diluted net loss per share |   | 250,838                       |       | 168,065 |   | 86,054 |   |
| Basic and diluted net loss per share                                                                        |   | $                             | (10.30     | ) | $ | (2.05 | ) | $ | (0.74 | ) |

 

44

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#### ***If the Company had reported net income, the calculation of dilutedearnings per share would have included, approximately, an additional23,273,000, 22,231,000, 7,568,000 common equivalent shares related tooutstanding stock options and warrants not included above (determined using thetreasury stock method) for the years ended December 31, 2001, 2000 and1999, respectively.***

#### *** ***

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

 

In July 2001, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 141 “BusinessCombinations” effective for fiscal years beginning after December 15,2001.  Under SFAS No. 141, pooling ofinterest is no longer an acceptable method of accounting for businesscombinations.  SFAS No. 141 alsodevelops further criteria for recognizing intangible assets separate fromgoodwill in a purchase transaction.  TheCompany does not expect the adoption of this statement to have a materialimpact on its consolidated financial statements.

 

In July 2001, theFASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.”  Under the guidance of SFAS No. 142, goodwilland indefinite lived intangible assets will no longer be amortized but will beperiodically assessed for any indication of impairment.  Separable intangible assets that are notdeemed to have an indefinite life will continue to be amortized over theiruseful lives.  The amortizationprovisions of SFAS No. 142 apply to goodwill and intangible assets acquiredafter June 30, 2001.  With respect togoodwill and intangible assets acquired prior to July 1, 2001 the provisions ofSFAS No. 142 will be effective at January 1, 2002.  During the transition period for goodwill and intangible assetsacquired on or before June 30, 2001 and those acquired after that date,pre-existing goodwill and intangibles were amortized until adoption of SFAS No.142, whereas any new goodwill and indefinite lived intangible assets acquiredon or after July 1, 2001 were reviewed for future impairment indicators.  The Company expects that the adoption of SFASNo. 142 in 2002 will result in a reduced operating charge for the amortizationof goodwill and intangibles.  TheCompany has not yet determined whether it will incur additional impairmentcharges as a result of the transition provisions of SFAS No. 142.

 

In August 2001,the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal ofLong-lived Assets.”  SFAS No. 144establishes a single accounting model, based on the framework established inSFAS No. 121, for long-lived assets to be disposed of by sale.  Consistent with SFAS No. 121, SFAS No. 144continues to require a step approach for recognizing and measuring theimpairment of long-lived assets to be held and used.  The statement is effective for financial statements issued forfiscal years beginning after December 15, 2001.  The Company has adopted the provisions of SFAS No. 144 effectivefrom January 1, 2002 and these provisions will be applied prospectively.  The Company does not expect the adoption ofSFAS No.144 will have a material effect on our consolidated financial positionor results of operations.

 

**2.  ACCOUNTSRECEIVABLE**

** **

Accountsreceivable consists of the following (in thousands):

 

|                                |   | **DECEMBER  31,** |   |
|-------------------------------------|--------|-------------------|--------|
|                                |   | **2001**          |   | **2000** |   |
| Accounts receivable                 |   | $                 | 59,390 |   | $ | 149,652 |   |
| Unbilled accounts receivable        |   | 10,564            |   | 15,381 |   |
|                                |   | 69,954            |   | 165,033 |   |
| Less accounts receivable allowances |   | 26,356            |   | 10,175 |   |
|                                |   | $                 | 43,598 |   | $ | 154,858 |   |

 

45

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Unbilled accountsreceivable result from professional services provided to customers that havenot yet been formally invoiced as of the reporting date. Such amounts aregenerally invoiced within fifteen business days of the end of the period inwhich services are provided.

 

**3.  PROPERTY ANDEQUIPMENT**

** **

Propertyand equipment consists of the following (in thousands):

 

|                                           |   | **DECEMBER  31,** |   |
|------------------------------------------------|--------|-------------------|--------|
|                                           |   | **2001**          |   | **2000** |   |
| Computer and office equipment                  |   | $                 | 74,825 |   | $ | 83,751 |   |
| Furniture and fixtures                         |   | 24,635            |   | 19,275 |   |
| Leasehold improvements                         |   | 15,660            |   | 11,599 |   |
| Work in process                                |   | 674               |   | 7,018 |   |
|                                           |   | 115,794           |   | 121,643 |   |
| Less accumulated depreciation and amortization |   | 50,886            |   | 26,500 |   |
|                                           |   | $                 | 64,908 |   | $ | 95,143 |   |

 

Depreciationexpense was approximately $45.4 million in 2001, $15.3 million in 2000 and $2.5million in 1999.

 

**4.  GOODWILL AND OTHERINTANGIBLE ASSETS**

** **

Goodwilland other intangible assets, which result from acquisitions accounted for underthe purchase method (Note 15) and the Covisint Technology Agreemententered into in December 2000, consists of the following (in thousands):

 

|                                      |   | **DECEMBER  31,** |    |
|-------------------------------------------|--------|-------------------|---------|
|                                      |   | **2001**          |    | **2000** |   |
| Goodwill                                  |   | $                 | 691,857 |   | $ | 1,733,093 |   |
| Covisint Technology Agreement             |   | 267,215           |    | 850,932 |   |
| Core and developed technology             |   | 34,742            |    | 33,805 |   |
| Assembled workforce                       |   | 29,273            |    | 29,299 |   |
| Customer contracts                        |   | 7,900             |    | 11,900 |   |
| Other                                     |   | 16,519            |    | 7,207 |   |
|                                      |   | 1,047,506         |    | 2,666,236 |   |
| Less accumulated amortization             |   | (637,972          | )       | (250,006 | ) |
| Goodwill and other intangible assets, net |   | $                 | 409,534 |   | $ | 2,416,230 |   |

** **

The Companyperiodically assesses the impairment of long-lived assets including goodwill,the Technology Agreement with Covisint and other identified intangibleassets.  An impairment assessment isperformed whenever events or changes in circumstances indicate that thecarrying value may not be recoverable. During the second quarter of 2001 the Company identified indicators ofpossible impairment relating to its long-lived assets.  The impairment indicators included, but werenot limited to, the Company’s net book value as compared to marketcapitalization, significant negative industry and economic trends, a significantdecline in the Company’s stock price for a sustained period and significantunderperformance relative to historical or projected future operating results.

 

In accordance withthe provisions of SFAS No. 121, “Accounting for the Impairment of Long LivedAssets and for Long Lived Assets to be Disposed of,” the Company performed,with the assistance of independent valuation experts, impairment tests todetermine whether any impairment existed. The Company determined that the sum of the expected undiscounted cashflows attributable to certain of its intangible assets was less than thecarrying value of those intangible assets. Accordingly, the Company calculated the estimated fair value of theassets by summing the present value of the expected cash flows over the life ofthe assets.  The impairment wascalculated by deducting the present value of the expected cash flows from thecarrying value of the intangible assets. Based on the results of these tests, the Company 

 

46

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determined that thecarrying values of goodwill and other intangible assets related to AppNet, theTechnology Agreement with Covisint and CommerceBid were not recoverable andtherefore had suffered impairment.

 

This assessmentresulted in write-downs during the second quarter of 2001 of $1,098.9 millionto record the amount by which the carrying amounts of the goodwill and otherintangible assets related to AppNet and CommerceBid exceeded their respectivefair values.  Further, an impairmentwrite-down of $592.3 million was recorded in relation to the TechnologyAgreement with Covisint and this amount was charged to cost of license fees.

 

The Company againperformed an impairment analysis based on undiscounted cash flows to determinewhether any further impairment existed with regard to the carrying value of itslong-lived assets in the third and fourth quarters of 2001.  The Company concluded that based on theresults of these tests the carrying values of goodwill and other identified intangibleassets were still recoverable and therefore had not suffered any furtherimpairment**.**

** **

**5.  INVESTMENTS ANDOTHER ASSETS**

** **

Investments andother assets consists of the following (in thousands):

 

|                                  |   | **DECEMBER  31,** |   |
|---------------------------------------|--------|-------------------|--------|
|                                  |   | **2001**          |   | **2000** |   |
| Investment in Covisint                |   | $                 | 9,255  |   | $ | 30,850 |   |
| Strategic investments                 |   | 258               |   | 3,603 |   |
| Note receivable from officer          |   | —            |   | 5,000 |   |
| Non-current prepaid software licenses |   | 592               |   | — |   |
| Other                                 |   | 602               |   | 6,961 |   |
|                                  |   | $                 | 10,707 |   | $ | 46,414 |   |

 

The Company hasmade several strategic investments in privately held companies and two publiclytraded companies and has an investment in Covisint (Note 11). The Company ownsless than a 5% interest and does not have a significant influence over thesecompanies. Investments in publicly traded companies are carried at fair value,based on quoted market prices, with unrealized gains and losses recorded inequity. Investments in private companies are recorded at cost. Theseinvestments are periodically evaluated for declines in value that areconsidered other than temporary. During the year 2001, the Company recordedinvestment losses of approximately $24.5 million of which$21.6 million related to the investment in Covisint, $2.4 million relatedto investments in other privately held companies and $0.5 million relatedto investments in publicly traded companies. During the year the note receivable from an officer was repaid in fullfollowing the resignation of the officer from the Company.

 

**6.  OTHER ACCRUEDLIABILITIES**

** **

Otheraccrued liabilities consists of the following (in thousands):

 

|                                                |   | **DECEMBER  31,** |   |
|-----------------------------------------------------|--------|-------------------|--------|
|                                                |   | **2001**          |   | **2000** |   |
| Accrued restructuring costs                         |   | $                 | 18,839 |   | $ | — |   |
| Income taxes payable                                |   | 10,055            |   | 5,688 |   |
| Royalty, referral, and marketing commitment payable |   | 5,225             |   | 8,289 |   |
| Accruals related to business combinations           |   | 5,112             |   | 28,529 |   |
| Professional fees (legal, tax, and accounting)      |   | 1,189             |   | 11,415 |   |
| Customer deposits                                   |   | —            |   | 9,497 |   |
| Other                                               |   | 9,601             |   | 17,990 |   |
| Total other accrued liabilities                     |   | $                 | 50,021 |   | $ | 81,408 |   |

** **

In February 2001, the Company approved andbegan to implement a restructuring plan (the “Plan”) aimed at streamlining itscost structure to better position the Company for growth and improved operatingresults.  The Plan 

 

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included costs related to separation pay,outplacement services, benefits continuation, office closure costs and thetermination of certain office leases. The Plan included staff reductions totaling approximately 270 employeeswhich were completed in the first and second quarters of 2001.  The Company incurred restructuring chargesof approximately $14.1 million in connection with the Plan in the first quarterof 2001.

 

In June 2001, the Company approved and beganto implement an additional restructuring plan (the “Second Plan”) optimizingand streamlining management to focus on their core e-business strategy.  The primary goal of the Second Plan was tosignificantly reduce the Company’s annual operating expenses by realigningresources around the Company’s core product initiatives.  Under the Second Plan estimatedrestructuring charges of approximately $62.0 million were incurred in thesecond quarter of 2001.  The Second Planincluded the costs associated with the termination of approximately 600employees including separation pay, outplacement services and benefitcontinuation, estimated customer claims resulting from the divestiture ofcertain parts of the Company’s Global Services division, and also thetermination of certain office leases, the consolidation or closure of certainfacilities and the write-down of the carrying value of computers and equipmentused by terminated employees.

 

In October 2001,the Company approved and began to implement a further restructuring program(the “Third Plan”) and charged a further $54.8 million to restructuring costsin relation to, the costs associated with terminating a further 1,200employees, further costs associated with the termination of office leases andthe consolidation and closure of certain facilities and subsidiaries.  Also in the fourth quarter of 2001, theCompany determined that amounts previously charged in the second quarter of2001 of approximately $4.3 million that related to anticipated liabilities forestimated customer claims resulting from the divestiture of certain parts ofthe company’s Global Services division were no longer required and this amountwas credited to restructuring costs and other in the fourth quarter of2001.  The net charge to restructurecosts and other was approximately $50.5 in the fourth quarter of 2001. 

 

The following table summarizesthe activity related to the current restructuring liability for the year endedDecember 31, 2001, (in thousands):

 
|                                                                     |   | **Amounts  charged to  restructuring  costs and  other** |    | **Amounts reversed** |   | **Net  amounts  charged to  restructuring   costs and  other** |   | **Amounts   paid or written off** |    | **Accrued   restructuring   costs at   December 31, 2001** |    |
|--------------------------------------------------------------------------|--------|----------------------------------------------------------|---------|---------------------------|--------|----------------------------------------------------------------|--------|----------------------------------------|---------|------------------------------------------------------------|---------|
| Lease cancellations and commitments                                      |   | $                                                        | 68,860  |                      | — |                                                           | $      | 68,860                                 |    | $                                                          | (17,971 | ) | $ | 50,889 |   |
| Termination payments to employees and related costs                      |   | 30,790                                                   |    | —                    |   | 30,790                                                         |   | (26,275                                | )       | 4,515                                                      |    |
| Write-off on disposal of assets and related costs                        |   | 30,418                                                   |    | (4,321                    | )      | 26,097                                                         |   | (25,657                                | )       | 440                                                        |    |
| Costs associated with divestiture of certain businesses                  |   | 858                                                      |    | —                    |   | 858                                                            |   | (858                                   | )       | —                                                     |    |
| Total restructure accrual and other                                      |   | $                                                        | 130,926 |                      | $      | (4,321                                                         | )      | $                                      | 126,605 |                                                       | $       | (70,761 | ) | $ | 55,844 |   |
| Less non-current accrued restructuring charges                           |   |                                                     |    |                      |   |                                                           |   |                                   |    | $                                                          | (37,005 | ) |
| Accrued restructuring charges included within other accrued  liabilities |   |                                                     |    |                      |   |                                                           |   |                                   |    | $                                                          | 18,839  |   |
|                                                                          |        |                                                          |         |                           |        |                                                                |        |                                        |         |                                                            |         |  |  |  |  |  |

 

### Leasecancellations and commitments

** **

In the first, second and fourth quarters of 2001, the Company incurredtotal restructuring charges of approximately $9.4 million, $33.6 million and$25.9 million, respectively, for facilities consolidated or closed in theUnited States, Europe and Asia.  Theseoffices were primarily responsible for the sale of the Company’s softwareproducts, professional services or customer support.  These restructuring charges reflect the remaining currentcontractual obligations under facility leases net of anticipated subleaseincome from the date of facilityabandonment to the end of the lease term. Certain facilities continued in use during the completion of therestructuring for which the Company continued to record monthly rent expense onthese facilities as an operating expense until the facilities were availablefor 

 

48

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sub-leaseor abandoned.  Non-current leasecancellation and commitment costs related to the restructuring plan and accruedat December 31, 2001 were approximately $37.0 million.  The Company estimates that cash payments forlease cancellations and commitments, net of any sublease income, will beapproximately $13.9 million in 2002 and approximately $37 million for non-currentlease obligation payments which are payable through to July 2009.

 

Termination payments to employees and related costs

 

In the first, second and fourth quarters of 2001, the Company incurredrestructuring charges of approximately $4.7 million, $15.9 million and $10.2million, respectively, for the termination of approximately 2,070 employees tocover costs such as separation pay, outplacement services and benefitcontinuation.  The separation paymentsand termination benefits were accrued and charged to restructuring costs in theperiod that both the benefit amounts were determined and such amounts werecommunicated to the affected employees. The employee reductions came from all areas of the Company and as ofDecember 31, 2001 all of the employees affected under the Plan, Second Plan andThird Plan had been notified and the majority of these terminations werecompleted.  The Company expects accruedrestructuring costs of approximately $4.5 million, as at December 31, 2001,will be fully paid during 2002.

 

Write-off ondisposal of assets and related costs

 

In the second andfourth quarters of 2001, the Company incurred restructuring charges ofapproximately $12.5 million and $17.9 million, respectively, related to thecarrying values of property, equipment and leasehold improvements abandoned inconnection with the restructuring and exit costs associated with theanticipated liabilities for estimated customer claims resulting from thedivestiture of certain parts of the Company’s Global Services division.  Included within the assets disposed of andcharged to restructuring costs were personal computers and equipment used byemployees terminated, office equipment and leasehold improvements in connectionwith the office closure or consolidation of facilities and subsidiaries in theUnited States, Asia and Europe.  Allidentified assets had been taken out of service and were held for disposal atthe end of the quarter for which they were identified for inclusion in theSecond and the Third Plans.

 

Included withinthe second quarter of 2001 charge of $12.5 million were amounts associated withthe anticipated liabilities for estimated customer claims resulting from thedivestiture of certain parts of the Company’s Global Services division whichwere no longer core to the Company’s business strategy.  The amounts accrued were based on theCompany’s estimation of the likely costs associated with the exit of certainservice contracts.  In the fourthquarter of 2001, the Company reevaluated this liability, based on the actualcustomer claims received, amounts paid and the successful execution of certainexit activities. The Company reduced the liability by $4.3 million with acorresponding credit to the restructuring charge in the fourth quarter of2001.  The net charge to restructurecosts and other related to the write-off on disposal of assets and otherrelated costs after recording this credit was approximately $13.6 million.  The Company expects accrued restructuringcosts of approximately $0.4 million, as at December 31, 2001, will be fullypaid in 2002.

 

Costs associated withdivestiture of certain businesses

 

In thefourth quarter of 2001, the Company recorded restructuring charges ofapproximately $0.8 million associated with the divestiture and closure of anumber of professional services operations no longer directly related to theCompany’s core product offering.  Thesebusiness divestitures and liquidations related primarily to the professionalservices organization purchased through the acquisition of AppNet in September2000.  The business divestitures whichwere completed in the first quarter of 2002 are described more fully inCorporate Restructuring and Business Divestitures within Management’sDiscussion and Analysis of operating results for the year.

** **

**7.  NOTES PAYABLE**

 

Notes payable as atDecember 31, 2000 included notes payable in connection with assets acquiredunder a leasing agreement and to former owners of a subsidiary acquired throughthe acquisition of AppNet in September 2000. During 2001 the Company repaid these notes and the related accruedinterest.

 

On March 15, 2001, the Companyentered into an alliance agreement with Microsoft in connection with themarketing, promotion and optimization of Commerce One products using Microsofttechnology.  To support theoptimization, Microsoft made a two-year, interest free loan of $19.0 million tothe Company.  This loan was originallydue on March 15, 2003 but would become immediately payable in the event theCompany breached certain provisions of the loan agreement or alliance agreement.

 

49

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On March 22, 2002,the Company and Microsoft Corporation terminated the alliance agreement andrevised the terms of the loan agreement. Under the revised terms, the $19.0 million loan is now due on April 1,2003 and bears interest at 7% per annum, payable quarterly.  The loan will become immediately due,however, if the Company's cash, cash equivalents and short-term investmentbalance falls below $125.0 million at any point during the term of the revisedloan.  The Company has also agreed tosecure the loan with a $19.0 million cash collateral account.

 

**8.  BUSINESSDIVESTITURE AND NOTES RECEIVABLE**

 

During 2001, theCompany completed the divestiture and closure of certain professional servicesdivisions within its Global Services division as part of the restructuring plandetailed in Note 6 of the Notes to the Consolidated Financial Statements.  These service divisions were initiallyacquired through the acquisition of AppNet in September 2000, and were eitherdivested through management buy-outs during the fourth quarter of 2001 or thefirst quarter of 2002, or the Company ceased business operations.  As part of the Third Plan, the Companyentered into three note receivable agreements, the terms of which are detailedbelow.

 

In October 2001,the Company entered into and executed an asset sale to Beaconfire ConsultingInc., 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 rights to a 4% and4.5% annual share of future revenues of Beaconfire Consulting for the next 2and succeeding 3 years, respectively, from the date of contract execution.  

 

In October 2001,the Company entered into and executed a stock transfer and asset sale withEdgar, 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 primarily on a quarterly basis.  Subject to certain criteria, the Company also has the rights toan annual revenue share of 6% of the future revenues of Edgar, Dunn &Company, Inc., for the four year period following the execution of thisagreement. 

 

On January 9,2002, the Company entered into and 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 February 21,2002, the Company entered into and 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 commonstock of Commerce One E-Government Solutions, Inc to eGov Holdings, Inc., theCompany received cash consideration of approximately $8.4 million.  

 

As a result of thebusiness divestitures completed in the fourth quarter of 2001 the Companyrecorded a loss on divestiture of $0.8 million that was charged torestructuring costs and other.  TheCompany recognized total revenues of approximately $98.7 million in 2001 fromits professional services operations within the Company’s Global Servicesdivision which were disposed of in the fourth quarter of 2001 and the firstquarter of 2002 under the Third Plan.

 

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**9.  COMMITMENTS ANDCONTINGENCIES**

** **

***LEASE OBLIGATIONS***

*** ***

The Company leasesits principal office facilities under non-cancelable operating leases. Rentexpense amounted to $22,856,000, $14,411,000 and $2,321,000 for the years endedDecember 31, 2001, 2000 and 1999, respectively.

 

Capital leaseobligations represent the present value of future rental payments under capitallease agreements for equipment. The original cost and accumulated depreciationof equipment under capital leases was $1,392,000 as at December 31, 2000.

 

Future minimumpayments under operating leases, net of any contracted third-party sub-leaserental income at December 31, 2001 are as follows (in thousands):

 

| **YEARS ENDING DECEMBER 31,** |   |   |    |   |
|-------------------------------|--------|--------|---------|--------|
| 2002                          |   | $      | 30,687  |   |
| 2003                          |   | 27,002 |    |
| 2004                          |   | 27,717 |    |
| 2005                          |   | 22,068 |    |
| 2006                          |   | 17,540 |    |
| Thereafter                    |   | 29,631 |    |
| Total minimum lease payments  |   | $      | 154,645 |   |

*** ***

Non-cancelable operatinglease obligations include $50.9 million which were accrued as restructuringcosts as at December 31, 2001.

 

***LEGAL PROCEEDINGS***

 

On June 19,2001, a putative securities class action, captioned*Cameron v. Commerce One, Inc., et al.*, Civil ActionNo. 01-CV-5575, was filed against the Company, several company officersand directors (the “Individual Defendants”), and three underwriters in theCompany's initial public offering (“IPO”), in the U.S. District Court for theSouthern District of New York. The complaint alleges violations ofSection 11 of the Securities Act of 1933 (“Securities Act”) against all defendants,a violation of Section 15 of the Securities Act and Section 20(a) ofthe Securities Exchange Act of 1934 (“Exchange Act”) against the IndividualDefendants, and violations of Section 12(a)(2) of the Securities Act andSection 10(b) of the Exchange Act (and Rule 10b-5, promulgatedthereunder) against the underwriters. The complaint seeks unspecified damageson behalf of a purported class of purchasers of common stock betweenJuly 1, 1999 and June 15, 2001. 

 

On July 6,2001, a similar complaint, captioned *MarketStreet Securities v. Commerce One, Inc*., Civil ActionNo. 1-01-CV-6138, was filed against the Company, the IndividualDefendants, and several of the IPO underwriters in the Southern District of NewYork. The complaint is substantially identical to the *Cameron* complaint, except in that italleges violations of Section 10(b) of the Exchange Act (andRule 10b-5, promulgated thereunder) against all defendants, including theCompany and the Individual Defendants and the class period ends December 6,2001. 

 

Additionallawsuits were filed making substantially identical allegations to those in the *Cameron* and *Market Street Securities* complaints.  Various plaintiffs have filed similaractions asserting virtually identical allegations against more than 300 othercompanies.  The lawsuits against theCompany have been coordinated for pretrial purposes with these other relatedlawsuits, and have been assigned the collective caption In re Initial PublicOffering Securities Litigation, Civil Action No. 21-MC-92.  The coordinated pretrial proceedings arepresently being overseen by Judge Shira A. Scheindlin.  As of March 27, 2002, no briefing schedulehas been established regarding the lawsuits against the Company.  The Company believes it has meritorious defensesto these securities lawsuits and will defend itself vigorously.

 

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Fromtime to time the Company is involved in other disputes and litigation in thenormal course of business. 

 

The Company doesnot believe that the outcome of any of these disputes or litigation will have amaterial effect on the Company's financial condition or results of operations.However, an unfavorable outcome of some or all of these matters could have amaterial effect on the Company's financial position or results of operations.

 

**10.RELATED PARTY TRANSACTIONS**

 

On September 18,2000, the Company entered into a strategic alliance agreement with SAP andSAPMarkets (collectively, "SAP") to jointly develop, market and sellthe MarketSet suite of applications and the Enterprise Buyer procurementapplications.  This agreement providedthat either party licensing the jointly developed products to its customerswould owe a royalty to the other party. The amount of the royalty was generally based on a percentage of thetotal license fee paid by the customer.

 

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.

 

Effective January1, 2002, the Company amended its strategic alliance agreement with SAP tosimplify its royalty payment provisions and to provide that SAP will have anunlimited right to resell the jointly developed products, in addition to aright to resell certain other Commerce One technology on an OEM basis, duringthe first three quarters of 2002 in return for an aggregate fee of approximately$20.7 million, comprised primarily of license fees, as well as associatedmaintenance and support.  These feeswill be credited against SAP's prior pre-payments to Commerce One, which havebeen recorded by Commerce One as deferred revenue, and the license fees will berecognized ratably over the three-quarter period. The amendment provides thatduring this three-quarter period, Commerce One will pay SAP a royalty basedupon a fixed percentage of the total license fee for jointly developed productssold by Commerce One. The amendment further provides that the royalty paymentsfor such rights shall be renegotiated by the parties prior to September 30,2002 and the agreement will default to the historical royalty structure in theevent the parties fail to agree on a new payment schedule by that date.

 

The amendmentfurther provides that each of the parties intend to phase out the jointlydeveloped Enterprise Buyer procurement products and replace such products overtime with its own successor procurement products.  As a result, the Company anticipates that corresponding revenuesreceived from SAP for the sale of such products will decline in the future asthe parties' shift their focus to their respective procurement products.  The Company further anticipates thatrevenues from the MarketSet product, primarily targeted at the e-marketplacesector, may decline over time as the Company shifts its focus to its otherenterprise applications.

 

During the yearsended December 31, 2001 and 2000, the Company recognized substantial revenuesin connection with its strategic alliance with SAP. In 2001 and 2000, SAPreported royalties to the Company of approximately $79.1 million and $44.6million, respectively, of which license revenues were approximately $68.3million and $44.1 million, respectively. As described above under the terms of the amended strategic allianceagreement with SAP, effective January 1, 2002, SAP will have an unlimited rightto resell jointly developed products during the first three quarters of 2002, inreturn for aggregate royalty fees of approximately $20.7 million, comprisedprimarily of license fees. The license fees will be recognized ratably over thefirst three quarters of 2002. SAP has historically made non-refundable royaltyprepayments to the Company, which the Company has recorded as deferred revenueas payments have been received.  TheCompany recognizes revenue when SAP reports the Company’s share of the licenseand software maintenance fees from jointly developed products that have been licensedby SAP.  When the Company licenses oneof the jointly developed products to its customer the Company records theroyalty payments due to SAP as a reduction of license or support revenue, asappropriate.  The Company has alsogenerated revenues from its relationship with SAP by performing professionalservices as a subcontractor to SAP, primarily on software implementationengagements where the Company has jointly sold MarketSet or Enterprise Buyer toa SAP customer.

 

During the yearsended December 31, 2001 and 2000, the Company recognized revenues withCovisint, LLC (“Covisint”), a business-to-business e-marketplace for theprocurement of goods and services by automakers, their suppliers andothers.  The Company holds a two percentequity interest in Covisint and under the terms of a Technology Agreement withCovisint (see Note 11), the Company indirectly licenses software andprofessional services and software maintenance to Covisint in exchange for cashcompensation and a share of Covisint’s e-marketplace revenue over a ten-yearperiod.

 

During the yearsended December 31, 2001, 2000 and 1999, the Company recognized revenue fromtransactions with NTT Corporation (“NTT”). A member of the Company’s Board of Directors currently serves as anexecutive of an NTT subsidiary.

 

Amounts includedin the consolidated financial statements in connection with the related partytransactions described above are as follows (in thousands):

 

|                                                                |   | **YEARS ENDING DECEMBER 31,** |   |
|---------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                |   | **2001**                      |   | **2000** |   | **1999** |   |
| Revenues:                                                           |   |                          |   |   |   |   |   |
| SAP                                                                 |   | $                             | 79,111 |   | $ | 44,602 |   | $ | — |   |
| Covisint                                                            |   | 12,885                        |   | 6,036 |   | — |   |
| NTT                                                                 |   | 5,745                         |   | 1,874 |   | 2,078 |   |
| Total                                                               |   | $                             | 97,741 |   | $ | 52,512 |   | $ | 2,078 |   |
|                                                                |   |                          |   |   |   |   |   |
| Professional  consulting costs   including within Cost of services: |   |                          |   |   |   |   |   |
| SAP                                                                 |   | $                             | 1,367  |   | $ | — |   | $ | — |   |
| Covisint                                                            |   | —                        |   | — |   |   |   |
| NTT                                                                 |   | —                        |   | — |   | — |   |
| Total                                                               |   | $                             | 1,367  |   | $ | 52,512 |   | $ | — |   |

 

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|                        |   | **DECEMBER 31,** |   |
|-----------------------------|--------|------------------|--------|
|                        |   | **2001**         |   | **2000** | ** ** |
| Accounts  receivable:       |   |             |   |   |   |
| SAP                         |   | $                | 874    |   | $ | 372 |   |
| Covisint                    |   | 738              |   | 1,059 |   |
| NTT                         |   | 57               |   | 1,054 |   |
| Total                       |   | $                | 1,669  |   | $ | 2,485 |   |
|                        |   |             |   |   |   |
| Accounts  payable:          |   |             |   |   |   |
| SAP                         |   | $                | — |   | $ | 2 |   |
| Covisint                    |   | —           |   | — |   |
| NTT                         |   | —           |   | — |   |
| Total                       |   | $                | — |   | $ | 2 |   |
|                        |   |             |   |   |   |
| Deferred  revenue:          |   |             |   |   |   |
| SAP                         |   | $                | 33,863 |   | $ | 35,874 |   |
| Covisint                    |   | 72               |   | — |   |
| NTT                         |   | 1,523            |   | 6,150 |   |
| Total                       |   | $                | 35,458 |   | $ | 42,024 |   |
|                        |   |             |   |   |   |
| Other current  liabilities: |   |             |   |   |   |
| SAP                         |   | $                | 4,114  |   | $ | 1,297 |   |
| Covisint                    |   | —           |   | — |   |
| NTT                         |   | —           |   | 400 |   |
| Total                       |   | $                | 4,114  |   | $ | 1,697 |   |

 

**11. STOCKHOLDERS' EQUITY**

** **

***STRATEGIC RELATIONSHIP WITH 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 5,059,546 shares of common stock to SAP AG foran aggregate purchase price of $250 million.

 

On June 28,2001, Commerce One and SAP AG entered into a further stock purchase agreementand related agreements that resulted in Commerce One's issuance of 47,484,767shares of its common stock to SAP AG at a purchase price of $4.75 per share,for a total purchase price of approximately $225 million. The transactionwas completed on August 6, 2001.  SAP AG owned a total of approximately 57.3 million shares of CommerceOne common stock as of March 20, 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 obligations are also suspended in the event of anoffer for such a change of control or acquisition, but will be reinstated ifthe offer is withdrawn or terminated. SAP AG also remains subject to the 

 

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operation ofCommerce One's shareholder rights plan, or “poison pill”, which was amended topermit SAP AG to beneficially own shares of Commerce One common stock up to the23% 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, shares acquiredin the transaction and any shares it acquires from Commerce One in the future.SAP AG also received the right to nominate a director for election toCommerce One's board of directors for as long as SAP AG owns ten percentor more of Commerce One's common stock. If SAP AG is entitled to nominatea director but no director is nominated or available to attend a meeting ofCommerce One's board of directors, SAP AG may send an observer to attend.SAP AG also generally agreed to vote its shares in proportion with the otherstockholders of Commerce One only with respect to nominees to Commerce One'sboard of directors and stockholder proposals to amend or rescind Commerce One'srights plan or SAP AG's standstill agreement during the standstill period.There are no other restrictions on SAP AG's voting rights. 

 

***STOCKHOLDERS’ RIGHTS AGREEMENT***

 

InMarch 2001, the Board of Directors of the Company approved a Stockholders'Rights Plan. Under the plan, Commerce One issued a dividend of one right foreach share of common stock of the Company held by stockholders of record as ofthe close of business on April 30, 2001. The rights trade with CommerceOne's common stock. Each right entitles stockholders to purchase a fractionalshare of Commerce One's preferred stock for an exercise price of $70. However,the rights are not immediately exercisable and will generally becomeexercisable 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 acquiror, for shares of Commerce One or of the third party acquirorhaving 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 INTO A HOLDING COMPANY STRUCTURE***

 

During 2001, theCompany completed its reorganization into a holding company structure.  As part of the reorganization, theStockholders of the “old” Commerce One (now the wholly-owned subsidiaryCommerce One Operations, Inc.) became stockholders of the “new” Commerce One.

 

In December 2000,Commerce One Operations, Commerce One, Ford Motor Company (Ford), GeneralMotors Corporation (GM), DaimlerChrysler AG, Renault S.A. and Nissan MotorCo., Ltd. entered into several agreements relating to the formation ofCovisint, LLC ("Covisint"), a business-to-business e-marketplace forprocurement of goods and services by automakers, their suppliers and others. Inconnection with the formation of Covisint, under the terms of a FormationAgreement, Commerce One Operations agreed to undergo a corporate restructuringinto a holding company. In addition, under the terms of a Technology Agreement,Commerce One indirectly licenses software and professional services and supportand maintenance services to Covisint in exchange for cash compensation and ashare of Covisint's e-marketplace revenue over a ten-year period. 

 

In July 2001,Commerce One Operations completed the reorganization into a holding companystructure by means of a merger with and into a wholly-owned subsidiary ofCommerce One, pursuant to an Agreement and Plan of Merger, dated April 25,2001 by and among Commerce One, New C1 Merger Corporation and Commerce OneOperations. 

 

Upon completion ofthe reorganization, Commerce One Operations became a wholly owned subsidiary ofCommerce One and changed its name to Commerce One Operations, Inc. Holdersof Commerce One Operations common stock (and the associated right underCommerce One Operation's stockholder rights plan) received one share ofCommerce One common stock for each share of Commerce One Operations commonstock (and associated right) held by such stockholder prior to thereorganization. Commerce One stock began trading on the NASDAQ Stock Market inplace of Commerce One Operations without interruption under the same tradingsymbol "CMRC." 

 

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CommerceOne continued the business of Commerce One Operations as the parent holdingcompany of Commerce One Operations. 

 

On the completionof the reorganization, Commerce One received an aggregate two percent equityinterest in Covisint. Upon the execution of the Formation Agreement, CommerceOne issued 14.4 million shares of its common stock to Ford and14.4 million shares of its common stock to GM. Half of each of Ford's andGM's shares are held in escrow and will be released to Ford and GM in December2002, unless certain conditions under the Formation Agreement are notsatisfied, in which case the shares will be released in June 2004. Priorto the reorganization, the board of directors issued a dividend of one rightunder Commerce One's stockholder rights plan per share of common stock held byFord and General Motors. 

 

In addition,pursuant to a Standstill and Stock Restriction Agreement entered into betweenCommerce One, Commerce One Operations, Ford and GM, all of the shares of stockissued to Ford and GM will generally be subject to transfer restrictions forthree years subject to certain exceptions. Ford and GM also agreed to certain"standstill" restrictions that will generally limit their ability toacquire individually more than 9.95%, or collectively more than 19.9%, ofCommerce One's outstanding common stock for three years, and individually 12.5%and collectively 25% thereafter. In addition, for a period of three years, Fordand GM generally agreed to vote their shares in accordance with therecommendations of Commerce One's Board of Directors with respect to nomineesto the Board of Directors and increases in Commerce One authorized capitalstock and amendments to stock option plans and employee stock purchase plansapproved by Commerce One's Board of Directors. Under a Registration RightsAgreement entered into between Commerce One, Ford and GM, Ford and GM are entitledto registration rights generally beginning after three years, subject tocertain exceptions. 

 

***STOCK OPTIONS***

 

In 1997, theCompany adopted the Commerce One 1997 Incentive Stock Option Plan, which planwas amended and restated in 1999 (the "1997 Plan").  In 1999, the Company adopted the 1999Nonstatutory Stock Option Plan (the "1999 Plan"). In connection withvarious acquisitions, the Company assumed the VEO and CommerceBid stock optionplans in 1999 and 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, 2001, the Company reserved an aggregate of 16,605,360shares 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 grantedunder the 1997 Plan may be either incentive stock options or non-qualifiedstock options. The exercise price of incentive stock options granted under the1997 Plan may not be less than the fair market value of the shares of theCompany's common stock on the date of grant. However, the Administrator of theplan shall determine the exercise price of non-qualified stock options. Theoption holder may exercise unvested options and obtain shares of stock that aresubject to a repurchase option by the Company at the original exercise price inthe event of the employee's termination. As at December 31, 2001 the Companyhad issued 668,000 shares of common stock subject to repurchase.  The repurchase rights lapse over the periodthat the underlying options vest.

 

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

 

Under theCompany's 1999 Director Option Plan, 810,000 shares of common stock have beenreserved for grants of stock options under such plan. As of December 31,2001, options to purchase 765,000 shares have been granted under the 1999Director Option Plan.

 

 

55

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A summary of theCompany's stock option activity under all plans is set forth below:

 

|                                        |   | **NUMBER OF   SHARES** |   | **WEIGHTED-AVERAGE    EXERCISE PRICE   PER SHARE** |   |
|---------------------------------------------|--------|------------------------|--------|----------------------------------------------------|--------|
| Outstanding at December 31, 1998            |   | 11,333,664             |   | $                                                  | 0.14   |   |
| Granted                                     |   | 26,288,024             |   | $                                                  | 11.23  |   |
| Exercised                                   |   | (7,431,282             | )      | $                                                  | 0.21   |   |
| Canceled                                    |   | (2,994,744             | )      | $                                                  | 0.57   |   |
| Outstanding at December 31, 1999            |   | 27,195,662             |   | $                                                  | 10.43  |   |
| Granted and assumed                         |   | 29,023,809             |   | $                                                  | 50.10  |   |
| Exercised                                   |   | (8,033,004             | )      | $                                                  | 5.04   |   |
| Canceled                                    |   | (2,275,244             | )      | $                                                  | 29.63  |   |
| Outstanding at December 31, 2000            |   | 45,911,223             |   | $                                                  | 35.49  |   |
| Granted and assumed                         |   | 48,960,033             |   | $                                                  | 4.43   |   |
| Exercised                                   |   | (4,293,315             | )      | $                                                  | 1.62   |   |
| Canceled                                    |   | (36,847,630            | )      | $                                                  | 40.47  |   |
| Outstanding at December 31, 2001            |   | 53,730,311             |   | $                                                  | 5.89   |   |
| Exercisable and vested at December 31, 2001 |   | 15,585,731             |   | $                                                  | 8.12   |   |

 
|                           |               | **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** |   |
| $                              | 0.00 -  $2.50 |                                    | 4,485,472  |                                                                | 6.95   |   | $ | 1.57 |   | 2,555,576 |   | $ | 0.73 |   |
| $                              | 2.81               |                                    | 18,317,584 |                                                                | 8.73   |   | $ | 2.81 |   | 6,967,794 |   | $ | 2.81 |   |
| $                              | 3.15 -  $3.26 |                                    | 604,390    |                                                                | 9.68   |   | $ | 3.26 |   | 226 |   | $ | 3.26 |   |
| $                              | 3.36               |                                    | 16,817,752 |                                                                | 9.87   |   | $ | 3.36 |   | 1,666 |   | $ | 3.36 |   |
| $                              | 3.48 - $4.99       |                                    | 3,260,446  |                                                                | 8.10   |   | $ | 3.60 |   | 1,457,785 |   | $ | 3.55 |   |
| $                              | 5.46 - $5.61       |                                    | 2,078,120  |                                                                | 8.82   |   | $ | 5.57 |   | 527,931 |   | $ | 5.53 |   |
| $                              | 5.84 - $9.22       |                                    | 2,698,244  |                                                                | 8.99   |   | $ | 8.26 |   | 1,048,321 |   | $ | 7.69 |   |
| $                              | 9.33 - $19.38      |                                    | 1,894,772  |                                                                | 7.98   |   | $ | 15.14 |   | 972,926 |   | $ | 15.92 |   |
| $                              | 19.83 - $32.06     |                                    | 1,675,977  |                                                                | 8.33   |   | $ | 24.29 |   | 912,921 |   | $ | 24.10 |   |
| $                              | 33.00 - $104.44    |                                    | 1,897,554  |                                                                | 8.36   |   | $ | 45.79 |   | 1,140,585 |   | $ | 45.08 |   |
|                           |               | 53,730,311                              |       | 8.88                                                                |   | $ | 5.89 |   | 15,585,731 |   | $ | 8.12 |   |

 

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

 

On March 5,2001, the Company announced a voluntary stock option exchange program for itsemployees. Under the program, employees were given the opportunity to elect tocancel outstanding stock options held by them in exchange for an equal numberof replacement options to be granted at a future date. The elections to canceloptions were effective on April 6, 2001. The exchange resulted in thevoluntary cancellation by 2,307 employees of options to purchase 24,585,051shares of common stock with exercise prices ranging from $1.00 to $104.44 inexchange for the same number of replacement options. The replacement optionswere granted on October 8, 2001 and have the same terms and conditions as eachoptionee's cancelled options, including the vesting schedule andexpiration date of the cancelled options. The replacement options were grantedat an exercise price of $2.81 per share of common stock on October 8, 2001.Employees were eligible to participate in the program; Board members, formeremployees and consultants were ineligible to participate. The Company did notincur any compensation charge in connection with the program.

 

56

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###### **RESTRICTED COMMON STOCK**

** **

In May 2001, theCompany issued 1,725,697 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 2001, 658,846 shares of restricted common stock were forfeiteddue to the cessation of employment by certain employees.  As of December 31, 2001, 744,593 shares ofrestricted common stock were outstanding and subject to forfeiture.

 

**DEFERREDSTOCK-BASED COMPENSATION**

 

The Companyrecorded deferred stock compensation of approximately $16,279,000 in 2001, ofwhich $2,180,000 related to the business acquisition of Exterprise Inc. and$14,099,000 related to the difference between the fair market value and fairvalue of restricted stock issued to employees in May 2001.  During the year the deferred stockcompensation recorded in relation to the restricted stock award was reduced by$4,836,000, representing the deferred stock compensation recorded forrestricted stock subsequently forfeited by employees upon termination of theiremployment.  In the years ended December31, 2000 and 1999 the Company recorded deferred stock compensation ofapproximately $189,340,000 (of which $169,166,000 related to acquisitions) and$4,586,000, respectively, representing the difference between the exerciseprice and the deemed fair value of certain of the Company's stock optionsgranted to employees and options assumed in connection with the acquisitions ofMergent Systems and AppNet. These amounts are being amortized by charges tooperations over the vesting periods of the individual stock options andrestricted common stock awards using a graded vesting method.  Such amortization amounted to approximately$98,302,000, $39,820,000 and $2,324,000 for the years ended December 31,2001, 2000 and 1999, respectively.

 

***PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK BASEDCOMPENSATION***

 

Proformainformation regarding results of operations and net loss per share is requiredby SFAS No. 123, which also requires that the information be determined as ifthe Company had accounted for its employee stock options under the fair valuemethod of SFAS No. 123. The fair value for these options was estimated atthe date of grant using a Black-Scholes option valuation model with thefollowing weighted-average assumptions: a risk-free interest rate of 5.0%, 6.2%and 5.7% for the years ended December 31, 2001, 2000 and 1999,respectively, no dividend yield, a weighted-average expected life of theoptions of 3.0 years for the year ended December 31, 2001 and 2000and 4.5 years for the year ended December 31, 1999, a volatilityfactor of the expected market price of the Company's common stock of 146% and135% for the years ended December 31, 2001 and 2000, respectively, and 170% forthe period July 1, 1999 to December 31, 1999 and 0% for the periodJanuary 1, 1999 to June 30, 1999.

 

The optionvaluation models were developed for use in estimating the fair value of tradedoptions that have no vesting restrictions and are fully transferable. Inaddition, option valuation models require the input of highly subjectiveassumptions, including the expected life of the option. Because the Company'semployee stock options have characteristics significantly different from thoseof traded options and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management's opinion, theexisting models do not necessarily provide a reliable single measure of thefair value of its employee stock options.

 

If compensationcost for the Company's stock-based compensation plans had been determined usingthe fair value at the grant dates for awards under those plans calculated usingthe Black-Scholes option valuation model, the Company's net loss and basic anddiluted net loss per share would have been increased to the pro forma asadjusted amounts indicated below (in thousands except per share data):

 
|                                                            |   | **YEARS  ENDED DECEMBER 31,** |       |
|-----------------------------------------------------------------|--------|-------------------------------|------------|
|                                                            |   | **2001**                      |       | **2000** |   | **1999** |   |
| Net loss—pro forma as  adjusted                            |   | $                             | (2,452,840 | ) | $ | (880,895 | ) | $ | (66,055 | ) |
| Basic and diluted net loss per share—pro forma as adjusted |   | $                             | (9.78      | ) | $ | (5.24 | ) | $ | (0.77 | ) |

 

The weightedaverage fair value of options granted, which is the value assigned to theoptions under SFAS No. 123, was $4.08, $47.06 and $18.89 for optionsgranted during the years ended December 31, 2001, 2000 and 1999,respectively.

 

57

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The pro formaimpact of options on the net loss for the years ended December 31, 2001,2000 and 1999 is not representative of the effects on pro forma net income(loss) for future years, as future years will include the effects of additionalyears of stock option grants.

*** ***

***1999 EMPLOYEE STOCKPURCHASE PLAN***

*** ***

Under the 1999Employee Stock Purchase Plan, (“ESPP Plan”), the Company issued 2,913,301shares of common stock at a weighted average price of $4.00 per share,1,985,340 shares of common stock at a weighted average price of $5.65 per shareand 653,076 shares of common stock at a weighted average price of $2.97 pershare, in 2001, 2000 and 1999, respectively. As of December 31, 2001, 10,783,687 shares of common stock havebeen reserved for issuance under the ESPP Plan. Eligible employees may purchasecommon stock at 85% of the lesser of the fair market value of the Company'scommon stock on the first day of the applicable two-year offering period or thelast day of the applicable six month purchase period. 

 

***WARRANTS***

*** ***

InNovember 2000, the Company issued a warrant to a consulting firm, inconnection with services provided, to purchase 100,000 shares of common stockat an exercise price of $110.92. The warrant is exercisable throughMarch 17, 2005. The fair value of the warrants was estimated using theBlack-Scholes option pricing model with the following assumptions: risk freerate of 5.0%, weighted average contractual life of 4.3 years, 106%volatility and no dividend yield, which resulted in a value of $1,524,000. Thisamount was charged to operations during the year 2000. 

 

**12. INCOME TAXES**

** **

Thefollowing is a geographical breakdown of consolidated income (loss) beforeincome taxes by income tax jurisdiction (in thousands):

 

|          |   | **YEARS  ENDED DECEMBER 31,** |       |
|---------------|--------|-------------------------------|------------|
|          |   | **2001**                      |       | **2000** |   | **1999** |   |
| United States |   | $                             | (2,626,787 | ) | $ | (308,411 | ) | $ | (50,187 | ) |
| Foreign       |   | 51,689                        |       | (30,136 | ) | (8,947 | ) |
| Total         |   | $                             | (2,575,098 | ) | $ | (338,547 | ) | $ | (59,134 | ) |

 

There has been noprovision for U.S. federal or state income taxes for any period as the Companyhas incurred operating losses in all periods. During the years endedDecember 31, 2001, 2000 and 1999, the Company recorded foreign income taxprovisions of $9,001,000, $6,400,000 and $4,188,000, respectively, relating totaxes withheld from customer payments and remitted to foreign taxingjurisdictions on the Company's behalf and income taxes generated in certainforeign jurisdictions.

 

Areconciliation of income taxes at the statutory federal income tax rate to netincome taxes included in the accompanying statements of operations is asfollows:

 

|                                         |   | **YEARS  ENDED DECEMBER 31** |
|----------------------------------------------|--------|------------------------------|
|                                         |   | **2001**                     |   | **2000** |   | **1999** |   |
| US federal taxes (benefit) at statutory rate |   | (35.0                        | )% | (35.0 | )% | (35.0 | )% |
| State                                        |   | (5.2                         | )% | (5.3 | )% | (5.0 | )% |
| Foreign                                      |   | 0.3                          | % | 1.9 | % | 7.1 | % |
| Acquisition related charges                  |   | 30.0                         | % | 24.7 | % | 12.1 | % |
| Valuation allowance                          |   | 10.2                         | % | 15.6 | % | 28.1 | % |
| Other Americas                               |   | —                       |   | — |   | (0.2 | )% |
| Total                                        |   | 0.3                          | % | 1.9 | % | 7.1 | % |

 

 

58

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Deferred incometaxes reflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. Significant components of the Company'sdeferred tax assets are as follows (in thousands):

 

|                                       |   | **DECEMBER  31,** |    |
|--------------------------------------------|--------|-------------------|---------|
|                                       |   | **2001**          |    | **2000** |   |
| Deferred tax assets:                       |   |              |    |   |   |
| Net operating loss carryforwards           |   | $                 | 239,607 |   | $ | 157,128 |   |
| Capitalized research and development costs |   | 12,156            |    | 5,604 |   |
| Deferred revenue                           |   | 22,035            |    | 15,016 |   |
| Tax credit carryforwards                   |   | 9,516             |    | 6,072 |   |
| Accrued costs and expenses                 |   | 29,805            |    | 26,543 |   |
| Deferred tax assets                        |   | 313,119           |    | 210,363 |   |
| Less: valuation allowance                  |   | (299,851          | )       | (145,844 | ) |
| Total deferred tax assets                  |   | 13,268            |    | 64,519 |   |
| Deferred tax liabilities:                  |   |              |    |   |   |
| Other identified intangible assets         |   | (13,268           | )       | (64,519 | ) |
| Total deferred tax liabilities             |   | (13,268           | )       | (64,519 | ) |
| Net deferred tax assets                    |   | $                 | 0       |   | $ | 0 |   |

 

Realization ofdeferred tax assets is dependent upon future earnings, if any, the timing andamount of which are uncertain. Accordingly, the net deferred tax assets havebeen fully offset by a valuation allowance. The valuation allowance increasedby $154,008,000, $102,829,000 and $29,212,000 during 2001, 2000 and 1999respectively.

 

The tax benefitsassociated with employee stock options provide a deferred tax benefit of$174 million as of December 31, 2001 which has been fully offset by avaluation allowance and will be credited to additional paid-in capital whenrealized.

 

As ofDecember 31, 2001, the Company had net operating loss carryforwards forfederal income tax purposes of approximately $662,272,000, which expire in theyears 2009 through 2021.

 

The Company alsohad net operating loss carryforwards for state income tax purposes ofapproximately $240,584,000 expiring in the years 2002 through 2011.

 

In addition, theCompany had federal and state tax credit carryforwards of approximately$6,251,000 and $4,947,000 respectively, which expire in the years 2012 through2021.

 

Utilization of theCompany's net operating loss and tax credit carryforwards may be subject to asubstantial annual limitation due to the ownership change limitations providedby the Internal Revenue Code and similar state provisions. Such an annuallimitation could result in the expiration of the net operating loss and taxcredit carryforwards before utilization.

 

**13.PROFIT SHARING PLAN**

 

The Company has aprofit sharing plan and trust under Section 401(k) of the Internal RevenueCode that covers substantially all employees. Eligible employees may contributeamounts to the plan via payroll withholdings, subject to certain limitations.The Company did not match contributions by plan participants during the yearended December 31, 2000. The Company began making matching contributionsin 2001.

 

59

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**14. REVENUE BY GEOGRAPHIC AREA**

** **

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

 

|                           |   | **YEARS  ENDED DECEMBER 31,** |    |
|--------------------------------|--------|-------------------------------|---------|
|                           |   | **2001**                      |    | **2000** |   | **1999** |   |
| United States                  |   | $                             | 270,630 |   | $ | 225,994 |   | $ | 9,733 |   |
| Europe, Middle East and Africa |   | 83,361                        |    | 119,372 |   | 8,877 |   |
| Asia Pacific                   |   | 28,319                        |    | 47,419 |   | 7,743 |   |
| Other Americas                 |   | 26,259                        |    | 9,011 |   | 7,204 |   |
|                           |   | $                             | 408,569 |   | $ | 401,796 |   | $ | 33,557 |   |

** **

**15. BUSINESS COMBINATIONS**

** **

***EXTERPRISE, INC.***

 

Effective May 25,2001, the Company acquired Exterprise, Inc. (“Exterprise”), a provider ofplatform solutions that enable the development and deployment of e-commerceapplications.  The acquisition wasstructured as a common stock for common stock merger and has been accounted foras a purchase transaction.  The purchaseconsideration was approximately $66.3 million consisting of 7.2 million sharesof common stock with a fair value of approximately $60.7 million, assumption ofoption to acquire approximately 258,000 shares of common stock with a fairvalue of $2.5 million and transaction costs of approximately $3.1 million.

 

The Companyestimated that approximately $4.5 million of the $66.3 million purchaseconsideration represented purchased in-process research and development thathad not yet reached technological feasibility and had no alternative futureuse.  Accordingly, this amount wascharged to operations during the year.

 

The total purchasecost for the Exterprise acquisition has been allocated to the acquired assetsand assumed liabilities based upon estimates of their fair value.  The following table depicts the totalpurchase cost and the allocation thereof (in thousands):

 
| 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 |   |

 

Goodwill arisingfrom the acquisition was amortized on a straight-line basis over five yearsuntil December 31, 2001.  Otherintangible assets are amortized over their estimated useful lives ranging fromone to five years.  Effective January 1,2002 goodwill and indefinite lived intangible assets will be assessed forimpairment under SFAS No. 142, “Goodwill and other Intangible Assets.”

 

***APPNET, INC.***

*** ***

EffectiveSeptember 13, 2000, the Company acquired publicly traded AppNet, Inc.("AppNet"), a provider of end-to-end Internet professional services.The acquisition was accounted for as a purchase transaction. The financialstatements include operating results of AppNet from the date of theacquisition. The purchase consideration was approximately $1,653.3 millionconsisting of 27,887,280 shares of common stock with a fair value ofapproximately $1.266 billion and assumption of option to acquireapproximately 7.0 million options of common stock with a fair value ofapproximately $363.1 million, and transaction costs of approximately$24.0 million.

 

The purchase costs was allocated to the acquiredassets and assumed liabilities based on the estimated deemed fair

 

60

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values as follows(in thousands):

 
| Cash                                  |   | $         | 39,122    |   |
|---------------------------------------|--------|-----------|-----------|--------|
| Accounts  receivable and other assets |   | 16,414    |      |
| Deferred  compensation                |   | 169,166   |      |
| Intangible  assets:                   |   |      |      |
| Assembled  workforce                  |   | 28,000    |      |
| Customer  contracts                   |   | 11,900    |      |
| Internal  proprietary software        |   | 3,500     |      |
| Covenant not to  compete              |   | 2,300     |      |
| Goodwill                              |   | 1,382,936 |      |
| Total intangible  assets              |   | 1,428,636 |      |
| Total purchase  costs                 |   | $         | 1,653,338 |   |

 

Goodwill arisingfrom the acquisition was amortized on a straight-line basis over three yearsuntil December 31, 2001.  Otherintangible assets are amortized over their estimated useful lives ranging fromone to three years.  Effective January1, 2002 goodwill and indefinite lived intangible assets will be assessed forimpairment under SFAS No. 142, “Goodwill and other Intangible Assets.”

 

During 2001 the Companyissued an additional 857,792 shares of its common stock to certain formerstockholders and employees of AppNet. The fair value of these shares was approximately $11.5 million, whichamount was charged against related liabilities assumed by the Company inconnection with the acquisition.

 

***MERGENT SYSTEMS, INC.***

 

EffectiveJanuary 7, 2000, the Company acquired Mergent Systems, Inc.("Mergent"), a company specializing in enabling infomediaries andGlobal 3000 companies to create, operate, and manage product informationsystems and aggregated multivendor catalogs for e-commerce, in a transactionaccounted for as a purchase. The consolidated financial statements includeoperating results of Mergent from the date of acquisition. The purchaseconsideration was approximately $148.4 million consisting of 1,742,190shares of common stock with a fair value of $122.6 million, assumption ofoptions to acquire 219,010 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.               

 

The purchase cost wasallocated to the acquired assets and assumed liabilities based on the estimateddeemed fair values as follows (in thousands):

 
| Cash                                                                               |   | $       | 1,126   |   |
|------------------------------------------------------------------------------------|--------|---------|---------|--------|
| Accounts  receivable and other assets                                              |   | 272     |    |
| Intangible  assets:                                                                |   |    |    |
| Purchased  technology                                                              |   | 7,884   |    |
| Assembled  workforce                                                               |   | 373     |    |
| Tradenames/patents                                                                 |   | 555     |    |
| Goodwill                                                                           |   | 133,065 |    |
| Total intangible  assets                                                           |   | 141,877 |    |
| Purchased  in-process research and development to be charged to operations in 2000 |   | 5,142   |    |
| Total purchase  cost                                                               |   | $       | 148,417 |   |

 

Goodwill arisingfrom the acquisition was amortized on a straight-line basis over five yearsuntil December 31, 2001.  Otherintangible assets are amortized over their estimated useful lives ranging fromone to five years.  Effective 

 

61

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January 1, 2002goodwill and indefinite lived intangible assets will be assessed for impairmentunder SFAS No. 142, “Goodwill and other Intangible Assets.”

 

The value of theacquired in-process technology was computed using a discounted cash flowanalysis on the anticipated income stream of the related product revenues. Thediscounted cash flow analysis was based on management's forecast of futurerevenues, cost of revenues, and operating expenses related to the products andtechnologies purchased from Mergent. The calculation of value was then adjustedto reflect only the value creation efforts of Mergent prior to the close of theacquisition.

 

***COMMERCEBID.COM, INC.***

*** ***

EffectiveNovember 12, 1999, the Company acquired CommerceBid.com, Inc.("CommerceBid"), a provider of business-to-business auction andreverse auction service solutions, in a transaction accounted for as apurchase. The consolidated financial statements include the operating resultsof CommerceBid from the date of acquisition. The purchase consideration wasapproximately $227.5 million consisting of 4,578,312 shares of commonstock with a fair value of $217.1 million, assumptions to acquire 59,004options with a fair value of $2.8 million, $4.5 million in cash plusan additional $5.0 million in contingent consideration.

 

Thepurchase cost was allocated to the acquired assets and assumed liabilitiesbased on deemed fair values as follows (in thousands):

 
| Cash                                                                         |   | $       | 1,160   |   |
|------------------------------------------------------------------------------|--------|---------|---------|--------|
| Accounts  receivable and other assets                                        |   | 296     |    |
| Intangible  assets:                                                          |   |    |    |
| Purchased  technology                                                        |   | 23,646  |    |
| Assembled  workforce                                                         |   | 385     |    |
| Goodwill                                                                     |   | 195,707 |    |
| Total intangible  assets                                                     |   | 219,738 |    |
| Purchased  in-process research and development charged to operations in 1999 |   | 6,337   |    |
| Total purchase  cost                                                         |   | $       | 227,531 |   |

 

Goodwill arisingfrom the acquisition was amortized on a straight-line basis over four yearsuntil December 31, 2001.  Otherintangible assets are amortized over their estimated useful lives ranging fromone to four years.  Effective January 1,2002 goodwill and indefinite lived intangible assets will be assessed forimpairment under SFAS No. 142, “Goodwill and other Intangible Assets.”

 

The value of theacquired in-process technology was computed using a discounted cash flowanalysis on the anticipated income stream of the related product revenues. Thediscounted cash flow analysis was based on management's forecast of futurerevenues, cost of revenues, and operating expenses related to the products andtechnologies purchased from CommerceBid. The calculation of value was thenadjusted to reflect only the value creation efforts of CommerceBid prior to theclose of the acquisition.

 

***VEO SYSTEMS, INC.***

*** ***

Effective January 15,1999, the Company acquired VEO Systems, Inc. ("VEO"), a companyspecializing in the creation of XML technology applications, in a transactionaccounted for as a purchase. The consolidated financial statements include theoperating results of VEO from the date of acquisition. The purchaseconsideration was approximately $23.2 million consisting of 11,794,130shares of common stock with a fair value of $13.3 million, 1,200,249shares of Series D prime preferred stock (having the same rights as Series Dwith an aggregate liquidation preference of $2,000,000) with a fair value of$2.8 million, 4,954,626 stock options with a fair value of$5.1 million, $258,000 of assumed liabilities, $400,000 in cash and$400,000 of acquisition costs. In addition, the Company advanced $950,000 incash to VEO under a note receivable during 1998. An additional consideration of$400,000 in cash was paid to certain employees who remained employed throughJanuary 2000.

 

The purchase costwas allocated to the acquired assets and assumed liabilities based on deemedfair

 

62

----

 

values as follows (in thousands):

 

| Cash                                                                         |   | $      | 358    |   |
|------------------------------------------------------------------------------|--------|--------|--------|--------|
| Accounts  receivable and other assets                                        |   | 823    |   |
| Intangible  assets:                                                          |   |   |   |
| Purchased  technology                                                        |   | 2,274  |   |
| Assembled  workforce                                                         |   | 541    |   |
| Tradenames/patents                                                           |   | 693    |   |
| Goodwill                                                                     |   | 15,432 |   |
| Total intangible  assets                                                     |   | 18,940 |   |
| Purchased  in-process research and development charged to operations in 1999 |   | 3,037  |   |
| Total purchase cost                                                          |   | $      | 23,158 |   |

 

Goodwill arising from the acquisition was amortized ona straight-line basis over five years until December 31, 2001.  Other intangible assets are amortized overtheir estimated useful lives ranging from two to five years.  Effective January 1, 2002 goodwill andindefinite lived intangible assets will be assessed for impairment under SFASNo. 142, “Goodwill and other Intangible Assets.”

 

The following unaudited pro forma adjusted summaryrepresents the consolidated results of operations for the years ended December31, 2001, 2000 and 1999 as if the acquisitions of VEO, CommerceBid, MergentSystems, AppNet and Exterprise had occurred on January 1, 1999 and are notintended to be indicative of future results (in thousands, except per sharedata):

 

|                                                                      |   | **YEARS  ENDED DECEMBER 31,** |       |
|---------------------------------------------------------------------------|--------|-------------------------------|------------|
|                                                                      |   | **2001**                      |       | **2000** |   | **1999** |   |
| Pro forma  adjusted net revenue                                           |   | $                             | 409,150    |   | $ | 540,944 |   | $ | 143,418 |   |
| Pro forma  adjusted net loss                                              |   | $                             | (2,606,032 | ) | $ | (753,359 | ) | $ | (817,495 | ) |
| Pro forma  adjusted net loss per share - basic and diluted                |   | $                             | (10.27     | ) | $ | (3.87 | ) | $ | (6.44 | ) |
| Number of shares  used in pro forma share calculation - basic and diluted |   | 253,707                       |       | 194,868 |   | 126,867 |   |

 

The pro forma results of operations include historicaloperations of the Company, VEO, CommerceBid, Mergent Systems, AppNet andExterprise adjusted to reflect certain pro-forma adjustments, includingamortization of goodwill and other intangible assets arising from theacquisitions, and do not include charges for purchased in-process research anddevelopment of $4,548,000, $9,374,000 and $5,142,000 in 2001, 2000 and 1999,respectively, as a result of these acquisitions as they are non-recurringcharges.  These results do not purportto be indicative of what would have occurred had the acquisition been made asof that date or the results of operations which may occur in future periods.

 

**15.SELECTED QUARTERLY COMBINED FINANCIAL DATA (UNAUDITED)**

 

A summary of the Company’s quarterly financial resultsfollows (in thousands, except per share data).

 
|                                  |   | **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 |   |
| 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 |   | $                                       | (1.02    | ) | $ | (9.02 | ) | $ | (0.45 | ) | $ | (0.59 | ) |

 
|                                  |   | **YEAR ENDED  DECEMBER  31, 2000** |    |
|---------------------------------------|--------|-----------------------------------------|---------|
|                                  |   | **QUARTER  ENDED**                      |    |
|                                  |   | **March 31**                            |    | **June 30** |   | **September  30** |   | **December  31** |   |
| Total revenues                        |   | $                                       | 35,009  |   | $ | 62,704 |   | $ | 112,684 |   | $ | 191,399 |   |
| Loss from  operations                 |   | $                                       | (45,186 | ) | $ | (42,859 | ) | $ | (62,496 | ) | $ | (195,023 | ) |
| Net loss                              |   | $                                       | (43,645 | ) | $ | (43,147 | ) | $ | (60,646 | ) | $ | (197,509 | ) |
| Basic and  diluted net loss per share |   | $                                       | (0.29   | ) | $ | (0.28 | ) | $ | (0.37 | ) | $ | (0.99 | ) |

 

**ITEM9.       CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

** **

None.

 

63

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**PART III**

 

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

 

The informationrequired by this item with respect to identification of directors and officersis incorporated by reference from Commerce One’s definitive Proxy Statement(“Proxy Statement”) for the Annual Meeting of Stockholders to be held onMay 29, 2002 under the captions “The Board” and “Executive Officers,”respectively.

 

The information required by this item with respect tothe information required under Item 405 of Regulation S-K is incorporatedby reference from the Proxy Statement under the caption “Section 16(a)Beneficial Ownership Reporting Compliance.”

 

**ITEM11.      EXECUTIVE COMPENSATION**

 

The information required by this Item is incorporatedby reference from the Proxy Statement under the caption “ExecutiveCompensation.”

 

**ITEM12.      SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

The information required under this Item isincorporated by reference from the Proxy Statement under the caption “SecurityOwnership of Management and Principal Stockholders.”

 

**ITEM13.      CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

The information required under this Item isincorporated by reference from the Proxy Statement under the captions “CertainRelationships and Related Transactions” and “Compensation Committee Interlocksand Insider Participation.”

 

**PART IV**

 

**ITEM 14****.        EXHIBITS, FINANCIAL STATEMENT SCHEDULES ANDREPORTS ON FORM 8-K**

 

(a)           DOCUMENTS FILED AS PART OF THE REPORT

 

1. FINANCIAL STATEMENTS

 

See Item 8 of this Form 10-K

 

2. FINANCIAL STATEMENT SCHEDULES

 

The following financial statement schedule of CommerceOne for each of the years ended December 31, 2001, 2000 and 1999 should beread in conjunction with the Consolidated Financial Statements, and relatednotes thereto, of Commerce One.

 

64

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|                                                |   |   |
|-----------------------------------------------------|--------|--------|
| Schedule  II—Valuation and Qualifying Accounts |   |   |

 

Schedules other than those listed above have beenomitted as they are either not required, not applicable, or the information hasotherwise been shown in the consolidated financial statements or notesthereafter.

 

3. EXHIBITS

 

The exhibits listed on the accompanying index toexhibits immediately following the financial statement schedule are filed aspart of, or incorporated by reference into, this Form 10-K.

 

**EXHIBIT INDEX**

** **
| **EXHIBIT NUMBER** |   | **DESCRIPTION**                                                                                                                                                                                                                                                                      |
|--------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                 |
| 3.1(1)             |   | Restated Certificate of Incorporation of the  Registrant.                                                                                                                                                                                                                            |
| 3.2                |   | 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)            |   | Governance Agreement between the Registrant and  British Telecommunications, plc., dated March 26, 1999.                                                                                                                                                                             |
| 10.8(2)            |   | Marketing Agreement between the Registrant and  British Telecommunications, plc., dated March 26, 1999.                                                                                                                                                                              |
| 10.9(2)            |   | MarketSite License Agreement between the Registrant  and British Telecommunications, plc., dated March 25, 1999.                                                                                                                                                                     |
| 10.10(2)           |   | Amended and Restated Trading Agreement between the  Registrant and British Telecommunications, plc., dated March 25, 1999.                                                                                                                                                           |
| 10.11(2)           |   | Stock Purchase and Master Strategic Relationship  Agreement between the Registrant and NTT Communications, dated June 1999.                                                                                                                                                          |
| 10.12(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.                                                                                                                    |

 

65

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| 10.13(4)   |   | Investor Rights Agreement by and between Commerce  One, Inc., New Commerce One Holding, Inc. and SAP AG dated June 28, 2001.                                                                                                                                                                                           |
|------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.14(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. |
| 10.15(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.                                                                                                                                 |
| 10.16(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.                                                                                                                                         |
| 10.17(6)   |   | Stand-alone Stock Option Agreement between Robert M.  Kimmitt and Commerce One, Inc., dated as of April 14, 2000.                                                                                                                                                                                                      |
| 10.18(6)   |   | Relocation Loan Agreement between Robert M. Kimmitt  and Commerce One, Inc. dated May 17, 2000, (repaid in full during 2001.)                                                                                                                                                                                          |
| 10.18.1(7) |   | First Amended Relocation Loan Agreement between  Robert M. Kimmitt and Commerce One, Inc. dated January 31, 2001.                                                                                                                                                                                                      |
| 10.19(8)   |   | Strategic Alliance Agreement dated September 18,  2000 by and between Commerce One, 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)   |   | Internet Outfitters, Inc. 1996 Incentive Stock  Option Plan.                                                                                                                                                                                                                                                           |
| 10.23(9)   |   | Century Computing, Incorporated Incentive Stock  Option Plan.                                                                                                                                                                                                                                                          |
| 10.24(7)   |   | Form of Change of Control Severance Agreement.                                                                                                                                                                                                                                                                         |
| 10.25(7)   |   | Form of Amendment No. 1 to Change of Control Severance  Agreement.                                                                                                                                                                                                                                                     |
| 10.26(10)  |   | Strategic Alliance Agreement Amendment No. 2, dated  April 10, 2001 by and between Commerce One Operations, Inc., SAP and SAP  Markets, Inc.                                                                                                                                                                           |
| 10.27(10)  |   | Strategic Alliance Agreement Amendment No. 3, dated  June 29, 2001 by and between Commerce One Operations, Inc., SAP and SAP  Markets, Inc.                                                                                                                                                                            |
| 10.28(11)  |   | Employee Loan Agreement between Commerce One, Inc.,  and Dennis H. Jones, dated August 22, 2001.                                                                                                                                                                                                                       |
| 10.29      |   | Promissory Note, dated March 22, 2002, executed by  Commerce One, Inc. in favor of Microsoft Capital Corporation.                                                                                                                                                                                                      |
| 10.30      |   | Collateral Account Notification and Acknowledgment  between Commerce One, Inc. and Microsoft Capital Corporation.                                                                                                                                                                                                      |

 

66

----

 
| 10.31 |   | Strategic Alliance Agreement Amendment No. 4,  effective as of January 1, 2002 by and between Commerce One Operations, Inc.,  SAP and SAP Markets, Inc.* |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 21.1  |   | List of Subsidiaries of Registrant.                                                                                                                      |
| 23.1  |   | Consent of Ernst & Young LLP, Independent  Auditors.                                                                                                 |
| 24.1  |   | Power of Attorney (see page 66).                                                                                                                         |

 

----

(1)       Incorporated by reference to CommerceOne’s Form 8-A (File No. 000-32979) filed on July 11, 2001.

 

(2)       Incorporated by reference to CommerceOne’s Registration Statement of Form S-1 (File No. 333-76987), declaredeffective July 1, 1999.

 

(3)       Incorporated by reference to CommerceOne’s Form S-8 (File No. 333-33328), filed on March 27, 2000.

 

(4)       Incorporated by reference to CommerceOne’s Current Report on Form 8-K (File No. 333-58558), filed on July 10, 2001.

 

(5)       Incorporated by reference to CommerceOne’s Current Report on Form 8-K (File No. 000-26453), filed on December 29,2000.

 

(6)       Incorporated by reference to CommerceOne’s Quarterly Report on Form 10-Q (File No. 000-26453), filed on August 14,2000.

 

(7)       Incorporated by reference to CommerceOne’s Annual Report on Form 10-K (File No. 000-26453), filed on April 2, 2001.

 

(8)       Incorporated by reference to CommerceOne’s Quarterly Report on Form 10-Q (File No. 000-26453), filed on November 14,2000.

 

(9)       Incorporated by reference to Commerce One’sForm S-8 (File No. 333-46254), filed on September 20, 2000.

 

(10)     Incorporated by reference to Commerce One’sQuarterly Report on Form 10-Q (File No. 000-32979), filed on August 14, 2001.

 

(11)     Incorporated by reference to Commerce One’sQuarterly Report on Form 10-Q (File No. 000-32979), filed on November 14, 2001.

 

*         Portions of this exhibit have been omitted pending adetermination by the Securities and Exchange Commission as to whether theseportions should be granted confidential treatment.

 

67

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(b)           **REPORTSON FORM 8-K**

 

The following reports on Form 8-K were filed duringthe quarter ended December 31, 2000:

 

None.

 

(c)           **EXHIBITS**

 

See Item 14(a)(3), above.

 

(d)           **FINANCIALSTATEMENT SCHEDULES**

 

See Item 8, above.

 

68

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: March 30, 2002

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

 

**POWER OF ATTORNEY**

 

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Peter F. Pervere andBeth Frensilli, his or her attorneys-in-fact, each with the power ofsubstitution, for him or her in any and all capacities, to sign any amendmentsto this Annual Report on Form 10-K, and to file the same, with exhibitsthereto and other documents in connection therewith, with the Securities andExchange Commission, hereby ratifying and conforming all that saidattorney-in-fact, or his or her substitute or substitutes, any do or cause tobe done by virtue hereof.

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| **Signature**          |   | **Title**                                    |   | **Date**       |
|------------------------|--------|----------------------------------------------|--------|----------------|
|                   |   |                                         |   |           |
| /s/ MARK B. HOFFMAN    |   | Chief Executive Officer  and Chairman of the |   | March 30, 2002 |
| Mark B. Hoffman        |   | Board (Principal  Executive Officer)         |   |           |
|                   |   |                                         |   |           |
| /s/ DENNIS H. JONES    |   | Vice Chairman of the  Board and President    |   | March 30, 2002 |
| Dennis H. Jones        |   |                                         |   |           |
|                   |   |                                         |   |           |
| /s/ PETER F. PERVERE   |   | Senior Vice President  and Chief Financial   |   | March 30, 2002 |
| Peter F. Pervere       |   | Officer  (Principal Financial and            |   |           |
|                   |   | Accounting  Officer)                         |   |           |
|                   |   |                                         |   |           |
| /s/ JOHN V. BALEN      |   | Director                                     |   | March 30, 2002 |
| John V. Balen          |   |                                         |   |           |
|                   |   |                                         |   |           |
| /s/ KENNETH C. GARDNER |   | Director                                     |   | March 30, 2002 |
| Kenneth C. Gardner     |   |                                         |   |           |
|                   |   |                                         |   |           |
| /s/ WILLIAM J. HARDING |   | Director                                     |   | March 30, 2002 |
| William J. Harding     |   |                                         |   |           |
|                   |   |                                         |   |           |
| /s/ ROBERT M. KIMMITT  |   | Director                                     |   | March 30, 2002 |
| Robert M. Kimmitt      |   |                                         |   |           |
|                   |   |                                         |   |           |
| /s/ DAVID H. FURNISS   |   | Director                                     |   | March 30, 2002 |
| David H. Furniss       |   |                                         |   |           |
|                   |   |                                         |   |           |
| /s/ TOSHIMUNE OKIHARA  |   | Director                                     |   | March 30, 2002 |
| Toshimune Okihara      |   |                                         |   |           |
|                   |   |                                         |   |           |
| /s/ LARRY W. SONSINI   |   | Director                                     |   | March 30, 2002 |
| Larry W. Sonsini       |   |                                         |   |           |
|                   |   |                                         |   |           |
| /s/ ALEX S. VIEUX      |   | Director                                     |   | March 30, 2002 |
| Alex S. Vieux          |   |                                         |   |           |

 

69

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**COMMERCE ONE, INC.**

**SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS**

 

**ACCOUNTSRECEIVABLE ALLOWANCES (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, 1999 |   | $                                       | 295    |             | $      | —                                 |   | $                                                   | 213    |           | $      | —                             |   | $ | (15 | ) | $ | 493 |   |
| Year ended  December 31, 2000 |   | $                                       | 493    |             | $      | 9,154                                  |   | $                                                   | 2,657  |           | $      | 2,510                              |   | $ | (4,639 | ) | $ | 10,175 |   |
| Year ended  December 31, 2001 |   | $                                       | 10,175 |             | $      | —                                 |   | $                                                   | 32,924 |           | $      | 16,807                             |   | $ | (33,550 | ) | $ | 26,356 |   |

 

 

S-1

----

 

**EXHIBITINDEX**

** **
| **EXHIBIT NUMBER** |       | **DESCRIPTION**                                                                                                                                                                                                                                                                      |
|--------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                                                                                                 |
| 3.1(1)             |       | Restated Certificate of  Incorporation of Commerce One, Inc.                                                                                                                                                                                                                         |
| 3.2                |       | 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)            |       | Governance Agreement  between the Registrant and British Telecommunications, plc., dated March 26,  1999.                                                                                                                                                                            |
| 10.8(2)            |       | Marketing Agreement  between the Registrant and British Telecommunications, plc., dated March 26,  1999.                                                                                                                                                                             |
| 10.9(2)            |       | MarketSite License  Agreement between the Registrant and British Telecommunications, plc., dated  March 25, 1999.                                                                                                                                                                    |
| 10.10(2)           |       | Amended and Restated  Trading Agreement between the Registrant and British Telecommunications,  plc., dated March 25, 1999.                                                                                                                                                          |
| 10.11(2)           |       | Stock Purchase and  Master Strategic Relationship Agreement between the Registrant and NTT  Communications, dated June 1999.                                                                                                                                                         |
| 10.12(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.                                                                                                                    |
|               | 10.13(4)   |                                                                                                                                                                                                                                                                                 | Investor Rights  Agreement by and between Commerce One, Inc., New Commerce One Holding, Inc.  and SAP AG dated June 28, 2001. |
|               | 10.14(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. |
|               | 10.15(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. |
|               | 10.16(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. |
|               | 10.17(6)   |                                                                                                                                                                                                                                                                                 | Stand-alone Stock  Option Agreement between Robert M. Kimmitt and Commerce One, Inc., dated as  of April 14, 2000. |
|               | 10.18(6)   |                                                                                                                                                                                                                                                                                 | Relocation Loan  Agreement between Robert M. Kimmitt and Commerce One, Inc. dated May 17,  2000. |
|               | 10.18.1(7) |                                                                                                                                                                                                                                                                                 | First Amended  Relocation Loan Agreement between Robert M. Kimmitt and Commerce One, Inc.  dated January 31, 2001. |
|               | 10.19(8)   |                                                                                                                                                                                                                                                                                 | Strategic Alliance  Agreement dated September 18, 2000 by and between Commerce One, 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)   |                                                                                                                                                                                                                                                                                 | Internet Outfitters,  Inc. 1996 Incentive Stock Option Plan. |
|               | 10.23(9)   |                                                                                                                                                                                                                                                                                 | Century Computing,  Incorporated Incentive Stock Option Plan. |
|               | 10.24(7)   |                                                                                                                                                                                                                                                                                 | Form of Change of  Control Severance Agreement. |
|               | 10.25(7)   |                                                                                                                                                                                                                                                                                 | Form of Amendment No. 1  to Change of Control Severance Agreement. |
|               | 10.26(10)  |                                                                                                                                                                                                                                                                                 | Strategic Alliance  Agreement Amendment No. 2, dated April 10, 2001 by and between Commerce One  Operations, Inc., SAP and SAP Markets, Inc. |
|               | 10.27(10)  |                                                                                                                                                                                                                                                                                 | Strategic Alliance  Agreement Amendment No. 3, dated June 29, 2001 by and between Commerce One  Operations, Inc., SAP and SAP Markets, Inc. |
|               | 10.28(11)  |                                                                                                                                                                                                                                                                                 | Employee Loan Agreement  between Commerce One, Inc., and Dennis H. Jones, dated August 22, 2001. |
|               | 10.29      |                                                                                                                                                                                                                                                                                 | Promissory Note, dated  March 22, 2002, executed by Commerce One, Inc. in favor of Microsoft Capital  Corporation. |
|               | 10.30      |                                                                                                                                                                                                                                                                                 | Collateral Account  Notification and Acknowledgment between Commerce One, Inc. and Microsoft  Capital Corporation. |
|               | 10.31      |                                                                                                                                                                                                                                                                                 | Strategic Alliance  Agreement Amendment No. 4, effective as of January 1, 2002 by and between  Commerce One Operations, Inc., SAP and SAP Markets, Inc.* |
|               | 21.1       |                                                                                                                                                                                                                                                                                 | List of Subsidiaries of  Registrant. |
|               | 23.1       |                                                                                                                                                                                                                                                                                 | Consent of Ernst &  Young LLP, Independent Auditors. |
|               | 24.1       |                                                                                                                                                                                                                                                                                 | Power of Attorney (see  page 66). |
|                    |            |                                                                                                                                                                                                                                                                                      |  |

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(1)       Incorporated by reference to CommerceOne’s Form 8-A (File No. 000-32979) filed on July 11, 2001.

 

(2)       Incorporated by reference to CommerceOne’s Registration Statement of Form S-1 (File No. 333-76987), declaredeffective July 1, 1999.

 

(3)       Incorporated by reference to CommerceOne’s Form S-8 (File No. 333-33328), filed on March 27, 2000.

 

(4)       Incorporated by reference to CommerceOne’s Current Report on Form 8-K (File No. 333-58558), filed on July 10, 2001.

 

(5)       Incorporated by reference to CommerceOne’s Current Report on Form 8-K (File No. 000-26453), filed on December 29,2000.

 

(6)       Incorporated by reference to CommerceOne’s Quarterly Report on Form 10-Q (File No. 000-26453), filed on August 14,2000.

 

(7)       Incorporated by reference to CommerceOne’s Annual Report on Form 10-K (File No. 000-26453), filed on April 2, 2001.

 

(8)       Incorporated by reference to CommerceOne’s Quarterly Report on Form 10-Q (File No. 000-26453), filed on November 14,2000.

 

(9)       Incorporated by reference to CommerceOne’s Form S-8 (File No. 333-46254), filed on September 20, 2000.

 

(10)     Incorporated by reference to Commerce One’sQuarterly Report on Form 10-Q (File No. 000-32979), filed on August 14, 2001.

 

(11)     Incorporated by reference to Commerce One’sQuarterly Report on Form 10-Q (File No. 000-32979), filed on November 14, 2001.

 

*         Portions of this exhibit have been omitted pending adetermination by the Securities and Exchange Commission as to whether theseportions should be granted confidential treatment.

 

S-2

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