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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF
THE SECURITIES ACT OF 1934
For the Quarter Ended March 31, 2000
Commission File Number 000-26299
ARIBA, INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0439730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1565 Charleston Road
Mountain View, California 94043
(Address of principal executive offices)
(650) 930-6200
(Registrant's telephone number, including area code)
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 (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
On April 28, 2000, 235,802,957 shares of the registrant's common stock were
issued and outstanding.
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Ariba, Inc.
Index
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 2000 and September 30, 1999 3
Condensed Consolidated Statements of Operations for the three and six-month periods ended March 31, 2000
and 1999 4
Condensed Consolidated Statements of Cash Flows for the six-month period ended March 31, 2000 and 1999 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 2. Changes in Securities and Use of Proceeds 32
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Securities Holders 34
Item 5. Other Information 35
Item 6. Exhibits and Reports on Form 8-K 35
SIGNATURES 36
2
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, September 30,
2000 1999
----------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 187,803 $ 50,284
Short-term investments 61,457 47,868
Restricted cash 1,500 800
Accounts receivable, net 9,790 5,157
Prepaid expenses and other current assets 7,693 1,936
----------- -------------
Total current assets 268,243 106,045
Property and equipment, net 23,484 9,402
Long-term investments 68,339 54,288
Other assets 276 286
Goodwill and other intangibles, net 3,386,418 -
----------- -------------
Total assets $ 3,746,760 $ 170,021
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,541 $ 3,846
Accrued compensation and related liabilities 24,642 6,959
Accrued liabilities 43,509 4,834
Deferred revenue 84,608 30,733
Current portion of long-term debt 624 685
----------- -------------
Total current liabilities 161,924 47,057
----------- -------------
Long-term debt, net of current portion 664 781
----------- -------------
Total liabilities 162,588 47,838
----------- -------------
Stockholders' equity:
Common stock 468 364
Additional paid-in capital 3,778,660 191,150
Deferred stock-based compensation (16,307) (24,178)
Accumulated other comprehensive income (loss) 2,557 (221)
Accumulated deficit (181,206) (44,932)
----------- -------------
Total stockholders' equity 3,584,172 122,183
----------- -------------
Total liabilities and stockholders' equity $ 3,746,760 $ 170,021
=========== =============
See accompanying notes to condensed consolidated financial statements.
3
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended March 31, Six Months Ended March 31,
2000 1999 2000 1999
--------- --------- --------- ---------
Revenues:
License $ 26,187 $ 5,673 $ 41,971 $ 10,500
Maintenance and service 13,855 3,813 21,550 5,838
--------- --------- --------- ---------
Total revenues 40,042 9,486 63,521 16,338
--------- --------- --------- ---------
Cost of revenues:
License 1,920 197 2,241 250
Maintenance and service (exclusive of stock-based
compensation expense of $281 and $229 for the three months
ended March 31, 2000 and 1999 and $625 and $325 for the
six months ended March 31, 2000 and 1999, respectively) 4,527 1,607 7,648 2,509
--------- --------- --------- ---------
Total cost of revenues 6,447 1,804 9,889 2,759
--------- --------- --------- ---------
Gross profit 33,595 7,682 53,632 13,579
--------- --------- --------- ---------
Operating expenses:
Sales and marketing (exclusive of stock-based compensation
expense of $1,741 and $1,380 for the three months ended
March 31, 2000 and 1999 and $3,904 and $1,951 for the six
months ended March 31, 2000 and 1999, respectively) 35,020 6,903 54,794 11,302
Research and development (exclusive of stock-based
compensation expense of $637 and $788 for the three months
ended March 31, 2000 and 1999 and $1,531 and $1,038 for
the six months ended March 31, 2000 and 1999, respectively) 7,124 2,200 11,567 3,849
General and administrative (exclusive of stock-based
compensation expense of $712 and $535 for the three months
ended March 31, 2000 and 1999 and $2,030 and $731 for the
six months ended March 31, 2000 and 1999, respectively) 5,327 1,497 8,748 2,698
Amortization of goodwill and other intangibles 98,287 - 98,287 -
In-process research and development 12,750 - 12,750 -
Amortization of stock-based compensation 3,371 2,932 8,090 4,045
--------- --------- --------- ---------
Total operating expenses 161,879 13,532 194,236 21,894
--------- --------- --------- ---------
Loss from operations (128,284) (5,850) (140,604) (8,315)
Other income, net 2,713 81 4,772 187
--------- --------- --------- ---------
Net loss before income taxes (125,571) (5,769) (135,832) (8,128)
Provision for income taxes 369 - 442 -
--------- --------- --------- ---------
Net loss $(125,940) $ (5,769) $(136,274) $ (8,128)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.70) $ (0.14) $ (0.81) $ (0.21)
========= ========= ========= =========
Shares used in computing basic and diluted net loss per share 179,241 41,307 167,610 38,778
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended March 31,
2000 1999
--------- ---------
OPERATING ACTIVITIES:
Net loss $(136,274) $ (8,128)
Adjustments to reconcile net loss to net cash provided by operating activities:
In-process research and development 12,750 -
Depreciation and amortization 2,163 496
Amortization of stock-based compensation 8,090 4,045
Amortization of goodwill and other intangibles 98,287 -
Non-cash warrant expense 14 13
Changes in operating assets and liabilities:
Accounts receivable 4,441 (4,187)
Prepaid expenses and other assets (5,652) (674)
Accounts payable 4,377 483
Accrued compensation and related liabilities 13,168 2,055
Accrued liabilities 6,244 1,116
Deferred revenue 24,389 14,821
--------- ---------
Net cash provided by operating activities 31,997 10,040
INVESTING ACTIVITIES:
Purchases of property and equipment, net (12,254) (2,033)
Purchases of investments, net (22,879) (1,255)
Cash acquired in purchase transactions 99,638 -
Direct costs of purchase transactions (11,939) -
Allocation to restricted cash (700) (800)
--------- ---------
Net cash provided by (used in) investing activities 51,866 (4,088)
FINANCING ACTIVITIES:
Repayments under long-term debt (444) (219)
Proceeds from sale of common stock 54,141 598
Repurchase of common stock - (5)
--------- ---------
Net cash provided by financing activities 53,697 374
EFFECT OF FOREIGN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (41) (16)
--------- ---------
Net increase in cash and cash equivalents 137,519 6,310
Cash and cash equivalents at beginning of period 50,284 8,305
--------- ---------
Cash and cash equivalents at end of period $ 187,803 $ 14,615
========= =========
See accompanying notes to condensed consolidated financial statements.
5
ARIBA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Basis of Presentation
The unaudited condensed consolidated financial statements have been
prepared by the Company and reflect all adjustments (all of which are normal
and recurring in nature) that, in the opinion of management, are necessary
for a fair presentation of the interim periods presented. Certain amounts in
the prior year financial statements have been reclassified to conform to the
current year presentation. The results of operations for the interim periods
presented are not necessarily indicative of the results to be expected for
any subsequent quarter or for the entire year ending September 30, 2000.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted under the Securities and Exchange
Commission's rules and regulations. These unaudited condensed consolidated
financial statements and notes included herein should be read in conjunction
with the Company's audited consolidated financial statements and notes for
the year ended September 30, 1999, included in the Company's Form 10-K filed
December 23, 1999 with the Securities and Exchange Commission.
On both November 16, 1999 and March 2, 2000 the Board of Directors
authorized a two-for-one stock split of the Company's common stock, in the
form of a stock dividend thus effecting an overall four-for-one split stock
split as of March 31, 2000. The financial information included in the
accompanying financial statements has been restated to give effect to these
stock splits.
Accounts receivable includes amounts due from customers for which
revenue has been recognized. Deferred revenue includes amounts received from
customers for which revenue has not been recognized.
Long-term investments include equity holdings in both public and
private technology companies, which have been classified as available for
sale. Public equity securities with a readily determinable fair value, are
stated at fair value, which is determined based upon the quoted market price
of the securities. Other equity securities are stated at the lesser of cost
or the net realizable value.
Note 2. Net Loss Per Share
The following table presents the calculation of basic and diluted
net loss per common share (in thousands, except per share data):
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
2000 1999 2000 1999
--------- ------- --------- ---------
Net loss $(125,940) $(5,769) $(136,274) $ (8,128)
========= ======= ========= =========
Basic and diluted:
Weighted-average common shares outstanding 202,273 73,840 192,721 73,794
Less: Weighted-average common shares subject to repurchase (23,032) (32,533) (25,111) (35,016)
--------- ------- --------- ---------
Weighted-average common shares used in computing basic and diluted net
loss per common share 179,241 41,307 167,610 38,778
========= ======= ========= =========
Basic and diluted net loss per common share $ (0.70) $ (0.14) $ (0.81) $ (0.21)
========= ======= ========= =========
Diluted net loss per share does not include the effect of the following
potential common shares at March 31(in thousands):
2000 1999
---- ----
Shares issuable under stock options 49,112 32,661
Shares of unvested stock subject to repurchase 21,017 32,782
Shares issuable pursuant to warrants to purchase common and convertible preferred stock 58 2,284
Shares of convertible preferred stock on an "as if converted" basis - 71,381
The weighted-average exercise price of stock options outstanding was
$16.12 and $0.50 as of March 31, 2000 and 1999,
6
respectively. The weighted average repurchase price of unvested stock was
$0.24 and $0.07 as of March 31, 2000 and 1999, respectively. The weighted
average exercise price of warrants was $0.83 and $0.82 as of March 31, 2000
and 1999, respectively.
Note 3. Comprehensive Income
SFAS No. 130 REPORTING COMPREHENSIVE INCOME, establishes standards
of reporting and display of comprehensive income and its components of net
income and other comprehensive income. Other comprehensive income refers to
revenues, expenses, gains and losses that are not included in net income but
rather are recorded directly in stockholders' equity. The components of
comprehensive loss for the three and six months ended March 31, 2000 and 1999
were as follows (in thousands):
THREE MONTHS ENDED MARCH 31, SIX MONTHS ENDED MARCH 31,
2000 1999 2000 1999
--------- ------- --------- -------
Net loss $(125,940) $(5,769) $(136,274) $(8,128)
Unrealized gain (loss) on securities 3,190 (55) 2,819 (80)
Foreign currency translation adjustments (29) (9) (41) (16)
--------- ------- --------- -------
Comprehensive loss $(122,779) $(5,833) $(133,496) $(8,224)
========= ======= ========= =======
Tax effects of comprehensive loss are not considered material.
The components of accumulated other comprehensive loss at March 31, 2000 and
September 30, 1999 were as follows (in thousands):
MARCH 31, SEPTEMBER 30,
2000 1999
------ -----
Unrealized gain (loss) on securities $2,597 $(222)
Foreign currency translation adjustments (40) 1
------ -----
Accumulated other comprehensive income (loss) $2,557 $(221)
====== =====
Note 4. Acquisitions
On January 20, 2000, the Company completed its acquisition of
TradingDynamics, Inc. ("TradingDynamics"). TradingDynamics provides
business-to-business Internet trading applications, including
business-to-business auction, request for quote (RFQ), reverse auction, and
bid/ask-style exchange mechanisms. Pursuant to the terms of the Agreement and
Plan of Merger each share of TradingDynamics common stock was converted into
the right to receive 0.6869094 shares of Ariba common stock. In addition, the
Company assumed each issued and outstanding option and warrant to purchase
shares of TradingDynamics common stock which was converted into an option or
warrant to purchase Ariba common stock using an exchange ratio of 0.6869094.
Pursuant to the exchange ratios applied in the acquisition, the
Company issued 7,274,656 shares of Ariba common stock with a fair market
value of $371.9 million and exchanged options and warrants to purchase
2,151,394 shares of Ariba common stock with a fair market value of $91.7
million. The fair market value of the exchanged options and warrants to
purchase 2,151,394 shares of Ariba's common stock was valued using the
Black-Scholes option pricing model with the following assumptions: 1)
expected volatility of 0.9572, 2) weighted-average risk-free interest rate of
6.53%, 3) expected term of approximately 3 years and 4) no expected
dividends. In connection with the acquisition, the Company incurred
transaction costs consisting primarily of professional fees of $1.4 million,
resulting in a total purchase price of $465.0 million. 829,660 shares of the
stock issued are being held in an escrow account to secure and collateralize
the indemnification obligations of TradingDynamics stockholders to Ariba. The
results of operations of TradingDynamics have been included with the
Company's results of operations since January 20, 2000, the date of
acquisition.
On March 8, 2000, the Company completed its acquisition of Tradex
Technologies, Inc. ("Tradex"). Tradex was a provider of solutions for net
markets. Pursuant to the terms of the Agreement and Plan of Reorganization
each share of Tradex common stock was converted into the right to receive
1.36712 shares of Ariba common stock. In addition, the Company assumed each
issued and outstanding option to purchase shares of Tradex common stock which
was converted into an option to purchase Ariba common stock using an exchange
ratio of 1.36712.
Pursuant to the exchange ratios applied in the acquisition, the
Company issued 34,059,336 shares of Ariba common stock with a fair market
value of $2.1 billion and exchanged options to purchase 4,018,804 shares of
Ariba common stock with a fair market value of $207.5 million. The fair
market value of the exchanged options and warrants to purchase 4,018,804
shares of Ariba's common stock was valued using the Black-Scholes option
pricing model with the following assumptions: 1) expected volatility of
0.9572, 2)
7
weighted-average risk-free interest rate of 6.55%, 3) expected term of
approximately 3 years and 4) no expected dividends. In connection with the
acquisition, the Company incurred transaction costs consisting primarily of
professional fees of $28.8 million, resulting in a total purchase price of
$2.3 billion. 3,374,738 shares of the stock issued are being held in an
escrow account to secure and collateralize the indemnification obligations of
Tradex stockholders to Ariba. The results of operations of Tradex have been
included with the Company's results of operations since March 8, 2000, the
date of acquisition.
The acquisitions were accounted for as purchase business
combinations which means that the purchase price was allocated to the assets
acquired and liabilities assumed based on the estimated fair values on the
date of acquisition.
The total purchase price paid for the TradingDynamics acquisition
was allocated as follows (in thousands):
TRADINGDYNAMICS
---------------
Property and equipment $224
Net liabilities acquired, excluding property and equipment (13,447)
Identifiable intangible assets 6,800
In-process research and development 950
Goodwill 470,477
---------------
Total $465,004
===============
There was one project included in in-process research and
development for TradingDynamics. The applications from this project will be
integrated into the Company's products. The efforts required to complete the
acquired in-process technology include the completion of all planning,
designing and testing activities that are necessary to establish that the
product can be produced to meet its design requirements, including functions,
features and technical performance requirements.
The value of the acquired in-process technology was computed using a
discounted cash flow analysis on the anticipated income stream of the related
product revenues. The discounted cash flow analysis was based on management's
forecast of future revenues, cost of revenues, and operating expenses related
to the products and technologies purchased from TradingDynamics. The
calculation of value was then adjusted to reflect only the value creation
efforts of TradingDynamics prior to the close of the acquisition. At the time
of the acquisition, the product was approximately 90% complete, and the cost
to complete the project will not be material. The resultant value of
in-process technology was further reduced by the estimated value of core
technology. The Company charged the $950,000 for in-process research and
development to operations in the three months ended March 31, 2000. A total
of approximately $6.8 million of the purchase consideration was allocated to
other intangible assets, including core technology ($4.4 million), assembled
workforce ($1.1 millon) and non-compete covenants ($1.3 million) with these
amounts being amortized over three years. The Company is still refining its
purchase price allocation and there could be some adjustments in the future.
The discount rates selected for estimating future discounted cash
flows for the core and in-process technology were 20% and 25%, respectively.
In the selection of the appropriate discount rates, consideration was given
to the Company's estimated weighted average return on working capital and the
Company's estimated weighted average return on assets. The discount rate
utilized for the in-process technology was determined to be higher than the
Company's estimated weighted average return on working capital due to the
fact that the technology had not yet reached technological feasibility as of
the date of valuation. In utilizing a discount rate greater than the
Company's weighted average return on working capital, the Company has
reflected the risk premium associated with achieving and sustaining growth
rates and improved profitability as well as the increased rates of return
associated with intangible assets.
The total purchase price paid for the Tradex acquisition was
allocated as follows (in thousands):
TRADEX
---------------
Property and equipment $3,502
Net assets acquired, excluding property and equipment 75,679
Identifiable intangible assets 15,300
In-process research and development 11,800
Goodwill 2,205,199
---------------
Total $2,311,480
===============
There was one project included in in-process research and
development for Tradex. The applications from this project will be integrated
into the Company's products. The efforts required to complete the acquired
in-process technology include the completion of all planning, designing and
testing activities that are necessary to establish that the product can be
produced to meet its design requirements, including functions, features and
technical performance requirements.
8
The value of the acquired in-process technology was computed using a
discounted cash flow analysis on the anticipated income stream of the related
product revenues. The discounted cash flow analysis was based on management's
forecast of future revenues, cost of revenues, and operating expenses related
to the products and technologies purchased from Tradex. The calculation of
value was then adjusted to reflect only the value creation efforts of Tradex
prior to the close of the acquisition. At the time of the acquisition, the
product was approximately 33% complete with approximately $693,000 in
estimated costs remaining, the majority of which are expected to be incurred
in 2000. The resultant value of in-process technology was further reduced by
the estimated value of core technology. The Company charged the $11.8 million
for in-process research and development to operations in the three months
ended March 31, 2000. A total of approximately $15.3 million of the purchase
consideration was allocated to other intangible assets, including core
technology ($7.9 million), assembled workforce ($5.4 millon) and trade
name/trademarks ($2.0 million) with these amounts being amortized over three
years. The Company is still refining its purchase price allocation and there
could be some adjustments in the future.
The discount rates selected for estimating future discounted cash
flows for the core and in-process technology were 21% and 22%, respectively.
In the selection of the appropriate discount rates, consideration was given
to the Company's estimated weighted average return on working capital and the
Company's estimated weighted average return on assets. The discount rate
utilized for the in-process technology was determined to be higher than the
Company's estimated weighted average return on working capital due to the
fact that the technology had not yet reached technological feasibility as of
the date of valuation. In utilizing a discount rate greater than the
Company's weighted average return on working capital, the Company has
reflected the risk premium associated with achieving and sustaining growth
rates and improved profitability as well as the increased rates of return
associated with intangible assets.
At March 31, 2000, accumulated amortization related to the goodwill
and other intangible assets acquired in the TradingDynamics and Tradex
acquisitions totaled $80.3 million. The goodwill and other intangible assets
are being amortized over a three year period.
The following summary, prepared on an unaudited pro forma basis,
reflects the condensed consolidated results of operations for the six month
period ended March 31, 2000 and 1999 assuming TradingDynamics and Tradex had
been acquired at the beginning of the periods presented (in thousands, except
per share data):
SIX MONTHS ENDED MARCH 31,
2000 1999
---- ----
Revenue $74,202 $18,165
Net loss (532,470) (462,559)
Basic and diluted net loss per share $(2.65) $(5.86)
The pro forma results are not necessarily indicative of what would
have occurred if the acquisitions had been in effect for the periods
presented. In addition they are not intended to be a projection of future
results and do not reflect any synergies that might be affected from combined
operations. The charges for in-process research and development have not been
included in the unaudited pro forma results because they are nonrecurring.
Note 5. Intellectual Property Agreement
In the quarter ended March 31, 2000 the Company sold 5,142,858
shares of common stock with a fair market value of $834.4 million to an
outside party. As part of the sale the Company received intellectual property
and $47.5 million in cash. The intellectual property is valued at the
difference between the fair market value of the stock being exchanged and the
cash received, which is $786.9 million. This amount is classified within
other intangible assets on the balance sheet and is being amortized over
three years based on the terms of the related intellectual property
agreement. At March 31, 2000, accumulated amortization related to this item
totaled $18.0 million.
Note 6. Deferred Stock-Based Compensation
The Company uses the intrinsic value method of accounting for its
employee stock-based compensation plans. Accordingly, no compensation cost is
recognized for any of its stock options when the exercise price of each
option equals or exceeds the fair value of the underlying common stock as of
the grant date for each stock option. With respect to the stock options
granted since inception through March 31, 2000, the Company has recorded
deferred stock-based compensation of $38.0 million for the difference at the
grant date between the exercise price and the fair value of the common stock
underlying the options. This amount is being amortized in accordance
9
with Financial Accounting Standards Board (FASB) Interpretation No. 28 over
the vesting period of the individual options, generally 4 years.
Note 7. Warrants
In January 2000, in connection with an alliance with EDS CoNext,
Inc., the Company issued warrants to purchase up to approximately 11,600,000
shares (0% to 4.9% of the Company's current stock outstanding) of the
Company's common stock, assuming the exercise of such warrants on a net
issuance basis at current market values, at various exercise prices. The
warrants vest upon attainment of certain milestones primarily related to
revenue targets and other sales related targets. The warrants generally
expire either upon the termination of the agreement, five years from their
vesting date or on December 31, 2008. The warrants can be earned over
approximately a five year period.
In February 2000, in connection with an alliance with Telefonica
S.A., the Company issued warrants to purchase up to 4,800,000 shares (0% to
2.0% of the Company's current stock outstanding) of the Company's common
stock at various exercise prices. The warrants vest upon attainment of
certain milestones related to revenue targets. The warrants generally expire
either upon termination of the agreement, when the milestone period expires
or one year after the specific milestone is met. The warrants can be earned
over approximately a five year period.
In March 2000, in connection with an alliance with International
Business Machines Corporation, the Company issued warrants to purchase up to
3,428,572 shares (0% to 1.5% of the Company's current stock outstanding) of
the Company's common stock at an exercise price of $87.50. The warrants vest
upon attainment of certain milestones related to revenue targets. The
warrants generally expire either upon termination of the agreement, when the
milestone period expires, or 18 months after the specific milestone is met.
The warrants can be earned over approximately a five year period.
If and when it becomes probable that the business partner will earn
any of the above warrants, the Company will recognize a non-cash expense for
these warrants. The amount of expense will be calculated using the
Black-Scholes option pricing model. The total expense associated with the
warrants will be measured at each subsequent balance sheet date until either
the milestones are achieved or the warrants expire. Future remeasurement
could result in substantial non-cash expense, which could fluctuate depending
on the fair market value of the Company's common stock at each measurement
date. At March 31, 2000 it was not considered probable that any of the
warrants would vest and therefore there has not been any expense recognized
for these warrants and no shares have been issued.
The Company also received warrants for the common stock of EDS
CoNext, Inc. in connection with the January alliance. The Company has
currently earned one of these warrants. The estimated fair value of this
warrant is included in the balance sheet under long-term investments with a
value of approximately $200,000. The Company is recognizing the revenue
related to this warrant on a straight-line basis over a five year period
which represents the life of the agreement. The other warrants, which may be
received by the Company, are based on performance milestones. They have not
been earned as of March 31, 2000 and therefore the Company has not recorded
any investment or revenue related to these warrants.
Subsequent to March 31, 2000, and in connection with an alliance
with Bank of America, N.A., the Company issued warrants to purchase up to
6,776,000 shares (0% to 2.9% of the Company's current stock outstanding) of
the Company's common stock at an exercise price based on the ten day average
of the Company's stock price up to and including the vesting date. Bank of
America, N.A has currently earned one warrant for 1,936,000 shares. The
Company will be calculating the expense of this warrant in the quarter ending
June 30, 2000 and recognizing the expense over the life of the agreement,
which is five years. This will be a substantial non-cash expense for the next
five years. The remaining warrants within this agreement vest upon attainment
of certain milestones, which have not yet been achieved.
Note 8. Line of Credit
In May 1999, the Company entered into a credit agreement with a
bank, which was originally scheduled to expire in March 2000 and is
collateralized by certain assets of the Company. In March this credit
agreement was extended until May 31, 2000. Under the provisions of the credit
agreement, the Company may borrow up to $7.0 million on a revolving line of
credit at the prime rate. At March 31, 2000 there were no amounts outstanding
under the revolving line of credit.
Note 9. Commitments
In March 2000, the Company entered into a new facilities operating
lease agreement. The lease term commences upon possession and is for 12
years. The Company currently expects possession to be in the quarter ending
June 30, 2001. Lease payments are going to be made on an escalating basis
with the total future minimum lease payments amounting to $386.8 million over
the lease term. The Company will also have to contribute a significant amount
towards construction costs of the facility. This amount is currently
estimated at approximately $116.0 million, but is subject to change. As part
of this agreement, in April 2000, the Company is required to hold a
10
certificate of deposit as a form of security. This certificate of deposit is
for $25.7 million and it will be classified as restricted cash on our balance
sheet.
Note 10. Recent Pronouncements
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities related to those instruments, as well as other hedging
activities. Because the Company does not currently hold any derivative
instruments and does not engage in hedging activities, the Company expects
the adoption of SFAS No. 133 will not have a material impact on its financial
position, results of operations or cash flows. The Company will be required
to adopt SFAS No. 133 in fiscal 2001 in accordance with SFAS No. 137, which
delays the required implementation of SFAS No. 133 for one year.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, or SAB 101. This summarizes certain areas
of the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The Company believes that its
current revenue recognition principles comply with SAB 101.
In March 2000, the FASB's Emerging Issues Task Force ("EITF")
reached a consensus on EITF 00-2, ACCOUNTING FOR WEB SITE DEVELOPMENT COSTS.
EITF 00-2 discusses how an entity should account for costs incurred to
develop a web site. We are currently evaluating EITF 00-2 and the potential
financial reporting impact of this issue.
In March 2000, the EITF reached a consensus on EITF 00-3,
APPLICATION OF AICPA STATEMENT OF POSITION 97-2 TO ARRANGEMENTS THAT INCLUDE
THE RIGHT TO USE SOFTWARE STORED ON ANOTHER ENTITY'S HARDWARE. EITF 00-3
discusses whether SOP 97-2 applies to arrangements that require the vendor to
host the software and whether SOP 97-2 applies to arrangements in which the
customer has an option to take delivery of the software and if so, when does
delivery of the software occur and how does the vendor's hosting obligation
impact revenue recognition. We are currently evaluating EITF 00-3 and the
potential financial reporting impact of this issue.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information in this discussion contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements are based upon current expectations that involve
risks and uncertainties. Any statements contained herein that are not
statements of historical facts may be deemed to be forward-looking
statements. For example, words such as "may", "will", "should", "estimates",
"predicts", "potential", "continue", "strategy", "believes", "anticipates",
"plans", "expects", "intends", and similar expressions are intended to
identify forward-looking statements. Our actual results and the timing of
certain events may differ significantly from the results discussed in the
forward-looking statement. Factors that might cause or contribute to such a
discrepancy include, but are not limited to, those discussed under the
heading "Risk Factors" and the risks discussed in our other Securities
Exchange Commission ("SEC") filings, including our Registration Statement on
Form S-1 declared effective on June 22, 1999 by the SEC (File No. 333-76953)
and in our Annual Report on Form 10-K filed December 23, 1999 with the SEC.
OVERVIEW
Ariba is a leading business-to-business electronic commerce platform
provider. We were founded in September 1996 and from that date through March
1997 were in the development stage, conducting research and developing our
initial products. In March 1997, we began selling our products and related
services and currently market them in the United States, Latin America,
Europe, Canada, Australia and Asia primarily through our direct sales force
and to a lesser extent through indirect sales channels.
On January 20, 2000 and March 8, 2000 we acquired TradingDynamics,
Inc. ("TradingDynamics"), and Tradex Technologies, Inc. ("Tradex"),
respectively, primarily for their product offerings and research and
development teams. We accounted for these acquisitions as purchase business
combinations. Accordingly, TradingDynamics' and Tradex's results of
operations are included in our combined results from the date of the
acquisitions. Please see Note 4 in the Notes to the Condensed Consolidated
Financial Statements for more detailed information.
Through March 31, 2000, our revenues have been principally derived
from licenses of our products, from maintenance and support contracts and
from the delivery of implementation consulting and training services.
Customers who license our Ariba B2B Buyer or our other products also
generally purchase maintenance contracts which provide software upgrades,
technical support and connectivity to the Ariba Network over a stated term,
which is usually a twelve-month period. Customers may purchase implementation
services from us, but we expect to increasingly rely on third-party
consulting organizations to deliver these services directly to our customers.
We also offer fee-based training services to our customers.
On October 1, 1997, we adopted Statement of Position, or SOP, 97-2,
SOFTWARE REVENUE RECOGNITION, which supersedes SOP 91-1, SOFTWARE REVENUE
RECOGNITION. On October 1, 1999 we adopted Statement of Position, or SOP,
98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO
CERTAIN TRANSACTIONS, which amends SOP 97-2, Software Revenue Recognition,
and supercedes SOP 98-4. The adoption of SOP 97-2 and SOP 98-9 has not had a
material effect on our operating results. SOP 97-2 generally requires
revenues earned on software arrangements involving multiple elements to be
allocated to each element based on the relative fair values of the elements.
Revenue allocated to software licenses is generally recognized upon delivery
of the products or ratably over a contractual period if unspecified software
products are to be delivered during that period. Starting in fiscal 1999, our
standard license agreement provided customers the right to future unspecified
software licenses. Accordingly, payments received from our customers upon the
signing of these license agreements are deferred, and the revenue is
recognized ratably over the contract period. Revenue allocated to maintenance
is recognized ratably over the maintenance term and revenue allocated to
training and other service elements is recognized as the services are
performed.
When we manage the implementation process for our customers, the
services are considered essential to the functionality of the software
products. Accordingly, both the software license revenue and service revenue
is recognized using the percentage of completion method in accordance with
the provisions of SOP 81-1, ACCOUNTING FOR PERFORMANCE OF CONSTRUCTION TYPE
AND CERTAIN PRODUCTION TYPE CONTRACTS. The implementation of our products can
take several months or more depending on the objectives of the customers, the
complexity of the customers' information technology environments and the
resources directed by the customers to the implementation projects.
The majority of our customers who license our software products
generally receive a server capacity license, one or more of the Ariba B2B
Buyer modules and adapters to interface with financial, human resource and
other existing enterprise systems. The fee for the server capacity license is
based on the customers' estimated annual volume of line items of purchasing
transactions. The license fees for the software modules and adapters consist
of individual prices for each module or adapter.
12
The volume licensing of the server capacity allows customers to
scale the total cost of their purchase of our products to their needs. The
server capacity license entitles customers to execute the licensed volume of
line items of purchasing transactions during any annual period following
their purchase of the server license. Our customers generally purchase
estimated server capacity at the time of the purchase of the server license.
Following the initial implementation of our products, and based on the
reporting and analysis tools available through our products, our customers
are able to understand their annual transaction volume more fully. Customers
who exceed their estimated volume can purchase additional server capacity.
However, there are no recurring annual license fees.
Our cost of license revenues includes royalties due to third parties
for integrated technology, certain reseller sales commissions, the cost of
manuals and product documentation, the cost of production media used to
deliver our products and shipping costs, including the costs associated with
the electronic transmission of software to new customers. Our cost of
maintenance and service revenues includes salaries and related expenses for
our customer support, implementation and training services organizations,
costs of third parties contracted to provide consulting services to customers
and an allocation of our facilities, communications and depreciation expenses.
Our operating expenses are classified into general categories: sales
and marketing, research and development and general and administrative. We
classify all charges to these operating expense categories based on the
nature of the expenditures. Although each category includes expenses that are
unique to the category type, there are commonly recurring expenditures that
are typically included in these categories in our operating expenses, such as
salaries, employee benefits, incentive compensation, bonuses, sales
commissions, travel and entertainment costs, telephone, communication, rent
and facilities costs, and third-party professional services fees. The sales
and marketing category of operating expenses includes expenditures specific
to the marketing group, such as public relations and advertising, trade
shows, marketing collateral materials and customer advisory council meetings.
We allocate the total costs for overhead and facilities to each of
the functional areas that use the overhead and facilities services based on
their headcount. These allocated charges include facility rent for the
corporate office, communication charges and depreciation expense for office
furniture and equipment.
Also included in our operating expenses is the amortization of
goodwill and other intangible assets. These expenses are for the amortization
of goodwill and other intangible assets we have purchased in our acquisitions
of TradingDynamics and Tradex and for the amortization of an intellectual
property agreement we have entered into with an outside party. In the quarter
ended March 31, 2000 we also had a charge related to the purchase of
in-process technology related to the acquisitions. Please see Notes 4 and 5
in the Notes to the Condensed Consolidated Financial Statements for more
detailed information.
Although revenues consistently increased from quarter to quarter, we
incurred significant costs to develop our technology and products, to recruit
and train personnel for our engineering, sales, marketing, professional
services and administration departments, and for the amortization of our
goodwill and other intangible assets. As a result, we have incurred
significant losses since inception, and, as of March 31, 2000, had an
accumulated deficit of $181.2 million. We believe our success is contingent
on increasing our customer base and developing our products and services. We
intend to continue to invest heavily in sales, marketing, research and
development and, to a lesser extent, support infrastructure. We also will
have significant expenses going forward related to the amortization of our
goodwill and other intangible assets, and we may have substantial expenses
related to the issuance of warrants to purchase our common stock. These
warrant related expenses will not be recognized until the warrants are earned
and will fluctuate depending on the market value of our common stock. We
therefore expect to continue to incur substantial operating losses for the
foreseeable future.
We had 1,002 full-time employees as of March 31, 2000 and intend to
hire a significant number of employees in the future. This expansion places
significant demands on our management and operational resources. To manage
this rapid growth and increased demand, we must invest in and implement
scalable operational systems, procedures and controls. We must also be able
to recruit qualified candidates to manage our expanding operations. We expect
future expansion to continue to challenge our ability to hire, train, manage
and retain our employees.
In connection with the granting of stock options to our employees,
we recorded deferred stock-based compensation totaling approximately $38.0
million from inception up to March 31, 2000. This amount represents the
difference between the exercise price and the deemed fair value of our common
stock for accounting purposes on the date these stock options were granted.
This amount is included as a component of stockholders' equity and is being
amortized on an accelerated basis by charges to operations over the vesting
period of the options, consistent with the method described in Financial
Accounting Standards Board Interpretation No. 28. During fiscal 1999 and
1998, we recorded $13.5 million and $830,000, respectively, of related
stock-based compensation amortization expense and during the six months ended
March 31, 2000, we recorded $7.9 million of related stock-based compensation
amortization expense. As of March 31, 2000, we had an aggregate of $15.8
million of related deferred compensation to be amortized. The amortization of
the remaining deferred stock-based compensation will result in additional
charges to operations through fiscal 2003. The amortization of stock-based
compensation is presented as a separate component of operating expenses in
our consolidated statements of operations.
13
In the quarter ended March 31, 2000 in connection with our recent
acquisitions and our entering into an intellectual property agreement with an
outside party, we recorded goodwill and other intangible assets of $3.5
billion. These assets are being amortized over their useful lives, which is
three years. During the three months ended March 31, 2000, we recorded $98.3
million of amortization expense for these assets. As of March 31, 2000, we
had an aggregate of $3.4 billion of goodwill and other intangible assets
remaining to be amortized. The amortization of the remaining goodwill and
other intangible assets will result in additional charges to operations
through the quarter ending March 31, 2003. The amortization of goodwill and
other intangible assets is presented as a separate component of operating
expenses in our consolidated statements of operations. We also had a
non-recurring charge of $12.8 million in the quarter ending March 31, 2000
for in-process research and development related to our recent acquisitions.
Please see Notes 4 and 5 in the Notes to the Condensed Consolidated Financial
Statements for more detailed information.
Our limited operating history makes the prediction of future
operating results very difficult. We believe that period-to-period
comparisons of operating results should not be relied upon as predictive of
future performance. Our operating results are expected to vary significantly
from quarter to quarter and are difficult or impossible to predict. Our
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies at an early stage of development, particularly
companies in new and rapidly evolving markets. We may not be successful in
addressing such risks and difficulties. Although we have experienced
significant percentage growth in revenues in recent periods, we do not
believe that prior growth rates are sustainable or indicative of future
operating results. Please refer to the "Risk Factors" section for additional
information.
RECENT EVENTS
On March 2, 2000 the Board of Directors authorized a two-for-one
stock split of our common stock, to be effected in the form of a stock
dividend. The stock split was effected on or about March 31, 2000 by
distribution to each stockholder of record as of March 20, 2000 of one share
of common stock for each share of common stock held. The financial
information included in this report has been restated to give effect to the
stock split.
In January 2000, in connection with an alliance with EDS CoNext
Inc., we issued warrants to purchase up to approximately 11,600,000 shares
(0% to 4.9% of our current stock outstanding) of our common stock, assuming
the exercise of such warrants on a net issuance basis at current market
values, at various exercise prices. The warrants vest upon attainment of
certain milestones related to revenue targets and other sales related
targets. The warrants expire either upon the termination of the agreement,
five years from their vesting date or on December 31, 2008. The warrants can
be earned over approximately a five year period.
In February 2000, in connection with an alliance with Telefonica
S.A., we issued warrants to purchase up to 4,800,000 shares (0% to 2.0% of
our current stock outstanding) of our common stock at various exercise
prices. The warrants vest upon attainment of certain milestones related to
revenue targets. The warrants expire either upon termination of the
agreement, when the milestone period expires or one year after the specific
milestone is met. The warrants can be earned over approximately a five year
period.
In March 2000, in connection with an alliance with International
Business Machines Corporation, we issued warrants to purchase up to 3,428,572
shares (0% to 1.5% of our current stock outstanding) of our common stock at
an exercise price of $87.50. The warrants vest upon attainment of certain
milestones related to revenue targets. The warrants expire either upon
termination of the agreement, when the milestone period expires, or 18 months
after the specific milestone is met. The warrants can be earned over
approximately a five year period.
If and when it becomes probable that the business partner will earn
any of the above warrants, we will recognize a non-cash expense for these
warrants. The amount of expense will be calculated using the Black-Scholes
option pricing model. The total expense associated with the warrants will be
measured at each subsequent balance sheet date until either the milestones
are achieved or the warrants expire. Future remeasurement could result in
substantial non-cash expense, which could flucutate depending on the fair
market value of our common stock at each measurement date. At March 31, 2000,
it was not considered probable that any of the warrants would vest and
therefore there has not been any expense recognized for these warrants and no
shares have been issued.
Subsequent to the quarter ended March 31, 2000, and in connection
with an alliance with Bank of America N.A., we issued warrants to purchase up
to 6,776,000 shares (0% to 2.9% of our current stock outstanding) of our
common stock at an exercise price based on the ten day average of our stock
price up to and including the vesting date. The business partner has
currently earned one warrant for 1,936,000 shares. We will be calculating the
expense of this warrant in the quarter ending June 30, 2000 and recognizing
the expense over the life of the agreement, which is five years. This will be
a substantial non-cash expense for the next five years. The remaining
warrants within this agreement vest upon attainment of certain milestones,
which have not yet been achieved.
14
RESULTS OF OPERATIONS
The following table sets forth certain statements of operations data
in absolute dollars for the periods indicated. The data has been derived from
the unaudited condensed consolidated financial statements contained in this
Form 10-Q which, in the opinion of management include all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position and results of operations for the interim periods. The
operating results for any period should not be considered indicative of
results for any future period. This information should be read in conjunction
with the Financial Statements and Notes thereto included in the Company's
Form 10-K.
Three Months Ended March 31, Six Months Ended March 31,
2000 1999 2000 1999
--------- ------- --------- -------
Revenues:
License $26,187 $5,673 $41,971 $10,500
Maintenance and service 13,855 3,813 21,550 5,838
--------- ------- --------- -------
Total revenues 40,042 9,486 63,521 16,338
--------- ------- --------- -------
Cost of revenues:
License 1,920 197 2,241 250
Maintenance and service (exclusive of stock-based
compensation expense of $281 and $229 for the three months
ended March 31, 2000 and 1999 and $625 and $325 for the
six months ended March 31, 2000 and 1999, respectively) 4,527 1,607 7,648 2,509
--------- ------- --------- -------
Total cost of revenues 6,447 1,804 9,889 2,759
--------- ------- --------- -------
Gross profit 33,595 7,682 53,632 13,579
--------- ------- --------- -------
Operating expenses:
Sales and marketing (exclusive of stock-based compensation
expense of $1,741 and $1,380 for the three months ended
March 31, 2000 and 1999 and $3,904 and $1,951 for the six
months ended March 31, 2000 and 1999, respectively) 35,020 6,903 54,794 11,302
Research and development (exclusive of stock-based
compensation expense of $637 and $788 for the three months
ended March 31, 2000 and 1999 and $1,531 and $1,038 for
the six months ended March 31, 2000 and 1999, respectively) 7,124 2,200 11,567 3,849
General and administrative (exclusive of stock-based
compensation expense of $712 and $535 for the three months
ended March 31, 2000 and 1999 and $2,030 and $731 for the
six months ended March 31, 2000 and 1999, respectively) 5,327 1,497 8,748 2,698
Amortization of goodwill and other intangibles 98,287 - 98,287 -
In-process research and development 12,750 - 12,750 -
Amortization of stock-based compensation 3,371 2,932 8,090 4,045
--------- ------- --------- -------
Total operating expenses 161,879 13,532 194,236 21,894
--------- ------- --------- -------
Loss from operations (128,284) (5,850) (140,604) (8,315)
Other income, net 2,713 81 4,772 187
--------- ------- --------- -------
Net loss before income taxes (125,571) (5,769) (135,832) (8,128)
Provision for income taxes 369 - 442 -
--------- ------- --------- -------
Net loss $(125,940) $(5,769) $(136,274) $(8,128)
========= ======= ========= =======
Basic and diluted net loss per share $(0.70) $(0.14) $(0.81) $(0.21)
========= ======= ========= =======
Shares used in computing basic and diluted net loss per share 179,241 41,307 167,610 38,778
========= ======= ========= =======
15
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES
LICENSE. License revenues for the quarter ended March 31, 2000 were
$26.2 million, a 362% increase over license revenues of $5.7 million for the
quarter ended March 31, 1999. This increase was primarily attributable to
continued market acceptance of our products, an increase in sales to new
customers resulting from increased headcount in our sales force along with an
increasing demand for business-to-business electronic commerce solutions
across a broad range of industries, having new strategic products and
solutions available, including those resulting from our acquisitions, having
more business partners to help promote and sell our product domestically and
internationally, and the increased acceptance of our products internationally.
MAINTENANCE AND SERVICE. Maintenance and service revenues for the
quarter ended March 31, 2000 were $13.9 million, a 263% increase over
maintenance and service revenues of $3.8 million for the quarter ended March
31, 1999. This increase is attributable to increased licensing activity as
discussed above, which has resulted in increased revenues from customer
implementations and maintenance contracts and, to a lesser extent,
accelerated customer implementations and renewals of recurring maintenance
have also contributed to the increase.
During the quarter ended March 31, 2000, no individual customers
accounted for more than 10% of total revenues, and, in the quarter ended
March 31, 1999, two individual customers each accounted for more than 10% of
total revenues. Revenues from international sales were $7.1 million in the
quarter ended March 31, 2000 and were $936,000 for the quarter ended March
31, 1999.
We plan to continue to add services and other functionality to the
Ariba Network. As such, we expect to charge fees for these services. The
revenues associated may be a combination of transaction and/or annual
subscription fees. Examples of such services include electronic payment,
bid/quote and sourcing, among others. We expect these network related
revenues to be a significant contributor to total revenues over time.
However, we cannot predict whether these services and other functionality
will be commercially successful or whether they will adversely impact
revenues from our Ariba B2B Buyer products and services. We would be
seriously harmed if the Ariba Network is not commercially successful,
particularly if we experience a decline in the growth or growth rate of
revenues from our B2B Buyer solution. In general, we expect that total
revenue will fluctuate in future periods depending on the timing and
acceptance of new product and service introductions, customer buying
patterns, pricing actions taken by us, competition and other factors.
COST OF REVENUES
LICENSE. Cost of license revenues were $1.9 million in the quarter
ended March 31, 2000, an increase of 875% over cost of license revenues of
$197,000 for the quarter ended March 31, 1999. The increase in the cost of
license revenues was primarily attributable to royalties due to third parties
for integrated technology and certain reseller sales commissions.
MAINTENANCE AND SERVICE. Cost of maintenance and service revenues
were $4.5 million in the quarter ended March 31, 2000, an increase of 182%
over cost of maintenance and service revenues of $1.6 million for the quarter
ended March 31, 1999. Our cost of maintenance and service revenues includes
salaries and related expenses for our customer support, implementation and
training services organizations, costs of third parties contracted to provide
consulting services to customers and an allocation of our facilities,
communications and depreciation expenses. The increase was primarily
attributable to increases in the areas described above because of increases
in the number of implementation, training and technical support personnel
from our internal growth and as a result of our acquisitions and because of
increased licensing activity in the current quarter resulting in increased
implementation, customer support and training costs.
During the quarter ended March 31, 2000, cost of maintenance and
service revenues including related stock-based amortization increased to $4.8
million from $1.8 million for the quarter ended March 31, 1999. In addition
to the factors mentioned above, this increase was also due to a greater
number of stock options being subject to amortization during the more recent
quarter where the original exercise price of the option was below the deemed
fair value of our common stock for accounting purposes. The amortization of
stock-based compensation primarily represents the difference between the
exercise price and the deemed fair value of our common stock for accounting
purposes on the date certain stock options were granted. This amount is
included as a component of stockholders' equity and is being amortized on an
accelerated basis by charges to operations over the vesting period of the
options, consistent with the method described in Financial Accounting
Standards Board Interpretation No. 28. As of March 31, 2000, we had an
aggregate of $1.3 million of deferred compensation relating to cost of
maintenance and service revenues still to be amortized.
16
OPERATING EXPENSES
SALES AND MARKETING. During the quarter ended March 31, 2000, sales
and marketing expenses were $35.0 million, an increase of 407% over sales and
marketing expenses of $6.9 million for the quarter ended March 31, 1999. The
increase was primarily attributable to increased sales commissions as a
result of increased sales, an increase in salaries, travel costs and related
expenses because of an increase in the number of sales and marketing
employees from continued expansion and our acquisitions, an increase in fees
paid to outside professional service providers, expanded marketing programs
for trade shows and customer advisory council meetings and increased facility
costs related to the expansion of our corporate headquarters and
international sales offices. We believe these expenses will continue to
increase in absolute dollar amounts in future periods as we expect to
continue to expand our sales and marketing efforts.
During the quarter ended March 31, 2000, sales and marketing
expenses including related stock-based amortization increased to $36.8
million from $8.3 million for the quarter ended March 31, 1999. In addition
to the factors mentioned above, this increase was also due to a greater
number of stock options being subject to amortization during the more recent
quarter where the original exercise price of the option was below the deemed
fair value of our common stock for accounting purposes. As of March 31, 2000,
we had an aggregate of $7.7 million of deferred compensation relating to
sales and marketing expense still to be amortized.
RESEARCH AND DEVELOPMENT. During the quarter ended March 31, 2000,
research and development expenses were $7.1 million, an increase of 224% over
research and development expenses of $2.2 million for the quarter ended March
31, 1999. The increase was primarily attributable to an increase in salaries
and related expenses because of an increase in the number of research and
development personnel from continued expansion and our acquisitions and, to a
lesser extent, to increased facility costs related to the expansion of our
corporate headquarters and our international sales offices. To date, all
software development costs have been expensed in the period incurred. We
believe that continued investment in research and development is critical to
attaining our strategic objectives. As a result, we expect research and
development expenses to increase in absolute dollar amounts in future periods.
During the quarter ended March 31, 2000, research and development
expenses including related stock-based amortization increased to $7.8 million
from $3.0 million for the quarter ended March 31, 1999. This increase is
because of the reasons mentioned in the above paragraph. This increase was
partially offset by a decrease in the amortization of our stock-based
compensation during the more recent quarter where the original exercise price
of the option was below the deemed fair value of our common stock for
accounting purposes. As of March 31, 2000, we had an aggregate of $3.5
million of deferred compensation relating to research and development expense
still to be amortized.
GENERAL AND ADMINISTRATIVE. During the quarter ended March 31, 2000,
general and administrative expenses were $5.3 million, an increase of 256%
over general and administrative expenses of $1.5 million for the quarter
ended March 31, 1999. The increase was primarily attributable to an increase
in the number of finance, accounting, legal, human resources and information
technology personnel from continued expansion and our acquisitions, an
increase in fees paid to outside professional service providers, an increase
in our allowance for doubtful accounts related to our domestic and
international growth, increased facility costs related to the expansion of
our corporate headquarters and international sales offices and to increased
communication costs, particularly to remote offices. We believe general and
administrative expenses will increase in absolute dollars, as we expect to
add personnel to support our expanding operations, and to incur additional
costs related to the growth of our business and our responsibilities as a
public company.
During the quarter ended March 31, 2000, general and administrative
expenses including related stock-based amortization increased to $6.0 million
from $2.0 million for the quarter ended March 31, 1999. In addition to the
factors mentioned above, this increase was also due to a greater number of
stock options being subject to amortization during the more recent quarter
where the original exercise price of the option was below the deemed fair
value of our common stock for accounting purposes. As of March 31, 2000, we
had an aggregate of $3.8 million of deferred compensation relating to general
and administrative expense still to be amortized.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. We acquired
TradingDynamics and Tradex in the quarter ended March 31, 2000 primarily for
their product offerings and research and development teams. We accounted for
the acquisitions as purchase business combinations. We also entered an
intellectual property agreement with an outside party in the quarter ended
March 31, 2000. As a result of these transactions we recorded goodwill and
other intangible assets on our balance sheet of $3.5 billion. Amortization of
goodwill and other intangible assets was $98.3 million in the quarter ended
March 31, 2000. We will be amortizing the remaining $3.4 billion of our
goodwill and other intangible assets on a straight-line basis through the
quarter ended March 31, 2003. Please see Notes 4 and 5 in the Notes to the
Condensed Consolidated Financial Statements for a more detailed discussion of
our goodwill and other intangible assets.
IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the
TradingDynamics and Tradex acquisitions we recorded a charge of $12.8 million
in the quarter ended March 31, 2000. Please see Note 4 in the Notes to the
Condensed Consolidated Financial Statements for a more detailed discussion of
the charge for in-process research and development.
17
OTHER INCOME, NET
Other income, net consists of interest income, interest expense and
other non-operating expenses. During the quarter ended March 31, 2000, other
income, net was $2.7 million, an increase of 3,249% over other income, net of
$81,000 for the quarter ended March 31, 1999. This increase is primarily
attributable to interest income resulting from higher average cash balances
during the more recent period.
PROVISION FOR INCOME TAXES
We incurred operating losses for all periods from inception through
March 31, 2000. We have recorded a valuation allowance for the full amount of
our net deferred tax assets, as the future realization of the tax benefit is
not currently likely. We recorded income tax expense of $369,000 primarily
relating to our international subsidiaries during the quarter ended March 31,
2000.
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999
REVENUES
LICENSE. License revenues for the six months ended March 31, 2000
were $42.0 million, a 300% increase over license revenues of $10.5 million
for the six months ended March 31, 1999. This increase was primarily
attributable to continued market acceptance of our products, an increase in
sales to new customers resulting from increased headcount in our sales force
along with an increasing demand for business-to-business electronic commerce
solutions across a broad range of industries, having new strategic products
and solutions available, including those resulting from our acquisitions,
having more business partners to help promote and sell our product
domestically and internationally, and the increased acceptance of our
products internationally.
MAINTENANCE AND SERVICE. Maintenance and service revenues for the
six months ended March 31, 2000 were $21.6 million, a 269% increase over
maintenance and service revenues of $5.8 million for the six months ended
March 31, 1999. This increase is attributable to increased licensing activity
as discussed above, which has resulted in increased revenues from customer
implementations and maintenance contracts and, to a lesser extent,
accelerated customer implementations and renewals of recurring maintenance
have also contributed to the increase.
During the six months ended March 31, 2000 no individual customers
accounted for more than 10% of total revenues, and, in the six months ended
March 31, 1999, two individual customers each accounted for more than 10% of
total revenues. Revenues from international sales were $15.1 million in the
six months ended March 31, 2000 and were $1.1 million for the six months
ended March 31, 1999.
COST OF REVENUES
LICENSE. Cost of license revenues were $2.2 million in the six
months ended March 31, 2000, an increase of 796% over cost of license
revenues of $250,000 for the six months ended March 31, 1999. The increase in
the cost of license revenues was primarily attributable to royalties due to
third parties for integrated technology and certain reseller sales
commissions.
MAINTENANCE AND SERVICE. Cost of maintenance and service revenues
were $7.6 million in the six months ended March 31, 2000, an increase of 205%
over cost of maintenance and service revenues of $2.5 million for the six
months ended March 31, 1999. Our cost of maintenance and service revenues
includes salaries and related expenses for our customer support,
implementation and training services organizations, costs of third parties
contracted to provide consulting services to customers and an allocation of
our facilities, communications and depreciation expenses. The increase was
primarily attributable to increases in the areas described above because of
increases in the number of implementation, training and technical support
personnel from our internal growth and a result of our acquisitions and
because of increased licensing activity in the period resulting in increased
implementation, customer support and training costs.
During the six months ended March 31, 2000, cost of maintenance and
service revenues including related stock-based amortization increased to $8.3
million from $2.8 million for the six months ended March 31, 1999. In
addition to the increases mentioned above, the increase was also due to a
greater number of stock options being subject to amortization during the more
recent period where the original exercise price of the option was below the
deemed fair value of our common stock for accounting purposes.
OPERATING EXPENSES
SALES AND MARKETING. During the six months ended March 31, 2000,
sales and marketing expenses were $54.8 million, an increase of 385% over
sales and marketing expenses of $11.3 million for the six months ended March
31, 1999. The increase was primarily attributable to increased sales
commissions as a result of increased sales, an increase in salaries, travel
costs and related expenses
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because of an increase in the number of sales and marketing employees from
continued expansion and our acquisitions, an increase in fees paid to outside
professional service providers, expanded marketing programs for trade shows
and customer advisory council meetings and increased facility costs related
to the expansion of our corporate headquarters and international sales
offices. We believe these expenses will continue to increase in absolute
dollar amounts in future periods as we expect to continue to expand our sales
and marketing efforts.
During the six months ended March 31, 2000, sales and marketing
expenses including related stock-based amortization increased to $58.7
million from $13.3 million for the six months ended March 31, 1999. In
addition to the increases mentioned above, the increase was also due to a
greater number of stock options being subject to amortization during the more
recent period where the original exercise price of the option was below the
deemed fair value of our common stock for accounting purposes.
RESEARCH AND DEVELOPMENT. During the six months ended March 31,
2000, research and development expenses were $11.6 million, an increase of
201% over research and development expenses of $3.8 million for the six
months ended March 31, 1999. The increase was primarily attributable to an
increase in salaries and related expenses because of an increase in the
number of research and development personnel from continued expansion and our
acquisitions and, to a lesser extent, the increase is also due to increased
facility costs related to the expansion of our corporate headquarters and our
international sales offices. To date, all software development costs have
been expensed in the period incurred. We believe that continued investment in
research and development is critical to attaining our strategic objectives,
and, as a result, we expect research and development expenses to increase in
absolute dollar amounts in future periods.
During the six months ended March 31, 2000, research and development
expenses including related stock-based amortization increased to $13.1
million from $4.9 million for the six months ended March 31, 1999. In
addition to the increases mentioned above, the increase was also due to a
greater number of stock options being subject to amortization during the more
recent period where the original exercise price of the option was below the
deemed fair value of our common stock for accounting purposes.
GENERAL AND ADMINISTRATIVE. During the six months ended March 31,
2000, general and administrative expenses were $8.7 million, an increase of
224% over general and administrative expenses of $2.7 million for the six
months ended March 31, 1999. The increase was primarily attributable to an
increase in the number of finance, accounting, legal, human resources and
information technology personnel from continued expansion and our
acquisitions, an increase in fees paid to outside professional service
providers, an increase in our allowance for doubtful accounts related to our
domestic and international growth, increased facility costs related to the
expansion of our corporate headquarters and international sales offices and
to increased communication costs, particularly to remote offices. We believe
general and administrative expenses will increase in absolute dollars, as we
expect to add personnel to support our expanding operations, and to incur
additional costs related to the growth of our business and our
responsibilities as a public company.
During the six months ended March 31, 2000, general and
administrative expenses including related stock-based amortization increased
to $10.8 million from $3.4 million for the six months ended March 31, 1999.
In addition to the increases mentioned above, the increase was also due to a
greater number of stock options being subject to amortization during the more
recent period where the original exercise price of the option was below the
deemed fair value of our common stock for accounting purposes.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. We acquired
TradingDynamics and Tradex in the quarter ended March 31, 2000 primarily for
their product offerings and research and development teams. We accounted for
the acquisitions as purchase business combinations. We also entered an
intellectual property agreement with an outside party in the quarter ended
March 31, 2000. As a result of these transactions we recorded goodwill and
other intangible assets on our balance sheet of $3.5 billion. Amortization of
goodwill and other intangible assets was $98.3 million in the quarter ended
March 31, 2000. We will be amortizing the remaining $3.4 billion of our
goodwill and other intangible assets on a straight-line basis through the
quarter ended March 31, 2003. Please see Notes 4 and 5 in the Notes to the
Condensed Consolidated Financial Statements for a more detailed discussion of
our goodwill and other intangible assets.
IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the
TradingDynamics and Tradex acquisitions we recorded a charge of $12.8 million
in the quarter ended March 31, 2000. Please see Note 4 in the Notes to the
Condensed Consolidated Financial Statements for a more detailed discussion of
the charge for in-process research and development.
OTHER INCOME, NET
Other income, net consists of interest income, interest expense and
other non-operating expenses. During the six months ended March 31, 2000,
other income, net was $4.8 million, an increase of 2,452% over other income,
net of $187,000 for the six months ended March 31, 1999. This increase is
primarily attributable to interest income resulting from higher average cash
balances during the more recent period.
PROVISION FOR INCOME TAXES
We incurred operating losses for all periods from inception through
March 31, 2000. We have recorded a valuation allowance for
19
the full amount of our net deferred tax assets, as the future realization of
the tax benefit is not currently likely. We recorded income tax expense of
$442,000 primarily relating to our international subsidiaries during the six
months ended March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had $317.6 million in cash, cash
equivalents and investments, and $106.3 million in working capital. In the
quarter ended March 31, 2000, we received $99.6 million in cash and cash
equivalents from the acquisitions of TradingDynamics and Tradex. In March
2000, we received $47.5 million in cash as part of a transaction with an
outside party. Please see Note 5 in the Notes to the Condensed Consolidated
Financial Statements. In June 1999, we completed the initial public offering
of our common stock and realized net proceeds from the offering of
approximately $121.2 million. Prior to the offering we had financed our
operations through private sales of preferred stock, with net proceeds of
$23.2 million, bank loans and equipment leases. We also continue to fund our
operations through our cash from operating activities. As of March 31, 2000,
we had outstanding lease liabilities of $1.3 million and we have a line of
credit of $7.0 million that can be used for working capital purposes. At
March 31, 2000, no amounts were outstanding under the line of credit. The
line of credit contains covenants that require the Company to maintain
certain financial ratios and levels of net worth. The line of credit also
does not permit the payment of dividends to stockholders.
Net cash provided by operating activities was $32.0 million in the
six months ended March 31, 2000 and $10.0 in the six months ended March 31,
1999. Net cash flows provided by operating activities in the six months ended
March 31, 2000 was primarily attributed to deferred revenue from customer
payments that were not recognized as revenue, and, to a lesser extent, by
increases in accounts payable, accrued compensation and related liabilities
and accrued liabilities and by customer payments on our accounts receivable.
These cash flows provided by operating activities were partially offset by
the net loss for the period and, to a lesser extent, an increase in prepaid
expenses and other assets for the six months ended March 31, 2000. Net cash
flows provided by operating activities in the six months ended March 31, 1999
was primarily attributed to deferred revenue from customer payments that were
not recognized as revenue, and, to a lesser extent, by increases in accounts
payable, accrued compensation and related liabilities and accrued
liabilities. These cash flows provided by operating activities were partially
offset by the net loss for the period and, to a lesser extent, an increases
in accounts receivable and prepaid expenses and other assets for the six
months ended March 31, 1999.
Net cash provided by investing activities was $51.9 million in the
six months ended March 31, 2000. The cash provided relates to the cash
acquired in our acquisitions of TradingDynamics and Tradex less direct
transaction costs for the mergers. This is partially offset by purchases of
property and equipment and purchases of investments. Net cash used in
investing activities was $4.1 million in the six months ended March 31, 1999.
Cash used in investing activities primarily reflects purchases of property
and equipment and purchases of investments in the six months ended March 31,
1999.
Net cash provided by financing activities was $53.7 million in the
six months ended March 31, 2000, primarily from the proceeds of our sale of
common stock to an outside party, and to a lesser extent, exercises of
employee stock options and stock purchased through our employee stock
purchase plan. This was partially offset by payments on capital lease
obligations. Net cash provided by financing activities was $374,000 in the
six months ended March 31, 1999, from the proceeds of stock purchased through
our employee stock option program. This was partially offset by payments on
capital lease obligations.
Capital expenditures purchases, including capital leases, were $12.5
million in the six months ended March 31, 2000 and $2.4 million in the six
months ended March 31, 1999. Our capital expenditures consisted of purchases
of operating resources to manage our operations, including computer hardware
and software, office furniture and equipment and leasehold improvements. We
expect that our capital expenditures will continue to increase in the future.
In March 2000, we entered into a new facilities operating lease agreement.
The lease term commences upon possession and is for 12 years. The Company
currently expects possession to be in the quarter ending June 30, 2001. Lease
payments are going to be made on an escalating basis with the total future
minimum lease payments amounting to $386.8 million over the lease term. We
will also have to contribute a significant amount towards construction costs
of the facility. This amount is currently estimated at approximately $116.0
million, but is subject to change. As part of this agreement, we are required
to hold a certificate of deposit as a form of security. This certificate of
deposit purchased in April is for $25.7 million and it will be classified as
restricted cash on our balance sheet. Since inception, we have generally
funded capital expenditures either through the use of working capital or with
capital leases. We will also need to purchase additional operating resources.
We expect to fund these commitments from our existing cash and cash
equivalents and our future cash flows from operations.
We expect to experience significant growth in our operating
expenses, particularly research and development and sales and marketing
expenses, for the foreseeable future in order to execute our business plan.
As a result, we anticipate that such operating expenses, as well as planned
capital expenditures, will constitute a material use of our cash resources.
In addition, we may utilize cash resources to fund acquisitions or
investments in complementary businesses, technologies or product lines. We
believe that our existing cash and cash equivalents and our anticipated cash
flow from operations will be sufficient to meet our working capital and
operating resource expenditure requirements for at least the next year.
Thereafter, we may find it necessary to obtain additional equity or debt
financing. In the event additional financing is required, we may not be able
to raise it on acceptable terms or at all.
20
YEAR 2000 COMPLIANCE
We have tested our products and believe that they are year 2000
compliant. We have also inquired of significant vendors of our internal
systems as to their year 2000 readiness, and we have also tested our material
internal systems. We believe that, based on these tests and assurances of our
vendors, we will not incur material costs to resolve year 2000 issues for our
products and internal systems. Furthermore, to date we have not experienced
any year 2000 problems and our customers or vendors have not informed us of
any material year 2000 problems. If it comes to our attention that there are
any year 2000 problems with our products or that some of our third-party
hardware and software used in our internal systems are not year 2000
compliant, then we will endeavor to make modifications to our products and
internal systems, or purchase new internal systems, to quickly respond to the
problem. The costs already incurred by us to date related to year 2000
compliance are not material, and we do not anticipate incurring additional
material costs related to year 2000 compliance.
RISK FACTORS
In addition to other information in this Form 10-Q, the following
risk factors should be carefully considered in evaluating Ariba and its
business because such factors currently may have a significant impact on
Ariba's business, operating results and financial condition. As a result of
the risk factors set forth below and elsewhere in this Form 10-Q, and the
risks discussed in Ariba's other Securities and Exchange Commission filings,
actual results could differ materially from those projected in any
forward-looking statements.
ARIBA IS AN EARLY-STAGE COMPANY. OUR LIMITED OPERATING HISTORY MAKES
IT DIFFICULT TO EVALUATE OUR FUTURE PROSPECTS.
Ariba was founded in September 1996 and has a limited operating
history. Our limited operating history makes an evaluation of our future
prospects very difficult. We began shipping our first product, the Ariba B2B
Buyer, in June 1997 and began to operate the Ariba Network in April 1999. We
will encounter risks and difficulties frequently encountered by early-stage
companies in new and rapidly evolving markets. Many of these risks are
described in more detail in this "Risk Factors" section. We may not
successfully address any of these risks. If we do not successfully address
these risks, our business would be seriously harmed.
THE MARKET FOR OUR SOLUTIONS IS AT AN EARLY STAGE. WE NEED A
CRITICAL MASS OF LARGE BUYING ORGANIZATIONS AND THEIR SUPPLIERS TO
IMPLEMENT OUR SOLUTIONS.
The market for Internet-based business-to-business applications and
services is at an early stage of development. Our success depends on a
significant number of large buying organizations implementing Ariba products
and services. The implementation of Ariba products by large buying
organizations is complex, time consuming and expensive. In many cases, these
organizations must change established business practices and conduct business
in new ways. Our ability to attract additional customers for our Ariba
products and services will depend on using our existing customers as
reference accounts. Unless a critical mass of large buying organizations and
their suppliers join the Ariba Network, our solutions may not achieve
widespread market acceptance and our business would be seriously harmed.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR LOSSES IN THE FUTURE.
We incurred net losses of $4.7 million in fiscal 1997, $11.0 million
in fiscal 1998, $29.3 million in fiscal 1999 and $136.3 million for the six
months ended March 31, 2000. We expect to derive substantially all of our
revenues for the foreseeable future from licensing our products and, to a
lesser extent, from transaction based revenue. Although our licensing
revenues have grown in recent quarters, we may not be able to sustain these
growth rates. In fact, we may not have any revenue growth, and our revenues
could decline. Over the longer term, we expect to derive more of our revenues
from revenues related to network access, network services and independent
internet marketplaces, which are based on unproven business models. Moreover,
we expect to incur significant sales and marketing, research and development,
and general and administrative expenses. In the future, we will incur
substantial non-cash costs relating to the amortization of deferred
compensation, and amortization of our goodwill and other intangible assets
and we may incur significant non-cash costs related to the issuance of
warrants to purchase our common stock. These non-cash costs will contribute
significantly to our net losses in future periods. As of March 31, 2000, we
had an aggregate of $16.3 million of deferred compensation and $3.4 billion
of goodwill and other intangible assets to be amortized. As a result, we
expect to incur significant losses for the foreseeable future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." and the "Notes to the Condensed Consolidated Financial
Statements."
21
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT.
IF WE FAIL TO MEET THE EXPECTATIONS OF PUBLIC MARKET ANALYSTS OR
INVESTORS, THE MARKET PRICE OF OUR COMMON STOCK MAY DECREASE
SIGNIFICANTLY.
Our quarterly operating results have varied significantly in the
past and will likely vary significantly in the future. We believe that
period-to-period comparisons of our results of operations are not meaningful
and should not be relied upon as indicators of future performance. Our
operating results will likely fall below the expectations of securities
analysts or investors in some future quarter or quarters. Our failure to meet
these expectations would likely adversely affect the market price of our
common stock.
Our quarterly operating results may vary depending on a number of
factors, including:
- Demand for Ariba products and services;
- Actions taken by our competitors, including new product
introductions and enhancements;
- Ability to scale our network and operations to support large
numbers of customers, suppliers and transactions;
- Ability to develop, introduce and market new products and
enhancements to our existing products on a timely basis;
- Changes in our pricing policies or those of our competitors;
- Integration of our recent acquisitions and any future
acquisitions;
- Ability to expand our sales and marketing operations,
including hiring additional sales personnel;
- Size and timing of sales of our products and services;
- Success in maintaining and enhancing existing relationships
and developing new relationships with strategic partners,
including systems integrators and other implementation
partners;
- Compensation policies that compensate sales personnel based on
specific objectives;
- Ability to control costs;
- Technological changes in our markets;
- Deferrals of customer orders in anticipation of product
enhancements or new products;
- Customer budget cycles and changes in these budget cycles; and
- General economic factors.
Our quarterly revenues are especially subject to fluctuation because
they depend on the sale of relatively large orders for our Ariba products and
related services. As a result, our quarterly operating results may fluctuate
significantly if we are unable to complete one or more substantial sales in
any given quarter. In some cases, we recognize revenues from product sales on
a percentage of completion basis. Accordingly, our ability to recognize these
revenues is subject to delays associated with our customers' ability to
complete the implementation of Ariba products in a timely manner. In some
cases, we recognize revenues on a subscription basis over the life of the
subscriptions specified in the contract, which is typically 12 to 24 months.
Therefore, if we do not book a sufficient number of large orders in a
particular quarter, our revenues in future periods could be lower than
expected. We also continue to develop our business model for the Ariba
Network and related services. As this business model evolves, the potential
for fluctuations in our quarterly results could increase and our revenues
could be lower than expected. Furthermore, other revenue recognition policies
and procedures may affect our quarterly revenues significantly. These
policies and procedures may evolve or change over time based on applicable
accounting standards and how these standards are interpreted. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We plan to continue to increase our operating expenses to expand our
sales and marketing operations, fund greater levels of research and
development, develop new partnerships, make tenant improvements to our new
facilities, increase our professional services and support capabilities and
improve our operational and financial systems. Moreover, non-cash expenses
related to the issuance of warrants to purchase our common stock could
fluctuate significantly as a result of fluctuations in the fair market value
of our common stock. If our revenues do not increase along with these
expenses or if we experience significant fluctuations in non-cash expenses
related to these warrants, our
22
business, operating results and financial condition could be seriously harmed
and net losses in a given quarter could be even larger than expected.
In addition, because our expense levels are relatively fixed in the
near term and are based in part on expectations of our future revenues, any
decline in our revenues to a level that is below our expectations would have
a disproportionately adverse impact on our operating results.
IMPLEMENTATION OF OUR ARIBA PRODUCTS BY CUSTOMERS IS COMPLEX, TIME
CONSUMING AND EXPENSIVE. WE FREQUENTLY EXPERIENCE LONG SALES AND
IMPLEMENTATION CYCLES.
Ariba B2B Buyer is an enterprise-wide solution that must be deployed
with many users within a buying organization. Its implementation by buying
organizations is complex, time consuming and expensive. In many cases, our
customers must change established business practices and conduct business in
new ways. In addition, they must generally consider a wide range of other
issues before committing to purchase our product, including product benefits,
ease of installation, ability to work with existing computer systems, ability
to support a larger user base, functionality and reliability. Furthermore,
because we are one of the first companies to offer an Internet-based
operating resource management system, many customers will be addressing these
issues for the first time in the context of managing and procuring operating
resources. As a result, we must educate potential customers on the use and
benefits of our products and services. In addition, we believe that the
purchase of our products is often discretionary and generally involves a
significant commitment of capital and other resources by a customer. It
frequently takes several months to finalize a sale and requires approval at a
number of management levels within the customer organization. The
implementation and deployment of our products requires a significant
commitment of resources by our customers and third-party and/or our
professional services organizations. Because we target different sized
customers, our sales cycles average approximately two to nine months for our
different product offerings.
BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE PURCHASING NETWORKS,
INCLUDING THE ARIBA NETWORK, ARE AT AN EARLY STAGE OF DEVELOPMENT
AND MARKET ACCEPTANCE
We began operating the Ariba Network in April 1999. Broad and timely
acceptance of the Ariba Network and other electronic purchasing networks,
which is critical to our future success, is subject to a number of
significant risks. These risks include:
- Operating resource management and procurement on the Internet
is a new market;
- Our network's ability to support large numbers of buyers and
suppliers is unproven;
- Our need to enhance the interface between our Ariba B2B Buyer
product and the Ariba Network;
- Our need to significantly enhance the features and services of
the Ariba Network to achieve widespread commercial acceptance
of our network; and
- Our need to significantly expand our internal resources to
support planned growth of the Ariba Network.
Although we expect to derive a significant portion of our long-term
future revenue from the Ariba Network, we have not yet fully evolved our
revenue model for services associated with the Ariba Network. The revenues
associated may be a combination of transaction and/or annual subscription
fees. Examples of such services might include electronic payment, bid/quote
and sourcing, among others. However, we cannot predict whether these services
and other functionality will be commercially successful or whether they will
adversely impact revenues from our Ariba B2B Buyer products and services. We
would be seriously harmed if the Ariba Network is not commercially
successful, particularly if we experience a decline in the growth or growth
rate of revenues from our Ariba B2B Buyer solution.
WE DEPEND ON SUPPLIERS FOR THE SUCCESS OF THE ARIBA NETWORK.
We depend on suppliers joining the Ariba Network. Any failure of
suppliers to join the Ariba Network in sufficient and increasing numbers
would make our network less attractive to buyers and consequently other
suppliers. In order to provide buyers on the Ariba Network an organized
method for accessing operating resources, we rely on suppliers to maintain
web-based catalogs, indexing services and other content aggregation tools.
Our inability to access and index these catalogs and services would result in
our customers having fewer products and services available to them through
our solution, which would adversely affect the perceived usefulness of the
Ariba Network.
23
WE RELY ON THIRD PARTIES TO EXPAND, MANAGE AND MAINTAIN THE COMPUTER
AND COMMUNICATIONS EQUIPMENT AND SOFTWARE NEEDED FOR THE DAY-TO-DAY
OPERATIONS OF THE ARIBA NETWORK.
We rely on several third parties to provide hardware, software and
services required to manage, maintain and expand the computer and
communications equipment and software needed for the day-to-day operations of
the Ariba Network. Services provided by these parties will include managing
the Ariba Network web server, maintaining communications lines and managing
network data centers, which are the locations on our network where data is
stored. We may not successfully obtain these services on a timely and cost
effective basis. Since the installation of the computer and communications
equipment and software needed for the day-to-day operations of the Ariba
Network to a significant extent will be managed by third parties, we will be
dependent on those parties to the extent that they manage, maintain and
provide security for it.
WE DEPEND ON STRATEGIC RESELLING RELATIONSHIPS WITH OUR PARTNERS
We have established strategic reselling relationships with some
outside companies. These companies are entitled to resell our products to
their customers. These relationships are new and this strategy is unproven.
We cannot be assured that any of these resellers, or those we may contract
with in the future, will be able to resell our products to an adequate number
of customers. If our current or future strategic partners are not able to
successfully resell our products our business could be seriously harmed.
THE BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE INDUSTRY IS VERY
COMPETITIVE, AND WE FACE INTENSE COMPETITION FROM MANY PARTICIPANTS
IN THIS INDUSTRY. IF WE ARE UNABLE TO COMPETE SUCCESSFULLY, OUR
BUSINESS WILL BE SERIOUSLY HARMED.
The market for our solutions are intensely competitive, evolving and
subject to rapid technological change. The intensity of competition has
increased and is expected to further increase in the future. This increased
competition is likely to result in price reductions, reduced gross margins
and loss of market share, any one of which could seriously harm our business.
Competitors vary in size and in the scope and breadth of the products and
services offered. We also increasingly encountered competition with respect
to different aspects of our solution from Captura Software, Clarus, Commerce
One, Concur Technologies, Extensity, GE Information Services, Intelisys,
Netscape Communications, a subsidiary of America Online and VerticalNet. We
also encounter significant competition from several major enterprise software
developers, such as Oracle, PeopleSoft and SAP. In addition, because there
are relatively low barriers to entry in the business-to-business exchange
market, we expect additional competition from other established and emerging
companies, as the business-to-business electronic commerce market continues
to develop and expand. For example, third parties that currently help
implement Ariba B2B Buyer and our other products could begin to market
products and services that compete with our own. We could also face
competition from new companies who introduce an Internet-based management
solution.
Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources than us, significantly greater name recognition and a larger
installed base of customers. In addition, many of our competitors have
well-established relationships with our current and potential customers and
have extensive knowledge of our industry. In the past, we have lost potential
customers to competitors for various reasons, including lower prices and
incentives not matched by us. In addition, current and potential competitors
have established or may establish cooperative relationships among themselves
or with third parties to increase the ability of their products to address
customer needs. Accordingly, it is possible that new competitors or alliances
among competitors may emerge and rapidly acquire significant market share. We
also expect that competition will increase as a result of industry
consolidations.
We may not be able to compete successfully against our current and
future competitors.
REVENUES COULD BE CONCENTRATED IN A RELATIVELY SMALL NUMBER OF
CUSTOMERS.
In the six months ended March 31, 2000, no individual customers
accounted for more than 10% of our total revenues; however, in fiscal 1999,
one customer accounted for more than 10% of our total revenues and, in fiscal
1998, five individual customers each accounted for more than 10% of our total
revenues. We may continue to derive a significant portion of our revenues
from a relatively small number of customers in the future. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WE WILL INCUR INCREASED NET LOSSES WHEN WE ARE REQUIRED TO RECORD A
SIGNIFICANT NON-CASH ACCOUNTING EXPENSE UPON THE VESTING OF WARRANTS.
Since January 1, 2000, in connection with alliances with different
business partners, we have issued warrants to purchase shares of our common
stock at various exercise prices. The warrants generally vest upon attainment
of certain milestones. If and when it becomes probable that any of the above
warrants will be earned we will recognize a non-cash expense for these
warrants. This expense would be calculated using the Black-Scholes option
pricing model. The potential expense underlying the milestones will be
measured at each
24
subsequent balance sheet date until the milestones are achieved or the
warrants expire. Future remeasurement could result in a substantial potential
non-cash expense, which could increase or decrease over time depending on the
fair market value of our common stock. At March 31, 2000 it was not
considered probable that any of the warrants would vest and therefore there
has not been any expense recognized for these warrants and no shares have
been issued. However subsequent to the quarter ended March 31, 2000 a
business partner has currently earned one warrant for 1,936,000 shares of our
common stock. We will be calculating the non-cash expense of this warrant in
the quarter ending June 30, 2000 and recognizing the expense over the life of
the agreement, which is five years. This will be a substantial non-cash
expense for the next five years. We could be required to record additional
significant non-cash accounting expenses if it becomes probable that any
warrants will vest in the future. In addition, from time to time we may enter
into similar arrangements with, and issue additional warrants to, other third
parties that could require us to record significant non-cash accounting
expenses based upon the value of such warrants. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations." and the
"Notes to the Condensed Consolidated Financial Statements."
OUR FUTURE RESULTS MAY DEPEND SIGNIFICANTLY ON THE USE OF OUR
ELECTRONIC COMMERCE PLATFORM IN INDEPENDENT INTERNET MARKETPLACES
We have entered into agreements to partner with independent internet
marketplaces that will be powered by our business-to-business electronic
commerce platform. These marketplaces are recently formed and at an early
stage of development. Our future results may depend significantly on the
success of these marketplaces and the use of our electronic commerce platform
by them. There is no guarantee regarding the level of activity of different
companies in these marketplaces, the effectiveness of the interaction among
companies using our business-to-business electronic commerce platform and of
the attractiveness of offerings of our competitors. If these marketplaces are
not successful, our business, operating results and financial position will
be seriously harmed.
WE HAVE ENTERED INTO STRATEGIC ALLIANCES TO CREATE A LARGER MARKET FOR
OUR PRODUCT OFFERINGS
We have established strategic alliances with various companies to
create a larger market for our product offerings both domestically and
internationally. These companies will be promoting our products to their
potential customer base. As part of these agreements we will be deploying
critical employee resources to help promote these alliances. There is no
guarantee that these alliances will be successful in creating a larger market
for our product offerings. If these alliances are not successful, our
business, operating results and financial position could be seriously harmed.
WE RELY ON THIRD PARTIES TO IMPLEMENT ARIBA PRODUCTS.
We rely, and expect to rely increasingly, on a number of third
parties to implement Ariba B2B Buyer and our other products at customer
sites. If we are unable to establish and maintain effective, long-term
relationships with our implementation providers, or if these providers do not
meet the needs or expectations of our customers, our business would be
seriously harmed. This strategy will also require that we develop new
relationships with additional third-party implementation providers to provide
these services if the number of Ariba B2B Buyer and other product
implementations continues to increase. Our current implementation partners
are not contractually required to continue to help implement Ariba B2B Buyer
and our other products. As a result of the limited resources and capacities
of many third-party implementation providers, we may be unable to establish
or maintain relationships with third parties having sufficient resources to
provide the necessary implementation services to support our needs. If these
resources are unavailable, we will be required to provide these services
internally, which would significantly limit our ability to meet our
customers' implementation needs. A number of our competitors, including
Oracle, SAP and PeopleSoft, have significantly more well-established
relationships with these third parties and, as a result, these third parties
may be more likely to recommend competitors' products and services rather
than our own. In addition, we cannot control the level and quality of service
provided by our current and future implementation partners.
WE MUST INTEGRATE RECENT ACQUISITIONS, AND WE MAY NEED TO MAKE
ADDITIONAL FUTURE ACQUISITIONS TO REMAIN COMPETITIVE. OUR BUSINESS
COULD BE ADVERSELY AFFECTED AS A RESULT OF THESE ACQUISITIONS.
In the quarter ended March 31, 2000, we completed our acquisitions
of TradingDynamics, a leading provider of business-to-business Internet
trading applications, and Tradex, a leading provider of solutions for net
markets, respectively. We may find it necessary or desirable to acquire
additional businesses, products, or technologies. If we identify an
appropriate acquisition candidate, we may not be able to negotiate the terms
of the acquisition successfully, finance the acquisition, or integrate the
acquired business, products or technologies into our existing business and
operations. If our efforts are not successful, it could seriously harm our
business.
Completing any potential future acquisitions, and integrating
TradingDynamics, Tradex or other acquisitions will cause significant
diversions of management time and resources. In particular, the acquisition
of Tradex requires the integration of two large, geographically distant
organizations. If we consummate one or more significant future acquisitions
in which the consideration consists of stock or other securities, our equity
could be significantly diluted. If we were to proceed with one or more
significant future acquisitions in which the consideration included cash, we
could be required to use a substantial portion of our available cash, to
consummate any
25
acquisition. Financing for future acquisitions may not be available on
favorable terms, or at all. In addition, in connection with our pending and
possibly with future acquisitions we will be required to amortize significant
amounts of goodwill and other intangible assets, which will negatively effect
the operating income of our business. As of March 31, 2000, we had an
aggregate of $3.4 billion of goodwill and other intangible assets remaining
to be amortized. The amortization of the remaining goodwill and other
intangible assets will result in additional charges to operations through the
quarter ending March 31, 2003.
WE DEPEND ON THE INTRODUCTION OF NEW VERSIONS OF ARIBA PLATFORMS AND
NETWORK SERVICES AND ON ENHANCING THE FUNCTIONALITY AND SERVICES
OFFERED THROUGH THE ARIBA NETWORK.
If we are unable to develop new software products or enhancements to
our existing products on a timely and cost-effective basis, or if new
products or enhancements do not achieve market acceptance, our business would
be seriously harmed. The life cycles of our products are difficult to predict
because the market for our products is new and emerging, and is characterized
by rapid technological change, changing customer needs and evolving industry
standards. The introduction of products employing new technologies and
emerging industry standards could render our existing products or services
obsolete and unmarketable.
To be successful, our products and services must keep pace with
technological developments and emerging industry standards, address the
ever-changing and increasingly sophisticated needs of our customers and
achieve market acceptance.
In developing new products and services, we may:
- Fail to develop and market products that respond to
technological changes or evolving industry standards in a
timely or cost-effective manner;
- Encounter products, capabilities or technologies developed by
others that render our products and services obsolete or
noncompetitive or that shorten the life cycles of our existing
products and services;
- Experience difficulties that could delay or prevent the
successful development, introduction and marketing of these
new products and services; or
- Fail to develop new products and services that adequately meet
the requirements of the marketplace or achieve market
acceptance.
IF WE FAIL TO RELEASE OUR PRODUCTS IN A TIMELY MANNER, OR IF OUR
PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS WOULD BE
SERIOUSLY HARMED.
We may fail to introduce or deliver new potential offerings on a
timely basis or at all. In the past, we have experienced delays in the
commencement of commercial shipments of our new releases. If new releases or
potential new products are delayed or do not achieve market acceptance, we
could experience a delay or loss of revenues and customer dissatisfaction.
Customers may delay purchases of Ariba B2B Buyer or other products in
anticipation of future releases. If customers defer material orders of Ariba
B2B Buyer or other products in anticipation of new releases or new product
introductions, our business would be seriously harmed.
NEW VERSIONS AND RELEASES OF ARIBA B2B BUYER AND OUR OTHER PRODUCTS
MAY CONTAIN ERRORS OR DEFECTS.
Ariba B2B Buyer and our other products are complex and, accordingly,
may contain undetected errors or failures when first introduced or as new
versions are released. This may result in loss of, or delay in, market
acceptance of our products. We have in the past discovered software errors in
our new releases and new products after their introduction. In the past, we
discovered problems with respect to the ability of software written in Java
to scale to allow for large numbers of concurrent users of Ariba B2B Buyer.
We have experienced delays in release, lost revenues and customer frustration
during the period required to correct these errors. We may in the future
discover errors and additional scalability limitations, in new releases or
new products after the commencement of commercial shipments. In addition, a
delay in the commercial release of the next version of Ariba B2B Buyer could
also slow the growth of the Ariba Network.
WE COULD BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS AND THIRD
PARTY LIABILITY CLAIMS RELATED TO PRODUCTS AND SERVICES PURCHASED
THROUGH THE ARIBA NETWORK.
Our customers use our products and services to manage their
operating resources. Any errors, defects or other performance problems could
result in financial or other damages to our customers. A product liability
claim brought against us, even if not successful, would likely be time
consuming and costly and could seriously harm our business. Although our
customer license agreements typically contain provisions designed to limit
our exposure to product liability claims, existing or future laws or
unfavorable judicial decisions could negate these limitation of liability
provisions.
26
The Ariba Network provides our customers with indices of products
that can be purchased from suppliers participating in the Ariba Network. The
law relating to the liability of providers of listings of products and
services sold over the Internet for errors, defects or other performance
problems with respect to those products and services is currently unsettled.
We do not pre-screen the types of products and services that may be purchased
through the Ariba Network. Some of these products and services could contain
performance or other problems. We may not successfully avoid civil or
criminal liability for problems related to the products and services sold
through the Ariba Network. Any claims or litigation could still require
expenditures in terms of management time and other resources to defend
ourselves. Liability of this sort could require us to implement measures to
reduce our exposure to this liability, which may require us, among other
things, to expend substantial resources or to discontinue certain product or
service offerings or to take precautions to ensure that certain products and
services are not available through the Ariba Network.
OUR SUCCESS DEPENDS ON RETAINING OUR CURRENT KEY PERSONNEL AND
ATTRACTING ADDITIONAL KEY PERSONNEL, PARTICULARLY IN THE AREAS OF
DIRECT SALES AND RESEARCH AND DEVELOPMENT.
Our future performance depends on the continued service of our
senior management, product development and sales personnel, in particular
Keith Krach, our Chief Executive Officer and Chairman of the Board of
Directors. None of these persons, including Mr. Krach, is bound by an
employment agreement, and we do not carry key person life insurance. The loss
of the services of one or more of our key personnel could seriously harm our
business. Our future success also depends on our continuing ability to
attract, hire, train and retain a substantial number of highly skilled
managerial, technical, sales, marketing and customer support personnel. We
are particularly dependent on hiring additional personnel to increase our
direct sales and research and development organizations. In addition, new
hires frequently require extensive training before they achieve desired
levels of productivity. Competition for qualified personnel is intense, and
we may fail to retain our key employees or to attract or retain other highly
qualified personnel.
IF THE PROTECTION OF OUR INTELLECTUAL PROPERTY IS INADEQUATE, OUR
COMPETITORS MAY GAIN ACCESS TO OUR TECHNOLOGY, AND WE MAY LOSE
CUSTOMERS.
We depend on our ability to develop and maintain the proprietary
aspects of our technology. To protect our proprietary technology, we rely
primarily on a combination of contractual provisions, intellectual property
agreements, confidentiality procedures, trade secrets, and patent, copyright
and trademark laws.
We license rather than sell Ariba B2B Buyer and our other products
and require our customers to enter into license agreements, which impose
restrictions on their ability to utilize the software. In addition, we seek
to avoid disclosure of our trade secrets through a number of means, including
but not limited to, requiring those persons with access to our proprietary
information to execute confidentiality agreements with us and restricting
access to our source code. We seek to protect our software, documentation and
other written materials under trade secret and copyright laws, which afford
only limited protection. We cannot assure you that any of our proprietary
rights with respect to the Ariba Network will be viable or of value in the
future because the validity, enforceability and type of protection of
proprietary rights in Internet-related industries are uncertain and still
evolving.
We have no patents, and none may be issued from our existing patent
applications. Our future patents, if any, may be successfully challenged or
may not provide us with any competitive advantages. We may not develop
proprietary products or technologies that are patentable.
In the quarter ended March 31, 2000, we entered into an intellectual
property agreement with an outside party as part of an alliance. This
intellectual property agreement protects our products against any patents of
this outside party that are currently issued, pending and are to be issued
over the three year period subsequent to the date of the agreement.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult, and while we are unable to determine the extent to
which piracy of our software products exists, software piracy can be expected
to be a persistent problem. In addition, the laws of some foreign countries
do not protect our proprietary rights to as great an extent as do the laws of
the United States. Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology,
duplicate our products or design around patents issued to us or our other
intellectual property.
There has been a substantial amount of litigation in the software
industry and the Internet industry regarding intellectual property rights. It
is possible that in the future, third parties may claim that we or our
current or potential future products infringe their intellectual property. We
expect that software product developers and providers of electronic commerce
solutions will increasingly be subject to infringement claims as the number
of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. Any
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require us to enter into royalty
or licensing agreements. Royalty or licensing agreements, if required, may
not be available on
27
terms acceptable to us or at all, which could seriously harm our business.
We must now, and may in the future have to, license or otherwise
obtain access to intellectual property of third parties. For example, we are
currently dependent on developers' licenses from enterprise resource
planning, database, human resource and other system software vendors in order
to ensure compliance of our Ariba B2B Buyer products with their management
systems. We may not be able to obtain any required third party intellectual
property in the future.
IN ORDER TO MANAGE OUR GROWTH AND EXPANSION, WE WILL NEED TO IMPROVE
AND IMPLEMENT NEW SYSTEMS, PROCEDURES AND CONTROLS.
We have recently experienced a period of significant expansion of
our operations that has placed a significant strain upon our management
systems and resources. If we are unable to manage our growth and expansion,
our business will be seriously harmed. In addition, we have recently hired a
significant number of employees and plan to further increase our total
headcount. We also plan to expand the geographic scope of our customer base
and operations. This expansion has resulted, and will continue to result, in
substantial demands on our management resources. Our ability to compete
effectively and to manage future expansion of our operations, if any, will
require us to continue to improve our financial and management controls,
reporting systems and procedures on a timely basis, and expand, train and
manage our employee work force. We have implemented new systems to manage our
financial and human resources infrastructure. We may find that this system,
our personnel, procedures and controls may be inadequate to support our
future operations.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF THE SYSTEMS WE USE ARE NOT
YEAR 2000 COMPLIANT
We have tested our products and believe that they are year 2000
compliant. We have also inquired of significant vendors of our internal
systems as to their year 2000 readiness, and we have also tested our material
internal systems. We believe that, based on these tests and assurances of our
vendors, we will not incur material costs to resolve year 2000 issues for our
products and internal systems. Furthermore, to date we have not experienced
any year 2000 problems and our customers or vendors have not informed us of
any material year 2000 problems. If it comes to our attention that there are
any year 2000 problems with our products or that some of our third-party
hardware and software used in our internal systems are not year 2000
compliant, then we will endeavor to make modifications to our products and
internal systems, or purchase new internal systems, to quickly respond to the
problem. The costs already incurred by us to date related to year 2000
compliance are not material, and we do not anticipate incurring additional
material costs related to year 2000 compliance.
AS WE EXPAND OUR INTERNATIONAL SALES AND MARKETING ACTIVITIES, OUR
BUSINESS WILL BE SUSCEPTIBLE TO NUMEROUS RISKS ASSOCIATED WITH
INTERNATIONAL OPERATIONS.
To be successful, we believe we must continue to expand our
international operations and hire additional international personnel.
Therefore, we expect to commit significant resources to expand our
international sales and marketing activities. If successful, we will be
subject to a number of risks associated with international business
activities. These risks generally include:
- Currency exchange rate fluctuations;
- Seasonal fluctuations in purchasing patterns;
- Unexpected changes in regulatory requirements;
- Tariffs, export controls and other trade barriers;
- Longer accounts receivable payment cycles and difficulties in
collecting accounts receivable;
- Difficulties in managing and staffing international
operations;
- Potentially adverse tax consequences, including restrictions
on the repatriation of earnings;
- The burdens of complying with a wide variety of foreign laws;
- The risks related to the recent global economic turbulence and
adverse economic circumstances in Asia; and
- Political instability.
28
IN THE FUTURE WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN ORDER TO
REMAIN COMPETITIVE IN THE BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE
INDUSTRY. THIS CAPITAL MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF
AT ALL.
We believe that our existing cash and cash equivalents and our
anticipated cash flow from operations will be sufficient to meet our working
capital and operating resource expenditure requirements for at least the next
year. After that, we may need to raise additional funds and we cannot be
certain that we will be able to obtain additional financing on favorable
terms, if at all. If we cannot raise funds on acceptable terms, if and when
needed, we may not be able to develop or enhance our products and services,
take advantage of future opportunities, grow our business or respond to
competitive pressures or unanticipated requirements, which could seriously
harm our business.
OUR STOCK PRICE IS VOLATILE.
Our stock price has fluctuated significantly. The market price of
the common stock may decrease significantly in the future in response to the
following factors, some of which are beyond our control:
- Variations in our quarterly operating results;
- Announcements that our revenue or income are below analysts'
expectations;
- Changes in analysts' estimates of our performance or industry
performance;
- Changes in market valuations of similar companies;
- Sales of large blocks of our common stock;
- Announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
- Loss of a major customer or failure to complete significant
license transactions;
- Additions or departures of key personnel; and
- Fluctuations in stock market price and volume, which are
particularly common among highly volatile securities of
software and Internet-based companies.
WE ARE AT RISK OF SECURITIES CLASS ACTION LITIGATION DUE TO OUR STOCK
PRICE VOLATILITY.
In the past, securities class action litigation has often been
brought against a company following periods of volatility in the market price
of its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert
management's attention and resources, which could seriously harm our business.
WE HAVE IMPLEMENTED CERTAIN ANTI-TAKEOVER PROVISIONS THAT COULD MAKE
IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US.
Provisions of our amended and restated certificate of incorporation
and bylaws, as well as provisions of Delaware law, could make it more
difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders.
WE DEPEND ON INCREASING USE OF THE INTERNET AND ON THE GROWTH OF
ELECTRONIC COMMERCE. IF THE USE OF THE INTERNET AND ELECTRONIC
COMMERCE DO NOT GROW AS ANTICIPATED, OUR BUSINESS WILL BE SERIOUSLY
HARMED.
Our business depends on the increased acceptance and use of the
Internet as a medium of commerce. Rapid growth in the use of the Internet is
a recent phenomenon. As a result, acceptance and use may not continue to
develop at historical rates and a sufficiently broad base of business
customers may not adopt or continue to use the Internet as a medium of
commerce. Demand and market acceptance for recently introduced services and
products over the Internet are subject to a high level of uncertainty, and
there exist few proven services and products.
Our business would be seriously harmed if:
- Use of the Internet and other online services does not
continue to increase or increases more slowly than expected;
29
- The technology underlying the Internet and other online
services does not effectively support any expansion that may
occur; or
- The Internet and other online services do not create a viable
commercial marketplace, inhibiting the development of
electronic commerce and reducing the need for our products and
services.
WE DEPEND ON THE ACCEPTANCE OF THE INTERNET AS A COMMERCIAL MARKETPLACE
AND THIS ACCEPTANCE MAY NOT OCCUR ON A TIMELY BASIS.
The Internet may not be accepted as a viable long-term commercial
marketplace for a number of reasons. These include:
- Potentially inadequate development of the necessary
communication and computer network technology, particularly if
rapid growth of the Internet continues;
- Delayed development of enabling technologies and performance
improvements;
- Delays in the development or adoption of new standards and
protocols; and
- Increased governmental regulation.
SECURITY RISKS AND CONCERNS MAY DETER THE USE OF THE INTERNET FOR
CONDUCTING ELECTRONIC COMMERCE.
A significant barrier to electronic commerce and communications is
the secure transmission of confidential information over public networks.
Advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments could result in compromises or
breaches of our security systems or those of other web sites to protect
proprietary information. If any well-publicized compromises of security were
to occur, it could have the effect of substantially reducing the use of the
web for commerce and communications. Anyone who circumvents our security
measures could misappropriate proprietary information or cause interruptions
in our services or operations. The Internet is a public network, and data is
sent over this network from many sources. In the past, computer viruses,
software programs that disable or impair computers, have been distributed and
have rapidly spread over the Internet. Computer viruses could be introduced
into our systems or those of our customers or suppliers, which could disrupt
the Ariba Network or make it inaccessible to customers or suppliers. We may
be required to expend significant capital and other resources to protect
against the threat of security breaches or to alleviate problems caused by
breaches. To the extent that our activities may involve the storage and
transmission of proprietary information, such as credit card numbers,
security breaches, could expose us to a risk of loss or litigation and
possible liability. Our security measures may be inadequate to prevent
security breaches, and our business would be harmed if we do not prevent them.
THE ARIBA NETWORK MAY EXPERIENCE PERFORMANCE PROBLEMS OR DELAYS AS A
RESULT OF HIGH VOLUMES OF TRAFFIC.
If the volume of traffic on the web site for the Ariba Network
increases, the Ariba Network may in the future experience slower response
times or other problems. In addition, users will depend on Internet service
providers, telecommunications companies and the efficient operation of their
computer networks and other computer equipment for access to the Ariba
Network. Each of these has experienced significant outages in the past and
could experience outages, delays and other difficulties due to system
failures unrelated to our systems. Any delays in response time or performance
problems could cause users of the Ariba Network to perceive this service as
not functioning properly and therefore cause them to use other methods to
procure their operating resources.
INCREASING GOVERNMENT REGULATION COULD LIMIT THE MARKET FOR, OR
IMPOSE SALES AND OTHER TAXES ON THE SALE OF, OUR PRODUCTS AND
SERVICES OR ON PRODUCTS AND SERVICES PURCHASED THROUGH THE ARIBA
NETWORK.
As Internet commerce evolves, we expect that federal, state or
foreign agencies will adopt regulations covering issues such as user privacy,
pricing, content and quality of products and services. It is possible that
legislation could expose companies involved in electronic commerce to
liability, which could limit the growth of electronic commerce generally.
Legislation could dampen the growth in Internet usage and decrease its
acceptance as a communications and commercial medium. If enacted, these laws,
rules or regulations could limit the market for our products and services.
We do not collect sales or other similar taxes in respect of goods
and services purchased through the Ariba Network. However, one or more states
may seek to impose sales tax collection obligations on out-of-state companies
like us that engage in or facilitate electronic commerce. A number of
proposals have been made at the state and local level that would impose
additional taxes on the sale of goods and services over the Internet. These
proposals, if adopted, could substantially impair the growth of electronic
commerce and could adversely affect our opportunity to derive financial
benefit from such activities. Moreover, a successful assertion by one or more
states or
30
any foreign country that we should collect sales or other taxes on the
exchange of goods and services through the Ariba Network could seriously harm
our business.
Legislation limiting the ability of the states to impose taxes on
Internet-based transactions has been proposed in the U.S. Congress. This
legislation could ultimately be enacted into law or this legislation could
contain a limited time period in which this tax moratorium will apply. In the
event that the tax moratorium is imposed for a limited time period,
legislation could be renewed at the end of this period. Failure to enact or
renew this legislation could allow various states to impose taxes on
electronic commerce, and the imposition of these taxes could seriously harm
our business.
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
We develop products in the United States and market our products in
North America, Europe, Australia and the Asia-Pacific region. As a result,
our financial results could be affected by factors such as changes in foreign
currency exchange rates or weak economic conditions in foreign markets. As
all sales are currently made in U.S. dollars, a strengthening of the dollar
could make our products less competitive in foreign markets.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
relate primarily to the Company's investment portfolio. The Company does not
use derivative financial instruments in its investment portfolio. The primary
objective of the Company's investment activities is to preserve principal
while maximizing yields without significantly increasing risk. This is
accomplished by investing in widely diversified investments, consisting
primarily of investment grade securities. Due to the nature of our
investments, we believe that there is no material risk exposure. All
investments in the table below are carried at market value, which
approximates cost.
The table below represents principal (or notional) amounts and
related weighted-average interest rates by year of maturity of the Company's
investment portfolio.
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
(IN THOUSANDS, EXCEPT MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
INTEREST RATES) 2001 2002 2003 2004 20005 THEREAFTER TOTAL
---------- ----------- ---------- ---------- ---------- ---------- --------
Cash equivalents $193,712 - - - - - $193,712
Average interest rate 5.80% - - - - - 5.80%
Investments $61,457 $45,649 $10,915 - - - $118,021
Average interest rate 6.12% 6.74% 6.23% - - - 6.46%
Total investment securities $255,169 $45,649 $10,915 - - - $311,733
OTHER INVESTMENTS
We have made four equity investments during the six months ended
March 31, 2000 of $6.3 million in four privately held companies. We also
acquired one equity investment of $571,000 as a result of our merger with
Tradex. We account for these investments under the cost basis of accounting,
valuing these investments at their original cost. Also as part of the Tradex
acquisition we acquired common stock in a publicly traded internet company.
The value of this common stock at March 31, 2000 was $1.0 million. This
investment in the publicly traded internet company is subject to significant
risk based on the historical volatility of internet stocks. We also currently
have a warrant for common stock in a software company being publicly traded
in Germany. The value of this warrant is $3.7 million and is included in our
long-term investments on the balance sheet. This warrant for common stock is
subject to significant risk based on the recent volatility of stock markets
around the world. We also received warrants in connection with an alliance
with a business partner. We have currently earned one of these warrants. The
estimated fair value of this warrant is included in the balance sheet under
long-term investments with a value of approximately $200,000. None of these
specific investments discussed are included in the table above.
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable.
ITEM 2. Changes in Securities and Use of Proceeds
(a) Modification of Constituent Instruments
Not applicable.
(b) Change in Rights
32
Not applicable.
(c) Changes in Securities
On January 1, 2000, we issued warrants to purchase shares of our
common stock in connection with the establishment of an alliance with an
outside party and our receipt of warrants to purchase shares of that party's
common stock constituting five percent of the fully-diluted equity of that
party. The warrants to purchase our common stock become exercisable upon that
party meeting significant predetermined performance targets. We also issued
that party an additional warrant that becomes exercisable in the event that
these performance targets are significantly exceeded. These warrants expire
five years after they become exercisable and have exercise prices ranging
from a fixed exercise price of $88.69 to exercise prices that adjust based on
the price of our common stock at the time they become exercisable. In
addition, they may be exercised only on a net issuance basis such that, if
exercised in full, the warrants would result in the issuance of approximately
11,600,000 shares of common stock, assuming the exercise of all shares
subject to the warrants at current market values of our common stock. The
offer and sale of the warrants to purchase Common Stock was exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant
to Section 4(2) thereof. The Company relied on the following criteria to make
such exemption available: the number of offerees, the size and manner of the
offering, the sophistication of the offerees and the availability of material
information.
On February 10, 2000, we issued warrants to purchase up to 4,800,000
shares of our common stock in connection with the establishment of an
alliance with an outside party. The warrants to purchase our common stock
become exercisable upon the outside party meeting significant predetermined
performance targets. These warrants generally expire one year after they
become exercisable, have different exercise prices and they may be exercised
only on a net issuance basis thus the number of shares actually issued will
be less than 4,800,000. The offer and sale of the warrants to purchase Common
Stock was exempt from the registration requirements of the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof. The Company relied on the
following criteria to make such exemption available: the number of offerees,
the size and manner of the offering, the sophistication of the offerees and
the availability of material information.
On March 2, 2000 the Board of Directors authorized a two-for-one
stock split of our common stock, to be effected in the form of a stock
dividend. The stock split was effected on or about March 31, 2000 by
distribution to each stockholder of record as of March 20, 2000 of one share
of common stock for each share of common stock held.
On March 7, 2000, we issued 5,142,858 shares of our common stock in
connection with entering into an intellectual property agreement with an
outside party. The consideration received was $47.5 million in cash and an
intellectual property agreement with this outside party. The offer and sale
of our Common Stock was exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. The
Company relied on the following criteria to make such exemption available:
the number of offerees, the size and manner of the offering, the
sophistication of the offerees and the availability of material information.
On March 7, 2000, we issued warrants to purchase up to 3,428,572
shares of our common stock in connection with the establishment of an
alliance with an outside party. The warrants to purchase our common stock
become exercisable upon the outside party meeting significant predetermined
performance targets. These warrants generally expire 18 months after they
become exercisable, have an exercise price of $87.50 and they may be
exercised only on a net issuance basis thus the number of shares actually
issued will be less than 3,428,572. The offer and sale of the warrants to
purchase Common Stock was exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof. The
Company relied on the following criteria to make such exemption available:
the number of offerees, the size and manner of the offering, the
sophistication of the offerees and the availability of material information.
During the quarter, in connection with the acquisitions of
TradingDynamics, Inc. and Tradex Technologies, Inc. we issued an aggregate of
approximately 41.3 million shares of our common stock to former stockholders
of those companies and granted options and warrants to purchase an aggregate
of approximately 6.2 million shares of our common stock. The shares, options
and warrants were issued pursuant to an exemption by reason of Section
3(a)(10) of the Securities Act of 1933. The terms and conditions of such
issuances and grants were approved after a hearing upon the fairness of such
terms and conditions by a government authority expressly authorized by the
law to grant such approval.
During the quarter, we issued an aggregate of 2,916,956 shares of
our common stock upon the exercise of outstanding options to purchase our
common stock. A portion of those shares were issued pursuant to an exemption
by reason of Rule 701 under the Securities Act of 1933.
All of the above amounts in this Item 2 (c) give effect to the
aforementioned two-for-one stock split.
33
(d) Use of Proceeds
On June 28, 1999, Ariba completed the initial public offering of its
common stock, The managing underwriters in the offering were Morgan Stanley
Dean Witter, Dain Rauscher Wessels (a division of Dain Rauscher
Incorporated), Deutsche Banc Alex. Brown and Merrill Lynch & Company. The
shares of the common stock sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(No. 333-76953). The Securities and Exchange Commission declared the
Registration Statement effective on June 22, 1999.
The offering commenced on June 23, 1999 and terminated on June 28,
1999 after we had sold all of the 23,000,000 shares of common stock
registered under the Registration Statement (including 3,000,000 shares sold
in connection with the exercise of the underwriters' over-allotment option).
The initial public offering price was $5.75 per share for an aggregate
initial public offering of $132.3 million.
We paid a total of $9.3 million in underwriting discounts and
commissions and approximately $1.8 million has been paid for costs and
expenses related to the offering. None of the costs and expenses related to
the offering were paid directly or indirectly to any director, officer,
general partner of Ariba or their associates, persons owning 10 percent or
more of any class of equity securities of Ariba or an affiliate of Ariba.
After deducting the underwriting discounts and commissions and the
offering expenses the estimated net proceeds to Ariba from the offering were
approximately $121.2 million. The net offering proceeds have been used for
general corporate purposes, to provide working capital to develop products
and to expand the Company's operations. Funds that have not been used have
been invested in money market funds, certificate of deposits and other
investment grade securities. We also may use a portion of the net proceeds to
acquire or invest in businesses, technologies, products or services.
Concurrent with the offering we also sold 28,800 shares of common
stock to our Canadian employees at $5.75 per share. The offering costs
associated with the offering of shares to our Canadian employees were not
material.
The information in the above paragraphs in this Item 2 (d) gives
effect to two-for-one stock splits on December 3, 1999 and March 20, 2000.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Securities Holders
The Company held its annual meeting of stockholders in Mountain
View, California on February 28, 2000, which meeting was adjourned until
March 17, 2000 when it was completed. Of the 184,006,676 shares outstanding
as of the record date, 140,157,886 shares were present or represented by
proxy at the meeting on February 28, 2000 and 157,546,516 shares were present
or represented by proxy at the adjourned meeting on March 17, 2000. At these
meetings the following actions were voted upon:
a. To elect the following directors to serve for a term ending upon the 2003
Annual Meeting of Stockholders or until their successors are elected and
qualified:
FOR AGAINST ABSTAIN
--------------------------------------------------------------
Keith J. Krach 157,430,936 119,124 0
Robert C. Kagle 157,428,062 121,998 0
b. To approve an amendment to the Company's Certificate of Incorporation to
increase the number of shares of Common Stock that the Company is authorized
to issue from 200,000,000 to 600,000,000:
FOR AGAINST ABSTAIN
--------------------------------------------------------------
137,475,124 19,944,102 130,834
34
c. To ratify the appointment of KPMG LLP as the Company's independent public
accountants for the fiscal year ending September 30, 2000:
FOR AGAINST ABSTAIN
--------------------------------------------------------------
157,381,556 56,624 111,880
ITEM 5. Other information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.4* Registration Rights Agreement, dated January 1, 2000, by and
between EDS CoNext, Inc. and the Registrant
10.10 Lease agreement, dated March 15, 2000, by and between Moffet
Park Drive LLC and the Registrant.
10.11* Class A Common Stock Purchase Warrant, dated January 1, 2000,
issued by the Registrant to EDS CoNext, Inc.
10.12* Class B Common Stock Purchase Warrant, dated January 1, 2000,
issued by the Registrant to EDS CoNext, Inc.
10.13* Class C-1 Common Stock Purchase Warrant, dated January 1, 2000,
issued by the Registrant to EDS CoNext, Inc.
10.14* Class C-2 Common Stock Purchase Warrant, dated January 1, 2000,
issued by the Registrant to EDS CoNext, Inc.
10.15* Class D Common Stock Purchase Warrant, dated January 1, 2000,
issued by the Registrant to EDS CoNext, Inc.
27.1 Financial Data Schedule.
* Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
(b) Reports on Form 8-K
A current report on Form 8-K was filed with the Securities
and Exchange Commission by Ariba on January 25, 2000 to report the
consummation of our merger with TradingDynamics, Inc. An amendment
to this current report on Form 8-K was filed with the Securities and
Exchange Commission by Ariba on April 4, 2000 with the required
financial information.
A current report on Form 8-K was filed with the Securities
and Exchange Commission by Ariba on March 21, 2000 to report the
consummation of our merger with Tradex Technologies, Inc. and to
report a two-for-one stock split, to be effected in the form of a
stock dividend.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARIBA, INC.
Date: May 15, 2000 By: /s/ Edward P. Kinsey
---------------------------------
Edward P. Kinsey
Chief Financial Officer, Executive
Vice-President-Finance and Administration
and Secretary (Principal Financial and
and Accounting Officer)
36
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT TITLE
- ----------- -------------
4.4* Registration Rights Agreement, dated January 1, 2000, by and
between EDS CoNext, Inc. and the Registrant
10.10 Lease agreement, dated March 15, 2000, by and between Moffet
Park Drive LLC and the Registrant.
10.11* Class A Common Stock Purchase Warrant, dated January 1, 2000,
issued by the Registrant to EDS CoNext, Inc.
10.12* Class B Common Stock Purchase Warrant, dated January 1, 2000,
issued by the Registrant to EDS CoNext, Inc.
10.13* Class C-1 Common Stock Purchase Warrant, dated January 1, 2000,
issued by the Registrant to EDS CoNext, Inc.
10.14* Class C-2 Common Stock Purchase Warrant, dated January 1, 2000,
issued by the Registrant to EDS CoNext, Inc.
10.15* Class D Common Stock Purchase Warrant, dated January 1, 2000,
issued by the Registrant to EDS CoNext, Inc.
27.1 Financial Data Schedule.
* Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
37