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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 June 30, 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 July 31, 2000, 240,614,616 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 June 30, 2000 and September 30, 1999 3
Condensed Consolidated Statements of Operations for the three and nine-month periods ended June 30, 2000
and 1999 4
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended June 30, 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 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes in Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 34
Item 4. Submission of Matters to a Vote of Securities Holders 34
Item 5. Other Information 34
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)
June 30, September 30,
2000 1999
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $152,267 $50,284
Short-term investments 63,636 47,868
Restricted cash 31,480 800
Accounts receivable, net 43,969 5,157
Prepaid expenses and other current assets 11,025 1,936
----------------- ----------------
Total current assets 302,377 106,045
Property and equipment, net 32,093 9,402
Long-term investments 90,772 54,288
Other assets 398 286
Goodwill and other intangibles, net 3,145,330 -
----------------- ----------------
Total assets $3,570,970 $170,021
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $9,048 $3,846
Accrued compensation and related liabilities 43,928 6,959
Accrued liabilities 25,019 4,834
Deferred revenue 153,670 30,733
Current portion of long-term debt 582 685
----------------- ----------------
Total current liabilities 232,247 47,057
Long-term debt, net of current portion 533 781
----------------- ----------------
Total liabilities 232,780 47,838
----------------- ----------------
Stockholders' equity:
Common stock 476 364
Additional paid-in capital 3,850,159 191,150
Deferred stock-based compensation (13,386) (24,178)
Accumulated other comprehensive loss (694) (221)
Accumulated deficit (498,365) (44,932)
----------------- ----------------
Total stockholders' equity 3,338,190 122,183
----------------- ----------------
Total liabilities and stockholders' equity $3,570,970 $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 June 30, Nine Months Ended June 30,
2000 1999 2000 1999
----------------- ---------------- -------------- -----------
Revenues:
License $53,574 $6,439 $95,545 $16,939
Maintenance and service 27,091 5,454 48,641 11,292
----------------- ---------------- -------------- -----------
Total revenues 80,665 11,893 144,186 28,231
----------------- ---------------- -------------- -----------
Cost of revenues:
License 3,117 331 5,358 581
Maintenance and service (exclusive of stock-based
compensation expense of $200 and $383 for the three
months ended June 30, 2000 and 1999 and $825 and $708
for the nine months ended June 30, 2000 and 1999,
respectively) 10,876 2,113 18,524 4,622
----------------- ---------------- -------------- -----------
Total cost of revenues 13,993 2,444 23,882 5,203
----------------- ---------------- -------------- -----------
Gross profit 66,672 9,449 120,304 23,028
----------------- ---------------- -------------- -----------
Operating expenses:
Sales and marketing (exclusive of stock-based compensation
expense of $588 and $2,318 for the three months ended
June 30, 2000 and 1999 and $4,492 and $4,269 for the
nine months ended June 30 , 2000 and 1999, respectively
and exclusive of $13,575 of business partner warrant
expense for the three and nine months ended June 30,
2000) 65,595 9,796 121,616 21,098
Research and development (exclusive of stock-based
compensation expense of $537 and $985 for the three
months ended June 30, 2000 and 1999 and $2,068 and $2,023
for the nine months ended June 30, 2000 and 1999,
respectively) 10,771 3,462 22,338 7,311
General and administrative (exclusive of stock-based
compensation expense of $543 and $1,599 for the three
months ended June 30, 2000 and 1999 and $2,573 and $2,330
for the nine months ended June 30, 2000 and 1999,
respectively) 6,442 2,396 13,963 5,094
Amortization of goodwill and other intangibles 290,392 - 388,679 -
In-process research and development - - 12,750 -
Business partner warrants 13,575 - 13,575 -
Amortization of stock-based compensation 1,868 5,285 9,958 9,330
----------------- ---------------- -------------- -------------
Total operating expenses 388,643 20,939 582,879 42,833
----------------- ---------------- -------------- -------------
Loss from operations (321,971) (11,490) (462,575) (19,805)
Other income, net 5,245 197 10,017 384
----------------- ---------------- -------------- -------------
Net loss before income taxes (316,726) (11,293) (452,558) (19,421)
Provision for income taxes 433 - 875 -
----------------- ---------------- -------------- -------------
Net loss $(317,159) $(11,293) $(453,433) $(19,421)
================= ================ ============== =============
Basic and diluted net loss per share $(1.45) $(0.21) $(2.46) $(0.45)
================= ================ ============== =============
Weighted-average shares used in computing basic and
diluted net loss per share 218,478 52,626 184,566 43,394
================= ================ ============== =============
See accompanying notes to condensed consolidated financial statements.
4
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended June 30,
2000 1999
----------------------- ----------------------
OPERATING ACTIVITIES:
Net loss $(453,433) $(19,421)
Adjustments to reconcile net loss to net cash provided by operating
activities:
In-process research and development 12,750 -
Depreciation and amortization 4,680 927
Amortization of stock-based compensation 9,958 9,330
Amortization of goodwill and other intangibles 388,679 -
Non-cash warrant expense 13,596 20
Changes in operating assets and liabilities:
Accounts receivable (29,738) (3,827)
Prepaid expenses and other assets (9,114) (469)
Accounts payable 4,884 226
Accrued compensation and related liabilities 32,454 2,787
Accrued liabilities 15,317 2,850
Deferred revenue 97,557 21,292
----------------------- ----------------------
Net cash provided by operating activities 87,590 13,715
INVESTING ACTIVITIES:
Purchases of property and equipment, net (23,380) (2,985)
Purchases of investments, net (50,652) (1,247)
Cash acquired in purchase transactions 99,638 -
Direct costs of purchase transactions (39,501) -
Allocation to restricted cash (30,680) (800)
----------------------- ----------------------
Net cash used in investing activities (44,575) (5,032)
FINANCING ACTIVITIES:
Repayments of long-term debt (617) (341)
Proceeds from sale of common stock 59,715 127,233
Repurchase of common stock - (12)
----------------------- ----------------------
Net cash provided by financing activities 59,098 126,880
EFFECT OF FOREIGN EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (130) 1
----------------------- ----------------------
Net increase in cash and cash equivalents 101,983 135,564
Cash and cash equivalents at beginning of period 50,284 8,305
----------------------- ----------------------
Cash and cash equivalents at end of period $152,267 $143,869
======================= ======================
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 Ariba, Inc. ("Ariba" or "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 and prior quarter financial
statements have been reclassified to conform to the current year and current
quarter 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 June 30, 2000. The financial information included in the accompanying
condensed consolidated 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
estimated 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 June 30, Nine Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
Net loss $(317,159) $(11,293) $(453,433) $(19,421)
==========================================================
Basic and diluted:
Weighted-average common shares outstanding 236,540 87,405 207,327 78,331
Less: Weighted-average common shares subject to repurchase (18,062) (34,779) (22,761) (34,937)
----------------------------------------------------------
Weighted-average common shares used in computing basic and diluted net
loss per common share 218,478 52,626 184,566 43,394
==========================================================
Basic and diluted net loss per common share $(1.45) $(0.21) $(2.46) $(0.45)
==========================================================
Diluted net loss per share does not include the effect of the following
potential common shares at June 30 (in thousands):
2000 1999
---- ----
Shares issuable under stock options 47,393 38,537
Shares of unvested stock subject to repurchase 15,532 34,538
Shares issuable pursuant to warrants to purchase common and convertible preferred stock
(In the quarter ended June 30, 2000 this includes 2,193 of business partner warrants
earned, and excludes the remaining business partner warrants that could
potentially be earned. Please see Note 7 for further discussion.) 2,251 186
6
The weighted-average exercise price of stock options outstanding was
$21.17 and $1.33 as of June 30, 2000 and 1999, respectively. The weighted
average repurchase price of unvested stock was $0.28 and $0.17 as of June 30,
2000 and 1999, respectively. The weighted average exercise price of warrants was
$111.40 and $0.80 as of June 30, 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 nine months ended June 30, 2000 and 1999 were as follows (in
thousands):
Three Months Ended June 30, Nine Months Ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
Net loss $(317,159) $(11,293) $(453,433) $(19,421)
Unrealized gain (loss) on securities (3,161) 5 (342) (75)
Foreign currency translation adjustments (90) 17 (131) 1
----------------------------------------------------------
Comprehensive loss $(320,410) $(11,271) $(453,906) $(19,495)
==========================================================
Tax effects of other comprehensive loss are not considered material.
The components of accumulated other comprehensive loss at June 30, 2000 and
September 30, 1999 were as follows (in thousands):
June 30, September 30,
2000 1999
---- ----
Unrealized loss on securities $(564) $(222)
Foreign currency translation adjustments (130) 1
---------------------------------
Accumulated other comprehensive loss $(694) $(221)
=================================
Note 4. Acquisitions
On January 20, 2000, the Company completed its acquisition of
TradingDynamics, Inc. ("TradingDynamics"). TradingDynamics provided
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. A total of
829,660 shares of the stock issued were placed 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.
7
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) 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. A total of 3,374,738 shares
of the stock issued were placed 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 because 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
====================
8
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.
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 because 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 June 30, 2000, accumulated amortization related to the goodwill and
other intangible assets acquired in the TradingDynamics and Tradex acquisitions
totaled $305.1 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 nine month
period ended June 30, 2000 and 1999 assuming TradingDynamics and Tradex had been
acquired at the beginning of the periods presented (in thousands, except per
share data):
Nine Months Ended June 30,
2000 1999
---- ----
Revenue $154,867 $31,399
Net loss (849,629) (702,084)
Basic and diluted net loss per share $(4.12) $(8.41)
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.
On June 21, 2000, the Company entered into an Agreement and Plan of
Reorganization to acquire SupplierMarket.com, Inc. ("SupplierMarket.com"), a
leading provider of online collaborative sourcing technologies. The agreement is
structured as a tax-free stock-for-stock merger and will be accounted for as a
purchase transaction. Based on SupplierMarket.com's capitalization as of June
30, 2000, the Company will issue approximately 6.3 million shares of Ariba
common stock to SupplierMarket.com stockholders and will exchange options to
purchase shares of Ariba common stock. Subject to satisfaction of customary
closing conditions the Company expects that the acquisition will close in the
quarter ending September 30, 2000.
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 independent
third 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
9
years based on the terms of the related intellectual property agreement. At June
30, 2000, accumulated amortization related to this item totaled $83.6 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 June 30, 2000, the Company has recorded deferred stock-based
compensation of $37.0 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 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
(up to 4.8% of the Company's stock outstanding at July 31, 2000) 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 based on future
prices of our common stock or on predetermined 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 (up to 2.0% of
the Company's stock outstanding at July 31, 2000) of the Company's common stock
at various exercise prices based on future prices of our common stock or on
predetermined 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 (up to 1.4% of the Company's stock outstanding at July 31,
2000) 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.
In April 2000, in connection with an alliance with Bank of America, the
Company issued warrants to purchase up to 6,776,000 shares (up to 2.8% of the
Company's stock outstanding at July 31, 2000) 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 of when the warrant is earned. The warrants
primarily vest upon attainment of certain milestones. 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 the quarter ended June 30, 2000, the total amount of expense
recognized relating to the Company's business partner warrants was $13.6
million. In the quarter ended June 30, 2000, a warrant for 1,936,000 shares of
the Company's common stock was earned upon signing of a sales and marketing
alliance agreement. A total of $56.2 million was recorded as an intangible asset
for this sales and marketing alliance based on the fair market value of the
warrant. This intangible asset will be amortized over the life of the agreement,
which is 5 years. $2.8 million was amortized during the recent quarter as sales
and marketing expense which is classified as business partner warrant expense on
the Company's income statement. As of June 30, 2000 there is an intangible asset
of $53.4 million remaining to be amortized over the next 19 quarters relating to
this warrant. The fair market value of the warrants to purchase the 1,936,000
shares of the Company's common stock was valued using the Black-Scholes option
pricing model with the following assumptions: 1) expected volatility of 1.032,
2) weighted-average risk-free interest rate of 6.23%, 3) expected term of
approximately 1 year and 4) no expected dividends.
Also during the quarter ended June 30, 2000, a warrant for 257,143
shares of the Company's common stock was earned upon attainment of a revenue
target milestone. Therefore the Company expensed $5.0 million of sales and
marketing expense which is classified as business partner warrant expense on the
Company's income statement. In addition it was determined that as of June 30,
2000 that it was probable that another warrant for 257,143 shares of the
Company's common stock would be earned in the future. Therefore the Company
expensed $5.8 million for this portion of the warrant in the quarter ended June
30, 2000. This $5.8 million of sales and marketing expense is classified as
business partner warrant expense on the Company's income statement. The fair
market value of the warrants to purchase these shares of the Company's common
stock were valued using the Black-Scholes option pricing model with the
following assumptions: 1) expected volatility of 1.032, 2) weighted-average
risk-free interest rates ranging from 6.23% to 6.48%, 3) expected term of
approximately 1.5 years and 4) no expected dividends.
10
If and when it becomes probable that the business partner will earn any
of the above warrants, the Company recognizes a non-cash expense for these
warrants. The amount of expense is calculated using the Black-Scholes option
pricing model. The total expense associated with the warrants is 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.
The Company also received warrants for the common stock of EDS CoNext,
Inc. in connection with the January alliance. The Company earned one of these
warrants in the quarter ended March 31, 2000. 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 June 30, 2000 and therefore the Company has not recorded any investment or
revenue related to these warrants.
The Company also received warrants for the common stock of Banc of
America Marketplace LLC in connection with the April alliance. The warrants,
which may be earned by the Company, are based on factors relating to the initial
public offering and market capitalization of Banc of America Marketplace LLC.
Note 8. Line of Credit
In May 1999, the Company entered into a credit agreement with a bank,
which was collateralized by certain assets of the Company. In May 2000, this
credit agreement expired.
Note 9. Commitments
In March 2000, the Company entered into a new facility lease agreement.
The lease term commences upon possession and is for 12 years. The Company
currently expects possession to be in the quarter ending March 31, 2001. Lease
payments will 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 the Company is required to
hold a certificate of deposit as a form of security. This certificate of deposit
is for $25.7 million and is classified as restricted cash on our balance sheet.
Note 10. Recent Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards, (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 ("SAB") 101, Revenue Recognition in Financial Statements
which provides guidance related to revenue recognition based on interpretations
and practices followed by the SEC. SAB 101 was effective the first fiscal
quarter of fiscal years beginning after December 15, 1999 and requires companies
to report any changes in revenue recognition as cumulative change in accounting
principle at the time of implementation in accordance with Accounting Principles
Board opinion 20, "Accounting Changes." In March 2000, the SEC issued SAB 101A
"Amendment: Revenue Recognition in Financial Statements," which delays
implementation of SAB 101 until the Company's first fiscal quarter of 2001. In
June 2000, the SEC issued SAB 101B "Second Amendment: Revenue Recognition in
Financial Statements," which delays the implementation of SAB 101 until the
Company's fourth fiscal quarter of 2001. The Company will adopt SAB 101 and is
currently in the process of evaluating the impact, if any, SAB 101 will have on
its financial position or results of operations.
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 (SOP) 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 delivery of the software
occurs and how the vendor's hosting
11
obligation impacts revenue recognition. The Company has adopted this EITF and it
has not had a material impact on the Company's results of operation.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25. This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a non compensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1,
2000,but certain conclusions in this Interpretation cover specific events that
occur after either December 15, 1998, or January 12, 2000. To the extent that
this Interpretation covers events occurring during the period after December
15,1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000.
12
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
and network services 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. We also entered into an Agreement and
Plan of Reorganization to acquire SupplierMarket.com, Inc.
("SupplierMarket.com"), a leading provider of online collaborative sourcing
technologies on June 21, 2000. Subject to satisfaction of customary closing
conditions, we expect that the acquisition will close in the quarter ending
September 30, 2000. Please see Note 4 in the Notes to the Condensed Consolidated
Financial Statements for more detailed information.
Through June 30, 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 operating resource management system software,
Ariba Buyer, and other products such as Ariba Marketplace, or our other
products also generally purchase maintenance contracts which provide software
upgrades, technical support and connectivity to our Ariba Commerce Services
Network over a stated term, which is usually a twelve-month period. Customers
may purchase implementation services from us, but we continue to 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 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 Buyer
modules and adapters to interface with financial, human resource and other
existing enterprise systems. The fee for the server
13
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.
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. Except
for stock-based compensation and business partner warrants 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.
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.
Also included in our operating expenses is the non-cash expense for
business partner warrants. This non-cash expense relates to warrants that have
been earned by our business partners. If and when it becomes probable that the
business partner will earn any warrants, we recognize a non-cash expense for
these warrants. Please see Note 7 in the Notes to the Condensed Consolidated
Financial Statements for more detailed information.
Although revenues have consistently increased from quarter to quarter,
we have incurred significant costs to develop our technology and products, to
recruit and train personnel for our engineering, sales, marketing, professional
services and administration departments, for the amortization of our goodwill
and other intangible assets and for our business partner warrants. As a result,
we have incurred significant losses since inception, and, as of June 30, 2000,
had an accumulated deficit of $498.4 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 continue to have substantial
non-cash 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 1,273 full-time employees as of June 30, 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 $37.0 million
from inception up to June 30, 2000. This amount represents the difference
between the exercise price and the
14
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 nine months
ended June 30, 2000, we recorded $9.7 million of related stock-based
compensation amortization expense. As of June 30, 2000, we had an aggregate of
$13.1 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.
In the nine months ended June 30, 2000 in connection with our recent
acquisitions and our entering into an intellectual property agreement with an
independent third party, we recorded goodwill and other intangible assets of
$3.5 billion. These assets are being amortized over their estimated useful
lives, which is three years. During the nine months ended June 30, 2000, we
recorded $388.7 million of amortization expense for these assets. As of June 30,
2000, we had an aggregate of $3.1 billion of goodwill and other intangible
assets remaining to be amortized for these assets. 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 expect to record
additional goodwill and other intangible assets in connection with the proposed
acquisition of SupplierMarket.com. 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 ended 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.
In the quarter ended June 30, 2000, a warrant for 1,936,000 shares of
our common stock was earned upon signing of a sales and marketing alliance
agreement. A total of $56.2 million was recorded as an intangible asset for this
sales and marketing alliance based on the fair market value of the warrant. This
intangible asset will be amortized over the life of the agreement, which is 5
years. $2.8 million was amortized during the recent quarter as sales and
marketing expense which is classified as business partner warrant expense on our
income statement. As of June 30, 2000 there is an intangible asset of $53.4
million remaining to be amortized over the next 19 quarters relating to this
warrant. We also had additional sales and marketing expense of $10.8 million in
the quarter ended June 30, 2000 related to other business partner warrants. This
was also classified as business partner warrant expense on our income statement.
Please see Note 7 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.
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 our 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.
15
Three Months Ended June 30, Nine Months Ended June 30,
2000 1999 2000 1999
----------------- ---------------- -------------- ------------
Revenues:
License $53,574 $6,439 $95,545 $16,939
Maintenance and service 27,091 5,454 48,641 11,292
----------------- ---------------- -------------- ------------
Total revenues 80,665 11,893 144,186 28,231
----------------- ---------------- -------------- ------------
Cost of revenues:
License 3,117 331 5,358 581
Maintenance and service (exclusive of stock-based compensation
expense of $200 and $383 for the three months ended
June 30, 2000 and 1999 and $825 and $708 for the nine
months ended June 30, 2000 and 1999, respectively) 10,876 2,113 18,524 4,622
----------------- ---------------- -------------- ------------
Total cost of revenues 13,993 2,444 23,882 5,203
----------------- ---------------- -------------- ------------
Gross profit 66,672 9,449 120,304 23,028
----------------- ---------------- -------------- ------------
Operating expenses:
Sales and marketing (exclusive of stock-based compensation
expense of $588 and $2,318 for the three months ended
June 30, 2000 and 1999 and $4,492 and $4,269 for the nine
months ended June 30 , 2000 and 1999, respectively and
exclusive of $13,575 of business partner warrant expense
for the three and nine months ended June 30, 2000) 65,595 9,796 121,616 21,098
Research and development (exclusive of stock-based
compensation expense of $537 and $985 for the three
months ended June 30, 2000 and 1999 and $2,068 and
$2,023 for the nine months ended June 30, 2000 and
1999, respectively) 10,771 3,462 22,338 7,311
General and administrative (exclusive of stock-based
compensation expense of $543 and $1,599 for the three
months ended June 30, 2000 and 1999 and $2,573 and $2,330
for the nine months ended June 30, 2000 and 1999,
respectively) 6,442 2,396 13,963 5,094
Amortization of goodwill and other intangibles 290,392 - 388,679 -
In-process research and development - - 12,750 -
Business partner warrants 13,575 - 13,575 -
Amortization of stock-based compensation 1,868 5,285 9,958 9,330
----------------- ---------------- -------------- ------------
Total operating expenses 388,643 20,939 582,879 42,833
----------------- ---------------- -------------- ------------
Loss from operations (321,971) (11,490) (462,575) (19,805)
Other income, net 5,245 197 10,017 384
----------------- ---------------- -------------- ------------
Net loss before income taxes (316,726) (11,293) (452,558) (19,421)
Provision for income taxes 433 - 875 -
----------------- ---------------- -------------- ------------
Net loss $(317,159) $(11,293) $(453,433) $(19,421)
================= ================ ============== ============
Basic and diluted net loss per share $(1.45) $(0.21) $(2.46) $(0.45)
================= ================ ============== ============
Weighted-average shares used in computing basic
and diluted net loss per share 218,478 52,626 184,566 43,394
================= ================ ============== ============
16
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
LICENSE. License revenues for the quarter ended June 30, 2000 were
$53.6 million, a 732% increase over license revenues of $6.4 million for the
quarter ended June 30, 1999. This increase was primarily attributable to
continued market acceptance of our products, including an increase in licenses
to new customers, resulting from increased headcount in our sales force,
increased demand for business-to-business electronic commerce solutions across a
broad range of industries, new strategic products and solutions, including those
resulting from our acquisitions, increased success from our business partners to
help promote and sell our product domestically and internationally, and the
growing acceptance of our products internationally.
MAINTENANCE AND SERVICE. Maintenance and service revenues for the
quarter ended June 30, 2000 were $27.1 million, a 397% increase over maintenance
and service revenues of $5.5 million for the quarter ended June 30, 1999. This
increase is attributable to increased licensing activity as discussed above,
resulting 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 June 30, 2000, one individual customer
accounted for more than 10% of total revenues, and, in the quarter ended
June 30, 1999, two individual customers each accounted for more than 10% of
total revenues. Revenues from international sales were $10.3 million in the
quarter ended June 30, 2000 and were $2.5 million for the quarter ended June 30,
1999.
We plan to continue to add services and other functionality to the
Ariba Commerce Services Network and other electronic trading networks. We expect
to charge fees for these services and functionality. 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 Buyer products and services. We would
be seriously harmed if the Ariba Commerce Services Network and other electronic
trading networks are 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 $3.1 million in the quarter
ended June 30, 2000, an increase of 842% over cost of license revenues of
$331,000 for the quarter ended June 30, 1999. The increase in the cost of
license revenues was primarily attributable to certain reseller sales
commissions and royalties due to third parties for integrated technology.
MAINTENANCE AND SERVICE. Cost of maintenance and service revenues were
$10.9 million in the quarter ended June 30, 2000, an increase of 415% over cost
of maintenance and service revenues of $2.1 million for the quarter ended
June 30, 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 in these costs was primarily attributable to
increases in the number of implementation, training and technical support
personnel from our internal growth and acquisitions and because of increased
licensing activity in the current quarter resulting in increased implementation,
customer support and training costs.
During the quarter ended June 30, 2000, cost of maintenance and service
revenues including stock-based amortization increased to $11.1 million from $2.5
million for the quarter ended June 30, 1999. In addition to the factors
mentioned above, this increase was partially offset by a lesser value 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. As of June 30, 2000, we had an aggregate of
$1.0 million of deferred compensation relating to cost of maintenance and
service revenues still to be amortized. 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.
OPERATING EXPENSES
SALES AND MARKETING. During the quarter ended June 30, 2000, sales and
marketing expenses were $65.6 million, an increase of 570% over sales and
marketing expenses of $9.8 million for the quarter ended June 30, 1999. The
increase was primarily attributable to
17
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 our internal growth and acquisitions,
employer payroll taxes on stock options in our foreign subsidiaries, an increase
in management bonuses, an increase in fees paid to outside professional service
providers, increased recruiting and employee development costs, expanded
marketing programs for advertising, trade shows and customer advisory council
meetings and increased depreciation, facility, and information technology costs
related to increased headcount, the expansion of our corporate headquarters and
international sales office expansion. 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 June 30, 2000, sales and marketing expenses
including business partner warrants and stock-based amortization increased to
$79.8 million from $12.1 million for the quarter ended June 30, 1999. In
addition to the factors mentioned above, this increase was also due to a $13.6
million expense for business partner warrants. In the quarter ended June 30,
2000, a warrant for 1,936,000 shares of our common stock was earned upon signing
of a sales and marketing alliance agreement. A total of $56.2 million was
recorded as an intangible asset for this sales and marketing alliance based on
the fair market value of the warrant. This intangible asset will be amortized
over the life of the agreement, which is 5 years. $2.8 million was amortized
during the quarter ended June 30, 2000. As of June 30, 2000 there is an
intangible asset of $53.4 million remaining to be amortized over the next 19
quarters relating to this warrant. We also expensed $10.8 million in the quarter
ended June 30, 2000 related to other business partner warrants. Please see Note
7 in the Notes to the Condensed Consolidated Financial Statements for more
detailed information.
These increases were partially offset by a lesser value 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 June 30, 2000, we had an aggregate
of $6.2 million of deferred compensation relating to sales and marketing expense
still to be amortized.
RESEARCH AND DEVELOPMENT. During the quarter ended June 30, 2000,
research and development expenses were $10.8 million, an increase of 211% over
research and development expenses of $3.5 million for the quarter ended June 30,
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 our internal growth and acquisitions and to increased
depreciation, facility and information technology costs related to the expansion
of our corporate headquarters. 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 June 30, 2000, research and development
expenses including stock-based amortization increased to $11.3 million from $4.4
million for the quarter ended June 30, 1999. In addition to the factors
mentioned above, this increase was partially offset by a lesser value 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 June 30, 2000, we had an aggregate
of $2.9 million of deferred compensation relating to research and development
expense still to be amortized.
GENERAL AND ADMINISTRATIVE. During the quarter ended June 30, 2000,
general and administrative expenses were $6.4 million, an increase of 169% over
general and administrative expenses of $2.4 million for the quarter ended June
30, 1999. The increase was primarily attributable to an increase in the number
of finance, accounting, legal, human resources and information technology
personnel from our internal growth and acquisitions, an increase in fees paid to
outside professional service providers, increased facility, information
technology and depreciation costs related to the expansion of our corporate
headquarters and also to increased communication costs. 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 June 30, 2000, general and administrative
expenses including stock-based amortization increased to $7.0 million from $4.0
million for the quarter ended June 30, 1999. In addition to the factors
mentioned above, this increase was partially offset by a lesser value 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 June 30, 2000, we had an aggregate
of $3.3 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 approximately $3.5 billion. Amortization of goodwill and
other intangible assets was $290.4 million in the quarter ended June 30, 2000.
We will be amortizing the remaining $3.1 billion of our goodwill and other
intangible assets relating to these acquisitions and the intellectual property
agreement 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 relating to these acquisitions and the intellectual
18
property agreement.
OTHER INCOME, NET
Other income, net consists of interest income, interest expense and
other non-operating expenses. During the quarter ended June 30, 2000, other
income, net was $5.2 million, an increase of 2,562% over other income, net of
$197,000 for the quarter ended June 30, 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
June 30, 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 $433,000 primarily relating
to our international subsidiaries during the quarter ended June 30, 2000.
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999
REVENUES
LICENSE. License revenues for the nine months ended June 30, 2000 were
$95.5 million, a 464% increase over license revenues of $16.9 million for the
nine months ended June 30, 1999. This increase was primarily attributable to
continued market acceptance of our products, including an increase in licenses
to new customers, resulting from increased headcount in our sales force,
increased demand for business-to-business electronic commerce solutions across a
broad range of industries, new strategic products and solutions, including those
resulting from our acquisitions, increased success from our 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 nine
months ended June 30, 2000 were $48.6 million, a 331% increase over maintenance
and service revenues of $11.3 million for the nine months ended June 30, 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 nine months ended June 30, 2000 no individual customer
accounted for more than 10% of total revenues, and, in the nine months ended
June 30, 1999, one individual customer each accounted for more than 10% of total
revenues. Revenues from international sales were $25.4 million in the nine
months ended June 30, 2000 and were $3.6 million for the nine months ended June
30, 1999.
COST OF REVENUES
LICENSE. Cost of license revenues were $5.4 million in the nine months
ended June 30, 2000, an increase of 822% over cost of license revenues of
$581,000 for the nine months ended June 30, 1999. The increase in the cost of
license revenues was primarily attributable to certain reseller sales
commissions and to royalties due to third parties for integrated technology.
MAINTENANCE AND SERVICE. Cost of maintenance and service revenues were
$18.5 million in the nine months ended June 30, 2000, an increase of 301% over
cost of maintenance and service revenues of $4.6 million for the nine months
ended June 30, 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 in these costs was
primarily attributable to 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 nine months ended June 30, 2000, cost of maintenance and
service revenues including related stock-based amortization increased to $19.3
million from $5.3 million for the nine months ended June 30, 1999. In addition
to the increases mentioned above, the increase was also due to a greater value
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 nine months ended June 30, 2000, sales
and marketing expenses were $121.6 million, an increase of 476% over sales and
marketing expenses of $21.1 million for the nine months ended June 30, 1999. The
increase was primarily
19
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 our internal growth and
acquisitions, employer payroll taxes on stock options in our foreign
subsidiaries, an increase in management bonuses, an increase in our allowance
for doubtful accounts related to our domestic and international growth, an
increase in fees paid to outside professional service providers, increased
recruiting and employee development costs, expanded marketing programs for
advertising, trade shows and customer advisory council meetings and increased
depreciation, facility and information technology costs related to increased
headcount, the expansion of our corporate headquarters and international sales
office expansion. 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 nine months ended June 30, 2000, sales and marketing
expenses including business partner warrants and stock-based amortization
increased to $139.7 million from $25.4 million for the nine months ended June
30, 1999. In addition to the factors mentioned above, this increase was also due
to a $13.6 million expense for business partner warrants. In the quarter ended
June 30, 2000, a warrant for 1,936,000 shares of our common stock was earned
upon signing of a sales and marketing alliance agreement. A total of $56.2
million was recorded as an intangible asset for this sales and marketing
alliance based on the fair market value of the warrant. This intangible asset
will be amortized over the life of the agreement, which is 5 years. $2.8 million
was amortized during the nine months ended June 30, 2000. As of June 30, 2000
there is an intangible asset of $53.4 million remaining to be amortized over the
next 19 quarters relating to this warrant. We also expensed $10.8 million in the
quarter ended June 30, 2000 related to other business partner warrants. Please
see Note 7 in the Notes to the Condensed Consolidated Financial Statements for
more detailed information.
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 nine months ended June 30, 2000,
research and development expenses were $22.3 million, an increase of 206% over
research and development expenses of $7.3 million for the nine months ended June
30, 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 our internal growth and acquisitions and to increased
depreciation, facility and information technology costs related to the expansion
of our corporate headquarters. 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 nine months ended June 30, 2000, research and development
expenses including related stock-based amortization increased to $24.4 million
from $9.3 million for the nine months ended June 30, 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 nine months ended June 30, 2000,
general and administrative expenses were $14.0 million, an increase of 174% over
general and administrative expenses of $5.1 million for the nine months ended
June 30, 1999. The increase was primarily attributable to an increase in the
number of finance, accounting, legal, human resources and information technology
personnel from our internal growth and acquisitions, an increase in fees paid to
outside professional service providers, increased facility, information
technology and depreciation costs related to the expansion of our corporate
headquarters and also to increased communication costs. 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 nine months ended June 30, 2000, general and administrative
expenses including related stock-based amortization increased to $16.5 million
from $7.4 million for the nine months ended June 30, 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 June 30, 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 approximately $3.5 billion. Amortization of goodwill and
other intangible assets was $388.7 million for the nine months ended June 30,
2000. We will be amortizing the remaining $3.1 billion of our goodwill and other
intangible assets relating to these acquisitions and the intellectual property
agreement 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 relating to these acquisitions and the intellectual property agreement.
20
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 nine months ended June 30, 2000, other
income, net was $10.0 million, an increase of 2,509% over other income, net of
$384,000 for the nine months ended June 30, 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
June 30, 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 $875,000 primarily relating
to our international subsidiaries during the nine months ended June 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had $215.9 million in cash, cash equivalents
and short-term investments, $90.8 million in long-term investments, $31.5
million in restricted cash and $70.1 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 June 30, 2000, we had outstanding lease liabilities of $1.1 million.
Net cash provided by operating activities was $87.6 million in the nine
months ended June 30, 2000 and $13.7 million in the nine months ended June 30,
1999. Net cash provided by operating activities in the nine months ended June
30, 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 other accrued
liabilities. These cash flows provided by operating activities were partially
offset by the net loss for the period and, to a lesser extent, increases in
accounts receivable and prepaid expenses and other assets for the nine months
ended June 30, 2000. Net cash provided by operating activities in the nine
months ended June 30, 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 other accrued liabilities. These cash flows provided by operating activities
were partially offset by the net loss for the period and, to a lesser extent,
increases in accounts receivable and prepaid expenses and other assets for the
nine months ended June 30, 1999.
Net cash used in investing activities was $44.6 million in the nine
months ended June 30, 2000 and $5.0 million in the nine months ended June 30,
1999. Cash used in investing activities primarily reflects purchases of property
and equipment, purchases of investments and our allocation of restricted cash
for both periods. This is partially offset by the cash acquired in our
acquisitions of TradingDynamics and Tradex less direct transaction costs for the
mergers.
Net cash provided by financing activities was $59.1 million in the nine
months ended June 30, 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 $126.9 million in the nine months ended June 30, 1999,
primarily from the net proceeds of our initial public offering of $121.2
million, as well as exercises of employee stock options, partially offset by
payments on capital lease obligations.
Capital expenditures purchases, including capital leases, were $23.6
million in the nine months ended June 30, 2000 and $3.8 million in the nine
months ended June 30, 1999. Our capital expenditures consisted primarily 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 facility lease agreement.
The lease term commences upon possession and is for 12 years. The Company
currently expects possession to be in the quarter ending March 31, 2001. Lease
payments will 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 was purchased in
April for $25.7 million and it is classified as
21
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.
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 Buyer,
in June 1997 and began to operate the Ariba Commerce Services 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 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 Commerce Services
Network, our solutions and services 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 $453.4 million for the nine months
ended June 30, 2000 (including $388.7 million of amortization of goodwill and
intellectual property intangibles). We expect to derive substantially all of our
revenues for the foreseeable future from licensing our products and 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, 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 June 30,
2000, we had an aggregate of $13.4 million of deferred compensation and $3.1
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."
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
22
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 36 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 Commerce Services 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. Also our amortization of stock-based
compensation and amortization of goodwill and other intangible assets will
fluctuate based on our acquisition activity. Moreover, any 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 business, operating results and financial condition could be
seriously harmed and net losses in a given quarter could be even larger than
expected.
23
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 Buyer and Ariba Marketplace are enterprise-wide solutions 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 typically average
approximately five to nine months for our different product offerings.
BUSINESS-TO-BUSINESS ELECTRONIC COMMERCE TRADING NETWORKS, INCLUDING
THE ARIBA COMMERCE SERVICES NETWORK, ARE AT AN EARLY STAGE OF
DEVELOPMENT AND MARKET ACCEPTANCE
We began operating the Ariba Commerce Services Network in April 1999.
Broad and timely acceptance of the Ariba Commerce Services Network and other
electronic trading 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;
- The ability of these electronic networks to support large numbers
of buyers and suppliers is unproven;
- Our need to enhance the interface between our Ariba Buyer product
and these electronic trading networks;
- Our need to significantly enhance the features and services of
existing and planned electronic trading networks to achieve
widespread commercial acceptance of our network; and
- Our need to significantly expand our internal resources to support
planned growth of the Ariba Commerce Services Network.
Although we expect to derive a significant portion of our long-term
future revenue from the Ariba Commerce Services Network and other electronic
trading networks, we have not yet fully evolved our revenue model for services
associated with these networks. 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 Buyer products and services. We would be seriously harmed if the Ariba
Commerce Services Network and other electronic trading networks are not
commercially successful, particularly if we experience a decline in the growth
or growth rate of revenues from our Ariba Buyer solution.
WE DEPEND ON SUPPLIERS FOR THE SUCCESS OF THE ARIBA COMMERCE SERVICES
NETWORK.
We depend on suppliers joining the Ariba Commerce Services Network. Any
failure of suppliers to join the Ariba Commerce Services 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 Commerce
Services 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 Commerce Services Network.
24
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 COMMERCE SERVICES 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
Commerce Services Network. Services provided by these parties will include
managing the Ariba Commerce Services Network web server, maintaining
communication 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 Commerce Services 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 encounter 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,
particulary if they acquire one of our existing competitors. For example, third
parties that currently help implement Ariba 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.
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 particularly given the expansion of our product offering as a
result of our recent acquisitions. 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 Buyer or other products in anticipation of future
releases. If customers defer material orders of Ariba Buyer or other products in
anticipation of new releases or new product introductions, our business would be
seriously harmed.
REVENUES COULD BE CONCENTRATED IN A RELATIVELY SMALL NUMBER OF
CUSTOMERS.
In the nine months ended June 30, 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
25
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 is calculated using the Black-Scholes option pricing
model. The potential expense underlying the milestones is measured at each
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. During the quarter ended June 30, 2000 a warrant was
earned for 1,936,000 shares of our common stock and $56.2 million was recorded
as an intangible asset relating to this warrant. This $56.2 million will be
amortized over 5 years, and $2.8 million was amortized during the recent quarter
as business partner warrant expense. Therefore there is $53.4 million remaining
to be amortized over the next 19 quarters. Also during the quarter a warrant was
earned for 257,143 shares of our common stock and $5.0 million was recorded as
business partner warrant expense. In addition, it was determined that as of
June 30, 2000 that it was probable that another warrant for 257,143 shares of
our common stock would be earned in the future. Therefore we estimated that the
expense would be $5.8 million for the portion of the warrant earned in the
quarter ended June 30, 2000.
We could be required to record additional significant non-cash
accounting expenses if it becomes probable that any other 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 are expected to 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 Buyer, Ariba Marketplace 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 Buyer, Ariba Marketplace and other product implementations
continues to increase. Our current implementation partners are not contractually
required to continue to help implement Ariba Buyer, Ariba Marketplace 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.
26
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. On June 21, 2000, we entered into an agreement to acquire
SupplierMarket.com, a leading provider of online collaborative sourcing
technologies. 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, SupplierMarket.com 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 acquisition. Financing for future acquisitions may not be
available on favorable terms, or at all. In addition, in connection with our
recent, pending and possibly with future acquisitions we will or may be required
to amortize significant amounts of goodwill and other intangible assets, which
will negatively effect the operating income of our business. As of June 30,
2000, we had an aggregate of $3.1 billion of goodwill and other intangible
assets remaining to be amortized of which a majority relates to our
acquisitions. The amortization of the remaining goodwill and other intangible
assets will result in additional charges to operations through the quarter
ending March 31, 2003 and if the SupplierMarket.com acquisition is consummated
there will be additional charges to operations for this acquisition.
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 COMMERCE SERVICES 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.
NEW VERSIONS AND RELEASES OF ARIBA BUYER, ARIBA MARKETPLACE AND OUR
OTHER PRODUCTS MAY CONTAIN ERRORS OR DEFECTS.
Ariba Buyer, Ariba Marketplace 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 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
27
shipments. In addition, a delay in the commercial release of the next version of
Ariba Buyer or Ariba Marketplace could also slow the growth of the Ariba
Commerce Services Network.
WE COULD BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS AND THIRD
PARTY LIABILITY CLAIMS RELATED TO PRODUCTS AND SERVICES PURCHASED
THROUGH THE ARIBA COMMERCE SERVICES 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.
The Ariba Commerce Services Network provides our customers with indices
of products that can be purchased from suppliers participating in the Ariba
Commerce Services 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 Commerce Services 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 Commerce Services 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
Commerce Services 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 Buyer, Ariba Marketplace 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 Commerce Services 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 independent third 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
28
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 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 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.
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 have committed and expect to continue 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.
29
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;
30
- 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 Commerce Services 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 COMMERCE SERVICES 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 Commerce
Services Network increases, the Ariba Commerce Services 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 Commerce Services 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 Commerce
Services 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 COMMERCE SERVICES
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 Commerce Services
31
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 any foreign country that we should collect sales or other
taxes on the exchange of goods and services through the Ariba Commerce Services
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.
32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
We develop products in the United States and market our products in the
United States, Latin America, Europe, Canada, Australia and Asia. 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
primarily all of our 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.
(in thousands, except Year Ended Year Ended Year Ended Year Ended Year Ended Thereafter Total
interest rates) June 30, 2001 June 30, 2002 June 30, 2003 June 30, 2004 June 30, 2005
--------------- -------------- --------------- -------------- --------------- ----------- --------
Cash equivalents $202,555 - - - - - $202,555
Average interest rate 6.18% - - - - - 6.18%
Investments $63,636 $50,617 $21,091 - - - $135,344
Average interest rate 6.31% 6.70% 6.60% - - - 6.50%
Total investment securities $266,191 $50,617 $21,091 - - - $337,899
OTHER INVESTMENTS
We have made seven equity investments during the nine months ended
June 30, 2000 of $16.9 million in seven 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 June 30, 2000 was $379,000. 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 at June 30, 2000 is $1.0 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. We also received
warrants as part of a revenue transaction with a customer. The estimated fair
value of these warrants is included in the balance sheet under long-term
investments with a value of approximately $5,000. 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.
33
(b) Change in Rights
Not applicable.
(c) Issuances of Securities
On April 1, 2000, we issued warrants to purchase up to 6,776,000 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
attainment of certain milestones. 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 exercise price is based on the ten day
average of the Company's stock price up to and including the vesting date. In
addition, they may be exercised only on a net issuance basis, thus the number of
shares actually issued will be less than 6,776,000. 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.
During the quarter, we issued an aggregate of 3,901,343 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.
The information in the above paragraphs in this Item 2 (c) gives effect
to two-for-one stock splits on December 3, 1999 and March 20, 2000.
(d) Use of Proceeds
On June 28, 1999, Ariba completed the initial public offering of its
common stock. 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 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.
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.
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
Not applicable.
ITEM 5. Other information
Not applicable.
34
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
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. An amendment
to this current report on Form 8-K was filed with the Securities and
Exchange Commission by Ariba on May 16, 2000 with the required
financial information.
A current report on Form 8-K was filed with the Securities and
Exchange Commission by Ariba on July 20, 2000 to report the
announcement of signing of a definitive merger agreement to acquire
SupplierMarket.com Inc.
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: August 14, 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
----------- -------------
27.1 Financial Data Schedule.
37