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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 DECEMBER 31, 2000
COMMISSION FILE NUMBER 000-26299
------------------------
ARIBA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0439730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1565 CHARLESTON ROAD
MOUNTAIN VIEW, CALIFORNIA 94043
(Address of principal executive offices)
(650) 930-6200
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
On January 31, 2001, 252,443,327 shares of the registrant's common stock were
issued and outstanding.
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ARIBA, INC.
INDEX
PAGE NO.
---------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 2000
and September 30, 2000 3
Condensed Consolidated Statements of Operations for the
three month periods ended December 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
three month periods ended December 31, 2000 and 1999 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 2. Changes in Securities and Use of Proceeds 39
Item 3. Defaults Upon Senior Securities 39
Item 4. Submission of Matters to a Vote of Securities Holders 39
Item 5. Other Information 39
Item 6. Exhibits and Reports on Form 8-K 39
SIGNATURES 40
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
2000 2000
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 154,330 $ 195,241
Short-term investments.................................... 150,231 84,974
Restricted cash........................................... 14,300 3,500
Accounts receivable, net.................................. 119,929 61,892
Prepaid expenses and other current assets................. 19,710 13,067
---------- ----------
Total current assets.................................... 458,500 358,674
Property and equipment, net................................. 72,909 56,049
Long-term investments....................................... 103,423 84,476
Restricted cash............................................. 29,700 28,537
Other assets................................................ 2,260 1,004
Goodwill and other intangible assets, net................... 2,992,437 3,287,138
---------- ----------
Total assets............................................ $3,659,229 $3,815,878
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 18,578 $ 11,235
Accrued compensation and related liabilities.............. 64,769 54,439
Accrued liabilities....................................... 66,466 51,372
Deferred revenue.......................................... 124,999 101,245
Current portion of other long-term liabilities............ 473 536
---------- ----------
Total current liabilities............................... 275,285 218,827
Deferred revenue............................................ 110,009 98,457
Other long-term liabilities, net of current portion......... 330 402
---------- ----------
Total liabilities....................................... 385,624 317,686
---------- ----------
Minority interest........................................... 15,773 --
Commitments
Stockholders' equity:
Common stock.............................................. 500 495
Additional paid-in capital................................ 4,552,127 4,466,325
Deferred stock-based compensation......................... (108,175) (130,003)
Accumulated other comprehensive loss...................... (1,289) (918)
Accumulated deficit....................................... (1,185,331) (837,707)
---------- ----------
Total stockholders' equity.............................. 3,257,832 3,498,192
---------- ----------
Total liabilities and stockholders' equity............ $3,659,229 $3,815,878
========== ==========
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 DECEMBER 31,
---------------------------------
2000 1999
--------------- ---------------
Revenues:
License................................................... $ 128,911 $ 15,784
Maintenance and service................................... 41,322 7,695
--------- --------
Total revenues.......................................... 170,233 23,479
Cost of revenues:
License................................................... 8,686 321
Maintenance and service (exclusive of stock-based
compensation expense of $1,494 and $344 for the three
months ended December 31, 2000 and 1999,
respectively)........................................... 22,645 3,121
--------- --------
Total cost of revenues.................................. 31,331 3,442
--------- --------
Gross profit.............................................. 138,902 20,037
--------- --------
Operating expenses:
Sales and marketing (exclusive of stock-based compensation
expense of $7,723 and $2,163 for the three months ended
December 31, 2000 and 1999, respectively and exclusive
of $12,783 of business partner warrant expense for the
three months ended December 31, 2000)................... 83,688 19,774
Research and development (exclusive of stock-based
compensation expense of $2,927 and $894 for the three
months ended December 31, 2000 and 1999,
respectively)........................................... 20,789 4,443
General and administrative (exclusive of stock-based
compensation expense of $8,187 and $1,318 for the three
months ended December 31, 2000 and 1999,
respectively)........................................... 16,395 3,421
Amortization of goodwill and other intangible assets...... 328,528 --
Business partner warrants................................. 12,783 --
Amortization of stock-based compensation.................. 20,331 4,719
--------- --------
Total operating expenses................................ 482,514 32,357
--------- --------
Loss from operations...................................... (343,612) (12,320)
Other income, net........................................... 4,580 2,059
--------- --------
Net loss before income taxes.............................. (339,032) (10,261)
Provision for income taxes.................................. 8,592 73
--------- --------
Net loss.................................................... $(347,624) $(10,334)
========= ========
Basic and diluted net loss per share........................ $ (1.48) $ (0.07)
========= ========
Weighted-average shares used in computing basic and diluted
net loss per share........................................ 235,285 155,980
========= ========
See accompanying notes to condensed consolidated financial statements.
4
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
---------------------------------
2000 1999
--------------- ---------------
OPERATING ACTIVITIES:
Net loss.................................................. $(347,624) $(10,334)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Provision for doubtful accounts......................... 12,965 --
Depreciation and amortization........................... 332,893 950
Amortization of stock-based compensation................ 20,331 4,719
Non-cash warrant expense, net........................... 11,625 7
Tax provision related to benefit from employee stock
option plans.......................................... 7,000 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (71,002) (3,663)
Prepaid expenses and other current assets............... (12,872) (4,280)
Accounts payable........................................ 6,650 3,099
Accrued compensation and related liabilities............ 10,330 3,964
Other accrued liabilities............................... 15,094 3,185
Deferred revenue........................................ 35,306 15,976
--------- --------
Net cash provided by operating activities................. 20,696 13,623
--------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment, net.................. (21,224) (5,448)
Purchases of investments, net............................. (82,475) (16,259)
Allocation to restricted cash............................. (11,963) (400)
--------- --------
Net cash used in investing activities..................... (115,662) (22,107)
--------- --------
FINANCING ACTIVITIES:
Repayments of long-term obligations....................... (135) (283)
Proceeds from issuance of common stock.................... 15,108 651
Proceeds from subsidiary stock offering................... 40,000
Repurchase of common stock................................ (5) --
--------- --------
Net cash provided by financing activities................. 54,968 368
--------- --------
EFFECT OF FOREIGN EXCHANGE RATES ON CASH AND CASH
EQUIVALENTS
Net decrease in cash and cash equivalents................... (39,998) (8,116)
Effect of foreign exchange rate............................. (913) --
--------- --------
Cash and cash equivalents at beginning of period............ 195,241 50,284
--------- --------
Cash and cash equivalents at end of period.................. $ 154,330 $ 42,168
========= ========
See accompanying notes to condensed consolidated financial statements.
5
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The unaudited Condensed Consolidated Financial Statements of Ariba, Inc. and
its subsidiaries ("Ariba" or "the Company") have been prepared by the management
of Ariba, Inc. furnished herein 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, 2001. 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 should be read in conjunction with the
Company's audited Consolidated Financial Statements and notes thereto, together
with management's discussion and analysis of financial condition and results of
operations presented in the Company's Form 10-K for the year ended
September 30, 2000, filed on December 29, 2000 with the Securities and Exchange
Commission.
As of December 31, 2000, the Company had one subsidiary with less than 100%
ownership, Nihon Ariba K.K. In accordance with Staff Accounting Bulletin,
("SAB") 51, the Company has elected to record gains and losses from sales of
subsidiary stock as a capital transaction. See Note 5 of Notes to Condensed
Consolidated Financial Statements for more detailed information.
NOTE 2--ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following (in thousands):
DECEMBER 31, 2000 SEPTEMBER 30, 2000
----------------- ------------------
Accounts receivable................................. $146,685 $ 75,683
Allowance for doubtful accounts..................... (26,756) (13,791)
-------- --------
Accounts receivable, net............................ $119,929 $ 61,892
======== ========
The provision for doubtful accounts is classified as sales and marketing
expense in the Company's Condensed Consolidated Statements of Operations.
6
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consisted of the following (in
thousands):
AS OF
--------------------------------------
DECEMBER 31, 2000 SEPTEMBER 30, 2000
----------------- ------------------
Goodwill............................................ $ 3,107,336 $3,101,697
Assembled workforce................................. 13,000 13,000
Covenants not-to-compete............................ 1,300 1,300
Trademarks.......................................... 2,000 2,000
Core technology..................................... 20,200 20,200
Intellectual property agreement..................... 786,929 786,929
Business partner warrants........................... 87,869 56,221
----------- ----------
4,018,634 3,981,347
Less: accumulated amortization...................... (1,026,197) (694,209)
----------- ----------
Goodwill and other intangible assets, net........... $ 2,992,437 $3,287,138
=========== ==========
The related amortization of goodwill and other intangible assets totaled
$331.9 million for the three months ended December 31, 2000. This amount
includes $3.4 million in amortization of business partner warrants which are
included as a business partner warrant expense. There was no amortization of
goodwill and other intangible assets during the first quarter of fiscal 1999.
See Note 7 of Notes to Condensed Consolidated Financial Statements for detailed
information.
NOTE 4--COMMITMENTS
In March 2000, the Company entered into a new facility lease agreement for
approximately 716,000 square feet currently under construction. The lease term
commences upon possession through twelve years, which is estimated to be
March 31, 2013. The Company currently expects possession to occur in phases as
each building is completed. The first two buildings are expected to be delivered
in the quarter ending March 31, 2001 and the remaining buildings in the quarter
ending June 30, 2001. Lease payments will be made on an escalating basis with
the total future minimum lease payments amounting to $387.3 million over the
lease term. The Company will also have to contribute a significant amount
towards construction costs to the facility. As of December 31, 2000, the Company
had paid $27.7 million for improvements of the facility. The total estimated
cost of improvements is approximately $115.0 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 totaling $40.0 million which is classified as
restricted cash on the Condensed Consolidated Balance Sheet.
NOTE 5--MINORITY INTEREST IN SUBSIDIARY
In December 2000, the Company's consolidated subsidiary, Nihon Ariba K.K.,
issued and sold 38,000 shares, or 40% of its common stock, for cash
consideration of approximately $40.0 million to an outside party. Prior to the
transaction, the Company held 100% of the equity of Nihon Ariba K.K. in the form
of common stock. Nihon Ariba K.K.'s operations consist of the marketing,
distribution, service and support of the Company's products in Japan. As a
result of the transaction, the Company recorded approximately $24.3 million, net
of minority interest of approximately $15.8 million, in its condensed
consolidated statement of stockholders' equity in order to adjust its investment
in and to reflect its share of the net assets of Nihon Ariba K.K. In addition,
the Company recognized as other income approximately $154,000 as the minority
interest's share of Nihon Ariba K.K.'s income.
7
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 6--SEGMENT INFORMATION
The Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, in fiscal 1999. SFAS No. 131 supercedes SFAS
No. 14, FINANCIAL REPORTING FOR SEGMENTS OF A BUSINESS ENTERPRISE and
establishes standards for reporting information about operating segments.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing performance.
The Company operates in one segment, business-to-business electronic
commerce solutions. The Company markets its products in the United States and in
foreign countries through its sales personnel and its subsidiaries. The
Company's management evaluates resource allocation decisions and the performance
of the Company based upon revenue by the geographic regions of the segment and
does not receive discrete financial information about asset allocation and
expense allocation on a disaggregated basis.
Information regarding geographic areas are as follows (in thousands):
THREE MONTHS ENDED
DECEMBER 31,
-------------------
2000 1999
-------- --------
Revenues:
United States............................................. $127,240 $15,491
International............................................. 42,993 7,988
-------- -------
Total................................................... $170,233 $23,479
======== =======
AS OF
----------------------------
DECEMBER 31, SEPTEMBER 30,
2000 2000
------------ -------------
Long-Lived Assets:
United States............................................. $3,061,679 $3,341,016
International............................................. 5,927 3,175
---------- ----------
Total................................................... $3,067,606 $3,344,191
========== ==========
NOTE 7--STOCKHOLDERS' EQUITY
INCORPORATION AND AUTHORIZED CAPITAL
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 1.5 billion shares of Common Stock $0.002 par value per share,
and 20 million shares of Preferred Stock, $0.002 par value per share.
WARRANTS
In August 1998, in connection with an additional lease line arrangement, the
Company issued warrants entitling the holder to purchase 58,176 shares of common
stock. The warrants are immediately exercisable and expire on the earliest of
(i) August 26, 2005 or (ii) three years from the effective date of the Company's
initial public offering. The fair value of the warrants of $31,000 was
calculated using
8
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
the Black-Scholes option pricing model and is being amortized to interest
expense over the term of the lease, 42 months. In December 2000, the Company
issued 57,486 shares of common stock for no proceeds in the cashless exercise of
these warrants.
In January 2000, in connection with a sales and marketing alliance agreement
with a third party, the Company issued warrants to purchase up to approximately
11,600,000 shares of the Company's common stock. None of the specified
milestones were considered probable and as a result, no stock-based compensation
associated with these warrants was recognized. Effective December 2000, all of
these warrants were cancelled in connection with an amendment of the related
sales and marketing agreement.
In fiscal 2000, in connection with sales and marketing alliance agreements
with certain third parties, the Company issued warrants to purchase shares of
the Company's common stock at various exercise prices based on future prices of
the Company's common stock or on predetermined exercise prices. Certain warrants
vested immediately upon completion of the related alliance agreements while the
majority are contingent and vest upon attainment of certain milestones. The
warrants generally expire either upon termination of the agreement, when the
milestone period expires or from twelve to eighteen months after the specific
milestone is met. The warrants can be earned over approximately a five year
period. The Company believes that these agreements could result in the
recognition of significant stock-based compensation. These alliances were
undertaken to broaden and accelerate adoption of the Company's marketplace
products.
Warrants which vest immediately are recorded as intangible assets at their
fair market value and amortized over the life of the related alliance agreement.
Contingent warrants are accounted for as they are earned at each reporting date,
stock-based compensation is recorded based on the fair value of the shares
underlying those milestones for which achievement is considered probable. Such
compensation is then remeasured at each reporting date, until each specified
milestone threshold is achieved and the related warrant shares vest, at which
time the fair value attributable to that tranche of the warrant is fixed. In the
event such remeasurement results in increases or decreases from the initial fair
value, which could be substantial, these increases and decreases will be
recognized immediately.
The Company believes that depending on the trading price of the Company's
common stock at the end of each quarter, and on whether subsequent milestones
are considered probable and achieved, the ultimate amount of the stock-based
compensation expense recorded could be substantial. The specific terms and
status of these partner warrants are summarized as follows:
In the quarter ended June 30, 2000, 1,936,000 shares of our common stock,
underlying a warrant, were 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 is being amortized over the life of the agreement of five years
and resulted in $2.8 million amortization during the three months ended
December 31, 2000. As of December 31, 2000, an intangible asset of
$47.8 million remains to be amortized over the next 17 quarters relating to this
warrant. In the quarter ended September 30, 2000 and December 31, 2000, the
third party exercised 550,000 and 1,386,000 shares underlying the warrant and
received a net exercise amount of 134,784 and 329,541 shares of the Company's
common stock, respectively.
9
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
In connection with a sales and marketing alliance agreement, 1,400,000
shares of our common stock underlying a warrant were vested upon the release of
certain escrowed license fees in the quarter ended December 31, 2000. Using the
Black-Scholes option pricing model and using the contractual term of one year,
expected volatility of 100%, risk-free rate of 5.06% and no dividend yield, the
fair value of the warrants to purchase these shares of the Company's common
stock amounted to $31.6 million, which is recorded as an intangible asset. This
intangible asset is being amortized over the remaining life of the agreement of
49 months and resulted in a $646,000 amortization to business partner warrants
expense during the three months ended December 31, 2000.
As of December 31, 2000, 725,183 shares of our common stock underlying a
contingent warrant vested upon attainment of certain milestones related to
targeted revenue amounts for sales of the Company's products to third party
end-users. Using the Black-Scholes option pricing model and using the
contractual term of 1.5 years, expected volatility of 100%, risk-free interest
rate of 5.06% and no dividend yield, $9.3 million of expense was recorded for
the three months ended December 31, 2000.
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 fixed 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 December 31, 2000, and options assumed in connection with the
acquisition of SupplierMarket, the Company has recorded deferred stock-based
compensation of approximately $38.4 million and $124.6 million, respectively,
for the difference at the grant date between the exercise price and the fair
value of the common stock underlying the options, respectively. 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 four years. Amortization expense recognized for the three months ended
December 31, 2000 and 1999 totaled $20.3 million and $4.7 million, respectively.
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 months ended December 31, 2000 and 1999 are as follows (in
thousands):
THREE MONTHS ENDED
DECEMBER 31,
--------------------
2000 1999
--------- --------
Net loss.................................................... $(347,624) $(10,334)
Unrealized gain (loss) on securities........................ 542 (371)
Foreign currency translation adjustments.................... (913) (12)
--------- --------
Comprehensive loss.......................................... $(347,995) $(10,717)
========= ========
10
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--STOCKHOLDERS' EQUITY (CONTINUED)
Tax effects of other comprehensive loss are not considered material.
The components of accumulated other comprehensive loss are as follows (in
thousands):
AS OF
----------------------------
DECEMBER 31, SEPTEMBER 30,
2000 2000
------------ -------------
Unrealized loss on securities............................... $ (203) $(745)
Foreign currency translation adjustments.................... (1,086) (173)
------- -----
Accumulated other comprehensive loss........................ $(1,289) $(918)
======= =====
NOTE 8--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
DECEMBER 31,
--------------------
2000 1999
--------- --------
Net loss.................................................... $(347,624) $(10,334)
--------- --------
Basic and diluted:
Weighted-average common shares outstanding................ 249,588 183,172
Less: Weighted-average common shares subject to
repurchase.............................................. (9,651) (27,192)
Less: Weighted-average shares held in escrow related to
acquisitions............................................ (4,652) --
--------- --------
Weighted-average common shares used in computing basic and
diluted net loss per common share......................... 235,285 155,980
========= ========
Basic and diluted net loss per common share................. $ (1.48) $ (0.07)
========= ========
The weighted-average exercise price of stock options outstanding was $33.34
and $12.23 as of December 31, 2000 and 1999, respectively. The weighted average
repurchase price of unvested stock was $0.45 and $0.42 as of December 31, 2000
and 1999, respectively. The weighted average exercise price of warrants was
$85.12 and $1.65 as of December 31, 2000 and 1999, respectively.
At December 31, 2000 and 1999, 62,038,000 and 66,388,000 potential common
shares respectively, are excluded from the determination of diluted net loss per
share, as the effect of such shares is anti-dilutive. Further, the potential
common shares for the three months ended December 31, 2000 exclude 10,943,389
shares which would be issuable under certain warrants contingent upon completion
of certain milestones.
NOTE 9--INCOME TAXES
The Company's current estimate of its annual effective tax rate on
anticipated operating income for the 2001 tax year is 38%. The estimated annual
effective tax rate of 38% has been used to record the provision for income taxes
for the three month period ended December 31, 2000 compared with an
11
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 9--INCOME TAXES (CONTINUED)
effective tax rate of nil% used to record the provision for income taxes for the
comparable year-ago period. The increase in our effective rate is due to the
existence of taxable U.S. income in the current quarter whereas in previous
periods our only taxable income was in foreign juridictions. Approximately, $7.0
million of the Company's income tax provision relates to the tax benefit from
employee stock option deductions which has been credited to additional paid in
capital.
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. To date, the Company has not invested in
derivative instruments and has not engaged in hedging activities. Accordingly,
the effects of adopting SFAS No. 133 did not have an impact on the Company's
financial position, results of operations or cash flows. The Company adopted
SFAS No. 133 in the first quarter of fiscal 2001 in accordance with SFAS
No. 137, which delayed the required implementation of SFAS No. 133 for one year.
In June 2000, the FASB issued Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities". FASB 138 addresses
certain issues related to the implementation of FAS 133, but did not change the
basic model of FAS 133 or further delay the implementation of FAS 133.
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 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." SAB 101 will not be effective until the
Company's fourth fiscal quarter of 2001. The Company is currently in the process
of evaluating the impact, if any, SAB 101 will have on its financial position or
results of operations and does not expect it to be significant.
NOTE 11--SUBSEQUENT EVENTS
On January 29, 2001, the Company signed a definitive agreement to acquire
Agile Software Corporation, ("Agile"), a leading provider of collaborative
commerce solutions. The acquisition, which is subject to the approval of the
Company's and Agile's stockholders, will be accounted for using the purchase
method of accounting and accordingly, the purchase price will be allocated to
the assets acquired and liabilities assumed based on their estimated fair values
on the acquisition date. The estimated purchase price of approximately
$3.0 billion will consist of approximately $2.5 billion of the Company's common
stock and assumed stock options with a fair value of $466.0 million, based upon
an average of the closing market price of the Company's common stock over a
period of two days prior to and two days after the proposed transaction was
announced ($38.83) and other estimated acquisition related expenses of
approximately $21.0 million. The Company expects that the acquisition will close
in the quarter ending June 30, 2001. The purchase price assumed for the Agile
acquisition is an estimate and could change primarily as a result of the actual
number of shares of Ariba common stock that is ultimately issued to the
stockholders of Agile.
12
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 11--SUBSEQUENT EVENTS (CONTINUED)
On February 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, Ariba employees will be given the
opportunity, if they so choose, to cancel outstanding stock options previously
granted to them in exchange for an equal number of new options to be granted at
a future date. The exercise price of these new options will be equal to the fair
market value of the Company's common stock on the date of grant, which will not
be later than October 15, 2001. The exchange program has been organized to
comply with FASB Interpretation No. 44 "Accounting for Certain Transactions
Involving Stock Compensation" and is not expected to result in any additional
compensation charges or variable plan accounting. Members of the Company's Board
of Directors and its officers and senior executives, are not eligible to
participate in this program.
13
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 in our Annual Report on Form 10-K filed December 29, 2000 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.
Through December 31, 2000, our revenues have been principally derived from
licenses of our products, from maintenance and support contracts and from the
delivery of implementation consulting and training services. Customers who
license Ariba Buyer and our other products, such as Ariba Marketplace, also
generally purchase maintenance contracts which provide software upgrades and
technical support 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 SOFTWARE
REVENUE RECOGNITION, as amended, generally requires revenue earned on software
arrangements involving multiple elements to be allocated to each element based
on the relative fair values of the elements. The fair value of an element must
be based on the evidence that is specific to the vendor. License revenue
allocated to software products generally is recognized upon delivery of the
products or deferred and recognized in future periods to the extent that an
arrangement includes one or more elements that are to be delivered at a future
date and for which fair values have not been established. 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. If evidence of fair value does not exist for all elements of a
license agreement and maintenance is the only undelivered element, then all
revenue for the license arrangement is recognized ratably over the term of the
agreement as license revenue. If evidence of fair value of all undelivered
elements exists but evidence does not exist for one or more delivered elements,
then revenue is recognized using the residual method. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining portion
of the arrangement fee is recognized as revenue. Revenue from hosted software
14
agreements are recognized ratably over the term of the hosting arrangement. The
proportion of revenues recognized upon delivery has increasingly evolved to a
level, that is more standard in the enterprise software business, resulting in
less ratable recognition in the current period compared to the same period last
year.
If we provide other services that are considered essential to the
functionality of the software products, both the software product revenue and
service revenue are 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. Such contracts
typically consist of implementation management services and are generally on a
time and materials basis with a few fixed fee contracts entered into in fiscal
1998 and 1997. The contracts are not subject to renegotiation and range from 5
to 24 months in duration. Revenues and costs are recognized based on the labor
hours incurred to date compared to total estimated labor hours for the contract.
Contract costs include all direct material, direct labor and indirect costs
related to contract performance. Selling, general, and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are recorded in the period in which such losses become probable based
on the current contract estimates. Commencing in fiscal year 2000, we have
relied principally on third party consultants to manage implementations of our
products for our customers. In the quarter ended December 31, 2000, there were
no contracts accounted for under SOP 81-1.
The majority of our customers who license our Ariba Buyer 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 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. Marketplace and Dynamic Trade
products are generally purchased under term licensing arrangements that include
incremental fees based on the customers' transactions or events.
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,
Tradex, SupplierMarket and for the amortization of an intellectual property
agreement we have entered into with an outside party.
On January 29, 2001, the Company signed a definitive agreement to acquire
Agile Software Corporation, the leading provider of collaborative commerce
solutions. The acquisition, which is subject to the approval of the Company's
and Agile's stockholders, will be accounted for using the purchase method of
accounting and accordingly, the purchase price will be allocated to the assets
acquired and liabilities assumed based on their estimated fair values on the
acquisition date. The estimated purchase price of approximately $3.0 billion
will consist of approximately $2.5 billion of the Company's common stock and
assumed stock options with a fair value of $466.0 million, based upon an average
of the
15
closing market price of the Company's common stock over a period of two days
prior to and two days after the proposed transaction was announced ($38.83) and
other estimated acquisition related expenses of approximately $21.0 million. The
Company expects that the acquisition will close in the quarter ending June 30,
2001. The purchase price assumed for the Agile acquisition is an estimate and
could change primarily as a result of the actual number of shares of Ariba
common stock that is ultimately issued to the stockholders of Agile.
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. See Note 7 of Notes to 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 December 31,
2000, had an accumulated deficit of approximately $1.2 billion. 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 1,985 full-time employees as of December 31, 2000 and our expansion
has placed 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 any
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 and in
connection with stock options issued related to the SupplierMarket acquisition,
we recorded deferred stock-based compensation totaling approximately
$163.0 million from inception through December 31, 2000. This amount represents
the difference between the exercise price and the deemed fair value of our
common stock for accounting purposes on the date these stock options were
granted. This amount is included as a component of stockholders' equity and is
being amortized 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 the three months ended December 31, 2000 and 1999,
we recorded $20.3 million and $4.7 million, respectively, of related stock-based
compensation amortization expense. As of December 31, 2000, we had an aggregate
of approximately $108.1 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 2004. The
amortization of stock-based compensation is presented as a separate component of
operating expenses in our Condensed Consolidated Statements of Operations.
In connection with our recent acquisitions and our entering into
intellectual property agreements and business partner agreements with
independent third parties, we recorded goodwill and other intangible assets of
approximately $4.0 billion. These assets are being amortized over their
estimated useful lives ranging from three to five years. During the three months
ended December 31, 2000, we
16
recorded $331.9 million of amortization expense for these assets, of which
$328.5 million was recorded as amortization of goodwill and other intangible
assets and the remaining $3.4 million was recorded as business partner warrant
expense on our Condensed Consolidated Statements of Operations. As of
December 31, 2000, we had an aggregate of approximately $3.0 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 September 30,
2003. The amortization of goodwill and other intangible assets is presented as a
separate component of operating expenses in our Condensed Consolidated
Statements of Operations. See Note 3 of Notes to Condensed Consolidated
Financial Statements for more detailed information.
In February 2000, in connection with a sales and marketing alliance
agreement with a third party, we issued warrants to purchase up to 4,800,000
shares of our common stock. The warrants vest upon attainment of certain
milestones related to revenue targets. As of December 31, 2000, the first
milestone had been attained resulting in the vesting of 1,400,000 shares
underlying the warrant. The fair value of the warrants to purchase the 1,400,000
shares of our common stock amounted to $31.6 million, which is recorded as an
intangible asset. This intangible asset will be amortized over the remaining
life of the five year agreement, which is 49 months, using the straight-line
method and resulting in a quarterly amortization of approximately $1.9 million.
As of December 31, 2000, $646,000 was amortized as a business partner warrant
expense. The remaining $31.0 million, as of December 31, 2000 will be amortized
over the next 16 quarter term of the warrant.
During the three months ended December 31, 2000, approximately $2.8 million
was amortized as a business partner warrant expense in connection with the fair
market value of a warrant issued to a third party in fiscal 2000. This
intangible asset is being amortized over the life of the agreement of five
years. The remaining $47.8 million, as of December 31, 2000 will be amortized
over the next 17 quarter term of the warrant.
In addition to the $3.4 million business partner warrant expense discussed
above, we also had additional sales and marketing expense of $9.3 million for
other business partner warrants for the three months ended December 31, 2000.
These alliances were undertaken to broaden and accelerate adoption of our
marketplace product. The entire $12.7 million of amortization expense is
classified as business partner warrant expense on our Condensed Consolidated
Statements of Operations. See Note 7 of Notes to Condensed Consolidated
Financial Statements for more detailed information.
In December 2000, our consolidated Japanese subsidiary, issued and sold 40%
of its common stock for cash consideration of approximately $40.0 million to an
outside party. See Note 5 of Notes to Condensed Consolidated Financial
Statements.
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, including risks associated with our recent acquisitions. 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.
STOCKHOLDERS' EQUITY
On November 16, 1999 and March 2, 2000, the Board of Directors authorized a
two-for-one stock split of our common stock, in the form of a stock dividend.
The financial information included in this report has been restated to give
effect to the stock splits.
17
On February 9, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, Ariba employees will be given the
opportunity, if they so choose, to cancel outstanding stock options previously
granted to them in exchange for an equal number of new options to be granted at
a future date. The exercise price of these new options will be equal to the fair
market value of the Company's common stock on the date of grant, which will not
be later than October 15, 2001. The exchange program has been organized to
comply with FASB Interpretation No. 44 "Accounting for Certain Transactions
Involving Stock Compensation" and is not expected to result in any additional
compensation charges or variable plan accounting. Members of the Company's Board
of Directors and its officers and senior executives, are not eligible to
participate in this program.
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
18
conjunction with the Consolidated Financial Statements and Notes thereto
included in the Company's Form 10-K for our fiscal year ended September 30,
2000.
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
2000 1999
-------------- --------------
Revenues:
License................................................... $ 128,911 $ 15,784
Maintenance and service................................... 41,322 7,695
--------- --------
Total revenues.......................................... 170,233 23,479
Cost of revenues:
License................................................... 8,686 321
Maintenance and service (exclusive of stock-based
compensation expense of $1,494 and $344 for the three
months ended December 31, 2000 and 1999,
respectively)........................................... 22,645 3,121
--------- --------
Total cost of revenues.................................. 31,331 3,442
--------- --------
Gross profit.............................................. 138,902 20,037
--------- --------
Operating expenses:
Sales and marketing (exclusive of stock-based compensation
expense of $7,723 and $2,163 for the three months ended
December 31, 2000 and 1999, respectively and exclusive
of $12,783 of business partner warrant expense for the
three months ended December 31, 2000)................... 83,688 19,774
Research and development (exclusive of stock-based
compensation expense of $2,927 and $894 for the three
months ended December 31, 2000 and 1999,
respectively)........................................... 20,789 4,443
General and administrative (exclusive of stock-based
compensation expense of $8,187 and $1,318 for the three
months ended December 31, 2000 and 1999,
respectively)........................................... 16,395 3,421
Amortization of goodwill and other intangible assets...... 328,528 --
Business partner warrants................................. 12,783 --
Amortization of stock-based compensation.................. 20,331 4,719
--------- --------
Total operating expenses................................ 482,514 32,357
--------- --------
Loss from operations...................................... (343,612) (12,320)
Other income, net........................................... 4,580 2,059
--------- --------
Net loss before income taxes.............................. (339,032) (10,261)
Provision for income taxes.................................. 8,592 73
--------- --------
Net loss.................................................... $(347,624) $(10,334)
========= ========
Basic and diluted net loss per share........................ $ (1.48) $ (0.07)
========= ========
Weighted-average shares used in computing basic and diluted
net loss per share........................................ 235,285 155,980
========= ========
19
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2000 AND 1999
REVENUES
LICENSE
License revenues for the three months ended December 31, 2000 were
$128.9 million, a 717% increase over license revenues of $15.8 million for the
three months ended December 31, 1999. This increase was primarily attributable
to continued market acceptance of and demand for our products, through internal
growth and acquisitions, an increase in our customer base, expansion of our
business outside the United States, expansion of our product offerings through
acquisitions, an increase in sales to new customers resulting from increased
headcount in our sales force, and the establishment of several strategic
relationships.
MAINTENANCE AND SERVICE
Maintenance and service revenues for the three months ended December 31,
2000 were $41.3 million, a 437% increase over maintenance and service revenues
of $7.7 million for the three months ended December 31, 1999, respectively. This
increase was primarily attributable to the increased licensing activity
described 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.
During the three months ended December 31, 2000 and 1999, no customer and
two customers, respectively, accounted for more than 10% of total revenues.
Revenues from international sales were approximately $43.0 million and
$8.0 million for the three months ended December 31, 2000 and 1999. Our
international revenues were derived from sales in Canada, Europe, Asia, Asia
Pacific and Latin America.
COST OF REVENUES
LICENSE
Cost of license revenues were $8.7 million for the three months ended
December 31, 2000, an increase of 2,606% over cost of license revenues of
$321,000 for the three months ended December 31, 1999. The increase in the cost
of license revenues was primarily attributable to royalties due to third parties
for integrated technology, increased co-sale fees due to increasing alliance
partner sales and increased product related costs due to major upgrade
introductions.
MAINTENANCE AND SERVICE
Cost of maintenance and service revenues were $22.6 million in the three
months ended December 31, 2000, an increase of 626% over cost of maintenance and
service revenues of $3.1 million for the three months ended December 31, 1999.
The increase was primarily attributable to personnel costs associated with
increases in the number of implementation, training and technical support
personnel from our internal growth and as a result of our acquisitions and due
to an increase in licensing activity resulting in increased implementation,
customer support and training costs.
OPERATING EXPENSES
SALES AND MARKETING
During the three months ended December 31, 2000, sales and marketing
expenses were $83.7 million, an increase of 323% over sales and marketing
expenses of $19.8 million for the three months ended December 31, 1999.
20
The increase was primarily attributable to increased compensation for sales
and marketing personnel as a result of increased sales through internal growth
and acquisitions, increases in management bonuses, expanded marketing programs
for tradeshows and customer advisory council meetings, fees paid to outside
professional service providers, the expansion of our corporate headquarters and
international sales offices, an increase in our allowance for doubtful accounts
and, to a lesser extent, related overhead. For the quarters ended September 30,
2000 and December 31, 2000, we recorded a provision for doubtful accounts of
approximately $13.8 million and $12.9 million, respectively, as a result of the
effects of the economic slowdown and its impact on the operations of certain
emerging e-commerce customers. 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.
RESEARCH AND DEVELOPMENT
During the three months ended December 31, 2000, research and development
expenses were $20.8 million, an increase of 368% over research and development
expenses of $4.4 million for the three months ended December 31, 1999.
The increase was primarily attributable to increases in compensation for
research and development personnel due to our internal growth and acquisitions,
technology costs related to the expansion of our headquarters and to a lesser
extent, related overhead. 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.
GENERAL AND ADMINISTRATIVE
During the three months ended December 31, 2000, general and administrative
expenses were $16.4 million, an increase of 379% over general and administrative
expenses of $3.4 million for the three months ended December 31, 1999.
The increase was primarily attributable to an increase in compensation
associated with additional employees in 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, an increase in communication costs, particularly to remote offices,
the implementation costs to install our financial and human resources
infrastructure and to a lesser extent, related overhead. 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 responsibilities as a public company.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Our acquisitions of TradingDynamics, Tradex and SupplierMarket were
accounted for under the purchase method of accounting. Accordingly, we recorded
goodwill and other intangible assets representing the excess of the purchase
price paid over the fair value of net assets acquired. The aggregate
amortization of goodwill and these other intangible assets was $262.9 million
for the three months ended December 31, 2000. There were no acquisitions in
fiscal 1999.
In fiscal 2000, we sold 5,142,858 shares of common stock with a fair market
value of $834.4 million to an independent third party in connection with an
intellectual property agreement. As part of the sale we 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 and is being amortized over three years based on the terms of
the related intellectual property agreement. The aggregate
21
amortization of this intellectual property agreement was $65.6 million for the
three months ended December 31, 2000.
The related amortization of goodwill and other intangible assets totaled
$331.9 million for the three months ended December 31, 2000. This amount
includes $3.4 million in amortization of business partner warrants which are
included as a business partner warrant expense. There was no amortization of
goodwill and other intangible assets during the first quarter of fiscal 1999.
See Note 7 of Notes to Condensed Consolidated Financial Statements for detailed
information.
We anticipate that future amortization of goodwill and other intangibles
associated with acquisitions and strategic relationships will continue to be
amortized on a straight-line basis over their expected useful lives ranging from
three years to five years, respectively. The remaining $3.0 billion of goodwill
and other intangible assets as of December 31, 2000 will be amortized on a
straight line basis though the quarter ending December 2004 until the related
goodwill and other purchased intangibles are fully amortized. It is likely we
may continue to expand our business through acquisitions including our recently
announced agreement to acquire Agile, and internal development. Any additional
acquisitions or impairment of goodwill and other purchased intangibles could
result in additional charges related to these assets.
STOCK-BASED COMPENSATION
We recognized stock-based compensation expense associated with stock options
granted to employees with an exercise price below market value on the date of
grant and unvested stock options issued to employees in conjunction with the
consummation of the August 2000 SupplierMarket acquisition. These amounts are
included as a component of stockholders' equity and are being amortized by
charges to operations over the vesting period of the options, consistent with
the method described in Financial Accounting Standards Board Interpretation
No. 28. The amortization of stock-based compensation is presented as a separate
component of operating expenses in our Condensed Consolidated Statements of
Operations. Amortization of stock-based compensation consists of the following
for the three months ended December 31, (in thousands):
2000 1999
-------- --------
Cost of revenues............................................ $ 1,494 $ 344
Sales and marketing......................................... 7,723 2,163
Research and development.................................... 2,927 894
General and administrative.................................. 8,187 1,318
------- ------
Total....................................................... $20,331 $4,719
======= ======
As of December 31, 2000, we had an aggregate of approximately
$108.1 million of deferred stock-based compensation remaining to be amortized.
BUSINESS PARTNER WARRANTS
We have issued warrants for the purchase of our common stock to certain
business partners which vest either immediately or based upon the achievement of
certain milestones related to targeted revenue amounts for sales of our products
to third party-users. During the three months ended December 31, 2000, we
recognized business partner warrant expenses associated with three sales and
marketing alliance agreements in the aggregate amount of $12.7 million. See Note
7 of Notes to Condensed Consolidated Financial Statements for more detailed
information.
In the quarter ended June 30, 2000, 1,936,000 shares of our common stock,
underlying a warrant, were 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
22
the warrant. This intangible asset is being amortized over the life of the
agreement of five years and resulted in $2.8 million amortization during the
three months ended December 31, 2000. As of December 31, 2000, an intangible
asset of $47.8 million remains to be amortized over the next 17 quarters
relating to this warrant.
In quarter ended December 31, 2000, 1,400,000 shares of our common stock,
underlying a warrant were earned upon the release of certain escrowed license
fees. A total of $31.6 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 is being amortized over the remaining life of the agreement of
49 months and resulted in a $646,000 amortization to business partner warrants
expense during the three months ended December 31, 2000.
During the three months ended December 31, 2000, 725,183 shares of our
common stock underlying a contingent warrant were earned upon attainment of
certain milestones related to revenue targets. A total of $9.3 million of
expense was recorded for the three months ended December 31, 2000.
OTHER INCOME, NET
Other income, net consists of interest income, interest expense and other
non-operating expenses. During the three months ended December 31, 2000, other
income, net was $4.7 million, an increase of 130% over other income, net of
$2.0 million for the three months ended December 31, 1999. This increase is
primarily attributable to interest income resulting from higher average cash
balances during the quarter ended December 31, 2000.
PROVISION FOR INCOME TAXES
The Company's current estimate of its annual effective tax rate on
anticipated operating income for the 2001 tax year is 38%. The estimated annual
effective tax rate of 38% has been used to record the provision for income taxes
for the three month period ended December 31, 2000 compared with an effective
tax rate of nil% used to record the provision for income taxes for the
comparable year-ago period. The increase in our effective rate is due to the
existence of taxable U.S. income in the current quarter whereas in previous
periods our only taxable income was in foreign juridictions. Approximately,
$7.0 million of our income tax provision relates to the tax benefit from
employee stock option deductions which has been credited to additional paid in
capital.
MINORITY INTEREST
In December 2000, the Company's consolidated subsidiary, Nihon Ariba, K.K.,
issued and sold 38,000 shares, or 40% of its common stock, for cash
consideration of approximately $40.0 million to an outside party. Prior to the
transaction, the Company held 100% of the equity of Nihon Ariba K.K. Nihon Ariba
K.K.'s operations consist of the marketing, distribution, service and support of
the Company's products in Japan. As a result of the transaction, the Company
recorded approximately $24.3 million, net of minority interest of approximately
$15.8 million, in its condensed consolidated statement of stockholders' equity
in order to adjust its investment in and to reflect its share of the net assets
of Nihon Ariba K.K. In addition, the Company recognized as other income
approximately $154,000 as the minority interest's share of Nihon Ariba K.K.'s
income.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, we had $304.5 million in cash, cash equivalents and
short-term investments, $103.4 million in long-term investments, $44.0 million
in restricted cash and $183.2 million in working capital. In the quarter ended
December 31, 2000, we received $40.0 million in cash and cash equivalents from
the issuance of common stock in our Japanese subsidiary to an outside party. We
also
23
continue to fund our operations through our cash from operating activities. As
of December 31, 2000, we had outstanding lease liabilities of $803,000.
Net cash provided by operating activities was approximately $20.7 million
for the three months ended December 31, 2000. Net cash provided by operating
activities for the three months ended December 31, 2000 was primarily attributed
to an increase in, deferred revenue from customer payments that were not
recognized as revenue, accrued liabilities, accrued compensation and related
liabilities and to a lesser extent, by increases in accounts payable. These cash
flows provided by operating activities were partially offset by the net loss for
the year (less non-cash expenses), increases in accounts receivable and, to a
lesser extent, increases in prepaid expenses and other assets for the three
months ended December 31, 2000.
Net cash used in investing activities was approximately $115.7 million for
the three months ended December 31, 2000. Cash used in investing activities
during the three months ended December 31, 2000 primarily reflects purchases of
property and equipment, purchases of investments and increase in restricted
cash.
Net cash provided by financing activities was approximately $55.0 million
for the three months ended December 31, 2000, primarily from the issuance of
common stock in our Japanese subsidiary to an outside party and by proceeds from
the exercise of stock options.
Capital expenditures, including capital leases, were $21.2 million and
$5.7 million for the three months ended December 31, 2000 and 1999,
respectively. Our capital expenditures consisted of purchases of operating
resources to manage our operations, including computer hardware and software,
office furniture and equipment and leasehold improvements. We expect that our
capital expenditures will continue to increase in the future. We, currently,
estimate that planned capital expenditures for fiscal 2001 will be approximately
$63.8 million, but that amount is subject to change.
In March 2000, the Company entered into a new facility lease agreement for
approximately 716,000 square feet currently under construction. The lease term
commences upon possession through twelve years, which is estimated to be
March 31, 2013. The Company currently expects possession to occur in phases as
each building is completed. The first two buildings are expected to be delivered
in the quarter ending March 31, 2001 and the remaining buildings in the quarter
ending June 30, 2001. Lease payments will be made on an escalating basis with
the total future minimum lease payments amounting to $387.3 million over the
lease term. The Company will also have to contribute a significant amount
towards construction costs of the facility. As of December 31, 2000, the Company
has paid $27.7 million for improvements to the facility. The total estimated
cost of improvements is approximately $115.0 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 totaling $40.0 million which is classified as
restricted cash on the Condensed Consolidated Balance Sheet.
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 flows 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.
24
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 including our
Form 10-K for our fiscal year ended September 30, 2000, 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 began
shipping Ariba Dynamic Trade in February 2000, following our acquisition of
TradingDynamics, and Ariba Marketplace in March 2000, following our acquisition
of Tradex. We will encounter risks and difficulties frequently encountered by
early-stage companies in new and rapidly evolving markets, including risks
associated with our recent acquisitions. 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 electronic commerce applications and services
is at an early stage of development. Our success depends on a significant number
of large buying organizations, marketplaces and exchanges implementing our
products and services. The implementation of our products by these 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 products and services will
depend on using our existing customers as reference accounts. Unless a critical
mass of large buying organizations, their suppliers, marketplaces and exchanges
join the Ariba Commerce Services Network, our solutions may not achieve
widespread market acceptance and our business would be seriously harmed.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR SIGNIFICANT ADDITIONAL
LOSSES IN THE FUTURE.
We had an accumulated deficit of approximately $1.2 billion as of
December 31, 2000, including $361.6 million in non-cash costs in the quarter
ended December 31, 2000, for amortization of goodwill and other intangible
assets resulting from acquisitions, stock-based compensation expense and
business partner warrant expense. 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
significantly in recent quarters, we do not believe that our prior growth rates
are sustainable or indicative of future operating results. 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 continue to 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. As of December 31, 2000, we
had an aggregate of $108.1 million of deferred compensation and $3.0 billion of
goodwill and other intangible assets to be amortized. As a result, we expect to
incur significant losses for the foreseeable future. See
25
"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 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 our 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 and business model or those of our
competitors;
- Integration of our recent acquisitions and any future acquisitions
including the acquisition of Agile;
- Ability to expand our sales and marketing operations, including hiring
additional sales personnel;
- Timing of sales of our products and services, including the recognition of
a significant portion of our sales at the end of the quarter;
- Customers purchasing larger, more strategic contracts to meet our revenue
targets,
- 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 achieving
annual quotas;
- 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, including an economic slowdown or recession.
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
26
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. As our business model evolves, the
potential for fluctuations in our quarterly results could increase and our
revenues could be lower than expected. Furthermore, our quarterly revenues may
be affected significantly by other revenue recognition policies and procedures.
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 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.
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 LARGE 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. Their 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 products, 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 and other B2B electronic commerce solutions, many customers
will be addressing these issues for the first time in the context of
implementing these solutions. 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 PURCHASING 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, which is important
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;
27
- Our network's ability to support large numbers of buyers and suppliers is
unproven;
- Our need to enhance the interface between our Ariba Buyer, Ariba
Marketplace and Ariba Dynamic Trade products and the Ariba Commerce
Services Network;
- Our need to significantly enhance the features and services of the Ariba
Commerce Services Network to achieve widespread commercial acceptance of
our network; and
- Our need to significantly expand our internal resources to support planned
growth of the Ariba Commerce Services Network.
Although we expect to derive a significant portion of our long-term future
revenue from the Ariba Commerce Services Network, 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, or if we experience a decline
in the growth or growth rate of revenues from our Ariba Buyer solution.
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 expand, manage and maintain 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 include managing
the Ariba Commerce Services Network web server, maintaining communications lines
and managing network data centers, which are the locations on our network where
data is stored. We may not successfully obtain these services on a timely and
cost effective basis. Since the installation of the computer and communications
equipment and software needed for the day-to-day operations of the Ariba
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 such equipment and software.
WE DEPEND ON STRATEGIC RELATIONSHIPS WITH OUR PARTNERS
We have established strategic reselling, ASP, and hosting and joint venture
relationships with some outside companies. These companies are entitled to
resell and/or host our products to their customers. These relationships are new
and this strategy is unproven. We cannot be assured that any of these resellers,
ASP partners, or hosts or other partners 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. We have formed strategic
alliance relationships with IBM and i2 Technologies to integrate our
technologies and work together to market and sell targeted solutions. We also
have strategic relationships with Softbank as a minority shareholder of our
Japanese subsidiary Nihon Ariba K.K., and with Telefonica in Europe and Latin
America. We plan to expand our strategic relationships both domestically and
internationally. 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.
28
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 companies such as 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,
particularly if they acquire one of our 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 DEVELOP OUR PRODUCTS AND SERVICES IN A TIMELY AND
COST-EFFECTIVE BASIS, OR IF OUR PRODUCTS AND SERVICES DO NOT ACHIEVE MARKET
ACCEPTANCE, OUR BUSINESS WOULD BE SERIOUSLY HARMED.
We may fail to introduce or deliver new releases or new potential offerings
on a timely and cost-effective basis or at all, particularly given the expansion
of our product offering as a result of our recent acquisitions. 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. In addition, we have
experienced delays in the commencement of commercial shipments of our new
releases in the past. 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.
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;
29
- 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;
- Experience deferrals in orders in anticipation of new products or
releases; or
- Fail to develop new products and services that adequately meet the
requirements of the marketplace or achieve market acceptance.
As a result of the foregoing factors, we could experience a delay or loss of
revenues and customer dissatisfaction when introducing new and enhanced products
and services.
WE EXPECT TO DEPEND ON ARIBA BUYER FOR A SUBSTANTIAL PORTION OF OUR REVENUES
FOR THE FORESEEABLE FUTURE. THESE REVENUES COULD BE CONCENTRATED IN A
RELATIVELY SMALL NUMBER OF CUSTOMERS.
We anticipate that revenues from Ariba Buyer and related products and
services will continue to constitute a substantial portion of our revenues for
the foreseeable future. Consequently, a decline in the price of, or demand for,
our Ariba Buyer solution, or its failure to achieve broad market acceptance,
would seriously harm our business. Although no customer accounted for more than
10% of our total revenues in fiscal 2000 we may in the future 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 RELY ON THIRD PARTIES TO IMPLEMENT OUR 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.
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 goods and services, 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
30
products and services available to them through our solution, which would
adversely affect the perceived usefulness of the Ariba Commerce Services
Network.
NEW VERSIONS AND RELEASES OF OUR 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. For example, 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 shipments. In addition, a delay in
the commercial release of the next version of Ariba Buyer, Ariba Marketplace or
our other products 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 goods and
services procurement and other business processes. 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 will 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. Similar
issues may arise for B2B marketplaces and exchanges that use our Ariba
Marketplace and Ariba Dynamic Trade applications. We may not successfully avoid
civil or criminal liability for problems related to the products and services
sold through the Ariba Commerce Services Network or other electronic networks
using our market maker applications. 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 or other
electronic networks using our market maker applications.
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 Chairman and Chief Executive Officer and Larry Mueller, our President and
Chief Operating Officer. None of these persons, including Messrs. Krach and
Mueller, 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
31
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, confidentiality procedures, trade
secrets, and patent, copyright and trademark laws.
We license rather than sell Ariba Buyer, Ariba Marketplace, Ariba Dynamic
Trade 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 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.
32
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 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.
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. In the quarter ended September 30, 2000, we completed our
33
acquisition of SupplierMarket.com, a leading provider of online collaborative
sourcing technologies. On January 29, 2001, we signed a definitive agreement to
acquire Agile Software Corporation, a leading provider of collaborative commerce
solutions. We expect that the Agile acquisition will close in the quarter ending
June 30, 2001. 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, including the acquisition of
Agile, and integrating our existing 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, including the
acquisition of Agile, 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 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
December 31, 2000, we had an aggregate of $3.0 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 September 30, 2003.
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 HIGHLY VOLATILE.
Our stock price has fluctuated dramatically. 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;
34
- 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;
- 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.
35
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 goods and services.
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 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.
36
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.
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. The
majority 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 for interest rates).
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT 2001 2002 2003 2004 2005 THEREAFTER TOTAL
INTEREST RATES) ------------ ------------ ------------ ------------ ------------ ---------- --------
Cash equivalents..... $170,860 $ -- $ -- $ -- $ -- $ -- $170,860
Average interest
rate............. 5.34% -- -- -- -- -- 5.34%
Investments.......... $160,000 $49,803 $21,025 -- -- -- $230,829
Average interest
rate............. 6.30% 6.51% 8.3% -- -- -- 6.39%
-------- ------- ------- --------- --------- --------- --------
Total investment
securities......... $330,861 $49,803 $21,025 $ -- $ -- $ -- $401,689
======== ======= ======= ========= ========= ========= ========
Note that these amounts exclude equity investments as described below.
OTHER INVESTMENTS
Equity investments consist of investments in publicly traded companies for
which the company does not have the ability to exercise significant influence
are classified as available-for-sale and stated at fair value based on quoted
market rates. Adjustments to the fair value of available-for-sale investments
are recorded as a component of other comprehensive income. As of December 31,
2000 and 1999, investments in publicly traded companies totaled approximately
$40,000 and $0, respectively.
At December 31, 2000 and 1999, the Company also held approximately
$30.0 million and $0, respectively, of common stock, preferred stock and
warrants of various private companies, some of which are business partners.
These investments are accounted for using the cost method and are classified as
long-term investments. These investments are reviewed each reporting period for
impairment and, if appropriate, written down to their estimated fair value. Some
of these equity
37
securities vest upon the attainment of certain milestones primarily related to
the attainment of revenue targets in connection with the use of the Company's
products. The shares underlying those milestones for which achievement is
considered probable are remeasured at each subsequent reporting date until each
revenue target threshold is achieved and the related underlying shares vest, at
which time that tranche of the equity investment is determinable and recorded.
During the quarter ended December 31, 2000, the Company also sold common
stock held in two public companies for proceeds of approximately $310,000. The
common stock is subject to significant risk based on the recent volatility of
stock markets around the world. This remainder of these investments are
classified as long-term investments as of December 31, 2000.
38
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings
Not applicable.
ITEM 2. Changes in Securities and Use of Proceeds
(a) Modification of Constituent Instruments
Not applicable.
(b) Change in Rights
Not applicable.
(c) Issuances of Securities
During the quarter ended December 31, 2000, we issued an aggregate of
2,591,544 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.
(d) Use of Proceeds
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Securities Holders
The Company held a special meeting of stockholders in Mountain View,
California on November 1, 2000. Of the 247,094,379 shares outstanding as of the
record date, 210,180,026 shares were present or represented by proxy at this
meeting. At this meeting the following action was voted upon:
(a) To approve an amendment to the Company's Certificate of Incorporation to
increase the number of shares of Common Stock that the Company is authorized
to issue from 600,000,000 to 1,500,000,000.
FOR AGAINST ABSTAIN
--- ------- -------
182,991,520 27,037,173 151,333
ITEM 5. Other information
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.5* Shareholders Agreement, dated October 19, 2000, by and among
Softbank Corp., Softbank E-Commerce Corp., the Registrant
and Nihon Ariba K.K.
10.16* Stock Purchase Agreement, dated October 19, 2000, by and
among Nihon Ariba K.K., Softbank Corp. and Softbank
E-Commerce Corp.
10.17 Offer Letter, dated November 22, 2000, by and between the
Registrant and Robert M. Calderoni.
10.18* Letter Agreement, dated November 29, 2000, by and between
the Registrant and Edward P. Kinsey.
10.19 Warrant Termination Agreement, dated December 21, 2000, by
and among Electronic Data Systems Corporation, EDS CoNext,
Inc. and the Registrant.
* Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.
(b) Reports on Form 8-K
Not Applicable.
39
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: February 14, 2001 By: /s/ ROBERT M. CALDERONI
----------------------------------------------
Robert M. Calderoni
Executive Vice-President and Chief Financial Officer
(Principal Financial and Accounting Officer)
40
EXHIBITS INDEX
EXHIBIT
NO. EXHIBIT TITLE
- ------- ------------------------------------------------------------
4.5* Shareholders Agreement, dated October 19, 2000, by and among
Softbank Corp., Softbank E-Commerce Corp., the Registrant
and Nihon Ariba K.K.
10.16* Stock Purchase Agreement, dated October 19, 2000, by and
among Nihon Ariba K.K., Softbank Corp., and Softbank
E-Commerce Corp.
10.17 Offer Letter, dated November 22, 2000, by and between the
Registrant and Robert M. Calderoni.
10.18* Letter Agreement, dated November 29, 2000, by and between
the Registrant and Edward P. Kinsey.
10.19 Warrant Termination Agreement, dated December 21, 2000, by
and among Electronic Data Systems Corporation, EDS CoNext,
Inc. and the Registrant.
* Confidential treatment has been requested with respect to certain
portions of this exhibit. Omitted portions have been filed separately
with the Securities and Exchange Commission.