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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES ACT OF 1934
For the Quarter Ended March 31, 2001
Commission File Number 000-26299
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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)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
On April 30, 2001, 254,279,823 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 March 31, 2001 and
September 30, 2000......................................... 3
Condensed Consolidated Statements of Operations for the
three and six month periods ended March 31, 2001 and 2000.. 4
Condensed Consolidated Statements of Cash Flows for the six
month periods ended March 31, 2001 and 2000................ 5
Notes to the Condensed Consolidated Financial Statements... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 21
Item 3. Quantitative and Qualitative Disclosures About Market
Risk....................................................... 47
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 49
Item 2. Changes in Securities and Use of Proceeds.................. 49
Item 3. Defaults Upon Senior Securities............................ 49
Item 4. Submission of Matters to a Vote of Securities Holders...... 49
Item 5. Other Information.......................................... 50
Item 6. Exhibits and Reports on Form 8-K........................... 50
SIGNATURES................................................. 51
2
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, September 30,
2001 2000
----------- -------------
ASSETS
Current assets:
Cash and cash equivalents........................ $ 123,053 $ 195,241
Short-term investments........................... 171,582 84,974
Restricted cash.................................. 15,099 3,500
Accounts receivable, net......................... 57,026 61,892
Prepaid expenses and other current assets........ 33,563 26,817
----------- ----------
Total current assets........................... 400,323 372,424
Property and equipment, net........................ 104,352 56,049
Long-term investments.............................. 49,745 53,976
Restricted cash.................................... 29,998 28,537
Other assets....................................... 10,984 42,754
Goodwill and other intangible assets, net.......... 1,199,099 3,262,138
----------- ----------
Total assets................................... $ 1,794,501 $3,815,878
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 22,157 $ 11,235
Accrued compensation and related liabilities..... 65,836 54,439
Accrued liabilities.............................. 70,787 51,372
Deferred revenue................................. 91,688 101,245
Current portion of other long-term liabilities... 407 536
----------- ----------
Total current liabilities...................... 250,875 218,827
Deferred revenue................................... 118,737 98,457
Other long-term liabilities, net of current
portion........................................... 257 402
----------- ----------
Total liabilities.............................. 369,869 317,686
----------- ----------
Minority interest.................................. 13,886 --
Commitments and Contingencies
Stockholders' equity:
Common stock..................................... 506 495
Additional paid-in capital....................... 4,509,883 4,466,325
Deferred stock-based compensation................ (74,878) (130,003)
Accumulated other comprehensive loss............. (4,258) (918)
Accumulated deficit.............................. (3,020,507) (837,707)
----------- ----------
Total stockholders' equity..................... 1,410,746 3,498,192
----------- ----------
Total liabilities and stockholders' equity..... $ 1,794,501 $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 Six Months Ended
March 31, March 31,
---------------------- ----------------------
2001 2000 2001 2000
----------- --------- ----------- ---------
Revenues:
License....................... $ 58,605 $ 26,187 $ 187,516 $ 41,971
Maintenance and service....... 32,048 13,855 73,370 21,550
----------- --------- ----------- ---------
Total revenues................ 90,653 40,042 260,886 63,521
----------- --------- ----------- ---------
Cost of revenues:
License....................... 5,766 1,920 14,452 2,241
Maintenance and service
(exclusive of stock-based
compensation expense of
$1,365 and $281 and for the
three months ended March 31,
2001 and 2000 and $2,859 and
$625 for the six months ended
March 31, 2001 and 2000,
respectively)................ 21,025 4,527 43,670 7,648
----------- --------- ----------- ---------
Total cost of revenues........ 26,791 6,447 58,122 9,889
----------- --------- ----------- ---------
Gross profit.................. 63,862 33,595 202,764 53,632
----------- --------- ----------- ---------
Operating expenses:
Sales and marketing (exclusive
of stock-based compensation
expense of $4,541 and $1,741
for the three months ended
March 31, 2001 and 2000 and
$12,264 and $3,904 for the
six months ended March 31,
2001 and 2000, respectively
and exclusive of $1,160 and
$13,943 of business partner
warrants expense for the
three and six months ended
March 31, 2001).............. 79,954 35,020 163,642 54,794
Research and development
(exclusive of stock-based
compensation expense of
$2,640 and $637 for the three
months ended March 31, 2001
and 2000 and $5,567 and
$1,531 for the six months
ended March 31, 2001 and
2000, respectively).......... 25,579 7,124 46,368 11,567
General and administrative
(exclusive of stock-based
compensation expense of
$7,151 and $712 for the three
months ended March 31, 2001
and 2000 and $15,338 and
$2,030 for the six months
ended March 31, 2001 and
2000, respectively).......... 18,772 5,327 35,167 8,748
Amortization of goodwill and
other intangible assets...... 327,571 98,287 656,099 98,287
In-process research and
development.................. -- 12,750 -- 12,750
Business partner warrants..... 1,160 -- 13,943 --
Amortization of stock-based
compensation................. 15,697 3,371 36,028 8,090
Impairment of goodwill and
other intangible assets and
equity investments........... 1,433,292 -- 1,433,292 --
Merger related costs.......... 9,185 -- 9,185 --
----------- --------- ----------- ---------
Total operating expenses...... 1,911,210 161,879 2,393,724 194,236
----------- --------- ----------- ---------
Loss from operations.......... (1,847,348) (128,284) (2,190,960) (140,604)
Interest income............... 5,693 2,721 11,560 4,828
Interest expense.............. (122) (87) (173) (130)
Other income (expense)........ 561 79 (675) 74
----------- --------- ----------- ---------
Net loss before income taxes.. (1,841,216) (125,571) (2,180,248) (135,832)
Income tax (provision)
benefit....................... 6,040 (369) (2,552) (442)
----------- --------- ----------- ---------
Net loss....................... $(1,835,176) $(125,940) $(2,182,800) $(136,274)
----------- --------- ----------- ---------
Basic and diluted net loss per
share......................... $ (7.60) $ (0.70) $ (9.16) $ (0.81)
----------- --------- ----------- ---------
Shares used in computing net
loss per share--basic and
diluted....................... 241,417 179,241 238,351 167,610
=========== ========= =========== =========
See accompanying notes to condensed consolidated financial statements.
4
ARIBA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
March 31,
----------------------
2001 2000
----------- ---------
Operating activities:
Net loss.............................................. $(2,182,800) $(136,274)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Provision for doubtful accounts...................... 20,109 --
Depreciation and amortization........................ 667,475 100,450
In-process research and development.................. -- 12,750
Amortization of stock-based compensation............. 36,028 8,090
Impairment of equity investments..................... 24,385 --
Impairment of goodwill and other intangible assets... 1,408,907 --
Non-cash warrant expense, net........................ 12,133 14
Minority interest in net income/(loss) of
consolidated subsidiary............................. (667) --
Changes in operating assets and liabilities:
Accounts receivable.................................. (16,265) 4,441
Prepaid expenses and other assets.................... (4,861) (5,652)
Accounts payable..................................... 10,144 4,377
Accrued compensation and related liabilities......... 11,397 13,168
Other accrued liabilities............................ 19,415 6,244
Deferred revenue..................................... 11,403 24,389
----------- ---------
Net cash provided by operating activities............. 16,803 31,997
----------- ---------
Investing activities:
Purchases of property and equipment, net............. (59,678) (12,254)
Purchases of investments, net........................ (80,402) (22,879)
Cash acquired in purchase transactions............... -- 99,638
Direct costs of purchase transactions................ -- (11,939)
Allocation to restricted cash........................ (13,060) (700)
----------- ---------
Net cash (used in) provided by investing activities... (153,140) 51,866
----------- ---------
Financing activities:
Repayments of long-term obligations.................. (275) (444)
Proceeds from issuance of common stock............... 28,112 54,141
Proceeds from subsidiary stock offering.............. 40,000 --
Repurchase of common stock........................... (61) --
----------- ---------
Net cash provided by financing activities............. 67,776 53,697
----------- ---------
Net increase (decrease) in cash and cash equivalents.. (72,188) 137,519
Effect of foreign exchange rate changes .............. (3,627) (41)
----------- ---------
Cash and cash equivalents at beginning of period...... 195,241 50,284
----------- ---------
Cash and cash equivalents at end of period............ $ 123,053 $ 187,803
=========== =========
See accompanying notes to condensed consolidated financial statements.
5
ARIBA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1--Description of Business and Summary of Significant Accounting Policies
Description of Business
Ariba, Inc., along with its subsidiaries (collectively referred to herein as
the "Company"), provides software, network access and commerce services
designed to enable corporations to electronically automate and optimize
business with their buyers and suppliers. The Company was founded in September
1996 and from that date through March 1997 was in the development stage,
conducting research and developing its initial products. In March 1997, the
Company began selling its products and related services and currently markets
them in the United States, Canada, Europe, Latin America, Asia and Asia
Pacific primarily through its direct sales force and indirect sales channels.
Basis of presentation
The unaudited Condensed Consolidated Financial Statements of the Company
have been prepared by the management of Ariba, Inc. and reflect all
adjustments (all of which are normal and recurring in nature) that, in the
opinion of management, are necessary for a fair presentation of the interim
periods presented. Certain amounts in the prior year and prior quarter
financial statements have been reclassified to conform to the current year and
current quarter presentation. The results of operations for the interim
periods presented are not necessarily indicative of the results to be expected
for any subsequent quarter or for the entire year ending September 30, 2001.
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America 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.
Acquisitions
To date, business combinations have been accounted for under the purchase
method of accounting. The Company includes the results of operations of the
acquired business from the acquisition date. Net assets of the companies
acquired are recorded at their fair value at the acquisition date. The excess
of the purchase price over the fair value of net assets acquired is included
in goodwill and other purchased intangibles in the accompanying consolidated
balance sheets. Amounts allocated to in-process research and development are
expensed in the period in which the acquisition is consummated.
Impairment of long-lived assets
The Company periodically assesses the impairment of long-lived assets,
including identifiable intangibles and related goodwill, in accordance with
the provisions of Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed of. The Company also periodically assesses the impairment of
enterprise level goodwill in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 17, Intangible Assets. An impairment review
is performed whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors the Company considers important
which could trigger an impairment review include, but are not limited to,
significant underperformance relative to historical or projected future
operating results, significant changes in the manner of use of the acquired
assets or the strategy for the Company's overall business, significant
negative industry or economic trends, a significant decline in the Company's
stock price for a sustained period, and the
6
Company's market capitalization relative to net book value. When the Company
determines that the carrying value of goodwill may not be recoverable based
upon the existence of one or more of the above indicators of impairment, the
Company measures any impairment based on a projected discounted cash flow
method using a discount rate commensurate with the risk inherent in its current
business model.
Revenue recognition
Revenue consists of fees for licenses and subscriptions of the Company's
software products, maintenance, hosted services, customer training and
consulting. Cost of license revenue primarily includes product, delivery, and
royalty costs. Cost of maintenance and service revenue consists primarily of
labor costs for engineers performing implementation services and technical
support and training personnel and facilities and equipment cost.
The Company's primary software products are Ariba Buyer, Ariba Dynamic Trade,
Ariba Marketplace Network Edition and Ariba Sourcing, the last two of which are
hosted applications. The Company licenses these products through its direct
sales force and indirectly through resellers. The Company's license agreements
for such products do not provide for a right of return. The Company does not
recognize revenue for refundable fee arrangements or arrangements with
cancellation rights until such rights to refund or cancellation have expired.
Historically, the Company has not offered such rights in any of its licensing
arrangements. The products are either purchased under a perpetual license model
or under a time-based license model. Access to the Ariba Commerce Services
Network (ACSN) is available to all Ariba Buyer customers as part of their
maintenance agreements. The ACSN allows customers to contact suppliers, access
catalog information and route orders. The Company is in the process of
developing value added commerce services which will be accessible through the
ACSN, however revenues from such offerings have been insignificant to date.
The Company recognizes revenue on its software products in accordance with
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by
SOP 98-4 and SOP 98-9. The Company recognizes revenue when all of the following
criteria are met; persuasive evidence of an arrangement exists; delivery of the
product has occurred; no significant obligations by the Company with regard to
implementation remain; the fee is fixed and determinable; and collectibility is
probable. The Company considers all arrangements with payment terms extending
beyond one year to not be fixed and determinable, and revenue is recognized as
payments become due from the customer. If collectibility is not considered
probable, revenue is recognized when the fee is collected.
SOP 97-2, 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. Revenue recognized from multiple-
element arrangements is allocated to undelivered elements of the arrangement,
such as maintenance and support services and professional services, based on
the relative fair values of the elements specific to the Company. The Company's
determination of fair value of each element in multi-element arrangements is
based on vendor-specific objective evidence (VSOE). The Company limits its
assessment of VSOE for each element to either the price charged when the same
element is sold separately or the price established by management, having the
relevant authority to do so, for an element not yet sold separately.
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 allocated to maintenance and support is
recognized ratably over the maintenance term (typically one year) and revenue
allocated to training and other service elements is recognized as the services
are performed. Revenue from the hosted applications are recognized ratably over
the term of the arrangement.
Certain of the Company's perpetual and time-based licenses include
unspecified additional products and/or payment terms that extend beyond twelve
months. The Company recognizes revenue from perpetual and time-based licenses
that include unspecified additional software products ratably over the term of
the arrangement.
7
Revenue from those contracts with extended payment terms are recognized at the
lesser of amounts due and payable or the amount of the arrangement fee that
would have been recognized if the fee was fixed or determinable.
Arrangements that include consulting services are evaluated to determine
whether those services are essential to the functionality of other elements of
the arrangement. When services are not considered essential, the revenue
allocable to the software services is recognized as the services are
performed. If the Company provides consulting 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. The Company entered into a limited
number of fixed fee contracts during fiscal year 1998 and earlier. 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. 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, third party
consultants have managed implementation of the Company's products for its
customers.
Account Receivable
Accounts receivable include amounts due from customers for which revenue has
been recognized. Deferred revenue includes amounts received from customers for
which revenue has not been recognized that generally results from the
following: (1) deferred maintenance and support; (2) consulting or training
services not yet rendered; and (3) license revenue deferred until all
requirements under SOP 97-2 are met. Deferred revenue is recognized as revenue
upon delivery of our product or as services are rendered.
Equity instruments received in conjunction with licensing transactions
Equity instruments received in conjunction with licensing transactions are
recorded at their estimated fair market value and included in the measurement
of the related license revenue in accordance with EITF 00-8, Accounting by a
Grantee for an Equity Investment to Be Received in Conjunction with Providing
Goods and Services.
Note 2--Accounts Receivable
Accounts receivable consisted of the following (in thousands):
March 31, September 30,
2001 2000
--------- -------------
Accounts receivable............................... $ 74,881 $ 75,683
Allowance for doubtful accounts................... (17,855) (13,791)
-------- --------
Accounts receivable, net.......................... $ 57,026 $ 61,892
======== ========
The provision for doubtful accounts is classified as sales and marketing
expense in the Company's Condensed Consolidated Statements of Operations.
Note 3--Other Assets
Other assets include investments in equity instruments of privately held
companies which amounted to $5.6 million and $30.5 million as of March 31,
2001 and September 30, 2000, respectively. These equity investments held in
private companies have been reclassified from long-term investments to other
assets as of September 30, 2000 to conform to the current presentation. These
investments are accounted for using the cost method and consist of common
stock, preferred stock and warrants for common stock. Of these amounts,
$2.8 million and $13.7 million at March 31, 2001 and September 30, 2000,
respectively, were received as consideration in connection with licensing
transactions with customers and business partners.
8
The Company determines the fair value for common stock and preferred stock
equity investments based on amounts paid by independent third parties in the
investees' most recent capital transactions. The fair value of the common
stock warrants received is determined using a Black-Scholes option pricing
model with the following assumptions: risk-free rate of 5.83%, contractual
life ranging from 2 to 4 years, expected dividend rate of 0% and volatility of
60%. The fair value of common stock underlying vested warrants totaled
approximately $1.4 million and $4.4 million at March 31, 2001 and September
30, 2000, respectively. These investments are reviewed each reporting period
for declines considered other-than-temporary, and, if appropriate, written
down to their estimated fair value.
During the three months ended March 31, 2001, the Company determined that
these investments had incurred a decline in value that was other-than-
temporary and reduced their carrying amounts to estimated fair value by a
charge of $24.4 million to results of operations.
Note 4--Goodwill and Other Intangible Assets
Goodwill and other intangible assets consisted of the following (in
thousands):
March 31, September 30,
2001 2000
---------- -------------
Goodwill......................................... $ 921,614 $3,101,697
Assembled workforce.............................. 11,127 13,000
Covenants not-to-compete......................... 1,300 1,300
Trademarks....................................... 540 2,000
Core technology.................................. 17,392 20,200
Intellectual property agreement.................. 786,929 786,929
Business partner warrants........................ 31,916 31,221
---------- ----------
1,770,818 3,956,347
Less: accumulated amortization................... (571,719) (694,209)
---------- ----------
Goodwill and other intangible assets, net........ $1,199,099 $3,262,138
========== ==========
The related amortization of goodwill and other intangible assets totaled
$329.6 million and $661.5 million for the three and six months ended March 31,
2001, respectively. These amounts include $2.0 million and $5.4 million in
amortization of business partner warrants which are included in the
accompanying condensed consolidated statements of operations as business
partner warrant expense for the three and six months ended March 31, 2001,
respectively. Amortization of goodwill and other intangible assets for the
three and six months ended March 31, 2000 totaled $98.3 million.
Acquisitions
TradingDynamics
On January 20, 2000, the Company acquired TradingDynamics, Inc.
("TradingDynamics"), which provided business-to-business Internet trading
applications, including business-to-business auction, request for quote,
reverse auction, and bid/ask-style exchange mechanisms. The acquisition was
accounted for using the purchase method of accounting and accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values on the acquisition date. Since January
20, 2000, TradingDynamics' results of operations have been included in the
Company's Consolidated Statements of Operations. The fair value of the
intangible assets acquired was determined based upon a valuation using a
combination of methods, including a cost approach for the assembled workforce,
an income approach for the covenants not-to-compete and an income approach for
the core technology.
9
The purchase price of approximately $465.0 million consisted of an exchange
of 7,274,656 shares of the Company's common stock with a fair value of $371.9
million, and assumed stock options with a fair value of $91.7 million. The
fair value of the common stock options was determined using a Black-Scholes
option pricing model with the following assumptions: risk-free rate of 6.53%,
expected life of 3.0 years, expected dividend rate of 0%, and volatility of
96%. There were also $1.4 million of direct transaction costs related to the
merger, consisting primarily of payments for financial advisor and other
professional fees. Of the total purchase price, $224,000 was allocated to
property and equipment, $13.4 million was allocated to net liabilities
assumed, excluding property and equipment, and the remainder was allocated to
intangible assets, including in-process technology ($950,000), core technology
($4.4 million), covenants not-to-compete ($1.3 million), assembled workforce
($1.1 million) and goodwill ($470.5 million). The acquired in-process
technology related to the acquisition are technologies representing the
processes and expertise employed to design and develop business-to-business
electronic commerce solutions. As of the acquisition date, the in-process
technologies consisted of TradingDynamics' Market Suite Product Version 1.5.
The Company determined the acquired in-process technology had not reached
technological feasibility and had no alternative future uses based on a review
by the Company's software engineers. The efforts required to complete the
acquired in-process technology included the completion of all planning,
designing and testing activities that were necessary to establish that the
product would be produced to meet its design requirements, including
functions, features and technical performance requirements. As of September
30, 2000, the Company had incorporated and released this technology as its
Dynamic Trade product.
The value of the acquired in-process technology was computed using a
discounted cash flow analysis rate of 25% on the anticipated income stream of
the related product revenues. The discount rate was applied giving specific
consideration to the risks and attributes of the subject assets. The
discounted cash flow analysis was based on management's forecast of future
revenues which assumed a compound annual growth rate of 151%. These forecasts
were based on management's estimates and the growth potential of the market.
The discounted cash flow analysis was also based on management's forecast of
cost of revenues and operating expenses related to the products and
technologies purchased from TradingDynamics. The calculation of value was then
adjusted to reflect only the value creation efforts of TradingDynamics prior
to the close of the acquisition. At the time of the acquisition, the product
was approximately 90% complete. The remaining costs to complete the project,
which were not significant, were incurred in fiscal 2000. The resultant value
of in-process technology was further reduced by the estimated value of core
technology and was expensed in the period the transaction was consummated. The
acquired intangible assets are being amortized over their estimated useful
lives of three years. Goodwill is being amortized using the straight-line
method over three years, resulting in an aggregate quarterly charge of $39.2
million during the amortization period. At March 31, 2001, cumulative
amortization of goodwill and other intangible assets associated with this
acquisition totaled $79.6 million.
The following is a summary of the allocation of the purchase price in the
acquisition of TradingDynamics (in thousands):
Property and equipment........................................... $ 224
Net liabilities assumed, excluding property and equipment........ (13,447)
Identifiable intangible assets................................... 6,800
In-process research and development.............................. 950
Goodwill......................................................... 470,537
--------
Total.......................................................... $465,064
========
Tradex Technologies, Inc.
On March 8, 2000, the Company acquired Tradex Technologies, Inc. ("Tradex"),
which provided solutions for net markets. The acquisition was accounted for
using the purchase method of accounting and accordingly, the purchase price
was allocated to the assets acquired and liabilities assumed based on their
estimated fair values on the acquisition date. Since March 8, 2000, the
results of operations of Tradex have been included in the
10
Company's Consolidated Statements of Operations. The fair value of the
intangible assets was determined based upon a valuation using a combination of
methods, including an income approach for the core technology, an income
approach for the trademarks and a cost approach for the assembled workforce.
The purchase price of approximately $2.3 billion consisted of an exchange of
34,059,336 shares of the Company's common stock with a fair value of $2.1
billion and assumed stock options with a fair value of approximately $207.5
million. The fair value of the common stock options was determined using a
Black-Scholes option pricing model with the following assumptions: risk free
rate of 6.55%, expected life of 3.0 years, expected dividend rate of 0%, and
volatility of 96%. There were also $28.8 million of direct transaction costs
related to the merger, consisting primarily of payments for financial advisor
and other professional fees. Of the total purchase price, $3.5 million was
allocated to property and equipment, $75.6 million was allocated to net assets
acquired, excluding property and equipment, and the remainder was allocated to
intangible assets, including in-process technology ($11.8 million), core
technology ($7.9 million), trademarks ($2.0 million), assembled workforce
($5.4 million) and goodwill ($2.2 billion). There was one project included in
in-process technology for Tradex. The acquired in-process technology related
to the acquisition are technologies representing the processes and expertise
employed to design and develop completely new platform architecture based on
Enterprise Java Beans, Uses XML documents, and Use of Entity Beans. As of the
acquisition date, this in-process technology consisted of Tradex's product,
Commerce Center v8.0. The Company determined that the acquired in-process
technology had not reached technological feasibility and had no alternative
future uses based on a review by the Company's software engineers. The efforts
required to complete the acquired in-process technology included the
completion of all planning, designing and testing activities that are
necessary to establish that the product can be produced to meet its design
requirements, including functions, features and technical performance
requirements. As of September 30, 2000, the Company had incorporated and
released this technology as its Marketplace Standard Edition product.
The value of the acquired in-process technology was computed using a
discounted cash flow analysis rate of 22% on the anticipated income stream of
the related product revenues. The discount rate was applied giving specific
consideration to the risks and attributes of the subject assets. The
discounted cash flow analysis was based on management's forecast of future
revenues which assumed a compound annual growth rate of 87.6%. These forecasts
were based on management's estimates and the estimated growth potential of the
market. The discounted cash flow analysis was also based on management's
forecast of cost of revenues and operating expenses related to the products
and technologies purchased from Tradex. The calculation of value was then
adjusted to reflect only the value creation efforts of Tradex prior to the
close of the acquisition. At the time of the acquisition, the product was
approximately 33% complete with approximately $693,000 in estimated costs
remaining, substantially all of which were incurred in fiscal 2000. The
resultant value of in-process technology was further reduced by the estimated
value of core technology. The acquired in-process technology was expensed in
the period the transaction was consummated. The acquired intangible assets are
being amortized over their estimated useful lives of three years. Goodwill is
being amortized using the straight-line method over three years, which
resulted in an aggregate quarterly charge of $182.5 million during the
amortization period. At March 31, 2001, cumulative amortization of goodwill
and other intangible assets associated with this acquisition totaled $368.5
million.
The following is a summary of the allocation of the purchase price in the
acquisition of Tradex (in thousands):
Property and equipment......................................... $ 3,502
Net assets assumed, excluding property and equipment........... 75,679
Identifiable intangible assets................................. 15,300
In-process research and development............................ 11,800
Goodwill....................................................... 2,185,000
----------
Total........................................................ $2,291,281
==========
11
SupplierMarket.com
On August 28, 2000, the Company acquired SupplierMarket.com
("SupplierMarket"), a leading provider of online collaborative sourcing
technologies that allows buyers and suppliers of direct and indirect materials
to locate new trading partners, negotiate purchases and collaborate on the
Internet. The acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values on the
acquisition date. Since August 28, 2000, the results of operations of
SupplierMarket have been included in the Company's Consolidated Statements of
Operations. The fair value of the intangible assets was determined based upon
a valuation using a combination of methods, including an income approach for
the in-process and core technology, and a cost approach for the value of the
assembled workforce.
The total purchase price of approximately $607.1 million consisted of an
exchange of 5,249,330 shares of the Company's common stock with a fair value
of $478.7 million and assumed stock options with a fair value of approximately
$108.4 million. The fair value of the common stock options was determined
using a Black-Scholes option pricing model with the following assumptions:
risk-free rate of 6.13%, expected life of 3.0 years, expected dividend rate of
0%, and volatility of 102%. There were also $20.0 million of direct
transaction costs related to the merger, consisting primarily of payments for
financial advisor and other professional fees. Of the total purchase price,
$3.1 million was allocated to property and equipment, $4.2 million was
allocated to net assets acquired, excluding property and equipment, $124.6
million to deferred compensation and the remainder was allocated to intangible
assets, including in-process technology ($14.6 million), core technology ($7.9
million), assembled workforce ($6.5 million) and goodwill ($446.1 million).
There was one project included in in-process technology for SupplierMarket.
The acquired in-process technology related to the acquisition are technologies
representing the processes and expertise employed to design and develop new
application servers with increased scalability and customer functionality. As
of the acquisition date, SupplierMarket had yet to commence shipments of its
products and these in-process technologies consisted of its new product
architecture. The Company determined the acquired in-process technology had
not reached technological feasibility and had no alternative future uses based
on a review by the Company's software engineers. The efforts required to
complete the acquired in-process technology included the completion of all
planning, designing and testing activities that are necessary to establish
that the product can be produced to meet its design requirements, including
functions, features and technical performance requirements. During the quarter
ended December 31, 2000, the Company incorporated and released this technology
as its sourcing product.
The value of the acquired in-process technology was computed using a
discounted cash flow analysis rate of 19% on the anticipated income stream of
the related product revenues. The discount rate was applied giving specific
consideration to the risks and attributes of the subject assets. The
discounted cash flow analysis was based on management's forecast of future
revenues which assumed a compound annual growth rate of 131.79%. These
forecasts were based on management's estimates and the growth potential of the
market. The discounted cash flow analysis was also based on management's
forecast of cost of revenues, and operating expenses related to the products
and technologies purchased from SupplierMarket. The calculation of value was
then adjusted to reflect only the value creation efforts of SupplierMarket
prior to the close of the acquisition. At the time of the acquisition, the
product was approximately 53% complete with approximately $158,000 in
estimated costs remaining, all of which were incurred by the end of the fiscal
quarter ended December 31, 2000. The resultant value of in-process technology
was further reduced by the estimated value of core technology. The acquired
in-process technology was expensed in the period the transaction was
consummated.
The Company recorded deferred stock-based compensation associated with
unvested stock options issued to employees in conjunction with the
acquisition. 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. The amortization of approximately $14.3
million for the quarter ended March 31, 2001 is based on the portion of the
intrinsic value related to SupplierMarket employees' services.
12
The acquired intangible assets are being amortized over their estimated
useful lives of three years. Goodwill is being amortized using the straight-
line method over three years, resulting in an aggregate quarterly charge of
$37.2 million during the amortization period. At March 31, 2001, cumulative
amortization of goodwill and other intangible assets associated with this
acquisition totaled $76.9 million.
The following is a summary of the allocation of the purchase price in the
acquisition of SupplierMarket (in thousands):
Property and equipment........................................... $ 3,165
Net assets assumed, excluding property and equipment............. 4,228
Deferred compensation............................................ 124,620
Identifiable intangible assets................................... 14,400
In-process research and development.............................. 14,600
Goodwill......................................................... 446,158
--------
Total.......................................................... $607,171
========
No assurance can be given that actual revenues and operating profit
attributable to acquired in-process technology will not deviate from the
projections used to value such technology in connection with each of the
respective acquisitions. Ongoing operations and financial results for acquired
businesses and the Company as a whole are subject to a variety of factors
which may not have been known or estimable at the date of such acquisition.
Impairment
As part of its review of its second quarter financial results, the Company
performed an impairment assessment of identifiable intangible assets and
goodwill recorded in connection with its various acquisitions. The assessment
was performed primarily due to the significant decline in the Company's stock
price, the net book value of assets significantly exceeding the Company's
market capitalization, the significant under performance of this one
acquisition relative to projections and the overall decline in industry growth
rates which indicate that this trend may continue for an indefinite period. As
a result, the Company recorded a $1.4 billion impairment charge in the second
quarter of fiscal 2001 to reduce goodwill and other intangible assets
associated with the Tradex acquisition to their estimated fair value. The
estimate of fair value was based upon the discounted estimated cash flows from
the sale of the marketplace Standard Edition product for the succeeding three
years using a discount rate of 18% and an estimated terminal value. The
assumptions supporting the estimated cash flows, including the discount rate
and an estimated terminal value, reflect management's best estimates. The
discount rate was based upon the weighted average cost of capital for
comparable companies. The remaining goodwill will be amortized using the
straight-line method over three years, resulting in an aggregate quarterly
charge of $517,600 each period.
Note 5--Commitments and Contingencies
Leases
In March 2000, the Company entered into a new facility lease agreement for
approximately 716,000 square feet to be constructed in four office buildings
and an amenities building in Sunnyvale, California as the Company's
headquarters. The lease term commences in phases upon completion of
construction and possession of each building, and ends on January 24, 2013.
The Company took possession and lease commencement began on Building 3 as of
January 25, 2001, Building 4 as of February 15, 2001, and Building 2 as of
March 22, 2001. Possession of Building 1 and the amenities building as of
April 12, 2001. A total of $2.1 million was paid for lease payments during the
quarter as commencement of leases took place on the first three buildings.
Minimum lease payments will be $2.1 million monthly when the project is fully
completed. Lease payments will escalate
13
annually with the total future minimum lease payments amounting to $387.3
million over the lease term. The Company has also contributed a significant
amount towards construction costs of the facility. As of March 31, 2001, the
Company has paid $56.7 million for improvements to the facility. The total
estimated cost of improvements is approximately $90.7 million, but is subject
to change. Construction payments are estimated to be fully paid by the quarter
ending September 30, 2001. As part of this agreement, the Company is required
to hold a certificate of deposit totaling $40.0 million as a form of security
through April 2013 which is classified as restricted cash on the Condensed
Consolidated Balance Sheets.
On April 3, 2001, the Company announced its decision to restructure its
operations and abandon certain excess leased facilities in Mountain View,
California; Tampa, Florida; Alpharetta, Georgia; Florham Park, New Jersey;
Lisle, Illinois; and Dallas, Texas for the remaining lease terms. The loss
associated with the abandonment of these leases is estimated to be in the
range of $50.0 million to $60.0 million over the lease terms. Management
intends to accrue this loss as a restructuring charge in the quarter ending
June 30, 2001. See Note 13 of Notes to Condensed Consolidated Financial
Statements for further detail.
Litigation
Between March 20, 2001 and April 5, 2001, several securities class action
complaints were filed against the Company and several of the Company's current
and former officers and directors in the United States District Court for the
Southern District of New York. The complaints allege that the Company's lead
underwriters, the Company and the other named defendants violated federal
securities laws by making material false and misleading statements in the
Company's prospectus incorporated in its registration statement on Form S-1
filed with the SEC in June 1999. The complaints are generally related to the
alleged receipt of excessive and undisclosed commissions by the underwriters
in connection with the allocation of shares of common stock in the Company's
initial public offering. The complaints are currently in the process of being
consolidated into a single action. The Company believes that the claims
against it are without merit and intends to defend against the complaints
vigorously.
Note 6--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 of
March 31, 2001, minority interest of approximately $13.9 million is recorded
on the Condensed Consolidated Balance Sheet in order to reflect the share of
the net assets of Nihon Ariba K.K. held by minority investors. In addition,
the Company recognized approximately ($820,000) and $154,000 as other
income/(expense) for the minority interest's share of Nihon Ariba K.K.'s
income (loss) for the three month periods ended March 31, 2001 and December
31, 2000, respectively. See Note 11 of Notes to Condensed Consolidated
Financial Statements for additional information.
Note 7--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 chief operating decision maker evaluates resource allocation
decisions and the performance of the Company based upon revenue in geographic
regions and does not receive financial information about expense allocations
on a disaggregated basis.
14
Information regarding revenue and long-lived assets in geographic areas is
as follows (in thousands):
Three months
ended Six months ended
March 31, March 31,
--------------- ----------------
2001 2000 2001 2000
------- ------- -------- -------
Revenues:
United States............................. $66,543 $32,900 $193,783 $48,391
International............................. 24,110 7,142 67,103 15,130
------- ------- -------- -------
Total................................... $90,653 $40,042 $260,886 $63,521
======= ======= ======== =======
March 31, September 30,
2001 2000
---------- -------------
Long-Lived Assets:
United States.................................... $1,310,952 $3,327,266
International.................................... 6,068 3,175
Eliminations..................................... (8,202) --
---------- ----------
Total.......................................... $1,308,818 $3,330,441
========== ==========
During the three months ended March 31, 2001 and 2000, one and no customers
accounted for more than 10% of total revenues, respectively. During the six
months ended March 31, 2001 and 2000, no customers accounted for more than 10%
of total revenues. Our international revenues were derived from sales in
Canada, Europe, Asia, Asia Pacific and Latin America.
Note 8--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 in June
2002. The fair value of the warrants of $31,000 was calculated using the
Black-Scholes option pricing model and is being amortized to interest expense
over the 42 months term of the lease. 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 if certain
revenue milestones were achieved. 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 February 2000, in connection with a sales and marketing alliance
agreement with a third party, the Company issued unvested warrants to purchase
up to 4,800,000 shares of the Company's common stock at various exercise
prices based on future prices of the Company's common stock or at
predetermined exercise prices. The alliance relationship was entered into to
broaden and accelerate adoption of the Company's marketplace products. During
the quarter ended December 31, 2000, 1,400,000 shares of the Company's common
15
stock underlying the warrant were considered probable of vesting based upon
the release of certain escrowed license fees. The remaining warrants vest upon
attainment of certain milestones related to contingent revenues to be received
by the Company under the terms concurrent software licensing arrangement. The
warrants generally expire when the milestone period expires or one year after
the specific milestone is met. To date the Company has not recognized any
revenue from the software licensing arrangement with this business partner.
In accordance with EITF No. 96-18, in the quarter ended December 31, 2000
the Company determined the initial fair value of the warrant to be
approximately $31.6 million 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 expected dividend yield. As of March 31, 2001, the
warrant has not vested, and accordingly was remeasured with a revised fair
value which totaled approximately $694,000 using the Black-Scholes option
pricing model and using the contractual term of one year, expected volatility
of 117%, risk-free rate of 4.63% and no expected dividend yield. The fair
value of these warrants has been recorded as an intangible asset which is
being amortized over the life of the agreement. The cumulative adjustment
related to the remeasured fair value of the warrant resulted in a reduction of
$589,000 of business partner warrant expense for the quarter ended March 31,
2001. The warrant will be remeasured at future reporting dates until the
warrants vest, at which time the fair value attributable to the warrant is
fixed. In the event such remeasurement results in increases or decreases from
the fair value previously determined, a cumulative adjustment to warrant
expense will be made in the current quarter. No amounts related to the
unvested warrants are reflected in the accompanying condensed consolidated
financial statements.
In March 2000, in connection with a sales and marketing alliance agreement
with a third party, the Company issued unvested warrants to purchase up to
3,428,572 shares of the Company's common stock at an exercise price of $87.50.
The alliance relationship was entered into to take advantage of the business
partner's global marketing and consulting resources and to broaden and
accelerate adoption of the Company's marketplace products. The business
partner can vest in a tranche of warrants upon attainment of certain periodic
milestones related to revenue targets associated with the Company's sales to
third parties under registered co-sale transactions and referrals or re-sale
to third parties by the business partner. The warrants generally expire when
the milestone period expires or eighteen months after the specific milestone
is met. The warrants can be earned over approximately a five-year period.
The Company has accounted for the warrants in accordance with the provisions
of EITF No. 96-18. At the end of each quarter, the Company determines which
revenue milestones have been met and those milestones for which achievement is
considered probable. Business partner warrant expense is measured at the end
of a quarter by determining the total fair value of the tranche or tranches of
warrants underlying a revenue milestone for which achievement is considered
probable. The amount of warrant expense that is recorded in a given quarter is
equal to the proportionate share of the expected total warrant expense that
was earned by the business partner during the quarter. The fair value of the
warrants is determined using the Black-Scholes option pricing model. The
amount of warrant expense associated with a given revenue milestone is
remeasured at the end of each subsequent quarter until the given revenue
milestone is achieved and the related tranche of warrants vests, at which time
the fair value attributable to that tranche of warrants is fixed. In the event
such remeasurement results in an increase or decrease to the initial or
previously determined estimate of the total fair value of a particular tranche
of warrants, a cumulative adjustment of warrant expense is made in the current
quarter.
During the three months ended March 31, 2001, the business partner vested in
982,326 shares of these warrants as a result of achieving revenue milestones
in connection with the Company's sales to third-party customers not affiliated
with the business partner. Using the Black-Scholes option pricing model and
using the contractual term of 1.5 years, expected volatility of 117%, risk-
free interest rate of 4.23% and no dividend yield, the expense was determined
by measuring the fair value of such warrants using the methodology discussed
above resulted in a reduction of $852,000 of business partner warrant expense
for the quarter ended March 31, 2001. No amounts related to the unvested
warrants are reflected in the accompanying condensed consolidated financial
statements.
16
In the quarter ended June 30, 2000, the Company entered into an agreement
with a third party. The business partner relationship was undertaken as part
of the Company's vertical industry strategy to obtain a major partner in the
financial services industry. In connection with the agreement, the Company
issued warrants to purchase up to 6,776,000 shares of the Company's common
stock at an exercise price based on the ten-day average of the Company's stock
price up to and including the vesting date of when the warrant is earned. Upon
signing of this agreement, 1,936,000 shares of the Company's common stock
underlying the warrants were immediately vested. The remaining warrants vest
upon attainment of certain milestones related to contingent revenues
(gainshare) to be received by the Company under the terms of the related
arrangement. The warrants generally expire when the milestone period expires
or one year after the specific milestone is met.
In accordance with EITF No. 96-18, the Company determined the fair value of
the vested warrants to be $56.2 million using the Black-Scholes option pricing
model, and a term of one year, risk free interest rate at 6.23%, expected
volatility of 103% and no expected dividends. In connection with the
agreement, the Company will receive a minimum of $25.0 million in guaranteed
gainshare revenues to be paid over a period of two years. The Company has
determined that the guaranteed $25.0 million represents a partial payment for
the warrants which vested upon signing of the agreement and has reduced the
fair value of the warrants given to the business partner, accordingly. The net
amount of $31.2 million was recorded as an intangible asset. The intangible
asset is being amortized over the expected term of the arrangement of three
years. For the quarter ended March 31, 2001, approximately $2.6 million of the
intangible asset has been amortized to sales and marketing expense. No amounts
related to the unvested warrants are reflected in the accompanying condensed
consolidated financial statements.
Depending on the trading price of the Company's common stock at the end of
each quarter, and on whether subsequent milestones are achieved or considered
probable of being achieved, the total amount of the business partner warrant
recognized could be substantial.
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. Additionally, the Company has adopted
the Financial Accounting Standards Board issued Interpretation No. 44, ("FIN
44"), Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB 25. This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a non compensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. With respect to the stock options granted
since inception through March 31, 2001, 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. 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 of
deferred stock-based compensation totaled $15.7 million and $3.4 million for
the three months ended March 31, 2001 and 2000 and $36.0 million and $8.0
million for the six months ended March 31, 2001 and 2000, respectively.
17
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income, establishes standards of
reporting and display of comprehensive income and its components of net income
and other comprehensive income. Other comprehensive income refers to revenues,
expenses, gains and losses that are not included in net income but rather are
recorded directly in stockholders' equity. The components of comprehensive
loss for the three and six months ended March 31, 2001 and 2000 are as follows
(in thousands):
Three months ended Six months ended
March 31, March 31,
---------------------- ----------------------
2001 2000 2001 2000
----------- --------- ----------- ---------
Net loss................... $(1,835,176) $(125,940) $(2,182,800) $(136,274)
Unrealized gain (loss) on
securities................ (255) 3,190 287 2,819
Foreign currency
translation adjustments... (2,714) (29) (3,627) (41)
----------- --------- ----------- ---------
Comprehensive loss......... $(1,838,145) $(122,779) $(2,186,140) $(133,496)
=========== ========= =========== =========
The income tax effects related to unrealized gains (losses) on securities
and foreign currency translation adjustments are not considered material.
The components of accumulated other comprehensive loss are as follows (in
thousands):
March 31, September 30,
2001 2000
--------- -------------
Unrealized loss on securities.................... $ (458) $(745)
Foreign currency translation adjustments......... (3,800) (173)
------- -----
Accumulated other comprehensive loss............. $(4,258) $(918)
======= =====
Note 9--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 Six months ended
March 31, March 31,
---------------------- ----------------------
2001 2000 2001 2000
----------- --------- ----------- ---------
Net loss................... $(1,835,176) $(125,940) $(2,182,800) $(136,274)
Weighted-average common
shares outstanding........ 252,876 202,273 251,232 192,721
Less: Weighted-average
common shares subject to
repurchase.............. (8,293) (23,032) (8,973) (25,111)
Less: Weighted-average
shares held in escrow
related to
acquisitions............ (3,166) -- (3,908) --
----------- --------- ----------- ---------
Weighted-average common
shares used in computing
basic and diluted net loss
per common share.......... 241,417 179,241 238,351 167,610
=========== ========= =========== =========
Basic and diluted net loss
per common share.......... $ (7.60) $ (0.70) $ (9.16) $ (0.81)
=========== ========= =========== =========
At March 31, 2001 and 2000, 54,847,919 and 70,187,000 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 March 31, 2001 and 2000
exclude 10,686,246 shares
18
and no shares, respectively, which would be issuable under certain warrants
contingent upon completion of certain milestones.
The weighted-average exercise price of stock options outstanding was $34.91
and $16.12 as of March 31, 2001 and 2000, respectively. The weighted average
repurchase price of unvested stock was $0.47 and $0.24 as of March 31, 2001
and 2000, respectively. The weighted average exercise price of vested warrants
outstanding was $85.62 and $0.83 as of March 31, 2001 and 2000, respectively.
Note 10--Income Taxes
The Company incurred operating losses for the quarter ended March 31, 2001
and the quarter ended March 31, 2000. Management has recorded a valuation
allowance for the full amount of net deferred tax assets, as the future
realization of the tax benefit is not considered more likely than not. During
the quarter ended March 31, 2001, the Company incurred income tax expense of
$0.8 million primarily attributable to its international subsidiaries. The
effect of recording this foreign income tax expense was offset by the reversal
of $6.8 million of income tax expense that had been recorded for the quarter
ended December 31, 2000 on the belief at that time that the Company would have
U.S. domestic taxable income for fiscal 2001.
Note 11--Related Party Transactions
In April 2001, the Company has sold approximately 40% of its consolidated
subsidiary, Nihon Ariba K.K. and approximately 40% of its consolidated
subsidiary, Ariba Korea, Ltd. to an outside party which also has the right to
distribute Ariba products in these jurisdictions, ("the Minority
Shareholder").
In April 2001, the Chief Executive Officer of the Minority Shareholder was
appointed to the Company's Board of Directors. For the six months ended March
31, 2001, the Company has recorded license revenue of $6.5 million related to
transactions with the Minority Shareholder.
Note 12--Recent Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
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
adoption of SFAS No. 133 did not have an impact on the Company's financial
position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") 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 a cumulative change in
accounting principle at the time of implementation. SAB 101 will not be
effective until the Company's fourth fiscal quarter of 2001. The Company does
not expect the adoption of SAB 101 will have a significant impact on the
Company's consolidated financial statements.
In September 2000, the (FASB) issued Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of FASB Statement No. 125, supersedes and replaces
the guidance in FASB Statement No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities. Statement No. 140
revises the standards for accounting for securitizations and other transfers
of financial assets and collateral and requires certain disclosures, but it
carries over most of the provisions of Statement No. 125 without
reconsideration. Statement No. 140 is effective for transfers of financial
assets occurring after March 31, 2001; and will be applied prospectively. The
Company does not expect that the adoption of Statement No. 140 will have a
significant impact on the Company's consolidated financial statements.
19
Note 13--Subsequent Events
On February 8, 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, at least six months and a day from the
cancellation date, which was May 14, 2001. 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 is not expected to be later than January 31, 2002.
In addition, participating employees will have the opportunity to receive for
each option included in the exchange, and in addition to the one-for-one
replacement option described above, a second option grant (the "Bonus Option")
to purchase a number of shares that will vary based upon the last reported
sales price of the Company's common stock on the replacement grant date. The
exercise price of each new option and Bonus Option will equal the last
reported sale price of Ariba common stock on the replacement grant date. Such
new options will have terms and conditions that are substantially the same as
those of the canceled options. The exchange program 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.
On April 3, 2001, the Company announced its plan to restructure its
worldwide operations including a reduction in workforce of approximately one
third of its worldwide headcount and the consolidation of its operating
facilities. As a result, the Company expects to record a restructuring charge
in the third quarter of fiscal 2001 of approximately $15.0 million for the
severance of approximately 700 individuals and $50.0 million to $60.0 million
for abandonment of leased facilities and related improvements.
In April 2001, the Company's consolidated subsidiary, Ariba Korea, Ltd.,
issued and sold 3,800 shares, or 40% of its common stock, for cash
consideration of approximately $8.0 million to an outside party. Prior to the
transaction, the Company held 100% of the equity of Ariba Korea, Ltd. in the
form of common stock. Ariba Korea, Ltd.'s operations consist of the marketing,
distribution, service and support of the Company's products in Korea. The
Company expects that the proceeds will be reflected as a capital transaction
in its condensed consolidated financial statements for the quarter ending June
30, 2001. See Note 11 of Notes to Condensed Consolidated Financial Statements
for additional information.
In April 2001, the Company's consolidated subsidiary, Nihon Ariba K.K.,
issued and sold 4% of its common stock, for cash consideration of
approximately $4.0 million to third parties. Prior to the transaction, the
Company held 60% of the equity of Nihon Ariba K.K. in the form of common
stock.
20
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 (referred to herein as "we"), 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, Asia Pacific and Asia
primarily through our direct sales force and to a lesser extent through
indirect sales channels.
Through March 31, 2001, 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 updates 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.
Our primary software products are Ariba Buyer, Ariba Dynamic Trade, Ariba
Marketplace Network Edition and Ariba Sourcing, the last two of which are
hosted applications. We license these products through our direct sales force
and indirectly through resellers. Our license agreements for such products do
not provide for a right of return. We do not recognize revenue for refundable
fee arrangements or arrangements with cancellation rights until such rights to
refund or cancellation have expired. Historically, we have not offered such
rights in any of our licensing arrangements. The products are either purchased
under a perpetual license model or under a time-based license model. Access to
the Ariba Commerce Services Network (ACSN) is available to all Ariba Buyer
customers as part of their maintenance agreements. The ACSN allows customers
to contact suppliers, access catalog information and route orders. We are in
the process of developing value added commerce services which will be
accessible through the ACSN, however, revenues from such offerings have been
insignificant to date.
We recognize revenue on our software products in accordance with Statement
of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-4
and SOP 98-9. We recognize revenue when all of the following criteria are met:
persuasive evidence of an arrangement exists; delivery of the product has
occurred; no significant obligations by the Company with regard to
implementation remain; the fee is fixed and determinable; and collectibility
is probable. We consider all arrangements with payment terms extending beyond
one year to not be fixed and determinable, and revenue is recognized as
payments become due from the customer. If collectibility is not considered
probable, revenue is recognized when the fee is collected.
SOP 97-2, 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. Revenue recognized from multiple-
element arrangements is allocated to undelivered elements of the arrangement,
such as maintenance and support services and professional services, based on
the relative fair values of the elements
21
specific to us. Our determination of fair value of each element in multi-
element arrangements is based on vendor-specific objective evidence (VSOE). We
limit our assessment of VSOE for each element to either the price charged when
the same element is sold separately or the price established by management,
having the relevant authority to do so, for an element not yet sold
separately.
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 allocated to maintenance and support is
recognized ratably over the maintenance term (typically one year) and revenue
allocated to training and other service elements is recognized as the services
are performed. Revenue from the hosted applications are recognized ratably
over the term of the arrangement. The proportion of revenue recognized upon
delivery may vary from quarter to quarter depending upon the relative mix of
licensing arrangements and the availability of vendor specific objective
evidence of fair value for undelivered elements.
Certain of our perpetual and time-based licenses include unspecified
additional products and/or payment terms that extend beyond twelve months. We
recognize revenue from perpetual and time-based licenses that include
unspecified additional software products ratably over the term of the
arrangement. Revenue from those contracts with extended payment terms are
recognized at the lesser of amounts due and payable or the amount of the
arrangement fee that would have been recognized if the fee was fixed or
determinable.
Arrangements that include consulting services are evaluated to determine
whether those services are essential to the functionality of other elements of
the arrangement. When services are not considered essential, the revenue
allocable to the software services is recognized as the services are
performed. If we provide consulting 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. The Company entered into a limited number of fixed
fee contracts during fiscal year 1998 and earlier. 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, third party
consultants have managed implementation of our products for our customers.
Accounts receivable include amounts due from customers for which revenue has
been recognized. Deferred revenue includes amounts received from customers for
which revenue has not been recognized that generally results from the
following: (1) deferred maintenance and support; (2) consulting or training
services not yet rendered; and (3) license revenue deferred until all
requirements under SOP 97-2 are met. Deferred revenue is recognized upon
delivery of our product or as services are rendered.
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.
During the year ended September 30, 2000 we also had a charge related
22
to the purchase of in-process technology related to the acquisitions. See
subsection Accounting for Recent Acquisitions and Note 4 of Notes to
Consolidated Financial Statements for more detailed information.
Also included in our operating expenses is the non-cash expense for business
partner warrants. This non-cash expense relates to warrants that have been
earned by our business partners. If and when it becomes probable that the
business partner will earn any warrants, we recognize a non-cash expense for
these warrants. See Note 8 of Notes to Condensed Consolidated Financial
Statements for more detailed information.
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 March 31, 2001, had an accumulated deficit of $3.0 billion of which
$1.4 billion is due to impairment of goodwill and other intangible assets
recorded in the quarter ended March 31, 2001. 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 2,163 full-time employees as of March 31, 2001 and our expansion has
placed significant demands on our management and operational resources. To
manage this 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 March 31, 2001. 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 and six months ended March 31, 2001,
we recorded $15.7 million and $36.0 million, respectively, of related stock-
based compensation amortization expense. As of March 31, 2001, we had an
aggregate of approximately $75.0 million of related deferred stock-based
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 the quarter ended June 30, 2000, we entered into an agreement with a
third party. The business partner relationship was undertaken as part of our
vertical industry strategy to obtain a major partner in the financial services
industry. In connection with the agreement, we issued warrants to purchase up
to 6,776,000 shares of our common stock at an exercise price based on the ten-
day average of our stock price up to and including the vesting date of when
the warrant is earned. Upon signing of these agreements, 1,936,000 shares of
our common stock underlying the warrants were immediately vested. We
determined the fair value of the vested warrants to be $56.2 million using the
Black-Scholes options pricing model. In connection with the agreement, we will
receive a minimum of $25.0 million in guaranteed gainshare revenues to be paid
over a period of two years. We have determined that the guaranteed $25.0
million represents a partial payment for the warrants which vested upon
signing of the agreement and have reduced the fair value of the warrants given
to the business partner, accordingly. The net amount of $31.2 million was
recorded as an intangible asset. The intangible asset is being amortized over
the expected term of the arrangement of three years. For the quarter ended
March 31, 2001, approximately $2.6 million of the intangible asset has been
amortized to business partner warrant expense on
23
our Condensed Consolidated Statements of Operations. The remaining $20.2
million, as of March 31, 2001, will be amortized over the remaining eight
quarter term of the arrangement. Cumulative adjustments related to the
remeasurement of other business partner warrants resulted in a reduction of
$1.4 million during the quarter ended March 31, 2001. See Note 8 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. In April 2001, this subsidiary issued and sold an additional
4% of its common stock, for cash consideration of approximately $4.0 million
to outside parties. See Note 6 and 13 of Notes to Condensed Consolidated
Financial Statements for additional information.
In April 2001, the Company's consolidated subsidiary, Ariba Korea, Ltd.,
issued and sold 3,800 shares, or 40% of its common stock, for cash
consideration of approximately $8.0 million to an outside party. Prior to the
transaction, the Company held 100% of the equity of Ariba Korea, Ltd. in the
form of common stock. Ariba Korea, Ltd.'s operations consist of the marketing,
distribution, service and support of the Company's products in Korea. The
Company expects that the proceeds will be reflected as a capital transaction
in its condensed consolidated financial statements.
On April 3, 2001, the Company announced its plan to restructure its
worldwide operations including a reduction in workforce of approximately one
third of its worldwide headcount and the consolidation of its operating
facilities. As a result, the Company expects to record a restructuring charge
in the third quarter of fiscal 2001 of approximately $15.0 million for the
severance of approximately 700 individuals and $50.0 million to $60.0 million
for abandonment of leased facilities and related improvements. See Note 5 and
13 of Notes to Condensed Consolidated Financial Statements for additional
information.
Our limited operating history makes the prediction of future operating
results very difficult. We believe that period-to-period comparisons of
operating results should not be relied upon as predictive of future
performance. Our operating results are expected to vary significantly from
quarter to quarter and are difficult or impossible to predict. Our prospects
must be considered in light of the risks, expenses and difficulties
encountered by companies at an early stage of development, particularly
companies in new and rapidly evolving markets, 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.
Accounting for Recent Acquisitions
Acquisitions
In fiscal 2000, we acquired three companies using the purchase method of
accounting. Accordingly, the purchase price for each company was allocated to
the assets acquired and liabilities assumed based on their estimated fair
values on the acquisition date.
In January 2000, we acquired TradingDynamics, which provided business-to-
business Internet trading applications. The purchase price of approximately
$465.0 million consisted of an exchange of 7,274,656 shares of our common
stock with a fair value of $371.9 million and assumed stock options with a
fair value of $91.7 million, and other acquisition related expenses of
approximately $1.4 million consisting primarily of payments for financial
advisor and other professional fees. Of the total purchase price, $224,000 was
allocated to property and equipment, $13.4 million was allocated to net
liabilities assumed, excluding property and equipment, and the remainder was
allocated to intangible assets, including in-process technology ($950,000),
core technology ($4.4 million), covenants not-to-compete ($1.3 million),
assembled workforce ($1.1 million) and goodwill ($470.5 million).
In March 2000, we acquired Tradex, which provided solutions for enabling B2B
marketplaces and exchanges. The purchase price of approximately $2.3 billion
consisted of an exchange of 34,059,336 shares of
24
our common stock with a fair value of $2.1 billion and assumed stock options
with a fair value of approximately $207.5 million, and other acquisition
related expenses of approximately $28.8 million consisting primarily of
payments for financial advisor and other professional fees. Of the total
purchase price, $3.5 million was allocated to property and equipment, $75.6
million was allocated to net assets acquired, excluding property and equipment,
and the remainder was allocated to intangible assets, including in-process
technology ($11.8 million), core technology ($7.9 million), trademarks ($2.0
million), assembled workforce ($5.4 million) and goodwill ($2.2 billion).
In August 2000, we acquired SupplierMarket, a leading provider of online
collaborative sourcing technologies. The total purchase price of approximately
$607.1 million consisted of an exchange of 5,249,330 shares of our common stock
with a fair value of $478.7 million, assumed stock options with a fair value of
approximately $108.4 million and other acquisition related expenses of
approximately $20.0 million consisting primarily of payments for financial
advisor and other professional fees. Of the total purchase price, $3.1 million
was allocated to property and equipment, $4.2 million was allocated to net
assets acquired, excluding property and equipment, $124.6 million was allocated
to deferred compensation and the remainder was allocated to intangible assets,
including in-process technology ($14.6 million), core technology ($7.9
million), assembled workforce ($6.5 million) and goodwill ($446.1million).
In-Process Research and Development
In connection with the acquisition of TradingDynamics we allocated $950,000
as in-process research and development, or 0.2% of the total purchase price.
The acquired research and development related to the TradingDynamics
acquisition are technologies representing the processes and expertise employed
to design and develop business-to-business electronic commerce solutions. As of
the acquisition date, the in-process technologies consisted of TradingDynamics'
Market Suite Product, Version 1.5. We determined the research and development
acquired had not reached technological feasibility and had no alternative
future uses based on a review by our software engineers. The efforts required
to complete the acquired in-process technology included the completion of all
planning, designing and testing activities that were necessary to establish
that the product could be produced to meet its design requirements, including
functions, features and technical performance requirements. As of September 30,
2000, we had incorporated and released this technology as our Dynamic Trade
product.
The value of the acquired in-process technology was computed using a
discounted cash flow analysis rate of 25% on the anticipated income stream of
the related product revenues. The discount rate was applied giving specific
consideration to the risks and attributes of the subject assets. The discounted
cash flow analysis was based on management's forecast of future revenues which
assumed a compound annual growth rate of 151%. These forecasts were based on
management's estimate and the growth potential of the market. The discounted
cash flow analysis was also based on management's forecast of cost of revenues
and operating expenses related to the products and technologies purchased from
TradingDynamics. The calculation of value was then adjusted to reflect only the
value creation efforts of TradingDynamics prior to the close of the
acquisition. At the time of the acquisition, the product was approximately 90%
complete. The remaining costs to complete the project, which were not
significant, were incurred in fiscal 2000. The resultant value of in-process
technology was further reduced by the estimated value of core technology and
was expensed in the period the transaction was consummated. The acquired
intangible assets are being amortized over their estimated useful lives of
three years. Goodwill is being amortized using the straight-line method over
three years, resulting in an aggregate quarterly charge of $39.2 million during
the amortization period. At March 31, 2001, cumulative amortization of goodwill
and other intangible assets associated with this acquisition totaled $79.6
million.
In connection with the acquisition of Tradex we allocated $11.8 million as
in-process research and development, or 0.5% of the total purchase price. The
acquired in-process technology related to the acquisition are technologies
representing the processes and expertise employed to design and develop
completely new platform architecture based on Enterprise Java Beans, Uses XML
documents and Use of Entity Beans. As of the acquisition date, this in-process
technology consisted of Tradex's product, Commerce Center v8.0. We
25
determined that the in-process technology acquired had not reached
technological feasibility and had no alternative future uses based on a review
by our software engineers. The efforts required to complete the acquired in-
process technology included the completion of all planning, designing and
testing activities that are necessary to establish that the product can be
produced to meet its design requirements, including functions, features and
technical performance requirements. As of September 30, 2000, we had
incorporated and released this technology as our Marketplace Standard Edition
product.
The value of the acquired in-process technology was computed using a
discounted cash flow analysis rate of 22% on the anticipated income stream of
the related product revenues. The discount rate was applied giving specific
consideration to the risks and attributes of the subject assets. The discounted
cash flow analysis was based on management's forecast of future revenues which
assumed a compound annual growth rate of 87.6%. These forecasts were based on
management's estimates and the estimated growth potential of the market. The
discounted cash flow analysis was also based on management's forecast of cost
of revenues and operating expenses related to the products and technologies
purchased from Tradex. The calculation of value was then adjusted to reflect
only the value creation efforts of Tradex prior to the close of the
acquisition. At the time of the acquisition, the product was approximately 33%
complete with approximately $693,000 in estimated costs remaining,
substantially all of which were incurred in fiscal 2000. The resultant value of
in-process technology was further reduced by the estimated value of core
technology. The acquired in-process technology was expensed in the period the
transaction was consummated. The acquired intangible assets are being amortized
over their estimated useful lives of three years. Goodwill is being amortized
using the straight-line method over three years, resulting in an aggregate
quarterly charge of $182.5 million during the amortization period. At March 31,
2001, cumulative amortization of goodwill and other intangibles assets
associated with this acquisition totaled $368.5 million. See the subsection of
Goodwill and Other Intangible Assets below for discussion regarding the
impairment charge relating to goodwill and other intangible assets acquired in
the Tradex acquisition.
In connection with the acquisition of SupplierMarket we allocated $14.6
million as in-process research and development, or 2.4% of the total purchase
price. The acquired in-process technology related to the acquisition are
technologies representing the processes and expertise employed to design and
develop new application servers with increased scalability and customer
functionality. As of the acquisition date, SupplierMarket had yet to commence
shipments of its products and these in-process technologies consisted of its
new product architecture. We determined the in-process technology acquired had
not reached technological feasibility and had no alternative future uses based
on a review by our software engineers. The efforts required to complete the
acquired in-process technology included the completion of all planning,
designing and testing activities that are necessary to establish that the
product can be produced to meet its design requirements, including functions,
features and technical performance requirements. During the quarter ended
December 31, 2000, we incorporated and released this technology as our sourcing
product.
The value of the acquired in-process technology was computed using a
discounted cash flow analysis rate of 19% on the anticipated income stream of
the related product revenues. The discount rate was applied giving specific
consideration to the risks and attributes of the subject assets. The discounted
cash flow analysis was based on management's forecast of future revenues which
assumed a compound annual growth rate of 131.79%. These forecasts were based on
management's estimate and the growth potential of the market. The discounted
cash flow analysis was also based on management's forecast of cost of revenues
and operating expenses related to the products and technologies purchased from
SupplierMarket. The calculation of value was then adjusted to reflect only the
value creation efforts of SupplierMarket prior to the close of the acquisition.
At the time of the acquisition, the product was approximately 53% complete with
approximately $158,000 in estimated costs remaining, which were incurred by the
end of the next fiscal quarter ended December 31, 2000. The resultant value of
in-process technology was further reduced by the estimated value of core
technology. The acquired in-process technology was expensed in the period the
transaction was consummated. The acquired intangible assets are being amortized
over their estimated useful lives of three years. Goodwill is being amortized
using the straight-line method over three years, resulting in an aggregate
quarterly charge of $37.2 million during the amortization period. At March 31,
2001, cumulative amortization of goodwill and other intangible assets
associated with this acquisition totaled $76.9 million.
26
The selection of discount rates for application in each acquisition were
based on the consideration of: (i) the weighted average cost of capital
("WACC"), which measures a company's cost of debt and equity financing
weighted by the percentage of debt and percentage of equity in its target
capital structure; (ii) the corresponding weighted average return on assets
("WARA") which measures the after-tax return required on the assets employed
in the business weighted by each asset group's percentage of the total asset
portfolio; and (iii) venture capital required rates of return which typically
relate to equity financing for relatively high-risk businesses or business
projects.
No assurance can be given that actual revenues and operating profit
attributable to acquired in-process technology will not deviate from the
projections used to value such technology in connection with each of the
respective acquisitions. Ongoing operations and financial results for acquired
businesses and Ariba as a whole are subject to a variety of factors which may
not have been known or estimable at the date of such acquisition. Actual costs
of completing these projects and the timing thereof have been consistent with
the estimates used in developing valuations for each of these acquisitions.
Goodwill and Other Intangible Assets
We recorded a total of $3.1 billion in goodwill and other intangible assets
in fiscal 2000 relating to the acquisitions of TradingDynamics, Tradex and
SupplierMarket. We incurred an amortization expense relating to this goodwill
and other intangible assets of $539.4 million for the year ended September 30,
2000, $262.9 million for the quarter ended December 31, 2000 and $262.0
million for the quarter ended March 31, 2001.
In the quarter ended March 31, 2001, we recorded a $1.4 billion impairment
charge relating to goodwill and other intangible assets acquired in the Tradex
acquisition. As of March 31, 2001, we had $1.2 billion of goodwill and other
intangible assets relating to the acquisition of TradingDynamics, Tradex,
SupplierMarket, an intellectual property agreement and business partner
warrant agreements after giving effect to previous amortization and impairment
charges.
See Note 4 of Notes to Condensed Consolidated Financial Statements for more
detailed information about the accounting treatment of TradingDynamics, Tradex
and SupplierMarket acquisitions.
Stock Option Exchange Program
On February 8, 2001, we announced a voluntary stock option exchange program
for our employees. Under the program, our 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 which will be at least six months and a day from the
cancellation date, which was May 14, 2001. The exercise price of these new
options will be equal to the fair market value of Ariba's common stock on the
date of grant, which is not expected to be later than January 31, 2002. In
addition, participating employees will have the opportunity to receive for
each option included in the exchange, and in addition to the one-for-one
replacement option described above, a second option grant (the "Bonus Option")
to purchase a number of shares that will vary based upon the last reported
sales price of Ariba's common stock on the replacement grant date. The
exercise price of each new option and Bonus Option will equal the last
reported sale price of our common stock on the replacement grant date. Such
new options will have terms and conditions that are substantially the same as
those of the canceled options. The exchange program 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.
27
Results of Operations
The following table sets forth statements of operations data in absolute
dollars for the periods indicated. The data has been derived from the
unaudited condensed consolidated financial statements contained in this Form
10-Q which, in the opinion of our management, include all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position and results of operations for the interim periods. The
operating results for any period should not be considered indicative of
results for any future period. This information should be read in conjunction
with the Consolidated Financial Statements and Notes thereto included in the
Company's Form 10-K for our fiscal year ended September 30, 2000 (in
thousands, except per share data).
Three Months Ended Six Months Ended
March 31, March 31,
---------------------- ----------------------
2001 2000 2001 2000
----------- --------- ----------- ---------
Revenues:
License....................... $ 58,605 $ 26,187 $ 187,516 $ 41,971
Maintenance and service....... 32,048 13,855 73,370 21,550
----------- --------- ----------- ---------
Total revenues................ 90,653 40,042 260,886 63,521
----------- --------- ----------- ---------
Cost of revenues:
License....................... 5,766 1,920 14,452 2,241
Maintenance and service
(exclusive of stock-based
compensation expense of
$1,365 and $281 and for the
three months ended March 31,
2001 and 2000 and $2,859 and
$625 for the six months ended
March 31, 2001 and 2000,
respectively)................ 21,025 4,527 43,670 7,648
----------- --------- ----------- ---------
Total cost of revenues........ 26,791 6,447 58,122 9,889
----------- --------- ----------- ---------
Gross profit.................. 63,862 33,595 202,764 53,632
----------- --------- ----------- ---------
Operating expenses:
Sales and marketing (exclusive
of stock-based compensation
expense of $4,541 and $1,741
for the three months ended
March 31, 2001 and 2000 and
$12,264 and $3,904 for the
six months ended March 31,
2001 and 2000, respectively
and exclusive of $1,160 and
$13,943 of business partner
warrants expense for the
three and six months ended
March 31, 2001).............. 79,954 35,020 163,642 54,794
Research and development
(exclusive of stock-based
compensation expense of
$2,640 and $637 for the three
months ended March 31, 2001
and 2000 and $5,567 and
$1,531 for the six months
ended March 31, 2001 and
2000, respectively).......... 25,579 7,124 46,368 11,567
General and administrative
(exclusive of stock-based
compensation expense of
$7,151 and $712 for the three
months ended March 31, 2001
and 2000 and $15,338 and
$2,030 for the six months
ended March 31, 2001 and
2000, respectively).......... 18,772 5,327 35,167 8,748
Amortization of goodwill and
other intangible assets...... 327,571 98,287 656,099 98,287
In-process research and
development.................. -- 12,750 -- 12,750
Business partner warrants..... 1,160 -- 13,943 --
Amortization of stock-based
compensation................. 15,697 3,371 36,028 8,090
Impairment of goodwill and
other intangible assets and
equity investments........... 1,433,292 -- 1,433,292 --
Merger related costs.......... 9,185 -- 9,185 --
----------- --------- ----------- ---------
Total operating expenses...... 1,911,210 161,879 2,393,724 194,236
----------- --------- ----------- ---------
Loss from operations.......... (1,847,348) (128,284) (2,190,960) (140,604)
Interest income............... 5,693 2,721 11,560 4,828
Interest expense.............. (122) (87) (173) (130)
Other income/(expense)........ 561 79 (675) 74
----------- --------- ----------- ---------
Net loss before income taxes.. (1,841,216) (125,571) (2,180,248) (135,832)
Provision for income taxes..... 6,040 (369) (2,552) (442)
----------- --------- ----------- ---------
Net loss....................... $(1,835,176) $(125,940) $(2,182,800) $(136,274)
----------- --------- ----------- ---------
Basic and diluted net loss per
share......................... $ (7.60) $ (0.70) $ (9.16) $ (0.81)
----------- --------- ----------- ---------
Shares used in computing net
loss per share--basic and
diluted....................... 241,417 179,241 238,351 167,610
=========== ========= =========== =========
28
Comparison of the Three and Six Months Ended March 31, 2001 and 2000
Revenues
License
License revenues for the three months ended March 31, 2001 were $58.6
million, a 124% increase over license revenues of $26.2 million for the three
months ended March 31, 2000. License revenues for the six months ended March
31, 2001 were $187.5 million, a 347% increase over license revenues of $42.0
million for the six months ended March 31, 2000. The increases are 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, domestically and internationally, 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 March 31, 2001
were $32.0 million, a 131% increase over maintenance and service revenues of
$13.9 million for the three months ended March 31, 2000. Maintenance and
service revenues for the six months ended March 31, 2001 were $73.4 million, a
240% increase over maintenance and service revenues of $21.6 million for the
six months ended March 31, 2000. The 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 March 31, 2001 and 2000, one and no customers
accounted for more than 10% of total revenues, respectively. During the six
months ended March 31, 2001 and 2000, no customers accounted for more than 10%
of total revenues, respectively. Revenues from international sales were
approximately $24.1 million and $7.1 million for the three months ended March
31, 2001 and 2000, respectively. Revenues from international sales were
approximately $67.1 million and $15.1 million for the six months ended March
31, 2001 and 2000, respectively. Our international revenues were derived from
sales in Canada, Europe, Asia, Asia Pacific and Latin America.
Cost of Revenues
License
Cost of license revenues was $5.8 million for the three months ended March
31, 2001, an increase of 200% over cost of license revenues of $2.0 million
for the three months ended March 31, 2000. Cost of license revenues are $14.5
million for the six months ended March 31, 2001, an increase of 545% over cost
of license revenues of $2.2 million for the six months ended March 31, 2000.
The increases in the cost of license revenues are 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 was $21.0 million for the three
months ended March 31, 2001, an increase of 364% over cost of maintenance and
service revenues of $4.5 million for the three months ended March 31, 2000.
Cost of maintenance and service revenues was $43.7 million for the six months
ended March 31, 2001, an increase of 471% over cost of maintenance and service
revenues of $7.6 million for the six months ended March 31, 2000. The
increases are 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.
29
Operating Expenses
Sales and Marketing
During the three months ended March 31, 2001, sales and marketing expenses
were $80.0 million, an increase of 128% over sales and marketing expenses of
$35.0 million for the three months ended March 31, 2000. During the six months
ended March 31, 2001, sales and marketing expenses were $163.7 million, an
increase of 199% over sales and marketing expenses of $54.8 million for the
six months ended March 31, 2000.
The increases are primarily attributable to increased compensation for sales
and marketing personnel, domestically and internationally, 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 six month periods ended March 31, 2001 and
2000, we recorded provisions for doubtful accounts of $20.1 million and $0,
respectively. During the quarters ended December 31, 2000 and March 31, 2001,
we recorded a provision for doubtful accounts of approximately $12.9 million
and $7.1 million, respectively, primarily as a result of the effects of the
economic slowdown and its impact on the operations of certain emerging e-
commerce customers. We have enhanced our efforts to manage our accounts
receivable balance. Although, we have not made significant changes in payment
terms, we have taken steps to focus additional resources on collection efforts
and we have reviewed our credit approval policies. Although, we anticipate
that our recent restructuring of our operations will reduce sales and
marketing expenses over the near term, these expenses may increase over the
longer term.
Research and Development
During the three months ended March 31, 2001, research and development
expenses were $25.6 million, an increase of 259% over research and development
expenses of $7.1 million for the three months ended March 31, 2000. During the
six months ended March 31, 2001, research and development expenses were $46.4
million, an increase of 301% over research and development expenses of $11.6
million for the six months ended March 31, 2000.
The increases are primarily attributable to increases in compensation for
research and development personnel due to our internal growth and
acquisitions, globalization of our products, 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. As a result, we anticipate
that our recent restructuring of our operations will reduce research and
development expenses over the near term, although these expenses may increase
over the longer term.
General and Administrative
During the three months ended March 31, 2001, general and administrative
expenses were $18.8 million, an increase of 252% over general and
administrative expenses of $5.3 million for the three months ended March 31,
2000. During the six months ended March 31, 2001, general and administrative
expenses were $35.1 million, an increase of 302% over general and
administrative expenses of $8.7 million for the six months ended March 31,
2000.
The increases are primarily attributable to an increase in compensation
associated with additional employees in finance, accounting, legal, human
resources and information technology personnel, both domestically and
internationally, 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 expand our financial and human resources infrastructure and to a lesser
extent, related overhead. Although, we anticipate that our recent
restructuring of our operations will reduce general and administrative
expenses over the near term, these expenses may increase over the longer term.
30
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 $262.0 million
and $98.3 million for the three months ended March 31, 2001 and 2000,
respectively. The aggregate amortization of goodwill and these other
intangible assets was $525.0 million and $98.3 million for the six months
ended March 31, 2001 and 2000, respectively.
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 amortization of
this intellectual property agreement was $65.6 million and $131.2 for the
three and six months ended March 31, 2001, respectively.
The related amortization of goodwill and other intangible assets totaled
$329.6 million and $98.3 million for the three months ended March 31, 2001 and
2000, respectively. This amount includes $2.0 million and $0 of business
partner warrant expense for the three months ended March 31, 2001 and 2000,
respectively. The related amortization of goodwill and other intangible assets
totaled $661.6 million and $98.3 million for the six months ended March 31,
2001 and 2000, respectively. This amount includes $5.4 million and $0 of
business partner warrants expensed for the six months ended March 31, 2001 and
2000, respectively. See subsection Impairment of Goodwill and Other Intangible
Assets regarding the impairment charge relating to goodwill and other
intangible assets acquired in the Tradex acquisition and Note 4 of Notes to
Condensed Consolidated Financial Statements for detailed information.
We anticipate that the unamortized balances 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 $1.2
billion of goodwill and other intangible assets as of March 31, 2001 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 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 deferred stock-based compensation 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 FIN 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
deferred stock-based compensation consists of the following (in thousands):
Six months
Three months ended ended
March 31, March 31,
---------------------------------
2001 2000 2001 2000
--------- ---------------- ------
Cost of revenues........................ $ 1,365 $ 281 $ 2,859 $ 625
Sales and marketing..................... 4,541 1,741 12,264 3,904
Research and development................ 2,640 637 5,567 1,531
General and administrative.............. 7,151 712 15,338 2,030
--------- -------- ------- ------
Total................................. $ 15,697 $ 3,371 $36,028 $8,090
========= ======== ======= ======
31
As of March 31, 2001, we had an aggregate of approximately $75.0 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 the three and
six months ended March 31, 2001, we recognized business partner warrant
expenses associated with three alliance agreements in the aggregate amount of
$1.2 million and $14.0 million, respectively. See Note 8 of Notes to Condensed
Consolidated Financial Statements for more detailed information.
In the quarter ended June 30, 2000, we entered into an agreement with a
third party as part of our vertical industry strategy to obtain a major
partner in the financial services industry. In connection with the agreement,
we issued warrants to purchase up to 6,776,000 shares of our common stock. A
warrant to purchase, 1,936,000 of these shares was immediately vested. The
remaining warrants vest upon attainment of certain milestones related to
contingent revenues (contingent gainshare) to be received by us under the
terms of the concurrent software licensing arrangement. The warrants generally
expire when the milestone period expires or one year after the specific
milestone is met. We determined the fair value of the vested warrants to be
$56.2 million. In connection with the agreement, we will receive a minimum of
$25.0 million in guaranteed gainshare revenues to be paid over a period of two
years. We have determined that the guaranteed $25.0 million represents a
partial payment for the warrants which vested upon signing of the agreement
and has reduced the fair value of the warrants given to the business partner,
accordingly. The net amount of $31.2 million was recorded as an intangible
asset in the accompanying condensed consolidated financial statements. The
intangible asset is being amortized over the expected term of the arrangement
of three years. For the three and six months ended March 31, 2001,
approximately $2.6 million and $5.4 million of the intangible asset
attributable to the arrangement has been amortized to sales and marketing
expense, respectively.
In quarter ended December 31, 2000, 1,400,000 shares of our common stock,
underlying a warrant were considered probable of earning upon the release of
certain escrowed license fees. We determined the initial fair value of the
warrant to be $31.6 million. As of March 31, 2001, the warrant has not vested
fully and was remeasured to a revised fair value of $694,000. The fair value
of these warrants has been recorded as an intangible asset which will be
amortized over the life of the agreement. The cumulative adjustment related to
the remeasured fair value of the warrant resulted in a reduction of $589,000
and a charge of $57,000 to business partner warrant expense for the three and
six months ended March 31, 2001, respectively.
During the quarter ended March 31, 2001, a business partner vested in
982,326 shares of warrants as a result of achieving revenue milestones in
connection with our sales to third-party customers not affiliated with the
business partner. The warrant expense determined by measuring or remeasuring
the fair value of such warrants resulted in a credit of $852,000 and a charge
of $8.5 million of business partner warrant expense for the three and six
months ended March 31, 2001, respectively. There was no business partner
warrant expense for the three and six months ended March 31, 2000.
Minority Interest
In December 2000, our 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, we
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 our products in Japan. As of March 31, 2001, minority interest of
approximately $13.9 million is recorded in the Condensed Consolidated Balance
Sheet in order to reflect the share of the net assets of Nihon Ariba K.K. held
by minority investors. In addition, we recognized approximately ($820,000) and
$154,000 as other income/(expense) for the minority interest's share of Nihon
Ariba K.K.'s income (loss) for the three month periods ended March 31, 2001
and December 31, 2000, respectively.
32
In-Process Research and Development
In connection with the acquisitions of TradingDynamics and Tradex, we
allocated $950,000 and $11.8 million as in-process research and development
during the quarter ended March 31, 2000. There were no completed acquisitions
in the quarter ended March 31, 2001. See subsection Accounting for Recent
Acquisitions for more detailed information regarding the accounting treatment
of the TradingDynamics and Tradex acquisitions.
Impairment of Goodwill and Other Intangible Assets and Equity Investments
In the quarter ended March 31, 2001, we recorded a $1.4 billion impairment
charge relating to goodwill and other intangible assets acquired in the Tradex
acquisition. See subsection Accounting for Recent Acquisitions and Note 4 of
Notes to Condensed Consolidated Financial Statements for more detailed
information.
During the quarter ended March 31, 2001, we determined that certain equity
investments of privately held companies had incurred a decline in value that
was considered other-than-temporary. We recorded a charge of $24.4 million in
our results of operations to write down the investments to their estimated
fair values.
There was no impairment charge related to goodwill and other intangible
assets recorded in fiscal 2000. See Note 4 of Notes to Condensed Consolidated
Financial Statements for more detailed information.
Merger Related Costs
On January 29, 2001, we signed a definitive agreement to acquire Agile
Software Corporation, ("Agile"), a leading provider of collaborative commerce
solutions. However, Ariba and Agile mutually agreed to terminate their
proposed merger without payment of any termination fees due to the recent
challenging economic and market conditions. We have incurred merger related
costs totaling $9.2 million related to financial advisor and other
professional fees which were all expensed during the quarter ended March 31,
2001.
Interest Income. During the three months ended March 31, 2001, interest
income was $5.7 million, an increase of 109 % over other interest income of
$2.7 million for the three months ended March 31, 2000. During the six months
ended March 31, 2001, interest income was $11.6 million, an increase of 139%
over interest income of $4.8 million for the six months ended March 31, 2000.
The increases are attributable to higher average cash and investment balances
during fiscal 2001.
Provision for Income Taxes
We incurred operating losses for the quarter ended March 31, 2001 and the
quarter ended March 31, 2000. Management has recorded a valuation allowance
for the full amount of net deferred tax assets, as the future realization of
the tax benefit is not considered more likely than not. During the quarter
ended March 31, 2001, we recorded income tax expense of $0.8 million primarily
relating to our international subsidiaries. The effect of recording this
foreign income tax expense was offset by the reversal of $6.8 million of
income tax expense that had been recorded for the quarter ended December 31,
2000 on the belief at that time we would have U.S. domestic taxable income for
fiscal 2001.
Liquidity and Capital Resources
As of March 31, 2001, we had $294.6 million in cash, cash equivalents and
short-term investments and $49.8 million in long-term investments, $45.0
million in restricted cash for total cash and investments of $389.4 million
and $179.4 million in working capital. In the six months ended March 31, 2001,
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 continue
to fund our operations through our cash from operating activities, although
cash flows from operations decreased to $16.8 million from $32.0 million
during the six months ended March 31, 2001 and 2000, respectively. As of March
31, 2001, we had outstanding lease liabilities of $664,000.
33
Net cash provided by operating activities was approximately $16.8 million
for the six months ended March 31, 2001. Net cash provided by operating
activities for the six months ended March 31, 2001 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 accounts payable. These cash flows provided by operating
activities were partially offset by the net loss for the year (less non-cash
expenses), decreases in prepaid expenses and other assets and, to a lesser
extent, decreases in accounts receivable for the six months ended March 31,
2001.
Net cash used in investing activities was approximately $153.6 million for
the six months ended March 31, 2001. Cash used in investing activities during
the six months ended March 31, 2001 primarily reflects purchases of property
and equipment, purchases of investments and the increase in restricted cash.
Net cash provided by financing activities was approximately $67.8 million
for the six months ended March 31, 2001, 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 $59.7 million and $12.5
million for the six months ended March 31, 2001 and 2000, 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 $48.0 million, but
that amount is subject to change.
In March 2000, we entered into a new facility lease agreement for
approximately 716,000 square feet to be constructed in four office buildings
and an amenities building in Sunnyvale, California as our headquarters. The
lease term commences in phases upon completion of construction and possession
of each building, and ends January 24, 2013. We took possession and lease
commencement began on Building 3 as of January 25, 2001, Building 4 as of
February 15, 2001, and Building 2 as of March 22, 2001. Possession of Building
1 and the amenities building took place as of April 12, 2001. A total of $2.1
million was paid as lease payments during the quarter as commencement took
place on the first three buildings. Minimum lease payments will be $2.1
million monthly when the project is fully completed. Lease payments will
escalate annually with the total future minimum lease payments amounting to
$387.3 million over the lease term. We have also contributed a significant
amount towards construction costs of the facility. As of March 31, 2001, we
have paid $56.7 million for improvements to the facility. The total estimated
cost of improvements is approximately $90.7 million, but is subject to change.
Construction payments are estimated to be fully paid by the quarter ending
September 30, 2001. As part of this agreement, we are required to hold a
certificate of deposit totaling $40.0 million as a form of security through
April 2013 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.
34
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.
We Have a Relatively Limited Operating History and Have Made Several Recent
Acquisitions. These Facts Make it Difficult to Evaluate Our Future Prospects
Based on Historical Operating Results.
We were founded in September 1996 and have a relatively limited operating
history. Our limited operating history makes an evaluation of our future
prospects very difficult. We began shipping our first product, 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 Trading Dynamics, and Ariba Marketplace in March 2000,
following our acquisition of Tradex. We will encounter risks and difficulties
frequently encountered by 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 Products and Services is at an Early Stage. They May Not
Achieve Widespread Market Acceptance.
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. Our ability to attract additional customers for our
products and services will depend on using our existing customers as reference
accounts. If our products and services do not achieve widespread market
acceptance, our business will 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 $3.0 billion as of March 31,
2001. We expect to incur significant losses for the foreseeable future for a
number of reasons, including the following:
License revenues from products and services declined in the quarter ended
March 31, 2001 compared to the quarter ended December 31, 2001, are not
expected to grow at historical rates and could decline further;
Transaction-based revenues from network access, network services and
independent Internet marketplaces are based on unproven business models and
may not grow;
Although we have announced a program to significantly reduce expense levels,
we may not reduce expenses to anticipated levels and we may incur significant
sales and marketing, research and development and general and administrative
expenses in the future;
We will continue to incur substantial non-cash expenses resulting from
amortization of goodwill and other intangibles relating to acquisitions,
deferred compensation and potentially the issuance of warrants.
As of March 31, 2001, we had unamortized goodwill and other intangibles of
approximately $1.2 billion, and deferred compensation of approximately $75.0
million. As a result of these intangible assets and deferred charges, we
expect to incur significant losses at least through fiscal 2003 and perhaps
beyond, even if our results of operations excluding amortization of
intangibles and deferred charges would be profitable.
35
Our Quarterly Operating Results Are Volatile and Difficult to Predict.
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future. For example, our quarterly
operating results for the quarter ended March 31, 2001 declined significantly
from our operating results for the prior quarter. 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 quarterly operating results may vary depending on a number of factors,
including the following:
Risks Related to Revenues
. fluctuations in demand for our products and services;
. changes in the timing of sales of our products and services because our
sales cycle changes; we realize a significant portion of revenues at
the end of the quarter and we depend on a relatively small number of
customers for relatively large orders;
. changes in the percentage of bookings in a given quarter that are
recognized as revenues in that quarter;
. actions taken by our competitors, including new product introductions
and enhancements; and
. an economic slowdown or recession affecting the economy generally or our
industry in particular.
Risks Related to Expenses
. payment of compensation to sales personnel based on achieving sales
quotas and co-sale payments, referral fees and other commissions to our
strategic partners based on our sales;
. royalties paid to third parties for technology incorporated into our
products and services;
. our ability to control costs, including our planned reduction in expense
levels;
. costs resulting from the write off of intangible assets relating to
recent and any future acquisitions; and
. fluctuations in non-cash expenses related to the issuance of warrants to
purchase common stock based on fluctuations in our stock price.
Risks Related to Operations
. our ability to scale our network and operations to support large numbers
of customers, suppliers and transactions;
. our 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; and
. integration of our recent acquisitions and any future acquisitions.
Our Revenues In Any Quarter Depend on a Relatively Small Number of Relatively
Large Orders. We Have Recently Experienced Lengthening Sales Cycles and
Deferrals of a Number of Large Anticipated Orders.
Our quarterly revenues are especially subject to fluctuation because they
depend on the sale of relatively large orders for our products and related
services. Many of these orders are realized at the end of the quarter. 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. We have
recently experienced lengthening sales cycles and deferrals of a number of
large anticipated orders which we believe have been affected by general
economic uncertainty.
Revenues in Any Future Quarter May Be Adversely Affected to the Extent We
Defer Recognizing Revenue from Contracts Booked in That Quarter.
We frequently enter into contracts where we recognize only a portion of the
potential revenue under the contract in the quarter in which we enter into the
contract. For example, we may recognize revenue on a ratable basis over the
life of the contract or enter into contracts where the recognition of revenue
is conditioned upon
36
delivery of future software elements. As a result, revenues in any given
quarter may be adversely affected to the extent we enter into contracts where
revenue under those contracts is recognized in future periods.
Our Recent Acquisitions Will, and Any Future Acquisitions May, Require Us to
Incur Significant Charges for Intangible Assets.
Our recent acquisitions will, and any future acquisitions may, require us to
incur significant charges for goodwill and other intangible assets, which will
negatively affect our operating income. As of March 31, 2001, we had an
aggregate of $1.2 billion of unamortized goodwill and other intangible assets,
after giving effect to the write off of $1.4 billion of goodwill and other
intangible assets relating to our acquisition of Tradex Technologies in the
quarter ended March 31, 2001. The amortization of our remaining goodwill and
other intangible assets will result in significant additional charges to
operations at least through the quarter ending December 31, 2004.
A Decline in Revenues May Have a Disproportionate Impact on Operating Results.
Because our expense levels are relatively fixed in the near term for a given
quarter 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 for that quarter.
Implementation of Our Products by Large Customers Is Complex, Time Consuming
and Expensive. We Frequently Experiences 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. Implementation of these
solutions by buying organizations is complex, time consuming and expensive. In
many cases, our customers must change established business practices. In
addition, they must generally consider a wide range of other issues before
committing to purchase our products and services, including product benefits,
ease of installation, ability to work with existing computer systems, ability
to support a larger user base, functionality and reliability. Furthermore,
many customers will be addressing these issues for the first time in the
context of implementing these solutions. As a result, we must often 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
professional services organizations. Because we target different sized
customers, our sales cycles typically average approximately five to nine
months for our different product offerings.
We Expect to Depend on Ariba Buyer for a Substantial Portion of Our Business
for the Foreseeable Future. This Business 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. For the quarter ended March 31, 2001, revenues from
Ariba Buyer and related products were more than a majority of our total
revenues. Consequently, if we experience a price decline or fail to achieve
broad market acceptance of Ariba Buyer, our business would be seriously
harmed. In addition, for the quarter ended March 31, 2001, a relatively small
number of customers accounted for a substantial portion of revenues from sales
of Ariba Buyer and related products. We may continue to derive a significant
portion of our revenues attributable to Ariba Buyer from a relatively small
number of customers.
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. Our
business would be seriously harmed if the Ariba Commerce Services Network and
other electronic commerce purchasing networks do not
37
achieve broad and timely market acceptance. Market acceptance of these
networks is subject to a number of significant risks. These risks include:
. operating resource management and procurement on the Internet is a new
market;
. our network may not be able to support large numbers of buyers and
suppliers and cause slower response times and other problems;
. 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.
If a Critical Mass of Suppliers Do Not Join the Ariba Commerce Services
Network, the Network Will Not Attract Sufficient Buyers and Other Sellers
Required to Make the Network Successful.
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 the 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 (product catalogues maintained in
electronic format), indexing services (services that provide electronic
product indices) and other content aggregation tools (software tools that
allow users to aggregate information maintained in electronic format). Our
inability to access and index these catalogs and services would result in our
customers having fewer products and services available to them through our
solution, which would adversely affect the perceived usefulness of the Ariba
Commerce Services Network.
Our Business Will Be Seriously Harmed If We Do Not Develop a Successful
Revenue Model for the Ariba Commerce Services Network.
Although we expect to derive a significant portion of our long-term future
revenue from the Ariba Commerce Services Network and other electronic commerce
purchasing networks, we have not yet fully evolved our revenue model for
services associated with these networks. The associated revenues 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 they adversely impact
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. We may not successfully obtain these
services on a timely and cost effective basis. For example, many of these
third parties experienced significant outages in the past and could experience
outages, delays and other difficulties due to system failures unrelated to our
systems. Any problems caused by these third parties could cause users of the
Ariba Commerce Services Network to perceive our network as not functioning
properly and to use other methods to buy goods and services.
38
We Depend on Strategic Relationships with Our Partners.
We have established strategic reselling, ASP and hosting 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 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. For example, we have formed strategic
alliances 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. For example, i2 Technologies recently announced that it has entered
into an agreement to acquire RightWorks, which offers Internet-based
applications and services that are competitive with applications and services
offered by us. As a result, i2 Technologies may not promote our products and
services to its customers. If these alliances are not successful, our
business, operating results and financial position could be seriously harmed.
We Face Intense Competition From Many Participants in the Business-to-Business
Electronic Commerce Industry. If We Are Unable to Compete Successfully, Our
Business Will Be Seriously Harmed.
The market for our solutions is 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, RightWorks 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 products and
services. 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, significantly greater name recognition and a larger installed base
of customers than us. 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 Will 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
39
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 of Ariba Buyer [and other products]
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.
For us to be successful, our products and services must keep pace with
technological developments and emerging industry standards, address the ever-
changing and increasingly sophisticated needs of our customers and achieve
market acceptance. In developing new products and services, we may:
. fail to develop and market products that respond to technological
changes or evolving industry standards in a timely or cost-effective
manner;
. encounter products, capabilities or technologies developed by others
that render our products and services obsolete or noncompetitive or
that shorten the life cycles of our existing products and services;
. experience difficulties that could delay or prevent the successful
development, introduction and marketing of these new products and
services;
. 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.
Our Business Will Be Seriously Harmed If We Fail to Establish and Maintain
Relationships With Third Parties That Will Effectively Implement Ariba Buyer,
Ariba Marketplace and Other 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. These products are enterprise-wide solutions that must be deployed
within the customer's organization. The implementation process is complex,
time-consuming and expensive. We rely on third parties such as Accenture,
Arthur Andersen, Ernst & Young and EDS to implement our products, because we
lack the internal resources to implement our products at current and potential
customer sites. If we are unable to establish effective, long-term
relationships with our implementation providers, or if they do not meet the
needs or expectations of their customers, our business would be seriously
harmed. Our current implementation partners are not contractually required to
continue to help implement our 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 party system integrators 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.
Some of Our Customers are Small Emerging Growth Companies that May Represent
Credit Risks.
Some of our customers expanded to include small emerging growth companies.
Many of these companies have limited operating histories, are operating at a
loss and have limited access to capital. With the significant slowdown in U.S.
economic growth in the past several months and uncertainty relating to the
prospects for near-term U.S. economic growth, some of these customers may
represent a credit risk. If our customers experience financial difficulties or
fail to experience commercial success, we may have difficulty collecting on
our accounts.
40
New Versions and Releases of Our Products May Contain Errors or Defects.
Ariba Buyer, Ariba Marketplace and our other products are complex. They 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 periods 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 Are the Target of Several Securities Class Action Complaints and are at
Risk of Securities Class Action Litigation, Which Could Result in Substantial
Costs and Divert Management Attention and Resources.
Between March 20, 2001 and April 5, 2001, several securities class action
complaints were filed against us and several of our current and former
officers and directors in the United States District Court for the Southern
District of New York. The complaints allege that our lead underwriters, Ariba
and the other named defendants violated federal securities laws by making
material false and misleading statements in our prospectus incorporated in our
registration statement on Form S-1 filed with the SEC in June 1999. The
complaints are generally related to the alleged receipt of excessive and
undisclosed commissions by the underwriters in connection with the allocation
of shares of common stock in our initial public offering. The complaints are
currently in the process of being consolidated into a single action. We
believe that the claims against us are without merit and intend to defend
against the complaints vigorously. Securities class action litigation could
result in substantial costs and divert our management's attention and
resources, which could seriously harm our business.
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 business-to-business 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.
41
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 Larry Mueller, our Chief Executive 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
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. Our
ability to retain key employees may be harder, because many employees hold
options to purchase stock with an exercise price that is substantially higher
than the current market price of our stock. 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 rights of
our technology. To protect our proprietary technology, we rely primarily on a
combination of contractual provisions, including customer licenses that
restrict use of our products, confidentiality agreements and procedures, and
patent, copyright, trademark and trade secret laws. We have only one issued
patent and may not develop proprietary products that are patentable. Despite
our efforts, we may not be able to adequately protect our proprietary rights,
and our competitors may independently develop similar technology, duplicate
our products or design around any patents issued to us or our other
intellectual property. This is particularly true because some foreign laws do
not protect proprietary rights to the same extent as do United States laws
and, in the case of the Ariba Commerce Services Network, because the validity,
enforceability and type of protection of proprietary rights in Internet-
related industries are uncertain and evolving.
In the quarter ended March 31, 2000, we entered into an intellectual
property agreement with an independent third party. This intellectual property
agreement protects our products against any claims of infringement regarding
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.
There has been a substantial amount of litigation in the software industry
and the Internet industry regarding intellectual property rights. We expect
that software product developers and providers of electronic commerce
solutions will increasingly be subject to infringement claims, and third
parties may claim that we or our current or potential future products infringe
their intellectual property. Any claims, with or without merit, could be time-
consuming, result in costly litigation, cause product shipment delays or
require us to enter into royalty or licensing agreements. Royalty or licensing
agreements, if required, may not be available on terms acceptable to us or at
all, which could seriously harm our business.
We must now, and may in the future have to, license or otherwise obtain
access to intellectual property of third parties. For example, we are
currently dependent on developers' licenses from enterprise resource planning,
database, human resource and other system software vendors in order to ensure
compliance of our products with their management systems. We may not be able
to obtain any required third party intellectual property in the future.
If We Do Not Effectively Manage Our Growth and Expansion, Our Business Will be
Harmed.
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, even after giving effect to
our recent workforce reduction, the number of our employees has increased
significantly over the last 12 to 18 months. We have also expanded the
geographic scope of our customer base and operations. This expansion has
resulted and will
42
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 these systems, 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 foreign tax consequences, including withholding in
connection with 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 May Be Unable to Complete Any Future Acquisitions. Our Business Could Be
Adversely Affected as a Result.
In the quarter ended March 31, 2000, we acquired TradingDynamics, a leading
provider of business-to-business Internet trading applications, and Tradex
Technologies, a leading provider of solutions for net markets. In the quarter
ended September 30, 2000, we acquired SupplierMarket.com, a leading provider
of online collaborative sourcing technologies. We anticipate that it may be
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, our
business could seriously be harmed.
Any Future Acquisitions May Dilute Our Equity and Adversely Effect Our
Financial Position.
Any future acquisition in which the consideration consists of stock or other
securities may significantly dilute our equity. Any future acquisition in
which the consideration consists of cash may require us to use a substantial
portion of our available cash. Financing for future acquisitions may not be
available on favorable terms, or at all.
Our Recent Acquisitions Are, and Any Future Acquisitions Will Be, Subject to a
Number of Risks.
Our recent acquisitions are, and any future acquisitions will be, subject to
a number of risks, including:
. the diversion of management time and resources;
. the difficulty of assimilating the operations and personnel of the
acquired companies;
. the potential disruption of the ongoing businesses;
43
. the difficulty of incorporating acquired technology and rights into our
products and services;
. unanticipated expenses related to technology integration;
. difficulties in maintaining uniform standards, controls, procedures and
policies;
. the impairment of relationships with employees and customers as a result
of any integration of new management personnel; and
. potential unknown liabilities associated with acquired businesses.
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. There is a significant risk
that the market price of the common stock will decrease significantly in the
future in response to any of 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;
. general economic slowdowns;
. changes in market valuations of similar companies;
. sales of large blocks of our common stock;
. announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
. loss of a major customer or failure to complete significant license
transactions;
. additions or departures of key personnel; and
. fluctuations in stock market price and volume, which are particularly
common among highly volatile securities of software and Internet-based
companies.
We Are at Risk of Securities Class Action Litigation Due to Our Stock Price
Volatility.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We have recently experienced significant volatility in the price
of our stock. 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.
44
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 reasons 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.
Since our business depends on the increased acceptance and use of the
Internet as a medium of commerce, if the Internet is not accepted as a viable
medium of commerce or if that acceptance takes place at a rate that is slower
than anticipated, our business would be harmed.
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 it does not prevent
them.
45
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 our 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.
Legislation limiting the ability of the states to impose taxes on Internet-
based transactions has been enacted by the U.S. Congress. This legislation is
presently set to expire on October 21, 2001. 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.
46
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
The Company develops products in the United States and markets its products
in the United States, Latin America, Europe, Canada, Australia and Asia. As a
result, the Company's 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 its sales are currently made in U.S. dollars,
a strengthening of the dollar could make its 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 only
of investment grade securities. Due to the nature of our investments, the
Company believes 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
March 31, March 31, March 31,
2002 2003 2004 Thereafter Total
---------- ---------- ---------- ---------- --------
Cash equivalents........ $131,207 -- -- -- $131,207
Average interest rate... 4.21% -- -- -- 4.21%
Investments............. $194,079 $22,120 $23,525 -- $239,724
Average interest rate... 5.15% 5.89% 6.20% -- 5.32%
Total investment
securities............. $325,286 $22,120 $23,525 -- $370,931
- --------
Note that these amounts exclude equity investments as described below.
Other Investments
Other assets include investments in equity instruments of privately held
companies which amounted to $5.6 million and $30.5 million as of March 31,
2001 and September 30, 2000, respectively. These investments are accounted for
using the cost method and consist of common stock, preferred stock and
warrants for common stock. Of these amounts, $2.8 million and $13.7 million at
March 31, 2001 and September 30, 2000, respectively, were received as
consideration in connection with licensing transactions with customers and
business partners. The Company determines the fair value for common stock and
preferred stock equity investments based on amounts paid by independent third
parties in the investees' most recent capital transactions. The fair value of
the common stock warrants received is determined using a Black-Scholes option
pricing model. The fair value of shares underlying vested warrants totaled
approximately $1.4 million and $4.4 million at March 31, 2001 and September
30, 2000, respectively. These investments are reviewed each reporting period
for declines considered other-than-temporary, and, if appropriate, written
down to their estimated fair value. During the three months ended March 31,
2001, the Company determined that these investments had incurred a decline in
value that was other-than-temporary and reduced their carrying amounts to
estimated fair value by a charge of $24.4 million to its results of
operations.
Equity 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.
47
During the six month ended March 31, 2001, 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. As of March 31, 2001 investments in publicly
traded companies totaled approximately $7,000 and is classified as long-term
investments.
48
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Between March 20, 2001 and April 5, 2001, several stockholder class action
complaints were filed in the United States District Court for the Southern
District of New York against us, several of our officers and directors, and
two underwriters of our initial public offering. The purported class actions
are all brought on behalf of purchasers of our common stock since June 23,
1999, the date of our initial public offering. The plaintiffs allege that our
prospectus, incorporated in the Registration Statement on Form S-1 filed with
the Securities and Exchange Commission, was materially false and misleading
because it failed to disclose, among other things, that Morgan Stanley, our
lead underwriter, required several investors who wanted large allocations of
initial public offering securities to pay undisclosed and excessive
underwriters' compensation in the form of increased brokerage commissions and
required investors to agree to buy shares of our securities after the initial
public offering was completed at predetermined prices as a precondition to
obtaining initial public offering allocations. The plaintiffs further allege
that because of these purchases, the Company's post-initial public offering
stock price was artificially inflated. As a result of the alleged omissions in
our prospectus and the purported inflation of our stock price, the plaintiffs
claim violations of Sections 11 and 15 of the Securities Act and Section 10(b)
of the Securities Exchange Act. The complaints are currently in the process of
being consolidated into a single action. We believe that we have meritorious
defenses against these actions and intend to vigorously defend them.
We are also subject to various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected
to have a material effect on our business, financial condition or results of
operations.
Item 2. Changes in Securities and Use of Proceeds
(a) Modification of Constituent Instruments
Not applicable.
(b) Change in Rights
Not applicable.
(c) Changes in Securities
Not applicable.
(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 its annual meeting of stockholders in San Mateo, California
on February 26, 2001, which meeting was adjourned until March 26, 2001 when it
was completed. Of the 251,041,398 shares outstanding as of the record date,
194,364,369 shares were present or represented by proxy at the meeting on
February 26, 2001 and 200,952,967 shares were present or represented by proxy
at the adjourned meeting on March 26, 2001. At these meetings the following
actions were voted upon:
a. To elect the following directors to serve for a term ending upon the
2004 Annual Meeting of Stockholders or until their successors are elected
and qualified:
FOR AGAINST
----------- ----------
Paul Hegarty........................................ 183,891,620 10,472,749
John B. Mumford..................................... 187,810,360 6,554,009
49
b. To approve an amendment to the Company's Certificate of Incorporation
to allow future amendments to Article IV of the Certificate of
Incorporation, which among other things, authorizes the capital stock of
the Company, to be accomplished by the approval of holders of a majority of
the outstanding shares of voting capital stock of the Company instead of
the current vote requirement of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares of voting capital stock of the Company:
FOR AGAINST ABSTAIN
----------- ---------- -------
127,349,562 22,845,992 244,337
c. To amend the Company's 1999 Equity Incentive Plan to modify the
provision for automatically increasing the number of shares available for
issuance under the 1999 Equity Incentive Plan:
FOR AGAINST ABSTAIN
----------- ---------- -------
132,611,383 61,243,748 509,238
d. To ratify the appointment of KPMG LLP as the Company's independent
public accountants for the fiscal year ending September 30, 2001:
FOR AGAINST ABSTAIN
----------- ---------- -------
188,467,995 5,676,909 219,465
Item 5. Other information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.20 Offer Letter, dated January 22, 2001, by and between the Registrant
and James W. Steele.
10.21 Offer Letter, dated February 21, 2001 by and between the Registrant
and Michael Schmitt.
(b) Reports on Form 8-K
A current report on Form 8-K was filed with the Securities and Exchange
Commission by Ariba on April 3, 2001 to report the termination of our merger
with Agile Software Corporation and the Termination Agreement and Release
entered in connection with the termination.
50
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.
/s/ Robert M. Calderoni
By: _________________________________
Date: May 15, 2001 Robert M. Calderoni
Executive Vice-President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
51
EXHIBIT INDEX
Exhibit
No. Exhibit Title
------- -------------
10.20 Offer Letter, dated January 22, 2001, by and between the Registrant
and James W. Steele.
10.21 Offer Letter, dated February 21, 2001 by and between the Registrant
and Michael Schmitt.